Los Angeles Lawyer January 2014

REAL ESTATE LAW 29 THE MAGAZINE OF THE LOS ANGELES COUNTY BAR ASSOCIATION TH ANNU

ISS AL UE

JANUARY 2014 / $4

EARN MCLE CREDIT PLUS RULLCA Replaces Cell Beverly-Killea Tower page 25 Approvals page 30 Tenant Bankruptcy Basics page8 Condo Hotels page 11 Koontz The Star Curbs Takings page 14 System

Los Angeles lawyers Richard H. Lee (left) and Jay M. Lichter explain California’s new energy regulations for commercial buildings page 20

When the waters are uncertain, experience matters.

Divorce I Support I Premarital Agreements

EXCLUSIVELY FAMILY LAW. walzermelcher.com

REAL ESTATE LAW

FEATURES 20 The Star System BY RICHARD H. LEE AND JAY M. LICHTER New regulations will make energy consumption information available for all nonresidential buildings in California

25 The New LLC BY LORYN DUNN ARKOW RULLCA’s default provisions must be considered when drafting operating agreements for real estate LLCs Plus: Earn MCLE credit. MCLE Test No. 231 appears on page 27.

30 Tower Building BY LYNN WHITCHER AND CYNTHIA HANSON The Telecommunications Act of 1996 provides municipalities and service providers with a framework for the approval process for cell towers

Los Angeles Lawyer DEPARTMENTS the magazine of the Los Angeles County 7 Barristers Tips 14 Practice Tips How to help a veteran who seeks Koontz curbs government power Bar Association pro bono legal aid to impose development fees January 2014 BY STEPHEN HODGES BY FERNANDO VILLA Volume 36, No. 10 8 Practice Tips 36 Closing Argument Analyzing the basics of a tenant Los Angeles gets a new mural COVER PHOTOGRAPH: TOM KELLER bankruptcy ordinance BY JEANNE C. WANLASS BY ERIC BJORGUM

11 Practice Tips Treatment of condominium hotels as securities after Salameh BY TIMI A. HALLEM AND JASON T. TAKETA LOS ANGELES LAWYER (ISSN 0162-2900) is published monthly, except for a combined issue in July/August, by the Los Angeles County Bar Association, 1055 West 7th Street, Suite 2700, Los Angeles, CA 90017 (213) 896-6503. Periodicals postage paid at Los Angeles, CA and additional mailing offices. Annual sub- scription price of $14 included in the Association membership dues. Nonmember subscriptions: $28 annually; single copy price: $4 plus handling. Address changes must be submitted six weeks in advance of next issue date. POSTMASTER: Address Service Requested. Send address changes to Los Angeles Lawyer, P. O. Box 55020, Los Angeles CA 90055. 01.14 VISIT US ON THE INTERNET AT www.lacba.org/lalawyer E-MAIL CAN BE SENT TO [email protected] EDITORIAL BOARD Chair PAUL S. MARKS Articles Coordinator MARY E. KELLY JERROLD ABELES (PAST CHAIR) K. LUCY ATWOOD ETHEL W. BENNETT SCOTT BOYER ERIC BROWN CAROLINE BUSSIN PATRICIA H. COMBS CHAD C. COOMBS (PAST CHAIR) HON. MICHELLE WILLIAMS COURT ELIZABETH L. CROOKE BEN M. DAVIDSON GORDON K. ENG DONNA FORD STUART R. FRAENKEL CHRISTY GARGALIS MICHAEL A. GEIBELSON (PAST CHAIR) CHRISTINE D. GILLE SHARON GLANCZ TED M. HANDEL JEFFREY A. HARTWICK STEVEN HECHT (PAST CHAIR) JOSHUA S. HODAS JOHN C. KEITH ERIC KINGSLEY KATHERINE KINSEY JENNIFER W LELAND STEPHANIE LEWIS SANDRA MENDELL AMY MESSIGIAN MICHELLE MICHAELS COMM. ELIZABETH MUNISOGLU PAUL OBICO CARMELA PAGAY AMANDA PAWLYK DENNIS L. PEREZ (IMMEDIATE PAST CHAIR) GREGG A. RAPOPORT GARY RASKIN (PAST CHAIR) JACQUELINE M. REAL-SALAS (PAST CHAIR) A. JOEL RICHLIN DAVID SCHNIDER (PAST CHAIR) NANCY L. SCHROEDER STEVEN SCHWARTZ HEATHER STERN KENNETH W. SWENSON (PAST CHAIR) MATTHEW D. TAGGART DAMON THAYER THOMAS H. VIDAL ALEX M. WEINGARTEN STAFF Publisher and Editor (in memoriam) SAMUEL LIPSMAN Editor ERIC HOWARD Art Director LES SECHLER Director of Design and Production PATRICE HUGHES Advertising Director LINDA BEKAS Administrative Coordinator MATTY JALLOW BABY

Copyright © 2014 by the Los Angeles County Bar Association. All rights reserved. Reproduction in whole or in part without permission is prohibited. Printed by R. R. Donnelley, Liberty, MO. Member Business Publications Audit of Circulation (BPA). The opinions and positions stated in signed material are those of the authors and not by the fact of publication necessarily those of the Association or its members. All manuscripts are carefully considered by the Editorial Board. Letters to the editor are subject to editing.

4 Los Angeles Lawyer January 2014 LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATION OF THE LOS ANGELES COUNTY BAR ASSOCIATION 1055 West 7th Street, Suite 2700, Los Angeles CA 90017-2553 Telephone 213.627.2727 / www.lacba.org

LACBA OFFICERS President PATRICIA EGAN DAEHNKE President-Elect LINDA L. CURTIS Senior Vice President PAUL R. KIESEL Vice President MARGARET P. STEVENS Treasurer MICHAEL K. LINDSEY Assistant Vice President BRIAN S. CURREY Assistant Vice President CHRISTINE C. GOODMAN Assistant Vice President SAJAN KASHYAP Immediate Past President RICHARD J. BURDGE JR. Chief Executive Officer/Secretary SALLY SUCHIL Chief Financial & Administrative Officer BRUCE BERRA General Counsel & Chief Administrative Officer W. CLARK BROWN BOARD OF TRUSTEES HARRY W. R. CHAMBERLAIN BRIAN K. CONDON DUNCAN W. CRABTREE-IRELAND DANIEL M. CROWLEY REBECCA A. DELFINO ANTHONY DE LOS REYES HOWARD S. FISHER RICHARD B. GOETZ JACQUELINE J. HARDING MARK A. KRESSEL DEVON MYERS JUAN A. RAMOS DAVID K. REINERT DIANA K. RODGERS JENNIFER S. ROMANO HARVEY I. SAFERSTEIN SUSAN KOEHLER SULLIVAN TERESA TRACY SULLIVAN BRENDA E. SUTTON-WILLS DAVID A. TILEM

AFFILIATED BAR ASSOCIATIONS BEVERLY HILLS BAR ASSOCIATION CENTURY CITY BAR ASSOCIATION CULVER MARINA BAR ASSOCIATION GLENDALE BAR ASSOCIATION IRANIAN AMERICAN LAWYERS ASSOCIATION ITALIAN AMERICAN LAWYERS ASSOCIATION JAPANESE AMERICAN BAR ASSOCIATION JOHN M. LANGSTON BAR ASSOCIATION KOREAN AMERICAN BAR ASSOCIATION OF SOUTHERN CALIFORNIA LESBIAN AND GAY LAWYERS ASSOCIATION OF LOS ANGELES MEXICAN AMERICAN BAR ASSOCIATION PASADENA BAR ASSOCIATION SAN FERNANDO VALLEY BAR ASSOCIATION SAN GABRIEL VALLEY BAR ASSOCIATION SANTA CLARITA VALLEY BAR ASSOCIATION SANTA MONICA BAR ASSOCIATION SOUTH BAY BAR ASSOCIATION SOUTHEAST DISTRICT BAR ASSOCIATION SOUTHERN CALIFORNIA CHINESE LAWYERS ASSOCIATION WHITTIER BAR ASSOCIATION WOMEN LAWYERS ASSOCIATION OF LOS ANGELES

Los Angeles Lawyer January 2014 5 ADR FOR THE WORLD’S MOST INTRACTABLE DISPUTES

BUSINESS • EMPLOYMENT • INTELLECTUAL PROPERTY FRANCHISE • INTERNATIONAL DEEP Subject Matter Knowledge he holiday season is traditionally a time of gift giv- EFFICIENT Party Driven Process FIERCELY Fair and Impartial ing and gift receiving. Like Ralphie for a Red Ryder SUPERB Judicial Temperament T BB gun, we may pine for some object that has sin- gularly captured our attention, and like Ralphie we may end up with pink bunny pajamas from Aunt Clara instead.

As you peruse the 2014 annual Real Estate Law issue on the heels of your holiday season and in the throes of the start of a new year, you will see a number of articles on several different topics pertaining to real estate. Ranging from a discussion of securities law as it applies to condominium hotels to a primer on the California Revised Uniform Limited Liability Company Act, this issue is a wide and varied assort- ment of brightly colored gifts. We hope that, within these pages, we can metaphor- ically offer you the gift of your equivalent of Ralphie’s Red Ryder. The holiday season is also traditionally a time of reflection. As we enter 2014, a year already being described as feeling like the middle innings of our recovery from the Great Recession, the varied nature of this issue offers a unique opportunity for that reflection. Emerging trends can be seen, for example, in this issue’s focus on wireless communication facilities as well as the discussion of new energy “...Holmes is unsurpassed at customizing the use disclosure requirements affecting commercial real estate. While we can rejoice parties' chosen resolution process to ensure speed, that development is the focus of several of the articles in this issue, we must also economy and justice”—Russell Fransen, Esq., note that bankruptcy law as it applies to real estate remains an important topic for The Business Legal Group our audience. • Large Complex Case Panel, American Arbitration Also of note is the diversity of the sources of law important to our practition- Association (AAA) National Roster of Neutrals ers. Our authors discuss new state statutes, federal statutes, state regulations, • International Panel, International Center for municipal ordinances, and U.S. Supreme Court precedent. Many of the new legal Dispute Resolution (ICDR) requirements discussed in these articles were enacted or developed directly as a result • Board of Directors, College of Commercial of the Great Recession. As we continue through the middle innings, the legal land- Arbitrators (CCA) scape will likely continue to change. The variety of topics and sources covered in • Board of Directors, California Dispute Resolution this issue reminds us how nimble we must be as practitioners, even as we delve into Council (CDRC) concepts that may date back to Blackstone or earlier. • Mediation Practice Director, Resolute Systems, The annual real estate law issue is one of two special issues published regularly LLC each year by Los Angeles Lawyer magazine and is the product of months of hard • Fellow, California Academy of Distinguished Neutrals work by our authors, the Editorial Board, and the staff. We sincerely thank our • President and Executive Director, Neutrals contributors for making this issue an engaging collection of articles. We also Diversity Aliance thank the staff and our fellow Editorial Board members for their hard work. As we reflect on 2013, we cannot help but remember Sam Lipsman, the longtime THE HOLMES LAW FIRM editor and publisher of the magazine, who passed away last summer. He helped shepherd many a real estate issue through to completion and would have been proud of this one. Thank you also to our readers and our advertisers. Without you, we would not have this opportunity to showcase the outstanding work of our contributors, make our contribution to the bar through this labor of love, or, most important, wax poet- To schedule your Mediation, Arbitration or other ADR process with Reg Holmes, please contact: ically about Ralphie's Red Ryder. We are very pleased with this special issue and hope you enjoy reading it and incorporating some of the tips and information into your For American Arbitration Association I administered matters: Michael R. Powell practice. ([email protected]) For independently administrated matters: rholmes@theholmeslawfirm.com For Resolute Systems, LLC administered matters: Mike Weinzerl ([email protected] Ted M. Handel is a partner in the Business Solutions practice group of Haight Brown & 1.877.FAIR.ADR (1.877.324.7237) Bonesteel, LLP, where he represents businesses and nonprofits in real estate transactions. Heather Stern is a partner with Kralik & Jacobs LLP, where she specializes in real estate and business litigation. Paul Obico is an attorney at Allen Matkins Leck Gamble & Mallory LLP, where www.theholmeslawfirm.com he practices in the firm’s business and tax planning group. California • Chicagoland • New York Metro • Atlanta

6 Los Angeles Lawyer January 2014 barristers tips BY STEPHEN HODGES

How to Help a Veteran Who Seeks Pro Bono Legal Aid

HELPING LOW-INCOME OR HOMELESS VETERANS is a noble cause anything personal or confidential. that many attorneys want to join. By volunteering at a stand down An attorney must also make every effort to manage expectations or for a public interest legal services provider, lawyers can improve when interacting with a veteran. Veterans often have the same per- the lives of veterans. Matching an attorney’s practice area with a vet- ceptions that many people have of lawyers; as a result, a veteran in eran’s legal needs is often more easily said than done, but a lawyer’s a meeting with a volunteer lawyer may have unrealistic expecta- skills, knowledge, and effort can go a long way toward helping a low- tions about what a lawyer has the power to do. The best way for a income or homeless veteran change the trajectory of his or her life. lawyer to manage expectations while building trust and rapport is to Lawyers who volunteer to help veterans should first recognize who clearly explain the area of law in which the lawyer has expertise and veterans are and what makes them unique. A veteran is generally be sensitive to the fact that the veteran’s legal problem may be com- defined as somebody who served in a branch of the U.S. Armed pletely outside the lawyer’s practice area. Forces: the Air Force, Army, Marine Corps, or Navy. Veterans may not have served in com- bat or during a time of military conflict, but A lawyer must first seek to establish trust and build rapport their common experience is that of being asked to set aside their personal desires, fears, and safety in order to accomplish a mission that with the veteran with whom he or she is working. may involve armed conflict or other personal sacrifice or danger. Unlike many other jobs in the civilian world, military service involves the sacrifice of short- and long-term wants in order to accomplish At a stand down or other similar event, matching a veteran with something for the benefit of something greater than the individual— a specific legal need with an attorney who has expertise in the rele- a military unit, a branch of service, or the national security interests vant area of law is always a goal. What is just as important, however, of the country. is how a lawyer reacts to a veteran who has a pressing legal issue that is outside of the lawyer’s practice areas. It is important not to be dis- Self-Sacrifice missive. A veteran may quickly distrust an organization—even if Many veterans have sacrificed their own well-being for the greater good that organization’s only mission is to help veterans—if the veteran has for so long that they cannot focus on fixing personal issues that only a problem that cannot be addressed with the services that the orga- affect themselves. Additionally, the can-do attitude that the military nization provides. The veteran should not be left with the feeling that instills into its members makes it difficult for many veterans to the organization hosting the stand down is unconcerned with his or acknowledge problems that they cannot overcome alone. This is her circumstances or unwilling to look beyond what the organization why psychological or emotional wounds from war are so hard to cure; traditionally does. many veterans find it difficult to admit that something intangible is The best way to address this issue is with honesty. A volunteer attor- hindering their ability to live normal, peaceful lives as civilians. ney should inform a veteran without hesitation what area of law the An attorney who seeks to give legal assistance to a low-income or lawyer practices. If a veteran has a legal issue outside of an attorney’s homeless veteran should not underestimate how effective his or her practice areas, it is critical that the attorney or host organization of initial tone can be at setting the foundation for a successful partner- a pro bono event follow through, even if the only help provided is a ship. As in any other good relationship, a lawyer must first seek to referral to another lawyer, agency, or organization. The simple act of establish trust and build rapport with the veteran with whom he or checking up later with a veteran to ask if the veteran found a legal she is working. An effective first step towards establishing trust is to resource that can help can mean the difference between a veteran who clearly explain that anything the veteran says will be kept confiden- feels overwhelmed by his or her circumstances and a veteran who feels tial. A lawyer must also make sure that the environment in which the empowered and able to weather the problem that he or she faces. veteran and lawyer interact is private; otherwise, the promise of Finally, heed the advice of the proverb: “If all you have is a ham- confidentiality will look like an empty one. mer, everything looks like a nail.” Avoid assuming that since a vet- A lawyer must first seek to establish trust with the veteran. The eran has been paired with a lawyer, the most pressing issue the vet- easiest way to do so is for the lawyer to listen to what the veteran eran faces is a legal one. The focus should always be on helping the needs. Such open-ended questions as, “What can I help you with?” veteran. Not every veteran in need has a legal problem that needs to or “How can I be of assistance?” are a great start toward getting vet- be solved. Often, matching nonlegal resources for veterans with veterans to talk about their most pressing problem. Veterans, like most erans in need is what a veteran needs most. I people, want a professional to listen to them and understand their per- spective regarding what they are going through before they disclose Stephen Hodges is an attorney and Operation Iraqi Freedom veteran.

Los Angeles Lawyer January 2014 7 practice tips BY JEANNE C. WANLASS

Analyzing the Basics of a Tenant Bankruptcy

LANDLORDS WHO RECEIVE NOTICE that a tenant has filed for bank- ant files affects how the landlord can and should respond. ruptcy face having their property sit for months without generating When a debtor files a bankruptcy petition, Bankruptcy Code rent. In addition, counsel for landlords in such a situation face hav- Section 362 imposes an automatic stay. This serves as an injunction ing to enter what may be the unfamiliar arena of bankruptcy court, against the commencement or continuation of a judicial proceeding which has its own code and rules. Regardless, every attorney should against the debtor.7 The stay includes an injunction against any be prepared to assess the basics of a tenant bankruptcy. action to obtain possession of property of the estate, such as an Upon notice of a tenant’s bankruptcy, one of the initial matters to interest in a leasehold.8 If the lease is not expired, and the landlord assess is the lease. For example, a basic question is whether the lease has not served a three-day notice to pay rent or quit or filed an has expired. No automatic stay applies against landlords seeking to unlawful detainer action before the bankruptcy case is filed, he or she obtain possession of their nonresidential real property when the is immediately stayed from doing so. lease has expired before the bankruptcy was filed.1 Furthermore, prop- If the landlord filed an unlawful detainer action before the debtor erty of the bankruptcy estate does not include the debtor’s interest in commenced the bankruptcy, it is important to assess the legal basis a nonresidential real property lease that expired prepetition.2 If a pursuant to which the unlawful detainer was filed. The automatic stay debtor-tenant has a commercial lease that expired prepetition, the land- does not remain in effect in every instance. For example, if the debtor lord’s efforts to obtain possession of the property may proceed— is a residential real property tenant and the landlord has filed an evic- although some clients still prefer to obtain an order from the bank- tion action based on endangerment of the property or the illegal use ruptcy court confirming that there is no stay. This order may be of controlled substances on the property, the stay expires 15 days after sought to forestall the tenant from making any allegations that the the landlord files a certification.9 The landlord must file and serve a landlord has acted improperly, thereby violating the automatic stay. declaration that this type of an eviction action has been filed or that Another initial matter to consider is whether the property is res- the tenant “during the 30-day period preceding the date of the filing idential or nonresidential. The Bankruptcy Code makes important dis- of the certification, has endangered property or illegally used or tinctions regarding the treatment of these two different types of allowed to be used a controlled substance on the property.”10 property but does not define the difference.3 The majority of courts However, if the unlawful detainer was filed due to nonpayment of rent, narrowly construe the term “residential” and generally hold that if this option is not available, and the eviction action is stayed. people are living on the property, it is residential, even if the prop- If the lessor obtains a judgment for possession of residential property has a commercial use as well.4 erty before the date of the filing of the bankruptcy, the automatic stay Counsel should be aware that not all provisions in a lease are under Bankruptcy Code Section 362 will not operate to stay an evic- enforceable. For example, most leases contain a provision that the lease tion or unlawful detainer action.11 Section 362(b)(22) of the is breached or terminated by the tenant’s act of filing a bankruptcy Bankruptcy Code provides that a landlord may continue the eviction petition. A lease may also require an additional security deposit or unless the tenant files a certification that the tenant would be allowed other protection for the landlord should the tenant file for bankruptcy. to cure the monetary default under state law and cures the rent defi- Bankruptcy law does not allow for the enforcement of these ipso facto ciency by depositing it with the clerk of the Bankruptcy Court pur- clauses in unexpired leases.5 suant to Bankruptcy Code Section 362(l).12 However, the tenant Counsel should determine what type of bankruptcy case he or she must timely comply with the requirements of Sections 362(b)(22) and faces. The debtor’s bankruptcy petition will identify the chapter 362(l), or there is no stay.13 under which the bankruptcy has been filed. Generally, a chapter 7 Relief from the Automatic Stay bankruptcy is filed by an individual or a business in order to liqui- date assets. A chapter 7 trustee is immediately appointed to admin- Under certain circumstances, a landlord can obtain relief from the stay ister the debtor’s available assets and use the funds, if any, to pay cred- by filing a motion for an order to proceed with the unlawful detainer itors. A chapter 13 case, in contrast, may only be filed by an individual or eviction.14 Grounds for relief include “cause.”15 This can include who has a regular income and debts below certain thresholds. In a failure to pay rent. Tenants of nonresidential property in particular chapter 13 case, the tenant seeks to propose a plan to pay debt.6 The are specifically required to pay any rent that comes due after the peti- court will appoint a chapter 13 trustee, but the tenant debtor still main- tion was filed.16 Therefore, if a commercial tenant does not pay rent tains control of certain aspects of the case, such as operating the ten- that comes due after the bankruptcy case has been filed, a motion for ant’s business. relief from stay can be brought for cause in order to allow the lessor A chapter 11 case, on the other hand, may be filed by either an to proceed with the eviction of the tenant. Likewise, relief from the individual or a business in order to attempt to reorganize the debt. automatic stay may be obtained if the debtor does not have equity In a chapter 11 case, a trustee is not automatically appointed, and the in the property and if the property is not necessary to an effective reor- debtor remains in control and operates his or her assets (including a business) in order to pay creditors. The type of bankruptcy the ten- Jeanne C. Wanlass practices bankruptcy law at Loeb & Loeb LLP in Los Angeles.

8 Los Angeles Lawyer January 2014 ganization.17 Additionally, relief from the assume and assign the lease, the landlord is stay is possible if the landlord can establish thereby presented with the opportunity to JUDGE that the tenant’s bankruptcy filing was part have all past defaults cured as well as to pro- LAWRENCE W. CRISPO of a scheme to delay, hinder, or defraud cred- ceed with a financially sound new tenant. (RETIRED) itors (including the landlord). The scheme Once the lease is assumed, any liability for any may involve the filing of multiple bankruptcy future breach of the lease is the responsibility petitions concerning the property.18 of the new tenant, not the old.26 If the automatic stay applies, and there are Rejection of a Lease no grounds to obtain relief from it, landlord’s counsel should be aware that the treatment of Alternatively, the tenant may seek to reject the an unexpired lease is largely governed by lease. The tenant is not required to wait to Section 365 of the Bankruptcy Code. Generally, reject a lease. The rejection of an unexpired a debtor has three options for how to treat an lease constitutes a breach of contract. The date unexpired lease: assumption, assumption and of the breach is set as immediately before assignment to a third party, or rejection. the filing date of the bankruptcy petition.27 When this happens, the unpaid prepetition Assumption of a Lease rental obligations under the lease and any If the lease is assumed, it becomes a postpe- claim for future damages become an unse- tition obligation and may be enforced.19 The cured claim of the landlord-creditor in the ten- tenant must abide by the terms of the lease, ant’s bankruptcy.28 However, when the ten- or the landlord can pursue available remedies. ant rejects the lease, the landlord can obtain If there has been a prepetition or postpetition an order from the bankruptcy court to force default, before the bankruptcy trustee20 can the tenant to vacate the premises.29 Mediator Arbitrator assume the lease, he or she must cure, or If a tenant of residential real property has provide “adequate assurance that the trustee filed a chapter 7 liquidation case, his or her will promptly cure, such default.”21 This is an chapter 7 trustee must assume or reject an opportunity for the landlord to have the unexpired lease within 60 days after the date Referee 213.926.6665 unpaid rental obligations paid in full. the tenant filed for bankruptcy. Otherwise, the [email protected] There are numerous situations in which a lease is deemed rejected, unless the court finds www.judgecrispo.com tenant may want to assume a lease. The lease cause to extend the deadline.30 Under chap- terms may be favorable compared to others ter 11 or 13, however, the trustee may assume currently available. The lease may be for a or reject an unexpired lease of residential real prime location. The orderly liquidation of a property at any time before the confirmation business may require remaining at the loca- of a plan.31 In Chapter 13 cases, for example, tion. The debtor may seek to sell a business a plan confirmation can take many months. VIGOROUS as a going concern at that location. The attor- Landlords may therefore request an early date STATE BAR DEFENSE ney for the landlord should be aware that an for the tenant to assume or reject the lease. The assumed lease becomes a postpetition con- court may therefore order the trustee to deter- JAMES R. DIFRANK tract, and any later default gives rise to an mine within a specified time whether to assume A PROFESSIONAL LAW CORP. 32 administrative claim that will be due a higher or reject a contract or lease. TEL 562.789.7734 priority of payment than almost all other As for nonresidential leases, the unexpired www.BarDefense.net 22 claims. lease of nonresidential real property is auto- E-MAIL [email protected] If the rent is at below-market rates, the ten- matically deemed rejected, and the tenant ant may seek to assume the lease and assign should immediately surrender the property to ¥ Disciplinary Defense it to a new tenant. If the lease can be assumed the landlord, if the trustee does not assume or ¥ Reinstatements/Admissions and assigned, the trustee must cure prepetition reject the unexpired lease by the earlier of 120 and postpetition defaults and assure the land- days after the bankruptcy case is filed or the ¥ Malpractice Defense lord that the new tenant can perform under date of an order confirming a plan.33 This ¥ Bankruptcy 23 the lease. Shopping center landlords in par- 120-day period may be extended for an addi- ¥ Criminal Defense ticular typically have certain protections. tional 90 days upon a court order, for a total Representation within the These include requirements that, for example, of 210 days after filing.34 ¥ State of California 1) the new tenant be at least as financially Another matter that a landlord’s counsel sound as the debtor was when the lease was may be called upon to handle for a landlord originally signed, 2) the percentage rent be client is the filing of a proof of claim or a FORMER: shown not to decline substantially, 3) the request for payment of an administrative State Bar Sr. Prosecutor assignment not violate any radius, location, use expense.35 Sr. State Bar Court Counsel or exclusivity provision of the lease, and 4) the Property of the estate will be distributed assignment not disrupt the tenant mix and bal- to pay claims in the order set forth in the ance in the shopping center.24 A tenant can- Bankruptcy Code.36 Generally, secured claim- not, however, assume and assign a nonresi- holders may look to payment from their se- dential real property lease that was terminated cured property. Upon court approval, admin- according to state law before the bankruptcy istrative expense claims are paid before other Home of Sir Winston case was filed.25 In such a scenario, if the unsecured claims.37 Unpaid postpetition rent Pictured Above bankrupt tenant files a motion seeking to is generally an administrative claim because it

Los Angeles Lawyer January 2014 9 is an actual and necessary cost and expense of TRUST DEED FORECLOSURES Law Firms 4 Sale preserving the bankruptcy estate.38 Next in line for distribution of estate property are prior- “Industry Specialists For Over 25 years” ity unsecured claims and, ﬁnally, general unse- t Witkin & Eisinger we specialize in the Non-Judicial Want to retire? Want to plan 39 AForeclosure of obligations secured by real property cured claims. Unpaid prepetition rent is or real and personal property (mixed collateral). When for your life after law! usually a general unsecured claim and is thus your clients needs a foreclosure done professionally and in the class of claims that are last in line for at the lowest possible cost, please call us at: See Ed Poll’s website payment. Furthermore, lease termination dam- 1-800-950-6522 www.lawbiz.com for the tools ages in such cases are capped by the provisions We have always offered free advice to all attorneys. you need to make a transition. of Section 502(b)(6) to the greater of one Want to buy a practice? year’s rent or 15 percent of the rent due under WITKIN the lease, not to exceed three years’ rent plus Ed can help! , LLC unpaid prepetition rent. The cap does not &EISINGER Call today 800.837.5880 RICHARD G. WITKIN, ESQ. ! CAROLE EISINGER always apply to all damages; however, it has been held not to apply to tortlike claims, for example physical damages to the property.40 While the ﬁeld of bankruptcy is an area of law in which some attorneys may choose not to venture too often, a knowledge of the basics can go a long way in addressing the concerns and managing the expectations of their landlord clients. I

1 11 U.S.C. §362(b)(10). 2 11 U.S.C. §541(b)(2). 3 See 11 U.S.C. §101. 4 In re Michael H. Clement Corp., 446 B.R. 394 (Bankr. N.D. Cal. 2011). 5 11 U.S.C. §365(e)(1). 6 11 U.S.C. §109(e). 7 11 U.S.C. §362(a)(1). 8 11 U.S.C. §§362(a)(3), 541. 9 11 U.S.C. §362(b)(23). 10 Id. 11 11 U.S.C. §362(b)(22). 12 11 U.S.C. §§362(b)(22), 362(l). 13 See In re Furtado, 2011 Bankr. LEXIS 5667 (Bankr. E.D. Cal. 2011). 14 The U.S. Bankruptcy Court for the Central District of California has mandatory forms for relief from stay motions. See http://www.cacb.uscourts.gov. 15 11 U.S.C. §362(d)(1). 16 11 U.S.C. §365(d)(3). 17 11 U.S.C. §362(d)(2). 18 11 U.S.C. §362(d)(4). 19 In re Coast Trading Co., 744 F. 2d 686 (9th Cir. 1984). 20 In a chapter 11 case, the trustee is usually the debtor. Have You Heard? 21 11 U.S.C. §365(b)(1). 22 In re Frontier Props., Inc., 979 F. 2d 1358, 1367 (9th Cir. 1992). DOUBLETREE HAS A NEW STATE OF THE ART WAR ROOM 23 11 U.S.C. §§365(b)(1), (c), (f). Now you can achieve a new level of comfort and productivity at the DoubleTree By Hilton Los 24 11 U.S.C. §365(b)(3). Angeles Downtown. Our state of the art new venue is the ideal spot for everything from depositions 25 11 U.S.C. §365(c)(3). to war rooms to board meetings. Featuring high tech tools to ease the work at hand and a 26 11 U.S.C. §365(k). welcoming ambiance at an all inclusive price. Make your reservation by March 31, 2014 and 27 earn Triple Hilton HHonors points. 11 U.S.C. §365(g). 28 See 11 U.S.C. §502(b)(6). 29 See 11 U.S.C. §362(d)(1). 30 11 U.S.C. §365(d)(1). 31 11 U.S.C. §365(d)(2). 32 Id. 33 11 U.S.C. §365(d)(4). 34 Id. 35 There is a federal form for proofs of claim. Where the little things mean everything.™ Administrative expenses are allowable after a request by DOUBLETREE BY HILTON LOS ANGELES DOWNTOWN an entity upon notice and a hearing. 11 U.S.C. §503. 120 South Los Angeles Street, CA 90012 T (213) 629 1200 36 See 11 U.S.C. §726. LosAngelesDowntown.DoubleTree.com 37 11 U.S.C. §503. Restrictions may apply. May not be combined with any other oer. Hilton HHonors membership, earning of Points & Miles and redemption of 38 11 U.S.C. §503(b). points are subject to HHonors Terms and Conditions. ©2013 Hilton Worldwide. 39 11 U.S.C. §726. 40 In re El Toro Materials Co., Inc., 504 F. 3d 978 (9th Cir. 2007), cert. denied, 2008 U.S. LEXIS 3140 (Apr. 14, 2008).

10 Los Angeles Lawyer January 2014 practice tips BY TIMI A. HALLEM AND JASON T. TAKETA

Treatment of Condominium Hotels as Securities after Salameh

ALTHOUGH THE TERM “CONDOMINIUM HOTEL” is common in the hos- ing the units later classified as securities. Unfortunately, there have pitality industry, there is no standard definition of a condominium hotel. been relatively few published decisions applying the Howey test to Rather, the term generally refers to variations on one theme: a real estate condominium hotels, so attorneys generally turn to the release along project that presents itself to the world as a traditional hotel in terms with the numerous no-action letters issued by the SEC since the pub- of appearance and operation, but in which some or all of the hotel’s lication of the release. In summary, based on the release and no-action rooms, units, or free-standing lodging quarters (such as bungalows and letters, the following general legal framework for modern hotel con- cottages) are actually condominiums owned by individuals. dominiums has evolved. Assertions that condominium hotel units may constitute securi- Rental Programs. Rental arrangements that pool all rents received ties are not novel. In 1946, the U.S. Supreme Court, in Securities & and all expenses attributable to rental of all the units in a develop- Exchange Commission v. W.J. Howey Company,1 created the test for ment project, and allocate the net proceeds to the individual owners determining whether a particular transaction qualified as an invest- on a ratable basis, are strictly forbidden. However, a rotational ment contract, hence a security. The Court found a security in any method that assigns hotel guests to condominium units participating “contract, transaction or scheme whereby a person invests his money in a rental program based on the unit type desired by a given guest in a common enterprise and is led to expect profits solely from the with the lowest historic occupancy, subject to accommodating a efforts of the promoter or third party.” guest’s requests for different views, bed types, and unit types, is gen- Under the Howey test, if condominium units are sold with certain erally permissible, provided that participating owners receive the ancillary features, such as a pooling of rental income or certain gross rental revenue derived from the rental of their specific condo- restrictions on occupancy and use, the units will be deemed securi- minium unit, less rental commissions and per-use charges. ties. By the early 1970s, a great deal of uncertainty had arisen about Cost Sharing Arrangements. A continuing affiliation between the the proper application of the Howey test to offerings of condomini- developers or promoters of a project and the project by reason of main- ums and other interests in common-use developments. In response, tenance arrangements will not make the unit a security. The SEC has in 1973, the SEC published the Securities and Exchange Commission consistently confirmed that mandatory arrangements between a pur- Release No. 33-5347,2 which clarified the SEC’s position on the chaser and a developer that pools the costs relating to maintenance, proper application of the Howey test to the offer and sale of condo- upkeep, repair, operation, and management of common areas will not miniums. In summary, the release states that a condominium offer- cause the offering of condominium units to be a security. ing in conjunction with any one of the following collateral arrange- Rental Program Structures. Permissible rental programs must be ments will cause the offering to be viewed as an offering of securities: optional; the purchaser must retain the authority to decide to par- 1) the offering or participation in a rental pool arrangement, 2) the ticipate in the rental program, rent the property through an unaffil- offering of a rental or similar arrangement whereby the purchaser must iated third party, or rent the property independently. The term of the use an exclusive rental agent, hold his unit available for rental for any program must not be for an unreasonable length of time, and par- part of the year, or is otherwise materially restricted in his occupancy ticipants must have a reasonable opportunity to terminate participation or rental of his unit, or 3) the offering or selling of units with an empha- in the program. Finally, developers or promoters cannot offer mate- sis on the economic benefits to the purchaser to be derived from the rial financial incentives to participate in an optional rental program. managerial efforts of the promoter, or a third party designated or Use and Occupancy Restrictions. The SEC has consistently advised arranged for by the promoter, from rental of the units. that developers cannot mandate that unit owners make their units Offering securities without strictly complying with state and fed- available for rent or impose material use restrictions, such as limita- eral securities registration requirements can have drastic conse- tions on the number of days that the owner may occupy the unit. quences. For example, violations of securities laws can be grounds for However, there is a line of no-action letters issued by the SEC imply- civil lawsuits by private plaintiffs or civil or criminal actions by gov- ing that obligations to rent and restrictions on occupancy imposed ernmental agencies, such as the SEC or state securities agencies. by pre-existing governmental zoning regulations, and not by a devel- Private plaintiffs are generally awarded rescission damages for secu- oper, are permissible. The SEC has informally expressed reluctance rities laws violations but not punitive damages or attorney’s fees. When to continue granting no-action letter relief on this basis, which has there are significant resale price declines, private plaintiffs are more called this zoning regulation exemption into question. likely to allege securities law violations, as evidenced by the sudden Manner of Offering. Condominium hotel developers must con- increase in securities law claims against developers in the wake of the sciously market their units without emphasizing any economic ben- financial crisis of 2008 and the accompanying downturn in commercial efits of ownership and adopt strict sales guidelines to ensure uniform and residential real estate. In light of the legal risks, real estate securities practitioners are often Timi A. Hallem and Jason T. Taketa are partners at Manatt, Phelps & Phillips, asked by condominium hotel developers to advise on the structure of LLP, who filed an amicus brief in Salameh on behalf of the Real Estate the developer’s marketing, sales, and rental programs to avoid hav- Roundtable and the National Association of Realtors.

Los Angeles Lawyer January 2014 11 implementation of marketing strategy. Dev- estate. As such, although the closing of the sale The court also rejected what appeared to elopers’ sales programs must be separate and of real estate may not occur for several weeks be the plaintiffs’ strongest argument: that distinct from their optional rental program. or months thereafter, discussing specific rental the real estate sale combined with external fac- Employees and operations of developers’ program terms and entering into rental agree- tors—such as a zoning ordinance restricting sales programs cannot overlap with employ- ments during such period is separate and dis- the occupancy of the units to no more than ees and operations of their rental programs tinct from the sales process. 28 days in a calendar year and requiring that in any way and should be run independently the units be offered to the public for rent as The Salameh Decision out of separate offices. Sales representatives part of the hotel when not occupied—gave may not discuss potential income or revenue The challenge facing many modern real estate them no choice but to sign the rental man- to be derived from rental of the units, possi- securities attorneys is that the release and agement agreement when it was later pre- ble economic benefit from rental of the units, the subsequent no-action letters are not bind- sented. Although the court described this or rental experience with similar condo- ing precedent.6 There have been relatively argument as having “some force,” it found minium hotel products. few published cases addressing the modern flaws with the implicit assumption that the condominium hotel structure (i.e., a condo- only viable use for the condominiums was as The Intrawest Model minium hotel that complies in all material an investment property and posited that In 2002, the SEC issued a no-action letter in respects with the release and prior SEC no- “there is no plausible reason why there can- the matter of Intrawest that generally eased action letters). Thus, the ability to predict not be a viable market for owner-occupied some of the rigid formalities separating con how a court may ultimately rule on the issue hotel condominiums for use as short-term dominium unit sales from the promotion of a has been difficult. vacation homes.” developer-sponsored rental program.3 Intra- In August 2013, however, the Ninth Circuit Although Salameh represents just one of west posited that developers and their sales Court of Appeals issued an important opin- several lawsuits filed by condominium hotel staff could disclose the existence of a rental ion that could establish a safe harbor to pro- buyers since the 2008 financial downturn in program to prospective purchasers and intro- tect condominium hotels from being charac- commercial and residential real estate, it is duce them to members of the developer’s terized as securities under federal and state important in several respects. rental management team to discuss the gen- securities laws. Salameh v. Tarsadia Hotel7 First, Salameh is the only opinion to date eral terms of the rental program. Previously, arose in December 2009 when certain Hard that thoroughly examines a modern condo- the SEC had indicated in several no-action let- Rock Hotel San Diego unit owners filed suit minium hotel that, by all appearances, com- ters that a developer could only discuss its in district court in San Diego seeking to rescind plied with prior SEC direction. For example, rental program with a prospective purchaser their purchases and claiming that the units rather than pool all rents and expenses attrib- in response to a specific request.4 However, constituted securities under federal and state utable and allocate the net proceeds to the indi- Intrawest argued that the SEC’s “don’t ask, securities laws. In characterizing the Hard vidual owners on a ratable basis, the Hard don’t tell” policy concerning renting takes a Rock Hotel San Diego units as securities, the Rock Hotel’s rental program employed a rota- “sound policy to an illogical extreme whereby plaintiffs alleged that the units and the optional tional method that allocated the gross rental an integral part of the purchase—what does rental management program operated by the revenue derived from the rental of a specific the purchaser do with this resort property hotel operator were offered as a single pack- condominium unit, less rental commissions the other 50 weeks of the year?—is often age; therefore, they expected to profit from and per-use charges, directly to the owner of excluded from the prospective purchaser’s their units based on the efforts of the hotel the unit. Furthermore, although Hard Rock investigation.”5 Ultimately, Intrawest suc- developer or hotel operator. However, most of Hotel unit owners were restricted from occu- cessfully argued that mere disclosure of the the purchasers did not sign rental program pying their units for more than 28 days a existence of a rental program as one of the agreements until eight to 10 months after year and obligated to make their units avail- many services offered to unit owners does they had signed their purchase agreements. able to the public for rent as part of the hotel not involve the offer of a security. The Ninth Circuit affirmed the district when not occupied, these restrictions were Intrawest permits rental management rep- court’s dismissal of the plaintiffs’ complaint, not imposed by the developer but rather by a resentatives to generally discuss the rental finding that it did not sufficiently allege facts pre-existing city zoning ordinance. Although program with prospective purchasers and to support claims that condo hotel units in the the hotel did promote the rental program to provide raw, publicly available information Hard Rock Hotel San Diego development unit purchasers, it does not appear that the regarding the rental of comparable units, constituted securities under federal and state hotel did so until after the unit owners had such as occupancy history and rental rates, securities laws. The court of appeals held signed binding unit purchase agreements. upon request. that the plaintiffs did not adequately allege Next, the court reached its decision despite Finally, Intrawest provides that once pur- facts demonstrating that they were offered real an SEC amicus brief arguing that the Hard chasers enter into agreements to purchase estate and rental program agreements as a Rock Hotel units were in fact investment units, representatives of a developer’s rental package or that they were induced to buy the contract securities, based on the totality of the management company may contact those condominiums by the rental program. The facts and circumstances of the offering. purchasers and discuss the specific terms and court also found that the plaintiffs did not Although courts often defer to the SEC’s conditions of the rental program and may also allege that they were even aware of the rental opinions on the application of the securities enter into agreements for rental management, program at the time they signed unit pur- laws, the court was unable to reach the same provided that such agreements may only chase agreements; therefore, they could not conclusion as the SEC. Because the Ninth become effective upon the closing of the sale allege that they were induced to buy the con- Circuit is an influential court nationwide, of the underlying unit. The reasoning upon dominiums by the opportunity to participate the court’s divergence from the SEC’s position which Intrawest relied, and the SEC accepted, in the rental program. The court’s ruling was may prove to be extremely influential in other is that once a unit purchaser has entered into underscored by the large gap in time between jurisdictions in the future. a binding purchase agreement and paid a non- the plaintiffs’ execution of the real estate Finally, although there appears to be ample refundable deposit, that purchaser has made purchase contracts and their execution of evidence in the record that the prospective unit a decision and commitment to purchase the real the rental management agreements. owners knew or should have known that

12 Los Angeles Lawyer January 2014 occupancy of their unit would be significantly restricted and that they would be As an Expert Witness, Attorney required to hold their units out for rent as part of the hotel when not occupied, the court LAWRENCE H. JACOBSON placed significant weight on the plaintiffs’ has consistently been on the Winning Team failure to allege that they relied on (or were even aware of) the actual rental program • Real estate broker, mortgage broker, title • Lawyer malpractice in ethics, business that the developer would later offer. There- insurance and escrow standards of care and real estate transactions fore, condominium hotel developers may be • Interpretation of real estate documents able to insulate themselves from future secu- Practicing real estate law in California since 1968. Past President, Beverly Hills Bar Association. rities law claims based on Salameh by delib- Former Vice President-Legal Affairs, California Association of Realtors. California Real Estate Broker since 1978. erately withholding information about their LAWRENCE H. JACOBSON AB, UCLA 1964, JD UCLA SCHOOL OF LAW 1967 rental programs from prospective unit purchasers during the sales process. TEL 310.271.0747 FAX 310.271.0757 EMAIL [email protected] www.lawrencejacobson.com LAW OFFICES: 9401 WILSHIRE BLVD. SUITE 1250, BEVERLY HILLS, CA 90212 Salemeh’s Limitations Based on the court’s reasoning, one of the key elements of the Intrawest model—the ability of developers to disclose the existence and REAL ESTATE, BANKING, MALPRACTICE terms of a rental management program to EXPERT WITNESS – SAMUEL K. FRESHMAN, B.A., J.D. prospective purchasers—appears to conflict Attorney and Real Estate Broker since 1956 with the contours of the Salameh safe harbor. Banker • Professor, Legal Malpractice • Arbitration • Brokerage • Malpractice Therefore, developers may face certain inher- Leases • Syndication • Construction • Property Management • Finance • Due Diligence ent practical limitations in trying to qualify Conflict of Interest • Title Insurance • Banking • Escrow for the safe harbor, as they may be required to adopt the “don’t ask, don’t tell” policy that Expert Witness • 57+ years State & Federal Courts • 32 articles Arbitrator • Mediator • Manager • $300,000,000+ Property Intrawest successfully argued against. Further- Author “Principles of Real Estate Syndication” more, condominium hotels are no longer nov- elties, and prospective purchasers may expect 6151 W. CENTURY BOULEVARD, SUITE 300, LOS ANGELES, CA 90045 to enter into a rental management arrange- TEL 310.410.2300 Ext. 306 | FAX 310.410.2919 | [email protected] ment. Thus, an integral question concerning the www.samuelkfreshman.com purchase—what does the purchaser do with this resort property the other 50 weeks of the year?—could be excluded from the prospective purchaser’s investigation. ROSS MEDIATION SERVICES In light of Salameh, condominium hotel Integrity Commitment Success developers must continue to structure their marketing and sales processes in accordance SPECIALTY AREAS with the release and re-evaluate their cur- • Real Estate • Business/Commercial rent sales and marketing programs to deter- • Mortgage & Lending • Escrow/Title/Agency mine whether they satisfy the conditions of • Trusts & Estates • Workplace the Salameh safe harbor. Condominium hotel • Construction • Multi-Party developers will have to reconcile the tension • Personal Injury • Professional Liability between the safe harbor’s protections and BARRY ROSS, ESQ., MBA the practical reality of selling condominium (818) 840-0950 hotel units and strike an appropriate balance. I www.ROSSmediation.com

1 SEC v. W.J. Howey Co., 328 U.S. 293 (1946). 2 Guidelines as to the Applicability of the Federal Securities Laws to Offers and Sales of Condominiums GREG DAVID DERIN - MEDIATOR & ARBITRATOR or Unites in a Real Estate Development, Exchange Act Release No. 33-5347, 1973 WL 158443 (Jan. 4, 1973). HONESTY • FAIRNESS • COMMITMENT • CREATIVITY • EXCELLENCE 3 Intrawest Corp., SEC No-Action Letter, 2002 SEC No-Act. LEXIS 787 (Nov. 8, 2002). AREAS OF EXPERTISE: 4 See FC Beach Joint Venture (May 29, 1998); • Entertainment and • Contract and Business Torts Princeville Corp. (Mar. 13, 1991); Diamond Cove Intellectual Property Real Property Associates (Sept. 27, 1990). • • Employment 5 Intrawest Corp., SEC No-Action Letter, 2002 SEC • Corporate and Partnership No-Act LEXIS 787 (Nov. 8, 2002). “Power Mediator” - The Hollywood Reporter, ADR SuperLawyerTM 6 Some developers have sought speciﬁc no-action letter comfort from the SEC directly. However, no-action Faculty - Harvard Negotiation Institute (2004-2012) letters are only binding on the SEC, and while they may Fellow - Chartered Institute of Arbitrators be a very persuasive deterrent against third-party private plaintiffs, they are not binding on third parties. 310.552.1062 I www.derin.com 7 Salameh v. Tarsadia Hotel, __ F. 3d __, 2013 WL 1925 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067 4055825 (9th Cir. 2013).

Los Angeles Lawyer January 2014 13 practice tips BY FERNANDO VILLA

Koontz Curbs Government Power to Impose Development Fees

LAST JUNE, THE U.S. SUPREME COURT handed down a ruling that reined in government’s ability to exact fees from developers in exchange for the right to develop property. In a 5-4 decision, the Court in K oontz v. St. Johns River Water Management District1 held that an agency must meet the heightened constitutional scrutiny of the “essential nexus” and “rough proportionality” test before it can impose conditions on proposed development. The Court’s decision signals that officials cannot evade this constitutional standard by exacting fees instead of an interest in land. It also opens the door to challenges to fee programs and other efforts that impose financial burdens that appear disproportionate to the impact caused by a development—burdens that ought to be borne by the public, not an individual owner. The Koontz opinion embodies the tension between a government’s legitimate interest in reducing impacts of a project and the constitutional imperative of protecting an owner from having to bear the cost of public improvements for which a project does not create a need. The recession has exacerbated this tension as state and local governments struggle to find financing for much needed infrastructure in the face of dwindling tax and other revenues. Agencies have increasingly responded by imposing development impact fees, dedications of property, and construction of off-site improvements as conditions to permit applications to provide public infrastructure. The temptation lies in going too far—requiring a developer to underwrite community benefits that have no relationship to the proposed project. A claim that an agency has succumbed to this temptation lies at the heart of Nollan v. California Coastal Commission2 and Dolan v. City of Tigard.3 The Court, relying on the “unconstitutional conditions” doctrine, ruled that government cannot condition approval of a land use permit on an owner’s relinquishment of a property interest unless it shows an “essential nexus” and “rough proportionality” between the condition and the project’s effects.4 This doctrine has a In Dolan the Court refined the constitutional test employed in “special application” in the land use context because it protects the Nollan by requiring 1) an “essential nexus” between a “legitimate state Fifth Amendment right to just compensation for property government interest” and the condition imposed and 2) a “rough proportional- takes when an owner seeks an entitlement.5 The Supreme Court ity” between the condition and the project’s impact.9 In satisfying the observed, “Land-use permit applicants are especially vulnerable to the second prong, an agency must make an “individualized determina- type of coercion that the unconstitutional conditions doctrine pro- tion that the required dedication is related both in nature and extent hibits because the government often has broad discretion to deny a to the impact of the proposed development.”10 The city of Tigard con- permit that is worth far more than the property it would like to take.”6 ditioned the owner’s application to enlarge her retail store by requir- In Nollan the California Coastal Commission conditioned approval ing dedications of a “greenway” for public use and preservation of of a coastal development permit to build a home on providing a pub- a nearby floodplain and a pedestrian-bicycle pathway easement to lic easement across the owner’s beachfront property to protect the pub- ease car traffic this project could generate. Although concluding lic’s “visual access” to the beach. The Court found it “quite impos- that Tigard showed a “nexus” between these dedications and its legit- sible” how the easement would help those already on the beach see imate interests in preserving a floodplain and reducing traffic, the the beach, or how the easement would lower an asserted “psycho- Court determined that this city did not meet the rough proportion- logical barrier” to using the beach for those driving by the property, ality prong because it failed to “quantify” or individualize how or why building the home would increase public use of the beach or these conditions would mitigate project impacts on the floodplain or how the easement could ease that increase.7 Thus, discerning no relationship between the condition imposed and the impact of the pro- Fernando Villa is a partner at Allen Matkins Leck Gamble Mallory & Natsis LLP 8 RICHARD EWING posed home, the Court invalidated this exaction. who specializes in land use and environmental law.

14 Los Angeles Lawyer January 2014 traffic. The majority found wanting why a impact of this proposal, he offered to provide alternative and filed suit in state court, alleg- public greenway, versus private open space, a conservation easement on the remaining ing an unconstitutional taking without just was needed to protect the floodplain and 11 acres of this site. When he applied to the compensation. looked askance at the city’s “conclusory state- St. Johns River Water Management District The district postured that petitioner had ment,” without more, that the pathway “could for permits under the state’s Water Resources no cognizable claim because, among other offset…traffic demand.”11 Act and Warren S. Henderson Wetlands reasons: 1) no taking occurred since the dis- Two key California Supreme Court deci- Protection Act, the district told petitioner trict denied the permits, 2) it could have sions emerged in the wake of Nollan and that it would not approve construction unless denied the permits outright without provid- Dolan that sought to apply the latter rulings he either: 1) developed only 1 acre, installing ing the option of granting the permit in to development impact fees. In Erhlich v. a costly subsurface water management system exchange for fees to pay for the off-site im- City of Culver City,12 the owner of a sports and deeding the rest of his 13.9 acres to the provements, and 3) a claim under Nollan center sought to rezone his property and district as a conservation easement, or 2) and Dolan does not extend to a demand for amend the city’s general and specific plans to developed on 3.7 acres, deeding the balance money. allow the development of a multiunit con- of the site to the district and paying for The Court rejected each contention in dominium project. The city conditioned these improvements on 50 acres of district-owned turn, opining that the principles of Nollan and entitlements on the owner’s payment of land several miles away. He declined each Dolan regarding nexus and rough propor- $280,000 to replace some of the recreational facilities that would be lost as a result of the proposed project. The owner sued, claiming the fees violated the Mitigation Act13 and constituted an unconstitutional taking of his property without just compensation. The Cal- ifornia Supreme Court concluded that the heightened scrutiny test formulated by Nollan and Dolan applied to this fee “under the circumstances of this case.”14 It interpreted the Mitigation Act’s “reasonable relationship” standard to embody this test but limited this test’s application to exactions imposed “on an individual, discretionary basis,”15 not to those imposed “generally” by “legislatively formulated development assessments.”16 In San Remo Hotel v. City and County of San Francisco,17 the California Supreme Court revisited impact fees in the context of Nollan and Dolan. There, the owners of a hotel challenged in lieu fees exacted by the city under an ordinance that required a developer desiring to convert residential hotel units to tourist use either to build or pay for, by an in lieu fee, housing to replace the lost units. A Solution The Court declined to apply the Nollan/Dolan test to the in lieu fees imposed because they That Fits emanated from a generally applicable development fee: You The “sine qua non” for application of Nollan/Dolan scrutiny is thus the “discretionary deployment of the police power” in “the imposition of land-use conditions” in individual cases. Only “individualized development fees war- rant a type of review akin to the con- ditional conveyances at issue in Nollan and Dolan”…therefore, housing replacement fees under the [ordinance] are * Commercial, Industrial & Residential not subject to Nollan/Dolan/Ehrlich * Income Property & New Construction scrutiny.18 * Personal Property & Holding * Refinance & Short Sale Enter Koontz * Bulk & Liquor Business The Court in Koontz dealt with an owner * Forward & Reverse 1031 Exchange who wanted to develop 3.7 acres of his 14.9- acre property that included installing a dry- 1545 Wilshire Boulevard, 6th Floor, Los Angeles, California 90017 bed pond for retaining and releasing stormwa- Contact: Mark R. Minsky, President | E-mail: [email protected] ter runoff. To mitigate the environmental Telephone: (888) 732-6723 | (213) 484-0855 | Web site: www.comescrow.com

Los Angeles Lawyer January 2014 15 tionality do not change depending on whether risk that the government may use its or alter a specific property interest. The Court the government approves a permit on a con- substantial power and discretion in reasoned that, quite the contrary, “the dition that an applicant will convey a prop- land-use permitting to pursue govern- demand for money at issue here did ‘operate erty interest or denies a permit because the mental ends that lack an essential upon…an identified property interest’ by applicant declines to do so.19 Although no nexus and rough proportionality to directing the owner of a particular piece of taking occurs in the latter event, an “extor- the effects of the proposed new use… property to make a monetary payment.”27 tionate” demand would “impermissibly bur- thereby diminishing without justifica- Indeed, this “direct link…implicates the cen- den the right not to have property taken tion the value of the property.23 tral concern of Nollan/Dolan.”28 without just compensation.”20 “Nor does it The Court observed that had it not applied After Koontz make a difference” that the district could Nollan and Dolan to fees, a government have denied the application outright without could easily evade heightened scrutiny by Unlike the California Supreme Court in conditions, since this agency cannot condition requiring an in lieu fee equal to the cost of the Ehrlich and San Remo, the Court in Koontz a “gratuitous benefit” upon an owner’s waiver property exaction that would itself fail to made no attempt to limit the reach of its of constitutional rights.21 Lastly, and critically, meet this standard.24 holding by, for example, requiring height- the Court ruled that a government’s demand The majority dismissed the district’s con- ened scrutiny only of money exactions for property from a land-use applicant must cern that making money demands subject to imposed on an ad hoc basis. The majority in satisfy the Nollan/Dolan test, “even when scrutiny under Nollan and Dolan would leave Koontz saw as the “fulcrum” of this case the government denies the permit and even no principled way of distinguishing imper- the “direct link” between a demand for when its demand is for money.”22 missible exactions from property taxes. First, money and a specific parcel. A fair reading of The Court’s reasoning for applying this the Court believed that this concern “exag- its opinion suggests that so long as a “demand test to fees is instructive. The majority ex- gerates” the practical difficulty of drawing this for money operates upon an identified prop- tended heightened scrutiny to fees because it distinction.25 Second, the district did not erty interest,” the demand might be subject saw these exactions as no different from claim its demand for money was a tax, and to heightened scrutiny under Nollan and other exactions where the risk of an extor- it could not plausibly have done so because Dolan, regardless of whether that demand tionate demand exists: Florida law did not afford the district the emanates from an ad hoc exaction, a leg- The fulcrum this case turns on is the power to tax petitioner’s property in the man- islative fee program replete with fee schedules, direct link between the government’s ner it sought.26 standards and the like, or other sources. demand [for money] and a specific Finally, the Court rejected respondent’s In her dissent, Justice Elena Kagan rec- parcel of real property. Because of that contention that an obligation to pay money ognized this potentially sweeping breadth of direct link, this case implicates the cen- cannot form the basis of a takings claim the majority’s ruling, and expressed grave tral concern of Nollan and Dolan: the bcause such an obligation does not operate on concern:

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16 Los Angeles Lawyer January 2014 By applying Nollan and Dolan to per- tions in ways that may not be obvious. For 2 Nollan v. California Coastal Comm’n, 483 U.S. 825 mit conditions requiring monetary pay- instance, California courts have consistently (1987). 3 ments—with no express limits except held that the Nollan/Dolan test does not Dolan v. City of Tigard, 512 U.S. 374 (1994). 4 Id. at 391; Nollan, 483 U.S. at 836. as to taxes— the majority extends the apply to conditions imposed as a part of a 5 Dolan, 512 U.S. at 385; Lingle v. Chevron U.S.A. Inc., Takings Clause…into the very heart of development agreement between a city and a 544 U.S. 528, 547 (2005); Koontz, 133 S. Ct. at 2594. local land use regulation and service developer that vests the right to develop prop- 6 Koontz, 133 S. Ct. at 2594. delivery. Cities and towns across the erty in accordance with local regulations in 7 Nollan, 483 U.S. at 838. 8 nation impose many kinds of permit- effect when the agreement is approved. This Id. at 839. 9 Dolan v. City of Tigard, 512 U.S. at 386, 391 (1994). ting fees every day. Some enable a gov- exception to heightened scrutiny rests on the 10 Id. at 391. ernment to mitigate a new develop- principle that such an agreement is freely 11 Id. ment’s impact on the community, like negotiated between a local agency and an 12 Erhlich v. City of Culver City, 12 Cal. 4th 854 increased traffic or pollution—or de- owner.31 But what if a city, believing it could (1996). 13 struction of wetlands…. All now must extract fees and other concessions that the GOV. CODE §§66000 et seq. 14 Ehrlich, 12 Cal. 4th at 860 (emphasis in original). meet Nollan and Dolan’s nexus and Fifth Amendment would otherwise prohibit, 15 Id. 29 proportionality tests. told a developer that it had to enter into a 16 Id. at 876. Justice Kagan expressed hope that the development agreement if it wants the city to 17 San Remo Hotel v. City and County of San Francisco, Court would in the future attempt to con- approve the project? Such a message would 27 Cal. 4th 643 (2002). strain the broad reach of its decision: seem to fit within the paradigm of an “extor- 18 Id. at 670 (citations omitted). 19 Koontz v. St. Johns River Water Mgmt. Dist., 133 Perhaps the Court means in the future tionate” demand from a vulnerable owner S. Ct. 2586, 2595 (2013). to curb the intrusion into local affairs that Koontz found would give rise to a tak- 20 Id. at 2596. that its holding will accomplish…. The ings claim. 21 Id. majority might, for example, approve Of course, the full effect of Koontz on 22 Id. at 2603. the rule, adopted in several States, that the viability of fee programs and other exac- 23 Id. at 2600. 24 Nollan and Dolan apply only to per- tions has yet to be realized. At this nascent Id. at 2599. 25 Id. at 2596. mitting fees that are imposed ad hoc, stage, however, it seems safe to say that the 26 Id. at 2601-02. and not to fees that are generally decision has placed government on notice to 27 Id. at 2599. applicable.30 proceed with caution when crafting and 28 Id. at 2600. As both the majority and dissenting opin- imposing impact fees. I 29 Id. at 2607. 30 ions in Koontz manifest, however, the Court’s Id. at 2609, (citing Ehrlich v. Culver City, 12 Cal. 4th 854, 911 (1996)). 1 Koontz v. St. Johns River Water Mgmt. Dist., 133 S. decision draws no such distinction, and places 31 See, e.g., Leroy Land Dev. Corp. v. Tahoe Reg’l Ct. 2586 (2013). no such limits. The absence of any apparent Planning Agency, 939 F. 2d 696, 697 (9th Cir. 1991). constraints on this ruling could leave a broad range of impact fee programs and other fees vulnerable to a legal challenge if they do not reflect a nexus and rough proportionality between conditions imposed and a project’s ERISA LAWYERS impacts. State and local agencies may be well advised that in adopting impact fee programs, they should attempt to fashion standards Long Term Disability that meet this heightened scrutiny and require • some form of individualized determination • Long Term Care that the amount of the fees to be imposed relates to the extent and nature of the project • Health and Eating Disorder impacts. Fee programs—and undoubtedly ad hoc fee impositions—that do not bear • Life Insurance claims these hallmarks could very well face legal challenges in the aftermath of Koontz. We handle claim denials under both Agencies may respond to this ruling by ERISA and California Bad Faith laws. correctly noting that Koontz dealt with an ad hoc fee exaction. As such, they might say, this ruling has not wrought any change in the State and Federal Courts throughout California distinctions drawn by Ehrlich and San Remo between such fees and those that apply gen- More than 20 years experience erally. California courts might also show Settlements, trials and appeals reluctance to venture afield from these lodestar state court rulings and to further burden financially strapped California cities KANTOR LLP by invalidating fee programs on the basis of KANTOR 818.886.2525 Koontz. Federal courts, however, might not www.kantorlaw.net be so inhibited, particularly if faced with an egregious fee program that lacks any mean- Referral fees as allowed by State Bar of California ingful standards and appears to be a thinly veiled revenue source for a city. Dedicated to Helping People Receive the Insurance Benefits to Which They Are Entitled. Koontz could affect other forms of exac-

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by Richard H. Lee and Jay M. Lichter TheSTAR System Under new California regulations, owners of commercial buildings may be obligated to disclose energy use data via the EPA’s Energy Star program

NEW REGULATIONS adopted by the California Energy Commission (CEC) designed to promote environmentally con- scious practices in commercial real estate transactions may have a significant effect on contract and lease terms and create potential new sources of civil liability. These “green” regulations are the result of a process that can be traced back to 2007, when the California Legislature enacted AB 1103,1 which reflected EPA policy that improving energy efficiency in buildings is the “fastest, cheapest, and largest untapped solution for saving energy, saving money, and preventing greenhouse gas emissions.”2 The new regulations require nonresidential building owners to benchmark and disclose the energy usage of their buildings before entering into major financial transactions that involve those buildings.3 “Energy usage” encompasses a building’s consumption of all different types of energy, including electricity, natural gas, fuel oil, and district steam.4 The new regulations establish a benchmarking system that makes energy consumption information for all nonresidential buildings in the state readily accessible.5 This new system allows “building owners and operators to compare their building’s performance to that of similar buildings and to manage their building’s energy cost.”6 The comparisons are expected to “motivate building operators to take actions to improve” a building’s energy use and help justify the cost of those improvements.7 The CEC’s most recent alternative regulations were adopted in October 2013 as the Nonresidential Building Energy Use Disclosure Program.8 The regulations are now being phased into effect.9 Nonresidential building owners will be required to disclose a building’s energy use over the past 12 months to prospective buyers, lessees, and lenders.10 The regulations also require owners to benchmark that data by providing a com- parison of the building’s energy use to that of similar buildings.11 The legislature has directed the CEC to establish a specific compliance schedule for the new disclosure mandate.12 The schedule requires each nonresidential building to comply with the new regulations at staggered dates based on the square footage of the building. Beginning January 1, 2014, commercial buildings with a total gross floor area measuring more than 10,000 square feet must comply with the new regulations.13 On July 1, 2014, the regulations will become

Richard H. Lee is a partner, and Jay M. Lichter is an associate, with Salisian Lee LLP. They practice in the area of busi-

ness litigation and commercial real estate disputes. MICHAEL CALLAWAY

20 Los Angeles Lawyer January 2014 applicable to buildings with a total gross ing the energy consumed by a building rela- account for the most recent 12 months.30 floor area measuring between 5,000 and tive to its size.24 Currently, a building or The building owner must then generate the 10,000 square feet.14 manufacturing plant is awarded Energy Star building’s data verification checklist from The regulations address the problem that certification if it performs better than at least portfolio manager and electronically submit many nonresidential building owners lack 75 percent of comparable buildings.25 the checklist to the CEC.31 Once this task is information regarding their building’s energy Compliance with the regulations requires complete, the owner must submit the data ver- usage.15 The EPA estimates that an average knowledge of specific Energy Star document ification checklist for the building to 1) a of 30 percent of the energy consumed in maintenance and data uploading procedures. prospective buyer of the building no later commercial buildings is wasted. Wasted A nonresidential building owner may be hes- than 24 hours before executing a sales con- energy increases costs for owners, interferes itant to navigate through these online pro- tract, 2) a potential lessee of the entire build- with accurate valuation of their buildings, grams because they present unknown or ing no later than 24 hours prior to signing a and results in harmful and needless greenhouse gas emissions.16 Specifically, energy use in commercial buildings and manufacturing plants accounts for nearly half of all energy consumption in the United States at a cost of over $200 billion per year.17 Accord- ingly, the regulations through their energy disclosure requirements focus on curbing the misuse of energy and promoting environmental efficiency and responsibility. The CEC regulations seek to remedy these problems by: 1) establishing a compliance schedule, 2) specifying what building charac- teristics and energy usage information must be provided to prospective buyers, lessees, and lenders, 3) identifying what disclosure documents must be supplied, 4) setting a deadline for utility releases of data to building owners while also requiring that utilities protect the confidentiality of customer data, and 5) enabling the CEC to access the energy use data.18 The Energy Star System The centerpiece of the CEC’s new benchmarking and disclosure program is the EPA’s Energy Star portfolio manager system. The portfolio manager is an interactive energy management tool that allows building managers to track and assess the energy consumption of one or more buildings in a secure, uncertain technical and legal requirements. lease, or 3) a lender financing the entire build- online environment.19 The portfolio man- While regulatory compliance does not nec- ing no later than submittal of a loan appli- ager is designed to help a building owner set essarily require legal assistance, lawyers with cation.32 investment priorities, identify underper- building owner clients should consider learn- Assisting in the technical requirements of forming buildings, and verify efficiency ing how to assist them in compliance. the document upload and data log proce- improvements.20 Consumers may recognize Under Title 20 of the California Code of dures, maintaining critical information con- the blue-and-white Energy Star logo that Regulations, a building owner is required to cerning the building, and explaining the need appears on energy-efficient homes and appli- open or update an existing account on the to provide certain information all may become ances. The certification logo indicates that a EPA’s Energy Star program Portfolio Manager duties for attorneys. The strict procedural product meets the energy efficiency require- Web site at least 30 days prior to when dis- requirements of the new regulations will also ments of a given Energy Star product.21 closure is required.26 In addition to provid- have a significant effect on commercial real For commercial real estate, the Energy ing the basics—such as a building owner’s estate transactions. Attorneys will need to Star system employs two specific metrics to contact information—the owner must also consider whether to include provisions ref- describe overall building energy use: 1) the identify the year in which the building was erencing the nonresidential building energy Energy Star energy performance score, and 2) constructed, list all sources of energy use use disclosure program in a contract. At a energy use intensity.22 The Energy Star energy data for the entire building for the past 12 minimum, provisions should be incorporated performance score compares a building to a months, describe each use of space located acknowledging that the owner has disclosed statistically representative sample of similar throughout the building, and request all util- the building’s energy use over the previous 12 buildings. For example, a score of 50 indicates ity27 and energy providers28 serving the build- months to the prospective buyer, lessee, or that a building’s energy consumption falls ing to release energy use data for the entire lender and has downloaded that informa- below the consumption of 50 percent of the building for the past 12 months.29 Once a util- tion to portfolio manager. A more compre- same type of buildings throughout the coun- ity or energy provider receives a request, it hensive provision would reference the specific try.23 The Energy Use Intensity metric must upload all applicable energy use data to building information disclosed in the disclo- describes a building’s energy use, represent- the building owner’s portfolio manager sure summary sheet, a statement of energy

22 Los Angeles Lawyer January 2014 performance, and a data checklist. The facil- Likewise, failure to disclose knowledge specific representations. Energy use data con- ity summary could include these documents of the building’s energy usage could constitute stitutes material information relative to the as exhibits to a contract. a cause of action. As a result, a court could purchase, lease, and finance of commercial rule against the owner and award damages or real estate. The suppression or misrepresen- Tenant Consent even rescind the sale, lease, or finance agree- tation of this information could establish the The new regulations dictate that only build- ment. While the latter remedy is drastic, it basic elements required to present causes of ing owners comply with the new upload and is expressly available for various causes of action for fraud40 or negligent misrepresen- disclosure requirements, but in so doing they action, such as fraud, that might arise from tation.41 A cause of action for fraud further affect the landlord-tenant relationship. The real estate transactions.35 The new regulations exposes an owner to liability for punitive CEC rejected a requirement that landlords may also support a cause of action under damages, which could potentially reach mil- obtain consent for release of energy usage California’s Unfair Competition Law (UCL).36 lions of dollars in liability, depending on the from tenants because it would be “so bur- The UCL is California’s consumer protec- nature and extent of the wrongdoing and densome that it would endanger compli- tion statute and applies broadly to consumers, the financial condition of the wrongdoer. ance.”33 Notwithstanding that decision, land- investors, business customers, and competi- The legal and technical burdens imposed lords could benefit from having energy usage tors. Because the UCL prohibits “unlawful, by California’s new energy disclosure laws are data from tenants, especially when tenants are unfair or fraudulent” business acts or prac- significant. Attorneys with clients who own on separate utility meters. Counsel for land- tices,37 and because the new regulations affir- commercial real estate should learn about lords may advise for obtaining tenant consent matively require disclosure of energy data, these new regulations in order to offer proper to disclose energy use information for pur- an owner’s failure to submit the required advice on compliance. California’s continu- poses of regulatory compliance. information could be deemed unlawful. In ing advancement toward a greener future This may give rise to disputes relating to turn, this failure to comply could constitute an gives attorneys an opportunity to help reduce the program’s incentive to reduce energy unlawful act under the UCL. A court that energy waste. I usage levels. For example, landlords may finds that an owner has violated the disclosure want to incorporate language in leases allow- rules could issue an order directing the owner 1 See AB 1103 (2007), codified at PUB. RES. CODE ing them to limit if not outright control the to disclose the energy usage of the building38 §25402.10; http://www.energy.ca.gov/ab1103. energy usage of their tenants. These provisions or order payment of restitution, including a 2 See Portfolio Manager Technical Reference: Source En- ergy, at http://www.energystar.gov/buildings/tools-and may allow for such measures as automatic return of all money paid to the owner.39 -resources/portfolio-manager-technical-reference-source power shutoff after regular business hours, Owners could also find themselves -energy [hereinafter Portfolio Manager]. limits on the use of temperature controls, exposed to claims for negligent misrepresen- 3 In the matter of: AB 1103 Commercial Building and restrictions on the use of equipment that tation and fraud, depending on such factors Energy Use Disclosure Program Rulemaking, California consumes large amounts of energy. These as an owner’s intent and a buyer’s reliance on Code of Regulations, Title 20, Sections 1680-1684, lease provisions may create conflict with ten- Order No. 12-1212-1h: Order Adopting Regulations ants who consume large amounts of energy. On the other hand, these provisions may also provide tenants with an incentive to operate their businesses with greater energy efficiency. Since these regulations are relatively new, they also present questions concerning enforcement and the potential for litigation. Significantly, the statutes implementing these regulations do not provide the CEC with the authority to impose monetary or other penal- ties for noncompliance. The absence of any specific enforcement mechanism, however, by no means suggests the lack of other legal means of achieving the policy objectives for which the regulations were enacted. The threat of litigation for nondisclosure or inaccurate disclosure could expose an owner to financial liability. In California, if Confidence At The Courthouse. “the seller knows of facts materially affecting the value or desirability of the property which Business litigation is increasingly complex. That is why we believe valuation are known or accessible only to him and also issues must be addressed with the same meticulous care knows that such facts are not known to, or as legal issues. Analysis must be clear. Opinions must be within the reach of the diligent attention and defensible. Expert testimony must be thorough and observation of the buyer, the seller is under articulate. HML has extensive trial experience and can a duty to disclose them to the buyer.”34 A provide legal counsel with a powerful resource for expert testimony and litigation support. building’s energy usage is an important element in determining the value of a property and thus constitutes material information. For More Information Call 213-617-7775 On a positive note, higher value could be Or visit us on the web at www.hmlinc.com placed on buildings for which regulatory BUSINESS VALUATION • LOSS OF GOODWILL • ECONOMIC DAMAGES • LOST PROFITS compliance in general and Energy Star certification in particular can be demonstrated.

Los Angeles Lawyer January 2014 23 and Directing Additional Rulemaking Activities (Dec. 17, 2012) at 1, available at http://www.energy.ca.gov /ab1103/rulemaking/notices/2012-12-12_Corrected _Order_Adopting_Regulations_and_Directing_Additio nal_Rulemaking_Activities_TN-69057.pdf [hereinafter Order Adopting Regulations]. 28th Annual 4 See Portfolio Manager, supra note 2. LAND USE LAW AND PLANNING CONFERENCE 5 See Final Statement of Reasons, AB 1103 Nonresi- !"#$%&#'(%)#*#+,--."",/0#1,-2034.#532.-#637#8"9.-.7 dential Building Energy Use Disclosure Program Rulemaking, California Energy Commission, Notice This unique conference offers a big-picture view of Enroll today & save with early pricing! File No. Z-12-0323-03 (Mar. 8, 2013) at 1, available land use law and planning practice. Speakers provide $455 by Dec 31; $495 after at http://www.energy.ca.gov/ab1103/rulemaking updates on core state and federal case law, legislation, Use Reg# Z3119W /documents/2013-03-08_Final_Statement_of_Reasons and land use practices. For more details and to enroll visit _TN-69881.pdf [hereinafter Final Statement of Reasons]. uclaextension.edu/landuseLAW Also featured is a keynote address by 3 generations 6 or call (310) 267-4264. See id. of San Diego’s planning directors, as well as panels on 7 Id. Planning, Zoning, and Development Law; CEQA; MCLE and AICP (CM) Credit Programs 8 CAL. CODE REGS. tit. 20, §§1680-84. Takings; and Demographics. 15116-13 9 See California Energy Commission Regulations: Non- residential Building Energy Use Disclosure Program: CAL. CODE REGS. tit. 20, §§1680-84. 10 15116.indd 1 12/5/13 9:58 AM See Final Statement of Reasons, supra note 5, at 1. 11 Id. AMERICAN LANGUAGE SERVICES 12 See AB 531, An Act to Amend Section 25402.10 of TRANSLATING & INTERPRETING ALL LANGUAGES the Public Resources Code, Relating to Energy (2009). CERTIFIED PROFESSIONALS 13 See California Energy Commission, Notice Regarding AB 1103 Program Implementation, available at http://www LEGAL .energy.ca.gov/ab1103/rulemaking/notices/2013-08 CORPORATE -14_suspend_notice.pdf. 14 Id. TRANSCRIPTIONS 15 See Final Statement of Reasons, supra note 5, at 5. EXPERT WITNESS TESTIMONY 16 Id. NATIONWIDE OFFICES 17 See Energy Star Strategies for Buildings and Plants, at http://www.energystar.gov. WORLDWIDE COVERAGE 18 See Final Statement of Reasons, supra note 5, at 1-2. 19 See Order Adopting Regulations, supra note 3, ESTABLISHED 1985 ~ EXCELLENT RATES Making the World a Little Smaller at 2; http://www.energystar.gov/buildings/facility DINA SPEVACK 310.829.0741 x 303 800.951.5020 alsglobal.net -owners-and-managers/existing-buildings/use-portfolio -manager. 20 Id. American Language Services : Contact Dina Spevack 21 See Energy Star Energy Efficient Products, at http:/ LALawyer Magazine : 1/6 Page Horizontal: 4-5⁄8” wide x 2-1⁄4” tall /www.energystar.gov. Linda Bekas 213.896.6504 • [email protected] 22 See CEC Energy Use Disclosure Summary Sheet, at PreparedEMPLOYMENT by Kathye Hicks : 310.826.0104 LAWc 310.916.7700 REFERRALS [email protected] 1, available at http://www.energy.ca.gov/2012publi- 1/10/12 Paying Highest Referral Fees (Per State Bar Rules) cations/CEC-400-2012-FS/CEC-400-2012-FS-001.pdf. 23 Id.

24 Id. 25 See Energy Star Strategies for Buildings and Plants, Honored to receive regular employment referrals from at http://www.energystar.gov. over 100 of Californiaʼs fi nest attorneys 26 See CAL. CODE REGS. tit. 20, §§1683, 1684(a). 27 A “utility” is defined as an “entity providing electricity or natural gas to a nonresidential building owner Stephen Danz 877.789.9707 or tenant.” CAL. CODE REGS. tit. 20, §1681(k). & Associates 28 An “Energy Provider” is defined as an “entity pro- Main offi ce located in Los Angeles and nearby offi ces in Pasadena, Orange County, Inland Empire & San Diego viding sources of energy other than electricity or natural gas that are recognized by Portfolio Manager.” Stephen Danz, Senior Partner 11661 San Vicente Boulevard, Suite 500, Los Angeles, CA 90049 CAL. CODE REGS. tit. 20, §1681(c). 29 CAL. CODE REGS. tit. 20, §1684(a). 30 CAL. CODE REGS. tit. 20, §1684(b). 31 CAL. CODE REGS. tit. 20, §1684(c). 32 CAL. CODE REGS. tit. 20, §1683(a). Let Us Help You Overcome the 33 See CEC Initial Statement of Reasons—Proposed Hurdles in Your Estate Disputes Regulations to Implement AB 1103: Nonresidential Energy Use Disclose Program, at 7 (Mar. 23, 2012). 34 Lingsch v. Savage, 213 Cal. App. 2d 729, 735-36 Estate Mediation (1963). Probates, Trusts & Estates 35 See CIV. CODE §§1688, 1689(b)(1); see also Lombardi LA County Volunteer Probate Mediator of the Year v. Sinanides, 71 Cal. App. 272, 279 (1925). 2010, 2011, 2012 36 BUS. & PROF. CODE §§17200 et seq. 37 BUS. & PROF. CODE §17200. 38 Consumers Union of U.S., Inc. v. Alta-Dena Certified Dairy, 4 Cal. App. 4th 963, 972-74 (1992). 39 People v. Superior Court, 9 Cal. 3d 283, 286 (1973). CALL (626) 584-8000 40 See Engalla v. Permanente Med. Group, Inc., 15 or visit us online Cal. 4th 951, 977 (1997). www.woodardmediation.com 41 See Thrifty Payless, Inc. v. The Americana at Brand, LLC, 218 Cal. App. 4th 1230, 1239 (2013).

24 Los Angeles Lawyer January 2014 MCLE ARTICLE AND SELF-ASSESSMENT TEST By reading this article and answering the accompanying test questions, you can earn one MCLE credit. To apply for credit, please follow the instructions on the test answer sheet on page 27.

REAL ESTATE LAW by Loryn Dunn Arkow NEWThe LLC RULLCA’s default provisions must be considered when drafting operating agreements for real estate LLCs

WITH THE START of the new year, the consistency with the limited liability com- Delaware has long been a state of choice California Revised Uniform Limited Liability pany laws of other states.3 While California’s for entity formation because of its overriding Company Act1 (RULLCA) has replaced the enactment of RULLCA brings its limited lia- commitment to uphold freedom of contract, Beverly-Killea Limited Liability Company bility company laws more in line with the as embodied in the Delaware Act,6 in addi- Act (Beverly-Killea).2 Because limited liabil- seven other states that have adopted the Model tion to Delaware’s generally business-friendly ity companies are often the entity of choice Act4 and others that incorporate select provi- body of law. In accordance with the Model for closely held businesses, including many sions, it reaffirms the gap between California’s Act, RULLCA pays homage to freedom of real estate-related enterprises, the recasting of law and the Delaware Limited Liability contract: “It is the policy of this title and California’s limited liability company laws Company Act5 (Delaware Act), which is the this state to give maximum effect to the prin- has widespread and signiﬁcant consequences preference of many operators, lenders, and ciples of freedom of contract and to the for businesses in California. institutional investors. An examination of var- enforceability of operating agreements.”7 RULLCA is modeled upon the Revised ious provisions of RULLCA, as compared to Nonetheless, RULLCA enumerates more than Uniform Limited Liability Company Act the Delaware Act, highlights reasons why (Model Act) published by the National Con- sponsors organizing limited liability companies Loryn Dunn Arkow is a partner in the Los Angeles ference of Commissioners on Uniform State in California may opt to form their entities in office of Kelley Drye and Warren LLP, where she Laws in 2006. The California Legislature, Delaware and be governed by the Delaware counsels real estate investors, lenders, developers, in enacting RULLCA, cited the benefit of Act rather than RULLCA. and sponsors.

Los Angeles Lawyer January 2014 25 20 restrictions on what members of a limited ber-managed limited liability company (or and managers to participate in activities that liability company can agree upon. Further, of a manager in a manager-managed limited may be competitive with the company, with- RULLCA provides new default standards liability company) are: out incurring any obligation to offer any (i.e., provisions that apply in the absence of (1) To account to a limited liability interest in these activities to the company or the parties’ providing otherwise in the oper- company and hold as trustee for it to the other members. This provision could ating agreement) that may complicate com- any property, profit, or benefit derived be read as negating the duty of a member to pany operations, creating a potential trap in by the member in the conduct and refrain from competing with the company, the event that members 1) fail to address winding up of the activities of a limited making it “manifestly unreasonable.” such matters in their operating agreements, or liability company or derived from a use Further, how do managers completely 2) in the case of existing companies, had by the member of a limited liability avoid situations in which they would be act- relied either on prior default rules that are company property, including the ap- ing on behalf of parties having an interest now supplanted by RULLCA or on the propriation of a limited liability com- adverse to the company when, for example, When proceeding under RULLCA, sponsors should precisely craft limitations on fiduciary duties tailored to the specific business plan and scope of the enterprise accounting for RULLCA’s limitations and should further consult California case law for guidance in interpreting what actions constitute a breach of fiduciary duty. absence of the extensive array of default rules pany opportunity. very often the manager’s affiliate is the prop- that appears in RULLCA. (2) To refrain from dealing with a lim- erty manager of the company’s property, ited liability company in the conduct the guarantor of the company’s debt, or a Limits on Contractual Variation or winding up of the activities of a stakeholder in a community where the com- Among other things, RULLCA prohibits an limited liability company as or on pany owns property? Inevitable divergences operating agreement from varying any provi- behalf of a party having an interest of interest are difficult to identify in advance sion relating to mergers and conversions pro- adverse to a limited liability company. without describing them in a manner so vided for in Articles 10 and 12 of RULLCA.8 (3) To refrain from competing with a overly broad it becomes “manifestly unrea- The restrictions also limit the ability to vary limited liability company in the con- sonable.” applicable law and the power of the court in duct or winding up of the activities of Given these challenges, the right under certain contexts.9 However, the restrictions on the limited liability company.13 Delaware law to contractually eliminate contractual flexibility set forth in RULLCA While Section 17701.10(c)(14) of RULLCA fiduciary duties15 appeals to sponsors as a particularly emphasize limitations on the prohibits elimination of these duties, it specif- way to mitigate unexpected liability not ability of the operating agreement to modify ically allows an operating agreement to qual- contracted for by the sponsor. The Delaware fiduciary duties and related obligations, with ify them by 1) identifying specific types or cat- Act cautions that, while fiduciary duties no less than nine subsections of RULLCA egories of activities that do not violate the may be contracted away, the operating agree- Section 17701.09 pertaining to these issues.10 duty of loyalty, if not manifestly unreasonable, ment “may not limit or eliminate liability Addressing a previously existing ambigu- or 2) specifying the number or percentage for any act or omission that constitutes a bad ity under California law, RULLCA states that of members that may authorize or ratify, faith violation of the implied contractual an operating agreement is prohibited from after full disclosure to all members of all covenant of good faith and fair dealing.”16 eliminating the duty of loyalty, the duty of material facts, a specific act or transaction that The requirement of good faith and fair care, or any other fiduciary duty.11 Nor may otherwise would violate the duty of loyalty.14 dealing, also inviolable under RULLCA,17 an operating agreement eliminate the con- This statute raises some questions. arguably sufficiently protects passive in- tractual obligation of good faith and fair First, does the inclusion of these specifi- vestors from true bad acts of managers, as dealing consistent with which a member is cally authorized modifications preclude any merited by public policy. required to perform its duties and exercise its other type of modification of the duty of loy- When proceeding under RULLCA, spon- rights with respect to the limited liability alty? Second, could typical provisions included sors should precisely craft limitations on fidu- company.12 in operating agreements potentially be found ciary duties tailored to the specific business Ambiguity remains, however, with respect by courts to be “manifestly unreasonable”? plan and scope of the enterprise accounting to the extent to which fiduciary duties may be For example, many operating agreements, for RULLCA’s limitations and should fur- modified. For example, RULLCA lists what including operating agreements of real estate- ther consult California case law for guidance the duties of loyalty that a member in a mem- related companies, authorize the members in interpreting what actions constitute a

26 Los Angeles Lawyer January 2014 MCLE Test No. 231 MCLE Answer Sheet #231 THE NEW LLC

The Los Angeles County Bar Association certiﬁes that this activity has been approved for Minimum Name Continuing Legal Education credit by the State Bar of California in the amount of 1 hour. Law Firm/Organization

1. The limited liability company law of which state has B. Even if the operating agreement allows for the Address a policy of giving maximum effect to the principles of sale upon majority approval. City freedom of contract and enforceability of operating C. If the operating agreement does not specify agreements? what vote is required. State/Zip A. California. 11. P ursuant to RULLCA, unless otherwise specified in E-mail B. Delaware. the operating agreement, taking of any action outside Phone C. Both. the ordinary course of the LLC’s activities by the man- State Bar # D. Neither. ager requires unanimous consent of the members. 2. The California Revised Uniform Limited Liability True. INSTRUCTIONS FOR OBTAINING MCLE CREDITS Company Act (RULLCA) permits elimination of the fidu- False. 1. Study the MCLE article in this issue. ciary duties of the manager. 12. RULLCA defines activities in the “ordinary course” 2. Answer the test questions opposite by marking True. as the day-to-day activities of the company. the appropriate boxes below. Each question False. True. has only one answer. Photocopies of this answer sheet may be submitted; however, this 3. The Delaware Limited Liability Company Act False. form should not be enlarged or reduced. (Delaware Act) permits elimination of the fiduciary 13. The default rule for the percentage vote required to duties of the manager. 3. Mail the answer sheet and the $20 testing fee amend the operating agreement under RULLCA is the ($25 for non-LACBA members) to: True. same as it was under Beverly-Killea. False. Los Angeles Lawyer True. MCLE Test 4. RULLCA allows an operating agreement to elimi- False. P.O. Box 55020 nate the contractual duty of good faith and fair dealing 14. In a manager-managed LLC, the members can Los Angeles, CA 90055 of the members. remove the manager without cause upon a majority Make checks payable to Los Angeles Lawyer. True. vote. 4. Within six weeks, Los Angeles Lawyer will False. True. return your test with the correct answers, a 5. The Delaware Act allows an operating agreement to False. rationale for the correct answers, and a certificate verifying the MCLE credit you earned eliminate the contractual duty of good faith and fair 15. A charging order is available as a remedy for judg- through this self-assessment activity. dealing of the members. ment creditors of members of an LLC in: 5. For future reference, please retain the MCLE True. A. California. test materials returned to you. False. B. Delaware. ANSWERS 6. Under RULLCA, one element of the duty of care that C. Both. a manager in a manager-managed LLC has is to refrain D. Neither. Mark your answers to the test by checking the appropriate boxes below. Each question has only from competing with the LLC in the conduct or winding 16. California law permits foreclosure on membership one answer. up of the activities of the LLC. interests in a multimember LLC as a remedy against a True. judgment debtor. 1. I A I B I C I D False. True. 2. I True I False 7. Under RULLCA, one element of the duty of loyalty that False. 3. I True I False a manager in a manager-managed LLC has is to refrain 17. California law permits foreclosure on membership I I from acting on behalf of a party having an interest interests in a single-member LLC as a remedy against 4. True False adverse to that LLC. a judgment debtor. 5. I True I False True. True. 6. I True I False False. False. 7. I True I False 8. RULLCA allows an operating agreement to qualify the 18. Delaware law permits foreclosure of membership 8. I True I False duty of loyalty by identifying specific types or cate- interests in a multimember LLC as a remedy against a 9. I True I False gories of activities that do not violate the duty of loy- judgment debtor. I I I alty, if not manifestly unreasonable. True. 10. A B C True. False. 11. I True I False False. 19. Delaware law permits foreclosure of membership 12. I True I False 9. Under RULLCA, a member is bound by a provision in interests in a single-member LLC as a remedy against 13. I True I False the operating agreement modifying the fiduciary duties a judgment debtor. 14. I True I False of the manager even if the member has not signed True. 15. I A I B I C I D the operating agreement. False. True. 16. I True I False 20. Under RULLCA, a merger must be approved by False. 17. I True I False unanimous consent of the members of each constituent 10. Unanimous consent of the members of a manager- LLC involved in the merger. 18. I True I False managed, California LLC is required for the sale of all or True. 19. I True I False substantially all of the property owned by the company: False. 20. I True I False A. Under all circumstances.

Los Angeles Lawyer January 2014 27 breach of fiduciary duty.18 RULLCA also provided by law, such as in the context of a liability company due to foreclosure of a provides that the fiduciary duties of a man- merger wherein only a majority in interest is judgment lien against the interest (which may ager of a limited liability company may only required for an amendment.23 be for a judgment of a much lesser value) be modified in a written operating agreement However the Delaware Act does not im- because liquid funds to pay the creditor are with the informed consent of the members.19 pose a hurdle of unanimous consent or any scarce. Accordingly, care should be taken that the particular voting requirement for actions RULLCA provides that a court can issue original members, as well as any transferees, by the limited liability company that fall out- a charging order as a lien on the trans- whether by operation of law or otherwise, pro- side of an undefined “ordinary course,” ferrable interest of the judgment debtor in a vide their written informed consent to these including sale, lease, exchange, or other dis- limited liability company and require that provisions. In addition, the operating agree- position of the company’s property, as does any distributions that would otherwise be ment perhaps should include recitals regard- RULLCA.24 Under RULLCA, it is not clear paid to the member be paid instead to the ing the informed consent of the members. what constitutes the “ordinary course,” judgment creditor. RULLCA further allows When proceeding under the Delaware Act, it including whether financings or other trans- for the foreclosure of the lien on the mem- is also necessary to explicitly specify if the par- actions are within the ordinary course. bership interest upon a showing that distri- ties have agreed to eliminate fiduciary duties Providing for unanimous consent of the butions under the charging order will not rather than attempt to contract them away by members to authorize actions of the manager pay the judgment debt within a reasonable omission. The Delaware Supreme Court confers upon minority members a dispro- time.26 In Delaware, on the other hand, the pointed out in 2012 that whether the Dela- portionate power over the destiny of the ability to foreclose in this context has been ware Act imposes default fiduciary duties company. squarely rejected. was unsettled,20 and in response the Delaware Further, RULLCA includes a default pro- In fact, the Delaware legislature amended Act was amended to specify that the rules of vision that a majority of the members can the Delaware Act in August 2013 to firmly law and equity relating to fiduciary duties choose a manager or, with or without notice establish that a charging order is the exclu- apply by default.21 or cause, remove a manager at any time.25 sive remedy that a judgment creditor can The Delaware Act has no similar provision. pursue with respect to the judgment debtor’s Default Voting Specifications In the absence of express requirements regard- interest in a limited liability company. The RULLCA necessitates that an operating agree- ing appointment and removal of managers, amendment states explicitly that attachment, ment also address the percentage vote of very different results would arise with respect garnishment, foreclosure, or other legal reme- members, if any, required for a company to to removal of the manager of a California lim- dies are not available to the judgment credi- take particular actions. A lack of specification ited liability company versus a Delaware one. tor. Further, the amendments also codified regarding whether a vote of members is In California, a manager can easily be ousted that the result will be no different if the judg- required in a manager-managed limited lia- from control unless alternative arrangements ment debtor is a single member or a multi- bility company, without affirmative language appear in the operating agreement. member limited liability company.27 This that a manager can act without a vote of Accordingly, an operating agreement declaration is significant, given that some members on any unspecified matters, likely should set forth with specificity that certain courts have viewed foreclosure by a judg- results in application of RULLCA’s new enumerated actions require a specific thresh- ment creditor against the interests in a single default rule requiring approval by a vote of old of consent (less than that set forth in member limited liability company as more members. This default rule, set forth in Section RULLCA) and that the manager can act with- equitable.28 In contrast, RULLCA provides 17704.07(c)(4), requires unanimous consent out the vote of any other member except as that foreclosure is available upon a showing of all members of the limited liability com- explicitly constrained by the operating agree- that distributions will not pay the judgment pany to do any of the following: ment. The operating agreement should also debt in a reasonable time, which is particu- (A) Sell, lease, exchange, or otherwise specify appropriate requirements for appoint- larly suited to allow for a foreclosure in the dispose of all, or substantially all, of the ment and removal of managers, which may context of a single-member limited liability limited liability company’s property, include removal of the manager only with company. with or without the goodwill, outside cause. Note that the adoption of RULLCA Delaware Law in California the ordinary course of the limited lia- also behooves lenders to require unanimous bility company’s activities. written consents of members up the chain of A question remains as to whether a California (B) Approve a merger or conversion.… ownership if the relevant limited liability court would enforce the choice of Delaware (C) Undertake any other act outside the company agreements are not completely clear law to govern the remedies available to the ordinary course of the limited liability that the manager of the company has author- judgment creditor. According to the Delaware company activities. ity to bind the company in a loan transaction statute, “a limited liability company agree- (D) Amend the operating agreement. without such consent. ment that provides for the application of The prior default rule under Beverly-Killea Delaware law shall be governed by and con- Rights of Judgment Creditors imposed a lower hurdle for decisions not strued under the laws of the State of Delaware otherwise addressed in the operating agree- Also of concern to sponsors, lenders, and in accordance with its terms.”29 However, ment, requiring the vote of a majority in investors in limited liability companies are the RULLCA states that the law of the jurisdic- interest of the members for “matters in which rights of judgment creditors against mem- tion of formation governs 1) the organization a vote is required,” except in the case of bership interests in the limited liability com- of the company, its internal affairs, and the amendment of the operating agreement or pany. In closely held companies, it would be authority of its members and managers, 2) the articles of organization, which specified unan- problematic if a judgment creditor could liability of a member as member and a man- imous consent as the default rule.22 In the interfere in the operations of a limited liability ager as manager for the debts, obligations, or absence of a contrary provision in the limited company or in any way supplant the intended other liabilities of the company, and 3) the liability company agreement, the Delaware members of the company. In addition, own- authority of the members and agents of a Act default rule similarly calls for unanimous ers of membership interests are loath to for- limited liability company.30 It is unclear consent for amendments, unless otherwise feit the entire value of an interest in a limited whether these categories are exclusive of all

28 Los Angeles Lawyer January 2014 other matters addressed by RULLCA, and 5 DEL. CODE ANN. tit. 6, §§18-101 to 18-1109. Section 17713.04 exacerbates this ambiguity, 6 DEL. CODE ANN. tit. 6, §18-1101. 7 declaring that RULLCA applies to all foreign CORP. CODE §17701.07. 8 CORP. CODE §§17701.10(c)(10) and (12). Note that limited liability companies registered in while CORP. CODE §17704.07(c)(4)(B) provides for a ALL MATTERS REAL ESTATE California.31 Perhaps the scope of application default rule of unanimous consent for a merger absent is meant to be limited to the provisions of any other provision in the operating agreement, CORP. RULLCA that specifically address foreign CODE §17710.12(a), which cannot be modified, indi- Landlord-Tenant • Appraisals limited liability companies (such as registra- cates that the agreement of merger shall be approved by all managers and a majority in interest of each Construction • Fire Safety tion, merger, and conversion), or perhaps class of membership interests of each constituent lim- • instead the section makes a far-reaching ited liability company, unless a greater approval is HOA-Condo Property Mgmt. attempt to override the choice of any other required by the operating agreement of the constituent Premises Liability • Escrow state law except for very limited purposes. limited liability company (subject to additional require- While a California court may attempt to as- ments if any member becomes personally liable for any obligations as a result of the merger). sert its domestic law regarding the rights 9 CORP. CODE §§17701.10(c)(2), (3), and (7). OPINEXPERTSOPINEXPERTS.COM of judgment creditors in the case of a Del- 10 CORP. CODE §§17701.10(c)(4), (5), (14), (15), (16), aware limited liability company operating in (d), (e), (f), and (g). California, especially considering Section 11 CORP. CODE §17701.10(c)(4). It is unclear what is 17713.04, it is certain that forming a Cali- meant by “any other fiduciary duty.” See §17704.09. 12 CORP. CODE §§17701.10(c)(5), 17704.09. We Collect Attorney Fee fornia limited liability company will result in 13 CORP. CODE §17704.09. Judgments the availability of foreclosure for judgment 14 CORP. CODE §§17701.10(c)(14), 17704.09. creditors. 15 DEL. CODE ANN. tit. 6, §18-1101(e). ZERO COSTS and ZERO RISK and 16 Id. We only get paid if we collect! The Issue of Practicality 17 CORP. CODE §17101(10)(c)(16). 18 In light of the changes in the California lim- Beverly-Killea referenced that fiduciary duties a man- Buffer yourself from State Bar Complaints and ager owes to the company and the members are those ited liability company statute, some have free up your time to do what you do best. of a partner. CORP. CODE §17153. See also CORP. counseled that limited liability companies CODE §§15904.08, 16404. Call us at 213-986-6020 or visit our website at amend their operating agreements to ensure 19 CORP. CODE §17101(10)(e). www.tjjudgments.com to learn more. that there are no unintended consequences of 20 Gatz Props., LLC v. Auriga Capital Corp., 59 A. 3d omissions from existing operating agree- 1206 (Del. 2012). 21 DEL. CODE ANN. tit. 6, §18-1104. ments. However, given that such amendments 22 CORP. CODE §§17103(a)(2), (3). Beverly-Killea pro- would likely be unpopular with those whose vided a minimum threshold, unalterable by the oper- fiduciary duties or approval rights are sought ating agreement, of a majority in interest for votes on to be altered, as well as that lender consent the amendment to articles or operating agreement, in most cases would be required to amend the dissolution, and merger. CORP. CODE §§17103(b), (c), 17350, 17551(a). operating agreement if a lender is involved, BUSINESS 23 DEL. CODE ANN. tit. 6, §18-302(f). amendment of existing agreements seems 24 The Delaware Act creates a default requirement of OPPORTUNITY impractical. California limited liability com- unanimous consent for admission of new members panies may want to consider conversion to and a two-thirds vote for dissolution. DEL. CODE ANN. Delaware limited liability companies, which tit. 6, §§18-301 and 18-801. 25 Want to purchase generally requires only a majority in interest CORP. CODE §17704.07(c)(5). 26 CORP. CODE §17705.03. Beverly-Killea allowed fore- 32 minerals and other approval, although in many instances con- closure “at any time” without requiring a showing version will also require lender consent, if that distributions under a charging order will not pay oil/gas interests? applicable. the judgment debt within a reasonable time. CORP. Send details to: The emphasis of RULLCA on fiduciary CODE §17302. 27 duties and rights of nonmanaging investors as DEL. CODE ANN. tit. 6, §18-703. P.O. Box 13557 28 See In re Albright, 291 B.R. 538, 539 (Bankr. D. Denver, CO 80201 well as its grant of foreclosure rights to judg- Colo. 2003); Olmstead v. FTC, 44 So. 3d 76 (Fla. ment creditors when a charging order seems 2010). The Florida legislature subsequently amended insufficient is reflective of California’s public its statute to provide for a charging order as the sole policy. Those who prefer the public policy of and exclusive remedy for a judgment creditor, except Delaware, which proclaims itself the corpo- that if the interest charged is an interest in a single member limited liability company and the judgment credi- Look for 2014 rate capital of the world,33 may alternatively tor makes a showing that distributions under a charg- your copy Southern opt for organization of their limited liability ing order will not satisfy the judgment within a with the California I companies in Delaware. reasonable time, the creditor has the option to foreclose February issue Directory of and become the sole member of the company. FLA. of Los Angeles STAT. §608.433. Experts & 1 CORP. CODE §§17701.01 et seq. Lawyer 29 DEL. CODE ANN. tit. 6, §18-1101(i). 2 CORP. CODE §§17000 et seq. Consultants 30 CORP. CODE §17701.06. 3 SB 323 BILL ANALYSIS, SENATE RULES COMMITTEE, 31 CORP. CODE §17713.04. Containing more than 2,000 listings in over JAN. 13, 2012. 32 4 See CORP. CODE §17540.3(b) (until Dec. 31, 2013) 500 categories, this is the definitive resource Florida, Idaho, Iowa, Nebraska, New Jersey, Utah, for finding expert witnesses, legal consultants, and CORP. CODE §17710.03(b)(1) (from and after Jan. Wyoming, and the District of Colombia. See SB 323 litigation service providers, arbitrators, and 1, 2014); DEL. CODE ANN. tit. 6, §18-214. A higher BILL ANALYSIS: SENATE JUDICIARY COMMITTEE HEARING mediators. (Jan. 10, 2012) and National Conference of threshold of approval is required if any of the members Just one of the many benefits Commissioners on Uniform State Laws, Legislative becomes personally liable for the obligations of the con- of LACBA membership! Fact Sheet: Limited Liability Company (Revised), avail- verted entity as a result of the conversion. 33 able at http://www.uniformlaws.org. See http://sos.delaware.gov.

Los Angeles Lawyer January 2014 29 REAL ESTATE LAW

by Lynn Whitcher and Cynthia Hanson TOWER BUILDING Federal, state, and municipal laws are all implicated in the siting and approval of wireless communication facilities

WIRELESS COMMUNICATION has local governmental approvals for new wire- assess how the proposed candidate will ben- become one of the most important sectors of less facility construction as well as modiﬁca- eﬁt the overall network. This is often fol- the national economy.1 Many U.S. house- tions to existing wireless infrastructure. lowed by radio frequency (RF) testing in the holds have given up their landline telephone Each wireless facility (commonly referred field that helps confirm the actual signal entirely in favor of reliance on wireless ser- to as a cell site) can only provide service strength predicted by the computer modeling. vices.2 Businesses have also greatly increased within a given area (the facility’s coverage) These tests are submitted to the municipality. their demand for wireless services as retailers and to a certain number of users (capacity). Infrastructure Selection use mobile devices to scan purchases and Therefore, wireless carriers are continually documents and to complete sales transac- monitoring their capacity to identify areas There are various types of wireless facilities. tions. The connected car of the future is antic- where new facilities may be needed. Customer The most commonly recognized facility is ipated to allow drivers to manage e-mail, complaints of dropped calls and failed calls the tower, which typically comes in three access the Internet, and program television are part of this process. The geographic area designs: the monopole, the self-supporting recordings by voice command. Healthcare is in which a new facility will be considered, lattice tower, and the guyed lattice tower. In going wireless as well, as doctors and hospi- known as a search ring, is literally repre- urban areas, monopoles are quite common. tals are increasingly able to monitor patients sented by a circle, or ring, on a map. The car- This type has a single pylon or pole to which remotely. This augmented demand has result- riers then select potential locations (candi- ed in a need for the wireless industry to dates) within the search ring for consideration. Lynn Whitcher is associate general counsel for expand, modify, and replace its wireless net- For each candidate, computer modeling tests Md7, a wireless services company. Cynthia Hanson work infrastructure. Consequently, service forecasting the coverage for the proposed is the land use project manager for Md7 and an

providers are constantly required to obtain site are prepared in order to help the carrier attorney. AMANE KANEKO

30 Los Angeles Lawyer January 2014 various antennae are mounted. Monopoles owner or the potential for an expedited land The carrier should expect to provide the are often camouflaged as trees, such as a use process made available under a new fed- jurisdiction with information regarding the palm (monopalm), pine (monopine), or euca- eral law.5 site selection process, such as maps identify- lyptus (monoeuc). Monopole facilities typi- ing the search ring, the location of the pro- The Approval Process cally range from 50 to 200 feet in height. The posed candidate, and the proposed coverage lattice tower can be much taller and is cus- Although wireless communication siting, area. The carrier also should provide infor- tomarily installed in rural areas where cov- much like the zoning for any real estate mation on the types of services and the pro- erage must be much broader. Generally, the development, is handled at the municipal posed facility equipment and design, includ- taller the tower, the broader the coverage level, federal and state laws play some part ing identification of the applicant and area. in the approval process. Almost two decades property owner, as well as their respective rep- In addition to tower facilities, cell sites can ago, Congress recognized the benefits to resentatives; a description of the property, also be mounted to various existing struc- American businesses and consumers result- including geographic features and vegeta- tures, including light poles, water tanks, ing from streamlined wireless siting.6 The tion; site plan drawings showing the dimen- building exteriors, and rooftops. The place- Telecommunications Act of 19967 confirms sions of facility components; the type of infra- ment of a cell site on an existing structure is that state and local governments maintain structure proposed (monopole versus known as a collocation. Collocations may be authority over the placement, construction, collocation), including any foundation or camouflaged by faux building facades or and modification of wireless facilities,8 but other support structure; the number, type, even an extension of the building, such as a it also provides certain protections to service and dimensions of antennae; tower lighting faux cupola or clock tower. A camouflaged providers. For example, municipalities can- as may be required by federal law;20 and the site is referred to as a stealth facility, and the not unreasonably discriminate among carri- dimensions and construction materials of the creation of a camouflaged cell site design is ers providing similar services9 or deny an equipment shelter that will house the carrier’s called stealthing. The creativity of stealth application because another carrier serves nontower equipment. To this end, standard facades is endless and may range from faux the area.10 Additionally, municipalities can- submission requirements include construc- boulders to faux cacti, even a faux bison. not act in a manner that prohibits or has the tion drawings signed and sealed by a state- While community members and local prop- effect of prohibiting wireless services.11 licensed engineer showing in detail the ground erty owners may prefer stealthed sites, they Municipalities reviewing zoning applications layout, the tower, equipment dimensions, come with their own set of complications. At for wireless facilities also must act within a and electrical details, along with an engi- times, community opposition to a cell site reasonable time after the request is submit- neer’s structural analysis attesting to the abil- may force a carrier to consider unique stealth ted.12 Under what are referred to as the shot ity of the proposed facility to handle the design solutions that may be economically clock requirements, reasonable response equipment load. and logistically impractical for the carrier. For times have been defined as 90 days for site As part of the approvals process, the car- example, one local community’s efforts to modifications and collocations13 and 150 rier may also be required to establish, among require a cell site design of a faux angel days for a new cell site,14 unless otherwise other things, that the height of the facility is proved unsuccessful due to space limitations. agreed between the parties.15 Municipalities the lowest technically feasible to accomplish This design would actually have negatively may not deny or regulate wireless facilities the carrier goals and that collocation on impacted existing property use.3 Moreover, due to environmental concerns arising from another tower, building, or other structure is communities that seek to limit the visual RF emissions16 so long as the equipment not a viable option. In addition, the carrier effects of a cell site by requiring stealthing complies with FCC regulations.17 Finally, may have to show that the site will have should be aware that stealthed sites may any land use denial must be in writing and emergency backup power sources in the event provide reduced coverage levels and limit supported by substantial evidence within the of a power outage at the property; that the collocation opportunities, which eventually written record.18 site design minimizes visual and other impacts may result in the need for additional cell Municipal regulations governing the land of the site, including by stealth design or sites in the community.4 use approval process for wireless facilities landscaping; and a detailed analysis of why Collocation may also refer to the practice differ widely. Whereas some regulations allow an alternative candidate was not selected. of subleasing space at an existing cell site, wireless communication facilities in certain A carrier may also have to demonstrate a usually a tower. Collocations involve the districts as a matter of right, others require viable plan for the removal of the facility and negotiation of RF interference concerns variances, and still others impose height restoration of the site upon discontinuance among the carriers, minimum space separa- restrictions and setback requirements or visual of use. tion requirements of the various kinds of screening of some type, including landscap- Because each jurisdiction may have its equipment, and structural considerations ing, or may treat wireless facilities as a spe- own unique process, it is difficult to list the arising from the installation of multiple pieces cial use or require site plan approval.19 possible additional steps that may be required of hardware on a single-tower structure, Regardless of the applicable process, the car- of the carrier in order to complete the land which may require reinforcement of the rier should confer with the jurisdiction early use approval process, but, as one example, tower. While an existing tower may be a in the application process to discuss the pro- the carrier may need to subdivide the land so potential candidate for collocation, there posed project and confirm the requirements. that the communication facility is located on may be technological, legal, and business Many jurisdictions will agree to a preappli- a separate parcel. As another example, some barriers. The available space at the tower may cation meeting at which both the applicant (or municipalities require carriers to regularly be at the wrong height, the sublease terms its representative) and a planning official submit construction plans so that the munic- may be too risky, or the rent may be too meet and confer regarding the design and ipality can have some general understanding high. While a municipality may not be able location of the proposed facility. This meet- of potential future site applications.21 Many to force a carrier to collocate, a carrier may ing allows the applicant to get important municipalities make the building permit nevertheless have an incentive to consider col- feedback from the municipality and to make process an integral part of the zoning location for various reasons, including a any requested changes prior to submitting approval process with the building permit good working relationship with the tower the application. approval contingent upon the zoning

32 Los Angeles Lawyer January 2014 approval or vice versa.22 shot clock, carriers have reported persistent seem that many local wireless ordinances may The public hearing is a sensitive compo- delays in the land use approval process. Based require rewriting to incorporate these new nent of the land use approval process in juris- upon information collected by CTIA,29 wire- streamlined processes. In September 2013, dictions where it is required. These hearings less service facility siting applications have Los Angeles instituted a new zoning process may attract community interest as concerned waited for approval anywhere from one to to implement the act’s procedures by allow- citizens sometimes express a preference that three years, even with respect to collocations ing certain wireless facility modifications to the facility be located “not in my back yard.” on existing towers and the simple replacement be handled by administrative sign-off and Carriers must develop a good rapport with the of existing equipment.30 Processing time for administrative plan approval.35 The states of community in order to address their con- applications in several California communi- Michigan, Missouri, and New Jersey have cerns. The local zoning department staff can ties has been reported to range from 28 to 36 enacted similar provisions.36 therefore provide valuable insight into local community responses to previous siting applications, which helps the prospective carrier identify issues that may arise in the public hearing process. Other Considerations As part of the land use process, the local jurisdiction must conduct a California En- vironmental Quality Act (CEQA)23 review in accordance with CEQA guidelines.24 An environmental impact report must be prepared, adverse environmental impacts of the proposed facility must be disclosed to the public, and feasible environmental mitigation measures must be determined and adopted. Additionally, a Phase I Environmental Site Assessment report must be prepared disclos- ing any preconstruction recognized environmental concerns at the site and a plan for addressing these concerns. Implementation of that plan and any subsequent remediation efforts are also disclosed to the municipality.25 Similarly, a National Environmental Policy Act review must be conducted to determine whether the site is located in a wilderness area, wildlife preserve, floodplain, wetland, or area with high intensity lights; whether there are threatened or endangered species; months.31 The California Wireless Association As wireless technology and demand con- whether the site is located within view of has taken an active role in working with tinue to advance, the land use approval historic properties or within designated his- local jurisdictions throughout the state to process has adapted as well. From the juris- toric districts; whether the site is located on reduce the length of time that applications are dictional standpoint, local authorities have a Native American religious site; and whether in process. begun to accept land use applications via e- the site will be compliant with certain RF As part of the Middle Class Tax Relief mail. These submissions are easily tracked, emission-related requirements.26 and Job Act of 2012, recognition of the vital saved, catalogued, and reviewed. Additionally, All wireless facilities must be evaluated to importance of a streamlined approval process electronic materials are more easily forwarded determine whether the site will be located resulted in the passage of important wireless to all necessary parties. This is a faster, greener, within an area that is registered, or may be facility deployment legislation. With respect and more cost-effective approach. registered, for listing in the National Register to the placement of new equipment on an From a technology standpoint, wireless of Historic Places. Placement of wireless facil- existing facility, or the sublease of space at an networks are adapting as well. The tradi- ities within these environmentally sensitive existing facility by a new carrier to the site (i.e., tional wireless network model built on large, areas will require FCC approval.27 collocation), the federal act provides that local outdoor wireless facilities (macrosites) has For facilities located on the California governments must approve such land use evolved to include smaller wireless facili- coast, the applicant must determine whether applications so long as the changes will not ties known as microcells, small cells, and Dis- a local coastal plan applies in order to ensure substantially change the physical dimensions tributed Antenna Systems. The advantage of that the facility will meet the plan require- of the tower facility.32 This effectively pre- these smaller cell sites is that they provide ments. For other coastal areas, the applicant empts zoning review processes and condi- continuous coverage to a select group of must work with the California Coastal tional approvals. The FCC has confirmed that users located in close proximity to the site. Commission to ensure that the facility is con- these site modifications may be handled Because these small cells are often located on sistent with Coastal Commission require- through an application for administrative private property or outdoors, but within ments.28 approval.33 The authority of the FCC to pro- the public right-of-way, they often require no Notwithstanding the ubiquitous nature mulgate and enforce these regulations was zoning approvals. Small cells thus provide a of wireless facilities and the federal imposi- recently upheld by the U.S. Supreme Court in benefit to both the community and the car- tion of timely review requirements under the Arlington v. FCC.34 Accordingly, it would rier by being visually unobtrusive and eas-

Los Angeles Lawyer January 2014 33 ily deployed. STITUTION: EARLY RELEASE ESTIMATES FROM THE limited number of antennas on an existing monopole The potential benefits from wireless devices NATIONAL HEALTH INTERVIEW SURVEY, 1 (May 2010), by a new carrier subleasing space at the site may poten- available at tially qualify. See also Wireless Telecommunications and services are limitless. Therefore, expedi- http://www.cdc.gov/nchs/data/nhis /earlyrelease/wireless201012.pdf. Bureau Offers Guidance on Interpretation of Section tious wireless facility siting will continue to be 3 Verizon Clips the Wings of Proposed Glassell Park 6409(a) of the Middle Class Tax Relief and Job an essential part of the conveniences we have Angel, theeastsiderla.com (Oct. 14, 2011), available at Creation Act of 2012, FCC Public Notice (Jan. 25, come to expect in everyday life. I http://www.theeastsiderla.com/2011/10/verizon-clips 2013). -the-wings-of-proposed-glassell-park-angel. 6 Peter M. Degnan, et al., The Telecommunications 4 Wireless Facility Siting 101: A Resource for Local Act of 1996: § 704 of the Act and Protections 1 Petition for Declaratory Ruling to Clarify Provisions and State Planning Authorities, at 24, available at Afforded the Telecommunications Provider in the of Section 332(c)(7)(B) to Ensure Timely Siting Review http://calwa.org/wp-content/uploads/2012/01/PCIA- Facilities Siting Context, 3 MICH. TELECOMM. TECH. and to Preempt Under Section 253 State and Local Wireless-Infrastructure-101-FINAL-6.pdf. L. REV. 1, 3 (1997), available at http://www.mttlr.org Ordinances that Classify All Wireless Siting Proposals 5 The Middle Class Tax Relief and Job Creation Act of /volthree/mclaren.pdf (citing H.R. Conf. Rep. No. as Requiring a Variance, Declaratory Ruling, 24 FCC 2012 (Tax Act) provides that local governments must 104-458, at 113 (1996), as reprinted in 1996 Rcd 13994, ¶5 (rel. Nov. 18, 2009), available at approve modifications of existing wireless facilities U.S.C.C.A.N. 124). https://hraunfoss.gov/edocs_public/attachmatch/FCC that would not result in a substantial change in the phys- 7 Telecommunications Act, Pub. L. 104-104, §704, -09-99A1.pdf [hereinafter Petition]. ical dimension of the site. See Pub. L. 112-96, §6409, 110 Stat. 56 (1996), partially codified at 47 U.S.C. 2 STEPHEN J. BLUMBERG & JULIAN V. LUKE, CENTERS FOR 126 Stat. 156 (2012). For example, the addition of a §332(c)(7). DISEASE CONTROL AND PROTECTION, WIRELESS SUB- 8 47 U.S.C. §332(c)(7). 9 47 U.S.C. §332(c)(7)(B)(i)(I). 10 Petition, supra note 1, at ¶56. 11 47 U.S.C. §332(c)(7)(B)(i)(II); §253(a). 12 47 U.S.C. §332(c)(7)(B)(ii). 13 Petition, supra note 1, at ¶46. 14 Id. at ¶48. 15 Id. at ¶50. 16 47 U.S.C. §332(c)(7)(B)(iv). 17 See 47 C.F.R. §1.1310. 18 47 U.S.C. §332(c)(7)(B)(iii). 19 See, e.g., SANTA BARBARA COUNTY ARTICLE II COASTAL ZONING ORDINANCE §35-144 F, available at http://www.sbcountyplanning.org/permitting/ldpp /auth_reg/ordinances.cfm. 20 Towers of a certain height or located within a certain proximity to airports must be reviewed by the FAA. Upon a determination by the FAA that the tower does not pose a danger to air traffic, the site must be registered with the FCC. The FCC, based on recommen- dations issued by the FAA, may require tower lights, paint, or other markings to ensure the tower is visible to aircraft. 21 See, e.g., COUNTY OF SAN DIEGO ZONING ORDINANCE §§6980 et seq., available at http://www.sdcounty.ca .gov/pds/zoning/z6000.pdf. 22 See, e.g., BERKELEY, CAL., CODE SUB-TITLE 23B. 23 PUB. RES. CODE §§21000 et seq. 24 CAL. CODE REGS. tit. 14, §§15000 et seq. 25 47 C.F.R. §§1.1307(a)(4), 1.1312(a). 26 42 U.S.C. §§4321 et seq. 27 36 C.F.R. §800, Subpart B. 28 PUB. RES. CODE §30251. 29 The CTIA is an international nonprofit organization representing the wireless communications industry whose members include wireless carriers and their suppliers, as well as providers and manufacturers of wireless data services and products. See http://www.ctia .org/aboutCTIA. 30 Petition, supra note 1, at ¶33. 31 Id. 32 Tax Act, Pub. L. 112-96, §6409, 126 Stat. 156 (2012). Anita Rae Shapiro 33 Wireless Telecommunications Bureau Offers SUPERIOR COURT COMMISSIONER, RET. Guidance on Interpretation of Section 6409(a) of the Middle Class Tax Relief and Job Creation Act of 2012, FCC Public Notice (Jan. 25, 2013), available at PRIVATE DISPUTE RESOLUTION ftp://ftp.fcc.gov/pub/Daily_Releases/Daily_Business /2013/db0128/DA-12-2047A1.txt. PROBATE, CIVIL, FAMILY LAW 34 Arlington v. FCC, 569 U.S. ___, 133 S. Ct. 1863 PROBATE EXPERT WITNESS (2013). 35 Wireless Telecommunication Facilities: Section TEL/FAX: (714) 529-0415 CELL/PAGER: (714) 606-2649 6409(a) Policy and Review Procedures, Office of Zon- ing Administration, City of Los Angeles, Memorandum E-MAIL: [email protected] (Sept. 3, 2013). http://adr-shapiro.com 36 MICH. COMP. LAWS §125.3514 (2012); N.J. STAT. ANN. §40:55D-46.2 (2012).

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Los Angeles Gets a New Mural Ordinance

LAST OCTOBER, PURSUANT TO THE NEW CITY MURAL ORDINANCE,1 The ordinance exists alongside other laws regulating art, includ- the Department of Cultural Affairs (DCA) of Los Angeles processed ing the federal Visual Artists Rights Act (VARA) and the California its first applications for new public art murals, ending a decade in Artist Protection Act (CAPA),5 the Copyright Act,6 and common law which they were in legal limbo. Older murals had been haphazardly rules concerning ownership of property.7 CAPA was the nation’s painted out or left in disrepair, and uncertain landowners commis- first moral rights law. VARA, more complex and limited than CAPA, sioned no new murals. was passed a decade later and preempts CAPA, although not com- In 2008, Judge Collins of the Central District held that exemp- pletely.8 Under VARA and CAPA, the landowner can destroy art after tions to the ban on off-site advertising and supergraphics vested too giving the artist 90 days’ notice. I have worked on a few VARA dis- much discretion in the city. However, in 2010, the Ninth Circuit putes, and whether the artist can be found is always an issue. overruled that holding, finding that the city’s regulation of super- It remains to be seen how VARA and CAPA will interface with the graphics and off-site advertising was constitutional. In 2011, the city council commis- sioned a Mural Working Group that approved Murals are already being painted, and unless enjoined, the law a general plan for time/place/manner permits, and after dozens of meetings held around the city, including with graffiti artists, a near- should result in a flowering in public art in Los Angeles. final version of the law made its way to the city’s Planning and Land Use Management Committee last summer. The new ordinance distinguishes between advertisements and new ordinance. For instance, the statute provides that a building owner murals, defining an “original art mural” as a “one-of-a-kind, hand- can remove a mural within two years upon request. DCA regulations painted, hand-tiled, or digitally printed image on the exterior wall of call for the 90-day waiting period of VARA and CAPA, but a build- a building that does not contain any commercial message” that ing owner may believe he or she can remove a mural once the city “advertises a business conducted, services rendered, or goods produced approves removal. Also, one can assume that constitutional challenges or sold.”2 Older murals are grandfathered in.3 will arise from the billboard industry. Meanwhile, murals are already Most significantly, the ordinance allows permitted and registered being painted, and unless enjoined, the law should result in a flow- murals on private property. The DCA’s rules include “neighborhood ering in public art in Los Angeles. Most of the revered murals in Los involvement requirements,” meaning that an applicant for mural Angeles are over 20 years old. Many street artists and graffiti artists approval must send a notice to the appropriate neighborhood coun- are chomping at the bit to get to work on new public art. cil 45 days before the DCA registers the mural. The DCA retains sole Overall, the new mural ordinance is a boon for the city. Artists are authority to approve the application under a content-neutral deter- now challenged to create great works of public art. Building owners mination. When the mural is registered, the building owner must record and art dealers can commission these works without fear of destruc- a covenant with the county and DCA.4 tion by the city. Artists and building owners—under common respon- By definition, a mural must remain unaltered for two years. The sibility of their rights, including moral rights, copyrights, and the law ordinance contains additional miscellaneous exclusions of murals over of ownership of the physical work of art—should bargain and come building openings, certain lighted murals, and murals extending to agreement in writing. Most importantly, public art may someday beyond structures upon which they are placed or 100 feet above grade. be as much as a part of property law as easements or fixtures. I Currently, murals cannot be painted on single-family residences. This provision was controversial, as one version with the single- 1 See L.A., CAL., CODE §§14.4.2, 14.4.3, and 14.4.20 (all as amended), L.A., CAL., family residence restriction and one without were considered by the ADMIN. CODE §22.119, available at http://clkrep.lacity.org/onlinedocs/2011/11 city council. The more limited version passed, but council members -0923_ord_182706.pdf, and Rules promulgated by the DCA. 2 L.A., CAL., CODE §14.4.2 (as amended). Gilbert Cedillo and José Huizar moved that their districts be allowed 3 L.A., CAL., ADMIN. CODE §22.119(c). to establish a pilot program permitting murals to be created on 4 L.A., CAL., ADMIN. CODE §22.119(b); see also http://www.muralconservancy.org. homes, and other neighborhoods (in Venice and South Central Los 5 117 U.S.C. §106A; CIV. CODE §987. Angeles) are joining. A certain public reluctance regarding permitting 6 17 U.S.C. §§101 et seq. murals on single-family residences is understandable in view of con- 7 See Lubner v. Los Angeles, 45 Cal. App. 4th 525, 527 (1996); CIV. CODE §987. 8 cerns over property values, but the proposed opt-in procedure for See 5 PATRY ON COPYRIGHT §§16:39 et seq. Districts 1 and 14 will be a testing ground for these fears. Indeed, the ordinance as written could also exclude traditional tiled entries or art Eric Bjorgum is a shareholder at Karish & Bjorgum, PC, an intellectual prop- removed from the common concept of a mural. erty firm in Pasadena.

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