Real Estate Legal Update OWNER and ______

July 2013

In this Issue

Real Estate Legal Update OWNER AND ______

LISTING AGENTS OWNER AND LISTING AGENTS OWE DUTY TO VISITORS TO PROPERTY, OWE DUTY TO INCLUDING REAL ESTATE AGENTS VISITORS TO PROPERTY, By Candace Kallberg INCLUDING REAL ______ESTATE AGENTS The question of notice often comes up in premises liability cases, typically brought  against the owner or operator of a business. It also arises in landlord/tenant scenarios. In the recent case of Hall v. Rockcliff Realtors (2013) 215 Cal. App. 4th 1134, the First POCKET LISTINGS: Appellate District held that as the agent of the property owner, a real estate agent owes a general duty of care to all persons coming upon the property, as does the owner. DO THE RISKS Information about a property known by an agent is imputed to the owner. They are OUTWEIGH THE “deemed to have notice of whatever either has notice of, and ought, in good faith and the BENEFITS? exercise of ordinary care and diligence, to communicate to the other.” (Civ. Code § 2332)

 Plaintiff, real estate agent, was showing property to a client when a hinge on a pull- down attic stairway broke, causing her to fall to the ground. Relying on the few reported THE HAMP cases on this topic, Merrill v. Buck (1962) 58 Cal. 2d 252 and Coughlin v. Harland L. DOCTRINE MAY Weaver, Inc. (1951) 103 Cal. App. 2d 602, the court held that a real estate agent has a duty IMPOSE A NEW to notify visitors of marketed property of concealed dangerous conditions of which the REQUIREMENT ON agent has actual or constructive knowledge. The owner and listing agents had reason to LENDERS know of the dangerous condition of the ladder based on an inspection report, which one of the agents admitted to looking at. Despite the fact that at least 100 persons had visited the property prior to this incident without a problem, the court held a triable issue of fact  existed as to whether the listing agents knew or should have known of the concealed danger and pointed it out to those who came to the premises. MKERT WELCOMES One further concern about this case is that it may expand the disclosure duties of an MARY E. WORK agent to disclose not only what they actually know, but what they "constructively" know AS ITS NEWEST (i.e. information buried in an inspection report whether or not the agent was cognizant of PARTNER it.) ______

POCKET LISTINGS: DO THE RISKS OUTWEIGH THE BENEFITS?

By Fredric W. Trester ______

A pocket listing is one which is held by the listing agent, and not advertised through public channels such as the MLS. While they are more frequently found in (continued)

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commercial transactions (some brokerages specifically advertise for principals only on Loopnet or other commercial sites), they are becoming more common in residential transactions.

Pockets are often marketed through word of mouth, direct mail, or on the broker’s own websites. Why would a seller agree to a pocket listing, when it obviously does not expose the property to the universe of buyers. Explanations include sellers who do not wish to have unqualified buyers come through their homes, clients who are wealthy and/or celebrities, or sellers who wish to keep the sale confidential.

MLS rules require that listings be placed in the MLS (see Model MLS Rule 7.5 requiring submission within two days). These MLS rules allow pocket listings, but only when a certification signed by the seller is submitted. Many Association of Realtors provide forms such as the “Seller Instruction to Include Listing” put out by the California Association of Realtors.

THE RISKS OF POCKET LISTINGS

1. Breach of Fiduciary Duty Resulting in Underpricing as to the Seller and Overpricing as to the Buyer.

The following real life examples demonstrate this risk. In one case an elderly widow advised her agent she did not want the property advertised in the MLS. The agent brought in an investor with whom she had worked before. After the sale of the seller’s children claimed the property was $300,000 underpriced and sued the agent. Hurting her defense, the agent failed to keep her comps which she gave to the seller.

In another case a 90 year old owner of a commercial building debated whether to fix the building up and rent it, or sell it. His property manager had the building appraised for between $2.6 million “as is,” and $3.2 million fixed up. The property manager brought in a buyer (who was later learned to be his cousin) who offered $2.5 million. A week following the close of escrow the buyer flipped the property for $4.2 million. The agent was paid a fee by his cousin on the flip

In the first case the agent was alleged to be negligent in determining a price. In the second case the argument was made that there was a breach of the duty of loyalty in that the agent put his interests before that of the seller.

Potential risks arise also where an agent advertises the property but does not put it in the MLS, seeking only to sell to principals. In that situation, buyer’s agents lose the incentive to bring offers.

Buyers also can overpay for pocket listed properties if their agents do not value the property properly.

The lesson here is that it is the agent must explain in writing all of the consequence of a pocket listing, and obtain informed consent before marketing the property as a pocket. The agent should also keep all of his/her comps showing how the price was obtained.

2. NAR Code of Ethics

Pocket listings could result in violations of the NAR Code of Ethics. Article 1 requires that agents present all offers and counter offers objectively and quickly as possible to a seller. Further, Article 1 requires the Realtor® to “promote and protect the interests of the client.” Further, Article 3 requires cooperation between brokers (although it does not obligate listing agents to compensate other brokers). This includes a “duty to cooperate. . .,” i.e., the obligation to share information on a listed property.

(continued)

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3. The Risk of Not Being Paid.

If a property is not in the MLS, a buyer’s agent’s commission is not protected. A seller may accept the offer which is procured by a buyer’s agent, but if the buyer’s agent has no written agreement with the listing agent to be paid, the listing agent has no obligation to pay them. As such, the buyer’s agent either must enter into a Buyer’s Broker Agreement with the buyer, or a cooperating broker’s agreement with a broker.

4. Fair Housing Violations

The most obvious would be if a seller says they want to keep the property off the MLS because they don’t want to sell to a particular group of people, such a people without families. More subtle however, are claims that the pocket listing has a “disparate impact.” This means that the practice has a “discriminatory effect” and “results in a disparate impact on a group of persons. . . or perpetuates segregated housing patterns. . .” 24 CFR §100.500. Examples include private arrangements with other agents to prevent the property to be marketed to particular ethnic groups, because all of the agents may be of a particular ethnic group themselves.

5. Anti-Trust Violations

Brokers now are creating private websites on which they list their properties to a select group of other brokers. If there are any types of minimum commission arrangements agreed upon this could be viewed as “price fixing” which is a violation of anti-trust laws. This would subject all participants in said “private MLS” to potential exposure for this violation.

6. Deterioration of Reported Information.

MLS sales are reported to the public when they are dissimilated on other websites such as Trulia, Redfin, or Realtor.com. These sites then can create graphs showing trends in a particular market, and provide quality information for comparable sales. Engaging in pocket listings removes a certain number of properties from the market, which can deteriorate the information provided by these websites. This can have an adverse effect on the entire industry.

CONCLUSION

It seems that it is a rare occasion where a pocket listing would actually benefit a seller. Agents should be extremely cautious in dealing with pocket listings, and Associations of Realtors should consider creating advisories that agents can provide to sellers explaining all the risks of a pocket listing so that the agent can demonstrate that he obtained informed consent. Agents should be particularly careful when dealing with elderly sellers.

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THE HAMP DOCTRINE MAY IMPOSE A NEW REQUIREMENT ON LENDERS TO COMPLY WITH A MODIFICATION OFFERED TO A BORROWER HOWEVER, IT WILL NOT NECESSARILY VOID A FORECLOSURE SALE

by Rinat B. Klier Erlich ______

In the last few years, there have been many cases brought by borrowers challenging foreclosure sale of their homes. The theories of liability claimed by the borrowers varied and have been extensively analyzed by the Court of Appeal. Most of those lawsuits have resulted in quick dismissals. (continued)

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The latest claim out of California, West v. JPMorgan Chase Bank, N.A., (2013) 214 Cal.App.4th 780 addressed the United States Department of the Treasury, Home Affordable Mortgage Program (HAMP) Supplemental Directive 09- 01 (Apr. 6, 2009). The Court found that if the lender approves a trial period plan (TPP), and the borrower complies with all the terms of the TPP, and all of the borrower's representations remain true and correct, the lender must offer a permanent loan modification. Under HAMP guidelines, if the borrower complies with the terms and conditions of the TPP, the loan modification becomes effective on the first day of the month following the trial period. The bank has some limited discretion to set the precise terms of an offered permanent modification if the borrower has fulfilled the TPP's conditions. Yet, the bank is required to offer some sort of good-faith modification to the borrower consistent with HAMP guidelines.

In West, plaintiff alleged that she had made modified payments under the TPP and that the lender, after accepting several payments, had denied a modification and foreclosed without notice. The bank challenged the pleading in a demurrer. The Court held, for purposes of a demurrer, that the complaint alleged sufficient facts to state fraud with the required particularity by describing misrepresentations about the modification, showing justifiable reliance on the representations, and alleging that such reliance had caused the borrower to forego taking legal action to stop the foreclosure sale.

Breach of contract was also sufficiently pleaded, which included incorporating HAMP requirements mandating that a lender’s offer of a good-faith modification to a borrower complying with a trial plan is an agreement. Many federal courts have concluded that a trial loan modification under HAMP constitutes a valid, enforceable contract, at least at the pleading stage of litigation. See e.g, Wigod v. Wells Fargo Bank, N.A. (7th Cir. 2012) 673 F.3d 547, 556–557. While the TPP signed by plaintiff, and prepared by the bank, did not expressly include the proviso that the bank would offer a permanent loan modification if plaintiff complied with the agreement terms, such a proviso was imposed by HAMP. Since a contract must be interpreted in a way to make it lawful (Civ. Code, § 1643), to make the TPP lawful, it must be interpreted to include the proviso imposed by the HAMP Directive. Also, to the extent that the bank claims that the contract was ambiguous, ‘when a contract is ambiguous, a construction given to it by the acts and conduct of the parties with knowledge of its terms, before any controversy has arisen as to its meaning, is entitled to great weight, and will, when reasonable, be adopted and enforced by the court.” Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 921. The TPP, “which was drafted before a controversy arose shows that the bank intended, at the very least, to give plaintiff the option and ability—before any foreclosure sale—to challenge the decision to deny her a permanent loan modification.” West, at 798-799.

Lastly, unfair or fraudulent practices under Bus. & Prof. Code, § 17200, was also sufficiently alleged. “An act or practice is unfair if the consumer injury is substantial, is not outweighed by any countervailing benefits to consumers or to competition, and is not an injury the consumers themselves could reasonably have avoided.” Daugherty v. American Honda Motor Co., Inc. (2006) 144 Cal.App.4th 824, 839.

However, the Court also held that the dismissal of the conversion and slander of title causes of action was affirmed, since they were not properly challenged by the plaintiff. Quiet title was also not properly alleged since plaintiff did not name the subsequent purchaser as a defendant in her complaint. Finally, and most importantly, the trustee's sale was not void and should not be vacated, because there was a proper substitution of trustee recorded under Civ. Code, §2934a(d); the notice of default was signed by an agent pursuant to Civ. Code, §2924(a)(1); and the complaint lacked an allegation of tender.

A challenge to the validity of a trustee's sale is an attempt to have the sale set aside and to have the title restored. Lona v. Citibank, N.A. (2011) 202 Cal.App.4th 89, 103. The elements of a cause of action to set aside a foreclosure sale (continued)

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are: (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale suffered prejudice or harm; and (3) the trustor or mortgagor tenders the amount of the secured indebtedness or was excused from tendering. The first element may be satisfied by alleging that: (a) the trustee or beneficiary failed to comply with the statutory procedural requirements for the notice or conduct of the sale; (b) the trustee did not have the power to foreclose; © the trustor was not in default, no breach had occurred, or the lender waived the breach; or (d) the deed of trust was void.

If a substitution of trustee is effected after recordation of a notice of default but before recordation of the notice of sale, the beneficiary or its agent must cause a copy of the substitution to be mailed to all persons to whom a notice of default is required to be mailed under Civ. Code, §2924b. See, Civ. Code, §2934a©. Once recorded, the substitution shall constitute conclusive evidence of the authority of the substituted trustee or his or her agents to act pursuant to this section. §2934a(d). In West, there were no sufficient allegations that the substitution of trustee was not properly recorded. The trial court properly took judicial notice of the Notice of Default and Election to Sell and the Substitution of Trustee, both recorded documents. Moreover, in regards to plaintiff’s claim of lack of proper notice the recorded documents were also used to substantiate the notice.

Still further, when a person is seeking to set aside a foreclosure sale (e.g., quiet title) an allegation of tender of the indebtedness is necessary to assert that the sale is voidable due to irregularities in the sale notice or the procedure. Abdallah v. United Savings Bank (1996) 43 Cal.App.4th 1101, 1109. The rationale behind the rule is that if the borrower could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the borrower. An offer, or tender to pay the debt, is not required where it would be inequitable, such as where the borrower has a legal right to avoid the sale. In West, the plaintiff did not have any allegations of tender. As a result, although part of plaintiff’s case was revived and remanded, the most important cause of action-- trying to void the foreclosure sale-- remained dismissed. This was a win without a victory.

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ABOUT THE AUTHORS ______

Fredric W. Trester is a named partner on the firm’s Real Estate Team. His practice focuses on real estate and civil litigation, as well as professional liability defense for real estate licensees, architects and engineers, insurance agents, and brokers. Mr. Trester has been a California Licensed Real Estate Broker since 1984, and acts as a volunteer mediator and arbitrator for the Los Angeles Courts. He can be reached at 213.624.6000 or by e-mail at [email protected].

Rinat B. Klier Erlich is a partner on the firm’s Real Estate Team. She focuses her practice on real estate and professional liability defense. Ms. Klier Erlich is also a licensed real estate broker and is an active member of the California Association of Realtors, Legal Affairs Forum and Defense Strategy Panel. She is a lecturer on real estate topics and has authored many articles in this field. She can be reached at 213.624.6900 or by e-mail at [email protected].

Candace Kallberg is partner focusing primarily on civil litigation and appeals. Ms. Kallberg’s civil experience includes handling cases involving real estate disputes, as well as premises and products liability. Her appellate experience includes arguing several matters before the Ninth Circuit Court of Appeals and in at least 35 cases before the California Courts of Appeal. She can be reached at 213.624.6900 or by e-mail at [email protected].

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ABOUT THE FIRM ______

Since 1994, Manning & Kass, Ellrod, Ramirez, Trester LLP has delivered exceptional results. Comprised of over 140 lawyers, we have represented clients in thousands of trials, appeals, and transactions across dozens of industries. We are renowned for our work and built one of the most well-respected law firms in the western U.S. Our firm’s achievements stem from our commitment to collaboration. Regardless of size, we provide each client with a talented team of attorneys who work collectively to serve the client’s needs. This unique approach yields cost-effective service and favorable results. Consequently, the firm has established a loyal client base that spans the Nation.

WELCOMES ITS NEWEST PARTNER

MARY E. WORK

We are pleased to announce Mary E. Work joined the firm as a partner. Mary has practiced law in California since 1995. Her practice is focused on advising and representing professionals who face licensing or regulatory problems. Prior to entering private practice in 2004, Mary was a prosecutor for the Department of Real Estate. Mary now represents licensees and applicants who face formal disciplinary proceedings before the Department of Real Estate (known now as the Bureau of Real Estate), and other regulatory bodies such as the Department of Insurance, the California Board of Accountancy, and boards governing health care professionals.

She is a sought-after speaker in the area of real estate licensing and serves as an executive committee member of the Real Property Section of the State Bar of California.

Mary’s expertise expands the firm’s existing Professional Liability and Real Estate practice areas.

Mary can be reached at (213) 553-2457 or [email protected].

COPYRIGHT AND REPRODUCTION NOTICE: Copyright © 2013, MANNING & KASS, ELLROD, RAMIREZ, TRESTER, LLP. All rights reserved. Reproduction of all or part of the contents in any form other than for individual use is expressly prohibited. This publication is published by the law firm of MANNING & KASS, ELLROD, RAMIREZ, TRESTER, LLP as a service to our clients, the legal profession, and others with interests in legal issues. All information provided is of a general nature and not intended nor represented to replace professional, specialized legal advice. The articles provided by contributing authors do not necessarily reflect the views of the firm.