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Which State’s Law Governs? Domesticating Out-of-State Judgments in California

January 19, 2022/in All Blog Posts/by John Ahn

I ran into an interesting legal question regarding the collection of out-of-state judgments: when an out-of-state judgement is domesticated in California, which state’s law controls? Let’s say a creditor secured a judgment against one spouse outside of California in another community property state, but that state’s community property laws prevented the married couple’s community property from being encumbered by the judgment. The rub is that the couple also own property in California. Can the creditor secure a lien against the California property by domesticating the judgment in California?

California Sister State Money Judgments Act and Domesticating Judgments

The California Sister State Money Judgments Act, Code Civ Proc section 1710 deals with sister state judgments and domesticating judgments in California, which states: “Except as otherwise provided in this chapter, a judgment entered pursuant to this chapter shall have the same effect as an original money judgment of the court and may be enforced or satisfied in like manner.” Code Civ Proc § 1710.35. Courts have taken the plain language of section 1710.35 and determined that the legislative intent of the “[a]ct was not intended to alter any substantive rights or defenses which would otherwise be available to a judgment debtor or a judgment creditor in this state.” Washoe Dev. Co. v. Irving Sav. Ass’n, 47 Cal.App.4th 1518, 1524 (1996); see also Kahn v. Berman,198 Cal. App. 3d 1499, 1505-1507 (1988).

In Washoe, a judgment was entered in Nevada and then renewed by court order, which revealed that Respondents had money due from Appellants remaining. 47 Cal.App.4th at 1521. Respondents obtained a judgment in California (domesticated judgment) to recover the remaining amount through the sister-state judgment process under Code Civ Proc section 1710. Id. There was an issue raised regarding whether the California judgment was unenforceable in light of conflicting Nevada law. Id. at 1523. However, the court in Washoe determined that defenses against sister-state judgment enforcement cannot be asserted because “the court rendering the judgment had fundamental jurisdiction”, which in this case, was California. Id. at 1524.

In light of Washoe and section 1710 of the California Sister State Money Judgments Act, the answer seems relatively straightforward. However, not all community property states are created equal, and will sometimes conflict with one another in terms of whether the community property can be encumbered by a judgment lien. For instance, Ariz. Rev. Stat. (“A.R.S.”) section 25-214 states that binding community property for “[a]ny transaction of guaranty, indemnity or suretyship” requires a joinder of both spouses. Ariz Rev. Stat. § 25-214. This effectively prevents the creditor in the situation supra from securing a lien on any of the couple’s community property. However, California has no such rule. In fact, California’s Code of Civil Procedure states that “[a]ll property of the judgment debtor is subject to enforcement of a money judgment.” Code Civ. Proc., § 695.010. This begs the question: if the creditor decides to domesticate the Arizona judgment in California, will the creditor be able to secure a lien on the community property located in California?

True Conflict Test

In Gaughan v. First Cmty. Bank (In re Miller), 517 B.R. 145, 152 (D.Ariz. 2014), a judgment was entered against the husband Larry Miller and not his wife, Kari Miller, in Arizona. 517 B.R. at 147. The judgment was later domesticated in California, and the Arizona District Court determined that Arizona laws should apply under the principles of full faith and credit. Id. at 155. However, the Ninth Circuit reversed this decision in First Cmty. Bank v. Gaughan (In re Miller), 853 F.3d 508, 519 (9th Cir. 2017).

The Ninth Circuit drilled down on this issue of conflicting statutes due to the presence of a choice-of-law provision and applied a three-prong test based on Kearney v. Salomon Smith Barney, Inc., 39 Cal. 4th 95, 111-12 (2006). 853 F.3d at 516. In determining which state’s law applies, they analyzed three questions: (1) does relevant law vary between the potentially affected jurisdictions?; (2) If there is a difference in law, does a true conflict exist such that “each of the states involved has a legitimate but conflicting interest in applying its own law[?]”; (3) If there is a true conflict, “which state’s interest would be more impaired if its policy were subordinated to the policy of the other state[?]” Id.; see also Kearny, 39 Cal. 4th at 111-12.

On paper, there seems to be a “true conflict” between the Arizona and California community property laws—applying Arizona law would mean the community property is exempt or protected from encumbrance, while applying California law would mean the community property can be encumbered. This is exactly what the court in Gaughan concluded prior to the Ninth Circuit’s reversal. However, the Ninth Circuit held that the differences in the two statutes did not necessarily compel the conclusion that a true conflict existed. In re Miller, 853 F.3d at 516. Instead, the “existence of such a conflict turns on whether the circumstances of the case implicate the policies underlying the ostensibly conflicting laws.” Id. at 517.

The Ninth Circuit dove deeper in light of this finding and analyzed the true purpose of each state’s ostensibly conflicting rules to see whether a true conflict actually existed. In doing so, the Ninth Circuit relied on Hamada v. Valley National Bank, 27 Ariz. App. 433 (1976). In Hamada, the Appellees Valley National Bank secured a judgment against the Appellants Hajime and Toshiko Hamada, a married couple. Id. at 436. However, Toshiko Hamada, Hajime’s wife, did not sign the promissory note on which the judgment was based. Id. The Arizona Court of Appeals explained that “[t]he husband, as a member of the community, has no power under the law without the knowledge and consent of his wife, to use community assets to guarantee the payment of a debt of a stranger to the community, it deriving no benefit therefrom.” Id. Therefore, the “policy underlying Arizona’s dual-signature requirement is to ensure that a spouse who lacks knowledge of, and does not acquiesce to, a guaranty is not bound.” In re Miller, 853 F.3d at 516.

Given that the Millers in In re Miller did not defend on the ground that Kari Miller lacked knowledge or acquiescence to justify her lack of signature on the guaranty, A.R.S. § 25-214 was not invoked and therefore, there was no true conflict between California and Arizona law. Id. at 518. Further, because there was no true conflict, the Ninth Circuit determined that California had a compelling interest in applying its law, one of which is “fostering the growth of commercial activities that require ready access to credit—a policy that would be undermined by limiting the ability of California creditors to enforce obligations for activities undertaken in California and made subject to the operation of California law by consent of the parties.” Id.

In light of the Ninth Circuit’s ruling in In re Miller, if the creditors in the hypothetical supra were to domesticate the out-of-state judgment in California and there are differences in the two states’ statutes, this might trigger the three-prong analysis to determine whether a true conflict actually exists. However, even if the analysis is triggered, it would probably be prudent to assume Washoe and California’s procedural laws would be controlling.

Author: John Ahn

When is a Broker Entitled to his Commission Fee – An Examination of the ‘Procuring Cause’ Requirement in California

January 19, 2022/in All Blog Posts, Corporate Litigation, Real Estate/by Dylan Contreras

Most, if not all, California real estate brokers (and agents) earn a living by helping people buy and sell homes. Brokers are often paid on a commission basis, usually 2%-3% of the sales price, and do not enjoy the luxury of a steady, bi-weekly paycheck. Given the “feast or famine” nature of the industry, brokers often find themselves in a commission fee dispute with another broker or their client.

In California, a real estate broker earns his commission fee when he produces a “ready, willing, and able” buyer to purchase the property. The broker must also be the “procuring cause” in effectuating the sale. Most brokers, agents, and lawyers are familiar with the former requirement—we have all heard that phrase before. However, the “procuring cause” element is often overlooked and misunderstood amongst real estate professionals. Although the California Association of Realtors (“C.A.R.”) has released helpful guidelines and even included these requirements in its model rules, confusion remains as to what “procuring cause” means. This blog article fills that void by exploring California’s case law on the ‘procuring cause’ requirement.

Ready, Willing, and Able – A Brief Summary

Under California law, a broker has satisfied the ready, willing, and able requirement when he has produced a buyer willing to purchase the property for the price and terms specified by the seller. (See Steve Schmidt & Co. v. Berry (1986) 183 Cal.App.3d 1299, 1305-06.) The buyer doesn’t need to make an offer to purchase the home, but an offer does indicate that the buyer is ready and willing to buy the home. (See Martin v. Culver Enterprises, Inc. (1966) 239 Cal.App.2d 925, 929.) In addition, the prospective purchaser must have the financial capability to purchase the property, such as the necessary capital, or is pre-approved for a home loan. (See Steve Schmidt, 183 Cal.App.3d at 1305-1306.).

In Steve Schmidt, the broker satisfied the ready, willing, and able requirement because the buyer possessed sufficient funds to purchase the property or, at a minimum, could obtain a loan to finance the transaction. In comparison, in Park v. First American Title Co. (2011) 201 Cal.App.4th 1418, 1426, the buyer was unable to purchase the property, which meant that the broker was not entitled to his commission fee. The buyer did not produce any evidence that indicated he had the financial capability to close the transaction, such as pay stubs and bank statements, nor had he been pre-approved for a home loan. The main takeaway is that a broker satisfies this first requirement if the buyer is serious about purchasing the property and has the financial wherewithal to do so.

Procuring Cause Requirement

The National Association of Realtors (“N.A.R.”) defines procuring cause as the “uninterrupted series of casual events, which results in the successful transaction.” C.A.R. has adopted N.A.R.’s definition and baked the procuring cause requirement into its Multiple Listing Services Rules (“M.L.S. Rules”). M.L.S. Rule 7.13 states that a buyer’s-broker’s offer is accepted by the selling broker “by procuring a buyer which ultimately results in the creation of a sales or lease contract.” The N.A.R.’s and M.L.S.’s respective definitions of procuring cause derive from the century-old landmark case of Sessions v. Pacific Improvement Co. (1922) 57 Cal.App. 1.

In Sessions, the plaintiff-broker was employed by the defendant-seller for the sole purpose of selling a shipping yard located near the San Francisco Bay. The plaintiff-broker completed all of the due diligence associated with the sale, such as obtaining the necessary maps and surveys and obtaining a permit to dredge the shipping yard, among other things. After the plaintiff-broker left his employ with the defendant-seller, he provided tract maps to the parties and even helped resolve a drainage issue on the shipping yard. The defendant-seller ultimately closed the transaction at the $1 million purchase price plaintiff-broker had previously proposed; however, the plaintiff-broker was not paid his commission fee.

In reviewing these facts, the California Supreme Court issued the ironclad rule that California Courts rely on to this day: a broker is entitled to his commission fee when he “set[s] in motion a chain of events, which, without a break in their continuity, cause the buyer and seller to come to terms as the proximate result of his peculiar activities.” (Sessions, 57 Cal.App. at 20.) The Supreme Court found that the plaintiff broker was an integral part of the sale because he had “performed the most effective and. . . .hardest and most expensive part of the whole undertaking.” (Id. at 32.) The Court concluded that the plaintiff-broker was entitled to his commission fee for his efforts in helping effectuate the sale of the shipping yard. (Id.)

Although Sessions was decided during the roaring twenties, California Courts have continuously relied on the case. For example, in Duffy v. Campbell (1967) 250 Cal.App.2d 662, the plaintiff-broker was the seller’s agent. The plaintiff-broker introduced the buyer to the seller, negotiated the sales price and contract terms, and even opened an escrow account for the parties. During the escrow period, the buyer and seller held a meeting at the exclusion of the plaintiff-broker and reduced the sale’s price by the amount of the broker’s commission fee. In addition, the parties conveniently closed the sale of the home after the last day the broker could claim a commission fee under the listing agreement.

The Court held that the plaintiff-broker was the procuring cause in effectuating the sale. (See generally Duffy, 250 Cal.App.2d at 665-57.) Akin to Sessions, the plaintiff-broker did all of the heavy lifting. He introduced the parties, negotiated the sales price, and even opened an escrow account for the parties. (Id.) The fact that the parties amended the agreement, principally to exclude the plaintiff-broker from the transaction, did not preclude the plaintiff-broker from collecting his commission fee. (Id. at 668.)

Although Sessions and Duffy may provide a sigh of relief to a broker currently involved in a commission fee dispute, it is important to examine cases in which the Court found that the complaining broker was not the procuring cause.

In Westside Estate Agency, Inc. v. Randall (2016) 6 Cal.App.5th 317, the plaintiff-broker made a $42 million offer for a Bel Air home on behalf of his clients. The offer was rejected, but the plaintiff-broker continued to negotiate and exchange offers with the seller’s broker. After the seller conditionally accepted the plaintiff-broker’s offer, the buyer contacted his attorney for additional advice and told the plaintiff-broker to cancel the deal. The plaintiff-broker did not submit any more offers for the buyer. Three months later, the buyer purchased the property for $1.25 million more than the plaintiff-broker’s original offer and used their attorney as the acting broker. The plaintiff-broker sued, claiming that he was entitled to a commission fee based on the new purchase price.

The Court disagreed and held that the plaintiff-broker “merely put the prospective buyer on track to purchase the property,” which did not entitle him to his commission fee. (Westside Estate Agency, Inc., 6 Cal.App.5th at 331.) The Court found that the plaintiff-broker’s efforts, albeit helpful, were too attenuated from the closing date to award him a commission fee because the transaction closed approximately three months after the buyer told the plaintiff-broker to cancel the deal. Moreover, the buyer purchased the home on different terms than those initially negotiated by the plaintiff-broker. (Id.)

In Schiro v. Parker (1955) 137 Cal.App.2d 503, the Court reached a similar conclusion as Westside Estate Agency, Inc. In Schiro, the property’s listed sale price was $366,000. The plaintiff-broker represented the buyer and submitted two offers at $320,000 and $325,000, both of which the seller rejected. The Plaintiff-broker later learned that the seller was inclined to sell the property for $330,000 or $335,000. The Plaintiff-broker communicated this information to the buyer, but the buyer chose not to submit another offer to the seller. A few weeks later, the buyer met with a separate broker, or the closing-broker, and told him that he thought the “deal was off.” Acting at the buyer’s direction, the closing-broker made two offers to the seller, and the seller accepted the closing-broker’s second offer for $330,000.

Based on these facts, the Court held that the plaintiff-broker was not entitled to his commission fee. The Court focused on the buyer’s state of mind in reaching its decision. The Court was persuaded by the fact that the buyer thought the “deal was off,” and he was, therefore, “free to believe that [plaintiff-broker] was unable to procure an acceptable offer from the seller.” (Schiro 137 Cal.App.2d. at 507-08.)

The holdings in Westside Estate Agency and Schiro teach us the Courts will examine multiple factors when determining whether the complaining broker was the procuring cause in effectuating the sale. In Westside Estate Agency, Inc., the Court focused on the fact that the plaintiff-broker’s efforts were too attenuated from the closing date to be considered the procuring cause. On the other hand, in Schiro, the Court’s relied on the buyer’s beliefs and state of mind concerning the transaction and his relationship with the plaintiff-broker.

There are noticeable factual differences in the case in which the broker was the procuring cause (i.e., Sessions and Duffy) and the cases in which the Court found the broker was not (i.e., Westside Estate Agency, Inc., and Schiro). In Sessions and Duffy, the plaintiff-brokers completed all of the major tasks related to the sale, and their efforts were closely related to the transactions in time and purpose. In comparison, in Westside Estate Agency, Inc. and Schiro, the brokers’ actions were too attenuated from the transaction (i.e., Westside Estate Agency, Inc.) and were not a significant factor or cause of the buyer and seller completing the sale.

The C.A.R. has adopted the case holdings described above and created four categories of factors to guide brokers, arbitrators, and courts in determining whether a broker was the procuring cause in the transaction. The four categories are outlined below:

Connection to the Transaction: These factors focus on who showed the property to the client, made offers on the client’s behalf, the amount of time that elapsed between the intro broker’s efforts and the sale of the property, and the services each competing broker provided. These factors were discussed in Westside Estate Agency, Inc., Sessions, and Duffy.
Buyer’s Choice: This set pertains to the client’s choice between brokers and his/her state of mind as to who was representing them. This factor was central to the holding in Schiro.
Broker’s Conduct: This category relates to the steps the competing brokers took to secure their commission fee and relationship with their clients. In other words, did the closing broker ask the seller if he/she had engaged with another broker? Did the intro-broker know that his/her client was attending open houses on their own? And did the intro-broker tell his client to inform other brokers that he/she was already represented?
Other – Catch-All: This set solely relates to whether any contractual agreements existed between the broker and the client, such as a Buyer-Representation Agreement.

It is important that California real estate brokers and agents keep these factors, as well as the cases discussed above, in mind when negotiating a sales contract on behalf of their client(s). Any ambiguity on who is entitled to a commission fee may negatively impact a broker’s livelihood and result in an arduous and time-consuming litigation process. Contact a California real estate attorney if you or another agent are involved in a commission-fee dispute.

The materials available at this website are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this web site or any of the e-mail links contained within the site do not create an attorney-client relationship. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

Author: Dylan Contreras

Standing to Sue: Possession vs. Ownership of Trade Secrets

January 10, 2022/in All Blog Posts, Corporate Litigation/by John Ahn

Trade secrets encompass a unique area of intellectual property law that where protection is granted without any formal filings. Unlike patents, trademarks, and copyrights, which generally require filing an application with a government office, trade secrets are protected via—you guessed it—secrecy.

Once you have a protectable trade secret, you will generally have recourse to sue for misappropriation. However, the courts have given standing to sue for this cause of action not just to the originator of the trade secret, but also to those who are in possession of the trade secret and have an obligation to protect the confidentiality of the information.

This blog will explore the topic of a third party’s right to bring a cause of action for misappropriation even though the third party is not the owner of the trade secret.

Trade Secret Protections, Generally

Trade secrets are defined under 18 U.S.C. § 1839[1] and Cal Civ Code § 3426.1[2]. Boiled down, three things must be true for the information you seek to protect:

Derives independent economic value;
Not generally known to the public;
Reasonable measures were taken to keep the information secret.

A good way to understand whether the information you want to protect as a trade secret derives independent economic value is to ask whether competitors would be able to gain immediate economic benefits if they got their hands this information. If so, your information likely derives independent economic value.

As to the second point, it is important to understand that the law only requires the information be not generally known to the public; it does not have to be a secret from everyone.

Finally, your efforts to protect the information have to reasonable under the circumstances. This does not mean or require that “confidential information be kept completely clandestine or mandate the use of nondisclosure agreements in all instances.” BladeRoom Grp. Ltd. v. Facebook, Inc., 219 F. Supp. 3d 984, 992 (N.D.Cal. 2017). However, if you disclose your information to those who have no obligation to protect that information, you will have extinguished your rights to protection. In re Providian Credit Card Cases, 96 Cal.App.4th 292, 304 (2002).

Non-originator’s Standing

It is widely understood that owners of intellectual property will be able to seek damages for infringement or misappropriation. This is true for patents, trademarks, copyrights, and trade secrets. However, within the realm of trade secrets, courts have ruled that rather than ownership, rightful possession of the protected information can be enough to give a party standing to sue.

Let’s say a ABC Company (“ABC”) has developed a novel, efficient method of producing a widget using proprietary software and machine sequences. Rather than disclosing this information to the public by attempting to secure a patent, ABC decides to go down the trade secret route and keep this information confidential. ABC then discloses this information to you, and you are able to incorporate this secret method and incorporate it into your own business practices. The disclosure is protected by non-disclosure agreements wherein you can use but not disclose the trade secret, and now you have a duty to maintain the secret. A few years down the line, you discover that despite reasonable efforts, one of your vendors hacked into your servers and pulled information—specifically, ABC’s trade secret—and began using it for economic gain.

The Plaintiff in BladeRoom faced a similar situation. In BladeRoom, the Plaintiff, as a licensee of another’s trade secret, filed a complaint alleging misappropriation against Facebook. 219 F. Supp. 3d at 989. Facebook argued, citing Nextdoor.com, Inc.v. Abhyanker, No. C-12-5667 EMC, 2013 U.S. Dist. LEXIS 101440, at *27, (N.D. Cal. July 19, 2013), that in order for plaintiff to bring a viable claim for misappropriation, the plaintiff must own the trade secret. Id. at 990. However, the court in BladeRoom stated that the citation denotes recognition of the “first element of a prima facie misappropriation claim” and that the term ownership is over-simplified in the cited text. Id.

Surprisingly, the court in BladeRoom placed great emphasis on possession rather than ownership of a trade secret. In following the rulings of courts in other jurisdictions, the court in BladeRoom stated that a party “has standing to bring a trade secrets claim if it has possession of the trade secret.” Id. “Those courts reason that ‘fee simple ownership’ as an element of a trade secret misappropriation claim ‘may not be particularly relevant’” because the confidential and proprietary aspect of a trade secret “flows, not from the knowledge itself, but from its secrecy.” Id. (quoting DTM Research, L.L.C. v. AT&T Corp., 245 F.3d 327, 332 (4th Cir. 2001)). Rather than ownership, “it is the secret aspect of the knowledge that provides value to the person having the knowledge.” Id. Further, although the confidential or proprietary secret information can be transferred, as with personal property, the continued secrecy within the transfer provides value, and any general, unprotected disclosure will destroy value. Id. Because trade secrets derive independent economic value from being not generally known to the public, “the better focus for determining whether a party can assert a misappropriation claim is on that party’s possession of secret knowledge, rather than on the party’s status as a true ‘owner.’” Id.

This emphasis was echoed more recently by the 3rd Circuit in Advanced Fluid Sys. v. Huber, 958 F.3d 168, 177 (3d Cir. 2020). In Huber, the Respondent obtained a license to use another company’s trade secrets. 958 F.3d at 178. Appellant Kevin Huber (“Huber”), while employed by Respondent, had access to the licensed trade secret information. Id. at 175. After Huber resigned, he continued to use the information he obtained during his employment, and Respondent filed a claim for misappropriation. Id. Appellants argued that because Respondent did not actually own the trade secret, Respondent lacked standing. Id. at 177. However, the court in Huber stated that while ownership is generally sufficient to bring a claim for trade secret misappropriation, ownership is not a necessary condition. Id. “A per se ownership requirement for misappropriation claims is flawed since it takes account neither of the substantial interest that lawful possessors of the secrets have in the value of that secrecy, nor of the statutory language that creates the protection for trade secrets while saying nothing of ownership as an element of a claim for misappropriation.” Id. Moreover, Respondent, as a licensee, had standing to sue because it was given possessory interest by the owner of the trade secret, even though full ownership interest was not transferred. Id. at 179.

Although both cases involve licensees, there is no distinction made by the courts in either BladeRoom or Huber between a licensee and a possessor of trade secret information. Rather, it appears that anyone who has been granted a possessory interest in a trade secret—and thereby an interest in keeping the information a secret—has standing to sue for misappropriation. The key takeaway here is that in light of these rulings (and referring back to the hypothetical above), the fact that you possess this information while not owning the trade secret may allow you to sue for misappropriation, as ownership may not be a strict requirement. It will be interesting to see if these rulings will be further adopted by other courts moving forward.

[1] (3) the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

[2] (d) “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Author: John Ahn

Debtor’s Motion to Dismiss v. Creditor’s Motion to Convert In Chapter 13—The 9th Circuit’s Ruling in In Re Nichols

January 6, 2022/in All Blog Posts, Bankruptcy, Corporate Litigation/by Dylan Contreras

On September 1, 2021, the Ninth Circuit issued its ruling in the case of In Re Nichols. The Circuit Court held that a debtor has an absolute right—without exception—to dismiss his Chapter 13 bankruptcy case under Section 1307 (b) of the Bankruptcy Code. In reaching its holding, the Ninth Circuit departed from an established precedent that when the bankruptcy court is confronted with a debtor’s motion to dismiss under Section 1307 (b) on the one hand, and a creditor’s motion to convert under Section 1307 (c) on the other, the court may convert the case from Chapter 13 to a Chapter 7 proceeding if there is evidence of bad faith or abuse of the bankruptcy process by the debtor. In Re Nichols is a significant and impactful holding in the Ninth Circuit because it informs all bankruptcy practitioners and creditors that even when a debtor has abused the bankruptcy process and engaged in bad faith, the debtor may escape the consequences of his actions by filing a motion to dismiss, which, according to In re Nichols, the court must grant.

The Relevant Statutes & Prior Law

The relevant statutes are Sections 1307 (b) and (c) of the Bankruptcy Code. Section 1307 (b) states in pertinent part:

On request of the Debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.

(emphasis added).

In comparison, Section 1307 (c) of the Code states:

Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including— [omitted].

(emphasis added).

The prior leading case on this subject was Marrama v. Citizens Bank, 549 U.S. 365 (2007) (“Marrama”). In Marrama, the primary question was whether a debtor’s bad-faith conduct permitted the bankruptcy court to deny the debtor’s motion to convert from a Chapter 7 to a Chapter 13 bankruptcy under Section 706 (a) of the Bankruptcy Code. The paradox was that Section 706 (a) granted the debtor a one-time unqualified right to convert from a Chapter 7 to a Chapter 13; however, Section 706 (d) specified that the debtor’s absolute right was conditioned on his ability to qualify as a debtor under Chapter 13.[1]

The Supreme Court first pointed out that Section 1307 (c) permitted the bankruptcy court to dismiss or convert a Chapter 13 case “for cause,” which encompasses a debtor that engaged in bad faith or abused the bankruptcy process. The Supreme Court reaffirmed that bankruptcy courts are courts of equity and have “broad authority . . . to take any action necessary or appropriate ‘to prevent an abuse of the process.’” Id. at 1111-12 (quoting 11 U.S.C. § 105 (a)). Armed with the expansive powers of Section 105 (a), the Supreme Court bridged the gap between Sections 706 (d) and 1307 (c). The Court held that when a debtor engages in bad faith conduct or abuses the bankruptcy process, the debtor is not a qualified debtor under Chapter 13 and thus, cannot satisfy the requirements of Section 706 (d).

Many courts throughout the country, including the Ninth Circuit, interpreted Marrama to hold that Section 105 (a) permitted bankruptcy courts to abrogate the absolute rights of debtors when there is evidence that the debtor engaged in fraud, bad faith, or abused the bankruptcy process. The expansive interpretation of Marrama paved the way for the Ninth Circuit’s holding in Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 777 (Ninth Cir. 2008) (“Rosson”) and other cases throughout the country.

In Rosson, the bankruptcy court ordered the debtor to deposit his arbitration award with the Chapter 13 Trustee to fund his reorganization plan. The debtor failed to do so, and the bankruptcy court moved, sua sponte, to convert the case to a Chapter 7 proceeding. Before the bankruptcy court entered its final order, the debtor filed a motion to dismiss, pursuant to Section 1307 (b). The bankruptcy court denied the debtor’s motion, and the debtor appealed.

Relying on Marrama, the Ninth Circuit held there was no analytical distinction between a debtor’s dismissal rights under Section 1307 (b) and a debtor’s right to convert from a Chapter 7 to a Chapter 13 under Section 706 (a). In other words, the same limitations imposed on a debtor’s right to convert from a Chapter 7 to a Chapter 13 under Section 706 (a) and (d) applied with equal force to a debtor’s right to dismiss his Chapter 13 case under Section 1307 (b). The Ninth Circuit held that the debtor’s “right of voluntary dismissal under Section 1307 (b) is not absolute but is qualified by the authority of a bankruptcy court to deny dismissal on the grounds of bad-faith conduct or to prevent an abuse of process.” Id. at 774. Based on this line of reasoning, the Ninth Circuit affirmed the bankruptcy court’s ruling.

Rosson bolstered the broad interpretation of Marrama and was cited by numerous bankruptcy courts in the Ninth Circuit and elsewhere. See In re Brown, 547 B.R. 846, 853 (Bankr. S.D. Cal. 2016) (“under § 1307 (c), where bad faith is present, the court decides how the case is to proceed, if at all, in the interests of the creditors rather than of the debtor”); see also In re Armstrong (Bankr. E.D.N.Y. 2009) 408 B.R. 559, 569 (same).

The New Law – In Re Nichols & Law v. Seigel

Similar to Rosson, the primary question in Nichols v. Marana Stockyard & Livestock Mkt., Inc. (In re Nichols) (Ninth Cir. Sep. 1, 2021, No. 20-60043) 2021 U.S. App. LEXIS 26366 (“Nichols”) was whether there was an implied exception to the debtor’s right to dismiss its Chapter 13 bankruptcy under Section 1307 (b) of the Bankruptcy Code. The Ninth Circuit held that there was no such exception and overruled its prior decision in Rosson. In reaching its decision, the Ninth Circuit relied heavily on the Supreme Court’s holding in Law v. Siegel 571 U.S. 415 (2014) (“Law”).

In Law, the trustee expended over $500,000 in attorneys’ fees in an adversary proceeding against the debtor. The trustee alleged the debtor fraudulently created a second position lien on his property to preserve his equity in the same. The bankruptcy court found in favor of the trustee. At the conclusion of the proceeding, the bankruptcy court granted the trustee’s motion to surcharge the entirety of the debtor’s homestead exemption to pay for the trustee’s attorneys’ fees. Section 522 (k) of the Bankruptcy Code states that funds safeguarded by the homestead exemption cannot be used to pay for administrative expenses.

In a unanimous decision, the Supreme Court held that Section 105 (a) “does not allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code.” Id. at 11. The Supreme Court found that the lower court “exceeded [the] limits of its authority under Section 105 (a) by surcharging the debtor’s entire homestead exemption,” which the Court found was a clear violation of Section 522 (k) of the Bankruptcy Code. The Supreme Court then turned its attention to clarifying its ruling in Marrama.

Writing for the Supreme Court, the late Justice Scalia wrote that Marrama stands for the limited proposition that courts may use, as a supplement to Section 706 (d), their equitable powers under Section 105 (a) to deny a debtor’s motion to convert from a Chapter 7 to a Chapter 13. The Supreme Court reasoned that Section 105 (a) was only relevant to the holding in Marrama because it allowed the Court to avoid the “procedural niceties” of granting the 706 (a) motion to convert, then dismissing or converting the case pursuant to Section 1307 (c) due to the debtor’s bad faith. More bluntly put, Section 105 (a) and its application in Marrama “did not endorse . . . the view that equitable considerations permit a bankruptcy court to contravene express provisions of the Code.” Id. at 426.

In Nichols, the Ninth Circuit found that Law rejected the broad sweeping language in Marrama that the Circuit Court relied upon to reach its decision in Rosson. The Ninth Court held that Rosson was no longer good law because Law made clear that even when there is evidence of bad faith, the bankruptcy court cannot utilize its equitable powers under Section 105 (a) to override the debtor’s absolute right to dismiss under Section 1307 (b) of the Bankruptcy Code.

Because Law overruled Rosson, the Ninth Circuit revisited the actual text of Section 1307 (b), which states in pertinent part: “on request of the debtor at any time . . . the court shall dismiss the case under any chapter.” [emphasis added]. The term “shall” “creates an obligation impervious to judicial discretion” and mandates action by the court. Id. at 13. Finding no other exception to Section 1307 (b), the Circuit Court held that Lawoverruled Rosson and that, in the Ninth Circuit, the debtor has an unqualified right to dismiss their Chapter 13 case at any time.

The holdings in Nichols and Law are significant and impactful for all bankruptcy practitioners. For Nichols, it is clear that the debtor has an absolute right to dismiss their case at any time—without exception. On the other hand, Law is entirely expansive. The holding in Law teaches us that the bankruptcy court’s equitable powers under Section 105 (a) are limited. The bankruptcy courts cannot explore the equities of the case when interpreting a statute that uses the terms “shall” or “must”; but, instead, the bankruptcy court must strictly comply with the Bankruptcy Code and, essentially, turn a blind eye to the realities of the case and circumstances. Only time will tell whether Nichols and Law further the spirit of the Bankruptcy Code and provide equal protection to debtors and creditors in bankruptcy court.

[1] Section 706 of the Bankruptcy Code states in pertinent part:

(a) The Debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.

(d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the Debtor may be a debtor under such chapter.

Author: Dylan Contreras

In Trusts We Trust?: Applying the Alter Ego Doctrine to Trusts

December 14, 2021/in All Blog Posts, Corporate Litigation/by Jake Ayres

Most attorneys are familiar with the rigamarole that comes with attempting to reach assets held by the principals of a business entity as a part of analyzing whether a judgment will be collectible—that is, whether the alter ego doctrine will apply such that the creditor may “pierce the corporate veil.” However, the rules for whether a judgment creditor may “pierce the veil” of a trust to reach the settlor behind that trust are a bit quirkier.

Indeed, most of the time when trusts are involved, the creditor is interest in proceeding the opposite direction—that is, reaching the assets held in trust for the benefit of a judgment debtor. Regardless of which direction the creditor may be going, this article discusses the rules of the road for collecting from individual via trust, and trust via individual.

First, it should be noted that the alter ego doctrine doesn’t even come into play where a judgment debtor transfers assets into a revocable trust. In that scenario, the judgment creditor can attach and collect upon the assets in the trust because they are treated as assets of the judgment debtor regardless of their placement into a revocable trust. See Bank One Texas v. Pollack, 24 Cal. App. 4th 973, 980 (1994); Gagan v. Gouyd, 73 Cal. App. 4th 835, 842 (1999), disapproved on other grounds in Mejia v. Reed, 31 Cal. 4th 657, 669 (2003); see also Prob. Code § 18200 (“Property in a revocable trust is subject to creditor claims to the extent of the debtor’s power of revocation.”).

Second, although the alter ego doctrine has been analyzed in the context of trusts rather than business entities, the California Court of Appeal has been careful to note that trusts are in fact not legal entities at all: “‘[A] trust is not a legal person which can own property or enter into contracts . . . It is the trustee or trustees who hold title to the assets that make up the trust estate . . . . [Therefore,] legal proceedings are properly directed at the trustee.’” Greenspan v. LADT LLC, 191 Cal. App. 4th 486, 521 (2010) (quoting Neno & Sullivan, Planning and Defending Domestic Asset-Protection Trusts, Planning Techniques for Large Estates (Apr. 26-30, 2010) SRO34 ALI-ABA 1825, 1869-70)). Moreover, “[b]ecause a trust is not an entity, it is impossible for a trust to be anybody’s alter ego.’” Id. at 522. However, the Court of Appeal did find that “applying the [alter ego] doctrine to trustees” was acceptable because “it’s entirely reasonable to ask whether a trustee is the alter ego of a defendant who made a transfer into the trust.” Id. The court in Greenspan concluded that alter ego doctrine could be applied to a third-party trustee of an irrevocable trust as the potential alter ego of the debtor settlor. Id.

The Ninth Circuit, applying California law a month before Greenspan, reached a similar conclusion in In re Schwarzkopf, 626 F.3d 1032 (2010), with a slight variation: the trust itself, rather than the trustee, can be considered the alter ego of a debtor settlor. In Schwarzkopf, the debtor transferred assets to two irrevocable trusts, naming his minor child as beneficiary and a third party as trustee, but, as to the second trust, “‘dominated and controlled all decisions of the . . . Trust.’” Id. at 1039. The Ninth Circuit first held that the California court’s then-current rule1 against “reverse veil piercing”—that is, attaching the assets of a corporation to satisfy the debts of a shareholder—did not prevent them from considering whether “reverse piercing” could be allowed in a trust context. See id. at 1038 (“In the absence of further guidance from California courts, therefore, we cannot extend the prohibition on reverse piercing to the trust context.”). The court went on to hold that “under California law, equitable ownership in a trust is sufficient to meet the ownership requirement for purposes of alter ego liability.” Id. Although the debtor was not the beneficiary of the trust, nor the trustee, the court still found that the debtor was “an equitable owner of the . . . Trust because he acted as owner of the trust and its assets” because he essentially dictated the actions of the trust to the trustee. Id. Accordingly, the Ninth Circuit held that “the bankruptcy court did not err in finding that the . . . Trust is [debtor settlor’s] alter ego.” Id. at 1040.

But what if the debtor is the trust—or, more accurately, per the admonitions in Greenspan, the trustee—and the creditor wants to reach the assets of the settlor as the debtor trust/trustee’s alter ego? To this author’s knowledge, there has been no California or Ninth Circuit case directly answering this question. One can surmise this is because trusts are used as the vehicle to shield assets of individuals and entities, and do not often themselves incur liabilities. However, it stands to reason that if a trustee of an irrevocable trust can be the alter ego of a debtor settlor per Greenspan, and an irrevocable trust itself can be the alter ego of a debtor settlor per Schwarzkopf, then the converse is also true—that is, a settlor can be the alter ego of a debtor trust or trustee. In other words, alter ego liability would seem to imply a two-way street: the trust/trustee is the settlor and the settlor is the trust/trustee. The waters seem to get murkier if one swaps in the trust beneficiary for the settlor in the foregoing analysis. However, the Schwarzkopf court’s emphasis on equitable title as forming the basis for alter ego liability would seem to suggest that beneficiaries would be subject to the same rules as Greenspan and Schwarzkopf, as well as the potential extension of those opinions to the converse rule. See Walgren v. Dolan, 226 Cal. App. 3d 572, 576 (1990) (“[T]he beneficiary [of a trust] holds only equitable title . . . .”). Of course, the Ninth Circuit’s focus on equitable title, and the California Court of Appeal’s focus on the separation of trust and trustee, could result in a split between state and federal courts in California in how they each handle the trust to settlor liability question.

In short, the current state of the law regarding trust alter ego theories is as follows:

Debtor = settlor of revocable trust → assets of trust collectible, no alter ego showing required
Debtor = settlor of irrevocable trust → assets of trust collectible upon alter ego showing
Debtor = trust or trustee → assets of settlor likely collectible
Debtor = trust or trustee → assets of beneficiary may be collectible

Scenarios 3 and 4 above may remain opaque until the unique scenario of an asset-poor trust and an asset rich beneficiary or settlor come before a relevant court of appeal, but given the relative rarity of that fact pattern, litigants that find themselves in that scenario will likely have to argue by analogy to the existing rules of Greenspan and Schwarzkopf.

Author: Jake Ayres

Landlord’s Limitations in Preventing Tenant’s Sale of Business

October 25, 2021/in All Blog Posts, Real Estate/by John Ahn

Landlord-tenant relationships can be difficult. What should be a relatively simple relationship based on contractual obligations often turns sour. To make matters worse, COVID-19 has created a litany of financial problems worldwide which has further strained already stressful situations. Due to the pandemic, many small businesses have struggled to make rent if not already completely shuttered. Some business owners have been able to successfully sell their business or find a new lessee to take over their tenancy to make ends meet. However, some business owners, due to unreasonable landlords, have been unable to sell their business and are stuck in a strange predicament where they are seemingly forced to slowly bleed out money.

This article will explore how much power a landlord has in preventing the assignment of a tenant’s lease.

I recently encountered this specific issue with two prospective clients as they were hoping to offload their business and move on with their lives. Both of these clients each owned and operated a restaurant in the same building with the same landlord. However, despite their best efforts to work with the landlord and having found viable assignees with solid business plans, the landlord simply refused without any good reason. The only complaint the landlord presented to these tenants is that he did not trust the potential assignees. It is difficult enough to find someone to buy your business and take over your lease, but it has unquestionably been a struggle during the pandemic. Tenant one and tenant two—over the course of twelve and fifteen years, respectively—had dutifully and timely paid rent and continued on with their respective businesses despite other alleged inequities on behalf of the landlord. However, the landlord in this case likely found the two existing tenants to be very reliable sources of income and refused to take on the uncertainty of new tenants.

Limitless Discretion?

If the situation above seems unreasonable, you are likely not alone. However, landlord’s do not have unmitigated discretion and cannot prevent the sale of a tenant’s business without good reason or a provision in the lease restricting transfer. In fact, a tenant’s right to assign her interest in the lease remains unrestricted unless the subject lease includes a restriction. (Cal Civ Code § 1995.210.) Conversely, the lease may include restriction provision which may absolutely prohibit transfer. (Cal Civ Code § 1995.230.) In either of these situations, the answer is fairly cut and dry; transfer may be fully prohibited or wholly unrestricted depending on the language of the lease.

But what if the restriction provision requires a landlord’s consent? Does the landlord have full control of the outcome of a tenant’s request to assign the lease? The courts have discussed this issue at length prior to codifying some of the rulings into law.

For instance, the court in Cohen stated that the duty of good faith and fair dealing prohibits landlords or lessors from arbitrarily or unreasonably withholding consent to an assignment. (Cohen v. Ratinoff, 147 Cal.App.3d 321, 329 (1983).) A lease is generally considered both a leasehold conveyance and a contract. (Medico-Dental etc. Co. v. Horton & Converse, 21 Cal.2d 411, 418 (1942).) Because a lease is also a contract, “there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing.” (Universal Sales Corp. v. California Press Mfg. Co., 20 Cal.2d 751, 771 (1942).) “This covenant not only imposes upon each contracting party the duty to refrain from doing anything which would render performance of the contract impossible by any act of his own, but also the duty to do everything that the contract presupposes that he will do to accomplish its purpose.” (Harm v. Frasher, 181 Cal.App.2d 405, 417 (1960).)

Arguably, being able to sell one’s business for a profit is an eventual fruit of a contract. As such, the implied covenant of good faith and fair dealing protects a tenant’s right to assignment of a lease. Although this right is not absolute, assignments are specifically allowed whenever there’s prior written consent from the lessor. (147 Cal.App.3d at 329.) “Accordingly, we hold that where, as here, the lease provides for assignment or subletting only with the prior consent of the lessor, a lessor may refuse consent only where he has a good faith reasonable objection to the assignment or sublease, even in the absence of a provision prohibiting the unreasonable or arbitrary withholding of consent to an assignment of a commercial lease.” (Id. at 330.) Some examples of a good faith reasonable objection include the “inability to fulfill terms of the lease, financial irresponsibility or instability, suitability of premises for intended use, or intended unlawful or undesirable use of premises.” (Id. at 329.) This reasoning was repeated in Schweiso v. Williams, 150 Cal.App.3d 883, 886 (1984) and in Kendall v. Ernest Pestana, 40 Cal.3d 488, 497 (1985) before being codified into law as Cal Civ Code §§ 1995.210-1995.270.

A key takeaway here is that in a situation where the existing lease contains a provision prohibiting the assignment of a lease without the consent of a lessor, the lessor needs to act reasonably in withholding consent. This presumption of reasonableness is what allows for freedom of contract between parties of commercial real property leases as intended by Cal Civ Code §§ 1995.210-1995.270. Determining whether the lessor is unreasonable is a question of fact, and the outcome will depend on whether a lessor’s withholding consent was objectively unreasonable. (Moore v. Wells Fargo Bank, N.A., 39 Cal.App.5th 280, 291 (2019).) Going back to the facts of the two tenants above, if the lessor refused consent because he simply did not trust the potential assignees—despite said assignees allegedly having solid business plans, good credit histories, or whatever else positive attributes—the tenants might each have a strong case to show the lessor is being objectively unreasonable. The burden to prove that will ultimately lie on each tenant and the outcome will depend on the facts surrounding the withholding.

It is also important to note that Cal Civ Code § 1995.230 allows for lease provisions where a tenant may be absolutely prohibited from transfer. (Cal Civ Code § 1995.230; See also Harara v. ConocoPhillips Co., 377 F.Supp.2d 779, 787 (N.D.Cal. 2005); “A lease term actually prohibiting transfer of the tenant’s interest is not invalid as a restraint on alienation.” Cal Civ Code § 1995.230.) In light of this, it is imperative that you carefully review the lease before signing to make sure you haven’t unintentionally placed yourself in a bind.

Author: John Ahn

Civil Litigation To Remain On Zoom In CA

October 12, 2021/in All Blog Posts, Corporate Litigation/by The Gupta Evans & Ayres Team

S.B. 241 is a Senate Bill that authorizes the use of remote technology in civil proceedings.

This may not seem revolutionary after 18 + months of Zoom proceedings (and one memorable cat lawyer) but until now these measures were necessary for safety and not thought to persist post-pandemic.

Now with SB 241, the CA supreme court states that “All 58 California superior courts can remotely hold proceedings in at least one case type and 39 courts in most or all case types…” per https://news.bloomberglaw.com/

The ability to hear more cases, as well as the ability for lawyers and plaintiffs and defendants to be present at their hearings regardless of travel issues, health issues, mobility concerns, or budgetary problems that prevent travel or at least make it prohibitively expensive, are also helped by SB 241.

Los Angeles County Superior Court averages 5,000 remote proceedings daily, clearing dockets and speeding justice from thousands of people who may otherwise have had to wait months for proceedings to be heard by the court.

Why continue to hear cases remotely?

With the uptick in employment law cases since the mandate for vaccines was introduced by many ALEs and government employers moving rapidly through cases will continue to be of utmost priority for CA civil courts.

Allowing for remote proceedings can not only speed the trial’s conclusion but keep costs down for attorneys and clients, saving both time and money.

The downsides of video trials cannot be ignored.

Video hides tell-tale signs a jury might pick up on like nuanced body language or facial expressions. As we all know from these months o Zoom – there is also the risk of Zoom fatigue. Thousands of Zoom trials could numb even the most caring heart or even-handed mind to the plight of yet another case on a video screen.

The veracity of testimony is crucial to outcomes in many employment law cases and remote video conferencing will never offer the kind of firsthand experience that in-person arguments provide.

The question is efficiency vs specificity, as it is so often. Faster isn’t always better, but on the other hand, “done” is beautiful.

What do you think about remote trials? Email us if you want to do a video on the pros and cons with Ajay, Jake, or Chris, and let’s argue this out… we can even record it over Zoom.

What Senate Bills 9 & 10 Mean for Attorneys in San Diego

October 12, 2021/in All Blog Posts, Corporate Litigation, Real Estate/by The Gupta Evans & Ayres Team

Unless you inherited your house from your grandmother (and keep a very very low profile), you know that the cost of real estate in California has been skyrocketing for decades.

Not even COVID could stop the real estate bubble, in fact, because many people didn’t want to move during the pandemic, it decreased the supply while the demand never slackened.

Immediately following the recent failed gubernatorial recall, Gavin Newsom put Senate Bills 9 & 10 on the CA Senate floor to help address the housing crisis in California.

As defined in a recent article in the NY Times:

“S.B. 9 allows duplexes to be built in most neighborhoods across the state, including places where apartments have long been banned.
S.B. 10 reduces environmental rules on multifamily housing and makes it easier for cities to add high-density development.”

Can you hear that? It’s the sound of people’s heads exploding.

San Diego is a big small town, you live here, you know. Neighborhoods as tony as Del Mar still have bungalows with beach views held onto by families who bought in the late ’60s and aren’t going anywhere. Housing prices have skyrocketed in the past 2 years with the median cost to buy a home topping $750K in 2021 and estimates saying the price will reach $1M next year.

So, What do Senate Bills 9 & 10 mean for attorneys in San Diego?

In theory, SB 9 would allow a family on an acre or 2 of land to build a casita, rent it out to a couple, make some income to pay their mortgage and in doing so also offset the housing shortage. In practice, developers are coming in, sweeping up family-owned properties and turning them into multi-unit rentals in areas like Clairemont Mesa and other suburban middle-class tracts that have not seen this kind of development since the 1950’s when they were first built up offering middle-income American’s a piece of the American dream.

SB 10 could allow more permitted buildings with less red tape to be built, easing the lengthy process of permits and ecological offsets to structures created in urban areas. Requirements for zoning changes can drive the cost of construction way up and delay projects that build housing in urban areas by months or in some cases even years which in turn raises the rent asked of those properties once they are complete. SB 10 should abate some of that and allow a streamlined route to more high-rise housing in areas like Hillcrest and UTC. In practice, those builders who began projects before SB10 will be at a disadvantage to those who are not required to adhere to the same rules, putting them at a competitive shortfall and potentially paving the way for lawsuits.

The US is a litigious society.

When we feel slighted, we sue. These new regulations in the San Diego housing market are sure to stir up their fair share of lawsuits, challenges, and infighting among developers and old school city residents.

Traffic, pollution, resources like grocery stores, schools, hospitals, urgent care clinics, gas stations, all will be affected by the tripling or more of the population in any one area. From a development perspective, the 2 bills go hand in hand very well allowing more units to be developed with less red tape and city interference.

So what should you beware of if your client is investing in a multi-family property newly allowed by SB’s 9 & 10?

How can you protect them from unnecessary litigation and headache down the road while still encouraging their CRE portfolio’s growth? One step you can take with little to no effort is to do a background check on the players involved. [WE CAN HELP WITH THAT]. If your search comes up with bankruptcies, charge-offs of debt, lawsuits for the past few decades, you’ll know the kind of person your client is getting in bed with and can triple-check those contracts to cut out any loopholes. On the other hand, if it comes back clear, it may just mean, they’re new at this game, so it’s probably still a good idea to check for loopholes in those contracts and investment disclosures.

Whether you fall on the side of the single-family homeowner who says, “not in my backyard” or the young couple looking to get their own place who wonder, “what can I afford?” or the developer who is looking to turn a profit and in doing so offset the housing shortage, SB 9 & 10 are sure to throw a cat among the pigeons in the San Diego Real Estate market for years to come.

The coming months and years are likely to be rife with lawsuits around these new developments. There are community boards that are adamant that their neighborhoods are not going to be the frontier of housing growth. It’s going to start somewhere and wherever it is, the changes are likely to be seismic and far-reaching.

FTC x Influencer: the FTC’s Rules on Influencer Marketing Disclosures

October 8, 2021/in All Blog Posts, Corporate Litigation/by John Ahn

The rise of social media has facilitated the birth of influencers, and over the past several years, influencer marketing has ballooned to become a multi-billion-dollar industry according to various sources. (See https://www.shopify.com/blog/influencer-marketing-statistics#7.) It comes as no surprise that the FTC has already extended advertising rules into the world of influencer and social media marketing. This article will explore the rules around influencer marketing, specifically on brand/influencer collaborations.

An Intro to Influencers

Influencers are individuals who generally have high social net worth and who have developed large social media followings. (Colgate v. Juul Labs, Inc. (N.D.Cal. 2019) 402 F. Supp. 3d 728, 742.) Influencers can be anyone from a professional athlete to a built-from-scratch social media sensation. However, whether your favorite influencer is an A-list celebrity or a stay-at-home dad who gained millions of followers by making comical TikTok videos, influencers share a key characteristic: they have the ability to greatly affect the purchasing decisions of their followers.[1]

An influencer’s ability to affect the purchasing decisions of followers boils down to relatability and authenticity. In essence, uploading content on social media is a type of disclosure of one’s personal life to the public. This in turn allows influencers to connect with the general public on a more personal level, which ultimately leads to an increase in followers. An influencer’s followers feel connected to the person they follow and are willing to trust this person’s words.

Influencer Marketing

Businesses have recognized the impact influencers have in the market and have continued to tap into these connections to create lucrative business opportunities. For instance, one frequently used method of marketing through influencers involves brand collaborations wherein businesses release limited edition products in collaboration with a popular influencer. You have likely seen the shorthand “x” to denote collaborations between brands: “Nike x sacai”, “adidas x Disney”, “Fendi x Versace”, etc. This moniker stylization can also be used for brand/influencer collaborations, e.g., “Brand x Influencer”.

Whenever a business decides to partner with an influencer on a marketing venture, it is important to be familiar with the FTC’s rules regarding disclosure. 16 C.F.R. Section 255.5 states that “[w]hen there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.” (16 C.F.R. § 255.5) “[I]nfluencers should clearly and conspicuously disclose their relationships to brands when promoting or endorsing products through social media.” (Ariix, LLC v. NutriSearch Corp. (9th Cir. 2021) 985 F.3d 1107, 1116; quoting Federal Trade Commission, FTC Staff Reminds Influencers and Brands to Clearly Disclose Relationship (Apr. 19, 2017), https://www.ftc.gov/news-events/press-releases/2017/04/ftc-staff-reminds-influencers-brands-clearly-disclose.) The reasoning behind this requirement is that the courts simply view influencer marketing as a form of advertising, and disclosure is necessary to prevent false, misleading, or fraudulent advertising.

Generally, disclosure is required if the connection is not reasonably expected by the audience. (16 C.F.R. § 255.5.) That said, disclosure isn’t always necessary. Section 255.5 includes several examples describing various scenarios where disclosure is not required by law. For instance, let’s say a food business ran an ad featuring an endorsement by an A-list celebrity and the endorsement regards only points of taste and individual preference. The celebrity’s compensation is likely ordinarily expected by viewers and so no disclosure is required. (Id.) The key here is that when assessing whether or not disclosure is required, a business should take into account whether a representation is being made by the endorser, whether the endorsement relationship is clear and conspicuous, and whether the connection should be reasonably expected by the audience.

Going back to our collaboration scenario, what happens with “Brand x Influencer”? Does the “x” between the names require additional disclosures by the influencer? In this specific situation, the answer is arguably “no”. It is well known in the industry that the “x” in, for instance, “Brand x Influencer” implies a collaboration between the brand and the influencer. It is also likely apparent to consumers that a collaboration generally implies a financial relationship if not a material connection between the Brand and the influencer. This arguably should be enough to make consumers aware of such relationship/connection, especially considering the “x” between names is commonly used to announce a collab (see examples above). In this instance, the audience should reasonably expect that both names on either side of the “x” will incur some sort of benefit, if not a financial one due to the clear and widely accepted implications. In short, “Brand x Influencer” should be enough of a disclosure to make consumers aware of the financial relationship between the two because the expectation of such a relationship is baked into the name via the “x” between the names.

If you plan on venturing into the world of influencer marketing, be sure to follow the FTC’s guidelines surrounding disclosure.

[1] Sometimes, this power can even influence stock prices of companies. For example, Cristiano Ronaldo, for all intents and purposes, is a mega influencer. During a press conference earlier this year, he moved a bottle of Coca Cola out of frame and instead, held up a water bottle and said, “Water!” in Portuguese. This immediately resulted in a $4 billion dollar drop in Coca Cola’s market value.

Author: John Ahn

An Offer You Can’t Refuse, Part II: No Cash, No Claim

August 6, 2021/in All Blog Posts, Corporate Litigation/by Jake Ayres

In a previous article, I discussed the often blurry line between permissible pre-litigation communications and constitutionally unprotected extortionate demands. However, one important dimension of the civil extortion universe was left unaddressed there—that is, no claim for civil extortion can lie unless the victim actually pays the extorter.

In much of the foundational precedent surrounding the issue of civil extortion, courts are primarily concerned with the first step of the anti-SLAPP analysis, wherein the defendant has the burden of proving that the speech at issue is protected. See, e.g., Flatley v. Mauro, 39 Cal. 4th 299, 320, 333 (2006). Under the anti-SLAPP statute’s two-step, burden-shifting framework, only when the defendant has made a prima facie showing that their speech is protected activity does the plaintiff then have the burden of proving a likelihood of success on the merits of their claim. Id. at 314. Flatley and nearly all of its progeny deal with scenarios where the defendant fails to meet their initial burden because their communications are held to be extortionate as a matter of law, and as a result, those courts did not reach the second step of the analysis—that is, whether the plaintiffs have viable claims for civil extortion.

If they had, most of those civil extortion claims would have been found lacking for the victim’s failure to pay.[1] Although extortionate demands may place communications outside of the protections of the constitution and the anti-SLAPP statute, merely receiving those communications does not on its own give rise to an actionable claim. See Fuhrman v. Cal. Satellite Sys., 179 Cal. App. 3d 408, 426 (1986), overruled on other grounds by Silberg v. Anderson, 50 Cal. 3d 205, 211 (1990). Although not termed an action for “civil extortion,” the California Supreme Court “has recognized a cause of action for the recovery of money obtained by the wrongful threat of criminal or civil prosecution.” Id. Because California only recognizes a cause of action for recovery of extorted money, would-be victims of an extortionate demand who do not pay do not have a cause of action for civil extortion.

Indeed, in an unpublished case, the California Court of Appeal rejected a claim for “attempted civil extortion” for this exact reason. Tran v. Eat Club, No. H046773, 2020 Cal. App. Unpub. LEXIS 5299, at *53-54 (Aug. 18, 2020). It is possible that a published case may take a different view, but allowing civil liability for “attempted” torts perhaps skirts too close to concepts of criminal liability.

In short, although an extortionate demand letter may not be entitled to constitutional protections as a matter of law, that does not mean, ipso facto, that the plaintiff has a viable claim for civil extortion. Indeed, without money changing hands, California law currently prohibits recovery of damages.

[1] Or, found lacking because the speech at issue would be protected by the litigation privilege, defeating the likelihood of success on the merits on the second step of the anti-SLAPP analysis. See Malin v. Singer, 217 Cal. App. 4th 1283, 1302 (2013) (holding that where demand letter was “protected by litigation privilege. . . . plaintiff [could not] establish a probability of prevailing where the litigation privilege precludes liability”).