All Blog Posts Archives - Page 7 of 8

Airbnb and Short-Term Rentals in San Diego: The Ban that Never Was

November 1, 2018/in All Blog Posts, Real Estate/by Chris Evans

You have likely seen the signs around town — “Neighborhoods are for Neighbors, Not Vacation Rentals.” This phrase has become the mantra of “Save San Diego Neighborhoods,” the lead organization pushing back against San Diego’s rapidly expanding short term rental market. Save San Diego is an organization fighting to stop the “illegal conversion of San Diego homes to short-term vacation rentals.” In doing so, Save San Diego has been pushing the San Diego City Council to impose significant regulations with respect to short-term rentals such as Airbnb.

Mounting such a fight, however, has not come without its challenges. The primary group pushing back against Save San Diego to try and keep San Diego’s short-term rental market alive and thriving is “Share San Diego,” a coalition of San Diegans in support of short-term rentals. Naturally, Share San Diego is strongly supported by short-term rental companies, such as Airbnb and HomeAway. Short-term rental units generate nearly $300 million annually for San Diego homeowners and an additional $200 million for the surrounding businesses. For perspective, the San Diego Padres—San Diego’s only professional sports franchise—generated only $266 million in total revenue for all of 2017. Obviously, there is a lot at stake when trying to regulate an industry of this size.

Despite resistance from Share San Diego and other proponents of short-term rentals, Save San Diego looked like they achieved victory back in July and August of 2018 when the San Diego City Council voted to outlaw vacation rentals in secondary homes, limiting short-term stays to one’s primary residence only.

The victory, though, was only temporary.

In response to the City’s decision to regulate short term rentals, Share San Diego put together a referendum petition that garnered over 62,000 San Diegan signatures in support of challenging the regulations. The petition forced the City to either rescind the ordinance or to have a public vote on the ordinance. On October 22, 2018, as a result of the referendum, the San Diego City Council made its choice and voted 8-1 to rescind the newly minted short-term rental ordinance—the ordinance that the Council passed barely three months earlier.

The repeal of the short-term rental regulations marked a significant win for Share San Diego, Airbnb and other proponents of short-term rentals. Yet, while Share San Diego may be leading on the scoreboard as of today, Save San Diego and other opponents of the short-term industry will undoubtedly continue to advocate for new regulations. Consequently, the repeal of short-term rental regulations has created tremendous uncertainty with regard to how the City of San Diego will look to regulate short term rentals going forward, if at all, and poses the question of what in fact is best for San Diego.

How Did We Get Here

In March 2017, San Diego City Attorney Mara Elliott issued a memo wherein she determined that “any use that is not listed in the City’s zoning ordinance is prohibited.” As a result, because short-term rentals are not listed, it was concluded that the San Diego Municipal Code does not permit short-term rentals in any zone in the city—residential, commercial or otherwise. At that point, the issue appeared cut and dry—short-term rentals are illegal and, therefore, should no longer be allowed. Not quite. Despite this memo being issued, Mayor Kevin Faulconer’s office chose not to declare the short-term rentals illegal and instead decided to wait for regulations, which caused the “mini-hotels” to continue spread throughout San Diego.
The City Attorney’s memo and the fact that short term rentals continued to be permitted by the Mayor’s office created a vacuum of uncertainty that the San Diego City Council was forced to address.
On July 16, 2018, the San Diego City Council voted to outlaw vacation rentals in secondary homes, limiting short-term stays to one’s primary residence only, so long as the rentals do not exceed six months out of the year, the owner applied for a permit and paid an annual fee of $949. Notably, the regulation did not include any exemption for the areas of Mission Beach, where 44% of the homes are estimated to be short-term rentals, or Pacific Beach—areas that include a total of over 3,100 short-term rental homes.
On August 1, 2018, after a five hour long hearing where opponents of the regulation voiced their concern, the San Diego City Council reaffirmed its July 16^th decision. This put the new regulation on course to become effective in July 2019. The reaffirmation of the short term rental ordinance was viewed by Share San Diego as “a massive loss for both property rights and the tourism industry in San Diego” and a decision that “will leave thousands of short term rental hosts without a lifeline and even more small business crippled with losses in revenue and traffic.”
Backed by Airbnb and HomeAway, opponents of San Diego’s short-term rental ordinance organized to fight the new regulations—lawsuits were threatened, testimony was heard, organizations were formed and, ultimately, a referendum petition was circulated with goal of forcing San Diego to revisit its controversial short-term rental regulations.
On August 30, 2018, Share San Diego’s referendum seeking to overturn the short-term rental ordinance collected signatures from more than 62,000 San Diegans. Only 36,000 signatures were needed.
On October 8, 2018, Share San Diego’s referendum and its 62,000 signatures were certified by the San Diego City Clerk. The certification presented the San Diego City Council with two options: (1) rescind the short-term rental ordinance; or (2) place the ordinance up for a public vote at a future date, likely in 2020.
On October 22, 2018, the San Diego City Council voted 8 – 1 to rescind the July 16^th short-term rental ordinance. Given the delay a 2020 public vote would bring, in addition to the potential of incurring millions of dollars defending lawsuits filed by opponents of the ordinance, rescission of the ordinance and starting over was the preferred choice for both opponents and proponents of the regulation.
The City now has the option of adopting a new set of rules within the next year, but such rules would have to be substantially different from the ones that were repealed. What set of regulations would be “substantially different” is yet another unknown

What Are We Yelling About?!

When addressing the importance of the short-term rental market in San Diego, Share San Diego and other opponents of the short-term rental ordinance focus largely on the undeniable economic benefit that short term rentals bring to San Diego and property owners. Short-term rental hosts are of the position that they should have the right to use their properties as a way of supplementing their income. In addition to the direct supplemental income a property owner garners from renting their home short-term, the community itself receives an economic boost.

Specifically, in October 2017, Alan Nevin of the Xpera Group published a study focusing on the economic impact of short-term rentals in San Diego. The study concluded that short term lodging in the City of San Diego generated almost $500 million in spending ($300 million direct and $200 million indirect and induced spending), $700,000 in sales tax revenue and over 3,000 jobs[1]. San Diegans earned $5.2 million over Labor Day weekend alone as they hosted 15,000 travelers. For comparison, as stated above, the San Diego Padres generated $266 million in total revenue in 2017.

A common counter to the economic benefit that short-term rentals bring to San Diego is that the benefit is coming at the expense of San Diego hotels. However, the Xpera Group’s report concluded that not only do the majority of short-term renters stay seven nights or longer (i.e. longer than a typical hotel stay), but short-term rental nights made up only 2.7% of hotel nights in San Diego. Of that 2.7%, the report further concluded that the short-term rental nights did not pull from hotel nights because of the cost and location of where the short-term rental nights occurred. The conclusion, as set forth in the Xpera Group Report, is that the short-term rental market “has had a minimal or negligible effect on the hotel market.”

As a result, opponents of the short-term rental market and those that want to regulate the industry (i.e. Save San Diego Neighborhoods) shy away from trying to diminish the economic impact of the short-term rentals. Rather, the main argument put forth by proponents of short-term rental regulations is essentially that short-term rentals harm the character and stability of neighborhoods in a way that is inconsistent with City Planning and negatively impacts San Diego residents.

As posited by Save San Diego Neighborhoods, short-term rentals disrupt San Diego communities by creating businesses in areas that were designed and intended to be purely residential communities. Unlike even monthly rentals, a short-term rental involves significantly more moving parts and, more often than not, a different type of customer. The infrastructure (i.e. roads, law enforcement, garbage collection, utilities, community maintenance) needed to support a vacation renter, short term or otherwise, is fundamentally different than that which is required to support a residential tenant. When the frequency of vacation renters is drastically increased through short-term rentals, the strain on the communities’ infrastructure is exacerbated. At some point, the strain will become too much. Similar to the SDSU Mini Dorm issue, the character of neighborhoods and the stability of communities are necessarily and unavoidably jeopardized, or at the very least, transformed, by the proliferation of short-term rentals.

One of the other main policy arguments put forth by Save San Diego Neighborhoods is that short-term rentals drive up rental and housing costs for San Diego residents. As outlined in our prior article related to rent control, rents in San Diego have increased substantially over the last three years. The average rent in March of 2018 in San Diego was $1,887, which represented a 20% increase since 2015. The median cost of rent is simply much higher than the average San Diegan can afford, which is causing families to be pushed into suburban neighborhoods where rents tend to be lower. However, Save San Diego Neighborhoods argues the increase in short-term rentals removes thousands of otherwise available long-term rental homes from that market.

Similarly, from a homebuyer’s perspective, Save San Diego Neighborhoods argues the increase of short-term rentals is naturally drawing otherwise uninterested investors to the residential housing market. The average potential homeowner is then forced to compete with investors whose sole business model is based on valuations associated with vacation rentals. The California homeownership rate already lags around 10 percentage points below the national homeownership rate, 54.6% versus 64.2%. That means that Californians rent at a rate that is 10% higher than the national average. In a market where investors are already competing with primary residence holders for middle class housing, the ever-expanding short-term rental market provides yet another obstacle to middle class homeownership. Put another way, with the ease of short-term renting created through sites like Airbnb, what is to prevent Pacific Beach and Ocean Beach from becoming like Mission Beach where over 44% of the homes are used as vacation rentals?

The economic benefit cannot be denied and will continue to be the primary argument of Share San Diego and those in favor of short-term rentals in San Diego. Opponents of short-term rental regulations will not try to deny this fact. That is not to say, however, that the economic benefit cannot be outweighed by a more compelling interest. In this instance, that interest is preserving the character and stability of a community and preventing the fundamental, unanticipated transformation of communities.

Technology—Yet Another Layer

There is one other, overlapping reality to this ongoing short-term rental saga: technology. Similar to the taxi industry and Uber, short-term rentals existed long before AirBnb and HomeAway came along. Airbnb simply made short-term rentals much more accessible in the exact same way that Uber made ride-sharing so easy that it has become ubiquitous.

It is technology that has allowed the use of short-term rentals to expand throughout the world. In years past, without technology (read: Internet), the increase of short-term rentals in certain communities and neighborhoods may have moved at rate that allowed those communities to adapt and families to adjust. Now, the rapid expansion of short-term rentals at the rate seen by communities, such as San Diego, make it nearly impossible for those communities to keep pace and adjust appropriately.

The challenge, then, is not whether short term rentals should be regulated in San Diego, but, rather, how the short-term rentals should be regulated. Clearly, some boundaries need to be drawn in a way that allows residential communities and neighborhoods to support an increase in vacation renters. Both sides likely agree with this position.

However, government, especially at the local level, is extraordinarily poorly equipped to regulate technology. This is especially true in an emerging market where even those that are shaping the landscape of the technology cannot claim to have visibility beyond three or four years. This fundamental shortcoming is exacerbated by the political nature of the California housing market and the size of the short-term rental market. This does not even begin to address the legal implications of such a decision (another blog for another day). The technological component and the political considerations surrounding short-term rentals will make it extremely difficult for a local body of government, such as the San Diego City Council, to regulate.

To Sum It All Up

Share San Diego and Save San Diego Neighborhoods each present strong arguments in favor of their respective positions. However, the reality is that attempts by the City of San Diego to regulate the short-term rental industry will inevitably benefit one side over the other. Ultimately, because of the relative strength behind each side in this fight and the arguments each side presents, this matter is likely to be resolved through a ballot measure and public vote.

While the most recent short-term rental ordinance from July 2018 may have had a short life span, if any at all, the potential for compromise between the two sides—one that furthers each of their goals—is certainly within the realm of possibility and one that San Diego and its residents should strive to achieve.

[1] The 2017 figures increased from approximately $196 million in direct and indirect spending in 2015.

Prop 10: Does Rent Control Make Sense for California?

September 29, 2018/in All Blog Posts, Real Estate/by Ajay Gupta

In June, the California Secretary of State confirmed Proposition 10 as a ballot initiative that, if passed, will allow cities in California to implement rent control. With the housing shortage in California, San Diego in particular, renters have seen dramatic increases in rent that quite simply have not kept up with the cost of living. As a result, San Diego is seeing gentrification in areas not normally associated with the displacement of middle- class renters, like La Mesa and the surrounding suburbs of downtown. This displacement is what is most likely bringing Proposition 10 to the ballots this November.

Historically, middle–class workers in California were able to afford homes, which granted them stability in terms of their cost-of-living. However, with skyrocketing housing prices, even those with good jobs have found themselves struggling to get into their first home. This confluence of unaffordable housing and the gentrification of the middle- class has brought the issue of rent controls back into the public purview.

Currently, rent controls are largely prevented under the 1995 Costa Hawkins Rental Housing Act.

The Costa Hawkins Act contains three major provisions:

It protects a landlord’s right to raise the rent to market rate on a unit once a tenant moves out.
It prevents cities from establishing rent control—or capping rent—on units constructed after February 1995.
It exempts single-family homes and condos from rent control restrictions.

Rents in San Diego have increased substantially over the last 3 years and vacancy rates remain low. The average rent in March of 2018 in San Diego was $1,887, which represented a 20% increase since 2015. At the same time, vacancy rates remain low, approximately 3.2%, which is below the historical average.

San Diego, unlike Los Angeles and San Francisco, has not implemented any rent controls. Across California, there are only 15 municipalities that have implemented rent controls prior to the acceptance of Costa Hawkins. Most rent control ordinances limit the permissible rent increase the landlord can charge if the tenant chooses to stay in the unit year over year. Rent control ordinances typically also prevent a landlord from evicting a tenant unless the landlord is planning on removing the property from the market. Finally, in some areas, even if the landlord is courting a new tenant, the landlord would be limited in the amount that he could charge the new tenant.

The implementation of rent controls will dramatically shift rights from property owners in rent controlled areas to renters who are fortunate enough to obtain housing in those areas.

The Economics:

In San Diego, the primary cause of higher rental costs is the result of the shortage of available rental units. With vacancies approaching 3%, most economists agree that San Diego’s high rental prices are a direct product of a fundamental lack of supply. Under this line of reasoning, which is the prevailing wisdom, the implementation of rent controls would simply lower the value of housing and therefore discourage investment in new housing. As the argument goes, while a select few who are in rent controlled districts would benefit, the decrease in new housing investments would cause higher rents for the remainder of San Diego’s renters.

Another line of reasoning focuses on the demand side of the equation. California’s homeownership rate is currently around 10 percentage points below the national homeownership rate, 54.6% versus 64.2%. That differential has always been true in California. Not surprisingly and directly proportionate, the rate of renters in California is about 10% higher than the rate of renters for the rest of the country, 46% compared with 36% respectively. Theoretically, by increasing homeownership rates, you would automatically decrease the number of renters in the market. Proponents of a demand side argument theorize that implementation of rent controls may decrease the value of homes for investors, but the value of homes would remain constant for primary residence holders. By shifting the value away from investors, homeownership rates will increase naturally through the conversion of rental properties to primary residence holders.

The rationale surrounding the demand side analysis is tortured on a number of levels. Most obviously, increasing homeownership rates by converting rental properties into primary residences simply decreases the number of available rental units on the rental market. While it does address the issue of gentrification for those that are able to buy homes, it does little to actually address the fact that there are more renters than houses available for them.

The argument does, however, touch on a fundamental issue that is unique to California: With such a large percentage of California’s population being renters, 10% more than anywhere else in the country, does California have an obligation to provide some stability to middle- class workers who are lifelong renters?

The Politics

The real rationale for Proposition 10 and the repeal of Costa Hawkins is grounded in politics, not economics. First, Proposition 10 itself does not implement rent controls; it simply would allow municipalities to implement rent controls at the local level. Proponents of Proposition 10 argue that areas such as San Francisco, Silicon Valley and National City all have different housing needs that should be addressed at the local level. Proposition 10 simply gives local municipalities the flexibility they need in order to meet the needs of their community and develop flexibility in community planning.

Proponents of Proposition 10 argue secondarily that housing stability should be a right as opposed to a privilege. The median household income in San Diego County in 2017 was $66,500. According to BankRate.Com, assuming 20% down and only $1,000 a month in non-housing related expense, the maximum recommended housing price is about $240,000. Meanwhile, the median home prices in San Diego rose 8.6% in April, 2018 to reach its highest level ever at $570,000.

Based on these numbers, the average middle- class worker cannot reasonably expect to ever buy a home in San Diego or in most metropolitan areas in California. Since that is our current reality, then shouldn’t local municipalities be given the option of protecting middle- class families from being displaced from their communities? Shouldn’t local government be given the tools to promote a stable and diverse community? If we value economic and racial diversity, shouldn’t a community be given the flexibility to plan for low income families through rent controls?

I struggle with these issues personally. We moved seven times in 11 years before we bought our home in 2018. Most of that was by choice, but I do know that rents went up precipitously over the same period. The one time where our landlord was selling the home we were renting, it was frustrating. As our kids are getting older, we are definitely accumulating more stuff, making the prospect of moving more daunting. Having a home now, I value homeownership, the stability it brings, and the investment in the community it allows. It would be devastating to know that I could never buy a home and I think that under those circumstances, I would want some stability in terms of my rental situation.

On the other hand, I firmly believe that the housing shortage and gentrification are supply side problems. The only practical means of bringing more housing on the market is to streamline the process of development and to increase investment into the housing market. Ultimately, the California housing market must be relied on to do what the California housing market has always done: Correct itself and bring housing back in line with what people can afford.

On balance, I take the position that Costa Hawkins should not be repealed. There are a myriad of reasons that lead to unaffordable housing in California. While each of these reasons can be separately analyzed and are topics worthy of their own articles, we have to start by looking at Proposition 13 and the relatively low effective property tax rates in California. From there, we quickly move to the development life cycle and costs of litigation. Finally, we have to look at the wealth effect and role that real estate plays in California’s economy.

Ultimately, what I am confident that we will find is that investors are competing with the middle-class for homes and driving the middle-class out of the owner occupied market and pushing them into an already flooded rental market. Further, I’m confident that the driving force behind the low owner-occupied housing rates can be traced to tax incentives that favor the investment buyer over the owner-occupied buyer.

As a result, the path to addressing middle-class gentrification is through policies that encourage higher owner-occupancy rates. While rent control may cause a small and unintended increase in owner-occupied housing rates, it really does little to help renters. Trying to address gentrification through rent control measures as allowed under Proposition 10 is just the wrong tool for the job, even if done at the local level. Instead, we must look long and hard at policies that have caused California to have the second lowest owner-occupancy rate in the country.

Reverse Veil Piercing: A Welcome Addition to the Creditor’s Collection Arsenal

September 18, 2018/in All Blog Posts, Corporate Litigation/by Chris Evans

In 2017, the California Court of Appeals ruled that creditors can directly pursue the assets of an LLC owned by a judgment debtor to satisfy the judgment. This process, known as “Reverse Veil Piercing,” marks a significant change in California law as it relates to collections and the way that the assets of an LLC are viewed in the eyes of the Courts. The ruling may also be indicative of how the Courts plan to treat closely held entities in the future.

In late 2017, California’s Fourth Appellate District concluded that “reverse veil piercing” may be used by creditors to add an LLC to a judgment the creditor has against an individual owner of the LLC. The decision, albeit narrow, was set forth in detail in Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5^th 214 and departed from the well-settled California law against reverse veil piercing set forth in the 2008 appellate decision, Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510. The Curci ruling grants creditors a significant new means of collecting a judgment that otherwise may be extraordinarily difficult, or impossible, to collect.

The Facts

The case of Curci Investments, LLC v. Baldwin involved Mr. James P. Baldwin. Mr. Baldwin was a real estate developer who over his lifetime was involved in hundreds of corporations and limited liability companies. One of the LLCs was named JPB Investments, LLC (JPB). Mr. Baldwin was the 99 percent owner of JPB, with his wife holding the remaining one percent. Mr. Baldwin was also the manager and CEO of JPB and controlled all of its decisions and actions, such as cash distributions to Mr. Baldwin and his wife. JPB’s exclusive purpose was to hold, invest and/or distribute the cash balances of Baldwin and his wife.

Mr. Baldwin defaulted under a $5.5 million promissory note. Curci, the owner of the note, filed suit and eventually obtained a judgment against Mr. Baldwin, personally, in the approximate amount of $7.2 million. When Curci obtained its judgment against Mr. Baldwin personally, Curci pursued several avenues to try and collect on the judgment. However, after exhausting most of its options, Curci was unable to receive any recovery on its judgment. With few options left, Curci filed a motion to expand the judgment to include one of Mr. Baldwin’s LLCs, JPB (above), based on the theory that JPB was the alter ego of Mr. Baldwin. In other words, Curci wanted to utilize “reverse veil piercing” to reach the assets of JPB and satisfy Curci’s judgment.

Hold That Thought…

A quick aside about alter ego and piercing the corporate veil. These concepts are not particularly new and have long been permissible in California[1]. As is well-recognized, a corporation or an LLC are considered a separate legal entity, distinct from its stockholders, officers and directors (or members and managers), with separate and distinct liabilities and obligations[2]. This affords the shareholders of a corporation, or the members of an LLC, protection from judgments against the corporation or LLC.

However, that legal separation (and protection) may be disregarded by the courts when the creditor shows the following exists:

Such a unity of interest and ownership between the corporation (or LLC) and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist (based upon a variety of factors); and
Injustice will result if the acts in question are treated as those of the corporation (or LLC) alone[3].

If these prongs are demonstrated, the actions of the corporation or LLC will be deemed to be those of the persons or organizations actually controlling the corporation. This is known as “piercing the corporate veil”—the creditor is piercing the protective veil of the corporation or LLC to reach the assets of particular shareholders or members[4].

The concept Curci sought to utilize with respect to its judgment against Mr. Baldwin was the concept of reverse piercing of the corporate veil. The concept of reverse veil piercing is similar to traditional veil piercing in that when the ends of justice so require, and the foregoing two prongs are shown to exist, a court will disregard the separation between an individual and a business entity. However, rather than seeking to hold an individual responsible for the acts of an entity, reverse veil piercing seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider.

Reverse Veil Piercing In California Before Curci

In Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1513 (Postal Instant Press), the Court held that a third-party creditor may not reverse pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability. In deciding against allowing reverse veil piercing, the Court cited three concerns:

The effect of allowing judgment creditors to bypass standard judgment collection procedures;
The potential of harming innocent shareholders and corporate creditors (i.e. the non-debtor insiders of a corporation or LLC); and
Using an equitable remedy in situations where legal theories or legal remedies are available outweigh the wrong to the judgment creditor.

With the ruling in Postal Instant Press, reverse veil piercing in California was effectively dead, and it remained that way until Curci obtained its judgment against Mr. Baldwin.

The Curci Decision

In Curci, the Court acknowledged the above concerns, but distinguished the facts from those in Postal Instant Press. In doing so, the Court concluded that the three concerns were not present in the case before the Court. The distinction was grounded largely in the fact that Postal Instant Press was dealing with a corporation, whereas Curci was dealing with an LLC owned entirely by Mr. Baldwin and his wife.

The Court identified that a creditor does not have the same options against a member of an LLC as it has against a shareholder of a corporation. If the debtor is a shareholder of a corporation, the creditor can step straight into the shoes of the debtor, acquire the shares and then have whatever rights the shareholder had in the corporation, including the right to dividends, to vote, and to sell the shares. On the other hand, when the debtor is a member of an LLC, the creditor may only obtain a limited charging order to receive any distributions made to the member from the LLC. Here, because Mr. Baldwin had complete management and control over JPB, Mr. Baldwin could manipulate distributions such that no funds went to Mr. Baldwin, which is precisely what Mr. Baldwin had been doing to avoid the judgment.

Additionally, there was simply no “innocent” member of JPB that could be affected by reverse piercing. Mr. Baldwin held a 99 percent interest in JPB and his wife holds the remaining 1 percent interest, who, based on community property principles, was also liable for the debt owed to Curci.

Based on the above, the Court held that reverse veil piercing may be available to Curci with respect to JPB and sent the case back to the trial court to undertake the fact-driven analysis applicable to piercing a corporate veil. In parting words, the Court held that “the key is whether the ends of justice require disregarding the separate nature of JPB under the circumstances.”

What Now?

The ruling from the Court in Curci will likely be construed quite narrowly and only with respect to fact patterns largely mirroring the facts of Mr. Baldwin and his entity. Additionally, the ruling in Postal Instant Press should still be considered binding law with respect to corporations as the Curci ruling was almost entirely founded on the fact that the entity in question was an LLC. Even with the Curci ruling, when corporate entities and LLCs are structured and operated correctly, they will in all likelihood continue to exist separately from the individuals who form and manage them.

That said, the Curci ruling remains notable and opens the door to reverse veil piercing in California, which is a significant shift in California creditor law and a substantial change in the options previously available to creditors struggling to collect a judgment against an individual debtor. Those setting up corporate entities that will be largely controlled and operated by a single individual should keep the Curci case top of mind. Going forward, when a creditor is dealing with an individual judgment debtor actively misusing an LLC, one can all but guarantee that the creditor will now rely upon the Curci ruling to argue “the ends of justice” require reverse veil piercing to be permitted against the debtor’s LLC.

The materials available at this web site 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.

[1] Sonora Diamond Corp. v. Superior Court (2000) 83 Cal. App. 4th 523, 538

[2] Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892

[3] Sonora Diamond Corp. v. Superior Court, supra, 83 Cal. App. 4th at 538

[4] In addition to piercing the alter ego and piercing the corporate veil, there is a concept known as the Single-Enterprise doctrine which is also recognized in California. While well outside the scope of this article, the Single-Enterprise doctrine can be used to hold multiple, distinct legal business entities liable as if they were a single entity. See Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1249-50.

San Diego Right To Know Ordinance: What Landlords Should Know Before Evicting Residential Tenants

July 20, 2018/in All Blog Posts, Real Estate/by Chris Evans

Landlords seeking to evict tenants within the City of San Diego are required to observe numerous eviction laws and guidelines imposed by the State of California that govern the eviction process. The laws already contain several nuances to which a landlord must strictly adhere or otherwise risk jeopardizing the eviction in question. However, in addition to the California eviction laws, a landlord must also strictly follow eviction laws adopted and imposed by the City of San Diego. One of such laws specific to the City of San Diego is the Tenants’ Right to Know Ordinance (the “RTK Ordinance”). San Diego Municipal Code Chapter 9, Article 8.

What Is It?

In 2004, the City of San Diego adopted the “Tenants Right to Know Ordinance,” which is a just cause eviction ordinance. The RTK Ordinance significantly impacts a landlord’s ability to terminate, or refuse to renew, the tenancy of a long-term residential tenant by requiring the landlord to provide cause for termination. Generally, the RTK Ordinance states that if a landlord wants to terminate a residential tenancy of more than two years, the landlord must have one of nine enumerated reasons for doing so and must inform the tenant of such reason at the time of serving the requisite notice under California law. The stated purpose of the RTK Ordinance is “to promote stability in the San Diego rental housing market and limit adverse impacts on long-term residential tenants displaced and forced to find replacement housing in the expensive and limited San Diego housing market.

The RTK Ordinance, San Diego Municipal Code Section 98.0730, states the following nine reasons upon which a landlord can rely to terminate or refuse to renew a tenancy consist of the following:

Nonpayment of rent;
Violation of Obligation of Tenancy;
Nuisance;
Illegal Use;
Refusal to Renew Lease;
Refusal to Provide Access;
Correction of Violations/Necessary Repairs or Construction;
Withdrawal All Rental Units from the Rental Market;
Owner or Relative Occupancy

For example, if a landlord wanted to end a residential month-to-month tenancy that has lasted for over two years and that pertains to a property in the City of San Diego, the landlord could only do so if one of the foregoing reasons existed. If one of the reasons existed, the landlord would serve the proper notice to the tenant as ordinarily required under California law (i.e. 3-day, 30-day, 60-day notice, whichever the case may be), and the landlord must include the specific reason for termination in the notice. This differs from the general practice in California wherein a landlord can terminate a month-to-month tenancy by simply providing a 30-day or 60-day notice, for any reason and such reason need not be given to the tenant.

Challenges to Interpretation.

At first glance, the RTK Ordinance appears relatively straightforward in that the typical reasons for terminating a tenancy match those permitted by the RTK Ordinance. However, problems may arise due to the ambiguous terminology used in the RTK Ordinance.

For example, while it is clear that the RTK Ordinance applies only to tenancies of more than two years in duration, it remains unclear whether the RTK Ordinance applies solely to month-to-month tenancies, or whether the RTK Ordinance also applies to fixed term tenancies. Our office is of the opinion that the RTK Ordinance is limited to the month-to-month tenancies given the fact that a fixed term tenancy automatically terminates without notice. However, the issue has yet to be litigated and could pose costly and time-consuming problems to a landlord looking to evict a tenant if a tenant, rightly or wrongly, sought to challenge the issue.

Additionally, further ambiguity arises where a landlord relies on the “Correction of Violation” cause to terminate a tenancy. The RTK Ordinance provides that a valid cause to terminate a tenancy exists if the landlord needs possession of the property in order to make “necessary repairs and construction” to the property in question. This obviously begs the question of what is “necessary,” which is not surprisingly undefined in the RTK Ordinance. Again, the issue has yet to be sufficiently litigated to create any sort of certainty around the issue for landlords seeking to evict.

Summary.

The RTK Ordinance is a very tenant-friendly ordinance that creates further nuance to the eviction procedures in the City of San Diego. The RTK Ordinance imposes additional burden on a landlord seeking to evict a residential tenant. Should an unlawful detainer be filed, the RTK Ordinance also provides a mechanism for the tenant to challenge the eviction by alleging as an affirmative defense that the landlord failed to abide by the RTK Ordinance. For instance, if the tenant contests the reason provided by the landlord in the notice (i.e. tenant contends he or she was not causing a nuisance), the tenant can allege the landlord did not abide by the RTK Ordinance and would bear the burden of proving that the landlord did not follow the RTK Ordinance.

Landlords need to be cognizant of the requirements of the RTK Ordinance in order to smoothly and efficiently evict a long-term residential tenant. Failure to adhere to the provisions of the RTK Ordinance could substantially and negatively impact a landlord. At a minimum, the landlord will suffer the lost time and inconvenience of having to serve a new notice that includes proper cause for eviction. If the landlord has gone so far as to actually commence an unlawful detainer suit based on the bad notice, the consequences can potentially be far worse. Not only will the tenant win the eviction case and the landlord will have to start the entire process over again, thus losing more time and rent, but a successful win for the tenant could subject the landlord to paying the tenant’s costs and attorneys’ fees.

The creation of the RTK Ordinance affirmative defense also creates a level of unpredictability for landlords when renting properties in the City of San Diego. Naturally, landlords will need to assess this potential risk and unpredictability associated with the RTK Ordinance and will take such risk into account when renting their properties to potential tenants.

Given the above, if you want to terminate a long-term residential tenancy, be sure to consult a real estate litigation attorney to help ensure that you are in compliance with the provisions of the RTK Ordinance and California eviction law.

Offices Available For Lease!

May 12, 2018/in All Blog Posts/by The Gupta Evans & Ayres Team

We have three single, private offices available for rent including two optional secretary bays. They are all furnished and newly remodeled. The offices are approximately 150 square feet, enjoy great views, include a kitchen and conference room, and are conveniently located downtown at the corner of 5th and Cedar in the Douglas Wilson Building. Below are some pictures. If you or someone you know is interested, please contact Michael Russo at (619) 866-3444 or at mr@SoCal.law

2018 Tax Changes

March 21, 2018/in All Blog Posts/by Ajay Gupta

As many of you are aware, there are several changes to your taxes coming in 2018. We are, by no means, tax experts, but we have a number of people that come to us and have been asking questions. Aron Feiles, a seasoned CPA with Lauer, Georgatos & Covel has written two excellent summaries on the matter, one for individuals and one for businesses. Aron has also been helping us navigate some the more interesting tax nuances that have come up with the recent changes as they impact our practice.

Below are the links to his articles. I highly recommend that you give him a call if you have any questions about the tax plan and how it impacts you or your business.

Alternative Dispute Resolution

August 19, 2016/in All Blog Posts/by Ajay Gupta

Our firm deals with both real estate transactional issues (helping people buy) and issues that surface when there is a dispute between what one of the parties expects, and the resulting reality of the situation (disclosure issues).

The professionals you surround yourself with: the realtor, the mortgage company, the insurance company etc are each important, yet undoubtedly carry a biased interest in “closing the deal.” These partisan individuals are paid on commission, potentially coloring their judgment. Both parties in any transaction naturally want to close on terms favorable to themselves. However, an attorney’s fee is generally not based on either party’s results. Thus, the presence of counsel without a vested interest is highly beneficial. Our attorneys provide the useful legal, financial, and personal perspective to offer a fresh opinion on a transaction. We want to provide a completely competent party with a legal acumen–one not vested in merely closing on your side.

There are two types of ADR (alternative dispute resolution), which tend to confuse people: mediation and arbitration. Mediation, a negotiation process involving a neutral third party, assess whether a settlement can be reached through direct talks and is almost always a preliminary step toward litigation. Arbitration is essentially a court proceeding undertaken by private parties, i.e. there is no direct discussion, statements and evidence are presented and both parties agree to be bound by the designated arbitrator’s decision. Mediation is almost mandatory for residential real estate transactional issues (depending on the forms of purchase) and is usually part and parcel to a lawsuit. It can happen at any stage of the litigation process: before filing litigation, during litigation, or even leading up to a trial. About 90-95% of cases are going to settle. Understanding these methods and how they apply to your circumstances is crucial.

We find that the transactional side is simple when hiring a lawyer, because we can help identify the upfront cost of a deal. We factor in how much assistance is necessary and estimate the anticipated transaction cost, or the cost of doing business. We try to aim for 25 thousand USD at issue before consideration. When hiring a lawyer for transactional procedures, one does not have to worry much about price as it is generally well defined in advance.

Litigation, however, is amorphous. Disputes over less than 25 thousand dollars generally are not worth attorney fees. Unfortunately, it’s not recommended to enter small claims court for a dispute over more than 10 thousand. This makes disputes from 10 to 25 thousand difficult to resolve without outside help and thus an ideal situation to employ ADR. We recommend small claims forms (accessible to most people) instead of an attorney when you are in a dispute with less than 10 thousand USD at stake. Small claims court allows you to place your dispute before a third party and results in a quick, objectively enforced judgment on your issue.

There are two major issues to watch out for before moving forward with any of the aforementioned options: title and disclosure. More often than not, title issues result in partition action, or a mandate dividing property into individual shares between disputants. Disclosure issues involve one party failing to communicate or actively concealing relevant information from the other and can result in serious legal ramifications.

Before Closing a Real Estate Deal

August 19, 2016/in All Blog Posts, Real Estate/by Ajay Gupta

We are all familiar with the intimidating mountains of paperwork that accompany a real estate purchase, but understanding precisely what they mean is critical given the potential implications of closing such a major transaction.

Though there are a multitude of potential issues, it is important to be aware of the two most common. First of which is a lack of follow-through on either the buyer or seller’s part for any number of reasons. Second are issues of disclosure, wherein relevant information has been unreasonably withheld. For example: the plumbing is leaking, the foundation is cracked, the electrical is not to code.

If you find yourself in one of these situations or any other, it’s vital to know your options. The California Association of Realtors Residential Purchase Agreement (CARRPA) is the standard for almost all real estate transactions: about 90% utilize this form. If you do not have a very good reason or very good legal representation you should not even consider entering into an agreement without its protection. Unorthodox deals are inherently unpredictable and equally hazardous.

CARRPA offers you three primary varieties of protection:

The Liquidated Damages Clause
The Mediation Clause
The Arbitration Clause

When a buyer breaches the established contract it may be feasible to site a liquidated damage clause. However, the liquidated damage clause has a contingency period after which the transaction cannot be easily terminated. If the buyer does bow out they generally forfeit 3% of the purchase price.

In the far less common event that the seller feels the need to back out, generally in light of second thoughts or family pressures, the situation is different. Though historically, when a seller retracts their offer the buyer is likely to simply move on. As the market tightens, the instances of disputes on these grounds will undoubtedly increase.

In the event that these, or any other disputes arise, the mediation clause virtually requires that a mediation process be undertaken before any further proceedings. The party initiating the dispute is responsible for submitting a formal request for mediation after which both parties must meet with a neutral third party and attempt to resolve the issue. The arbitration clause offers a further venue for disputes to be settled outside of court and ideally prevent amassing even greater legal fees.

Hard Money Loans

August 16, 2016/in All Blog Posts, Bankruptcy/by Ajay Gupta

Hard money loans do not deserve the seedy, or even criminal, reputation they have gained in the popular imagination. Though not ideal for all situations, they can provide specific advantages and are certainly not inherently predatory.

There are a variety of common, if unexpected, situations that may require a business or individual to pursue timely financial liquidity. Hard money loans, like any other borrowing method, have pros and cons. The key is to be well-informed of all your options so that you can choose that which will best address your needs. Ted Przybylek (ranchoted.com), a San Diego area lender, has years of experience with hard money loans. In the video above he relates the experience of a friend who, in the midst of a transaction, was unable to get to clear his loan due to deposits that were deemed unacceptable. With only 14 days left to close the deal, Ted’s organization was able to intervene and provide a hard money loan. Though they can certainly be a life-saver, it is important to realize that this process, like any other, must be conducted properly to avoid serious consequences.

There is a persistent belief that hard money loans are necessarily sub-prime, which naturally elicits anxiety in potential borrowers. That assumption is meritless; rather, they are high collateral loans. This simply means the recipient must own sufficient real property to back the loan. Generally speaking, hard money loans can equal roughly 65% of available collateral. For example, a million dollar property could back a hard money loan of about 650 thousand dollars. This arrangement provides the lender with a high degree of protection, which in turn helps the borrower with correspondingly low interest rates and the possibility of refinance later in the life of the loan. Mr. Przybylek has arranged loans with interest rates as low as 8%.

The following are three situations where one might consider a hard money loan:

As an investor: Though flipping real estate can be extremely profitable, by its nature it opens an investor to the risk of many unexpected issues. These problems can be mitigated through bridge financing, which provides temporary capital while the investor’s funds are tied up elsewhere.

As a business owner: Business expenses such as primary loan payments, payroll, stocking, etc. can create a climate where income varies widely from month to month. A hard money loan can stabilize a business’ access to capital.

As a private borrower: Unfortunately, the need for an average borrower to pursue a hard money loan tends to stem from their being taken advantage of by another lender. Unscrupulous lenders may issue a predatory loan intending to seize the borrower’s assets and a hard money loan may allow the borrower to avoid this.

Hard loans may be the best remedy to a difficult situation. Before such a major step it is always advisable to ply one’s personal network for less financing options with lower stakes. It is always better to avoid such situations in the first place and when in doubt you should always seek legal counsel before signing a potential dangerous loan.

My Credit Card Sued Me, Now What?

August 15, 2016/in All Blog Posts, Bankruptcy/by Ajay Gupta

It’s a story that plays out all the time: People fall behind on credit card debts, can’t pay back collectors and find themselves in a situation where they are possibly facing a lawsuit.

Studies show nearly 98% of all people who get sued for a credit card debt, take no action whatsoever. In doing so, collectors can get a default judgment against you. With that they can force payment from the debtor through wage garnishments, bank account levies, property levies, and other ways.

People generally seek out ways to resolve the matter, or figure there’s nothing left to do. Some end up filing for bankruptcy to clear the debt or pay it off over a period of time.

Doing nothing is not the answer.

If you are sued for a credit card debt take these steps to ensure you get the best possible outcome:

First identify if there were any service issues. Look at the complaint and identify who’s being sued; this should be your name.
Take notice to the date, time, and how you received the papers.
Review the claims. Read the complaint carefully to ensure that the debt belongs to you, and it will give you information about the original creditor. Look at the value of the claim. If this is something you can afford to pay off, work out a way to structure payments with the credit card company to avoid the cost of an attorney or potential litigation.
Responding in a timely manner. Defendant’s response to the plaintiff’s complaint must be filed within 30 days of being served. Seek legal help if necessary to ensure the right steps are being taken.
You aren’t legally required to have a lawyer represent you in court, but it is important to gather all necessary information and seeing if you have any valid defenses. Remember, it is up to the plaintiff to prove what they are claiming before the court.
Whether you hire an attorney or go alone, you must file papers within the period of time provided under the law. You also must appear at scheduled court hearings.
Look at whether bankruptcy is a viable option to discharge the debt.

No one wants to deal with a lawsuit for a debt, but try to keep it in perspective, and focus on resolving it with the best possible outcome. Our advice is to look at this as an opportunity to negotiate with the collector and work out an affordable solution that will benefit both parties and avoid legal parameters.