Ajay Gupta Archives - Gupta Evans and Ayres

Gupta Evans and Ayres Confirms One of the First Contested Subchapter 5 Bankruptcies in the Southern District of California. In re: Eminent Cycles, LLC

June 10, 2022/in All Blog Posts/by The Gupta Evans & Ayres Team

On February 3, 2022, the Subchapter 5 plan for Eminent Cycles, LLC (Case #21-01006-CL11 filed in the Southern District of California) was confirmed over objection from the main secured creditor. The Debtor in this instance had financing ready but could not move forward because the secured creditor’s interest was substantially more than the value of the company.

In a highly contested Chapter 11, the Debtor’s plan effectuated a cramdown of the primary secured creditor allowing the company to continue operations as a going concern while forcing the creditors to restructure their liabilities. The valuation of the business was contested in addition to the plan, however, the Court ultimately held that the plan was proposed in good faith and was in the best interests of the creditors.

There are couple take aways from this process. First and foremost, despite the attempt to streamline the Subchapter 5 process, a Subchapter 5 is still very expensive. A contested Subchapter 5 bankruptcy is much more than a glorified Chapter 13 and debtor’s counsel should plan on a budget that respects the time that it will take to get a plan to completion.

Second, you can confirm a Subchapter 5 without a consenting class of creditors if the plan is fair and equitable. There are two major additions to the code that make a Subchapter 5 easier to confirm than a traditional Chapter 11. The abolition of the absolute priority rule for Subchapter 5 bankruptcies allows access to a restructuring under Chapter 11 that previously was not available to most small businesses. While we did not need that rule in our case, the other major addition which we were able leverage allows a plan to be confirmed without a consenting class of as long as the plan does not discriminate unfairly and is fair and equitable. (11 USC 1191(b))

We are not aware of any specific contested cases that were approved prior to ours, but the UST’s office said there may be another one out there. In any case, if you have any questions or concerns about your Subchapter 5 whether it is a creditor or a debtor matter, we’d be happy to look at it for you and get you some guidance.

Ajay Gupta and Chris S. Evans Obtain Six-Figure Jury Verdict For Client in Property Dispute

June 10, 2022/in All Blog Posts/by The Gupta Evans & Ayres Team

Gupta Evans and Ayres is proud to announce they were able to secure another resounding victory and six-figure verdict for their client after over four years of litigation and a hard-fought jury trial in San Diego County.

GEA represented a purchaser of a home in Oceanside that the purchaser later discovered to be littered with an assortment of undisclosed defects and faulty repairs. The Firm began representing the client in early 2017, which would begin what would become a marathon of litigation and include a litany of hotly contested issues, complete with extensive discovery and motion practice (and, of course, a global pandemic). Although the case concluded as a trial between a buyer and seller of residential real estate, the case began with three times the parties and several cross-complaints and competing defenses, all of which had to be resolved before trial.

Finally, after over four years of litigation, and a seven-day jury trial before Judge Blaine Bowman in the North County branch of San Diego Superior Court, the Firm established that the sellers of the home were liable to the client-buyer for breach of contract, fraud (intentional and negligent misrepresentation) and engaging in work as an unlicensed contractor. After establishing such liability, the jury returned a six-figure verdict in favor of the firm’s client.

As the prevailing party at trial, the Firm was then also able to succeed on a post-judgment motion for attorneys’ fees and costs incurred by their client throughout the course of the litigation, in part by successfully arguing the “intertwinement” of the tort and contract causes of action.

After resolving claims against parties other than the seller pre-trial, and upon the successful jury verdict and attorneys’ fees motion, the client was granted a total award of approximately $540,000, inclusive of punitive damages. Congratulations to trial counsel Ajay Gupta and Chris S. Evans for bringing this case across the finish line and obtaining a victory for the Firm’s client!

Understanding California’s Interpretation of Force Majeure in the Context of COVID-19

October 26, 2020/in All Blog Posts, Corporate Litigation/by Ajay Gupta

In the wake of the COVID-19 pandemic, state and local governments throughout the U.S. ordered restaurants, bars, and shopping centers to shut down, while essential businesses were permitted to remain open. These drastic measures have forced small and large companies to close their doors forever; however, most businesses are still struggling to find ways to morph what was a viable business model into something capable of surviving for the next 12 months. Force majeure, or the so called “Act of God” provision associated with all contracts, is an essential tool in helping businesses traverse the COVID-19 valley of death.

Today, California follows a strict four-tier color system that allows counties, and consequently businesses, to gradually reopen based on the number of confirmed COVID-19 cases per day. As businesses adhere to this reopening plan, they should continue to question whether they (or the other contracting party) were legally excused from performing their contractual obligations during the Shelter-In-Placeorder or anytime thereafter.

This article provides an analysis of California’s force majeure defense that may excuse a party from performing his or her otherwise required contractual duties.

What is Force Majeure?

Force majeure—which means “superior force” en français—excuses a party’s nonperformance of a given contractual duty when an unanticipated event, such as a pandemic or epidemic, occurs. Many contracts contain a force majeure provision in them, but, for those that do not, the force majeure defense is available by statute.

Force Majeure By Statute

Section 1511 of the Cal. Civ. Code provides that a party is excused from a contractual obligation when performance is prevented or delayed by (1) operation of law or (2) an irresistible or superhuman cause.

Operation of Law, Cal. Civ. Code § 1511(1)

The broad language of section 1511(1) invites the question of whether Governor Newsom’s Stay at Home order rendered performance of a contractual obligation illegal, impracticable, or frustrated the underlying purpose for why both parties entered into the contract. California’s controlling law has historically allowed for a broad interpretation of the language of section 1511(1).

For instance, in Indus. Dev. & Land Co. v. Goldschmidt, 56 Cal. App. 507 (1922), the plaintiff entered into a commercial lease agreement that restricted his use of the property to the operation of a liquor business. After Congress passed the Prohibition Amendment, the plaintiff argued that he was excused from paying any further rents because the operation of his business became illegal. The court sided with the plaintiff, finding that the lease agreement became inoperative after the passage of the 18th Amendment, which excused performance of his contractual duty. Id. at 509.

Likewise, in Johnson v. Atkins, 53 Cal. App. 2d 430 (1942), the court held that a Colombian buyer was not liable for breach of contract because the Colombian government refused to issue the buyer a legal permit to accept a shipment. The court reasoned that had the buyer accepted the goods he would have committed an unlawful act, which justified his nonperformance. Id. at 432.

However, just because an event may fall within the purview of section 1511(1), it does not mean that a party is automatically excused from satisfying their contractual obligations. There are limits to this rule, and each potential application of section 1511(1) will require a fact-intensive inquiry of the surrounding circumstances.

In Dwight v. Callaghan, 53 Cal. App. 132 (1921), for instance, the defendant claimed he could not satisfy his contractual duties because the U.S. government purchased a large quantity of the same materials the defendant needed to satisfy his contractual obligations. The court found that the plaintiff had acquired the same materials from other suppliers such that the government’s interference with defendant’s performance did not render performance impossible; but, instead, just more expensive than the defendant had initially anticipated. Id. at 137.

This case and the many that came after it showcase the fact intensive nature of a force majeure inquiry. What appears “impossible” to one person is, in reality, merely more difficult. In such circumstances, a court will not permit a party to avoid liability simply because performance is more costly or burdensome than originally anticipated.

Irresistible or Superhuman Causes, Cal. Civ. Code §1511(2)

“Acts of God” encompass the latter section of 1511(2) and excuse a party’s nonperformance if a natural event, like a pandemic, earthquake, or flood, occurs that renders performance impossible. In most instances, the court’s ruling will often turn on whether the natural event was unanticipated by the parties at the time of contracting.

For example, in Ryan v. Rogers, 96 Cal. 349 (1892) (Yes, 1892), the defendant pleaded that he was unable to complete his deliveries because heavy rainfall had flooded his usual delivery route. The court found that the defendant knew—before signing the contract—that rainstorms were a common occurrence during that time of year, and defendant’s usual delivery route was often flooded after a heavy rainstorm. Based on these findings, the court concluded that the flood was not unforeseeable, but expected at some point during the life of the contract and held the defendant liable for breach of contract. Id. at 353.

In comparison, the court in Ontario Deciduous Fruit-Growers’ Ass’n v. Cutting Fruit-Packing Co., 134 Cal. 21 (1901) held that a farmer was excused from furnishing specific varieties of fruit because the farmer’s orchards were “affected by an extraordinary drought.” Id. at 25. The court concluded that the farmer “[cannot] be made to perform impossibilities” in light of extreme weather conditions that were not contemplated by the parties when they signed the contract. Id.

Although both cases are extremely old, courts will turn to these cases as guidance as there are no recent decisions on the application of section 1511(2) and they are still good law. The underlying principle in both cases is that courts will not excuse a party’s nonperformance just because of a natural event, like severe weather, that interferes with the party’s performance. The court’s inquiry is whether the natural event was foreseeable by the parties when they executed the contract. If an impediment to a party’s performance is anticipated or reasonably foreseeable at the time of contracting, the concerned party should draft a contract to account for such risk.

In looking at the statutory interpretation of 1511, the Coronavirus pandemic may on its surface will likely qualify as an “Act of God.” Some argue that the Coronavirus outbreak is a natural event because we did not intentionally create the virus; rather, it is a natural product of our interactions and actions. Even if the Coronavirus does not meet the definition of “natural event,” the resulting effects of the pandemic, such as Governor Newsom’s order touched on above, likely trigger the application of section 1511 to a variety of otherwise required contractual obligations.

Force Majeure By Contract

Before resorting to section 1511, nonperforming parties should first turn to their contract to determine whether a force majeure clause is included. Force majeure clauses are worded differently from contract to contract; but, generally, a force majeure clause will excuse a party’s nonperformance (or delay performance) of a given contractual duty when an unanticipated event specified in the clause occurs, rendering performance temporarily impossible.

The occurrence of an event specified in the force majeure clause does not automatically excuse a party from fulfilling their contractual commitments. Instead, the nonperforming party claiming nonperformance was justified due to an unforeseen event must satisfy two requirements.

The first requirement is the event that caused the party’s nonperformance must have been unforeseeable at the time the parties signed the contract. This requirement is akin to the analysis above regarding section 1511(2) and the holding in Ryan v. Rogers, 96 Cal. 349 (1892).

Second, performance must have been “impracticable” or “impossible” when performance was due, which largely mirrors the analysis of section 1511(1). Specific to force majeure provisions included in a contract, the nonperforming party must demonstrate that performance would cause them to suffer “an extreme loss, expense, difficulty, or injury.” Butler v. Nepple, 54 Cal. 2d 589, 599 (1960). However, a party cannot avoid liability merely because performance was more costly or burdensome than originally anticipated. Id.

Butler illustrates that fact intensive inquiry that is require for a proper analysis of this defense. In Butler, Nepple breached the contract because the steelworkers’ union went on strike, and he could not obtain the steel needed to satisfy his contractual commitments. Critical to Nepple’s argument was that the force majeure clause specified that if the steelworkers’ union went on strike, his performance was excused. Despite the clear language of the force majeure provision, the California Supreme Court disagreed. The court held that Nepple failed to show the other steel manufacturers’ prices were “extreme and unreasonable” based on what he usually paid. The court concluded that had Nepple satisfied his contractual obligations and obtained the requisite steel, Nepple would have only incurred a “mere increase in expense,” which does not justify a party’s nonperformance of a given contractual duty. Id.

Applying Force Majeure Provisions to COVID-19

As of now with Courts just now reopening, there have been no California State Court or District Courts interpreting whether performance was excused due to Governor Newsom’s Stay at Home Order. The closest we get is 9^th Circuit District Court case out of Hawaii interpreting Hawaii law, but even that case illustrates the fact intensive nature of these inquiries.

In NetOne, Inc. v. Panache Destination Mgmt No. 20-cv-00150-DKW-WRP, 2020 U.S. Dist. LEXIS 99089, at *7 (D. Haw. June 5, 2020), the plaintiff was scheduled to hold a four day event that started March 22, 2020. As part of that event, they paid the defendant $121,000 as a security deposit for services. On March 11, due to Coronavirus, plaintiff cancelled the event and made a demand for their security deposit from the defendant. After filing suit, plaintiff filed for summary judgement arguing that the defendant was legally required to return the security deposits to the plaintiff because it had cancelled the contract under the force majeure clause of the contract. The court pushed back stating that because the force majeure clause did not have a remedy associated with the excuse, the issue of whether the plaintiff was entitled to his security deposit back was not going to be subject to a motion for summary judgment.

Despite this early ruling, the current interpretations of 1511 seem clear: if a the Shelter in Place Order restricts a business from operating or performing their contractual duties, then the performing party will be excused from performance so long as they can trace their inability to perform to Order itself. It gets more complicated when we have businesses that may have been open, but are unable to perform due to COVID-19. Some will argue that COVID-19 was reasonably foreseeable and, therefore, not a sufficient excuse for performance. Others may have difficulty tracing the inability perform to COVID-19 directly, after all, not all businesses were impacted the same.

From a practical perspective, the availability of force majeure as an excuse to non-performance will be leveraged to facilitate negotiations in what otherwise would have been very straight forward breach of contract matters. Neither party will be in a position to resolve cases without a trial and juries will be left to decide the applicability of these provision. As a result, it is likely that many enforcement actions that would have been brought, particularly with respect to personal guarantees, will never see a court room.

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.

California Bill to Substantially Increase the Homestead Exemption Goes to Governor Newsom for Signing (AB 1885)

September 3, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

With all the craziness around eviction moratoriums, COVID-19, and election politics dominating the headlines, the California legislature quietly passed AB 1885 (its Senate Corollary was SB 832) on Tuesday, September 2nd. AB 1885 increases the California homestead to the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the year in which the judgement debtor claims the exemption, not to exceed $600,000. As a frame of reference, the following are projections for a few of California’s major metropolitan areas:

San Diego County: $600,000 (estimated $628,500 Median)
Los Angeles County: $600,000 (estimated $664,500 Median)
San Francisco County: $600,000 (estimated $1,444,000 Median)
Riverside County: $400,500

The homestead exemption protects the value of a homeowner’s home in the event of a bankruptcy or a judgment creditor enforcing a judgment. The exemption provides that a specified portion of equity in a homestead, as defined, is exempt from the execution to satisfy such debts. However, the exemption does not protect against voluntary liens, such as a deed of trust or even a homeowner’s association lien. In addition, federal and state tax liens are generally not subject to any homestead protections. Depending on certain characteristics of the homestead’s residents, the law currently prescribes that the amount of the homestead exemption is either $75,000, $100,000 or $175,000—a stark difference from the potential $600,000 exemption now permitted under new AB 1885.

Proponents of AB 1885 argue that the current homestead standards are designed for an era when properties were simply worth less. The California homestead exemption protected almost the full value of a median priced home 45 years ago; but, today the homestead exemption covers barely 15%. Also, many other states with much lower home costs have far higher exemption amounts, with 8 states providing their homeowners with an unlimited exemption. Finally, proponents argue that COVID-19 mandates higher exemptions because a higher exemption will allow for individuals, who would otherwise lose their homes, to access bankruptcy relief during this economic disaster.

Creditors’ rights advocates argue that increasing the homestead exemption six-fold for most Californians is unwarranted and the product of political pandering during a once in a lifetime pandemic. While most opponents do not dispute that the homestead exemptions are outdated, they push for a graduated increase that is less severe and that takes age and disabilities into account.

Regardless of your opinion, this bill is sitting on Governor Newsom’s desk and is expected to be signed into law. If signed, the bill is likely to be effective on January 1, 2021; however, there may be procedural mechanisms for the Governor to make it effective immediately.

If you’d like to weigh in on this signature, now is the time. Send your emails to the governor at leg.unit@gov.ca.gov.

Discussion: California Legislature Set to Halt COVID Related Evictions on August 31st Through AB 3088

August 29, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

On August 13th, the California Judicial Council amended its emergency rules to lift the statewide ban on evictions. In doing so, the Courts effectively passed the baton to the California Legislature to develop and pass a bill to address the looming eviction crisis set to erupt on September 1, 2020 when the statewide eviction ban is formally withdrawn. After weeks of drafts, negotiation and compromises between lawmakers, tenant advocates and landlord organizations, Governor Newsom has announced Assembly Bill 3088, known officially as the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act of 2020 (the “AB 3088”). The Relief Act will be voted on in the Senate on August 31, 2020 and will need a 2/3 majority vote to pass and be sent back to the Assembly.

AB 3088 is intended to serve as a statewide eviction moratorium bill, applicable only to residential landlords and tenants. Commercial tenants will have to continue to rely on local eviction moratoriums, many of which (including San Diego) are due to expire at the end of September 2020. In large part, AB 3088 will serve as a “stop-gap” measure to address California’s eviction crisis, until the California Legislature reconvenes early next year. While AB 3088 is incredibly nuanced and detailed, the general points of the Relief Act are as follows:

For rent due between the covered period of March 1, 2020 through August 31, 2020, residential tenants cannot be evicted if they declare under penalty of perjury that they have experienced a “COVID-19-related financial distress”;
Only high income tenants (those earning 130% of the County’s median income) would be required to show proof of COVID-19-related financial distress;
For rent due between the transition period of September 1, 2020 through January 31, 2021, tenants would still be required to pay 25% of the outstanding balance, and such payment would be due by January 31, 2021;
All unpaid rent would be converted to consumer debt and residential landlords would be permitted to collect such debt in Small Claims court, beginning March 1, 2021;
The Relief Act would preempt any local ordinance, resolution, regulation, or administrative actions such that eviction moratoriums previously passed by cities and counties will be grandfathered in, but they won’t be able to pass any extensions.

To learn more about AB 3088, its specific provisions, how it may be interpreted in Courts, as well as several other interesting and related real estate topics, please check out the discussion we held (coincidentally) just hours after the Relief Act was announced.

PANELISTS

Founder, Gupta Evans and Associates
Ajay Gupta, Esq

Attorney Ajay Gupta is a certified bankruptcy specialist and has been working on real estate and bankruptcy matters since 2005. He is a thought leader on real estate matters in California with an emphasis on secured transactions and foreclosures. Mr. Gupta founded Gupta Legal Center, now Gupta Evans and Associates, in 2008. He has represented debtors and creditors as well as landlords and tenants in over hundreds of litigation matters over the past 15 years both in state and federal court.

Senior Attorney, Partner, Gupta Evans and Associates
Chris Evans, Esq

Chris Evans is a skilled litigator and Partner at Gupta Evans and Associates, with a focus on the Firm’s real estate and business litigation matters. Over the course of his career, Chris has successfully litigated or reached favorable settlements for both individual and entity clients in an array of matters ranging from lease disputes in both the commercial and residential context, commercial and residential eviction proceedings, disputes between business owners (often styled as the “business divorce”), fraud and fiduciary claims and complex real estate investment fraud. Chris graduated magna cum laude and Phi Beta Kappa from San Diego State University in 2010 and immediately pursued his legal career by graduating from the University of San Diego School of Law in 2013. In law school, Chris served as an Editor for the San Diego Journal of Climate & Energy Law and a member of the Phi Delta Phi Honors Society.

Broker Associate, Team Steven Wener, eXp Realty of California, Inc.
Steven Wener

Steven Wener is a thought leader, author and entrepreneur who currently works as a coach, mentor, and licensed real estate broker. He started door knocking at the age of ten with his father, became a licensed real estate agent in 1993, consistently receives numerous top performer awards and has helped thousands of families transact real estate. Steven has also been a radio show host, as well as spoken on stages across the United States, sharing his message of judgement, justification, vulnerability, accountability, commitment and personal story. Steven focuses on the personal, versus simply transactional points of view and developed an engaging, disarming and professional approach to both business and personal relationships. Steven is married to his beautiful wife Rebekah and they have 3 incredible children together which are his pride and joy.

Senior Attorney, Gupta Evans and Associates
Jake Ayres, Esq

Jake Ayres is an experienced and versatile attorney and the senior associate at Gupta Evans and Associates, PC. Drawing on his depth of experience in litigation from two AmLaw 200 firms, Jake represents individuals and businesses in both real estate litigation and transactional matters, including disclosure and HOA disputes, foreclosures, asset purchases, and private placements. Jake also is also part of the vanguard of service providers to the legal cannabis and hemp industries, advising businesses therein regarding compliance with regulations and dispute resolution.

Senior Vice President and Director, Hughes Marino
Star Hughes-Gorup

Star Hughes-Gorup is a senior vice president and director at Hughes Marino, San Diego’s leading commercial real estate firm that exclusively represents tenants and buyers. Star is a licensed broker in eight states, handling complex transactions for her clients throughout the country. She is a five-time winner of The Irvine Company’s prestigious “Broker of the Year” award, a three-time winner of San Diego Magazine’s “Woman of the Year” award, a three-time winner of the Business Journal’s “Women Who Mean Business” award, a two-time winner of San Diego Metro Magazine’s “40 Under 40” award, among many other honors.

Residency Program Director, New York Presbyterian
Dr. Manish Garg MD

Dr. Manish Garg MD is a Professor of Emergency Medicine and the current Residency Program Director in the New York-Presbyterian health system. He holds a dual faculty appointment at Cornell & Columbia medical schools and works clinically in their hospitals. Dr. Garg was on the front-lines of the New York City epicenter of the COVID-19 pandemic caring directly for patients. As a researcher, Dr. Garg has secured grant funding that originated from the National Institutes of Health and the Centers for Disease Control & Prevention to investigate emerging infectious diseases. He has authored many scientific literature contributions including multiple COVID-19 manuscripts.

Upcoming Webinar: Exploring California’s Looming Eviction Crisis – Legislative Options for Renters and Landlords

August 26, 2020/in All Blog Posts, Real Estate, Webinars/by Ajay Gupta

This Friday, August 28th at 4PM, we’re hosting an all star panel to discuss California’s eviction crisis and we hope you’ll join us.

Free registration can be found here

On August 13th, the California Judicial Council amended its emergency rules to lift the statewide ban on evictions. Measures passed by Governor Newsom and local cities still remain in place to try and slow the pace of evictions; but, by and large, the now-lifted statewide eviction freeze was the only thing that was stopping the flood of evictions that everyone knows is coming.

California has a disproportionate number of residential renters, about 45% compared with 36% for the rest of the country. On the commercial front, it is clear that the restaurant and retail sectors have suffered hardest from the COVID crisis. Tenants in these sectors tend to have massive capital investments in location and are generally intimately tied to the location itself. These two sectors also employ about 1 out of every five people across the country and the employees tend to be residential renters.

In a very real sense, the first true signs of the fallout from COVID will happen through the eviction process. Up until now, the California Legislature has been content to punt on the issue of dealing with the eviction crisis because the Judicial Council ban effectively handled that issue for them. With that option gone, the California legislature is considering two bills AB 1436 and SB 1410 to address the medium run needs of landlords and tenants. It is likely that one of these two bills, or a compromise between the two, will be passed before the Judicial Council’s statewide eviction ban is lifted next Tuesday, September 1st.

Ultimately, there are only two options: On the one hand, California and the Federal government must continue to infuse money into the system to protect tenants and landlords from the inevitable fallout of COVID. Assuming the well goes dry or is otherwise channeled to other pastures, California is going to have to figure out how to spread this pain between tenants, landlords and, ultimately, the banks, in a manner that is not only economically feasible, but fair and equitable to all parties.

WEBINAR AGENDA

• Introductions

• Dr. Manish Garg, MD (10 minutes): From the front lines of the New York emergency room, what COVID was like and where it’s going over the next year. Dr. Garg will explain his opinions on vaccines, testing, tracking and treatment.

• Chris Evans, esq (10 minutes): Real Estate attorney and evictions expert provides a brief overview of SB 1436 and 1410. Mr. Evans will explore some of the salient details of what has been proposed, the changes, and the politics involved in these incredibly important bills.

• Round table discussion (30 Minutes): Our seasoned panel below will explore options for both residential and commercial landlords and tenants.

• Town Hall Style Meeting: We’ll invite participants into our discussion to ask questions, forward opinions, and generally participate in the discussion. This will likely be limited to 20 people, so email me once you’re registered so we can make appropriate accommodations.

PANELISTS

Attorney Ajay Gupta is a certified bankruptcy specialist and has been working on real estate and bankruptcy matters since 2005. He is a thought leader on real estate matters in California with an emphasis on secured transactions and foreclosures. Mr. Gupta founded Gupta Legal Center, now Gupta Evans and Associates, in 2008. He has represented debtors and creditors as well as landlords and tenants in over hundreds of litigation matters over the past 15 years both in state and federal court.

Chris Evans is a skilled litigator and Partner at Gupta Evans and Associates, with a focus on the Firm’s real estate and business litigation matters. Over the course of his career, Chris has successfully litigated or reached favorable settlements for both individual and entity clients in an array of matters ranging from lease disputes in both the commercial and residential context, commercial and residential eviction proceedings, disputes between business owners (often styled as the “business divorce”), fraud and fiduciary claims and complex real estate investment fraud. Chris graduated magna cum laude and Phi Beta Kappa from San Diego State University in 2010 and immediately pursued his legal career by graduating from the University of San Diego School of Law in 2013. In law school, Chris served as an Editor for the San Diego Journal of Climate & Energy Law and a member of the Phi Delta Phi Honors Society.

Steven Wener is a thought leader, author and entrepreneur who currently works as a coach, mentor, and licensed real estate broker. He started door knocking at the age of ten with his father, became a licensed real estate agent in 1993, consistently receives numerous top performer awards and has helped thousands of families transact real estate. Steven has also been a radio show host, as well as spoken on stages across the United States, sharing his message of judgement, justification, vulnerability, accountability, commitment and personal story. Steven focuses on the personal, versus simply transactional points of view and developed an engaging, disarming and professional approach to both business and personal relationships. Steven is married to his beautiful wife Rebekah and they have 3 incredible children together which are his pride and joy.

Jake Ayres is an experienced and versatile attorney and the senior associate at Gupta Evans and Associates, PC. Drawing on his depth of experience in litigation from two AmLaw 200 firms, Jake represents individuals and businesses in both real estate litigation and transactional matters, including disclosure and HOA disputes, foreclosures, asset purchases, and private placements. Jake also is also part of the vanguard of service providers to the legal cannabis and hemp industries, advising businesses therein regarding compliance with regulations and dispute resolution.

Star Hughes-Gorup is a senior vice president and director at Hughes Marino, San Diego’s leading commercial real estate firm that exclusively represents tenants and buyers. Star is a licensed broker in eight states, handling complex transactions for her clients throughout the country. She is a five-time winner of The Irvine Company’s prestigious “Broker of the Year” award, a three-time winner of San Diego Magazine’s “Woman of the Year” award, a three-time winner of the Business Journal’s “Women Who Mean Business” award, a two-time winner of San Diego Metro Magazine’s “40 Under 40” award, among many other honors.

Dr. Manish Garg MD is a Professor of Emergency Medicine and the current Residency Program Director in the New York-Presbyterian health system. He holds a dual faculty appointment at Cornell & Columbia medical schools and works clinically in their hospitals. Dr. Garg was on the front-lines of the New York City epicenter of the COVID-19 pandemic caring directly for patients. As a researcher, Dr. Garg has secured grant funding that originated from the National Institutes of Health and the Centers for Disease Control & Prevention to investigate emerging infectious diseases. He has authored many scientific literature contributions including multiple COVID-19 manuscripts.

How Commercial & Residential Tenants Can Save Their Lease Post COVID-19

June 12, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

In a recent three-part blog article, Chris Evans discussed the moratorium on evictions and current rental obligations from a state, local, and judicial level. The blog article revealed that, among other things, San Diego tenants are protected from eviction until June 30, 2020. The article further clarified that landlords cannot initiate an unlawful detainer action until 90 days after Governor Newsom lifts the State of Emergency Declaration. These governmental actions have certainly provided some welcomed breathing room for tenants that have felt the immediate economic impacts of COVID-19 on their lease.

However, it is uncertain how much longer these orders will stay in place. As Governor Newsom recently announced, Californians have “arguably” flattened the curve, and we are in phase two of the State’s four-phase reopening plan. Additionally, San Diego County has begun permitting certain restaurants, retail businesses, and other parts of the economy to reopen. Given these new developments, commercial and residential tenants alike need to start questioning how they will protect their tenancy once the government lifts these tenant-friendly orders.

If commercial and residential tenants envision themselves on the losing side of an unlawful detainer action in the foreseeable future, they should look towards Sections 1179 and 3275 of the California Civil Code. Both statutes provide the court with broad authority to grant the tenant with “relief from forfeiture” of the lease agreement and reinstate the tenant to its former tenancy—even after the court has terminated the lease and issued a judgment in favor of the plaintiff-landlord. Indeed, tenants use both statutes as a “last hope” to save their tenancy. This article will discuss both statues in-depth and how tenants can utilize these statues in state and bankruptcy courts in a post COVID-19 world.

What Does “Forfeiture” Mean & When is a Lease Forfeited?

The term “forfeiture” simply means that the lease agreement is terminated, and the tenant has no further rights, obligations, or privileges under the contract. If the lease is “forfeited,” the tenant loses the benefits it expected to receive under the lease agreement, such as options to renew or extend its tenancy or its security deposit. A tenant forfeits a lease agreement in two ways.

First, the landlord declares a forfeiture of the lease agreement when the following four requirements have been satisfied:

The tenant breached the lease;

The landlord properly served the tenant with a notice to cure the breach within a reasonable time (i.e., a three-day notice to pay or quit);
The notice contains a provision that allows the landlord to declare a forfeiture of the lease if the tenant does not cure the breach; and
The tenant failed to cure the breach within the time permitted.[1]

Second, the lease agreement contains a clause that allows the landlord to declare a forfeiture if the other party breaches a covenant or condition of the contract. The landlord must show that the tenant’s breach was a “material breach” that affected the landlord. An unharmful or de minimis violation will not suffice.

For example, in Boston, LLC v. Juarez, the landlord was permitted to declare a forfeiture of the lease if the tenant violated any portion of the lease agreement. The court held that the tenant’s failure to obtain renter’s insurance, as required under the lease, did not amount to a “material breach” of the agreement. The court found that the condition to obtain renter’s insurance benefited the tenant, and its breach of this provision did not harm or impair the landlord’s rights under the lease agreement. As such, the landlord was estopped from declaring a forfeiture.[2]

A more common material breach is sub-leasing the property when the lease forbids sub-leasing or failing to pay rent. It is essential for tenants, primarily commercial tenants and landlords, to review their lease agreement to determine whether the contract contains a forfeiture clause.

Section 1179 of the Cal. Civ. Code

Section 1179 allows the court to grant “relief from forfeiture” if the tenant: (1) pays all past rent owed or cures its breach of the lease covenants; and (2) convinces the court that it will suffer a “hardship” if it is not restored to its prior tenancy.[1] Commercial and residential tenants often struggle to satisfy the second requirement, as courts find “hardship” in rare circumstances.

To determine whether granting relief is fair to both parties, courts engage in a three-factor test. The three factors are: (1) the nature and character of the tenant’s breach; (2) hardship of the parties if relief from forfeiture is/is not granted, and (3) whether the parties have acted in good and/or bad faith towards each other.[4] The three-factor test is certainly an extra hurdle that tenants must overcome when seeking relief. Nevertheless, courts have continuously granted relief from forfeiture when the circumstances are so dire that it would be unjust not to restore the tenant to their former tenancy.

For instance, in Hamid v. Janakus, the tenant, an 89-year-old man, fractured his hip and was placed in a nursing home for a month. The elderly tenant forgot to pay his rent while rehabbing his injury and did not have any family or friends to monitor his financial affairs. Moreover, the tenant resided at the property for over 35 years, and the property was under the city’s rent control laws.

The tenant argued that he would suffer undue hardship if he were required to move because he would be unable to find a residence at the same rental rate. The tenant further claimed that due to his poor health, it was nearly impossible for him to relocate to a new home. The court found the tenant’s argument convincing and granted the tenant relief from forfeiture, but on a conditional basis. Before retaking possession of the property, the tenant was required to pay all past rent owed and reimburse the landlord for his attorney fees.[5]

The holding in Hamid v. Janakus illustrates the classic “hardship” scenario where the tenant’s circumstances are so rare that relief from forfeiture is necessary to protect the tenant’s well-being. Fortunately, not every tenant has to make such a drastic showing to obtain relief under Section 1179. Courts will grant relief from forfeiture if the tenant has invested a substantial amount of money into the property and would lose their entire investment if evicted from the premises.

In Assi Super, Inc. v. Eight Oxfords Property Management, Inc., the tenant had invested over $1.8 million in upgrades to the property and recently signed a second loan to make further improvements to the property. The tenant secured the second loan with his residence. To make matters worse, the tenant had over 30 sub-lease agreements with small business owners that operated their business in a commercial unit within the property. Most of the small business owners resided in the U.S. under “Business Investment Visas” and were at risk of being deported if the lease was forfeited.

Given these unique circumstances, the court granted the tenant’s motion to be relieved from forfeiture. Had the court not granted relief, the tenant would have lost its entire $1.8 million investment in the property, and a majority of the sub-tenants would have been deported. Similar to the order in Hamid v. Janakus, the court granted relief from forfeiture on a conditional basis. Before the tenant could retake possession of the property, it was required to cure its breach and reimburse the landlord for its attorney fees and costs.[6]

The cases cited above provide commercial and residential tenants with two points to consider. First jand foremost, the examples show that courts will grant relief from forfeiture to protect the tenant’s overall well-being or prior investments. It is also clear that courts will consider the impact on third parties if relief from forfeiture is not granted. In Assi Super, Inc., the court’s ruling was based in part on the effects a forfeiture of the lease would have on the tenant’s sub-tenants.

Second, California courts have regularly granted relief from forfeiture on the condition that the tenant must reimburse the landlord for its attorney fees and court costs. Courts believe it is unfair to reinstate the tenant to their prior tenancy and leave the landlord without a remedy against the breaching tenant. In the court’s view, if the tenant is restored to their former tenancy, then, at the least, the landlord should be restored to its original financial position had the tenant not breached the lease agreement.

Seeking Relief Under Cal. Civ. Code § 3275

Section 3275 provides tenants with another path to seek relief from forfeiture of a lease agreement. Section 3275 serves the same overall purpose as Section 1179, however, there are two critical differences between the two statutes.

The most significant distinction is that Section 3275 applies to all types of contracts, whereas Section 1179 applies to strictly commercial and residential leases only.[7] As such, a contracting party can utilize Section 3275 in any contractual dispute where forfeiture is at issue. The other key difference is that Section 3275 requires the party to prove that their breach of the contract (or lease) was not “grossly negligent, willful, or fraudulent.”[8] A party seeking relief under Section 3275 must, in addition, show that it has satisfied the two requirements of Section 1179.[9]

Last, contracting parties can effectively waive both statutes in any given contract or lease agreement. The bankruptcy court in In re Art & Architecture Books of the 21st Century held that no California statute prohibits a party from waiving its right to relief from forfeiture under Sections 1179 and 3275. The court stated that parties to a “lease should generally be free to contract with each other upon such terms as they agree,” as long as the terms do not contravene public policy. In this case, the court found the right to seek relief from forfeiture benefited the party that waived such right and, thus, did not violate the court’s public policy concerns.[10]

Given this ruling, landlords and tenants must exercise diligence when drafting and reviewing a contract or lease agreement. Landlords that wish to include the waiver provision must add specific and unambiguous language that clearly states the tenant is voluntarily waiving its statutory rights under Sections 1179 and 3275. On the other hand, tenants must carefully review their residential or commercial lease agreements to ensure that the contract does not contain such a waiver.

Overall, Section 3275 provides the same relief as the previously discussed Section 1179. The critical difference is that Section 3275 requires the requesting party to prove that their breach was not “grossly negligent, willful, or fraudulent.” At first glance, this additional hurdle seems to act as an impediment for tenants (and contracting parties) seeking relief under Section 3275. However, no court has directly ruled on whether a tenant that breached its lease agreement for no fault of its own, did so willfully or with gross negligence. Given this uncertainty, wise real estate litigators seek relief from forfeiture by employing both Sections of 1179 and 3275. Bringing the motion on both grounds allows the court to grant relief under either section of the code.

Applying Sections 1179 and 3275 in Bankruptcy Court

Sections 1179 and 3275 are not strictly reserved for California State Courts and are applicable in a bankruptcy proceeding.[11] Section 365 of the Bankruptcy Code allows the Trustee to assume a residential or commercial lease of the debtor, as long as the lease did not terminate before the bankruptcy petition was filed. However, most debtor-tenants that file a bankruptcy petition do so after the termination of the lease agreement, which prevents the Trustee from assuming (and saving) the lease under Section 365.

Fortunately, the landmark case of In Re Windmill Farms addressed this deficiency.[12]In that case, the court held that if a two-factor test is satisfied, the bankruptcy court can grant relief from forfeiture under Sections 1179 or 3275 and reinstate the lease. If the bankruptcy court reinstates the lease, the Trustee can then assume the lease under Section 365 of the Bankruptcy Code, as the lease is no longer terminated. The holding in In Re Windmill Farms bridges the gap between the strict language of Section 365 and California’s anti-forfeiture statutes, allowing tenants to save their lease through a bankruptcy proceeding.

The first factor is determining when the lease agreement was terminated. If the lease was terminated before the bankruptcy petition was filed, then the debtor will have to proceed to the second factor. On the other hand, if the lease was terminated after the bankruptcy petition was filed, the Trustee can assume the lease under Section 365, provided the Trustee promptly cures the debtor-tenant’s default.

The second factor is applying Sections 1179 and 3275 and the case law that flows from those statutes to the case at hand. If the court determines that relief is proper, then the debtor-tenant must cure its default before retaking possession of the property. If the two factors are satisfied, then the lease is reinstated, and the Trustee may assume (and save) the lease under Section 365 of the Bankruptcy Code.

Finally, debtor-tenants and their counsel must be familiar with the basics of lease assumption in a bankruptcy proceeding. If the debtor wants to retain the lease, the debtor will move to assume it, and must do so within 120 days of filing the bankruptcy petition. The court can extend this time period without the landlord’s consent for 90 additional days, making a total of 210 days, but any further extensions require the landlord’s prior written consent.[13] If the lease is not assumed (or assumed and assigned) within this period, the lease automatically will be deemed rejected and the debtor-tenant will have to vacate the property.[14]

In order to assume the lease, the debtor must cure any defaults or provide assurance that it will promptly do so.[15] This is at least true with respect to monetary defaults. There is a split in the case law as to whether non-monetary defaults must be cured in order to assume a lease (or other executory contracts). The debtor-tenant must also compensate the landlord for “any actual pecuniary loss” resulting from the debtor’s breach.[16] And the debtor must “provide adequate assurance of future performance.”[17]

Any tenant that files a bankruptcy petition must understand that Sections 1179 and 3275 can save their tenancy in a bankruptcy proceeding. This is especially true during this time, as many small and large businesses seek bankruptcy protection.

Seeking Relief from Forfeiture in a Post COVID-19 World

The economic effects of COVID-19 have left one in every four San Diego residents unemployed and forced notable businesses to either wind up their operations or file for bankruptcy protection. These drastic results certainly provide a basis for commercial and residential tenants to seek relief from forfeiture under Sections 1179 and 3275, whether in state or bankruptcy courts. The only hurdle for tenants is showing the “hardship” they will suffer from if relief from forfeiture is not granted.

As mentioned above, hardship can be shown by the rental rate one currently pays compared to the market values, the past investments one has made into the property, or the effects forfeiture will have on third parties, such as employees. Given the uncertain economic times, along with the unique facts of each case, courts will undoubtedly broaden its definition of “hardship” and grant relief from forfeiture when necessary.

If you find that you are on the brink of eviction or may be served with an unlawful detainer action in the near future, contact a California attorney immediately.

[1] Cal. Civ. Code § 1174 (a)

[2] Bos. LLC v. Juarez, 245 Cal.App.4th 75, 82 (2016)

[3] Cal. Civ. Code § 1179

[4] See Thrifty Oil Co. v. Batarse, 174 Cal.App.3d 770, 777 (1985) See also Hignell v. Gebala, 90 Cal. App. 2d 61, 71 (1949)

[5] Hamid v. Janakus, No. BV 024000, 2003 WL 26128877, at *3 (Cal. App. Dep’t Super. Ct. May 13, 2003)

[6] See Assi Super, Inc. vs. Eight Oxfords Property Management, Inc., No. Bc319425, 2006 WL 4749574

[7] Cal. Civ. Code § 3275; see also Hignell v. Gebala, 90 Cal. App. 2d 61, 70 (1949) (holding that “section [1179] is special in its nature, applying only to unlawful detainer proceedings, while section 3275 is general”).

[8] Cal. Civ. Code § 3275

[9] Cal. Civ. Code § 3275; see also Am. Bankers Mortg. Corp. v. Fed. Home Loan Mortg. Corp., 75 F.3d 1401, 1413 (9th Cir. 1996) (finding that the requesting party must “must plead and prove facts entitling it to relief under the section [3275]”)

[10] In re Art & Architecture Books of the 21st Century, 518 BR 43 (Bankr. C.D. Cal. 2014)

[11] In re Burke, 76 F. Supp. 5, 8 (S.D. Cal. 1948) (“[t]he proposition that Section 1179, Cal. C.C.P., is applicable in and by the Bankruptcy Courts is so plain, that the point need not be further labored.”)

[12] In re Windmill Farms, Inc., 841 F.2d 1467, 1472 (9th Cir. 1988)

[13] 11 U.S.C. § 365 (d)(4)(A)

[14] Id.

[15] 11 U.S.C. § 365 (b)(1)(A-C)

[16] Id.

[17] Id.

Partition Actions

April 21, 2020/in All Blog Posts, Corporate Litigation/by Ajay Gupta

Generally, when two people purchase property together neither are thinking about what will become of it if they separate. This can become a major problem if such a situation arises, but there are steps that can be taken to guard against excessive losses. While forming a contingency plan for the end of any kind of partnership may not be pleasant, partition actions are for the good of both parties.

Documentation of all expenses related to a purchase, and the amount each party contributed, is essential for planning, as well as resolution of any eventualities. This way, accurate reimbursements can be agreed upon with minimal dispute.

When worst does come to worst, the most common remedy is mediation. It is a standard first step in dispute resolution and tends to be highly effective, particularly in partition. That said, it can still be expensive, certainly much more so than a well made separation plan.

Legal Real Estate Issues

April 20, 2020/in All Blog Posts, Real Estate/by Ajay Gupta

Real estate litigation commonly arises from “self-help issues”, or a situation where an individual attempts to resolve a dispute through their own unsanctioned action. This is never advisable, as it can easily lead to further escalation and potentially less civil confrontations. In the video below, Mr. Gupta discusses a situation where a disputed property line ran through one party’s driveway. In order to block this access point the other party erected a low cinderblock wall along the property line. This action only exacerbated the situation, as the erection was unsanctioned in first place, but even its removal would be grounds for further dispute.

One must weigh their options carefully in this or any similar scenario. Attempting to resolve the dispute on one’s own is unwise and possibly even dangerous. Additionally, litigation can be costly, protracted, and may not even produce a desirable outcome. In addressing a property line dispute it is always important to consult one’s title company. While they may not be able to directly intervene, they may be able to provide relief depending on one’s policy, property type, etc..
It is important to remember that, while these scenarios may seem uncommon, any property purchase is a major investment and significant legal process, so steps should be taken to guard against any eventualities. Mr. Sewing cites an enlightening statistic: of the top five legal issues in a recent study real estate disputes were the most common, with 21 percent of respondents reporting issues in that category. One should start by considering if they will need an attorney for their buying process, though some states mandate this regardless. This is, of course, a product of the very nature of real estate deals, wherein all parties have a vested financial interest in the deal closing. Thus, a neutral party can be invaluable in ensuring propriety and avoiding future issues.

Particularly for one’s first property acquisition, it is essential to recognize the moving parts that may cause problems. H.O.A.s are a major consideration. It is highly recommended that a potential buyer review their C.C.R. and even the association’s meeting minutes in order to ascertain exactly the standards that must be followed, the general attitude of the community, and potential issues inherent in neighboring properties. Joint purchasers should always protect themselves and each other through legal representation, as well as those purchasing commercial property (link to partition actions post). An attorney can also mitigate risk by helping draft a trust and examining one’s title policy and mortgage agreement to ensure all due propriety. It is well known that much trouble can come from signing unread contracts but it continues to be a problem for the average consumer who is not necessarily well-versed in the language of these documents.

Webinar: COVID-19 – Impact and Options for SoCal Businesses

April 9, 2020/in All Blog Posts, Bankruptcy/by Ajay Gupta

As the COVID-19 pandemic has surged upwards, our practice has seen a dramatic uptick in the number of calls we’ve been receiving from business owners, including landlords, tenants and lenders, who are all grappling with issues never before seen and seeking answers to questions they have never faced before. In an effort to educate the community and businesses about what we’re seeing in San Diego, we put together a panel on Covid-19 impact and options for a Webinar.

The Webinar was held April 1st, 2020 and featured the following panelists:

Ajay Gupta, Founder of Gupta Evans and Associates. — Attorney Ajay Gupta is a certified bankruptcy specialist and has been working on real estate and bankruptcy matter since 2005. He represents both debtors and creditors in state and federal bankruptcy court on a host of matters from secured transactions, to landlord-tenant disputes, to complex bankruptcy matters.

Sam Brotman, Founder of Brotman Law. — Attorney Sam Brotman’spractice primarily centers on all aspects of tax litigation and criminal/civil tax controversies in front of the Internal Revenue Service, Franchise Tax Board, Employment Development Department, California Department of Tax and Fee Administration, and various other state/local tax agencies.

Randy Newman, Founder Total Lender Solutions — Attorney Randy Newman is the founder of Total Lender Solutions which operates as the foreclosure trustee for numerous lenders across the country. Randy works primarily as an agent for lenders where there is a default on a loan and foreclosure is imminent

Jon Fleming, Receiver at Legacy Receivers. — Jon Fleming’spractice focuses primarily on receiverships and asset management. As an asset manager, Jon manages a number of housing units and is on the front line of many of the new eviction rules and issues. As a receiver, Jon is frequently called in to manage secured assets where there has been a default by a secured borrower.

Sean O'Neill advisor at US Bank. — Sean O’Neill
Vice President | Relationship Manager
Emerging Business Group | U.S. Bank Business Banking
sean.oneill@usbank.com

Please feel free to reach out to any of us with your questions or concerns. I’d again like to thank the panelists for sharing their knowledge and making this Webinar a success.

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WEBINAR AGENDA