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BY: KELLY A. NEAVEL, ATTORNEY CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
There have been four recent cases decided by the California Courts of Appeal that will have an effect on how real estate brokers and agents conduct business. This article will will discuss two of those cases.
In RealPro, Inc. v. Smith, the court took a closer look at the standard Listing Agreement used in the sale of real property. In September 2005, Sellers/Defendants Smith Residual Company, LLC and J&A Gonzales, LLC retained real estate broker MGR Services, Inc. to act as their agent for the sale of real property in Riverside County. A “Standard Owner-Agency Agreement for Sale or Lease of Real Property” was executed, setting forth the sale price and terms of “$17,000,000 cash or such other price and terms agreeable to [Sellers]…” In November 2005, RealPro, Inc., broker for the buyer, submitted a written offer to MGR for the full asking price of $17,000,000 cash. In December, MGR countered that offer, stating that the listing price was being increased to $19,500,000. Both MGR and the Sellers (Defendants) confirmed a brokerage fee of 4% split equally between MGR and RealPro. However, the Counteroffer was rejected by RealPro.
In March 2006, RealPro demanded its 2% brokerage fee for producing a ready, willing, and able buyer. When Sellers refused to pay the brokerage fee, RealPro filed the instant action, wherein the trial “court found that RealPro had ‘failed to allege facts giving rise to the existence of an enforceable written contract for the payment of a real estate commission.’” RealPro appealed the trial court’s decision. The Court of Appeal ultimately agreed with the trial court. According to the Court of Appeal, the confusion centers on the word “or” at Paragraph 1.4(a) of the Listing Agreement. Plaintiff RealPro interpreted the “or” to act as a means of separating the $17,000,000 cash offer from the phrase “such other price and terms acceptable to [Sellers].” Defendants interpreted the “or” to include the phrase “such other price.” With this interpretation, the emphasis is on the “and,” not the “or”: “$17,000,000 cash or such other price and terms agreeable to [Sellers].” The court agreed with Defendants’ interpretation, stating that the presentation of a $17 million cash offer did not obligate the Sellers to enter into a purchase and sales agreement. Further language in the Listing Agreement indicates that Sellers are allowed “to specify price and terms, even outside of the four corners of [the Agreement].” The Court of Appeal concluded that the $17 million was merely an invitation to submit offers. It is an asking price to “guide negotiations.”
RealPro argued that the Listing Agreement contains “language that allows for payment of any commissions simply upon receipt of a full price offer.” The Court disagreed. Sellers pointed out that such language would create a conflict that is not to the mutual benefit of the parties who entered into the Listing Agreement to begin with. “Mutual benefit” is the purpose of a contract. Having to pay a commission for any full price offer that is submitted would create a myriad of problems for the Seller, including: (1) preventing a Seller from accepting any higher offers without still owing a commission to the first broker, (2) creating an obligation for the Seller to pay multiple commissions on multiple offers, and, (3) prospective buyer’s brokers would have no incentive to obtain purchase prices below the listing price because it would jeopardize their commission.
This case reminds real estate agents and brokers to look carefully at the documents they are signing and the contracts they are entering into. From the start of representation, real estate contracts are laced with subtle nuances that often escape many agents’ notice. As a result of this case, the California Association of REALTORS® is considering changing the language of the Listing Agreement in order to make it less ambiguous.
Bank of America, N.A. v. Mitchell addresses California’s antideficiency statutes as a matter of law and how they are affected by the structure of certain loans. In this case, in 2006 GreenPoint Mortgage loaned Defendant Michael Mitchell $315,000 to purchase real property located in Lancaster. The loan was secured by two notes with a first deed of trust and a second deed of trust, both held by GreenPoint. In 2008, Mitchell defaulted on both notes. In 2009, GreenPoint foreclosed on the first deed of trust. Thereafter, GreenPoint assigned the second deed of trust to Bank of America. Bank of America attempted to collect the debt owed under the second deed of trust. However, Mitchell refused to pay, arguing that the second loan was “wiped out” at the foreclosure sale of the first loan. Bank of America initiated this lawsuit for breach of contract based on the second promissory note. The trial court agreed with Mitchell and stated, “the Bank’s…claims seek recovery of the balance owed on the obligation secured by the second deed of trust and, thus, are barred by the antideficiency statutes…” Bank of America appealed, yet the Court of Appeal affirmed the decision of the trial court.
In California, Code of Civil Procedure §580d is part of the antideficiency statutes. It prohibits a creditor from seeking a judgment for a deficiency on all notes “secured by a deed of trust or mortgage upon real property…in any case in which the real property…has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.” This means that the beneficiary of a deed of trust cannot go after the debtor for the deficiency (unless he uses judicial foreclosure).
In its discussion in the Mitchell case, the Court of Appeal analyzed decisions reached in two separate, similar cases, both interpreting Code of Civil Procedure §580d. The Court of Appeal reasoned that GreenPoint would not have been a “sold-out junior lienor” after the foreclosure sale of the first deed of trust because it held both the first and the second deeds of trust at the time of the foreclosure sale. Therefore, it was not entitled to obtain a deficiency judgment. The fact that the junior note was thereafter transferred to Bank of America does not change the fact that a deficiency judgment cannot be obtained. The Bank merely “‘stands in the shoes’ of the assignor, assuming the assignor’s rights and remedies.” Essentially, because GreenPoint was precluded from obtaining the deficiency judgment, Bank of America was also precluded.
What can be taken away from this case is that the structure of the loans at the time of the foreclosure sale will determine whether a second lien holder can pursue a deficiency judgment.
Many homeowners who have been foreclosed upon may find themselves in similar situations where California’s antideficiency statutes can be interpreted in a different way than what they may believe to be true. Here at The Giardinelli Law Group, APC, we find that many people come in, both before and after a foreclosure sale, with knowledge that they have either heard through the rumor mill or read on the internet, which may not be completely correct. If you or someone you know are going through a foreclosure, this case demonstrates the fact that not every situation is cut and dry and each foreclosure or short sale deserves special attention and, potentially, legal expertise.
Look for Part Two of this series in next month’s Courtside Newsletter!