9th Circuit Applies California Law to Contract Where Parties Agreed to Apply Georgian Law

The basic facts of the case are an individual entered into an agreement with a bank located in Georgia to borrow money to purchase her home. It is not clear whether the individual even signed the contract or where the contract was signed but it ends up not mattering because the bank sued in California District Court under diversity jurisdiction. Note: in California, if a contract contains an attorney fees clause provision, both sides of the dispute get to use it. That’s not the law in Georgia. The Bank wanted to be able to enforce its attorney fee clause against litigants but to not allow other litigants to use that clause against the bank!

California law was applied to this contract in two instances.

First, the choice of law clause had to be interpreted. It would be circular logic to apply the choice of law clause in determining which states’ laws applied to the choice of law clause. The Court held that in diversity jurisdiction cases, such as this one, it would “apply the substantive law of the forum in which the court is located, including the forum’s choice of law rules.” Since the lawsuit was in California, California’s choice of law clause applied to the case.

California follows restatement second of Conflict of Laws § 187 to determine the law that applies to a contract with a choice-of-law clause. Under § 187, a California court begins its analysis by determining “whether the chosen state has a substantial relationship to the parties or their transaction, or … whether there is any other reasonable basis for the parties’ choice of law. If so, the court then determines whether California would “be the state of the applicable law in the absence of an effective choice of law by the parties.” If the chosen forum has a substantial relationship to the parties or their transaction but California law would apply in the absence of a choice-of-law provision, the court then determines whether the relevant portion of the chosen state’s law is contrary to a fundamental policy in California law.

If there is such a conflict, the court finally determines whether California has a materially greater interest than the chosen state in the determination of the particular issue.

Since California’s Supreme Court has yet to rule on the matter, the 9th Circuit had to predict whether California’s reciprocity law, § 1717, embodies a fundamental policy of the state. The 9th Circuit decided it did and thereby affirmed the lower court’s decision to award attorney fees to the individual.

The case can be found here.

6th Circuit Holds That FDCPA Protects Corporations

The FDCPA is a powerful piece of legislature designed to eliminate abusive debt collection practice. The teeth behind the act are an attorney fees clause and provisions that allow for emotional distress and punitive damages to be awarded.

One distinction between consumer debt collectors and commercial debt collectors is that those practicing consumer debt collections had to be very careful not to violate the FDCPA while commercial debt collectors did not have the same worries. Consumers are not as sophisticated as those engaged in business and so this additional protection makes sense.

That distinction now blurred because the 6th Circuit held that corporations may take advantage of the FDCPA.  This is a BIG deal.

You can find the case here.

Hat tip to Professor Dan Schechter, Loyola Law School, Los Angeles and the ABA’s Insolvency Law Committee.

Most Commercial Speech is Not Activity Protected by California’s Anti-SLAPP Statute.

On August 20, 2015, the Los Angeles Division District Court was presented with the issue of whether false advertising on the internet was subject to anti-SLAPP protection. The case is In L.A. Taxi Cooperative, Inc. v. The Independent Taxi Owners Association of Los Angeles and a copy can be found here.

Apparently rival cab companies are purchasing pay per click advertisements on leading search engines which purport to be the rival company but really redirect customers to their own websites and numbers. An example is:

Kia Tehrany, director of operations for Yellow Cab, stated that he conducted a search using the terms “‘Yellow Cab Los Angeles.’” The results included the following:

Yellow Cab Los Angeles – Call 800-521-8294 or Book Online!
Our Cabs get you there Fast & Safe.

Tehrany stated that neither the listed telephone number nor the website was owned or controlled by Yellow Cab. Instead, the website contained information related solely to taxi services provided by ITOA.

So the Yellow Cab Company and affiliates filed a lawsuit against ITOA and its affiliates alleging (1) violation of Business & Professions Code section 17500, which prohibits false or misleading statements when advertising one’s services, and (2) violation of Business and Professions Code section 17200, which prohibits unfair competition in the form of any unlawful, unfair or fraudulent business act or practice. The complaint was amended to include violations of the Lanham Act for false advertising and trade name infringement.

Eventually, the defendants filed an anti-SLAPP motion. As a reminder, there was a time in California where people would file lawsuits just to prevent the opposing side from voicing their opinions (often referred to as strategiclawsuit against public participation). The California legislature passed what are called anti-SLAPP statutes which are designed to quickly end these kinds of lawsuits and punish the party filing the SLAPP motion. Over time, it has become a powerful tool.

In this case, the defendants filed an anti-SLAPP motion alleging that the Yellow Cab Company was filing a lawsuit to prevent them from exercising their right to speech. They not only lost but the loss was affirmed by the appellate court and they are now liable for attorney fees.

The appellate court found that “It is well established that commercial speech that does nothing but promote a commercial product or service is not speech protected under the anti-SLAPP statute.” It then concluded that the particular advertisements were purely commercial speech. Hence the anti-SLAPP statutes wouldn’t even apply.

That’s not the end of the inquiry though. Commercial speech that involves a matter of public interest, however, may be protected by the anti-SLAPP statute. The appellate court found that in this particular case, the advertisements were not a matter of public interest. “The subject advertisements did not constitute participation in any public dialogue about public transportation via taxicabs, the taxicab industry, or taxicab licensing and regulation. Rather, the advertisements on their face were designed to further defendants’ private interest in increasing the use of their taxicab services.”

The appellate court seemed to espouse the view that consumer information that goes beyond a particular interaction between the parties and implicates matters of public concern that can affect many people is generally deemed to involve an issue of public interest for purposes of the anti-SLAPP statute.

As if all this was not enough, there is a commercial speech exception to the anti-SLAPP statute! As set forth in section 425.17, subdivision (a), the Legislature was concerned with the abuse of the anti-SLAPP statute. To curb such abuse, it placed limits on when an anti-SLAPP motion may be brought. One such limitation is set forth in section 425.17, subdivision (c), the commercial speech exemption, which provides that the anti-SLAPP statute does not apply to claims brought against a person primarily engaged in the business of selling goods or services, arising from any statement or conduct by that person, if two conditions exist:

  1. “[t]he statement or conduct consists of representations of fact about that person’s or a business competitor’s business operations, goods, or services, that is made for the purpose of obtaining approval for, promoting, or securing . . . commercial transactions in, the person’s goods or services,…”; and

  2. “[t]he intended audience is an actual or potential buyer or customer, or a person likely to repeat the statement to, or otherwise influence, an actual or potential buyer or customer….”

The appellate court then held that the exception applied to the facts of this case. Finally, the court found that the anti-SLAPP motion was frivolous and awarded attorney fees and costs to the Plaintiff.

Author’s comment: anti-SLAPP motions have teeth but sometimes they bite you! Attorneys have to be more diligent and aware of the possibility of being hit with an anti-SLAPP motion than ever before but they must be just as cognizant of the possibility that they will be sanctioned for filing frivolous anti-SLAPP motions.

Sometimes Complete Disclosure, Disinterestedness and an Approved Employment Application are Not Good Enough!

On August 24, 2015, Judge Lee, a Bankruptcy Judge in the Eastern District of California, disqualified the Estate’s general bankruptcy counsel even though counsel was properly employed under § 327(a). The Court found that counsel was a disinterested person within the meaning of the code and did not hold or represent an interest adverse to the estate. This is a wild (but proper) result because under California law, a client’s waiver or consent can cure these types of deficiencies and under Bankruptcy law, those defects cannot be cured!

So how is it that under Bankruptcy law, counsel was properly employed but had to be disqualified under California law?

California Rules of Professional Conduct (“State Rule”) § 3-310(E), relates to the representation of adverse interests and states:

“A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.”

The analysis under State Rule 3-310(E) in the bankruptcy context was addressed by Judge Bufford in In re Muscle Improvement, Inc., 437 B.R. 389 (Bankr. C.D. Cal. 2010). In that case, the subject attorney consulted twice with the prospective debtors regarding the filing of a bankruptcy petition, but she was not retained to do so. She then undertook the representation of the debtors’ primary creditor after the petition was filed by another attorney. Although the debtors had not retained the attorney, the debtors successfully disqualified that attorney from representing the adverse creditor because there was a “substantial relationship” between the debtors’ consultation with the attorney and the attorney’s subsequent representation of the creditor. That “substantial relationship” created an IRREBUTTABLE PRESUMPTION that confidential information had been divulged and, therefore, in light of the debtors’ objection, the attorney could not represent the party with adverse interests.

The public policy at issue here was explained in the Ninth Circuit case, Trone v. Smith, 621 F.2d 994 (9th Cir. 1980).

The interest to be preserved by preventing attorneys from accepting representation adverse to a former client is the protection and enhancement of the professional relationship in all its dimensions. . . . These Objectives require a rule that prevents attorneys from accepting representation adverse to a former client if the later case bears a substantial connection to the earlier one. Substantiality is present if the factual contexts of the two representations are similar or related.

Id. at 998

In the Ninth Circuit the relevant test for disqualification is whether the former “representation” (here, consultation) is “substantially related” to the current representation of Charlotte and her bankruptcy estate. In the course of the consultation, it does not matter whether or not confidential information has actually been exchanged.

[I]t is immaterial whether [the attorney] actually obtained confidential information in the course of her meeting with debtors’ agents. The two dispositive issues are whether the subject matter of their meetings is substantially related to the subject matter of this case and whether [the attorney’s] relationship with debtors was one in which confidential information would ordinarily be disclosed.

Muscle Improvement, Inc., 437 B.R. at 396.

The rule is necessary to, inter alia, implement canons of professional ethics:

Canon 1 (maintaining integrity and confidence in the legal profession);
Canon 4 (preserving confidences and secrets of a client);
Canon 5 (exercise of independent professional judgment);
Canon 6 (representing a client competently);
Canon 7 (representing a client zealously within bounds 61 the law);
Canon 9 (avoiding even the appearance of professional impropriety).

The court must consider whether the attorney was in a situation where the attorney was likely to receive confidential information. However, the court may not inquire as to that information, which would require disclosure of the very confidential information that is being protected. Instead, the “substantial relationship” test is used as a substitute.

Where there is a “substantial relationship” between the consultation with a potential client, and the subsequent representation of an adverse client, an irrebuttable presumption arises that confidential information has been exchanged and disqualification of the attorney is mandatory.

The case can be found here.

Rule 9011 is Applied Much More Harshly to Bankruptcy Cases than its Rule 11 Counterpart!

At this month’s Southern California Bankruptcy Inn of Court meeting, now called the James T. King Inn of Court, we had a lively discussion regarding whether attorneys may engage in litigation for the purpose of harassing the other party.

The room was fairly evenly split with half saying absolutely not while the other half focused on whether the litigation was meritorious.

It turns out the issue is more complicated than that. In summary, if the litigation is engaged in and proceeds under Bankruptcy Law, then the litigation cannot proceed if brought for an improper purpose such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

Outside of bankruptcy, litigation may proceed if brought for an improper purpose but ONLY IF it is otherwise meritorious.

To learn more about this unfair distinction, see Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir.1994) (per curiam). If anyone knows a case to the contrary, please let me know!

Credit Card Companies Beware, California Appellate Court Finds That Their Evidence of Debt May Not Be Admissible

This is a summary of Sierra Managed Asset Plan, LLC, vs. Hale which was published by the California Court of Appeals on August 20, 2015. You can find the case here.

Consumer opened a credit card account with Citibank, N.A. He accumulated an unpaid balance of $10,138.41. Through a series of assignments, Sierra acquired Citibank’s rights as creditor. Sierra sought to enforce those rights through a lawsuit. Consumer did not deny the account, but he testified that he did not recall any of the details of the purchases on or the accrued balance of the account.

To prove that the defendant owed the money, Sierra had its agent testify and attach exhibits which substantiated the assignments leading to Sierra’s acquisition of rights as creditor on the account in question, the account agreement, and the account statements reflecting all of the charges culminating in the unpaid balance due. The account statements reflect purchases by a “David C. Hale,” with a listed address the same as that acknowledged by appellant at trial.

Consumer objected to receipt of the credit account exhibits attached to Sierra’s agent’s declaration on a variety of grounds, including hearsay and the lack of any foundation which would support their admission under the business records exception. (Evid. Code, § 1271.)

The Appellate Court agreed with Consumer, finding that the testimony did not provide substantial evidence of the foundation necessary for admission of the records pursuant to the business records exception to the hearsay rule.

Evidence Code, section 1271 provides as follows:

“Evidence of a writing made as a record of an act, condition, or event is not made inadmissible by the hearsay rule when offered to prove the act, condition, or event if:
(a) The writing was made in the regular course of a business;
(b) The writing was made at or near the time of the act, condition, or event;
(c) The custodian or other qualified witness testifies to its identity and the mode of its preparation; and
(d) The sources of information and method and time of preparation were such as to indicate its trustworthiness.”

In order for business records to meet the above elements for admission as an exception to the hearsay rule, either the person who created the documents, or an authorized custodian of the documents, or some “other qualified witness” must testify “as to the identity and mode of preparation of the documents.” The trial court has wide discretion in determining whether a “qualified witness” possesses sufficient personal knowledge of the “identity and mode of preparation” of documents for purposes of the business records exception. – This foundation requirement may be met by any “qualified witness,” meaning the witness need not be the custodian or the person who created the record.

Finally, based on the above, the Appellate Court found that there was no way for the particular declarant to know about Citibank’s business practice to form the foundation of the evidence presented!

Author’s comments: This is going to help a lot of pro se people fight credit card debt because most of the time, it is pursued by third parties similarly situated with Sierra but how does it affect bankruptcy practice?

The key here is that the Consumer’s testimony that he did not deny the account, but he testified that he did not recall any of the details of the purchases on or the accrued balance of the account was sufficient for the Appellate Court to shift the burden onto the creditor to prove the claim. So we should be able to file claim objections on the basis that our clients do not recall the particular purchases (assuming this is actually true). This would shift the burden onto the creditor thereby allowing us to successfully object to these claims.

Request for Admissions Are a Powerful Tool Which Should Not Be Taken Lightly

I found the following case very interesting because based on my limited experience, litigators tend to take a deny everything and admit nothing approach. But as the litigators here found out, this can be a dangerous game.

This is a quick summary based on the California Court of Appeals decision in TIMOTHY GRACE et al. vs. LEVIK MANSOURIAN et al. which was published on September 15, 2015. You can find the case here.

Defendants were served with requests for admissions seeking admissions on negligence, causation, and damages. Plaintiffs asked defendants to admit defendant failed to stop at the red light and that the failure was negligent, the actual and legal cause of the accident, etc.

Their response was to deny almost every request for admission. On the eve of trial, certain requests were admitted to through stipulation. Plaintiffs won the trial and filed a motion seeking to recover costs of proof under Code of Civil Procedure section 2033.420. The Court found defendants liable, in part, and awarded attorney fees and costs for the portion of the trial that could be earmarked towards proving certain requests for admissions that were denied by defendants.

It reasoned as follows. First, it found that the purpose of requests for admissions is

“… primarily aimed at setting at rest a triable issue so that it will not have to be tried. . . . For this reason, the fact that the request is for the admission of a controversial matter, or one involving complex facts, or calls for an opinion, is of no moment. If the litigant is able to make the admission, the time for making it is during discovery procedures, and not at the trial.”

It also held that,

“[S]ince requests for admissions are not limited to matters within personal knowledge of the responding party, that party has a duty to make a reasonable investigation of the facts before answering items which do not fall within his personal knowledge.”

So it concluded that

“When a party propounds requests for admission of the truth of certain facts and the responding party denies the requests, if the propounding party proves the truth of those facts at trial, he or she may seek an award of the reasonable costs and attorney fees incurred in proving those facts. (§ 2033.420, subd. (a).) The court is required to award those costs and fees unless it finds the party who denied the requests “had reasonable ground to believe [he or she] would prevail on the matter” or “[t]here was other good reason for the failure to admit.”

Based on the above, you would think that many of the games litigators play are prevented by this code sections; however, the Court also found that those amounts cannot be awarded if the parties stipulated to facts, even if the responding party had previously denied them.

Sometimes the State Court Gets it Right!

Instead of delving into the actual facts of In re Marriage of Walker, I will use similar facts as they will be easier to understand. You can find the actual case here.

House is worth $350,000 with a $150,000 1st priority lien. In a divorce proceeding, a judge will order the sale of the property with proceeds split evenly. Assuming no cost of sale, taxes, etc., this would mean husband is paid $100,000 and wife is paid $100,000.

The result should not be different if there was an intervening bankruptcy, or should it!?

Prior to the divorce, the wife had file for Chapter 7 bankruptcy and obtained a discharge. Her argument was that the discharge extinguished her personal liability for the first priority lien. Assuming the 1st lien could not be enforced against her, the proceeds would then need to be divided as follows:

Sale at $350,000. $175,000 to Wife, $175,000 to Husband and Husband obligated to pay 1st lienholder $150,000. So the division would be $175,000 to Wife and $25,000 to Husband!

She is right you know, she is not personally liable for the 1st mortgage. The state court judge agreed and she was awarded the $175,000. Part of the judge’s reasoning was that enforcement of the 1st lien against Wife could be a violation of the discharge injunction.

Fortunately for the Husband, there was a guru at the appellate court level who recognized that even though the Wife was no longer personally liable for the debt, the real property was! Enforcement of this obligation then, was not against wife but against Wife’s interest in the encumbered community property asset; an obligation not discharged by the bankruptcy.

The Court of Appeals reversed the trial court and all is as it should be.

Tenants Beware: Stipulation to Judgment May Be Treated as Res Judicata

This blog is a quick review of Needelman v. DeWolf Realty Company which was entered on July 21, 2015.

The tenant entered into a stipulated judgment that specifically provided that Tenant waived “any claims he may have, which [the lessors] assert do not exist, to bring an attempted wrongful eviction against [the lessors] or any action in any way arising out of or concerned with his tenancy…” and stated that Tenant “agrees that any of his personal property remaining in the unit after he vacates or is evicted therefrom shall be considered abandoned property, and [the lessors] shall be entitled to dispose of it without any notice to Tenant or his attorney.”

The res judicata doctrine is codified under Code of Civil Procedure § 1908. It provides that “a judgment or final order in an action or special proceeding” is conclusive as to “the matter directly adjudged.” It applies to situations where (1) the issues decided in the prior adjudication are identical with those presented in the later action; (2) there was a final judgment on the merits in the prior action; and (3) the party against whom the plea is raised was a party or was in privity with a party to the prior adjudication.

The Court found that the stipulated judgment in the unlawful detainer action had preclusive effect.

Author’s comment: This is an interesting twist as landlords have a lot of power when entering into these stipulations. For example, what if the landlord has the tenant stipulate that it waives any right to the states anti-forfeiture laws or that the property is not necessary to an effective reorganization? Would a bankruptcy judge then be forced to grant a relief from stay motion?

You can read the case here.

Is It Community Property Or Separate Property?

The 9th Circuit really confused a lot of people in 2003 when it incorrectly interpreted California community property laws. The confusion spread to California courts of appeal until finally corrected by the California Supreme Court in 2014!

In Hanf v. Summers (In re Summers), 332 F.3d 1240 (9th Cir.2003), the pertinent facts are as follows: Husband, Wife and Daughter bought real property and titled it as joint tenants. The bankruptcy court held that the property was held in a joint tenancy! The BAP affirmed, and the 9th Circuit affirmed the BAP.

The basic idea was since the property was titled as joint tenants, the property was owned as a joint tenancy. The problem with this is that Cal. Fam.Code § 852(a) provides that “[a] transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”

So there you have it, the property is community property because the parties did not have an express declaration otherwise. But that is not how the Circuit Court decided this case. It held that § 852 has historically only been applied to inter-spousal transactions and so it did not apply to the facts of this case due to the parties having bought the property from a third party.

Since most spouses purchase their first home after marriage, this holding had the practical effect of making virtually all post-marriage purchases of real property a joint tenancy instead of community property. It is difficult to understand why the Circuit court would believe this was something the legislature would have intended particularly when the 1984 amendments were made to prevent exactly that!

Now the law as it stands today, according to In re Marriage of Valli (2014) 58 Cal.4th 1396, 1400:

Property that a spouse acquired before the marriage is that spouse’s separate property.

Property that a spouse acquired during the marriage is community property unless it is:

traceable to a separate property source;
acquired by gift or bequest; or
earned or accumulated while the spouses are living separate and apart.
Finally, spouses may change the character of property during the marriage by what is called a “transmutation.” To do so, they need to comply with § 852 even if the property is purchased from a third party.

The Valli Court was critical of the 9th Circuits holding, stating that “There, the federal appellate court was attempting to construe and apply California law ‘to determine whether the requirements of California’s transmutation statute . . . must be met when realty is transferred from a third party to spouses as joint tenants.’”

It further criticized the Court’s holding as “not persuasive insofar as [it] purport[s] to exempt from the transmutation requirements purchases made by one or both spouses from a third party during the marriage.” The California Supreme Court did not think the 9th Circuit’s rationale reconciled the exemption with the state legislatures purpose in enacting § 852.

The court went one step further and said that in so far as Evidence Code section 662, which states that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title,” applies to a situation, it does not apply when it conflicts with transmutation statutes.

The Court left open whether § 662 can ever apply to marital dissolution proceedings.

The concurring opinion is a work of art but too long for me to go over. I highly recommend it to anyone who would like a deeper understanding of the subject matter. You can find it here.

Note: This is important, not only in bankruptcy proceedings and marital dissolution proceedings but also for tax purposes. If the tenancy is a joint tenancy, then upon death, only the deceased spouses “share” of the property will have a step up in basis. If held as community property, then the whole property receives the benefit of a step up in basis.