If you get lucky and get a good deal at a foreclosure sale, can the former owner challenge your bid and get it set aside? Sometimes.

The key is to get the Trustee’s Deed DELIVERED to you as soon as possible. Acceptance of delivery (which doesn’t require recording, but that’s important too) gives you, as a buyer, a “conclusive presumption” that the same was conducted properly.

And that’s “special.”

When are demand letters and other communications useable as a defense to a lawsuit?

When your lawyer is really creative. Or not. A recent court of appeal decision held that correspondence from one partner to another in which the first partner tries to talk the second partner out of selling the second partner’s interest to a third party are not, necessarily, privileged. Thus, when the third party had to pay more for the second partner’s interest, the first partner had the chance to became liable to the buyer for the increase in purchase price! When sued for that difference, the first partner tried to characterize the letters and emails as communications “in anticipation of litigation” and thus privileged, under the Anti-SLAPP rules. Not so, said the court.

Reference: Haneline Pacific Properties v. May (2008, DJDAR 15330)

Need some polish for your “Corporate Shield?”

Many brokers (agents too) have set up corporations for themselves to protect against claims. Then they forget about the annual “formalities” or use the “company” money for personal expenses – which allows a plaintiff to “pierce the corporate veil” and go after their personal assets.

A California law, AB 957, known as the Buyer’s Choice Act amends Civil Code Section 1103.20 through 1103.23 regarding title insurance and escrow service providers.

Federal RESPA law prohibits the seller from requiring the buyer to purchase title insurance from an insurer designated by the seller. RESPA applies to the sale of 1 to 4 unit residential properties where the buyer acquires using a federally related loan. That is broadly construed to include any loan issued or insured by a government agency, a loan issued by a federally chartered lender and any loan sold to a federally related agency in the secondary market. That would cover almost all loans except where the buyer pays cash or gets a loan from a private lender.

The penalty for a RESPA violation of this requirement is that the buyer can recover from the seller a penalty of three times the amount paid by the buyer for the title insurance.

The California Legislature has now determined it is appropriate to expand these protections in the case of REO sales. CA now applies those provisions to all sales where the seller was a mortgagee or beneficiary on a loan and purchased the property securing the loan at a foreclosure sale. The CA law applies to escrow services as well as title insurance.

The CA law does not entirely prohibit negotiations between the buyer and seller that results in the buyer purchasing from a company suggested by the seller but requires that the seller must first provide the buyer with a written notice of the right to make an independent selection.

Violation of this law differs from the RESPA law in that in addition to the three times the buyer’s cost penalty it also states that any licensee violating the provision may be subject to disciplinary action by the licensing agency.

It is likely most REO sellers will quickly incorporate the notice to buyer into their counter so that the law will have limited, if any, effect. The law expires January 1, 2015.

“The seller told me – so it must be true.” Don’t bet on it. At least not without checking first.

President Reagan wasn’t the only one to say, “Trust; but verify.” Under California law, a real estate broker has an obligation to independently verify information passed on to a client OR, advise a client of the fact that information being passed on by the broker has not been independently verified by the broker (when it hasn’t been) and to also advise the principal to independently verify the information if it is material. If the agent doesn’t make that advisory statement and the information passed on is proven false, even if the agent didn’t know it at the time, the agent has liability to the principal for any damage the principal suffers.

Few of us know exactly what “statute of limitations” means; even fewer know how long one has before it’s “too late”, and even fewer know the exceptions to the rules.

There’s this great moment in “Philadelphia“, the movie starring Tom Hanks as a fired lawyer with AIDS, when he is being told that the complaint for a lawsuit, which has to be filed today, is missing. The computer files associated with it are all missing as well, and Hanks just happens to be out of the office that day (in the days before email, etc.). You share the panic in Hanks’ face; it’s the feeling you get like the bottom just dropped out and you’d do anything to turn back time, even if just for one day. Eventually, the complaint is found, and timely filed.

It is not uncommon for a most of us to be aware that if you “miss the statute of limitations”, you are forever barred from bringing your lawsuit, no matter how good a case you have, and no matter the excuse. Most of us somehow know this intuitively, like stopping for red lights (most of us). Fewer of us, though, know exactly what “statute of limitations” means; even fewer know how long one has before it’s “too late”, and even fewer know the exceptions to the rules (when too late isn’t).

Each different type of lawsuit, or “cause of action”, has its own statute of limitations. The word “statute” refers to the actual law, and the word “limitations” refers to the limit of time in which a person can file his or her lawsuit with the court. These statutes of limitations (for lawsuits in California) are found, for the most part, in the California Code of Civil Procedure.

One type of lawsuit, or “cause of action”, is a breach of contract. Two people promise to do something, and one of those people breaks the promise. If the promise was in writing, then a person has four years from the time the promise is broken, or the “breach of contract”, to file the lawsuit. If the agreement is verbal (i.e., not written, but a handshake), then one has only two years to file a lawsuit. If there is negligence, and damage to real property, the time limit is generally three years to bring the lawsuit.

First of all, why is there a time limit to bring a lawsuit to begin with. It just seems like people are being rushed for no reason. Well, memories fade, people move or die, and evidence disappears, making lawsuits that much more difficult to prove, or defend, if not prosecuted within a certain period of time.

Seems easy enough. For the most part it is. And many lawsuits are stopped dead in their tracks at this point (usually and hopefully with that first phone call to a lawyer).

But what do you do if someone keeps the breach a secret by covering tracks, telling lies, making misrepresentations’ In such a case, the time to bring an action is extended, or “tolled”, during the time the plaintiff is prevented from discovering the breach.

However, if, through reasonable due diligence, the breach could have been discovered anyway, the time to bring the lawsuit will not be tolled. This is known as the “discovery rule”, which says that statute of limitations does not begin to run until the damage is actually discovered, or could have been discovered through reasonable diligence. Angeles Chem. Co. v Spencer & Jones (1996, 2nd Dist) 44 Cal App 4th 112. For example, two people contract for personal services, and, unbeknownst to the boss, the subordinate hadn’t provided any such services in months. The boss had no reason to believe that the services were not being performed, but discovered this fact eight months after the services had stopped. As a result, the boss would have four years and eight months to bring the lawsuit (though there would be no reason to wait that long anyway).

However, it is the breach, or defect, that is protected by the discovery rule. For example, if the breach has been discovered, but the culprit has yet to be exposed, do not wait. Because the time you take to discover the wrong-doer is not time that tolls the statute, nor is time to discover the law itself.

What happens if the defect, say, in a construction matter, is not discovered for a very long time. You know how that can happen: a building is constructed, and that small pipe leak, or that concrete that was mixed improperly, is not sufficiently appreciable to reveal itself as a defect until years down the line. Do you still have four years (or three for negligence) from the date of discovery to file your lawsuit? Yes, and no. When it comes to construction, you do, in fact, still use the discovery rule. However, the first question that has to be asked is: has it been ten years since substantial completion of the construction project? If the answer is yes, then, generally speaking, absent some other exception, the time has run, even if there’s another, say, two years to go since discovery. So, if the defect is discovered in the ninth year since construction, there is only one year left before the time runs, not three – or four – years.

Lawsuits can be, and have been, brought to their knees based on a defense of the statute of limitations. Don’t wait; be proactive in this process. It will not wait for you.

Corporations are business entities separate and apart from their individual shareholders.

Corporations

Corporations are business entities separate and apart from their individual shareholders. Where corporate formalities are followed (among so so many other things), the corporation’s shareholders, directors and officers are generally protected from the claims against the corporation. A shareholder’s liability is usually limited to the amount of his or her investment in the business, and no more.  If, however, anyone is deemed to have behaved badly within the corporation, that person can always be held personally liable for his or her actions.  Recent examples of this include, on a larger scale, the executives of Enron. “C-corporations” are corporations that have not elected to be taxed as a “small business” for state and federal tax purposes (see below).

S Corporations

Under certain conditions a corporation and its shareholders may elect to have the corporation treated as a “small business” corporation for the purpose of federal income taxes. This election permits the taxable income of a corporation making the election to be taxed to the shareholders, rather than the corporation.

There are numerous requirements which must be satisfied to qualify a corporation and its shareholders to make an election to be taxed in this fashion. The officers of the corporation should consult with the corporation’s counsel and accountant to determine whether the corporation is eligible to make such an election and to consider the consequences, advantages or disadvantages of making the election. The election typically must be made and filed within 75 days from incorporation.

Partnerships

A partnership is defined as an association of 2 or more persons to carry on as co-owners a business for profit. In California, there are general partnerships, limited partnerships, and LLCs electing to be treated as partnerships. S Corporations are also treated in most ways like a partnership for tax purposes. Typical of partnerships is the characteristic that the tax benefits (and, gulp, corresponding burdens) flow-through to the individual taxpayers, typically in proportion to their percentage of interest in the profits, but not always. And frequently two people find themselves in a partnership without even knowing it. As a result, they find themselves obligated to each other, and taxing authorities, in ways that are frequently a shock to them.

In a general partnership, each partner, and that partner’s personal assets, is liable for the partnership’s liabilities, and for each other partners’ liabilities incurred on behalf of the partnership. Limited partnerships, on the other hand, limit the liability of the limited partners up to each of their investments. Members of a limited liability company are generally treated the same as limited partners. Of course, anything a partner does personally that is, well, bad, will likely expose that partner to personal liability.

Every entity has its purpose and usefulness. General partnerships should be used when there’s more than one person in the enterprise, partners trust (ahem) each other, and there is little concern about being sued. However, if you can think of an enterprise in today’s economic and political climate where being sued is not likely, please call us.

Limited partnerships are very useful in ventures where there is a desire to have one corporation or person managing an enterprise, and the rest of the participants desire to be passive investors, or “silent” partners. However, LLCs are being used more and more for this purpose, including in the area of real estate investments.

LLC

An LLC, or limited liability company, is a recent invention, combining the limited liability of a corporation, with the pass-through taxation characteristics of a partnership. It is formed, and its existence commences, when articles of organization are filed with the California Secretary of State. Typically, the management and operation of a limited liability company is governed by an “operating agreement”. This is the equivalent of a partnership agreement and the bylaws of a corporation. An LLC can have 1 or more members.

Typically people like to use, and we recommend using, an LLC, almost whenever possible. Compliance with corporate-like characteristics is optional. However, LLCs can not be used for most professional business enterprises, and there are certain tax disadvantages to LLCs.

Articles of Incorporation

The articles of incorporation are contained in one document which, when filed with the Secretary of State (for a nominal fee), bring a corporation to life. Prior to the articles being filed, the corporation is not a corporation at all, but merely an enterprise, or a corporation “in formation”. The articles define the name of the corporation, and certain other required and optional information about the corporation, which information can only be changed by following certain statutory formalities.

The SS-4

Every new business, including a new corporation, must obtain an Employer Identification Number from the Internal Revenue Service. The number must be used on all federal tax returns and related documents. The corporation’s accountant or counsel can assist in filing Form SS-4 to obtain this number. One of the few times this may not be necessary is when forming a single-member LLC without any employees.

25102(f)

Corporate shares, LLC memberships, and partnership interests are considered securities for purposes of federal securities laws and, generally, will be a security under California securities laws. Under California securities laws, any “offer” or “sale” of “securities” must be qualified with a permit from the California Department of Corporations, unless either the security or the transaction is exempt under the California Securities Law or preempted by federal law.

Section 25012(f) of the California Corporations Code provides a limited offering transaction exemption for offers and sales of securities to up to 35 purchasers within or outside of California. Huh? This exemption means that, if certain guidelines are followed, there is no need to comply with the voluminous (literally) state and Federal securities laws. There are a number of exemption requirements. One of them is the filing of the form named after the statute, the 25102(f) Notice of Transaction Form. This form is filed with the Department of Corporations, must be done online, and must be accompanied with the appropriate filing fee.

Some businesses don’t file one, and though not filing one is acceptable, the fee for filing will go up dramatically if, for some reason, the Department of Corporations makes a demand for such filing.

Close Corporations

Close corporations, or closely-held corporations, are corporations which have chosen to be governed by certain statutory rules. Typically these are chosen by people who do not want to have to deal with the ongoing corporate book maintenance issues of minutes and such, but who aren’t aware of the corresponding downsides and obligations, or these are chosen by people who simply thing that if there are a few shareholders, that it’s good to be “close”.

Generally speaking, we do not recommend this type of entity, unless it is under some very specific circumstances. Shareholders in close corporations are required to enter into an agreement for purposes of governing corporate operations and share restriction. And though we recommend this anyway for all corporations, it is required here. In addition, there are some other rules which restrict the day-to-day governance and decision-making process. Typically it involves the ongoing participation of all shareholders, whether majority or minority. And though that might work for some, generally we find that having one person in charge makes life easier, and subjecting that person to the typical corporate scrutiny of fellow shareholders or directors.

In Closing

Starting a new business, or growing one, can be very exciting, and daunting. Do not let the plethora of information in this article, or otherwise available to you, overwhelm you. You’ve already done the right thing by reading this article. When it comes to your business, you can never know too much.

We’re regularly called upon to settle (or try to settle) neighbor disputes about trees, branches and roots.

You would think it is s simple issue. Well, read on…

Who owns what?

Yes, it’s true, a property owner owns the trees on his or her land. (So far, so good.) A tree whose trunk stands entirely on one’s own property belongs exclusively to the landowner even if the roots fo into the land of another. A adjacent landowner cannot enter another’s land, to cut it down – that’s called trespassing (among other things). A neighbor who cuts down the tree is liable to the owner for any resulting damage.

Let’s deal with tree-tops first:

An owner who fails to maintain a tree properly may be liable for the damages caused to the neighbor when a branch falls onto a house on an adjacent parcel. (Be glad you don’t live in tornado, or hurricane country…) Even the government is not immune from liability.

When the trunk of a tree is located wholly on the property of another, a neighbor had an absolute right to remove those branches that overhung his property, whether they cause damage or not. Note: “had.” Even then, the branches only could be cut back to the boundary line, and the tree itself – could not be cut down.

In removing the overhanging portions, the neighbor may use “self-help” and need not resort to court action. But this “absolute right” was taken away in 1994. Read on.

And now, to the root of the problem:

An owner also has liability for a tree’s roots. If roots encroach under adjacent property, there is a trespass and the neighbor can the cut roots if they cause damage . BUT, even when the roots of a tree encroach on a neighbor’s, the neighbor does not have an absolute right to remove the roots – if there is no evidence of damage to the neighbor’s property.

“Huh?” you ask. You mean that a neighbor has an “absolute right” with respect to branches, but not to roots? That’s the way it seemed, but the “absolute right” is really gone as to both branches and roots.

Booska v. Patel, 24 Cal. App. 4th 1786, 30 Cal. Rptr. 2d 241 (1st Dist. 1994), changed the “absolute right” business of trees. Branches, roots and self-help. The case involved a claim by a homeowner against his neighbor for damage to a tree caused by the negligent severing of roots, necessitating removal of the tree because it had become unsafe. The neighbor claimed he had an “absolute right” to cut tree limbs or sever tree roots on his property, even if the work was performed negligently or maliciously and even if the tree caused no damage to his property. The trial court agreed . The appellate court, didn’t. It held that a homeowner’s rights “in the management of his own land – are tempered by his duty to act reasonably.”

So, now, a landowner does not have an “absolute right” to cut the branches or roots of a tree located on adjacent property, and the landowner will be liable for damages if he or she acts negligently or unreasonably.

When it all goes bad, who pays – and what?

For the adjoining landowner:

Generally, the owner of the tree is liable for any actual damages caused by its branches or roots.

However, an adjoining landowner can recover only the actual money damages sustained as a result of a tree’s encroachment on his or her land. Thus, a mere encroachment that does not cause actual damage to an adjoining landowner does not give a right to recover damages.

For the owner of the tree:

The owner’s recovery is generally limited to the difference between the value of the real property before and after the injury and “never exceed the value of the land prior to the injury.” The owner may alternatively seek to recover the cost of restoring the property to its prior condition, but “only reasonable costs of replacing destroyed trees with identical or substantially similar trees may be recovered.” If restoring the land to its prior condition is impossible or impracticable, then “the landowner may recover the value of the trees or shrubbery, either as timber or for their aesthetic qualities, again without regard to the diminution in the value of the land.”

In addition, if an adjoining landowner’s act (of chopping down a tree, cutting off its branches, or ripping out its roots) is willful and malicious, the injured owner may recover treble damages against the wrongdoer.

Ok, but what about common trees?

Trees that stand partly on the land of two or more coterminous owners belong to them in common. And, no owner has a right to cut down a tree located on the boundary line or to cut away the part that extends on his or her land without the consent of the others – even if the continued existence of the tree or its overhanging branches will cause damage to his or her property.

So, in the case of a “common tree,” the adjacent owner is in a worse position with respect to his right to protect his property than if the trees are owned wholly by the other owner. In other words, he has less right to cut the branches because he owns a portion of the tree than he would have if he owns none of it.

And you thought being a lawyer was easy!

“My sister and I decided to buy some investment property together. My credit was lousy, so I gave her my one-half share of the money to buy it, and she put it in her name. Now that escrow has closed, I’ve asked her to put the property in both of our names, since I can’t sign the deed for her. All of a sudden it was like she became a totally different person, and she says, ‘No way, get your own property. This is my puppy.’ Can she do this?”

Well, people can do whatever they want. The question is whether she’ll get away with it. When it comes to the law, the question is: what’s the best way for you to get what’s yours? What do you sue for when someone accepts your money, takes title to property, promises to give it to you, and then reneges on the promise? In other words, to put it in a legal way: what is your remedy?

It’s called a Resulting Trust. In this example, the sister has taken title to property, a portion of which is not hers. She is therefore holding it in trust for you, and becomes what is then called a trustee. Once a court determines that the sister is the trustee, then, after you file all the right paperwork with the court, the court will order the sister to give you half. At that point, you can decide whether you still want to be on title with your estranged sibling or not. I think we all know the answer to that question.

“OK, but what actually happened was that my sister and I took title to the property together as joint tenants, but I’m the only one who paid for it. Can I get her off the property?”

It’s a little odd that the sister is on there when she wasn’t supposed to be, but people do strange things all the time. If you can convince the court that the sister shouldn’t be there because you and she never agreed to that, then the court will declare the portion she holds as a Resulting Trust, and will order her to deed her half to you. That’s case law . . . from 1962.

“So, what do I do about my son? My wife and I wanted a second property, but couldn’t qualify for a second loan. My son, though, could, because he could get a GI loan. We put in the down payment, he got the loan, and the house went into his name. Now he says the house is his, and he won’t give it to us. He said he wants to live in it. He wants to sell it. We clearly never intended this.”

Your parenting skills aside (ahem), your fix here is to sue him for a Resulting Trust. You provided the money, and you did not intend to give him this. He knew it was supposed to go to you. Ask him to give it to you; if he says no, sue him. Zella Johnson sued her son, Houston Johnson, to get title to property in her son’s name in 1987 for a house near Burbank, California, and won, in 1987. The court said it was a Resulting Trust.

“I’m comfortable with that. But what if I didn’t actually give any money? What if I just found the property? This is the situation: My now ex-partner and I had talked about investing in property together, so I started to look for something. We talked about how it had to have a stream or other water, some hills, some flats, you know, something with some variety. So I spent a whole bunch of time and effort in trying to find a particular piece of property. When I found it, I called my partner, and told him where it was. It started to rain, and washed out the road; I couldn’t get down the hill to make the purchase. He knew we’d buy it together, but when I finally got out of there, I discovered he’d bought it for himself, and all my efforts were for nothing. I mean, I didn’t put in any money, so what right do I have to sue?”

You’re in luck. This year (2010) is the the 104th anniversary of a gold-mine case that said if you make the effort to find the property, then you don’t have to pay any money to have a claim for a Resulting Trust. Your effort, at least back in 1906, would have been enough to get you on title with your partner. One question: how long ago did this happen?

“How long ago? Well, my partner put himself on title about five years ago. I haven’t done anything about it since I thought I was just out of luck. I haven’t said anything to him about it, though. We just went our separate ways. Why, is there a certain amount of time I have to sue him? Is it too late?”

If you’ve done nothing about it, then you might be in luck. But if five years ago you told him to give it back to you and he didn’t, then it’s too late to file your lawsuit. But if you just dropped it, and you make the demand to be on title now, then you might be okay. You have four (4) years from the time “the breach of trust occurs”. Usually the breach of occurs when you make the demand, and the other party refuses. If you file a lawsuit now, you can be sure your ex-partner’s lawyer will argue that you’re too late.

Resulting Trusts are somewhat peculiar, and not common. However, if you ever find yourself in a situation where you’ve paid for property that someone else took title to, it’s an efficient way to get back what may be legally yours.

Transforming One Cause of Action into Another: Negligence CAN become Breach of Contract

Perry v. Robertson (1988) 201 Cal.App.3d 333 (“Perry“) is a case most brokers are not aware of, and should be.

Plaintiffs, based on Perry, without pleading a claim of “breach of contract” have been able to transform a claim of “negligence” into “breach of contract” solely to collect attorneys fees. And they’ve done it after a trial is over, and no defense to the breach of contract claim has been made by the broker.

In Perry, the plaintiff, a seller of property, sued a real estate agent, pleading the negligent reduction to writing of an oral agreement for the sale of the property. The plaintiff in that case, plead the substantive terms of the listing agreement within the cause of action for negligence. Plaintiff prevailed on the negligence cause of action and sought attorney’s fees according to the listing agreement. Defendants challenged the request for attorney’s fees on the basis that plaintiff did not prevail on a contract claim. The court held that plaintiff pled all the elements of a breach of contract cause of action, putting the contract theory in issue.

Additionally, the court noted “that defendants were given actual notice that [plaintiff] intended to pursue a theory of breach of contract.” One of the means by which the court noted that defendants were so notified was a letter from plaintiff to defendants stating that attorney’s fees were sought.

The sole issue the court decided was “whether the complaint pled a claim in contract and whether [plaintiff] elected a consistent remedy.” The court found that the contract claim was pled and the remedies were the same for both tort and contract, except for the attorney’s fees and, as to the attorney’s fees, defendants were on notice of plaintiffs election to seek those.

The court held that the facts from which a cause of action arise must be pled and no technical form of action is required. We have no dispute with that contention. But what about the other way around? What if the “contract” claim fails – can a broker then be sued for “negligence” for the sole purpose of salvaging a lost cause of action on the eve of trial.

It is not disputed that the same act can be both a breach of contract and a tort (like “negligence”). Perry, supra, at 340. Furthermore, in such cases the plaintiff “may pursue both legal theories of recovery until an occasion for an election of remedies arises. (Ibid., emphasis added.) “Where the remedies sought are inconsistent, a pleading should segregate the allegations requisite for each theory in distinct counts. (Ibid., emphasis added.) Witkin adopts this view (Witkin, California Procedure, 139) as does Matthew Bender (10-104 California Forms of Pleading and Practice–Annotated 104.41.)

Breach of Contract CAN NOT become Negligence

Where Plaintiffs’ counsel elects to seek contract remedies (i.e., attorney’s fees) and fails to segregate the tort and contract causes of action, it’s another story.

Plaintiffs’ counsel, have no excuse as to this issue. In one instance, Plaintiffs’ counsel who were both trial and appellate counsel in Perry, presented a case to the court for consideration where they tried to do just that (after claiming they had “forgotten” to mention Perry in their pleading). It was argued, in opposition, that Plaintiffs’ counsel were familiar with the court’s instruction in Perry, and the Court was left with the possible conclusions that counsel (1) never intended to claim negligence and were raising this issue on the eve of trial to salvage their case; (2) never intended to claim negligence and were attempting to mislead the court and opposing counsel by their contention that the claim has been sufficiently raised by a complaint that did not set forth negligence as a separate count; or (3) intended that the claim of negligence be stated in the claim, but intentionally left their complaint vague for the purpose of misleading defendants until a last-minute amendment.

The first option would be understandable, but should not be allowed due to prejudice to the Defendants to allow an amendment of a complaint on the eve of trial (literally, in this particular instance, the day of trial). The other options involve such chicanery that neither can be condoned. Defense counsel would presume that a negligence claim was not intended, since the only way it could have been intended would mean that Plaintiffs’ Counsel also intended to mislead Defense counsel and the court. As it is clear that one should not infer wrongful intent based only on the end result we must conclude that no negligence was intended to be pled.

A review of Perry shows that it has been cited in both judicial opinions and secondary treatises. However, in none of those instances, was it cited for the proposition that a negligence cause of action can be found where only a breach of contract has been pled. The primary reasons for which Perry has been cited are: (1) where a tort action is pled and the prevailing party seeks to recover attorney’s fees under the contract from which the tort claim arose (where the contract has been pled in substance)¹; and (2) for the proposition that the same act may be both a breach of contract and a tort and a plaintiff may plead both causes of action.²

In the only instance where the court was required to determine whether a plaintiff prevailed on a tort or contract theory, the court held that the complaint was for breach of contract, as pled, not for fraud and upheld the award of attorney’s fees under the contract. (Boyd v. Oscar Fisher Co. (1989) 210 Cal.App.3d 368.) In any similar instance, the court would be being asked to interpret the complaint to include a negligence cause of action or allow amendment of the complaint to state a negligence cause of action.

In either event, Defendants are generally prejudiced severely. No timely notice is usually given that the plaintiffs plan to proceed on a tort theory until the request for amendment³. It becomes important when the agent is not a party to the “broker-client” contract, but would presumably be required to defend against a tort claim for negligent performance of that broker-client contract. When no defense has been prepared to a negligence cause of action, because none was plead, it creates a severe hardship upon the agent.

The Same Logic Applies to “Fraud” vs. “Constructive Fraud” Claims.

Amendment is not allowed to transform one cause of action into another. In Winberry v. Lopez (1960) 178 Cal.App.2d 672 [3 Cal.Rptr. 245], intentional fraud was pled and evidence came in to prove elements of intentional fraud. The appellant asked for an amendment according to proof, to change his pleading to a theory of constructive fraud. “Having pleaded and tried his case upon the theory of actual fraud, appellant cannot be heard to say now that he made out a case for constructive fraud . . .” (Id. at 678.) In its reasoning, the court looked to the prejudice that the amendment would cause to the opposing party, in this case shifting the burden unfairly which would have been highly prejudicial to the opposing party. (Id.)

What is the difference? An intentional fraud requires that the plaintiff prove intent and reliance on the misrepresentation before the plaintiff can receive an award of damages. In a constructive fraud claim, the plaintiff need only prove the existence of a “fiduciary” relationship, and the burden then shifts to the defendant to prove that the defendant met the standard of care. In addition, and more importantly, “reliance” is not an element in a constructive fraud case. The plaintiff could win, even if it is shown that the plaintiff did NOT rely on the misrepresentation !

When a Plaintiff seeks to transform their intentional fraud claim to one of constructive fraud, they are really seeking to unfairly shift the burden and to allege a cause of action for breach of fiduciary duty. To allow them to do so at this late juncture would severely prejudice the Defendants and is not allowed under Winberry.

See, e.g., Lynch v. Warwick (2002) 95 Cal.App.4th 267 (involving a claim of legal malpractice in a criminal matter, where plaintiff failed to prove innocence); Fairchild v. Park (2001) 90 Cal.APp.4th 919; Michaelis v. Benavides (1998) 61 Cal.App.4th 6 (court did not allow negligence claim against corporate officer to be recharacterized as a contract action; N. Am. Chem. Co. v. Superior Court (1997) 59 Cal.App.4th 764.

It is anticipated that Plaintiffs may contend that notice of a negligence claim was given by use of the phrase in paragraph 18 of their 2^nd Am. Comp. “They failed to act in a competent . . . manner to secure plaintiffs’ financing.” This phrase does not give notice that there is a negligence claim being made because it is wholly irrelevant to even the breach of contract claim as securing financing was not an obligation under the “verbal agreement” . . . “to act as a dual agent” . . . “in the transaction.” In the role of loan or broker, there is no “dual” agency. The verbal agreement can only have applied to the role of real estate broker. In addition, the failure to plead any additional terms of the alleged verbal agreement negates any argument that there was adequate notice of plaintiffs’ claim.