This one is for the birds… (we can’t make this stuff up!).  According to an article in the Beaufort (SC) Gazette, two Hilton Head siblings were recently awarded $4.25M in a pet turkey lawsuit:

What began as a dispute between neighbors about pet turkeys ended Friday when a Beaufort County jury awarded two Hilton Head Island siblings $4.25 million in damages.

In 2004, defendant Ralph Dupps accused Robert and Jennifer Klippel of taking his turkeys from his Sea Pines home and setting them free. The charges were dismissed, and the Klippels sued Dupps. They claim he accused them falsely and that their wrongful arrest caused public humiliation and emotional distress that drove Robert Klippel to alcohol and Jennifer Klippel to the use of sleep aids and depression medication.

Much of the plaintiffs’ claims revolved around arguments that the turkeys shouldn’t have been on Dupps property in the first place.

The issue dates back to the fall of 2004 when, according to the Klippels, the birds began roaming their yard, defecating, creating traffic issues and scaring Robert Klippel’s son.

After reporting the turkeys to Sea Pines Security, an officer allegedly told the Klippels that Dupps had set them free. The officer offered to help catch the birds and later suggested shooting them, according to the Klippels’ complaint.

The Klippels admitted they took the turkeys to a wildlife preserve, saying it was out of concern for the birds’ safety.

When Dupps arrived home to find his birds missing, he contacted authorities….

Three law enforcement officials told Dupps no crime had occurred, Kippel attorney Richard Rosen said. Yet, Dupps proceeded to get arrest warrants for the Klippels from a Hilton Head Island judge and sought out his brother-in-law, a special prosecutor in the 14th Circuit Solicitor’s office at the time, to prosecute the case, Rosen said.

Rosen suggested to jurors that Dupps should pay $10 million in damages for “seeking revenge on the Klippels” and subsequently causing them great distress.

Our opinion: $4.25 million ought to clean up a LOT of turkey poop!

Real estate agents and talking on the phone while driving go together like milk and cookies.  Just be sure California doesn’t turn it into sour milk!

Look at these fines and think again about the cost of that hands-free cell phone headset:

• Drive using wireless phone not hands free, first offense: $148
• Drive using wireless phone not hands free, for each subsequent offense: $256
• Drive using wireless device to send, read or write text: $148

According to the CHP, “The base fine for the FIRST offense is $20 and $50 for subsequent convictions.  However, with the addition of penalty assessments, the total amount can be more than triple the base fine.”

And with California scrambling for any and every opportunity to add revenue to our starved coffers, you can be sure those penalty assessments will be added!

A mortgage broker who took out astronomical loans on behalf of “straw buyers” has been sentenced to a five-year term in federal prison (“the big house”) for the mortgage fraud scheme.

Viktor Kobzar, a Federal Way mortgage broker, and six other associates charged in the scheme had falsified income documents to obtain loans and then siphoned money prior to attempting to resell the homes.

According to news reports, Kobzar obtained a $1.2 million loan for a house cleaner earning less than $20,000 a year.  A janitor earning $16,600 annually had his income falsified to reflect an annual income of $385,000.

Former U.S. Attorney for Seattle Jeffrey Sullivan noted that the banks extending the loans — primarily Washington Mutual and ING Bank — could have prevented the fraud by conducting “a little more due diligence.” (A janitor earning $385K a year?  Ya think?)

All six defendants have been tried and sentenced; all but one is serving time in prison (an accountant who falsified income statements got probation and 200 hours of community service).

And what of Washington Mutual and ING?  WaMu got eaten by Chase and ING just got gobbled up by Julius Baer Group, Ltd., a private Swiss bank.

And the American taxpayer?   Still choking on the leftovers.

A “hot” market just means deferred litigation. For many.

We’re not the only ones that think so. Calls from brokers, buyers and sellers tell us: time in court is coming a broker’s (and agent’s) way.

The rising real estate market covered a multitude of sins, sins which are now becoming clear. In addition, 85% ( ! ) of recent licensees hold “conditional” licenses – meaning that they only completed 1 of the 3 “required” courses to get their license in the first place. (But they promised to complete the other 2 in 18 months…)

With so little experience and training, mistakes got made. Many were overlooked because of the profits that were made in the rising market. Now, it’s another story.

Nobody likes to “need” lawyers; but when you do, you want them to be the best.

In the event a claim is made, you need to designate specific legal representation in your E&O Policy. (Generally at the time of application or renewal.)

It’s a simple document – that can strike fear in the heart of the most experienced owner, buyer, or broker.

A Lis Pendens (Latin for: Notice of Pending Action) is recorded to advise a potential purchaser or lender of another’s claim to ownership of the real property that is adverse to the owner of record. It kills deals.

What many don’t know is that you must follow very strict rules in recording that lis pendens, or it is invalid. And if the owner brings a motion to expunge it, and wins, the owner “shall” be awarded attorney fees. In some cases, the owner can get attorney fees, even if the lis pendens is voluntarily withdrawn before the hearing on an expungement motion.

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.

“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.

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

Corporations

Corporations are business entities separate and apart from its 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.

“Puffing” is an art; but where’s the line from “puff” — to problem?

You want to get attention focused on your listing, as opposed to the swarm of others out there. You’re under obligation to the client is to make the property sound as attractive as possible – from a buyer’s perspective; whether it’s the sunny kitchen, or the stream of rental income. “Puffing” is an art; but where’s the line from “puff” — to problem?

In a recent case we handled, the agent described a property as having “legal duplex” in an MLS listing. The MLS also said “Check w/ City.” The Transfer Disclosure Statement said: “Property was purchased at a trustee’s sale…, and is being sold strictly for profit, tax records show the property as a duplex, however property is being used as a triplex, sellers have not checked county records to see whether or not work was done w/permits.”

When checking with the County tax assessor, the property was assessed as having two units, and when checking with the City, we found there were two, separate-address, permit files for the property, each for an individual unit – one commercial, one residential.

After the close of escrow, the buyer began working on the property, without getting a permit. The City red-tagged the job, and while conducting inspections, discovered the bootlegged 3rd unit in the residential building, and required its removal. The buyer never used or rented the commercial part of the property, and later, it was torn down – thus converting the property into a single family dwelling (SFD).

The buyer then sued the seller, and the seller’s agent for fraud – claiming the misrepresentation in the MLS induced him into buying a property he thought was a “duplex” when it was in fact only a SFD. An arbitration followed. The seller won, but the listing agent lost and was required to pay the buyer $45,000!

The arbitrator held that Civil Code § 1088, which provides that any agent who places a listing or other information in an MLS shall be responsible for the truth of those statements, created a duty between the listing agent and the buyer. (This was not otherwise a “dual agency” relationship.) Since the buyer claimed (without any other evidence than his mere statement to this effect) that he relied on the representation of “legal duplex” in the MLS and since the buyer took that to mean “two residential units” – the arbitrator found the listing agent liable.

This is a cautionary tale on two counts:

First, be careful about what you place in an MLS.
Second, do NOT agree to binding arbitration, ever.

This buyer could not speak English, and when asked to read the errant MLS, did not read or understand the word “duplex.” In addition, the buyer made a profit when he re-sold the property. The buyer also stated in the arbitration that he would have been satisfied with 2 units, of any kind, not just residential units. The listing agent should have been cleared of liability because the buyer could not have “relied” on an MLS statement he couldn’t read, there were no damages since he made a profit, and there was no “material” negligent misrepresentation because the buyer was satisfied with any kind of units, so long as there were two. Yet in this case, the arbitrator found against the uninsured (!) listing agent, for $45,000.

Arbitrators can be arbitrary. And an arbitration has no right to appeal.