The Basics on Foreclosure in California

By Josh Martin

When a borrower defaults on a loan secured by California real property, foreclosure is the most common remedy employed by the lender.  In California, there are two ways by which a lender may foreclose: through nonjudicial foreclosure (commonly referred to as a “trustee’s sale”) or through a judicial foreclosure.

Most California deeds of trust contain language allowing the trustee named in the deed to conduct a sale of the real property securing the loan in the event that the borrower defaults on her obligation.  This enforcement action is referred to as nonjudicial foreclosure or private sale or “trustee’s sale.”  It is much more common than judicial foreclosure primarily because it is far quicker and less expensive than judicial foreclosure.  It requires no court supervision and, if conducted properly, constitutes a final adjudication of the borrower’s (and lender’s) rights with regard to the property.

The downside to the lender in a nonjudicial foreclosure is that by foreclosing nonjudicially he gives up his legal right to collect the unpaid balance on the loan from the defaulting borrower.  Suppose, for example, that Betty Borrower has defaulted on her $500,000 home loan from Larry Lender.  Betty’s loan is secured by a deed of trust upon the beachfront condo she purchased with the loan money, and the condo, lovely as it is, is now worth only $250,000.  If Larry Lender forecloses nonjudicially upon Betty, the condo will then be sold at a public auction.  There, Larry will  either obtain the condo (worth  $250,000) by making the highest bid at the auction or he will collect the proceeds from the winning bid– up to the amount owed on Betty’s loan.  Either way, by foreclosing nonjudicially Larry forfeits his legal right to collect any unpaid balance, any  “deficiency,” owing to him on the loan after the foreclosure sale.  This anti-deficiency rule, so-called because it prevents lenders from enforcing collection of unpaid balances (“deficiencies”) on loans subsequent to nonjudicial foreclosure, is codified in the California  Code of Civil Procedure.  The rule contains numerous exceptions, discussion of which is outside the scope of this brief blog article.

A judicial foreclosure is a lawsuit brought by a lender to foreclose upon the property securing his loan.  It is called a judicial foreclosure because it is a formal court action and because the court supervises the foreclosure.  If the lender is successful in prosecuting the foreclosure action, he obtains a judgment ordering the sale of the property which is then conducted by a “court-appointed levying officer.”

The major advantage to a judicial foreclosure is that the lender not only receives money from the court-supervised sale of the property–or the property itself if the lender is the high bidder– but also may obtain a judgment against the borrower personally for any deficiency (the balance owed on the loan) after that sale.  So, in the example above, if Larry Lender knows that Betty Borrower has $250,000 resting in her bank account but has decided to stop making payments on the loan–pretty as the condo is, it has turned out to be a poor investment– Larry Lender might want to consider a judicial foreclosure as it would allow him to obtain a personal judgment against Betty and obtain proceeds from a court-supervised sale of the property or, alternatively, the property itself if Larry is the high bidder at the sale.  The principal disadvantage to judicial foreclosure actions is that they are lawsuits and, as such, they take much longer than trustee’s sales. In addition, after a judicial foreclosure sale the borrower retains the right to regain ownership of the property by paying the foreclosure price plus certain other amounts for one year following the judicial foreclosure sale.

For more information , contact Josh Martin at jmartin@sjmslaw.com.

 

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JOBS Act Helps Start-Ups Raise Money

On April 5th, President Obama signed into law legislation that should make it easier for entrepreneurs to start and grow businesses on the Central Coast.  That legislation is the JOBS (Jumpstart Our Business Startups) Act.  The goal of the new law is to make it easier for small and growing companies to access capital investment.  There are a couple of components of the Act that could have a significant impact on entrepreneurs in our community.

A little background: A general principal of securities laws is that ANY sale of securities, including the sale of common stock by a new company to investors, must be registered with the SEC unless an exemption from registration is available.  Registration is a complex, expensive process and being a public, registered company is complex and expensive, which is why most small companies prefer to stay privately held.  However, the exemptions from the  registration requirements have restrictions that can make it tough for start up companies to use them to raise the money they need.  The JOBS Act aims to ease some of these restrictions in several important ways.

Regulation A under the Securities Act of 1933 is one such exemption from the registration requirement.  It has generally been available for companies looking to raise no more than $5 million in a 12-month period but it has not provided an exemption from registration under STATE securities laws.  This relatively low limit and the need to still find an exemption under state laws has meant that Regulation A has rarely been used by companies looking to raise capital.  The new Act raises the limit of an offering under this exemption to $50 million and offers an exemption from state registration for securities sold to qualified purchasers.  These changes could revive Regulation A as a meaningful way for companies to raise equity financing.

Regulation D also offers exemptions from registration, with Rule 506 under Reg D being an exemption that most companies use to conduct a private sale of stock.  Yet, Rule 506 has had a significant obstacle to capital raising, one that has either made it difficult for start-up companies or that companies have inadvertently violated, with potentially significant consequences.  The obstacle is a prohibition on general solicitation or advertising of a stock offering.  This prohibition is broader than most people realize.  If an interview of the CEO of a new company in the local newspaper about the company’s great new product includes the CEO’s offhand remark that her company is seeking investors, that is considered advertising of the sale of stock.  If the founder of a start-up pitches his company’s investment opportunity at an investment forum that is open to the general public, that is considered advertising of the sale of stock.  If an enterprising marketing executive mails a letter about his company’s investment opportunity to all the recent customers of the local Mercedes and Lexus dealers, that is considered advertising.

Generally, soliciting anyone outside the circle of personal connections of the principals of a company has been considered a general solicitation or advertising.  This is a huge barrier, as most new entrepreneurs don’t run in the same circles as their would-be investors.  The JOBS Act removes that ban on advertising in a Rule 506 private offering, as long as the company takes reasonable steps to make sure that it only sells to accredited investors, which are persons that meet certain wealth tests.  This change may make it significantly easier for small companies to find investors and raise capital.

Lastly, I want to touch on the area of the Act that sounds the most exciting and cutting edge, but which only time will tell how useful it will be in practice.  That is crowdfunding.  The term generally refers to offerings in which a company raises a significant sum through a large number of people investing small amounts.  Crowdfunding has been taking place already in a donation or retail sales context: like a band saying send us $100 now to help us raise the money we need to record a CD and we’ll send you a signed one when it’s done.  However, the contributor does not get an interest in the company or any share of profits.

The JOBS Act changes this by allowing private companies to raise up to $1 million of capital per year from large pools of non-accredited (generally, smaller) investors.  It is anticipated that most of crowdfunding will take place through investment “portals” on the Internet.  However, as finally enacted, the law has significant restrictions on the company, the investors, and the investment portals: the company must file certain information with the SEC, including names of officers, directors and major stockholders, a business plan, anticipated use of proceeds from the offering, and financial statements.  The investment portals must be registered with the SEC, provide certain disclosures, and conduct background checks on the directors, officers, and major stockholders of the company looking to sell stock through the portal.  There is some apprehension that the regulations on crowdfunding may make it unattractive to legitimate entrepreneurs but that the concept may provide a façade behind which small investors can be swindled out of large aggregate sums.  We’ll see how that plays out and whether new businesses can find a way to make this work for them.

It is important to note that most of the provisions of the Act require the SEC to adopt rules to implement the new law.  These rules will further define the new landscape and provide guidance to entrepreneurs.  So stay tuned!

For more information, contact June McIvor at JMcIvor@sjmslaw.com.

 

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The Basics on Short Sales and Deeds in Lieu

By Josh Martin

Residential property value is a favorite topic at water coolers, little league baseball games, pizza parlors after the game, or anywhere else in California where two adults are engaged in conversation.  Indeed, real property value  has been an obsession of sorts in California for several generations, with many believing that a constant increase in the value of their homes was as reliable as an annual property tax bill and staking their financial future on that belief.

Unfortunately, that bubble has been burst.  However, the conversation continues and now necessarily includes the subject of foreclosure and alternatives to foreclosure such as short sales and deeds in lieu, as foreclosures continue to pile up and depress the value of California real property throughout much of the State.

As a litigator with experience in the area of real property law, I have observed some confusion and misinformation among laypersons and lawyers alike regarding the meaning of the terms short sale and deed in lieu of foreclosure, how each works, and the differences between them.  Below is a very brief explanation of short sales and deeds in lieu, including their differences and why lenders will even consider them.

A short sale is a sale of real property in which a lender agrees to reconvey its deed of trust upon the property in exchange for payment of less than the full balance due on the underlying loan.  It is called a short sale because the selling price is short of the amount required to fully satisfy the debt.  It is an alternative to foreclosure that is typically initiated by a borrower saddled with a piece of real property whose value is less than the amount she owes on her loan and who is unable to make monthly payments on the loan.

A deed in lieu of foreclosure or “deed in lieu” is a deed given by the borrower to the beneficiary named on the deed of trust (usually the lender) by which the borrower simply transfers her interest in the real property to the lender.  Often times, the lender will agree to cancel the note and terminate the previous loan relationship in exchange for the property transfer.

The major difference between a short sale and deed in lieu is that the lender in a short sale never takes title to the property while the lender in a deed in lieu does.  However, the major incentive to the lender in both instances is basically the same: avoid the cost, delay, and uncertainty of foreclosure.  For instance, rather than paying a foreclosure trustee and attorney fees and waiting four months or longer for a trustee sale to occur, the lender can minimize transaction costs by simply accepting a deed in lieu.  In the case of short sale, the lender can also avoid the costs of marketing and selling the property, which can be significant.

Of course, short sales and deeds in lieu are very popular with borrowers in default or at risk of defaulting on a residential home loan because they generally impose far less damage to a borrower’s credit than a foreclosure.  But, as seen above, there are benefits to a lender as well.  Whether you are a lender or a borrower, a proper understanding of these terms may better your understanding and assist your contribution to the conversation.

For more information, contact Josh Martin at JMartin@sjmslaw.com.

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Clarity for Employers on Meal and Rest Breaks

On April 12, the California Supreme Court issued the long-awaited decision in the case of Brinker Restaurant Corp. v. Superior Court.  The decision has been eagerly anticipated by the employment  community for several years, as it was hoped that the Supreme Court would clarify the responsibility of employers with respect to meal and rest breaks in California.  While the case also addressed issues relating to certification of class action lawsuits, the primary focus of attention is on the Supreme Court’s reasoning with respect to meal and rest breaks.

One Meal Period Is Required For Each Five Hour Shift, Not For Each Five Hours of Work. Labor Code section 512(a) provides, with limited exceptions, that “an employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes.”  Plaintiffs argued that this language obligated the employer to provide a meal break after every five hours on the job (“rolling meal period”) so that an employee who received a meal break after two hours of work would be entitled to a second meal break after seven hours on the job (five hours later).  The Supreme Court rejected this argument, holding that “an employer’s obligation is to provide a first meal period after no more than five hours of work and a second meal period after no more than 10 hours of work.”

Employers Must Provide Meal Periods But Need Not Insure That No Work is Performed. Plaintiffs argued that the employer is obligated to insure that the employee performs no work during the meal break, such as answering calls, checking email, responding to inquiries, etc.  The Supreme Court rejected this argument, holding that “the employer is not obligated to police meal breaks and ensure no work thereafter is performed.”  At the same time, the Supreme Court cautioned that employers “may not
undermine a formal policy of providing meal breaks by pressuring employees to perform their duties in ways that omit breaks.”  The Supreme Court held that “an employer’s obligation when providing a meal period is to relieve its employee of all duty for an uninterrupted 30-minute period” and that “the employer satisfies this obligation if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so.”

One Rest Break is Required for Each Four Hours or “Major Fraction” (50%) Worked. The Wage Orders require an employer to provide each employee who works more than 3.5 hours in a day with a 10-minute rest period for each four hours or “major fraction” worked.  The Supreme Court interpreted a “major fraction” to be more than 50% (2 hours), and held that an employee is entitled to one 10-minute rest period for work shifts lasting from 3.5 hours to six hours; two 10-minute rest periods for work shifts lasting from six hours to 10 hours; three 10-minute rest periods for work shifts lasting from 10 hours to 14 hours, etc.

Rest Breaks Should Occur in the Middle of the Work Period if Practical. The Wage Orders specify that rest breaks “as practicable shall be in the middle of each work period.”  The Supreme Court concluded that employers have “a duty to make a good faith effort to permit rest breaks in the middle of each work period, but may deviate from that preferred course where practical considerations render it infeasible.”  While the Supreme Court suggested as a general rule that one rest break should fall on each side of the meal period during a standard eight-hour shift, “shorter or longer shifts and other factors that render such scheduling impracticable may alter this general rule.”

The Brinker decision provides some much needed clarification on employer responsibilities with respect to meal and rest breaks.  For more information, please contact Dave Juhnke at  djuhnke@sjmslaw.com.

 

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Employers Get Respite from NLRB Poster Requirement

D.C. Circuit Issues Injunction Against NLRB Poster Requirement. On April 17, the U.S. Court of Appeals for the District of Columbia issued an emergency injunction prohibiting implementation of the rule promulgated by the National Labor Relations Board (NLRB) which would have required all employers to post a “Notice of Employee Rights” by April 30, 2012.

The NLRB adopted the rule in August 2011 requiring all private employers regardless of size to post a notice by November 14, 2011 advising employees of their right to unionize and outlining various forms of unlawful employer conduct which should be reported to the NLRB.  After significant outcry from the business community, the NLRB delayed implementation of the notice requirement until January 31, 2012 to allow for enhanced education and outreach to employers, particularly those who operate small and medium sized businesses.

Two lawsuits challenging the poster requirement were filed by the National Association of Manufacturers (U.S. District Court for District of Columbia) and the United States Chamber of Commerce (U.S. District Court for South Carolina).  The NLRB agreed to delay implementation of the poster requirement until April 30, 2012 so that the courts might consider and rule in those cases.

On March 2, 2012, the U.S. District Court for the District of Columbia upheld the NLRB’s right to require the poster but rejected the NLRB’s authority to impose penalties for employer violations.  The National Association of Manufacturers appealed that decision, and on April 17 the U.S. Court of Appeals for the District of  Columbia issued an emergency order enjoining implementation of the poster requirement pending resolution of the appeal in the fall of 2012.

On April 13, 2012, the U.S. District Court for South Carolina entered an order completely invalidating the poster requirement on the ground that the NLRB lacked authority to issue the rule.  That decision undoubtedly will be appealed to the U.S. Court of Appeals for the Fourth Circuit.  Any inconsistency between the Circuit Court decisions may well end up before the U.S. Supreme Court.

In the meantime, the good news is that employers are not obligated to comply with the NLRB poster requirement pending resolution of the ongoing court actions or further court order.  For more information, please contact Dave Juhnke at djuhnke@sjmslaw.com.

 

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SJMS Sponsors Soccer Film at SLO International Film Festival

SJMS is excited to co-sponsor the film Pelada at the San Luis Obispo International Film Festival.   Pelada is the story of the people who play soccer for the sheer love of the game–a film of two former college soccer stars, Luke and Gwendoyn, who travel to 25 countries to explore and share their passion for soccer.  The screening will be at 11:00 a.m. on Sunday, March 11 at the Downtown Cinemas.  Luke Boughen and Gwendolyn Oxenham will be at the screening for a Q&A.  Come join us!   See the trailer here.

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SJMS Sponsors Entrepreneurship Forum

SJMS is excited to sponsor the first Entrepreneurship Forum of 2012 of the Cal Poly Center for Innovation & Entrepreneurship. The theme is “Breaking the Mold — The New Start-up Paradigm.”   It will take place on Monday, February 13 from 4:30 to 7:00 p.m. at the Cal Poly Performing Arts Center.  A panel discussion will feature Amy Kardel of Clever Ducks, Paul Pluschkell, CEO and founder of Spigit, Brad Roldan of Bandwidth, and Scott Stanfield, CEO of Vertigo Software Inc.  Come join us at this stimulating event!  Click here for more info.

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Josh Martin One of SLO’s Top 20 Under 40

SJMS attorney Josh Martin was honored as one of San Luis Obispo County’s top young business and community leaders by being named as a Top 20 Under 40 Award winner.  Josh was recognized for his professional contributions to the local legal community and for his community contributions through the Arroyo Grande Chamber of Commerce and the Greater Pismo Beach Kiwanis Club.

Read more and see photos in The Tribune.

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Firm Announces New Name

We are excited to announce that, as of February 1, 2012, our new firm name will be Sinsheimer Juhnke McIvor & Stroh, LLP.  The name recognizes the contributions of partner Herb Stroh, a Certified Specialist in Estate Planning, Trust, and Probate by
the State Bar of California Board of Legal Specialization.

“I am excited about the position of our firm for the future,” said Warren Sinsheimer.  “We currently have in place a terrific group of attorneys who provide exceptional legal service to our clients in core practice areas.”

About Sinsheimer Juhnke McIvor & Stroh, LLP

Sinsheimer Juhnke McIvor & Stroh, LLP, is the pre-eminent business law firm in San Luis Obispo County, California.  Founded in 1978, SJMS represents businesses from a wide range of industries in all stages of their life cycle in sophisticated business transactions and in complex commercial litigation. Areas of practice include Business Transactions, Business Litigation, Trust and Estates, Intellectual Property and Real Estate.  Current partners in the firm are Warren Sinsheimer, Dave Juhnke, June McIvor and Herb Stroh.

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Locals Only Job Fairs Fuel SLO Economic Strategy

Implementation of the SLO County Economic Strategy Project continues to take shape!  The Knowledge & Innovation Cluster is teaming up with Cal Poly and Cuesta College to offer two job fairs for local employers only. Cal Poly: Feb 23; Cuesta: March 28.

SJMS is proud to be a part of this project.  This effort is connecting businesses with the wealth of talent coming out of these institutions and showing students it is possible to stay here after graduation.  Register your business to participate!  Link to Registration

 

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