Knapp, Petersen & Clarke is proud of the community involvement of its employees. Attorneys, paralegals, and staff members have served on, chaired, and continue to volunteer their time to a broad variety of community programs.

I’m particularly pleased to announce that two of KPC’s attorneys, Steve Garcia and Greta Hutton, have been appointed by the mayors of their respective home towns to serve as planning commissioners, putting their legal and real property skills to work for those communities.

Steve Garcia was recently appointed by Mayor David Rose to the South Pasadena Planning Commission, where he will serve a three-year term. The South Pasadena Planning Commission is responsible for proposing changes to the zoning codes and is empowered to approve conditional use permits, variances, and other exceptions to the zoning codes. The Commission works closely with and oversees the city’s Community Development Department. The Commission also monitors zoning code enforcement within the city. Currently, the Commission has two lawyers and three architects, each of whom is a resident of the City of South Pasadena.

Greta Hutton was recently appointed by Los Angeles Mayor James Hahn to serve as a Commissioner on the South Valley Area Planning Commission, where she will serve through June 2003. She was also elected Vice President by the Commission’s members. The Commission oversees major planning for most of the communities within the south San Fernando Valley. Greta’s appointment to the Commission comes at a very turbulent time, where a movement exists to have the Valley secede from the rest of the City of Los Angeles. Greta will help guide the communities of Toluca Lake, Cahuenga, North Hollywood, Valley Village, Studio City, Sherman Oaks, Encino, Reseda, West Van Nuys, Van Nuys, Tarzana, Canoga Park, Winnetka, West Hills, and Woodland Hills, deciding on both long-term planning and short-term development issues. Greta joins the Commission following a two-year term as a member of the board of the Community Redevelopment Agency (CRA) of the City of Los Angeles, to which she was appointed by former Mayor Richard Riordan.

The South Valley Area Planning Commission will consider the Van Nuys Airport Master Plan at its next meeting. The Van Nuys Airport is one of four airports owned and operated by Los Angeles World Airports. Van Nuys Airport contributes $1.2 billion dollars annually to the Southern California economy and is the sixth busiest airport in the United States in terms of takeoffs and landings.

Both Steve and Greta continue to work with the firm’s Title and Litigation Departments.

Cynthia A. Trangrsud

Ms. Trangsrud serves as President of the firm and Chair of its Executive Committee.

EMPLOYMENT LAW

Major Changes for State Employers in 2002: Domestic Partners; English-Only Workplaces; Lactation Accommodation; At-Will Employment; Unemployment Insurance; and Wage and Hour Law Changes

Effective January 1, 2002, California employers will face numerous changes in state labor laws.

Domestic Partnerships (AB 25): Allows a terminated employee to collect unemployment insurance if he/she leaves a job to relocate with a domestic partner; allows domestic partners to use kin care (sick leave) to care for each other or the other partner’s child.

English-Only Workplace (AB 800): Limits an employer’s ability to adopt or enforce a policy requiring English only be spoken in the workplace.

Lactation Accommodation (AB 1025): Requires employers to reasonably accommodate employees who wish to express breast milk at work, i.e., increased break time and privacy.

At-Will Exception (SB 20): Prohibits at-will termination of janitors and building maintenance personnel under specified conditions.

Unemployment Insurance (SB 40): Increases UI benefits, expands eligibility to workers who are only available part-time, keeps WARN Act payments from affecting UI eligibility, and changes base period calculation.

Overtime Exemption (SB 1208): Creates an overtime exemption for doctors paid on an hourly basis.

Drug Testing (SB 871): Places new requirements and penalties on motor carrier employers who are subject to federal Department of Transportation drug and alcohol testing requirements, including trip damages if a driver injures another person.

Garnishments (AB 1426): Adds a new penalty for failure to comply with child support garnishments and authorizes court-ordered electronic transfer of garnishments from the employer’s bank account.

Temporary Nursing Staff (AB 1643): Imposes new requirements on employment agencies that provide temporary certified nurse assistants or licensed nursing staff for long-term health care facilities, including background checks.

Governor Vetoes Workers’ Compensation Increase
and Other Labor Laws

Governor Davis vetoed the following legislation:

Workers’ Compensation (SB 71): Would have increased workers’ compensation benefits and modified the administration of the workers’ compensation system.

Employee Computer Privacy (SB 147): Would have prohibited employers from monitoring employee e-mail or other computer records without first advising employee of the employer’s workplace privacy and monitoring policy.

Sick Leave (SB 1197): Would have prohibited employers from enforcing absence control policies against employees who use sick leave to care for a child, spouse, or parent (kin care).

Sexual Harassment (SB 208): Would have allowed a human resources professional without a private investigator’s license to be hired as an independent contractor to conduct workplace harassment investigations. The California State Department of Consumer Affairs issued an administrative interpretation earlier this year stating that a private investigator’s license is required to conduct third-party investigations, unless the investigator is an attorney.

More Information

For more information, call Greta T. Hutton of Knapp, Petersen & Clarke at (818) 547-5108. For your convenience, we have put together a package containing copies of the new legislation that is available on a complimentary basis. Interested parties should contact Ms. Hutton.

Greta T. Hutton

Ms. Hutton is a Principal in the firm’s Employment and Commercial Litigation Groups. E-mail: gth@kpclegal.com.

ADR

Two Different Arbitration Clauses Found “Unenforceable”

In the last few months, two cases have dealt blows to parties seeking to enforce arbitration provisions, one dealing with a dispute over the terms of a “reverse mortgage” and the other in a employer-employee dispute.

In Flores v. Transamerica Homefirst, Inc., 113 Cal. Rptr. 2d 376 (2001), the California appellate court examined a clause inserted by a lender in its reverse mortgage documents. In that matter, Transamerica, which was reportedly “the only lender offering the subject mortgage at the time the documents were signed,” included an arbitration clause at page 11 of its 14-page printed loan document. The clause mandated that disputes between the parties be arbitrated, but contained a number of carve-outs whereby many of the proceedings that could logically be instituted by Transamerica were exempt from arbitration. Among other things, the arbitration clause exempted any foreclosure, injunctive, or other remedy before arbitration.

While there exists a strong public policy in favor of resolving disputes by arbitration, the trial court in Flores found that the policy did not extend to this “one-sided” clause, which it held was unenforceable as a “contract of adhesion,” since the borrower had no opportunity to negotiate the clause that realistically applied to “claims of the borrower against [the lender], but not vice versa.”

At least one commentator has contrasted the facts of this case with the arbitration provisions commonly found in real estate purchase contracts, where the buyer and seller are given the opportunity to “opt in” or “opt out” of the process by separately initiating the arbitration provisions and where there exists a parity in the remedies available to both parties.

Practice Tip: Parties desiring to have contractual disputes handled in an arbitration forum should review their agreements and consider: (1) creating separate arbitration clauses to avoid the “contract of adhesion” issues described above; (2) give parties the right to “opt in” or “opt out” at the time of signing and (3) where possible, assure that there is a parity in the remedies available to both parties in the arbitration forum.

In January 2002, the U.S. Supreme Court decided the case of Equal Employment Opportunity Commission v. Waffle House, dealing with the mandatory arbitration provisions in agreements between Waffle House and its employees. In Waffle House, the EEOC brought suit on behalf of an employee who suffered a seizure at work and was subsequently fired by Waffle House, claiming that the firing violated the provisions of the Americans With Disabilities Act (ADA). Waffle House defended, asserting that the Federal Arbitration Act (“FAA”), read with the clause in the employment agreement, bound the EEOC to arbitrate its action against Waffle House. The court examined the FAA policy, noting that “despite the FAA policy favoring arbitration agreements, nothing in the FAA authorizes a court to compel arbitration of any issues, or by any parties that are not already covered in the Agreement.” Based on that finding, the court held that “an agreement between an employer and an employee to arbitrate employment-related disputes does not bar the EEOC from pursuing victim-specific judicial relief, such as back pay, reinstatement and damages in an ADA enforcement action.”

Practice Tip: While employers have been leaning toward including arbitration provisions in agreements with their employees, in light of the Waffle House decision, the parties should reconsider, since they could be bound to arbitrate cases brought by employees, while facing administrative proceedings on the same sets of facts. Careful drafting might give the employer the right to consolidate arbitration proceedings into court proceedings, in the event that a third party steps in to litigate a matter that would otherwise be arbitrated.

James M. Phillippi

James Phillippi manages the firm’s Real Estate and Construction Law Department and is a construction arbitrator with the American Arbitration Association. Complimentary copies of the Transamerica and Waffle House cases can be obtained from Mr. Phillippi, by contacting him at (818) 547-5130 or jmp@kpclegal.com.

INSURANCE

First-Party Loss Adjusting and the Statute of Limitations

In an action stemming from the Northridge earthquake, the California Supreme Court held an insurance adjuster’s inaccurate estimate of covered property damage which induces the insured from presenting a claim may act to estop the insurer from asserting the policy statute of limitations, when the insured belatedly discovers and asserts a claim for additional damages. The court’s holding has a broad impact on all forms of first-party property coverage.

In Vu v. Prudential Property & Casualty Company, 26 Cal.4th 1142, 113 Cal.Rptr.2d 70 (2001), decided November 5, 2001, the court reaffirmed the longstanding rule that an insurer’s unqualified denial of coverage will start the running of the statute of limitations. But an insurer may be estopped to raise the statute of limitations defense if the insured can show he refrained from bringing a timely action because he reasonably relied on the insurer’s factual misrepresentation concerning the nature and extent of his damages.

Within weeks of the January 14, 1994, earthquake, Prudential’s adjuster inspected Vu’s home and provided an itemized worksheet of the damages, which totaled only $3,962.50, an amount significantly below the policy’s $30,000 deductible. Relying on Prudential’s inspection and denial of his claim, Vu took no further action until September 1995, when he discovered substantial additional damage which far exceeded the deductible. Vu promptly informed Prudential and requested coverage for this newly-discovered damage. Prudential denied the claim on the ground that the policy’s one-year statute of limitations had expired.

The California Supreme Court reaffirmed its longstanding decision in Neff v. New York Life Ins. Co., 30 Cal.2d 165, 180 P.2d 900 (1947), that a denial of coverage, even if phrased as a “representation” that the policy does not cover the insureds’ claim, offers no grounds for estopping the insurer from raising a statute of limitations defense because a denial of coverage is not a misrepresentation of fact.

But in Vu, the court found a possible misrepresentation of fact. The adjuster’s worksheet and explanation did not merely convey a denial of coverage or state Prudential’s interpretation of the policy. Instead, the adjuster communicated specific facts describing the nature and amount of damage and advised Vu not to file a claim because the total damage was less that the policy’s deductible.

Vu did not depend upon a showing the adjuster purposely sought to mislead the insured. The mere inaccuracy of the estimate which misled the insured was sufficient.

On these facts, the court concluded Prudential might be estopped from raising a statute of limitations defense if Vu could show that he reasonably relied on the inspector’s representation because “. . . an estoppel may arise although there was no designed fraud on the part of the person sought to be estopped. [Citation.] To create an equitable estoppel, ‘it is enough if the party has been induced to refrain from using such means or taking such action as lay in his power, by which he might have retrieved his position and saved himself from loss. . . .’  ‘Where the delay in commencing action is induced by the conduct of the defendant it cannot be availed of by him as a defense.’”

The court further rejected Prudential’s claim that Vu’s reliance was unreasonable as a matter of law. Instead, whether Vu’s reliance was reasonable depends on a myriad of factual questions, including whether Vu himself was qualified to evaluate the damage or had to rely on an expert; what Vu told the inspector about his damage; whether the inspector was qualified and, if not, whether Vu knew of his lack of qualification; whether the inspector examined the entire property and, if not, whether Vu knew the inspection was more limited; what led Vu to suspect his damage was greater than the policy’s deductible amount, and whether Vu then acted diligently after he so suspected, etc. In short, all of these issues would require resolution at trial.

Vu provides a ringing reminder of the importance of accurate first-party property damage estimates. Although arising in the earthquake coverage context, the rationale of Vu provides a broad and generic basis for insureds to excuse the passage of time for claim submission, based on the adjuster’s inaccurate evaluation of the insured’s damage. Indeed, Vu may raise questions over the finality of property damage settlements, where additional damages are later discovered.

Accordingly, adjusters need to take great care in carefully determining the extent of an insured’s property damage claim and keep an open mind if other damage is later discovered.

Peter J. Senuty

Mr. Senuty is a Director in the firm’s Insurance Coverage and Appellate Departments. E-mail: pjs@kpclegal.com.

REAL PROPERTY

Condo Association Assessment Liens Take Priority From Date of Recordation of Notice of Delinquent Assessment

In a case of first impression, Thaler v. Household Finance Corp., 80 Cal. App. 4th 1093 (2000), the First District Court of Appeal considered the relative priority of a second deed of trust and a condominium homeowner association (“HOA”) assessment lien. The court held that the assessment lien was junior to the second deed of trust, because the assessment lien took its priority from the date of the recordation of the Notice of Delinquent Assessment (“NDA”), which had recorded after the second deed of trust. It did not matter that the CC&Rs, pursuant to which the NDA had recorded, were recorded before the second deed of trust. It did not matter that the CC&Rs purported to create a “present lien.” Under the decision, homeowner associations cannot obtain a lien against a defaulting condominium owner’s condominium until a default in payment of the assessment has occurred and the NDA has been recorded. The court did confirm that NDAs are conveyances entitled to constructive notice upon recordation.

The pertinent recorded documents in the chain of title were as follows: (1) CC&Rs recorded in 1984; (2) amended CC&Rs recorded in 1985; (3) second deed of trust recorded in 1992; (4) NDA recorded under the CC&Rs in October 1997; and (5) Trustee’s Deed Upon Sale recorded in May 1998, enforcing the assessment lien.

Thayer, the grantee under the Trustee’s Deed Upon Sale enforcing the assessment lien, sued the defendant, the beneficiary of the second deed of trust, to confirm that Thayer had taken title to the subject condominium free of the second deed of trust, i.e., that the assessment lien was senior to the second deed of trust, so that the foreclosure under the senior assessment lien extinguished the junior second deed of trust.

In his first amended complaint for declaratory relief, to quiet title, and for damages, Thayer alleged: (1) the state of record title when he purchased the condominium, as described above; (2) that the CC&Rs themselves created an immediate lien against the condominium with a power of sale to enforce the lien, under then Civil Code 1356 (now Civ. Code § 1367); (3) that the lien was intended to enable the HOA to operate and maintain the condominium project; and (4) that the CC&Rs provided that the assessment lien was subordinate to first deeds of trust, which should be interpreted to mean that assessment liens are always senior to more junior deeds of trusts. The trial court sustained the demurrer to plaintiff’s first amended complaint without leave to amend. Plaintiff appealed.

The First District Court of Appeal, in upholding the ruling of the trial court, held that the second deed of trust had priority over the assessment lien, reasoning: (1) interests generally attach to real property in the order of recordation (actually from the date of creation, Civ. Code § 2897); (2) recordation of an interest against a property gives constructive notice of that interest to persons taking interests in that property thereafter; (3) the CC&Rs, although recorded prior to the second deed of trust, did not, under the law (Civ. Code § 1367) create a lien until the NDA was recorded; (4) the NDA was recorded after the second deed of trust was recorded; (5) the assessment lien, therefore, attached to the title to the condominium after the lien represented by the second deed of trust; and (6) the second deed of trust, therefore, had priority over the assessment lien. Since foreclosure of the assessment lien, i.e., a junior lien, could not extinguish the lien of the senior second deed of trust, plaintiff Thayer took title to the condominium subject to the second deed of trust.

The court rejected two arguments put forth by the plaintiff to show that the second deed of trust had been subordinated to the assessment lien: (1) that the assessment lien priority dated from the creation or recordation of the CC&Rs, and (2) that public policy considerations required that assessment liens always be given priority over liens attaching after the CC&Rs are recorded.

According to the court, the argument that the language in the CC&Rs, to the effect that the CC&Rs per se created the assessment lien, had no merit because: (1) the foreclosure documents (the notice of default, notice of sale, Trustee’s Deed Upon Sale) all recited that they were given by way of enforcing the NDA, not the CC&Rs; (2) the CC&Rs themselves provided that the assessment lien would be perfected only upon recordation of the NDA, pursuant to Civil Code section 1356 (now section 1367); (3) the fact that the CC&Rs expressly made assessment liens junior to first deeds of trust (whenever they recorded) did not mean that under the CC&Rs assessment liens were to be senior to second deeds of trust (because the CC&Rs did not provide for that, and because priority of non-first deeds of trust vis-ŕ-vis assessment liens would still be governed by the general lien priority rules, i.e., earlier recorded trust deeds have priority over later recorded NDAs); and (4) even if the CC&Rs so provided, the CC&Rs would be superceded by the provisions of the Davis-Stirling Common Interest Development Act, which contemplates that earlier recorded interests are senior to later-recorded assessment liens. It would have made no difference to the court had the Trustee’s Deed Upon Sale stated that it was given pursuant to the CC&Rs, rather than pursuant to Civil Code section 1367.

The court held that public policy considerations favored the second deed of trust holder, not the HOA. Plaintiff argued that giving priority to lien holders, whose liens attached after the CC&Rs recorded but before the NDA is recorded would permit condominium owners to overencumber their properties with senior encumbrances, before the HOA was in a position to record an NDA, thereby rendering the HOA’s assessment lien valueless. Plaintiff argued that since public policy supports the ability of the HOA to maintain the condominium project, assessment liens should take their priority from the date the CC&Rs are recorded. Plaintiff also argued that giving the assessment lien junior priority under these circumstances would mean that in order to protect its assessment lien, the HOA (meaning the individual condominium owner members) would either have to cure the defaulting condominium owner’s default under the senior deed of trust or purchase the defaulting condominium owner’s condominium at the trustee sale under the senior deed of trust. Otherwise, the HOA’s assessment lien would be extinguished by that trustee’s sale.

The court rejected those arguments, holding: (1) that the HOA could choose not to cure the default and not to buy the condominium at the senior’s trustee’s sale (notwithstanding the extinguishment of its assessment lien under that sale, the HOA would still retain its right to sue to recover unpaid assessments [Civ. Code § 1367(f)]) ; (2) that public policy favors the condominium owner’s right to make use of the equity in the condominium over the HOA’s rights as a secured creditor; (3) that plaintiff’s construction of Civil Code section 1367 (governing HOA lien assessment and foreclosure procedures) was inconsistent with the clear language of that section; (4) that it was for the Legislature to readjust assessment lien priorities, not the court; (5) that based on the clear language of section 1367, it does not matter that the monies sought to be collected through the assessment lien are used to improve the value of the deed of trust holder’s security or that it is easier for the deed of trust holder to protect his, her or its deed of trust lien against senior foreclosures than it is for the HOA to protect its assessment lien.

Alex Levy

Mr. Levy is a Principal in the firm’s Real Estate Litigation Department, specializing in the litigation of complex real property title-related disputes. E-mail: ala@kpclegal.com

Effective July 1, 2001, California recognized a new way to hold title — community property with the right of survivorship — thanks to the enactment of AB 2913. Until recently, there have been but three ways a husband and wife can hold title to property in California: community property, joint tenancy, and tenancy in common. To briefly explain the distinctions, property held as either community property or in joint tenancy is always held in equal shares with coequal rights to the property. By contrast, property held as tenants in common need not be held in equal shares or proportions. As to real property, both spouses must join in transferring title to or in encumbering community property, but either spouse alone may transfer or encumber property held in joint tenancy or as tenants in common.

Unless the spouses take their interest in a different form of vesting, the law has always assumed that all property acquired during marriage by a husband and wife is community property, provided the acquisition is not a gift from a third party or a device (property one spouse receives by a bequest in a will). In these latter two instances, the property is considered to be the separate property of the receiving spouse. If the spouses hold title as community property and one dies without a will, however, the property will pass by operation of law to the surviving spouse.

By contrast, property held in joint tenancy is viewed as the separate property of the spouses but may not be disposed of by will. Upon the death of one spouse, the property immediately becomes the property of the survivor, not subject to any bequest in a will of the deceased spouse. Property held as tenants in common is considered separate property and may be left by will to another; if there is no will, it passes to the deceased spouse’s heirs at law upon that spouse’s death.

Because of these distinctions, the law recognizes a difference from a tax perspective in the two types of co-equal vesting, community property versus joint tenancy. Suppose Hal and Wendy, who are husband and wife, acquire a home for $100,000. That $100,000 then becomes their taxable basis in the property, so that if they sell the property, they are taxed only on the gain measured by whatever price the property brings in excess of $100,000. Now, suppose Hal dies at a time when the value of the property has risen to $150,000. If Hal and Wendy held title as joint tenants, the law would step-up the tax basis of Hal’s one-half interest to the fair market value at the time of his death, and his interest would pass to Wendy with the stepped-up basis. Thus, at the time of Hal’s death, Wendy would have a new tax basis in the property of $125,000, which equals her original basis in the property of $50,000 (i.e., half of the $100,000 she and Hal paid for the property) plus $75,000 (i.e., half of the fair market value of the property at the time of Hal’s death) for a total stepped-up basis of $125,000. If she then sells the property for its $150,000 fair market value, she will have to pay tax only on the gain of $25,000.

Now, let’s contrast that with what would happen in the same scenario if Hal and Wendy held title as community property. At Hal’s death, assume Wendy receives complete title to the property. She now gets a complete step-up in the tax basis to the property to the fair market value of the property at the time of Hal’s demise, $150,000 in our example. Thus, if she sells the property for its full fair market value, she will realize a gain of zero since she will have sold the property without any gain from her stepped-up tax basis. As such, the advantage of holding title as community property from a tax perspective on the death of a spouse is plain.

Now the Legislature has, through AB 2913, enacted Civil Code section 682.1 to combine the two ways of holding title into a single, hybrid form of vesting. According to the Legislative Analysis of the bill, of the nine states that recognize some form of community property law, six of them have a form of community property with the right of survivorship. California now joins that group. Nevertheless, the bill raises some important questions about how it will operate but does not provide clear answers.

For instance, the bill says that property acquired as community property may be expressly declared in the transfer document to be with the right of survivorship, “which may be accepted in writing on the face of the document by a statement signed or initialed by the grantees.” This language begs the question of what happens if the grantees do not sign or initial the document. Will the right of survivorship still be recognized? Certainly the use of the term “may” suggests that the signatures or initialing is not a requirement, but the legislative history states to the contrary, saying, “There should not be any fear of the parties unintentionally creating this new form of title because the bill would require the signature or initials of the parties on the face of the document which expressly declares it to be community property with the right of survivorship.” (Senate Judiciary Committee Analysis of AB 2913; emphasis added.) The problem here, of course, is that the word “may” is not typically interpreted by the courts as being a requirement rather than an option. Further, it is unclear what language suffices to declare the intention of the parties to agree to this form of title. Would initialing the vesting language in the deed be enough? Attorneys and title companies will have to consider carefully how best to indicate the assent of the parties on the document, although the problem should not be a difficult one to solve. The simple addition on the instrument of conveyance of “I agree to the above form of vesting,” followed by the vestee’s initials would probably be sufficient, provided the insurer agrees. Further, it is unclear whether the initialing by the grantees on the deed would have to be acknowledged by a notary public before the document could be recorded.

Other questions arise as to how one terminates this type of ownership. The bill seems plain, saying, “Prior to the death of either spouse, the right of survivorship may be terminated pursuant to the same procedures by which a joint tenancy may be severed.” Typically, a joint tenancy is severed by either recording a new document, changing the vesting to a different form, or by transferring a minor interest to a third person so as to break the unity of equal ownership. But, suppose a husband wants to terminate the right of survivorship in property he holds as community property with the right of survivorship, but his spouse does not agree. A spouse cannot simply transfer a minor interest in the property to a third person, because California law provides that both spouses must sign an instrument transferring an interest in community property. Similarly, it would appear that merely leaving an interest in a will to someone other than the surviving spouse would not be sufficient to terminate the right of survivorship. Rather, it appears that the manner of terminating the right would be for the party seeking the termination to sign a deed, changing the vesting to community property, without mentioning the right of survivorship.

It is unclear if an off-record agreement between the parties to hold title in another manner — called a transmutation agreement — would be effective to terminate the right of survivorship. Normally, transmutation agreements are used to indicate the intention of the parties to hold title as community property, regardless of how it is vested of record, so it is possible that such an agreement may be used to terminate the right of survivorship in appropriate circumstances. The problem is that such agreements are typically not recognized when the joint tenants are not married, so an argument could be made that they should not be used in this circumstance either, given the language of the statute.

Because the Legislature has left these and other questions unanswered in both the law and the legislative history regarding this new type of vesting, those interested in this new form of vesting should consult their lawyer to review the ramifications of the new law with them and draft the documents accordingly.

Steven Ray Garcia

Mr. Garcia is a Director with the firm’s Title Insurance Department. E-mail: srg@kpclegal.com.

Private Landowners Now Required to Post Payment Bonds or Provide Other Security for the Benefit of General Contractors

Effective January 1, 2002, an owner of property who contracts for a $5 million or greater private work of improvement must provide one of three types of payment security, to be drawn upon in the event the owner defaults on obligations to the general contractor.

The Construction Employers’ Association sponsored this legislation, adding provisions to California Civil Code section 3110.5, ostensibly to assure at least partial payment to general contractors, who, according to the Association, run the risk of having to pay subcontractors without adequate security of payment by defaulting owners.

The Association sponsored the bill, after the California Supreme Court’s holding in the case of Wm. R. Clarke Corp. v. Safeco Insurance Co., 15 Cal. 4th 882 (1997), which invalidated “pay when paid” provisions in contractor-subcontractor agreements (i.e., provisions that held that a subcontractor could not recover unless and until the general contractor recovered monies due from a project owner). According to Assembly Judiciary Committee analyst, the Association sought the bill after the Safeco holding “effectively made the general contractor the guarantor of the project, instead of the property owner or their financiers.”

To address this circumstance, Assembly Bill 1534 requires owners of privates works construction projects of $5 million or more and owners building private works of $1 million on another’s land to post one of the following types of collateral:

(A)    A payment bond (1) in the amount of at least 25 percent of the total amount of the contract if the contract is scheduled to be completed within six months of commencement or (2) in the amount of at least 15 percent of the total amount of the contract in all other cases;

(B)    A irrevocable letter of credit for the amounts noted above; or,

(C)    A construction security escrow with restrictions calling for release of the money upon the joint authorization of the owner and the general contractor.

Except in extraordinary cases, bonding companies are expected to require cash collateral before issuing the requisite bonds, so, as a practical matter, construction lenders will likely be called upon to extend additional credit to owners faced with the new funding requirements.

James M. Phillippi

Mr. Phillippi manages the firm’s Real Estate and Construction Law departments. He is a real estate and construction arbitrator with the American Arbitration Association. Complimentary copies of the new legislation and analyst's reports can be obtained by contacting Mr. Phillippi, at (818) 547-5130 or by e-mail to jmp@kpclegal.com.

LITIGATION

Opening Statements:
the Defense Perspective

Introduction

It has been stated for many years that the two most important phases of a trial for purposes of persuasion is jury selection and opening statement. These two phases are typically grouped together for purposes of analysis and strategy because the jury selection process includes the opportunity to select a jury (or “deselect” a jury depending upon the circumstances) which then helps the lawyer in tailoring his opening statement to fit the particular case, but also to persuasively present the case to the particular jury that will be hearing the trial.

From the defense perspective, the opening statement is very important in establishing the basic themes that the defense will be presenting during the trial. It is very important for the defense lawyer to give his opening statement immediately following the plaintiff’s, rather than reserving the opening statement for when the plaintiff has rested the case in chief. This is because the importance of stating the basic themes and establishing credibility with the jury are very important. Moreover, jury selection and opening statement phases represent two of the three times during the trial that the trial lawyer has the opportunity to directly address and communicate with the jury. Final argument, of course, is the third.

Organizing the Themes of Opening Statement

The initial consideration for the defense should be to effectively organize the opening statement in order to maximize the presentation of the basic themes in the first comments to the jury. It is important to consider the effective use of strong, persuasive language in outlining the basic themes. It is also important to consider that the concepts of primacy, which is remembering the first thing that is said, and recency, which is remembering the last thing that is said, become very important in the giving of the opening statement. For that reason, it is important for the defense lawyer to give a strong initial opening statement regarding the basic themes that will follow. This is also important to diffuse what the plaintiff’s lawyer has already told the jury in his opening statement, and it is important to take the necessary steps to neutralize and establish a level of communication with the jury about the issues in the case from the defense perspective.

The Use of Language

The defense lawyer needs to use strong, forceful words in describing the themes and facts that will be developed during the trial. It becomes very important that the defense lawyer is able to use descriptive words rather than a flat recitation of facts. This is an opportunity to develop themes through the use of descriptive language that can be utilized throughout the trial, including final argument. In other words, it sometimes is very effective to establish themes in opening statements that will be developed throughout the trial and then utilized again in the final argument. The repetition of such phrases and use of language can be a very effective persuasive tool for the defense lawyer.

The Opening Statement Should be Thorough and Complete

It also is very important that the defense lawyer make a complete and thorough opening statement without promising anything to the jury in terms of the evidence that will not be proved later. This means that the defense lawyer needs to be very careful in reciting the facts without becoming argumentative in making promises that cannot be fulfilled. Astute plaintiffs’ lawyers will be carefully listening for such promises and, if the evidence does not support the promise, he will surely remind the jury of this failure during final argument.

The defense lawyer should also emphasize the defense case in opening statement rather than criticizing or subtly arguing that the plaintiff will not be able to sustain his burden of proof. This is because it is better to emphasize the positive aspects of the defense case during opening statement rather than state a critique of the plaintiff’s case. Moreover, if the plaintiff’s lawyer has employed a strategy of anticipating and attempting to refute the defense case in opening statement, it is a very good contrast for the defense lawyer to emphasize the positive aspects of the defense case rather than being drawn into a mere response.

The Importance of Humanizing the Defense

Many defense lawyers tend not to emphasize the importance of humanizing the defendant in trials. The importance is magnified when the plaintiff is very sympathetic, or the defendant is a corporation that is difficult to personalize or humanize. For this reason, it is very important that the defense lawyer take the appropriate steps to analyze the best method of humanizing the defense, even if there is a corporation as the defendant party. A company representative should always be present in order to establish to the jury that the defense does care about the outcome of the case, especially when the plaintiff will most likely be present during the entire trial.

Confirming the Credibility and Integrity of the Defense Lawyer

This may be the most important aspect of the opening statement in establishing the credibility and integrity of the defense lawyer. It is important that the jury clearly understands that the defense lawyer “says what he means and means what he says.” The defense lawyer should also endeavor to be professional in all ways in court before the jury. It has been said that the jury sees everything that occurs both before court begins and during the trial. It has also been commented that the jury may not be allowed to talk about the case, but they certainly occasionally speak about their impression of the lawyers.

Be Careful Not to Argue in the Opening Statement

It is important that the defense lawyer be careful to follow the appropriate rules for the giving of the opening statement, which basically express that the opening statement is not argument. It should be a clear, concise development of the themes and facts which support the defense case and the ultimate conclusion that the defense would like the jury to conclude by the verdict that it returns.

Conclusion

As stated in this article, the opening statement is a very important part of the defense case, and careful and prudent defense lawyers should take great care in preparing for and giving their opening statement. This may be the best opportunity to effectively communicate the themes and facts that support the defense case at a point in the trial when the jury will have an open mind as to all of the issues in the case.

STEPHEN C. PASAROW

Mr. Pasarow is a Director in the firm’s Litigation Department, specializing in casualty defense litigation. E-mail: scp@kpclegal.com.

KPC IN ACTION

Cliff Cohen, with assistance from Jim Phillippi, and Pete Stoterau, recently completed a $26 million purchase transaction for a client of 200,000 square feet of office space situated on 11 acres in Southern California. The transaction was consummated prior to construction and was contemplated to be a turn-key sale of two “build-to-suit” buildings which were to be leased to a Fortune 500 company for its home office campus. In order to facilitate the construction, Knapp, Petersen & Clarke’s client loaned the developer a portion of the construction costs, which were to be repaid at close of escrow or upon completion of the buildings if escrow did not close. The transaction, however, was complicated by several factors. During the course of escrow the lessee company was acquired by a larger company, precipitating a change in occupancy needs. Then the buildings were not completed by the initially contemplated date. Last minute negotiations ensued in order to obtain protections for the client necessary to close the transaction, notwithstanding the existence of these issues.

Representing one of an insured’s fifteen insurance carriers, K. Stephen Tang worked at trial with the insured to defeat another carrier’s action to rescind its policy. After a six-day trial the court ruled for the insured (and Steve’s client) holding that, among other rulings, the second carrier’s actions after the claim against the insured arose were wholly inconsistent with the carrier’s desire to rescind its coverage. A fascinating angle to this trial was that rescission was being sought for a policy on the risk 22 years ago and a claim made 21 years ago.

Steve Garcia recently gave a speech to the San Diego County Escrow Association; his topic was “The Paperless Escrow: Are You Ready?” Steve has also recently had published “Community Property with the Right of Survivorship: Only Your Heir Dresser Knows for Sure” in the California Escrow Association Newsletter. Another recent speech topic was “Select Issues in Community Property: From the Brady Bunch to the War of the Roses.”

Lynn Johnson was recognized several times in 2001 for her volunteer activities in the local community and her contributions to the Glendale Chamber of Commerce as a vice president and member of its Board of Directors. In addition to being selected by the Glendale Chamber of Commerce as the “2001 Woman of the Year,” Lynn was recognized by Business Life Magazine as one of their “Women Achievers,” and she was honored by the Glendale Business and Professional Women as their “2001 Woman of Achievement.” In 2002, she is continuing to serve the community as the President of the Glendale Chamber of Commerce. Congratulations, Lynn!

Greta Hutton just won a summary judgment on behalf of a client accused of fraudulently billing the City of Los Angeles (“City”) in the aftermath of the Northridge Earthquake of 1994. The plaintiff sued the City of Los Angeles and many contractors who entered into debris removal and demolition contracts with the City to recover millions of dollars for alleged violations of the Federal False Claims Act (“FCA”). The district court found that the City implemented appropriate internal controls and oversight over the contractors. The court further found that there was no evidence of fraudulent billing by Greta’s client, which was compensated for work performed in accordance with its contract.

Greta Hutton recently negotiated a favorable settlement of a negligent hiring and supervision and premises liability case. The plaintiff alleged that her uncle, a night and weekend janitor who worked for Greta’s client, a nonprofit corporation, repeatedly molested the plaintiff on the premises of the employer over the course of one and one-half years. The plaintiff sought to impose significant liability upon the employer, arguing that the employer failed to check the janitor’s background before hiring him and failed to supervise him, thereby allowing him to molest his niece on company premises.