Lawyers 101

A recent California decision miraculously vacated an arbitration award in a commercial lease dispute. The Columbus Club Inc. owned a banquet room, and leased to a commercial caterer, who did over $300,000 in tenant improvements. The Lessee intended to hold weddings at the location. At their first event, the police showed up and told the Tenant the could not hold functions beyond 12:30 at night due a local ordinance. The tenant also learned that they could not use the Landlord’s liquor license. Apparently they did not consult with an experienced real estate and leasing attorney in negotiating this lease.

The Lessee claimed that, during the negotiations, the Lessor knew about the restrictive laws but did not disclose them, and in fact made contrary representations about the operating hours. They sued the Club, and the individual (Rodela) who signed the lease on behalf of the club. After a trial date had been set they agreed to submit the case to binding arbitration.

The arbitrator, retired judge Hubbell, refused to allow the Club to select who would represent the corporation, allowing only Rodela to do so. The arbitrator also allowed the Lessee to present an expert who submitted a report that the Lessee’s lost profits were over $1 million, though the Lessee failed to provide that report o the Club as part of the pre-arbitration exhibit exchange. I guess the fact that the Club was surprised by this million dollar claim, and without disclosure was unprepared to counter it, did not bother this arbitrator. He ruled for the Lessee, with a total of $1.2 million in damages. The Court of Appeals vacated the decision, on the grounds that the arbitrator exceeded his powers, in Hoso Foods, Inc. V. Columbus Club, Inc.

First, a discussion of arbitration and why this blogger is not a fan. Arbitration decisions get only extremely narrow judicial review. Courts will not review the merits of the controversy, the validity of the arbitrator’s reasoning or the sufficiency of the evidence supporting the award. Unless specifically required to act in conformity with the rules of law, may act contrary to substantive law and base their decisions on broad principles of justice and equity. Hoso @ 887. Even where application of a particular law or body of law is required by the arbitration agreement, the arbitrator’s failure to apply such law is not an excess of the arbitrator’s powers. Hoso @ 890. That means they can do as they darn well please.

In this case, the Court of Appeals took umbrage with the arbitrator’s refusal to allow the Columbus Club to select whoever they wanted to represent them at the arbitration. Rodela did not participate in the lease negotiations, and could not assist their attorney with the arbitration, and cross-exam of witnesses who testified as to misrepresentations. The Court found that this violated Code of Civil Procedure section 1286.2 (a)(4), because the arbitrator exceeded his powers by limiting the appellant’s representation. This limitation eliminated the possibility of the Club receiving a fair hearing. Nothing in the state law or AAA arbitration rules provides that an arbitrator has the power to prevent a corporate party from picking their own representative. Decisions vacating arbitration awards are scarce; those affirming obviously bad awards are common.

A spite fence is any fence or barrier intended to annoy the neighbor, and serves no purpose to the builder. In California they are governed by Civil Code Section 841.4. The most famous spite fence on California real estate was Charles Crocker’s 40 footer on Nob Hill in 1879.

The statute includes any “fence or structure…;” does that include trees or vegetation? In the California case of Wilson v. Handley the court looked at the purpose of the law ,which was to prevent what would otherwise be a lawful practice of building or maintaining an unnecessarily high barrier on their property line. It concluded that a row of trees planted on or near the boundary line between adjoining parcels of land can be a “fence or other structure in the nature of a fence.” Other decisions have found sheds or other building to fit the requirements.

In the recent California decision of Vanderpol v. Starr the jury intended to rule for the plaintiffs, but there was a problem with the special verdict forms. The Carlsbad, California defendants had tall trees that blocked the neighbors’ view of the ocean. The jury found that:
1. the defendants were maliciously maintaining trees that unnecessarily exceed 10 feet for the dominant purpose of annoying the plaintiffs;
2. The defendants’ conduct was a substantial factor in causing harm to the plaintiffs; and
3. Relating to nuisance, as to leaves & debris, but not view, the defendants did not create a condition that was an obstruction to the free use of the property, so as to interfere with the comfortable enjoyment of life or property.

However, they were not asked to decide a necessary element of section 841.4: whether the plaintiffs “sustained injury in their comfort and enjoyment of their estate by such nuisance.” This is the sort of technical distinction that makes all the difference in court. Finding number three was as to the nuisance of leaves and debris, not view. The court concluded in this case that it was necessary to prove injury relating to view for purposes of the spite fence law, which the jury did not find. Thus the plaintiffs could not be awarded damages or injunctive relief.

Another hypothetical problem that could be confronted by Sacramento Real Estate Attorneys could arise in properties with zero lot line clearance. Because of the narrowness of the lots, structures such as the house or the garage could be built with no setback from the property line. The structure acts like a fence. Could it be a spite fence, if it is over 10 feet tall? Probably not; it has to satisfy the zoning ordinances, and the building permit must be approved. The offended neighbor would essentially be arguing that the government conspired with the defendant to maliciously harm him. I think the approval process gives the homeowner a pass.

California Civil Code section 1950.7 controls the commercial Lessor / Landlord’s use of the deposit. A commercial landlord got a surprise in decision involving a San Francisco commercial lease. The tenant had already leased the premises for five years when PERS (Public Employee’s Retirement System, California’s state employee retirement program) bought the building. PERS terminated, or reduced, many of the services the prior lessor had provided the lessee. The lessee was infuriated, and stopped paying rent. Two months later he made a partial payment of back rent, and vacated the building. PERS v. Winston

The trial court found that the elimination of some and reduction of other services followed by the tenant vacating the premises was a “constructive eviction” (where the conditions are so reduced that the tenant is forced to vacate the premises). The court concluded that the tenant owed rent for the time up until he vacated the property, reduced by an amount to account for the reduced services. The court made no finding as to the deposit. On appeal, the tenant said that the landlord was entitled to offset the deposit by the rent due, but was then required to refund the balance of the deposit. As a result, the landlord owed him money.

The Appellate Court agreed. It reasoned that under subdivision c) of 1950.7, where the only default is failure to pay rent, the lessor is required to return the balance of the deposit to the tenant “no later than two weeks after the landlord receives possession of the premises…” Thus, the landlord owed the tenant a refund before the lawsuit was filed. The landlord cannot offset the deposit for future rent damages, interest, or attorney fees it may recover in a lawsuit. Important in this case is the timing of the offset. It was critical in determining who was entitled to a money judgment.

This is important for the potential award of attorney fees under Civil Code section 1717, which allows an award of fees to the party who “…recovered a greater relief in the action on the contract.”

The trial court had found that PERS was to recover a judgment, but the appellate court says no, since the offset of the deposit was to be done immediately on vacating the premises, the tenant here would recover a money judgment for the balance of the deposit. The attorney fees in this case surely exceed the damages awarded by a factor of more then 10.

What is a commercial landlord / lessor to do? First of all, ensure a knowing waiver of California Civil Code section 1950.7. Alternatively, make sure the deposit is accounted for immediately, and, if any balance is remaining, return it to the tenant. Surprising here was that the default in rent was the ONLY claim on the deposit of the landlord. Experienced Sacramento leasing attorneys routinely see claims for damages and cleaning expenses, which seems to eat up the security deposit.

A “Power Coupled With An Interest” is an ancient legal concept that is different from an ordinary power of attorney. A power of attorney gives the attorney-in-fact or agent (the holder of the power) the ability to act on behalf of the principal, who is the person who granted the power. However, in the case of a power coupled with an interest, the agency is created for the benefit of the agent in order to protect some title or right in the subject of the agency or secure some performance to the agent. This kind of power is not an agency as the term is commonly understood. Instead, the grantor or creator of the power relinquishes the ability to direct the attorney in fact, who is then permitted to act solely in his own interest. This type of power is to protect the agent’s interest. It does not create an agency, because it is not given for the benefit of the person who grants it. The holder does not owe any duty to the creator. Experienced real estate attorneys see this situation when a developer obtains an option to buy property, and also receives a power of attorney to pursue the development entitlement process.

The power and the interest must be united in the same person. If a power of attorney is granted to Fred, but an option to Susan, there is no power coupled with an interest. Recently some Sonoma County developers discovered that it is easy to terminate a power by uncoupling it. In Bonfigli v. Strachan, the developers’ limited partnership (“LP”) obtained an option to buy real property. The LP also received a special durable power of attorney coupled with an interest, granting the LP the right to rent, encumber, grant easements, and other things necessary to develop the property.

The LP then assigned the option to their construction company LLC. The LLC did not exercise the option, but did file a lot line adjustment with the City. The adjustment was completed. The developer also used the property as collateral for a loan.

The option was never exercised, the landowners discovered the lot line had been adjusted, and sued the developers. The court found that the Power of Attorney was coupled with the option to purchase the property. When the option was assigned to a different entity than the one which held the power of attorney, it was decoupled from the power, the power was extinguished. At the time of the lot line adjustment, no one had a power of attorney which allowed them to make the adjustment. The court ruled for the landowners against the developers.

The developers could have avoided the problem from the start by making sure that they could first obtain a new Power of Attorney before they transferred the option. As long as the option and power are in the same person, they are coupled and enforceable.

By James Bowden

Fellow blogger and occupant of the lawyerly Nirvana that is in-house counselhood Mark Herrmann recently wrote a blog post carried by Above The Law noting, in essence: (i) young attorneys don’t have great attention to detail and fail to sweat the small stuff, and (ii) more experienced attorneys obsess over details and are bothered by younger attorneys’ failure to do so, because they have all been driven insane. It is probably a fair criticism, though one that I think begs a response, in bullet-points (because I’ve been told that in-house people love bullet points):

The granular attention to detail that makes attorneys so valuable to companies and obnoxious to their non-lawyer friends is a learned behavior, gained from extensive training. It is not a behavior that people are born with (like washing one’s hands with five different bars of soap every time we pass a sink) even if the manifested result is similar. Risk aversion is likely the trait attorneys are born with, and attention to detail is a professional coping mechanism. In short, we’re learning. There is a big difference, at least from my perspective, between initial drafting and the editorial process. I am notorious for typos in documents I draft – I think it is because I know what it is supposed to say, and am a little bit blind to minor errors in my own work. Which is why my poor assistant has to review everything for me. On the other hand, I am very good at picking up typos and inconsistencies in other people’s work. This may explain in part why one of my earlier posts misspelled “hearsay” in the title. Also, per a colleague of mine, I have the spelling skills of a baby walrus. An engineer once told me that his rule for producing work was, “fast, good, and cheap: pick any two.” In law firm life, young attorneys are asked to provide things good and fast; cheap is simply a function of how much time you have to work. So, while law firms rightly obsess themselves with producing flawless work product (with the possible exception of initial complaints in class-action securities cases), sometimes the timeframe required results in work product that is “as fast as possible, and as good as it can be in the time provided.” Which is good, because it gives the other side things to comment on. The Young Lawyers Blog has no comment as to the sanity or lack there of demonstrated by more experienced attorneys, except to say that if insanity is a characteristic of the attorneys we work under, insanity must be a part of what we aspire to. I’ve noticed that attorneys tend to eat a large amount of sushi, which leads me to believe that the observed behavior noted by Mr. Herrmann may in fact be the result of mercury poisoning.  Once I saw a sticker (maybe a t-shirt) that said “insanity is hereditary; you get it from your children.” Based on Mr. Herrmann’s post, in the practice of law insanity is a sign of life’s lessons learned.

By James Bowden

Much noise is being made in the media over News Corporation’s British subsidiary The News of the World’s alleged hacking into the voice mail of a kidnapped English teen, and even the possibility of similar hacking into 9/11 victims’ voicemail. I’m curious why so little attention is being paid to the possibility that one of the worlds largest and most powerful corporations might be charged with multiple felonies by the U.S. Department of Justice. I’m pretty sure that News Corporation has taken note of the issue.

A little bit of background on the Foreign Corrupt Practices Act – in the late 1970s, the public got wind of U.S. corporations paying bribes to foreign officials. Lots of them. So, the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq., was passed in 1977 to prohibit similar corporate bad behavior abroad in the future. The statute includes two major provisions: (i) adherence to accounting standards and required disclosure on filings with the S.E.C. designed to make under-the-table payments difficult to get away with, and (ii) a blanket prohibition on bribing foreign officials.

So the analysis: The News of the World, a News Corporation Subsidiary (editors note: if you had any doubt as to how huge News Corporation is, check out the length and breadth of its subsidiary list), allegedly paid multiple illegal bribes through its employees to officers in Scotland Yard in order to receive the benefit of non-public confidential information. Suffering Succotash! Sounds like an issue!

The experts seem to be indicating that a suit would be an uphill struggle, if not completely futile. The FCPA is rarely applied to actions taken in G20 countries (read: countries the D.O.J. considers competent to enforce the rule of law itself), and paying cops for information isn’t exactly an action that has previously been prosecuted under the FCPA. I think the most interesting argument is for due process (i.e., that there is no point in prosecuting acts done in Britain by British Citizens in concert with British officials in American courts), but making this an explicit limitation to the FCPA would eviscerate the statute – all a malfeasant company would need to do to avoid prosecution would be to make sure the bribe was paid by a local. The commentary does also note that the D.O.J. has recently been less gun shy about prosecuting companies under the FCPA.

Even if prosecution under the FCPA is unlikely, News Corporation is certainly lawyering up, and there is speculation that they will make a voluntary self disclosure to the S.E.C. and the D.O.J. And while I am not an expert on the FCPA, I know that while many companies survive, the consequences of a felony conviction for a U.S. company are potentially devastating. I also know what the term “willful blindness” means (ahem, James Murdock at 10:41 A.M.), and that it is no defense.

By James Bowden

If you are listing agreements, adjectives, putting together a series of representations in a single subsection, or making a shopping list, is the last comma in the series really necessary?

I wear two hats here. The first is my “English Major / High School English Teacher” hat, which compels me to say, “yes, absolutely, and I’ll dock you points on your essay if you fail to include it.” But my second hat, the “Corporate and Securities Lawyer” would have to say, “no, never in any document I would draft, and I’ll eliminate them from your documents with extreme prejudice if you send one including such a crime against document drafting my way.” 

My “Corporate and Securities Lawyer” hat was hard-earned; I had the Oxford Comma beaten out of me by mark-up after ruthless mark-up. But now, no less than Oxford University has come down on the side of transactional attorneys everywhere. 

Which is correct? It seems to be that both are acceptable, and I can’t speak for the preference of my good friends who are litigators. But if I ever do write the Great American Novel (highly unlikely, although I might be able to squeeze out a haiku or two one day), I think I’ll favor using the Oxford comma. Here’s why – because the following sentence is just plain incorrect, even if Oxford University says it is OK: 

“During my trip to India, I met Gandhi, a Buddhist Monk and a pornographer.” 

And the following sentence, similar in all respects but for the Oxford comma, is saved by the apparently offensive punctuation: 

“During my trip to India, I met Gandhi, a Buddhist Monk, and a pornographer.” 

So with deference to the transactional attorney in me, I think I have a defensible position in support of the Oxford comma.

* Thanks to Kevin Hartley of Stites & Harbison PLLC for his examples, and for calling out the transactional attorney in me for his grammatical transgressions.

By Kathleen Pearson

In Chris Matthews’ book, Hardball, he recounts the following story:

“Do you guys know who Bill Bradley is? Well, let’s just say he’s everything you’d want to be and more. So here’s Bill one evening at a dinner at the White House. The waiter is filling water glasses and passing out bread and butter. Bill says to the guy, ‘Hey you, waiter. Get me some more butter, this just isn’t enough.’ To which the waiter says, ‘I’m sorry, each guest only receives one serving of butter.’

Nearly hysterical Bradley then goes on to ask, ‘Son, do you know who I am?’ A bit startled at the challenge the waiter says ‘No, I’m sorry sir, but I don’t.’ Leaning back with an assured grin Bradley then begins, ‘I’m Bill Bradley. I was an All-American basketball player at Princeton and got an Olympic gold before even graduating. Then I turned down the NBA to be a Rhodes Scholar at Oxford. After finishing that up I came back to the US, played for 10 seasons with the Knicks and won two championships. Then I retired and became a senator. Oh yeah, and then I ran for President.’

Taken aback a bit by the aggressiveness in Bradley’s short outburst, the waiter took a few moments to gather himself then returned the brazen stare and said, ‘I don’t think you know who I am.’ ‘Well, who ARE you?’ Bradley asked. The waiter grinned, ‘I’m the guy in charge of the butter. One per person.” And with that, the waiter walked away.

No matter where you go in your career, no matter how important you THINK you are, always be aware of who controls the butter.

By James Bowden

I am now knowingly wading into a political subject in the most non-partisan manner I can manage, with an eye to the legal issues surrounding congressional action (or, to date, inaction) raising the debt ceiling. I am sincerely looking forward to your comments on the many ways that I have failed.

Currently, the U.S. Federal Government is subject to a limit (right now set at $14.3 trillion) on the amount of outstanding borrowings it may incur. On May 16, the debt ceiling was reached; the Treasury Department is now transferring funds across accounts (mainly raiding pension accounts, etc.) in order to keep the government in business. They can only do this for so long until the government will be shuttered for inability to pay its obligations, and worse yet – possibly default on its outstanding debt. But the limit is statutory, not market-driven; the historically low cost of borrowing that the U.S. enjoys indicates that lenders still see the U.S. T-Bill as a sound investment, even (and in spite of) recent warnings issued by credit rating agencies to the contrary. Only an act of Congress can increase the limit on the government’s credit card.

The debt ceiling was enacted in 1917, as a way of limiting aggregate debt (rather than requiring congress to individually authorize each debt issuance). This action modernized the U.S. government’s financial position by allowing the government to turn over its debt, much like large corporations. The problem is that a vote on the debt ceiling, particularly in an atmosphere where public debt is heavily scrutinized, is a deeply political issue – and currently both Democrats and Republicans are making noises that the ceiling may not be increased, or may be increased only in conjunction with drastically deep budget cuts. But what if on the day the Government ran out of funds the Treasury Department just went ahead and issued bonds – effectively exceeding its credit limit?

It ends up that some folks in the legal world believe that Congress cannot constitutionally or legally deny the executive branch the ability to incur debt in order to fund the programs already authorized by Congress. Effectively, when Congress passes a budget, be it balanced or projected to require deficit spending, it is instructing the Executive Branch to do certain things and implicitly obligating the government to the expenses related to those things. Refusing to increase the debt ceiling is in effect saying that the government must do certain things but doesn’t get the money with which to do them. It is, perhaps illegally, counteracting its own laws and attempting to undermine the validity of U.S. debt.

The constitutional argument that the debt ceiling is illegal is rooted in Section 4 of the 14th Amendment, which in effect prohibits public debt authorized by law from being questioned. The genesis for this provision came out of the aftermath of the Civil War, when southern lawmakers were contesting the debts incurred by the Union fighting the Confederacy. It’s not just supporters of the current President that hold this view, either: Bruce Bartlett, an avowed political independent and fellow blogger who advised President Reagan on economic issues, has argued that the President should consider the debt limit a nullity for just this reason. The granular question is whether public debt is incurred when the Treasury issues bonds, or when Congress passes budgets requiring those bonds to be issued.

The stakes are high on this one – it is deeply unlikely that the Treasury will disregard the debt ceiling and set of the inevitable constitutional crisis that would follow. But what about default? If the U.S. were to default on its debt, the fallout could make the financial Armageddon that was the financial crisis look like a minor nuisance, and we’re still trying to dig our way out of that one. And while it would seem unlikely that Congress would pull down the temple on top of themselves, the folks in the house have made a bad policy decision for penny wise, pound foolish political reasons before. And if you want to take a look at what policies and circumstances led to the debt level we currently (*ahem*) enjoy, here’s a helpful chart.

So, is Congress’s possible punt on the debt ceiling well analogized to the story of Sampson? I’d say there are a few major differences, two of which bear mentioning: first, Sampson didn’t build the temple that he destroyed, and second, Sampson knew full well the consequences of his actions.

<<< *An earlier version of this post indicated that the U.S. debt ceiling was established in 1939, when it was in fact established in 1917 by the Second Liberty Bond Act of 1917. In 1939, the debt ceiling was revised to its modern iteration of an aggregate limit, applicable to nearly all debt of the U.S. Federal Government. Thank you to Bruce Bartlett for the clarification.>>>