In LA, motel owners are presumed guilty of creating a public nuisance

A client of mine owns motels in South Central Los Angeles. He runs a clean business. He has a full-time on site manager who requires several forms of identification before renting rooms. They do not permit “guests” in the rooms. They have 24 hour security. Even though the motels are in a rough neighborhoods, they have had no problems in the motels for a long time.

The neighborhood surrounding the motels is a bad one. People are constantly dumping trash on the sidewalk, outside the motel. Prostitutes are usually loitering at the bus stop across the street from the motel. Drug deals are often done in the vacant lot next to the motel. Other than my client’s motels, the biggest property owner on the block is a half-way house.

You might think that this would give the motel owner a grievance with the City. He is trying to run a clean business, but, since the City can’t effectively police the area, my client constantly has to deal with all of the problems caused by crime, prostitution and drug dealing in the area.

That is not how the City sees it. The way the City sees it, since there are problems in the neighborhood, they must be caused by the only business in the area. The City has brought an action to revoke my client’s business license, or to place restrictions upon it. I went to the administrative hearing. The primary witness were cops.

The cops were hard-working, good people, trying to do their jobs. They admitted very freely that my client’s motel was a good one. They said that my client was doing everything that he could to run a clean business. They said, however, that outside the motel, bad things were happening. Trash was being dumped frequently. Drug deals were being done, and so forth.

Because these bad things were happening in the area, the City says, restrictions have to clamped down on my client. What was the connection between anything my client was doing, or failing to do, and the bad things in the area? There was no such connection, the cops admitted. My guy was doing everything he could. Even still, they wanted to put restrictions on him, because they are looking for ways to take action, and he is the one visibly solvent business in the area. The fact that placing restrictions on the business license makes the motel harder to sell, and harder to get a loan for, is not something that the City thinks about.

This is nuts, both as policy and of law. As a policy matter, this is a good example of why businesses are leaving Los Angeles, and California. My client’s motel is the only job-producing business in a very bad area. A sane local government would be asking my client what they could do to make his life easier and to encourage him to expand his business and to provide more jobs. Since this is LA, the government is looking for ways to make my client’s life miserable, and to encourage him to invest next time in Houston instead of Los Angeles.

Second, the City ordinance which is being enforced, Los Angeles Municipal Code Section 12.27.1, seeks to control public nuisances. It is basic to public nuisance law that the bad guy has to be doing something, which is causing a problem. The City, in this case, has made no effort to prove that our client did anything, which is causing anyone a problem. Rather, the City’s case is that, since there are problems in the neighborhood, they must be being caused by business. Business is presumed guilty of causing every urban ill. We will, of course, appeal this craziness through the administrative maze and then to the courts.

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Two deeds of trust tied in priority, says Court of Appeal

When two deeds of trust have exactly the same time-stamp on them, but one is indexed before the other, which one is senior? They have equal priority, said First Bank v. East West Bank, 11 Cal. Daily Op. Serv. (2nd District Court of Appeal, October 17, 2011).

As a rule, in California, the first-recorded lien has priority over later-recorded liens. This rule makes it tremendously important to determine the precise time at which a lien is recorded. County Recorder’s Offices thus have time stamps, which state the date, the hour and the minute when documents are presented to the Recorder’s Office. This is usually enough to decide who is first in time.

What happens if two deeds of trust have exactly the same time stamp on them? A possible way to distinguish between them is to look at which one was indexed first. No, said the Court of Appeal. If two deeds of trust have the same time stamp, they are equal in priority.

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New limits on federal home loan guarantees

In a move likely to have a major impact on the California housing market, the federal government is going to lower the limit on home mortgages which can be guaranteed by the Federal Housing Administration (“FHA”), Fannie Mae and Freddie Mac. As of Saturday October 1, 2011, the maximum “conforming” home loan in Los Angeles and Orange Counties will drop from the current maximum of $729,750 to a new maximum of $629,500. Other drops will be made on a county-by-county basis.

The home lending market is almost completely controlled by the federal rules. Once upon a time, before the 1990s, most home mortgage loans were made by local lenders who intended to, and usually did, keep the loans which they made. Such lenders generally could not sell their loans, even if they wanted to, because mortgages were then considered to be one-of-a-kind assets which no outsider could understand.

This business model was transformed during the 1990s and the first decade of this century. Under the new business model, most mortgage loans were made by “loan originators” who did not intend to keep the mortgage on their own books, but who intended to sell the loans. This transformation was made possible by Fannie Mae and Freddie Mac. Fannie and Freddie were privately-owned corporations, which were “government-sponsored,” meaning that they received a number of government perks. The primary business of Fannie and Freddie was to purchase large numbers of mortgages, both to hold and to re-sell, and to guarantee mortgages.

Fannie and Freddie, in short, created the secondary market in mortgages. They made it easy for lenders to sell mortgages, and by the same token, they made it easy for Wall Street to invest in mortgages. Fannie and Freddie were thus at the center of the recent real estate bubble. They were both taken over by the federal government, in 2008, after they became insolvent.

Since the government takeover, the role of Fannie and Freddie has grown larger, not smaller. In recent years, 90% of all home loans have been guaranteed by the FHA, Fannie or Freddie. In other words, the home mortgage market has been effectively taken over by Washington, since the real estate downturn.

The reduction in the amount of loans which Washington will guarantee is a first step toward the government getting out of the mortgage market. With Fannie, Freddie and the FHA not guaranteeing mortgages above a certain dollar limit, mortgages at those price levels will only be available from truly private lenders. How many private lenders will want to lend, at those levels, and on what terms, remains to be seen. The likely short-term effect of this change is for mortgages above the new limits to be harder to obtain. Thus, this change will likely tend to further drive down real estate prices.

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Gibson Law settles two business bank loan cases at 5 cents on the dollar

We just settled two business cases for 5 cents on the dollar. Our client is a real estate developer. The other side was a bank, which had purchased the assets of an insolvent bank from the FDIC. We were in litigation, the two cases went to mediation and we settled.

The two cases were quite different from each other. In one case, our client had no very good defenses. In the other case,however, we had the interesting fact pattern that a construction loan had been taken out, and the bank had then run out of money before the project was completed. We have been doing this since 1983, and prior to last year, we never saw that fact pattern. We are seeing it quite a bit now.

The new bank sued our client for the unpaid debt. We counter-sued for breach of contract, i.e. not giving us the money to finish the project. We analogize these cases to the bank loaning us enough money to build the bridge half way across the river. Obviously, a half-finished construction loan is worse than useless; it puts the developer in a worse position than if the loan had been denied, and nothing built.

The banks, in these cases, always defend by arguing that they purchased the assets, not the liabilities, of the old bank, and that, for various technical legal reasons, they are not liable for the prior bank’s breach of contract. There are a number of ways for the bank lawyer to phrase this basic argument. We have consistently argued that the bank lawyers are wrong on this one, and that, if the new bank is going to chase our client for the loan money, we get to argue the old bank’s breach of contract, at least as a set-off to the debt and also as an affirmative claim.

Thus far, we have settled all of these cases on favorable terms, so we have not yet gotten a judicial ruling on these arguments. Stay tuned. This fact pattern is increasingly common, and we are going to take one or more of these cases to trial.

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Gibson Law settles construction defect case for $305,000

We just successfully concluded a piece of construction defect litigation. Our client was a commercial baker. Their business had expanded, so they had purchased a large, empty warehouse space, which they needed converted into a food processing facility. They contracted with a very experienced speciality general contractor in the field. For reasons that never became entirely clear, the experience was a disaster. The project was supposed to take five months. Instead, it took about a year and a half. The facility was supposed to be fully operational from day one. It was not. When the client moved in, the air conditioning did not work, the freezer door opened and closed by itself, the concrete floor had weird slopes in it, and so forth and so on. Prior counsel had filed the case, but was had been beaten down by opposing counsel’s rude aggression. We came in shortly prior to trial, got the expert testimony in shape, dealt with opposing counsel and finally got a reasonable settlement, on the first day of trial.

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Over-regulation is killing California

I have a client, who would like to spend money and create jobs in California. Our government, however, is working overtime to stop him.

My client inherited 20 acres about a mile off Highway 5 up north of Magic Mountain. The land is ugly. There are no trees. It is dusty hills covered with chaparral. For the last thirty years, it was a junkyard, covered with junked cars and decades of trash.

For some reason, my client loves this dusty property. He has already spent a good hauling off the old cars and junk. He wants to put up a 7,000 square foot home.

He is about three years into it, and he has built nothing. What is taking so long? When he submitted his plans to the County, he was told that he would need to get approvals from six (6) federal, state and local agencies. You see, there is a “blue-line stream” on the property. Thus, he needs to get an environmental OK from the U.S. Army Corps of Engineers, the State Dept. of Fish & Game and the State Water Quality Department.

What is this “blue-line stream” that so many regulators are protecting? It is a gully between two hills. It has water in it, when it rains. When it is not raining, it has no water. For nine months out of the year, it is dry. How many fish are there in a dry gully? Oh, he also needs to have an archeological study done, to make sure that King Solomon or the Lost Tribes of Israel did not leave behind them unique ruins north of Magic Mountain.

Sensible environmental regulation is a good idea. No one wants toxins in the water or other real problems. But this is nuts. On land which has no flowing water, we have three separate agencies protecting the alleged stream. On land that no one has done anything on ever, we have an official archeologist checking it out.

These regulations serve no sensible purpose. They simply give employment to bureaucrats and consultants, and jack up the cost of building anything in California. Businesses spend money, so that they can make money. From a dollar and cents point of view, why would any sane person build in California, when they go elsewhere?

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Neglected foreclosed properties spread

A very depressing news story this morning. Increasing numbers of foreclosed properties are being totally neglected by their owners, spreading blight and lowering property values all around America.

Why don’t the owners take care of the properties? It is hard to say who the owners are. There is usually some bank holding title to the property. If you look into it, however, you find that the bank is only a nominal owner; real ownership is divided among large numbers of investors, all around the world. The investors have already lost huge sums, so they are not very interested in investing more in the properties. The banks do not see themselves as real owners, so they are not very interested in investing more either.

It is a senseless tragedy. The properties were taken away from owners who actually wanted to keep them. Now, the properties are orphans, owned by no one in particular, yet another negative consequence of mortgage securitization.

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