Glass & Goldberg | Financing, Property & Bankruptcy Law

As summer began, the judges of the United States District Court for the Eastern District of California (E.D. Cal.) drafted a letter to the members of the United States Senate and House of Representatives providing notice of a current crisis as well as a warning that any exacerbation of this crisis will have serious and devastating consequences. The most significant consequence is that the eight million residents of the Eastern District face inaccessibility to the United States Federal Court system.

The Eastern District of California, encompassing 87,010 square miles, is larger than forty-one states in the country. Thirty-four of California’s fifty-eight counties are within this district. Its population of 8,094,480 persons is larger than the population of thirty-eight states. The corresponding responsibilities of the U.S. District Court are equally substantial. However, currently, there are only six District Judges in the Eastern District with two of them planning to retire in the next nineteen months. Each of the six District Judges has a caseload of roughly 900 cases, which is more than double than the nationwide average (425 cases) for District Judges.

The E.D.’s letter to Congress describes how the resources of the district have been deficient for thirty years. In the last ten years, the Administrative Office of the Courts has recommended that 4 to 6 new District Judges be added to handle the excessive caseload. One of the Senior District Judges has also given notice of retirement while of the other two Senior District Judges, one is over 80 years of age and the other only maintains a 50% caseload.

If these judges leave as anticipated, 2,000 cases will need to be redistributed to the remaining four District Judges, giving these judges a caseload of almost 1,400, which will be 1,000 more cases than the national average. With an expected increase of 12 Assistant U.S. Attorneys, an increase is expected in the number of indictments sought and filed, thus stressing a system even further that currently disposes of cases three times longer than the national average.

The letter calls for an immediate commitment to acting expediently to nominate and confirm any replacement judges as well as an emergency congressional bill to create five more judgeship positions. This crisis greatly affects all of the residents of the Eastern District and their access to a federal court system that efficiently disposes of their claims in a timely manner. Stay tuned as we’ll keep a watchful eye moving forward in 2018.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Today’s blog reviews a case where the plaintiffs were time-barred from filing their lawsuit by the statute of limitations, but tried to claim that the filing of a different lawsuit by a third-party satisfied the statute. In Reid v. City of San Diego – filed May 25, 2018, Fourth District, Div. One 2018 S.O.S. 2617, Plaintiffs, Yvonne Reid and Serena Wong, sued the City of San Diego (City) and the San Diego Tourism Marketing District (TMD) in a putative class action complaint, claiming that the defendants were charging “an illegal hotel tax.”

The defendants’ demurred to the complaint, asserting that the defendants lacked standing, and that various causes of action were either barred by res judicata, two statutes of limitations found in the San Diego Municipal Code, or other grounds.

The plaintiffs argued that the validation statutes do not apply because “this action does not involve the issuance of bonds.” Plaintiffs alternatively asserted that any limitation period was equitably tolled during the pendency of a prior lawsuit filed by a third party, San Diegans for Open Government (SDOG), who challenged the renewal assessment as being an unconstitutional tax in violation of a local regulation, Proposition 26.

Plaintiffs asserted they had standing because the assessed hotel owners and operators “simply collect a tax that is imposed upon their hotel guests.”

The court sustained the demurrer to some of the causes of action based on statute of limitations grounds. The defendants’ demurrer to other causes of action was sustained as well based on grounds that the challenged ordinance did not impose or assess a tax and that a public entity may limit approval of an assessment to those who pay for it.

The California Court of Appeal affirmed, agreeing that some of the causes of action were time-barred and the remainder failed to state facts constituting a cause of action. The court found that a limitation period is consistent with due process if it provides a reasonable time to bring the action.

Further, it found that there was no authority that would allow a plaintiff in one case to equitably toll the limitation period based on the filing of a lawsuit by an unrelated third party. In this case, there was no basis for equitable tolling because the plaintiff in the SDOG litigation and the Plaintiffs were different. Plaintiffs cited no authority that would allow a plaintiff in one case to equitably toll the limitation period based on the filing of a stranger’s lawsuit.

Equitable tolling of the statute of limitations has been recognized in California when the following circumstances are present:

1. the plaintiff is pursuing an alternative remedy in another forum;
2. under narrow circumstances, while plaintiff is pursuing the same remedy in the same forum;
3. where a defendant fraudulently conceals the cause of action; and
4. in certain actions against an insurer.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In Bushansky v. Soon-Shiong, 2018 S.O.S. 2627, the plaintiff, Stephen Bushansky, filed a shareholder derivative action on behalf of a nominal defendant, NantKwest, Inc. The trial court dismissed the suit based on a forum selection provision in NantKwest’s certificate of incorporation that named Delaware as the forum for shareholder derivative actions. The forum selection clause required that the parties file any disputes in Delaware, “subject to the court’s having personal jurisdiction over all indispensable parties named as defendants.”

The court ruled that because the contract term in question was silent about the fulfillment of a condition, the prevailing presumption is that the parties intended that the condition must be met within a reasonable time. And here, it was.

Bushansky appealed the dismissal of the case, arguing that the forum selection provision was subject to a condition precedent which never occurred. The condition precedent required that Delaware have personal jurisdiction over all indispensable parties that are named defendants.

At the time Bushansky filed the lawsuit in California, Delaware courts lacked personal jurisdiction over one of the defendants. Of course, Bushansky initiated the suit in California courts based on the fact that the condition was not met and, therefore, the forum selection provision designating Delaware was never triggered.

The court pointed out that the forum selection provision did not specifically mandate that personal jurisdiction must be determined by the time that an action is filed. It could be before the filing, but not after, Bushansky contended. Actually, the forum selection provision was completely silent and failed to provide any guidance as to the point in time when Delaware must have personal jurisdiction over all indispensable parties named as defendants.

The court reiterated a long-standing principle of contract law that, when a contract term is silent about the fulfillment of a condition, presumes that the parties intended that the condition is met within a reasonable time. Thus, the court framed the issue as “when does personal jurisdiction over all indispensable parties have to exist?”

Based on its conclusion that the contract was silent regarding the point in time when the condition must be fulfilled, the court ruled “[we] apply the rule that where no time is fixed for the performance of a condition precedent, it will be presumed that it is to be performed within a reasonable time.”

Bushansky attempted to argue that the provision was permissive rather than mandatory, but the court ruled against him as the contract stated “to the fullest extent permitted by law, the Court of Chancery of the State of Delaware (or, if such court lacks jurisdiction, any other state or federal court located within the State of Delaware) shall be the sole and exclusive forum . . . for any derivative action.”

The court concluded with “the enforcement of forum selection clauses stems from courts’ discretion to decline to exercise jurisdiction in recognition of the parties free and voluntary choice of a different forum . . . we say merely that a court properly declines to exercise jurisdiction based on a contractual forum selection clause like this one when consent to jurisdiction in the alternate forum is provided within a reasonable period of time.”

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Enacted in 1994, the California Residential Mortgage Lending Act (CRMLA) became effective in 1996. The California Assembly formulated the CRMLA as an alternative to existing regulations that licensed lenders under existing law including the California Finance Lenders Law (CFLL). The purpose of the CRMLA was to provide a licensing law specifically intended to regulate mortgage bankers and their primary functions of originating and servicing residential mortgage loans.

Licensees under the CRMLA must have a certified public accountant (CPA) audit their books and accounts at the end of each fiscal year, but no more than 12 months after the last audit was conducted. Licensees must file the certified audit report within 105 days of the end of their fiscal year. If a licensee fails to file the required report, a certified public accountant may be selected to perform the audit at the licensee’s expense.

The license of a licensee who fails to file a certified financial statement prepared by a certified public accountant at the request of the state’s Commissioner of Business Oversight (the “Commissioner”) may be summarily revoked. Audits must be sufficiently comprehensive that the CPA can issue an “expression of opinion,” which can be an unqualified opinion, a qualified opinion, a disclaimer of opinion, or an adverse opinion. If a certified public accountant provides a qualified opinion, the Commissioner may require the licensee to address the opinion’s qualification.

The Commissioner may also reject an audit report by:

• Providing notice of the rejection and a statement of the underlying reasons;
• Giving the licensee 30 days to correct any deficiencies; and
• Retaining a copy of all rejected reports.

Audits that comply with HUD’s Uniform Single Audit Procedures will fulfill the requirements for an audit required by the Residential Mortgage Lending Act.

The CRMLA is contained in Division 20 of the California Financial Code, commencing with § 50000. The CFLL is contained in Division 20 of the California Financial Code, commencing with § 22000. The regulations are contained in Subchapter 11.5 of Chapter 3 of Title 10 of the California Code of Regulations, commencing with Section 1950.003 (10 C.C.R. §1950.003, et seq.).

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In February of 2018, the State Regulatory Registry, LLC (the “Registry”) reached out seeking public comment on proposed changes to the NMLS Mortgage Call Report, which provide information about a licensed mortgage business enterprise’s financial condition, loan activities, and loan origins. However, the Registry issued a notice in June stating that the implementation of planned changes to reporting requirements for the Nationwide Multi-state Licensing System has been delayed.

At first, any proposed revisions were scheduled to be implemented for the first quarter of 2019 reporting period. But the Registry’s notice indicated that it was postponing the implementation for a year until the first quarter of 2020. Originally, comments to Proposal 2018-1 were due by April 13, 2018.

“The delayed implementation will allow for industry users to be better acquainted with the use of NMLS 2.0 and allow additional time to prepare for the first filing in the new system,” the notice stated.

The NMLS had requested comments to the proposed changes to the Mortgage Call Report (MCR) contained in Proposal 2018-1. Some of the proposed changes include the following:

• The requirement that licensed companies would only have to complete those fields of the MCR directly relevant to the business enterprise.
• Updating of the MCR definitions and instructions to provide clarity and uniformity.
• The addition of a Supplemental State-Specific Form (SSSF) to allow states to request filers provide certain state-specific information that would satisfy requirements of their jurisdiction.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) requires all state mortgage licensees to submit a report of financial condition and loan activity to the NMLS. The California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (CRMLA) both contain provisions related to reporting requirements for licensees, including rules related to Mortgage Call Reports, annual reports, special reports detailing servicing activity, and audit reports. Fannie Mae or Freddie Mac Sellers/Services or Ginnie Mae Issuers must submit an Expanded Mortgage Call Report.

Companies that hold a state license or state registration through the Nationwide Multistate Licensing System & Registry (NMLS) are required to complete a Mortgage Call Report. All CFLL and CRMLA licensees are required to file a Mortgage Call Report with the NMLS. Mortgage loan originators are required, under both the CFLL and the CRMLA, to ensure that all residential mortgage loans they process to closing are included in the Mortgage Call Reports submitted to the NMLS.

There are two different types of Mortgage Call Report (MCR) Filings in NMLS. The Expanded Mortgage Call Report (E-MCR) and the Standard Mortgage Call Report (S-MCR). The E-MCR is required for a company that indicates on its Company Form (MU1) that it is a Fannie Mae or Freddie Mac Approved Seller/Servicer or Ginnie Mae Issuer. A company required to only file an S-MCR may choose to file an E-MCR.

Mortgage Call Reports have two components – the Financial Condition (FC) and the Residential Mortgage Loan Activity (RMLA) Report. The FC contains the company’s financial data and, for Standard filers, is required to be filed annually, no later than 90 days after the end of the fiscal year. Expanded filers must file the Financial Condition Report every calendar quarter. The RMLA Report includes information about the company’s mortgage activities and its’ Mortgage Loan Originators.

Standard MCRs must be submitted as follows:

• RMLA is due quarterly, within 45 days of the end of the calendar quarter.
  • Q1 data (January 1 – March 31) is due May 15
  • Q2 data (April 1 – June 30) is due August 14
  • Q3 data (July 1 – September 30) is due November 14
  • Q4 data (October 1 – December 31) is due February 14
• FC is due annually, within 90 days of a business enterp[rise’s Fiscal Year End as reported in the Company (MU1) Form.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

A recent study shows that many small and medium-sized enterprises/businesses  (SMEs, SMBs) are unprepared for the General Data Protection Regulation (GDPR) that took effect on May 25, 2018. The consequences may be costly financially as the GDPR replaces the entire body of existing data protection laws throughout Europe and significantly effects how companies handle, protect and profit from data.

This new evidence shows that the GDPR is likely to impact smaller companies as the study shows that 82% of SMEs are unaware of the law and therefore potentially face substantial fines when the enforcement of the GDPR begins next year in 20-19. Other findings of the survey show:

• More than 75 percent of the survey’s respondents outside Europe say they are not or don’t know if they are prepared for GDPR;
• More than 80 percent of the survey’s respondents either have knowledge of nothing about the GDPR or have knowledge of only a few details about the GDPR;
• Less than one in three companies believe they are prepared for the GDPR;
• 97 percent of companies don’t have a plan for compliance with the GDPR;
• Only nine percent of IT and business professionals are confident that they will be fully ready for the GDPR.

Any business and not-for-profit organization that processes personal data related to employees, customers or prospective employees or customers who are in the European Union (EU) and/or are EU citizens fall within the scope of GDPR, regardless of the location of the company or the location of the actual data processing itself. Thus, the law basically applies on a worldwide scale and all those business enterprises affected had until May 25, 2018, to sufficiently prepare.

By attaching rights to an individual’s data separately from the right attached to an individual, the EU can impose its data protection standards on businesses in locations outside of Europe. In determining whether a business enterprise is within the scope of the GDPR, three questions should be considered. If a business can affirmatively answer any of the following three questions, it is most likely within the scope of the GDPR:

1. Is the business organization based in the EU?
2. Does the organization handle data concerning EU-based individuals?
3. Does the organization do any kind of business with organizations to which 1 or 2 apply?

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In Airs Aromatics v. CBL Data Recovery Technologies, 2018 S.O.S. 2612, filed May 23, 2018, CBL Data Recovery Technologies, Inc. (CBL) appealed an order denying its motion to set aside a default judgment entered in favor of Airs Aromatics, LLC (Airs). CBL argued that because the trial court awarded damages above the amount demanded in the complaint, the default judgment was void pursuant to § 580 (a) and § 585 (c) of the California Code of Civil Procedure.

The California Court of Appeal for the Fourth Appellate District, Division One, agreed. The Court simply reaffirmed the long-standing rule of § 580 (a) that “The relief granted to the plaintiff, if there is no answer, cannot exceed that demanded in the complaint.” While there are exceptions to § 580 for personal injury or wrongful death cases and cases requesting punitive damages. § 580 (a), § 425.11, § 425.115), none applied to Airs’s request for compensatory damages.

Other statutes parallel § 580’s rule that a complaint’s prayer or demand for relief must state the amount of damages sought, except in cases involving personal injury, wrongful death, or punitive damages. (§ 425.10 (a)(2), § 425.10 (b).)

§ 585 (c) states that a plaintiff requesting a default judgment “may apply for the relief demanded in the complaint.” Further, a court “shall render judgment in the plaintiff’s favor for that relief, not exceeding the amount stated in the complaint . . . as appears by the evidence to be just.”

§ 580 is strictly construed “in accordance with its plain language” and “a plaintiff cannot be granted more relief than is asked for in the complaint.” In re Marriage of Lippel (1990), 51 Cal.3d 1160, 1166. A default judgment greater than the amount specifically demanded in the complaint is void as beyond the court’s jurisdiction. Greenup v. Rodman (1986) 42 Cal.3d 822, 826; see Finney v. Gomez (2003) 111 Cal.App.4th 527, 534 [“[T]he courts have reaffirmed the language of section 580 is mandatory. Therefore, ‘in all default judgments the demand sets a ceiling on recovery.’ “].)

While there’s unquestionably a substantial amount of precedent that delineates the rule, the case demonstrates the (apparent) necessity to yet again reaffirm the rule. It’s one thing for a plaintiff to state in a complaint that it is requesting damages “in excess of $25,000 and in an amount to be proven at trial.”  This will certainly establish jurisdiction and move the case to trial, however, if the defendant defaults problems can clearly arise if the plaintiff’s prayer only states it is requesting damages “in excess” of $25,000, even though it can prove actual damages in the millions. Because $25,000 is the only number listed in the complaint, that’s the limit on any recovery in case of default. What makes the rule even more unforgiving is that any default judgment in excess of the amount stated in the complaint is not merely voidable, but void.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The California Residential Mortgage Lending Act (CRMLA) defines “trust funds” as funds that a licensee collects and holds on behalf of another while making or servicing a mortgage loan. Licensees must place the funds in a non-interest-bearing account with a federally-insured depository institution.

Licensees may not commingle trust account funds with any other funds that they hold or possess. Funds in a trust account may only be removed for the following reasons:

• Payments authorized by the borrower, allowed by the mortgage lending agreement, or required by state or federal law;
• Refunds to the borrower;
• Transfer of funds to a trust account with another depository institution;
• Forwarding of funds when there is a new loan servicer for the mortgage loan;
• Removal for any legal reason stated in the lending agreement; and
• Compliance with a regulatory or court order.

At the request of the owner of trust funds, a licensee may transfer funds initially placed in a non-interest-bearing account into an interest-bearing account in a federally-insured depository institution if the licensee:

• Establishes the account in the name of the licensee in trust for a specified beneficiary;
• Confirms that all funds are federally insured;
• Separates trust funds from the funds of the licensee and from funds belonging to any other trust account;
• Discloses the method of calculating and paying interest to the beneficiary and to the person from whom funds are received;
• Discloses whether there will be payment of service charges to the depository institution and who will pay them;
• Discloses whether there are penalties for the withdrawal of funds from the account; and
• Pays all interest earned from the account to the owner of the trust fund or the beneficiary.

CRMLA licensees must supply borrowers with statements of account that show the transactions and the borrower’s current position. Licensees may not withdraw funds from an account in excess of the amount in the account at the time of the withdrawal. Any payment made to a borrower’s account must be credited on the same day as the payment was received by the licensee, regardless of when it was processed.

A CRMLA licensee is generally required to process the payment to the borrower’s account within two business days from the day the payment was received. The trust funds held by a licensee are never treated as an asset of the licensee and are not subject to a claim or an enforcement action against the licensee.

The CRMLA is contained in Division 20 of the California Financial Code, commencing with Section 50000. The regulations are contained in Subchapter 11.5 of Chapter 3 of Title 10 of the California Code of Regulations, commencing with Section 1950.003 (10 C.C.R. §1950.003, et seq.).

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.