STATUTE OF FRAUDS KILLS BORROWERS’ SUIT AGAINST BANK

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Banks have been scrutinized for lending practices for years, and particularly so following the market downturn in 2008.  Inappropriate and unmonitored loans went into default in the millions across the United States beginning in that year.  The federal government took numerous, specific actions designed to control and regulate lending institutions.

Borrowers continue to file lawsuits as a result of poor lending practices.  The claims in these suits, while in some instances quite legitimate, are still required to follow the basic parameters of California law.  Sometimes, these lawsuits fail due to hard and fast rules regulating oral promises and the “statute of frauds.”  Such is the result in the recent case of Jones v. Wachovia Bank (2014) H038382; Sixth App. Dist., Santa Clara County.

Plaintiffs Mark and Roberta Jones sought damages after losing their home in a foreclosure sale which they understood from a phone conversation with the bank would be postponed to a date 10 days after the actual sale date.  The Jones further alleged they “had ready funds available to cure the outstanding default within the time prescribed by law and made preparations to timely submit funds to Wachovia. Plaintiffs were prevented from doing so by the advancement of the trustee sale date, which the Jones claim was contrary to the oral representation made by Wachovia on the telephone.

The Court of Appeal reviewed some of the basic principles of agreements for real estate loans and modifications.  They are summarized here.  In California, a real property loan generally involves a promissory note secured by a deed of trust in which the debtor (a home buyer) is the trustor, the creditor (a lending institution) is the beneficiary, and a neutral third party serves as the trustee. When a debtor defaults on a loan, the creditor has the right to invoke the power of sale provided by the deed of trust.

The statute of frauds requires certain agreements involving real property to be in writing.  A deed of trust is covered by the statute of frauds (Civ. Code, § 1624(a)(6)), and an agreement to modify a deed of trust is governed by Civil Code section 1698.  An agreement to postpone a valid sale of property beyond the date when said property may be sold under and according to the terms of a trust deed obviously is an agreement to alter the terms of the instrument, raising the issue of the statute of frauds.

To prevent (“estop”) a defendant from asserting the statute of frauds, a plaintiff must show unconscionable injury or unjust enrichment if the promise is not enforced. The doctrine of estoppel has been applied where an unconscionable injury would result from denying enforcement after one party has been induced to make a serious change of position in reliance on the contract or where unjust enrichment would result if a party who has received the benefits of the other’s performance were allowed to invoke the statute.

Here, the plaintiffs were unable to show injury, much less the unconscionable injury needed to avoid application of the statute of frauds. At a minimum, the Jones would have to show that they changed their legal position in some way, or undertook some act that showed detrimental reliance upon a promise by the Bank.  They could not do so, and their claim thus failed.

This opinion by the Court of Appeal demonstrates that the statute of frauds is still an important legal hurdle that a borrower must overcome if he or she is going to sue a bank on alleged oral promises.  There is considerable work for a lawyer to do when making a claim of this nature.  Worse, most loan documents have attorney fee provisions, meaning that if the borrower makes a claim against a bank and fails, the borrower could end up with a judgment for attorneys’ fees when he or she loses.  Borrowers should be very cautious about pursuing a claim on an oral promise by a bank representative, and a thorough discussion with counsel about whether to pursue a case should include the risk of loss.

 

HOW TO KEEP COMPETITORS OUT OF YOUR RETAIL SPACE

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Most retail shops operating in a mall or other commercial area would like a guarantee that the landlord will not rent to a competing business.  This guarantee is often negotiated in the lease as an “exclusive use” provision.  Here are some things to consider when negotiating exclusive use provisions:

What’s the use?  Commercial tenants should specifically define their “use” in the Lease.  What kinds of other businesses might be allowed in the absence of the provision?  For instance, if a tenant has an ice cream cone shop and also sells a few ice cream cakes, can the landlord still rent to a bakery? If a coffee retailer has “exclusive use,” does that mean a sandwich shop can’t also sell coffee?  Commercial tenants should be specific in the negotiations with the landlord in order to deter competing businesses from renting in the same building.

What about pre-existing tenants?  A landlord can promise not to rent to a competing business in the future, but what happens if an existing tenant wants to change its business model and start offering competing products?  Retail tenant are reminded to inquire about existing leases and the specific nature of the businesses of the other tenants.  Again, use the lease to negotiate the issue of exclusions and limitations in use of the business area by the competing businesses.

What if things change?  What happens if a tenant re-focuses its business and the use changes? Can it still keep the competitors away…and can it do so with regard to the new focus of the business? What if the tenant sublets some space or assigns the lease – does the exclusive use still apply?  If the tenant temporarily falls behind on the rent, does it lose the right to exclusive use?  All of these issues can and should be addressed in the lease.

What’s the remedy? If a tenant moves in, and changes the focus of its business to compete with an existing tenant having a similar business, and an exclusive use provision, what is the landlord’s remedy?  The Lease will often describe the notice provisions and “events of default.”  A Notice of Default and eventually a Notice to Quit may be proper remedies.  Conversely, can a tenant take legal action if a landlord violates the contract and leases space to a competitor?  Again, remedies are typically proscribed by the Lease, and if the evidence is availing for the tenant, an action for injunction will likely be an appropriate measure.   Be wary of withholding rent, and be sure to consult with an attorney before taking any action that could be construed as a default.

ARE YOUR LINKEDIN CONTACTS A TRADE SECRET?

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If salespeople connect with their business contacts on LinkedIn or another social media site, can they take that information with them when they leave the company?  Maybe not, according to a federal court in California.

Employees who wish to start their own businesses are often faced with difficult questions.  Can I take my customer list with me?  Can I contact customers of my former employer?  We have received many inquiries on these questions through our websites, pcghlawyers.com and hammers-law.com, both from employers and employees.

David Oakes worked for six years as a salesman for a cell phone accessories company. He had signed an agreement saying that he wouldn’t disclose any proprietary information, including the company’s customer base. When the company terminated him, he started a competing business. His old company then sued, claiming, among other things, that he had maintained his LinkedIn contact list after he was terminated.

Oakes asked the court to throw the suit out, arguing that contacts on LinkedIn are not a “trade secret.”

But the court said a jury should decide the question. Among other things, the jury will have to consider (1) whether the contact list was built up as a result of the company’s business efforts, as opposed to simply being generated by LinkedIn’s “People You May Know” algorithm, and (2) whether Oakes “disclosed” the information by making his contact list accessible to others.

If you have questions about your right to limit employees from taking customer lists, or if you are an employee wishing to start a business, contact a lawyer.

Stephen Hammers, Price, Crooke, Gary & Hammers, Incorporated, 10 Corporate Park, Suite 300, Irvine, California 92606,(949) 573-4910; (800) 511-6058; www.hammers-law.com 

 

COPYING COMPETITOR’S WEBSITE? THINK AGAIN.

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If you’ve put a lot of time and money into designing a distinctive website or online store, and a competitor comes along and copies your site’s look, what are your rights?  Can you file a lawsuit?  Yes, according to a federal court in a recent California case. The “look and feel” of a website is protected by the trademark laws.

Surprisingly, this is one of the first court rulings ever on this question.

In Ingrid & Isabel, Inc. v. Baby Be Mine, LLC, the U.S. District Court for the Northern District of California has made an important ruling.  The case involves two websites selling maternity products. Ingrid & Isabel claimed that a competitor by the name of Baby Be Mine had illegally copied its website design. Specifically, Ingrid & Isabel claimed that Baby Be Mine had copied (1) the idea of putting its logo in pink-orange pastel feminine lettering, (2) the use of models with long wavy hair, shown from head to mid-thigh, wearing white tank tops and jeans, and (3) the general colors, patterns, fonts and wallpaper of Ingrid & Isabel’s site.  Baby Be Mine filed a summary judgment motion arguing that the case should be thrown out.  It argued that there is little, if any, precedent suggesting that a cause of action can succeed on a claim that a website has been ‘copied.’

The District Court disagreed with Baby Be Mine.  It found that the case can and should be tried.  In the past, courts have ruled that the design of a physical store can amount to “trade dress” – such as the color scheme of 7-11 markets, or the distinctive décor of a Mexican restaurant chain. But this is one of the very first occasions in which a court has protected the design of online stores as well.

“Trade dress” refers to the distinctive way that a product is packaged or presented. Examples include the shape of a Coca-Cola bottle or the color of Tiffany’s blue boxes. You obviously can’t trademark the general idea of putting soda in a bottle or jewelry in a box, but if the color and shape are distinctive enough and are separate from the functionality of the product, then they’re protected, and a competitor can’t simply copy them.

Of course, websites are different from trademarks, which provide businesses with a number of additional rules to consider.  I’ve blogged about the importance of protecting trademarks in an earlier article (http://www.hammers-law.com/business-fraud/dont-skimp-protecting-trademarks/).  But differences aside, this ruling is important because it affirms that a website can be protected by the law.  In particular, a website can be a significant aspect of a company’s “trade dress,” and online shops now have legal recourse if their websites appear to have been copied by a competitor.

WAGE GARNISHMENT: A MINEFIELD FOR ORANGE COUNTY BUSINESSES

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Wage garnishment in Orange County is as difficult as it is in the rest of the country.  More than 10 percent of employees between the ages of 35 and 44 had their wages garnished last year, according to a new study by payroll company ADP. That’s a staggering figure, and it creates a serious problem for employers, who are subject to complex state and federal laws about garnishment and can be sued if they make a mistake.

For years, wage garnishment was generally limited to people who fell behind on child support payments or owed money to the IRS. But that’s changed, as more and more private companies are using wage garnishment as a way to collect overdue consumer debts.

In the past few years, these creditors have filed millions of lawsuits. Last year, some 4 million people had their wages garnished for credit card debts, student loans, car payments, medical bills and other consumer obligations. In fact, among employees earning $25,000 to $40,000 a year, more had garnishments for consumer debts than for child support.

There are complex federal and state laws that dictate how employers must respond to garnishment requests. Sometimes they conflict, in which case the employer must generally follow the law that results in the smallest garnishment.

Garnishment orders are typically made by a local court, after a worker has fallen seriously behind on a debt and the creditor has filed a lawsuit. Generally, a business must comply with the order and is not required by federal law to obtain a worker’s authorization to withhold money from a paycheck (although state law may vary).  Employers who fail to abide by garnishment orders, often pursued in California as “Writs of Execution,” can face fines, and even liability for the employee’s debt in some cases.

Under federal law, garnishment is limited to a percentage of a worker’s “disposable earnings.” Figuring this figure can be complicated.  It includes wages, salaries, bonuses, commissions, and pension earnings, but doesn’t include tips. This amount must be reduced by federal, state and local income taxes, along with Social Security and unemployment deductions – but not voluntary deductions such as union dues, health insurance payments or retirement plan contributions.

Garnishment amounts for consumer debts are limited to 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal hourly minimum wage, whichever is less. (Again, state laws may be different.)

Under federal law, up to 65% of disposable income can be garnished for alimony and child support, but this figure depends on whether the worker is supporting a new spouse or child as well as how far behind he or she is on the payments.

There are special rules that apply to garnishments of tax debts, bankruptcy-related debts, money owed to federal agencies, and student loans owed to the U.S. Department of Education.

The rules are so complex that it’s not unheard of for a local court to issue a garnishment order that’s not consistent with federal or state law. In such a case, the employer will need to go to the court and ask it to fix the problem – a company can’t legally break the rules even if it’s following a court order.

Some businesses have been known to fire employees rather than deal with wage garnishment issues. Curiously, federal law prohibits a business owner from firing someone due to a single wage garnishment, while theoretically allowing an employer to fire someone who has two separate wage garnishments at the same time, or who voluntarily assigned wages to a creditor rather than waiting for a court garnishment order.

In summary, employers should be extremely careful about garnishment. Employers who violate the federal law on firing over a garnishment can be sued for reinstatement and back pay, and can even be prosecuted criminally.