As we round out the year, we want to catch you up on where we are as a firm, provide some insights into cases coming down the pike, and give you some food for thought on some of the most interesting and current legal developments.
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Welcome to the Salisian | Lee LLP Newsletter
Welcome to the Autumn edition of our firm newsletter. As we round out the year, we want to catch you up on where we are as a firm, provide some insights into cases coming down the pike, and give you some food for thought on some of the most interesting and current legal developments. We hope you enjoy and please, feel free to reach out with any questions or concerns at info@salisianlee.com. We always look forward to hearing from you. Happy Autumn!
Firm News

  • Senior Associate Tyler Sanchez and his wife welcomed a new baby boy to their family in June.
  • We hired a law clerk, Danya Elbendary, in September, to help support our various litigation teams. Welcome Danya!
  • In concert with our firm's Amicus sponsorship, several Salisian Lee attorneys attended Lambda Legal's West Coast Liberty Awards in October. The event was held to celebrate the organization's mission of furthering LGBTQ+ rights and supporting those living with HIV.
  • Thanks to one of our cases in which we appealed an erroneous trial court decision and won that appeal, there is new California law on the books! In a published opinion by the California Court of Appeal in Soleimany v. Narimanzadeh (Case No. B304644), the court found that lenders' usurious interest rate on a loan secured by a deed of trust still entitled them to seven percent interest on any unpaid principal at the date of maturity. This result spells out the default interest rate in this context - a meaningful development lenders and borrowers alike should recognize moving forward.
  • Congratulations to our new associate Danya Elbendary for having successfully passed the California Bar.
 

Cases to Watch

By Danya Elbendary, Law Clerk

Andy Warhol Foundation for the Visual Arts v. Goldsmith, U.S. No. 21-869 (2022)

When is artwork considered "transformative" under the fair use doctrine?

The U.S. Supreme Court began its latest term on October 3, 2022 and heard several critical cases in its first month. One such case was Andy Warhol Foundation for the Visual Arts v. Goldsmith, a copyright protections case concerning fair use of artwork.

Generally, the Copyright Act of 1976 extends copyright protections to both an original, creative work itself as well as to derivative works, defined as "a work based upon one or more preexisting works." However, under the common law doctrine of fair use and as codified under the Copyright Act, certain uses of a copyrighted work, such as for the enumerated purposes of criticism, comment, news reporting, teaching, scholarship, or research, are deemed to constitute a "fair use," and thus, are not an infringement of copyright.

Factors to be considered in determining whether a work constitutes a fair use under the Copyright Act include (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

The issue in this case relates to the first factor: the purpose and character of the use, which is primarily assessed based on the degree to which the use is considered "transformative." Specifically, courts look to see whether the new work "adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message."

The dispute involves a photograph taken by photographer Lynn Goldsmith of the musician Prince in 1981, which Goldsmith later licensed to Vanity Fair magazine in 1984 for limited use as an artistic reference for an Andy Warhol commission based on the image, and for use in its November 1984 issue only. Warhol, however, created an addition 15 pieces based on Goldsmith’s photograph, collectively deemed the "Prince Series," which were later acquired and sold by the Andy Warhol Foundation ("AWF") following Warhol's death. When Goldsmith eventually became aware of the series, she registered the photograph with the U.S. Copyright Office, eventually leading AWF to sue for a declaratory judgment of noninfringement or fair use and causing Goldsmith to countersue for copyright infringement.

In 2019, the district court granted summary judgement for AWF on its fair-use claim, finding that Warhol had transformed the work into something "new and different." However, in 2020, the Second Circuit Court of Appeals reversed, holding the "Prince Series" did not constitute fair use of Goldsmith's photograph, as it remained "recognizably derived" from the original by retaining the essential elements of the source material. On October 12, 2022, the Supreme Court heard oral argument for the case.

The highest Court's opinion here will be an interesting one to look out for. As both the Second Circuit and several Justices noted during oral argument, this case raises concern regarding the potential need for judges to assume the role of art critics in copyright interpretation. Accordingly, the Court's decision on this issue as it pertains to fair use has the potential to fundamentally shape not only copyright protections, but also judicial interpretation of the fair use doctrine in the future.

National Pork Producers Council v. Ross, U.S. No. 21-468 (2022)

The Supreme Court also heard oral argument on October 11, 2022, in National Pork Producers Council v. Ross, a key case before the Court this term that remains critical to watch due to its far-reaching implications, from pork to immigration.

The case examines whether California's Proposition 12 violates the Dormant Commerce Clause, a federal constitutional principle which forbids states from imposing regulations that unduly burden interstate commerce. Proposition 12 prohibits California businesses from knowingly engaging in a commercial sale of pork meat, among other animal products, which are the product, or immediate offspring of, an animal that was confined in a way that fails to comply with certain regulatory standards that aim to prevent animal cruelty.

During oral argument, challengers of Proposition 12 argued that the law violated the Dormant Commerce Clause in two major ways. First, it violates the extraterritoriality principle, which generally holds that a state cannot regulate transactions that occur outside of that state's borders and attempt to impose its own moral views on other states; and second, it fails the balancing test established by the 1970 Supreme Court case Pike v. Bruce Church, Inc., which requires a balancing of the burdens on interstate commerce against the benefits of the regulation, due to the substantial burdens that it places on interstate commerce. On the other hand, proponents of Proposition 12 argued that states should be able to enact health, safety, and environmental regulations for the benefit of its citizens.

Several Justices raised interesting questions during oral argument, bearing some insight as to their view on the potential implications of the case. Notably, Justice Kagan envisioned a scenario in which states might use laws structured like Proposition 12 to pick fights over policy disputes with other states, using labor unions and immigration policy as examples, and highlighting concerns regarding balkanization more generally. This sentiment was echoed by other Justices, including Justices Alito and Kavanaugh, who also asked questions regarding union membership and immigration in the same context. Finally, Justice Barrett mirrored this concern, likening it to vaccination status and gender affirming surgeries; however, Justice Barrett also pointed out that striking down Proposition 12 as the challengers of the law suggest could lead to the striking down of "many, many state laws" that would impermissibly regulate out-of-state transactions in the same way.

Given the wide range of implications that the Court's interpretation on this issue could have in terms of States' ability to impose burdens on interstate commerce using moral-based legislation if Proposition 12 is allowed to stand, the Court's opinion in this case will be a key ruling to watch out for during this Supreme Court term.

Chamber of Commerce of the United States of America v. Bonta, 9th Cir. No. 20-15291 (2021)

Where do mandatory arbitration agreements stand?

On August 22, 2022, in a two-to-one decision, the Ninth Circuit Court of Appeals withdrew its previous ruling in Chamber of Commerce of the United States of America v. Bonta, which had largely upheld California's Labor Code Section 423.6 banning mandatory arbitration agreements in the employment context, and instead granted a panel rehearing to reconsider the issues.

Specifically, Section 432.6 prohibits employers from requiring applicants and employees to consent to mandatory arbitration agreements "as a condition of employment, continued employment, or the receipt of any employment-related benefit." In 2020, shortly after the law took effect, the U.S. Chamber of Commerce requested a preliminary injunction to halt its enforcement, which was granted by a federal district court that concluded Section 432.6 placed agreements to arbitrate on unequal footing with other contracts and stood as an obstacle to the other purposes and objectives of the Federal Arbitration Act (the "FAA").

On appeal, the Ninth Circuit originally held that the district court erred in concluding that Section 432.6 was preempted by the FAA because it was solely concerned with pre-employment behavior, although it did agree that civil and criminal penalties associated with the section were contrary to the purpose of the FAA, and thus preempted. Following that decision, a petition for rehearing en banc was filed by the Chamber of Commerce, which the Ninth Circuit deferred in anticipation of the Supreme Court ruling on a similar issue in Viking River Cruises v. Moriana.

In Viking River Cruises, the Supreme Court ultimately held that the FAA preempted a similar California Law that invalidated contractual waivers of the right to assert representative claims under the California Private Attorneys General Act. Subsequently, instead of ruling on the Chamber of Commerce's petition, the Ninth Circuit decided to withdraw its previous opinion and rehear the case.

The Ninth Circuit's decision to withdraw its opinion will surely cause confusion regarding the legality of mandatory arbitration agreements in California among both employers and attorneys alike until the issue is reheard. Given the uncertainty of the outcome here, it would be prudent for employers in California to implement voluntary, as opposed to mandatory, arbitration agreements at least until the Ninth Circuit renders its final decision.
Topics Making Headlines
 
Commercial Real Estate Proprietors May Benefit from California's Residential Housing Shortage

By Marius Mateescu, Associate
California must build over 180,000 new units per year over the next eight years to keep up with existing housing demand, according to the 2022 Statewide Housing Plan. Unfortunately, only 100,000 new housing units are built per year, in part due to the California Environmental Quality Act ("CEQA").

CEQA's purpose, when passed in 1970, was to facilitate public input into developments by requiring dissemination of certain information. But it came with unintended consequences. Specifically, affordable housing development projects are routinely delayed for decades as CEQA litigation over allegedly inadequate disclosures contained in "environmental impact reports" occurs. These reports are supposed to detail how the developments will impact the environment. But development opponents use it as a tool to delay, claiming inadequacy under CEQA because they legally can do so. Due to CEQA litigation, projects are routinely abandoned as cash reserves dwindle, usually after a trip to bankruptcy court. A new developer must pick up the old developer’s pieces yet faces the same issues. This process can continue for decades, stymieing housing development for those who need it most.

Against this backdrop, the California Legislature recently enacted the Affordable Housing and High Road Jobs Act of 2022 (the "Act"), signed into law by Governor Newsom on September 28, 2022 and sunsetting on January 1, 2033. Broadly, the Act allows for commercially zoned property to be converted into multi-unit residential property in a more streamlined process without CEQA's more onerous provisions applying. In turn, developers are substantially freed from the burden of dealing with the considerable costs occasioned by CEQA litigation.

More specifically, the Act allow a "development proponent" to submit an "application for a housing development" in accordance with the Act's provisions, and local government is mandated to allow development to proceed without CEQA applying. See Gov't Code § 65912.110. To qualify, a project must meet certain conditions, outlined below.

First, the project must be within a commercial zoning area or a commercial corridor. See Gov't Code §§ 65912.111(a), 65912.120 et seq. Second, the development must be on a parcel within "a city where the city boundaries include some portion of either an urbanized area or urban cluster" or in an "unincorporated area... wholly within the boundaries" of such an area or cluster. See Gov't Code § 65912.111(b). Third, more than 75 percent of the development's perimeter must adjoin "parcels that are developed with urban uses," and, subject to certain exceptions, it may not be associated with or connected to the following:
  • a "industrial use"
  • a motorhome park
  • a "coastal zone"
  • "prime farmland or farmland of statewide importance"
  • "land zoned or designated for agricultural protection or preservation"
  • "wetlands"
  • land within "very high fire hazard severity zones"
  • a "hazardous waste site"
  • a "delineated earthquake fault zone"
  • land within a "regulatory floodway"
  • lands subject to a "natural community conservation plan" or "habitat conservation plan" or which is a habitat for a "protected species"
  • lands "under a conservation easement."
 
Gov't Code § 65912.111(c)-(f).

If the site is within a "neighborhood plan area," it must be permitted by a "neighborhood plan." Gov't Code § 65912.111(g). If the site is "vacant," it cannot contain "tribal cultural resources" that may be affected by the development, nor be within a very high fire hazard severity zone. See Gov't Code § 65912.111(h).

Along with these conditions relating to the land's characteristics, the units within the development must meet "affordability criteria." Gov't Code § 65912.112. Specifically, all of the units within the project, other than the managers' units, must be dedicated to lower income households and offered at an "affordable cost" or "affordable rent," for a period of 55 years for rental units and 45 years for owner-occupied units. See Gov't Code § 65912.112(a)-(b).

The development must also meet certain "objective development standards," meaning the development: (1) must be a "multifamily housing development project"; (2) must have sufficient density; (3) must be subject to a "phase I environmental assessment"; and (4) must not be within 500 feet of a freeway or within 3,200 feet of a facility extracting or refining oil and gas. See Gov't Code § 65912.113 (a)-(g). Finally, certain labor standards apply to those working on the development. See Gov't Code §§ 65912.130, 65912.131.

Navigating these onerous requirements may require counsel. However, commercial proprietors facing decreased demand due to COVID-19 may benefit from the Act. A couple beneficial implications immediately stand out.

Initially, the Act creates an entitlement by right for developments meeting its conditions. This entitlement could potentially raise the value of commercial property without any development occurring yet, because of the property’s increased potential to generate increased short-term cash flow and long-term capital gains when compared to commercial property of the same type. In other words, a mere plan to develop the commercial property under the Act when such development could not have otherwise occurred is potentially valuable because it allows development without the usual cost of CEQA litigation. Thus, before commercial property is sold, the potential of acquiring an entitlement by right under the Act should be explored to maximize the value.

Also, it appears that after 55 years for rental units or 45 years for owner-occupied units, the affordable housing development may be turned into luxury units. There is no ban on such conduct in the Act. Thus, the long-term potential of the development is substantial. After renovations and maintenance, it could substantially appreciate in value and be rented out at significantly higher rates as luxury apartment units.

Commercial proprietors interested in learning more about the Act's streamlined development procedures should contact an attorney to investigate whether their properties and/or development plans are subject to the Act and whether, if an application for development under the Act has been denied, their rights under the Act have been violated.
"Transmogrifying the 'American Rule' in Business Tort and Contract Cases" - Fallout from Siry Inv., L.P. v. Farkhondehpour, 13 Cal. 5th 333, 339 (2022)

By Tyler Sanchez, Senior Associate
A hallmark of American jurisprudence is the so-called "American Rule" requiring each party to bear its own attorney's fees in litigation absent a statutory or contractual exception. Many breach of contract and business tort cases have settled, been abandoned, or resulted in Pyrrhic victory by the sheer weight of compounding attorneys' fees that exceed the amount in controversy.

In July 2022, the California Supreme Court weighed in on this predicament when it issued its ruling in the case Siry Inv., L.P. v. Farkhondehpour, 13 Cal. 5th 333, 339 (2022), interpreting the breadth of conduct that may trigger special civil remedies allowed for by Penal Code section 496(c).

That section states that any person who has been injured by a violation of section 496(a) "may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney's fees."

The Court sought to clarify what conduct constitutes a purchase or receipt of "property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained" under section 496(a).

The underlying allegations in Siry are familiar to business litigators:
  • Parties a created partnership to renovate and lease space in a mixed-use building in downtown Los Angeles with a specific cash distribution allocation.
  • Defendant-partners created a separate entity apart from partnership.
  • Defendant-partners required tenants to pay the new entity, thereby diverting rental income from partnership.
  • Defendant-partners charged personal and non-partnership expenses to partnership.
  • Defendants misrepresented rental income to keep plaintiffs unaware of diversion of funds.
 
In an amended pleading, plaintiffs prayed for treble damages and attorneys' fees under Penal Code section 496(c). The Court of Appeal found section 496(c) inapplicable in the underlying context because the legislative intent to maintain tradition remedies for business tort claims trumped the plain language of the statute.

The Supreme Court disagreed after an extensive analysis of the various approaches courts have taken on the issue of what constitutes a theft under section 496(a) to trigger the special civil remedies of section 496(c). The Court found that remedies under section 496(c) are available when property "has been obtained in any manner constituting theft" based on its reading of the unambiguous language of section 496 read together with the general theft statute in Penal Code section 484. On the facts of Siry, the Court found that by diverting the partnership funds with the intent to steal, the defendant-partners had “received” property obtained in a manner constituting theft and thus liable for the special civil remedies.

In an attempt to rein in the ramifications of its decisions, the Court clarified that a plaintiff must prove criminal intent on the part of the defendant beyond "mere proof of nonperformance or actual falsity." The Court also issued a vague warning that not all fraud, misrepresentation, and breach of contractual promise will amount to theft and if misrepresentations or unfulfilled promises "are made innocently or inadvertently, they can no more form the basis for a prosecution for obtaining property by false pretenses than can an innocent breach of contract."

It is in this uncertain dicta that the Court kicked the proverbial "hornet's nest" that will inevitably lead to an influx in section 496(c) related litigation, as creative attorneys attempt to pave a pathway to attorneys' fees and treble damages where those remedies were previously unavailable in business tort cases.

In fact, a California district court – in Carreon v. Edwards, No. 2:19-cv-01879-TLN-JDP, 2022 U.S. Dist. LEXIS 179047 (E.D. Cal. Sep. 29, 2022) – has already found, in denying a motion to dismiss, that the Siry holding applies to a breach of contract claim containing allegations that a defendant intentionally breached a contract in order to steal property.

It also remains to be seen whether this "sword of Damocles" will (1) lead to more or less settlements in the future; (2) lead to more just or unjust results in low compensatory damage cases; or (3) as suggested by the Siry court, cause the legislature to revisit and revise section 496 to clarify its intent after Siry.

For litigators, it will be important to understand the ramifications of the holding in Siry and the resulting cases to be prepared for such claims and to use such claims to leverage seemingly low-value cases.
Collecting Crypto in California - A Judgment Creditor's Potential Hidden Gem

By Woody Jones, Associate
The good news is that you have a judgment against your Debtor, and you have the ability to collect on their assets. The not-so-good news is that finding those assets can be difficult. Debtors may not be quick to turn over their assets, but they are often quick to hide them. Among other tactics, people evading collections have historically hidden their assets in offshore bank accounts to evade paying taxes or creditors, and that still happens. However, an increasingly common hideout Debtors have turned to more recently is converting their money into cryptocurrencies and safeguarding it in a digital account through a crypto exchange such as Crypto.com, Coinbase, Gemini, Binance, and others. This is an alluring hiding spot not only because it is a newer and perhaps not as well understood type of asset, but also because the general public seems to believes that these accounts are secure, anonymous, private and, most importantly, cannot be reached by anyone attempting to collect on them. The general public might be wrong.

While cryptocurrency accounts may be protected by incredibly complex cyber security, levying on a cryptocurrency account may potentially be just as straightforward as levying on a traditional bank account. Before discussing digital currency and how to collect from a crypto exchange platform, a brief explanation of the collection process is our starting point.

Our Creditor Clients first obtain a judgment, usually by default, stipulation, summary judgment, or after a court trial. Often, our clients secure a default judgment because the Debtor simply fails to respond to the complaint and takes no other corrective action. While this is a quick win for our clients, collecting on that judgment is a different story, and can prove challenging.

To collect on the money judgment1, our next step is to research any assets the Debtor may have. This is typically done by a private investigator who provides a report of any real property, personal property or bank accounts in the Debtor’s name, among other assets. Because cash is liquid, bank accounts are usually a great starting place to levy if any accounts are found. However, the Debtor knows this too, not only because it is an obvious start, but also because the Creditor must give notice before taking any enforcement steps, including Notice of the Entry of Judgment to the Debtor. This acts as sort of an unofficial warning to the Debtor that the collections hunt for their assets is on, and so begins the chase.2

Once the Debtor's bank accounts are located, a legal team prepares the necessary documents for a bank levy, and sends them to the proper Sheriff's office with instructions to levy the account. This freezes any funds in the Debtor’s accounts, the bank then forwards the funds to the Sheriff, and finally the Sheriff forwards the funds to the Judgment Creditor. However, knowing that the bank levying process often takes longer than one would hope, a common strategy employed by Debtors is to cash out their bank accounts early in the process or move money around from account to account, thereby evading collection.

But what about collecting from crypto accounts?

A crypto account is similar to a traditional bank account in that users deposit and store crypto currency3 in what is called a digital wallet. Cryptocurrencies have very unique and highly technical attributes to it. This article helps explain cryptocurrency in more detail, but the gist is that it is a completely digital currency not regulated by a central government or agency, but is instead regulated in a decentralized system with "miners"4 solving complex mathematical problems to keep the blockchain updated, or the ledger of transactions. While there are various reasons people choose to use crypto, all users need an account to store them, since they are digital and there are no traditional physical banks to do so. This is where crypto exchanges, such as Coinbase, come into play, which are online platforms for buying, selling, transferring, and storing cryptocurrency.

Cryptocurrency's decentralized digital structure makes transactions hard to follow, which is one attraction for its account holders. Due in large part to privacy and security concerns, people choose to convert their cash into cryptocurrency and store it in online wallets or crypto exchange platforms. But even though there is a lot of chatter about how private and secure crypto is, that does not necessarily mean it is completely hidden and untouchable. Just because the account transactions are incredibly hard to track does not mean the account itself is hard to find.

In one instance, after successfully levying on a Debtor's traditional bank accounts and rendering them nearly empty, a Judgment Debtor stashed away five figures in a popular crypto exchange account, which we fortunately were able to successfully levy upon as well. Just as we did with the traditional bank accounts, we followed the standard bank levying procedures, instructed the Sheriff to levy on the Debtor's crypto exchange account, and were able to secure a sum of money for our client. Thus, while holding assets in cryptocurrency may have been an option for debtors to evade collections efforts at one point simply because of its novelty, that may no longer be true today.

1 A money judgment is the part of a judgment requiring the payment of money. Generally, a money judgment must be stated with certainty and specificity. See Civ. Proc. Code § 680.270.

2 The preparation of a few preliminary documents are advisable. The Abstract of Judgment creates a judgment lien on real property within a county (Civ. Proc. Code section 697.310); the Notice of Judgment Lien creates a judgment lien on personal property within the state (Civ. Proc. Code section 697.530(d)(3)); and pertinent here is the Writ of Execution, which is a court-approved accounting form of all amounts owed to the Creditor (Civ. Proc. Code section 699.720(a)); and the Memorandum of Costs accounts for the amounts owed to the Creditor in addition to the judgments, such as costs, interests or fees (Civ. Proc. Code section 685.070).

3 There is much litigation as to whether cryptocurrencies such as Bitcoin are "Money" or "Funds" under 18 USC section 1960. Notably, the IRS classifies virtual currency as Property for federal tax purposes: https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions.

4 Josh Fairfield, BitProperty, 88 S. Cal. L. Rev. at 15 (2015), available at http://ssrn.com/abstract=http://ssrn.com/abstract=2504710.
Legal Disclaimer: The information contained in this newsletter is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients of content from this newsletter, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the state of California.
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