Salisian Lee LLP Newsletter

Welcome to the Salisian | Lee LLP Newsletter

Welcome to the fall edition of our newsletter. As always, we aim to provide you timely and useful insights into recent legal, regulatory and industry news in a brief, accessible and interesting way. We look forward to your feedback and to any suggestions you might have on how we can improve our efforts in this regard. Happy reading!

Firm News

Associate Yujin Chun became Membership Chair for the LACBA Barristers Executive Committee. The term officially started in July.

Associate Natalie Rastegari was married this summer, with a wedding in Italy.

In this Issue

State of the Law: Status Update on California's Marijuana Laws
New California Laws You May Have Missed: Summer 2018 Edition
The Privacy Movement: How California's New Consumer Privacy Law Affects You or Your Business

Cases to Watch

By Melissa Pender, Associate

Black Sky Capital, LLC v. Cobb, S243294. (E064482; 12 Cal. App. 5th 887; San Bernardino County Superior Court; CIVDS1416584.)

The California Supreme Court will review the Fourth District Court of Appeal's reversal of the judgment of the San Bernardino County Superior Court.

The root of the issue is a lender's ability to enforce two loans made to the same borrower and secured by the same property. In 1992, the First District Court of Appeal interpreted Code of Civil Procedure section 580d as restricting lenders to either a judicial foreclosure or a non-judicial foreclosure. Thus, that court held that a senior lender cannot collect on a senior lien through a non-judicial foreclosure and then judicially collect on the promissory note by claiming it is a sold-out junior. Simon v. Superior Court, 4 Cal. App. 4th 63 (1992).

The instant case involves two loans extended to Michael A. Cobb and Kathleen S. Cobb by Citizens Business Bank, which later sold the notes to Black Sky Capital, LLC. After the Cobbs defaulted on their senior loan, Black Sky conducted a trustee's sale under the senior deed. The Cobbs then defaulted on the junior loan, and Black Sky filed suit to recover the amount owed on the junior note. The San Bernardino County Superior Court granted the Cobbs' motion for summary judgment based largely on Simon. The trial court found that a lender that has already collected on a senior loan through foreclosure cannot pursue a monetary judgment for the junior lien, as this would be a deficiency judgment prohibited by Code of Civil Procedure section 580d.

Black Sky appealed, and the Fourth District Court of Appeal reversed, holding that Section 580d does not apply to multiple deeds of trust even where they are secured by the same property. The Fourth District therefore created a clear split between its decision in Black Sky and the precedent of Simon.

The California Supreme Court is now called upon to interpret the law under Code of Civil Procedure section 580d and resolve the split between Black Sky and Simon. Specifically, the Court will decide whether a creditor that separately holds both a senior lien and a junior lien on the same property may seek a money judgment on the junior lien after the creditor foreclosed on the senior lien and purchased the property at a nonjudicial foreclosure sale. Should the Court side with the Black Sky court, and decide that a creditor may so proceed, lenders will be able to collect on two loans backed by one property by taking the entirety of the collateral for the senior loan and then seeking further recovery on the junior loan.

Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., S232946. (B256314; 244 Cal. App. 4th 590, mod. 245 Cal. App. 4th 63b; Los Angeles County Superior Court; YC067332.)

Opinion issued August 30, 2018.

On August 30, 2018, the California Supreme Court partially affirmed the Second District Court of Appeal's reversal of a judgment of the Los Angeles County Superior Court. The Court agreed with the appellate court insofar as it reversed the superior court's judgment entered on the arbitration award. However, it reversed the appellate court's order for disgorgement of all fees collected, instead remanding the matter back to the trial court.

J-M Manufacturing Co., Inc. ("J-M") engaged Sheppard, Mullin, Richter & Hampton, LLP ("Sheppard Mullin") to defend it against a lawsuit brought by plaintiffs including South Tahoe Public Utility District ("South Tahoe"). J-M and Sheppard Mullin entered into a standard engagement agreement, which provided for J-M's advance waiver of conflicts.

Sheppard Mullin, however, also represented South Tahoe in an unrelated matter. Sheppard Mullin was therefore disqualified from the litigation due to failure to obtain informed consent from adverse clients in violation of California Rules of Professional Conduct Rule 3-310, which bars simultaneous representation of adverse clients.

Sheppard Mullin then sued J-M to recover the attorneys' fees it argued that J-M owed pursuant to the engagement agreement. J-M contended that the engagement agreement was unenforceable because it violated the public policy embodied in Rule 3-310, and that J-M therefore did not owe any fees to Sheppard Mullin.

An arbitral panel awarded Sheppard Mullin the majority of its claimed fees, and the Los Angeles County Superior Court confirmed. J-M appealed, arguing that the trial court enforced an illegal contract in violation of public policy. The Second District Court of Appeal reversed, finding that Sheppard Mullin was not entitled to fees for work it did while violating 3-310.

The California Supreme Court ruled on several issues during its partial affirmation and partial reversal of this appellate decision. First, it held that a court can rely on non-legislative expressions of public policy (here, Rule 3-310) to overturn an arbitration award on illegality grounds. Next, it held that informed consent was not created by J-M's agreeing to a general advance waiver of conflicts, even though it was a sophisticated legal consumer represented by counsel. Finally, it remanded to the trial court the question of whether the conflict of interest, which undisputedly caused no damage to the client, and did not affect the attorney's representation, should lead to the disgorgement of paid fees and/or preclude recovery of a reasonable value for previously performed work.

Heimlich v. Shivji, S243029. (H042641; 12 Cal. App. 5th 152; Santa Clara County Superior Court; CV231939.)

The California Supreme Court will review the Sixth District Court of Appeal's reversal of the Santa Clara County Superior Court's denial of a motion for costs pursuant to Code of Civil Procedure section 998.

Attorney Alan Heimlich sued Shiraz M. Shivji for unpaid legal fees. Shivji made a section 998 offer, which Heimlich rejected, and the case later went into arbitration. The arbitrator's award provided no recovery for either side.

Six days after the arbitration award, Shivji sought from the arbitrator costs pursuant to section 998 because Heimlich's recovery was less favorable than the section 998 offer. The arbitrator claimed he lacked jurisdiction, and Shivji asked the Santa Clara County Superior Court to confirm the arbitration award and grant the section 998 costs. The trial court confirmed the arbitration award but denied Shivji's section 998 costs request, finding it was not timely because it came after the arbitrator's award, based on Maaso v. Signer, 203 Cal. App. 4th 362 (2012).

The Sixth District Court of Appeal reversed, directing the trial court to enter an order, with the parties' consent, for a hearing before the same arbitrator on the section 998 costs request. The Court of Appeal directed that if the parties refused to consent to the arbitrator's jurisdiction, the trial court should adjudicate the section 998 costs request itself.

The Court of Appeal noted that the trial court's approach presents a challenge for parties requesting section 998 costs in the arbitration context. As Code of Civil Procedure section 998(b)(2) prevents the presentation of an unaccepted section 998 offer as evidence, the seeking party cannot present their section 998 offer or costs request to the arbitrator until after the award comes down. However, once the award is made, the arbitrator no longer has jurisdiction over the action, and the request is considered untimely pursuant to Maaso.

The California Supreme Court will therefore seek to resolve the conundrum identified by the appellate court. Specifically, it will consider how, when, and from whom a party to arbitration should request costs after receiving an arbitration award more favorable than an offer it made pursuant to Code of Civil Procedure section 998.

De La Torre v. CashCall, S241434. (9th Cir. No. 14-17571; 854 F.3d 1082; Northern District of California; No. 3:08-cv-03174-MEJ.)

Opinion issued August 13, 2018.

On August 13, 2018, the California Supreme Court ruled on a question of California law presented in a matter pending in the United States Court of Appeals for the Ninth Circuit. The Court held that the interest rate on consumer loans of $2,500 or more governed by California Financial Code section 22303 can render the loans unconscionable under section 22302 of the Financial Code.

The Court recognized that Financial Code section 22302 sets interest rate caps only on consumer loans less than $2,500. Nevertheless, the Court rejected "the implication that a court may never declare unconscionable an interest rate on a loan of $2,500 or more."

The Court went on to acknowledge the creation of a sliding-scale approach to unconscionability. It interpreted Financial Code sections 22302 and 22303, when read together, as "tend[ing] to show how the Legislature's purpose in enacting these provisions was to free larger-denominated debts from the rigid regulation of usury rates, without rendering irrelevant to those transactions the flexible standard of unconscionability long rooted in both statutes and California common law."

The Court recognized the risks inherent in this decision, noting that it will be a daunting task for courts to "pinpoint the precise threshold separating a merely burdensome interest rate from an unconscionable one." To that end, the Court admonished courts to pursue with caution their responsibility to guard against consumer loan provisions with unduly oppressive terms.

In effect, the Court created a new context-specific approach to unconscionability regarding consumer loans over $2,500. California lenders should watch closely as lower courts attempt to apply the Court's decision and should consider the ways the new jurisprudence could affect their methods, their consumers, and their businesses.

State of the Law: Status Update on California's Marijuana Laws

By Yujin Chun, Associate

Starting on January 1, 2018, adults over 21 years of age began being able to legally purchase recreational marijuana from a licensed dispensary. As the calendar approaches the latter half of the year, a look at how the state has been dealing with this significant change is worth the analysis for the rest of the nation that may later follow suit.

In the first quarter of the year, the weed industry generated $60.9 million in sales tax revenue for the state, including $32 million in excise tax. Second quarter brought in around $74.2 million in marijuana industry tax revenue. Finance officials had estimated California would bank $185 million from excise and cultivation taxes in the first six months of broad legal sales, which kicked off Jan. 1, but collections by midyear has hit only $82 million.

The reason for this is not a mystery: there still exists a vast black market for marijuana products. Consumers are certainly purchasing marijuana products but still turn to illicit means to avoid taxes and higher prices. Furthermore, there are also issues with shaky supply chains, testing, and debates about deliveries to cities and counties that still have banned marijuana.

Since broad legal sales started in January 2018, temporary rules have governed the sales, growing, and manufacturing of marijuana products. California now considers changes to those rules, which was at the crux of a hearing in Los Angeles this month. Dozens of marijuana business owners, activists, consumers, and lawyers had an opportunity to tell Lori Ajax, the state's top marijuana regulator, what needed to be done.

One of the biggest issues discussed was delivery to the so-called "pot deserts" – cities and counties that have banned the sale of marijuana. Residents in these places have little to no access to legal medical or recreational cannabis products because of those local regulations. Roughly half of Californians live in cities or counties that prohibit marijuana stores and delivery services from opening there.

These residents are more likely to reach for the illicit market, which adds to the problem the state has already. And the more California cities prohibit legitimate marijuana businesses, the more likely the consumers will rely on unlicensed sellers for convenience and cost.

Now, California's Bureau of Cannabis Control wants to clarify the law. Draft regulations released by the agency last month would make it clear that businesses may deliver to any private address in the state — including in the "pot deserts." Delivery employees would still need to confirm the identity and age of the buyer, and the delivery would have to be made to private physical addresses.

The proposed regulations still face opposition based on that Proposition 64 does give local governments the right to ban commercial marijuana activity. However, on the other side of the debate is that a city is generally not able to prohibit an individual from buying a legal product from a licensed business that is located outside its limits. So why the exception for cannabis?

It comes down to the fact that this is new: it's a previously illegal product that is now suddenly legal, and the state has taken a slow approach letting local governments make the call. It has had the unintended effect of pushing the market further into the shadows, however, as it made the now-legal product more expensive and inconvenient. California still has ways to go before it can find a good balance, and it is unclear when it would get there.

New California Laws You May Have Missed: Summer 2018 Edition

By H. Han Pai, Associate

The "dog days of summer" usually conjures up a host of fun, summertime activities - a day at the ballpark, working on that tan on the beach, or, especially important recently, just lounging somewhere with strong air conditioning.

But for lawmakers and legal gurus, the show must go on. California attorneys have one particularly exciting activity to look forward to this time of year: reviewing the brand-new laws that went into effect on July 1. Indeed, the California legislature does not limit the effective date of new laws to January 1 of every year, though a good majority do go into effect at that time.

Here are some of the new California laws that went into effect on July 1, 2018 and may impact your business or industry:

1. Real Estate

Appraiser License - 10 Code of Regulations § 3541.

The Bureau of Real Estate Appraisers made subtle change to a requirement to become a licensed real estate appraiser in California, such that the experience may be obtained "cumulatively" rather than obtained "continuously."

Specifically, applicants seeking to obtain their real estate license can now meet the minimum requirements - 3,000 hours of real property appraisal experience for certified general appraisers or 2,500 hours for certified residential appraisers, both over a period of not less than 30 months, among other requirements – cumulatively, rather than continuously. Thus, there is some flexibility, as those hours can now be broken up into segments, rather than the more onerous method of doing so all at once.

Rental Property Flood Hazard Zone - Government Code § 8589.45.

While this new statute already went into effect on January 1, 2018, it nonetheless impacts every lease or rental agreement for residential property entered into on or after July 1, 2018.

In particular, for every lease or rental agreement for residential property entered into on or after July 1, 2018, the statute requires every owner or person offering for rent any real property located within a special flood hazard or an area of potential flooding, as determined by the statute, to disclose to the tenant specified information pertaining to the risk of flooding.

Solar Energy - Business & Professions Code §§ 7169, 7170, and Public Utilities Code § 2854.6.

The Legislature implemented a trio of new statutes aimed at arming consumers with more information regarding solar energy systems.

The first Business & Professions Code section requires the Contractors State License Board, which regulates contractors in California, to develop and make available on its Internet Web site a disclosure document that provides consumers with accurate, clear, and concise information regarding the installation of a solar energy systems, as specified in the statute, on or before July 1, 2018.

The second Code section requires the Board to receive and review consumer complaints and questions and complaints received from state agencies regarding solar energy systems companies and solar contractors.

Finally, the new Public Utilities Code section requires the Public Utilities Commission, by July 1, 2019, to develop standardized inputs and assumptions to be used by vendors, installers, or financing entities in the calculation and presentation of electric utility bill savings to consumers that can be expected by using a solar energy system and to post them on their Internet Web sites.

2. Consumer Protection

"Automatic Renewals" - Business & Professions Code § 17602.

The amended version of this Code section bolsters protection to consumers by prohibiting any business that makes an automatic renewal offer or continuous service offer to a consumer that includes a free gift or trial from doing the following:
- Not presenting the offer a clear and conspicuous explanation of the price that will be charged after the trial ends or the manner in which the subscription or purchasing agreement pricing will change upon conclusion of the trial;
- Not presenting the offer a clear and conspicuous explanation of the price that will be charged after the trial ends or the manner in which the subscription or purchasing agreement pricing will change upon conclusion of the trial;
- Not presenting the offer a clear and conspicuous explanation of the price that will be charged after the trial ends or the manner in which the subscription or purchasing agreement pricing will change upon conclusion of the trial;
In short, if you market to consumers by enticing them with freebies in order to convince them to sign up for a product or service that entails an automatic renewal, the terms must be explained clearly.

3. Employment/Labor

Worker's Compensation System - Labor Code §§ 3351, 3352, 3364, 3706.5, and 4156.

Changes were made to these sections of the Labor Code, which relate to California' workers' compensation system. Some of the notable changes include the following:
- Lowers the threshold for ownership for an officer or member of the board of directors to waive workers' compensation coverage from at least 15% to at least 10%.
- Expands the grounds for opting out of workers' compensation coverage to include close relatives of owners who have at least 10% ownership, if that close relative owns at least 1% of the company, and shows proof of being covered by a health care coverage plan.
- Expands the grounds for waiving workers' compensation coverage to include owners of a professional corporation if the owner is a practitioner of the professional services for which the professional corporation was created and the owner is covered by a health insurance policy or health care service plan.
- Clarifies that an owner of a company who is the sole shareholder is not an employee.
- States that once an owner/employee has executed a waiver of workers' compensation coverage, it is conclusively presumed that the person is not covered for workers' compensation benefits.
- Provides that a policy that is entered into or renewed in compliance with the law is subject to the rules for waivers by eligible employees then in force at the time the policy was entered into or renewed.
The changes were made to continue the Legislature's efforts to curb fraud on the workers' compensation system, as well as to assist owners of small businesses with 7 or more owners/partners and professional corporations to waive worker's compensation, and provide for additional opt out options.

The Privacy Movement: How California's New Consumer Privacy Law Affects You or Your Business

By Natalie Rastegari, Associate

Do you ever notice that the item you were considering buying online suddenly pops up in an advertisement on your social media profile? Well, everyone is starting to notice, too. Thanks to the recently enacted California Consumer Privacy Act of 2018 (CCPA), there are now established data privacy guidelines effective January 2020 in California regarding organizations' interactions with consumers and penalties for violations.

Quickly following the lead of the EU's enactment of its General Data Protection Regulation (GDPR), the CCPA is the California version aiming to strengthen consumers' rights and consumer transparency, and to protect California residents from the ever-growing threat of data breaches. In addition to implementing the GDPR standards, businesses must now make further privacy compliance efforts to ensure they are in line with the CCPA requirements and to minimize liability exposure.

With Silicon Valley and now Silicon Beach, it's no wonder that California has decided to adapt to the times and adopt new data privacy laws. But what does this new law do exactly?

As a preliminary matter, the CCPA governs organizations that collect personal information from California consumers for a commercial use. To trigger CCPA compliance, the organization must have annual gross revenues exceeding $25 million; deal with the personal information of at least 50,000 consumers or devices; or receive at least half of its annual revenues from selling personal information. It even encompasses entities that have the same branding and that control or are controlled by such organizations, and entities that provide services to such organizations. The CCPA does contain certain exemptions and ambiguous provisions, so this law may be further amended by the legislature or litigated to define the parameters.

For the average consumer, the CCPA means that you will get more information and communications through a company's website or public statements about its data practices - where your personal information goes or what is will be used for. Under the CCPA, "personal information" includes your purchase history of goods or services, your internet search history, and even publicly available information if it is being used for a purpose "not compatible" with the purpose for which it is publicly maintained. As a California consumer, you will have the right to request detailed profiles of your personal information that was collected, sold or disclosed, and with whom it was disclosed or sourced from. In addition, you will be able to opt out of having your personal information sold or used for certain purposes, and request that a business delete your personal information that was collected.

For tech, marketing, and other such industries, that means the CCPA imposes more stringent standards regarding the ways in which organizations protect data and their transparency with consumers. Companies whose business activities primarily deal with customer data should take steps to make the information removal request process faster and easier, and should ensure that they have the proper resources devoted to regulatory compliance.

Otherwise, the CCPA provides for a private right of action, allowing consumers to initiate lawsuits for certain misuses of data after providing the business with 30 business days' notice to cure the violation. If the business can cure the violation, it must provide the consumer with a written statement detailing as much and represent that the violation will not occur again. Only if a cure is not possible or the business purportedly did not cure its violation, can a private right of action then proceed. The California Attorney General is also authorized under the CCPA to seek penalties against violators, and businesses should also be on the lookout for any regulations that the California Attorney General enacts under the CCPA to implement its requirements.

The privacy movement is gaining speed all over the world. In the US, California is leading the way in the changing regulatory environment, and you can be sure that the rest of the states will soon follow her lead in implementing stricter privacy laws. So all businesses, no matter where in the world or what commercial activities they engage in, should prepare themselves and better protect their consumers by implementing minimum standards similar to those found in the CCPA.

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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