Welcome to the second edition of our quarterly newsletter. As always, we are seeking to provide helpful, informative and insightful articles written by our attorneys and based on their experiences in the course of practice.
Welcome to the Salisian | Lee LLP Newsletter
Welcome to the second edition of our quarterly newsletter. As always, we are seeking to provide helpful, informative and insightful articles written by our attorneys and based on their experiences in the course of practice. Please let us know if you have any feedback on how we can improve our offering or if you would prefer to be removed from the distribution list. Thank you and happy reading!
In this Issue
Cases to Watch
By Katharine Miner, Salisian | Lee LLP
Horiike v. Coldwell Banker Residential Brokerage Co., S218734
Horiike v. Coldwell Banker Residential Brokerage Co. considers what fiduciary duties are owed by agents to buyers and sellers in residential real estate transactions, when the agents are acting under the same brokerage firm. The dispute in Horiike arose from a sale of residential property in which the agent for the seller and the agent for the buyer were employed by the same brokerage firm. The seller’s agent provided the buyer with a flier he had prepared stating that the property was 15,000 square feet, when he had knowledge that this assessment was contradicted by public records. The buyer brought suit against the broker and the seller’s agent for, inter alia, breach of a fiduciary duty. The trial court found that no such duty existed, granted nonsuit to the claim against the seller’s agent, and directed the jury that the broker had no liability for breach of a fiduciary duty. The Second District for the California Court of Appeals reversed and remanded for a new trial, finding that under Civil Code section 2079.13, the brokerage firm was a dual agent, and the agents were each associate licensees of the broker. Thus, each agent was the fiduciary of both the buyer and seller, with the duty to provide undivided loyalty, confidentiality and counseling to both. If the Supreme Court upholds this decision, brokerage firms will want to reconsider having their employees represent both buyer and seller in residential real estate transactions.
DKN Holdings LLC v. Faerber, S218597
DKN Holdings LLC v. Faerber concerns whether joint and severally liable parties can be sued in separate actions. This case arises from a dispute over a commercial lease entered into by a lessor and three lessees who were jointly and severally responsible under the lease. When one colessee sued the lessor for fraud and on other grounds, the lessor cross-complained for money due under the lease, but failed to serve the cross-complaint on the other colessees or move to add them to the judgment. Instead, the lessor filed a separate action seeking the same damages against the other colessees. The trial court sustained the demurrer of the other colessees, and the Fourth District for the California Court of Appeals affirmed, holding that separate suits on a contract where the parties are joint and severally liable is barred by the doctrine of res judicata. The Supreme Court will consider the question presented in this case, as well as whether the holding conflicts with the opinion in Williams v. Reed, 48 Cal. 2d 57 (1957), which held that a payee on a promissory note was not precluded from pursuing a deficiency action against two of the note’s three makers, when the payee had sued one maker on the note in an earlier action. The Court’s decision will be of great significance to parties considering entering into or bringing suit under contracts involving joint and severally liable parties.
California Bldg Industry Ass'n v. Bay Area Quality Mgmt. Dist., S213478
The issue on review in California Building Industry Association v. Bay Area Quality Management District is under what circumstances, if any, does the California Environmental Quality Act ("CEQA"), Pub. Resources Code, section 2100 et seq., require an analysis of how existing environmental conditions will impact future residents or users of a proposed project? In 2010, a local air quality management district promulgated new thresholds of significance for air pollutants and greenhouse gases to be used in determining whether a project’s impact on air quality might be deemed "significant" for purposes of review under CEQA. The significance levels were based on "risks and hazards" posed by existing conditions to persons who would be living or working on the site of the proposed project or within the area. The California Building Industry Association filed a petition for writ of mandate, challenging the thresholds on grounds that they should have been subject to CEQA review, and that the impact of existing conditions on future occupants or users is not a proper inquiry under CEQA. The trial court issued a writ of mandate, but the First District for the California Court of Appeals overruled the trial court. The Appellate Court found that the thresholds were not subject to CEQA review, and that the thresholds requiring analysis of the impact that existing environmental conditions will have on a new project’s occupants were not facially invalid. On review, the Supreme Court will consider the latter argument. If the Court holds that it is proper to consider the impact of existing environmental conditions on future occupants, CEQA review of new projects will become more likely, and securing project approval will become more difficult for builders and developers.
Lessons from the Trenches: Dos and Don'ts of Depositions

By Richard Lee, Salisian | Lee LLP
California has a lot of attorneys - some would even say too many. Some of our attorneys are outstanding at what they do, some confounding, and all of them interesting. In our daily dealings with our peers - and their clients - we are consistently surprised by how much we can learn from their triumphs and from their mistakes.

In this, the first of what we hope will be an ongoing series on best and worst legal practices, we will explore the dos and don’ts of depositions. Some of these may be obvious, but some, gleaned from years of experience, may prove enlightening. At best, we hope they will help you in your practice. At the very least, we hope they will entertain.

Do:
  • Do meet with your witness at least a day beforehand to go over the general procedures and expectations of the deposition process, the anticipated areas of questioning, possible documents for review, and just overall hand-holding. First-time witnesses, in particular, will be nervous and very reliant upon you. They will expect the attorney at hand to tell them what to do, how to behave, what to wear, how to sit, how to answer, and what to bring. Often, first-time witnesses will think depositions are akin to dodge ball, intended to mislead or misinform the opposition and/or trier of fact. They need to be dissuaded of this notion early and often, as neither a judge nor jury will be impressed when either has to weigh credibility at trial. A thorough prep session at least a day before the actual deposition will help ameliorate these issues, though, frankly, some witnesses are more challenging than others, with a small percentage of witnesses falling into the "hopeless" category.
  • Do evaluate your witness’ strengths and weaknesses in holding up under questioning, especially if the deposition is going to be videotaped. Some witnesses are great in group meetings, but when grilled in a deposition room by a single attorney over the course of a day, the witness may slip and blurt out something inappropriate or even nonsensical. For hopeless witnesses, the idea is to limit the expected damage and do whatever you can to shorten the deposition. Which leads me to the last "Do"...
  • Do take frequent breaks to give periodic updates to the witness on how the testimony is going, what to expect as part of the next line of questioning, and to rebuild the witness’ confidence, as needed. Sometimes, a short break is recommended to halt any rapport that may be growing between a cleverly friendly questioner and the witness. Breaks will also help stop a witness from getting tired and making incorrect and harmful unqualified admissions to questions. In particular, end-of-day blurt-outs happen more often than not at deposition, as the witness will no longer be on his or her guard. Sensing the finish line in sight, the witness will often say anything to wrap up the deposition and get out of the room. This is therefore a dangerous time, and attorneys need to be mindful of it.
Don't:
  • Don't try to set up a signal system to the witness to tell him or her when to be silent or suddenly experience amnesia. I have seen attorneys have a fairly easy to decipher signal system involving hand gestures or tapping with a pen on a clipboard. When I notice an opposing attorney engaging in this tactic, I attempt to call them out on the record, describing the signal system in full, and accusing the defending attorney of improper coaching and just plainly questionable ethics. Every so often, depending on my mood, I try to call them out in a different way by engaging in the same signaling during my questioning just to throw them off. If the witness shows any hesitation with his or her response, I will then remark on the record about how the witness must have gotten confused because, oh, pardon me, I guess I used their unethical signaling system to throw a wrinkle at them. So don’t do it.
  • Don't instruct the witness not to answer areas of questioning that you just do not like or that you think are irrelevant but do not pertain to a clear privilege. All that will do is call the deposing attorney’s attention to the sensitive subject area and suggest that you are hiding something significant. It also makes you look weak and unsure. More likely than not, it will only serve to prolong the deposition and incur needless attorneys’ fees and time, as the deposing attorney can win a motion to compel order that forces you and the witness to return for deposition to answer those questions in full (and also possibly pay monetary sanctions for the attorney time incurred in bringing and arguing the motion to compel).
  • Don't have your break meetings in the hallway right next to the deposition door or wall, especially if you or the witness have a loud voice. Walls are thin, doors are not soundproof, and people eavesdrop, even if it is done inadvertently. In fact, try to avoid any conversations in any common areas like hallways or bathrooms or elevators. Stick to other, enclosed conference rooms. Or if it is lunchtime, wait till you get outside the building. I once had a deposition where co-counsel just loved to spill his guts in the elevator about his thoughts on our witness, the other side’s case, and the deposing attorney. Unfortunately, a member of the deposing attorney’s administrative staff was in our elevator, as we later discovered. There was a reason why she was smirking the whole way up the elevator.
Keeping an Eye on Eminent Domain

By Jay Lichter, Salisian | Lee LLP
The generally stable area of eminent domain law, which permits the government to acquire private property as a means to achieve certain public purposes, got a jolt recently when an intermediate appellate court declared that part of the statutory scheme was unconstitutional in Property Reserve, Inc. v. Superior Court, 224 Cal. App. 4th 828 (2014).

In Property Reserve, the State of California relied on state "entry statutes" to enter private property and conduct various suitability tests for a larger construction plan. Those entry statutes historically permit entry and testing on private property without the need for formal condemnation proceedings.

The Court of Appeal for the Third Appellate District, however, found the proposed activity constituted taking per se, requiring a lengthy and expensive condemnation process, despite the permission granted by the entry statutes. As they did not provide the required constitutional protections in the event of a "taking," they were struck down as unconstitutional.

To be constitutionally valid, the court reasoned, the statutes must provide the eminent domain rights granted under Article I, section 19(a), of the state constitution. That is, if the entry statutes authorize the state to conduct "takings," those statutes must also provide constitutional protections to landowners, including the right to "just compensation."

Property Reserve exposes the fatal flaw of the entry statutes: they permit the State, under the guise of investigative activity, to "take" property and side-step the eminent domain protections of the state constitution. As noted in a lengthy dissent by Justice Coleman A. Blease, the ruling represents the first time a portion of the entry statutes has been declared unconstitutional since their enactment 38 years ago.

Property Reserve was de-published on June 25, 2014, when the California Supreme Court granted review. As a result, the future of public works projects in California is now unclear.

On the one hand, the Supreme Court may overturn Property Reserve, and rule the state’s entry statutes do, in fact, provide an adequate mechanism to compensate property owners for pre-condemnation activities that amount to a taking.

This would represent an obvious win for the government as it would once again enable the state to undertake investigative activities without having to bear the full-blown expense of a condemnation action. The state would thus be free to continue pursuing planned projects and acquire all necessary personal property in its way.

On the other hand, a Supreme Court ruling upholding Property Reserve may have staggering consequences for California’s public works plans. Virtually any public works plan with an eye toward acquiring personal property would potentially be saddled with the expense of formal condemnation proceedings during (and in reality, prior to) the state’s test-and-examination phase. If affirmed, this heightened expense must be figured into every potential plot of land before the state even decides it needs to acquire the property.

As a result, public works projects such as municipal buildings, schools, hospitals, transportation infrastructure, parks, and water supply lines all may become much more expensive than originally anticipated.

Depending on how the Supreme Court resolves the issue, eminent domain in California may either continue as before, or impose a substantial financial burden on the state to the point where public works projects stall or fail completely. If upheld, Property Reserve will be a big win for landowners, but a substantial blow to the public good. Indeed, this push and pull has been at the very heart of the eminent domain debate since its inception.
The financial services industry is no stranger to the vast and wide-reaching transformation in the economic landscape over the past several years. Increased defaults and bankruptcy filings by borrowers, expensive collections efforts, and more government pressure has taken its toll on lenders, who have progressively tightened their grip on credit.

Luckily, a slew of non-traditional lenders have recently entered the scene in an attempt to provide relief, notably, by offering short-term bridge loans. The hallmark of the bridge loans are their shorter terms, and quick processing and funding. Borrowers typically use such loans to "bridge" a financing gap in their capital needs until permanent financing is secured, to satisfy an existing obligation, or to pay current operating expenses.

Bridge loans are certainly not a novel concept, but they present an attractive option of late, particularly for small to mid-sized businesses and startups and as the economy continues to recover. For bridge lenders, preventative steps can be taken at the outset of the lender/borrower relationship in order to mitigate the legal risks. The following highlights some of the material issues to consider.

Forum Selection Clause

Loan agreements will usually include a clause stating that if a dispute arises, the borrower consents to resolving the dispute in the jurisdiction chosen by the lender. Generally, such forum selection clauses are presumptively enforceable absent a showing that enforcing it would be unreasonable and unjust. See, e.g. M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972).

Recent U.S. Supreme Court authority reaffirms this principle, and in fact, makes it easier to enforce such clauses. The high Court updated the analysis in this area, which applies regardless of whether the designated forum is a federal, state, or foreign court, and made the following key rulings for when such a clause is present in a contract:
  1. If a plaintiff initiates a lawsuit in someplace other than agreed on in the contract, the plaintiff bears the burden to establish that a transfer to the parties’ originally-designated forum is unwarranted;
  2. Convenience of the parties and other fairness arguments are not to be considered; and
  3. When a plaintiff initiates a lawsuit in a different forum, the choice-of-law rules of the originally-designated forum should be applied to prevent "forum-shopping." See Atlantic Marine Constr. Co. v. United States Dist. Court, 134 S. Ct. 568 (2013).
For the high-volume bridge loan lender based in one state but whose borrowers operate across the country, the ruling has obvious relevance, and may impact how it crafts its forum selection clause.

At first blush, a lender residing in a lender-friendly state would ostensibly want to designate its home state in a forum selection clause. But on the other side of the coin, there may be a benefit to intentionally drafting the clause more vaguely such that the lender retains the discretion to designate the forum. This method may present a workaround of the binding Supreme Court authority, giving lenders more flexibility in choice of forum if a dispute arises.

Perfecting the Security Interest

Another common feature of loan agreements is a broadly-worded provision where the borrower grants the lender an optional security interest to secure the obligation against some type of collateral, usually inventory, accounts, or equipment.

A UCC-1 Financing Statement must be filed in order to perfect the lender’s lien on such collateral, and gives the lender rights superior to other creditors. Perfecting the lien becomes particularly crucial when the borrower files for bankruptcy, as all parties would then be entitled to rely on the secured or unsecured status of each of the other creditors.

Specifically, if the lender’s security interest was unperfected at the time of the bankruptcy filing, then the security interest is "avoidable" in the bankruptcy, meaning the debtor or a trustee could undo the particular transaction for the benefit of the bankruptcy estate. The potentially perilous consequences that could arise simply from failing to file a form are not hard to envision.

Nevertheless, there is a narrow exception under bankruptcy law. In essence, a lender is granted a 30-day grace period to perfect its interest, so long as the loan was entered into pre-petition (i.e., before the borrower files for bankruptcy) and there is a non-bankruptcy law that allows for such a retroactive perfection.

Because of the limited application of this exception, reason dictates that a lender should perfect its security interest immediately after entering into the loan agreement so as to avoid any complications that could arise from a borrower’s bankruptcy down the road.

Due Diligence on Borrowers

Finally, common-sense practices cannot be forgotten. Simple precautionary measures such as investigating a potential borrower’s ability to repay should be conducted before entering into any loan transaction. The typical documents to review include:
  • Annual receipts compared against the loan amount requested;
  • Credit files;
  • Corporate records;
  • Dun & Bradstreet Reports;
  • Public records searches, such as UCC, judgments, and/or tax liens;
  • Bank statements for the certain period prior to making the loan;
  • Google search with an aerial photo of the borrower’s business location; and
  • Verification from a borrower’s landlord of the businesses’ existence.
As lenders and borrowers alike forge ahead in largely unpredictable waters, there are no magic bullets. Nonetheless, old-fashioned gumption goes a long way to help navigate those tides. And should the inevitable occur, prior preparation will have paid off.
California Federal Court Issues Pay-For-Athletes Decision, Sets Stage for Potential New Lawsuits Allowing Pay-For-Play in College Sports

By Natalie Rastegari, Salisian | Lee LLP
Do the National Collegiate Athletic Association’s ("NCAA") rules represent a price-fixing conspiracy, or a set of rules created to protect college education and athletics? Following the bench trial in O'Bannon, et al. v. NCAA, et al., United States District Court (N.D. Cal.), Case No. 4:09-cv-03329, Judge Claudia Wilken seems to have established that it was more the former.

The class action lawsuit, led by former UCLA basketball star Ed O’Bannon, charged that the NCAA violated the Sherman Antitrust Act by profiting from the use of Football Bowl Subdivision ("FBS") and Division I basketball athletes’ names, images, and likenesses in videogames, live game telecasts, re-broadcasts, and archival game footage, while at the same time prohibiting the athletes from sharing in any of the revenues. Now, it would appear that some of the NCAA’s billions of dollars in revenues will need to be shared with the country’s top young athletes and the NCAA’s former athletes.

Section 1 of the Sherman Antitrust Act prohibits the formation of any "contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States." 15 U.S.C. § 1. Judge Claudia Wilken, who penned the 99-page O'Bannon decision, found that the NCAA is a "cartel" that violated the Sherman Antitrust Act by engaging in price-fixing in the "college education" national market.

Judge Wilken held that the NCAA’s ban on FBS and Division I athletes’ compensation for the use of their names, images, and likenesses restrains price competition among schools, where the schools are "suppliers of the unique combination of educational and athletic opportunities that elite football and basketball recruits seek." Alternatively, the schools can also be viewed as the "buyers" in this marketplace. Judge Wilken held that in this context, the NCAA’s rules still restrain trade "where these schools compete to acquire recruits’ athletic services and licensing rights."

While the NCAA argued that its restraint on compensating college athletes did not violate antitrust laws because the restraint maintained competitive balance among FBS and Division I basketball teams and promoted "amateurism" -- i.e., that the athletes primarily attend the school for academics and not athletics -- Judge Wilken rejected this defense, finding that compensating athletes would not destroy college sports. Judge Wilken further stated that providing athletes with a share of the revenue generated from the use of their names, images, and likenesses would not "undermine consumer demand for the NCAA’s products nor hinder its member schools’ efforts to educate student-athletes."

The Court issued a permanent injunction that enjoins the NCAA and NCAA member schools from agreeing to prohibit certain compensation of college athletes. Specifically, the injunction effectively allows NCAA member schools to place upwards of $5,000 per year per athlete in trust "for the licensing or use of prospective, current, or former Division I men’s basketball and Football Bowl Subdivision football players’ names, images, and likenesses," which in turn can be paid to the athlete after "expiration of athletic ability or graduation." In the opinion of the NCAA’s own economic expert witness, Daniel Rubinfield, these $5,000 payments would not affect the NCAA’s goals of “amateurism” or competitive balance in the respective marketplace. Ironically for the NCAA, it was this testimony by the NCAA’s own expert that Judge Wilken relied upon in issuing her ruling against the NCAA and in favor of a $5,000 cap in payments to individual college athletes, starting in 2016.

The injunction also allows NCAA member schools to include "compensation for the licensing or use of prospective, current, or former Division I men’s basketball and FBS football players’ names, images, and likenesses in the award of a full grant-in-aid, up to the full cost of attending the respective NCAA member school."

The question remains, what does the O'Bannon decision mean for college athletes and the issue of direct compensation? If the decision is upheld, the NCAA, starting in 2016, will no longer be able to prevent its member schools from paying its FBS and Division I men’s basketball athletes for the use of their names, images, and likenesses, within the $5,000 limit per athlete delineated by the Court. It is still unclear whether athletes will be able to sell or license their own images and likenesses to corporate sponsors such as EA Sports, adidas, and Coca-Cola, and not run afoul of NCAA eligibility regulations.

What’s more, Judge Wilken’s ruling only addresses the NCAA’s use of its athletes’ likenesses in college’s two big revenue sports: football and men’s basketball. As a result, the scope of the ruling is arguably limited to athletes participating in those two sports. Thus, a women’s college basketball player or college baseball player may not be afforded the same $5,000 per player allowance for the use of their likenesses, even if those same athletes’ images and likenesses are marketed by the NCAA in telecasts, promotional materials, and re-broadcasts of the women’s college basketball Final Four or the College World Series.

For the NCAA, it will likely mean going back to the drawing board and reforming its rules to adapt to the changing college sports marketplace. The Court’s decision did provide some leeway to the NCAA by leaving untouched all of its other "pro-competitive" rules. This includes the NCAA’s rules prohibiting college athletes from endorsing commercial products and setting academic eligibility requirements.

Not surprisingly, the NCAA has filed a notice of its intent to appeal the District Court’s August 8, 2014 ruling. As the briefing and oral arguments in the appellate case will take several months, a Ninth Circuit decision is not expected any time soon.

While the injunction will not be stayed pending the NCAA’s appeal of the ruling, it will only be effective as to the next FBS and Division I basketball recruiting cycles. At the earliest, the first group of recruits to be affected by the ruling would be those enrolling in school on or after July 1, 2016.

Meanwhile, another lawsuit entitled Jenkins v. NCAA, et al., which was filed this past March in the United States District Court for the District of New Jersey, seeks to go further than the O'Bannon decision and turn college sports into a free market for athletes’ services, regardless of whether participants are in the two big revenue sports or not. The O'Bannon ruling will help plaintiffs in that case and others against the NCAA, and, relevant for our clients, will set the stage for a wide array of litigation and new reforms in the college sports context. Certainly, the prevailing direction set by the O'Bannon court sails in favor of both new compensation agreements between NCAA schools and college athletes, and the eventual administration of NCAA trust funds and applications of the rules to women’s sports teams.

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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