SEC v. Jarkesy, 603 U.S. 109 (2024)

In SEC v. Jarkesy, 603 U.S. 109 (2024), the United States Supreme Court held that it is a violation of the Seventh Amendment right to a jury trial for the Securities and Exchange Commission (“SEC”) to bring enforcement actions against parties for securities violations in in-house administrative proceedings.

Congress enacted the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940 (“the Antifraud Provisions”) to combat securities fraud and increase market transparency. The SEC is charged with enforcing the provisions and can bring enforcement actions either (1) in federal court, where a jury finds the facts, and an Article III judge presides; or (2) in-house, where there are no juries, and either the SEC or an Administrative Law Judge finds the facts and adjudicates the matter.

Following an in-house enforcement action the SEC determined that George Jarkesy, Jr., and his firm, Patriot28, LLC, had violated the antitrust provisions, and levied a penalty of $300,000. Jarkesy and Patriot28 petitioned for judicial review, whereupon the Fifth Circuit Court of Appeal held that adjudicating the matter in-house violated the defendants’ Seventh Amendment right to a jury trial. The United States Supreme Court subsequently granted the SEC’s petition for certiorari.

The Majority Held that the SEC Adjudicating the Matter In-House Violated the Seventh Amendment Right to a Jury

a) The Seventh Amendment is Implicated When Suits are Legal in Nature

The Court held that the Seventh Amendment “embrace[s] all suits which are not of equity or admiralty jurisdiction.” The majority explained that this means statutory claims which are “legal in nature” implicate the Seventh Amendment. To determine whether an action is legal in nature, the majority, relying on Tull v. United States ,481 U.S. 412 (1987), explained that a court must consider “whether the cause of action resembles common law causes of action, and whether the remedy is the sort that was traditionally obtained in a court of law.” Of these two factors, the majority believed the remedy is the more important, and, in this case, was all but dispositive.

The SEC sought civil penalties, which are a form of monetary relief. According to the majority, such relief is legal in nature when it is designed to “punish or deter the wrongdoer rather than solely to ‘restore the status quo.’” The majority concluded the penalties go beyond restoring the status quo, and are “a type of remedy…that could only be enforced in courts of law,” because (1) the Antifraud Provisions condition the availability and size of civil penalties on considerations including culpability, deterrence, and recidivism; (2) the SEC is not obligated to use the penalties to compensate victims; and (3) the SEC is allowed to collect penalties even when no one is injured.

Also, the majority found that, though federal securities fraud and common law fraud are not identical, they are similar enough that federal securities fraud “resembles [a] common law cause[] of action,” confirming the action is “legal in nature.”

b) If a Claim Implicates the Seventh Amendment, a Jury Trial is Required Unless the “Public Rights” Exception Applies

Under the “public rights” exception, Congress may properly assign certain matters for decision to an agency without a jury trial. The SEC, relying on Atlas Roofing Co. v. Occupational Safety and Health Review Comm’n, 430 U.S. 442 (1977), argued that the public rights exception applied here because (1) Congress created “new statutory obligations, impose[d] civil penalties for their violation, and then commit[ted] to an administrative agency the function of deciding whether a violation ha[d] in fact occurred”; and (2) the Government was the party bringing the action. But the majority held Atlas Roofing inapplicable because the claim in that case was not akin to a common law claim. The majority clarified that, per Tull, the Seventh Amendment applies to novel statutory claims so long as they are akin to common law claims. The public rights exception does not “apply automatically whenever Congress assigns a matter to an agency for adjudication.”

Relying on Granfinanciera, S.A. v. Nordberg ,492 U.S. 33 (1989), the majority further explained that what matters “is the substance of the suit, not where it is brought, who brings it, or how it is labeled.” Congress may not “withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at common law.” If a suit is in the nature of an action at common law, the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory, regardless of whether the Government is a party. Here, the antifraud provisions target the same basic conduct as common law fraud, operate pursuant to the same basic legal principles, and provide for civil penalties. In the majority’s view, this means the action in question involves private, rather than public, rights. The fact that Congress had statutorily created the cause of action, and the fact that the Government was a party to the suit, did not change the type of right implicated, and so the public rights doctrine did not obviate the need for a jury.

The Dissent, Asserted That the Public Rights Doctrine is Much Broader Than the Majority Believes

In dissent, Justice Sotomayor (joined by Justices Kagan and Justice Jackson) agreed that a Seventh Amendment challenge was at issue. They explained that the Seventh Amendment question only arises after addressing a threshold Article III question. Per the dissent, if an action is properly in a non-Article III forum, then the Seventh Amendment does not apply.

The dissent treats the public rights doctrine not as an exception to the Seventh Amendment, but rather the first step in answering the Article III question. If a cause of action involves a public right, then it need not be adjudicated in an Article III court. Relying on Granfinanciera, the dissent explained that (1) if Congress enacts a statutory cause of action that “inheres in, or lies against, the Federal Government in its sovereign capacity” then it is a public right; and (2) if a case involves a dispute “to which the Federal Government is not a party in its sovereign capacity” (i.e. a case between two private parties) then it is a public right if “Congress…has created a seemingly ‘private’ right that is so closely integrated into a public regulatory scheme as to be a matter appropriate for agency resolution.” Because the government was a party and sought to enforce rights for the benefit of the public, the dissent believed the public rights doctrine clearly applied here.

Also, the dissent criticized the majority’s reliance on Granfinanciera. According to the dissent, Granfinanciera is distinguishable because the action there was between two private parties. Because the government was not a party the dissent believed Granfinanciera is only relevant when addressing the second type of public right outlined above.

In addition, the dissent took issue with the majority’s reliance on Tull for the proposition that the remedy is nearly dispositive of the issue. The dissent distinguished Tull because it took place in a federal district court. According to the dissent, once a case is in an Article III court, the Seventh Amendment analysis outlined by the majority kicks in, but that analysis is inapplicable to determining whether a case need be in an Article III court.

The dissent further agreed that, contrary to the majority’s assertion, the dissent believed the statutory scheme in Atlas Roofing involved civil penalties and resembled the common-law torts of negligence and wrongful death as closely as the antifraud provisions resemble common-law fraud. Because it did not find Atlas Roofing to be distinguishable and found that neither the rule established in Tull nor Granfinanciera apply to a dispute wherein the Government is a party, and in which the dispute is adjudicated in a non-Article III forum, the dissent argued that Atlas Roofing easily settled this case. In the dissent’s opinion Congress acted within its power to create a new statutory scheme, and to allow the SEC to enforce that scheme in-house. Because the dissent found no Article III issue, the Seventh Amendment was not implicated.

Conclusion and Broader Application

There are more than two dozen agencies that can impose civil penalties in administrative proceedings. Though some of those agencies, such as the Consumer Financial Protection Bureau, the Environmental Protection Agency, and the SEC, are authorized to pursue civil penalties in both administrative proceedings and federal court, many others, such as the Occupational Safety and Health Review Commission, the Federal Energy Regulatory Commission, the Federal Mine Safety and Health Review Commission, and the Department of Agriculture, are only authorized to bring enforcement of civil penalties in in-house proceedings. For those that are authorized to do both, the holding in this case may require enforcement actions to be pursued in federal court, which would likely increase the cost of such actions, and reduce consistency as to their outcomes. For those that are required to utilize in-house proceedings, this holding may prove more troublesome still, as the constitutionality of hundreds of statutes may now be in question. Per the words of the dissent, for those agencies “all the majority can say is tough luck; get a new statute from Congress.”

Glen Hansen is Senior Counsel, and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

Friends of Gualala River v. Gualala Redwood Timber_ LLC_2024 U.S. App. LEXIS 24618

In Friends of Gualala River v. Gualala Redwood Timber, LLC, 2024 U.S. App. LEXIS 24618, the Ninth Circuit affirmed the district court’s dismissal of Appellants’ action under 16 U.S.C. § 1540(g), concluding Appellants’ claim under the Endangered Species Act (“ESA”) is moot.

Plaintiffs-Appellants Friends of Gualala River (“FOGR”) and the Center for Biological Diversity (“CBD”) (collectively, “Appellants”) sued Defendant-Appellee Gualala Redwood Timber, LLC (“GT”) for violating the ESA by logging the Gualala River floodplain and “taking” several endangered species, under the citizen suit provisions of the ESA.

The underlying suit was dismissed in 2020 when FOGR and CBD jointly filed the case in the Northern District of California federal court to challenge GT’s logging plan that the plan allegedly would result in the “taking” of protected species through habitat modification and degradation. Appellants brought their claims on Section 9 of the ESA, 16 U.S.C. § 1538, which makes it unlawful to “take” any species listed as threatened or endangered. To “take” means to “harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or attempt to engage in such conduct.” 16 U.S.C. § 1532(19). The district court concluded that Plaintiffs did not meet the threshold inquiry for injunctive relief that they had demonstrated a likelihood of success on the merits because a final judgment had already been issued by a California state court on the same claim and principles of res judicata would bar them from relitigating the same cause of action as a prior case in the federal court. Therefore, the district court denied the preliminary injunction in August 2021.

On September 30, 2924, the Ninth Circuit determined that Appellants’ claim of illegal “taking” of several endangered species by GT was moot, reasoning that “[a]ppellants brought their suit under section 9, not section 7. Section 9 does not authorize the Court to impose mitigation measures on a private party in an ESA case. Rather, it allows only injunctive relief, which Appellants failed to receive in the district court and have not appealed here.” Therefore, there was no effective remedy available.

Glen Hansen is Senior Counsel and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

Puget Soundkeeper Alliance v. Port of Tacoma, 104 F.4th 95 (9th Cir. 2024).

Puget Soundkeeper Alliance (“Puget”) is an environmental organization concerned with water quality in Puget Sound. It brought a citizen suit under the Clean Water Act (“CWA”) against the Port of Tacoma, alleging that the Port had violated the Act in various respects. The marine cargo terminal contains a portion of the terminal where five large cranes load and unload container ships, commonly referred to as “the Wharf.” When rain falls on the terminal, stormwater runs into Puget Sound, carrying with it metals and other pollutants. The district court granted partial summary judgment to the Port, holding that the Industrial Stormwater General Permit (“ISGP”) does not extend coverage to the entire footprint of facilities but only to the parts “associated with industrial activity.” Because such activities do not occur at the Wharf, discharges from there do not require permits.

The Ninth Circuit vacated and reversed in part the district court’s partial summary judgment in favor of the Port and held that the plain text of the ISGPs required “a transportation facility conducting industrial activities implement stormwater controls across the entire facility.” Because the terminal was a facility conducting industrial activities, the permits extended CWA discharge requirements to all discharges from the whole facility, including the Wharf. The panel further reasoned that “the nature of the facility, not the nature of the discharge, determines whether there is coverage.”

Separately, the Port of Tacoma challenged the 2020 ISGP before the Washington State Pollution Control Hearings Board. The Washington Court of Appeals reviewed the board’s decision and issued a decision in accordance with the one from the Ninth Circuit. The port’s appeal is pending before the Washington Supreme Court.

Glen Hansen is Senior Counsel and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

In 2023 the California Department of Water Resources (“DWR”) deemed Groundwater Sustainability Plans (“GSPs”) for six groundwater basins inadequate, triggering state intervention. The six subbasins are: Chowchilla Subbasin, Delta-Mendota Subbasin, Kaweah Subbasin, Tule Subbasin, Tulare Lake Subbasin, and Kern Subbasin. When DWR deems a GSP inadequate for a basin, oversight of the basin transfers from the local Groundwater Sustainability Agency (“GSA”) to the State Water Resources Control Board (“SWRCB”), who holds a public hearing to determine whether the basin should be placed on probationary status.

On April 16, 2024, at a Public Board Hearing for the first of the six subbasins, the SWRCB designated the Tulare Lake Subbasin as probationary. The decision marks the first time a groundwater basin has been designated as probationary. Under that decision, starting July 15, 2024, well users who extract more than two acre-feet of groundwater per year will be required to track their groundwater use, and submit annual groundwater extraction reports by December 1, 2024 and by December 1 for every subsequent portion of the water year that the basin is probationary. If, after a year the deficiencies have not been addressed, the SWRCB could move into the next phase of the state intervention process, called an interim plan, under which the SWRCB could impose pumping restrictions on basins, or issue fines for exceeding water allotments. However, these reporting requirements have been temporarily suspended as of July 15, 2024 due to ongoing litigation, although groundwater extractors are responsible for staying up to date regarding fee payments.

The Kings County Farm Bureau, joined by two landowners, filed a lawsuit on May 15, 2024, in response to the designation. The lawsuit alleges that the SWRCB’s decision is “an act of State overreach that exceeds the Board’s authority under [the Sustainable Groundwater Management Act] and will devastate the Tulare Lake Subbasins and the Kings County economy.” The lawsuit asks for declaratory and injunctive relief.

Original hearings to consider designation of the Tule Subbasin and the Kaweah Subbasin were scheduled for September 17, 2024, and November 5, 2024, respectively. But the state postponed the Kaweah groundwater region’s probationary hearing until January 7, 2025, according to an announcement at a “state of the subbasin” event held June 19, 2024 to answer questions about what probation would mean. The hearing for Kern County Groundwater Subbasin on probationary status is scheduled for February 20, 2025. Hearings for the remaining two subbasins have yet to be scheduled.

Glen Hansen is Senior Counsel and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

Reserve your seat for our annual conference taking place in March of 2024 for our in-person and virtual conferences.

On March 14, 2024, Abbott & Kindermann, Inc. will present its 23rd annual In-Person Conference. March 28-29, 2024 Abbott & Kindermann, Inc. will present its 23rd annual Virtual Conferences. All Conferences are for clients and colleagues interested in current land use, environmental, and real estate issues affecting commercial and residential development, agriculture, real estate transactions, easements, mining and the construction materials production industry.

A summary of 2023 case law and legislative updates includes the following hot topics:

  • CALIFORNIA WATER RIGHTS AND SUPPLY
  • WATER QUALITY
  • WETLANDS
  • AIR QUALITY
  • CLIMATE CHANGE & RENEWABLE ENERGY
  • ENDANGERED SPECIES
  • HAZARDOUS MATERIALS & REMEDIATION
  • NATIONAL ENVIRONMENTAL POLICY ACT (“NEPA”)
  • MINING, OIL AND GAS
  • STREAMBED ALTERATION AGREEMENTS
  • FOREST RESOURCES
  • CULTURAL RESOURCES PROTECTION
  • ENVIRONMENTAL ENFORCEMENT
  • GENERAL REAL ESTATE
  • COMMON INTEREST DEVELOPMENTS
  • REAL ESTATE CONTRACTS & TRANSACTIONS
  • EASEMENTS, ADVERSE POSSESSION, DEDICATIONS, & BOUNDARY DISPUTES
  • FEES, TAKINGS, AND EXACTIONS
  • CALIFORNIA ENVIRONMENTAL QUALITY ACT (“CEQA”)
  • PLANNING, DEVELOPMENT AND THE SUBDIVISION MAP ACT
  • LOCAL GOVERNMENT AND LOCAL GOVERNMENT ORGANIZATION

Details for the In-Person and Virtual Conferences will come out shortly.  We hope you can join us and we look forward to seeing you there.

Reserve your seat for our annual conference taking place in March of 2024 for our In-Person and Virtual Conferences.

On March 14, 2024, Abbott & Kindermann, Inc. will present its 23rd annual In-Person Conference. March 28th or 29th, 2024 Abbott & Kindermann, Inc. will present its 23rd annual Virtual Conferences. All Conferences are for clients and colleagues interested in current land use, environmental, and real estate issues affecting commercial and residential development, agriculture, real estate transactions, easements, mining and the construction materials production industry.

A summary of 2023 case law and legislative updates includes the following hot topics:

  • CALIFORNIA WATER RIGHTS AND SUPPLY
  • WATER QUALITY
  • WETLANDS
  • AIR QUALITY & CLIMATE CHANGE
  • RENEWABLE ENERGY
  • ENDANGERED SPECIES
  • HAZARDOUS MATERIALS & REMEDIATION
  • NATIONAL ENVIRONMENTAL POLICY ACT (“NEPA”)
  • MINING, OIL AND GAS
  • STREAMBED ALTERATION AGREEMENTS
  • FOREST RESOURCES
  • CULTURAL RESOURCES PROTECTION
  • ENVIRONMENTAL ENFORCEMENT
  • GENERAL REAL ESTATE
  • COMMON INTEREST DEVELOPMENTS
  • REAL ESTATE CONTRACTS & TRANSACTIONS
  • EASEMENTS, ADVERSE POSSESSION, DEDICATIONS, & BOUNDARY DISPUTES
  • FEES, TAKINGS, AND EXACTIONS
  • CALIFORNIA ENVIRONMENTAL QUALITY ACT (“CEQA”)
  • PLANNING, DEVELOPMENT AND THE SUBDIVISION MAP ACT
  • LOCAL GOVERNMENT AND LOCAL GOVERNMENT ORGANIZATION

Abbott & Kindermann, Inc. will present its annual program virtually and in-person with a mix of conveniently available pre-recorded content and a live session component. 

Registration Information:

  • Registration fee is $110.00 for In-Person Conference
    • Location of In-Person Conference: Hilton Sacramento Arden West
  • Registration fee is $55.00 for Virtual Events
  • Register for the date of the In-Person and Virtual Event you would like to attend by clicking the following links:
    • March 14, 2024 (In-Person):
    • March 28th or 29th, 2024 (Virtual):

Please register early to reserve your spot. MCLE and AICP CM credits are available. We hope you can join us and we look forward to engaging with you soon.

Please call (916) 456-9595 with any questions.

Colyear v. Rolling Hills Community Assn. of Rancho Palos Verdes (2024) 100 Cal.App.5th 110

In Colyear v. Rolling Hills Community Assn. of Rancho Palos Verdes (2024) 100 Cal.App.5th 110, the Court of Appeal for the Second District held that the Rolling Hills Community Association of Rancho Palos Verdes (“Association”) could not enforce a covenant that allowed the Association to trim property owners’ trees against an owner whose deed did not contain the covenant and whose property was not described in any instrument containing the covenant.

In the 1930’s the Palos Verdes Corporation began subdividing the planned community of Rolling Hills. The first phase of the development was initiated with the recordation of Declaration 150, which covered only a certain portion of Rolling Hills and established that additional tracts may be added via subsequent declarations. Declaration 150 contains a tree cutting covenant (“TCC”) that allows the Association to enter properties and trim trees in order to preserve the views of the community. Additional tracts were added to Rolling Hills over the years governed by additional declarations, not all of which included the TCC. In 1967 and 1970 Richard C. Colyear purchased two parcels governed by Declaration 150-M, which does not contain the TCC.

In 2015 Colyear’s neighbor filed an application with the Association requesting the Association trim another neighbor’s trees. The application contained a photograph in which two of Colyear’s trees were visible. Colyear preemptively sued the Association seeking declaratory relief stating the TCC was not enforceable against his property.

The trial court ruled in favor of Colyear, and the Association appealed. On appeal the Association argued that: (1) Declaration 150-M’s references to Declaration 150 incorporate the restrictions of Declaration 150, or, alternatively, put Colyear on notice that the TCC applies to his property; and (2) because Colyear benefits from the use of the Association’s common areas the TCC applies to his property.

Under Citizens for Covenant Compliance v. Anderson (1995) 12 Cal.4th 345, Declaration 150 Does Not Apply to Colyear’s Property

The Court of Appeal first explained why Declaration 150 does not directly apply to Colyear’s property, independent of the Association’s allegations that it was incorporated by reference into Declaration 150-M. In Citizens,the California Supreme Court established that where a common plan for a subdivision is recorded before the properties are sold, all properties in the subdivision are bound by the restrictions therein, regardless of whether the deed for a given property mentions the restrictions. The Citizens court explained that this rule is “consistent with the rationale that a covenant requires an agreement between buyer and seller.” If a recorded plan establishes that it applies to a given property, the implied intent of the purchaser to be bound by its restrictions may be inferred. However, here Declaration 150 does not describe Colyear’s property and does not indicate that it applies to all properties in Rolling Hills. Rather Declaration 150 covers a narrow strip down the middle of Rolling Hills. The Court of Appeal therefore explained that under Citizens, Declaration 150 does not apply to Colyear’s property.

Declaration 150-M Does Not Incorporate the Restrictions in Declaration 150 by Reference

Though a contract may incorporate the terms of another contract by reference, “the reference…must be clear and unequivocal.” Unlike some declarations governing tracts in Rolling Hills, Declaration 150-M does not expressly incorporate the restrictions in Declaration 150. Rather Declaration 150-M duplicates some of Declaration 150’s restrictions while omitting others. Though Declaration 150-M acknowledges that Declaration 150 exists, it does not state that Declaration 150’s covenants apply to tracts covered by Declaration 150-M. Because the references to Declaration 150 in Declaration 150-M do not sufficiently provide a clear, unequivocal, or certain incorporation of Declaration 150’s terms, the references that do exist in Declaration 150-M do not subject Colyear’s property to Declaration 150’s TCC.

References to Declaration 150 Did Not Put Colyear on Notice

Alternatively, the Association asserted the references to Declaration 150 in Declaration 150-M are sufficient to have put Colyear on notice at the time he purchased his property that the TCC applied to the property. According to the Association, Colyear should have seen the references, analyzed the competing declarations, and concluded the TCC applied to the property, and, under Citizens, this is sufficient to enforce the TCC. The court disagreed, explaining that in reviewing Declaration 150 Colyear could have reasonably concluded it only applied to the section of Rolling Hills described, which does not include his property. Accordingly, the court held the references to Declaration 150 in Declaration 150-M did not put Colyear on notice that the TCC applied to his property.

Colyear’s Use of Common Areas Does Not Subject His Property to the TCC

As a final argument, the Association asserted it would be unfair to allow Colyear to enjoy the benefits of Rolling Hills’ roads, gates, and other common areas without subjecting him to the burden of the TCC. The court disagreed, explaining that the Association’s articles of incorporation “establish that the common areas are governed by the Association ‘for the benefit of residents of any tract’ and as may be set forth in any subsequent declaration for such tract.” This means the use of the common areas is not restricted to properties subject to Declaration 150, and, as no declaration applicable to Colyear’s property includes the TCC, his use of the common areas could not be grounds for enforcing the TCC.

Conclusion

Though Citizens established that under certain circumstances covenants which are not recorded in a property’s deed can still be enforced against a property, it “does not stand for the proposition that a purported covenant outside the chain of title can be enforced whenever there is a development with a common grantor.” Though all the parcels in Rolling Hills share a common grantor, the parcels were conveyed under different declarations. For a covenant to apply to a property when it is not in the deed the restriction must be recorded in such a way that it would indicate to the purchaser at the time of purchase that the property is encumbered. As no recorded instrument indicated Colyear’s property was subject to the TCC, the court upheld the trial court’s determination.

Jack Sandage is a Law Clerk and J. Gage Marchini is a Senior Associate Attorney at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

Sam v. Kwan (2024) 101 Cal. App. 5th 556.

The California Court of Appeal, Second Appellate District reversed a trial court’s decision in a real estate case of breach of fiduciary duty between two partners of an LLC. The case demonstrates that the bona fide purchaser doctrine will not protect a third-party buying the property when the buyer negligently ignored the obvious disputes regarding the seller LLC’s true managing manager. The ruling also underscores the importance of conducting thorough title research in real estate transactions and the potential liability of the escrow agents and title companies involved in these transactions.

The Trial Court Erred in Granting Summary Judgment in Favor of the Board

Anthony Sam and Renee Kwan formed a limited liability company (“2013 LLC”) to buy a parking lot, but their business relationship deteriorated. In 2015, Kwan negotiated the sale of the parking lot to the Board of Fire and Police Pension Commissioners for the City of Los Angeles (“Board”) for $3.8 million, which reaped more than $2 million in profit in less than a year and a half. The Board used a law firm as outside counsel and First American Title Company (“First American”) as the title insurer and escrow agent for the real estate transaction. Sam did not share the gains from the sale. He alleged this sale was done without his knowledge, and that Kwan had “fabricated” and “forged” documents to remove him from the 2013 LLC, as well as pocketing the sale proceeds. Sam sued Kwan, her companies, First American, and the Board after discovering the sale of the parking lot. The trial court ruled in favor of the defendants on various pretrial motions, effectively denying Sam a legal remedy.

There were two versions of the operating agreement which revealed contradictory information – one named Kwan as the managing manager and the other named Sam as the manager. The two operating agreements bored the same date “October 13, 2013” and the two partners developed conflicting explanations. Kwan said it was a simple and innocent “mistake” while Sam charged Kwan forged her version by altering the names, and fraudulently created it to make it look like she had authority she did not possess. Because Kwan’s proof of consent document appeared to have several problems, and the Board’s ignorance of such suspect and closing the deal rendered inadequate diligence, the court of appeal ruled that the summary judgment in the Board’s favor was inappropriate, and a fact finder must decide who was telling the truth.

Bona Fide Purchaser Doctrine

The bona fide purchaser (“BFP”) doctrine enables a buyer to keep the purchased property if the property is bought for value and the buyer lacked knowledge or notice of another’s claim. When the buyer has actual, constructive or inquiry notice of a prior interest, however, the buyer takes the property subject to those other interests. For a buyer to claim BFP protection, he must demonstrate that he has conducted research with due diligence to see if the title of the property-to-purchase would be good. California’s quiet title laws put this duty of inquiry on buyers of real estate transactions, and they must inquire into the validity of their prospective ownership claim. Even if the buyer does not have actual notice of the prior interest, if he negligently caused the lack of knowledge, or he would have known the dispute had he done the research, he would not be able to use the BFP doctrine.

More specifically, the buyer cannot claim as a BFP if he failed to do the due diligence. In the present case, there were apparent inconsistencies in the documented deed showing who was the managing manager, however, the Board’s lawyer entirely skipped the portion of the preliminary report that stressed the need, in the case of a limited liability company, to examine the company’s operating agreement and to obtain proof the company was properly operating through its manager. The Board’s attorney also failed to review the deed of trust and the assignment of rents. This suspect claim of authority would have caused a reasonable and prudent buyer to inquire further, and it is a standard practice to review the operating agreement during an LLC involved real estate transactions. But instead of pausing to figure out the details and suspects of the disputes, the Board went ahead and closed the transaction. Therefore, it cannot be qualified as a BFP and avoided possible damage or litigation, when the managing manager got challenged in a later claim.

Fiduciary Duty Between Partners of an LLC

As a joint venturer in an LLC, each partner owes the other one a fiduciary duty, even for a non-managing member, and one of the duties included is the duty to disclose material information. Sam alleged that Kwan, as his fiduciary, was under a duty to disclose material facts that she concealed: namely, her fabrication of a false operating agreement, her sale of the property without proper approval, and her failure properly to account for the funds. Sam also adequately alleged a claim for fraud based on concealment. A claim for fraud based on concealment will lie where the defendant concealed a material fact; the defendant was under a duty to disclose the fact to the plaintiff; the defendant concealed the fact with the intent to defraud the plaintiff; the plaintiff was unaware of the fact and would have acted differently if plaintiff knew; and the concealment harmed the plaintiff. Since Sam adequately alleged harm, the trial court erroneously granted judgment on the pleadings to the LLC’s managing member on Sam’s breach of fiduciary claim and it should be reversed.

Conclusion

A third-party buying property from a manager-managed LLC does not qualify as a BFP on summary judgment if there are factual disputes regarding the identity of the LLC’s manager and the buyer acted negligently in its due diligence to discover the obvious disputes.  It is the buyer’s duty to make a reasonable inquiry regarding the identity of the LLC’s manager. The court’s holding also indicates the potential liability of escrow agents and title companies in real estate deals, although it was not the focus of the ruling of the present case.

William Abbott is of Counsel and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

Simple Avo Paradise Ranch, LLC v. Southern Cal. Edison Co. (2024) 102 Cal.App.5th 281.

In Simple Avo Paradise Ranch, LLC v. Southern Cal. Edison Co. (2024) 102 Cal.App.5th 281, the Second District Court of Appeal affirmed the applicability of inverse condemnation claims to privately-owned utility companies.

Simple Avo Paradise Ranch, LLC (“Simple Avo”), a private-owned avocado farm, and other plaintiff filed an action against Southern California Edison Company (“SCE”), a private utility company, alleging SCE was responsible for damages caused by the 2017 Thomas Fire in Southern California. A master complaint in a coordinated proceeding involving hundreds of similar lawsuits alleged an inverse condemnation cause of action, claiming that the fire was caused by downed power lines owned and operated by SCE, which allegedly failed to mitigate the risks associated with its problematic electrical distribution system.

SCE demurred to the master complaint on the ground that inverse condemnation should only apply to public entities and not to investor-owned utility companies, like SCE. But in light of established precedent in Barham v. Southern Cal. Edison Co. (1999) 74 Cal.App.4th 744 (“Barham”)and Pacific Bell Telephone Co. v. Southern California Edison Co. (2012) 208 Cal.App.4th 1400 (“Pacific Bell”), the trial court overruled the demurrer. Simple Avo joined the lawsuit five months after the trial court overruled SCE’s demurrer, submitting a form complaint adopting and incorporating the master complaint.

In January 2022, Simple Avo settled with SCE and Edison International in the amount of $1.75 million, subject to SEC’s appeal of the demurrer ruling. The trial court entered the stipulated judgment and SCE appealed.

On appeal, SCE continued to question the viability of Barham and Pacific Bell, and also contended that Simple Avo has not alleged other elements of the inverse condemnation cause of action. The Court of Appeal affirmed the trial court’s decision overruling the demurrer. The court addressed the issue of whether a privately-owned utility can be liable in an inverse condemnation action. As in Barham, SCE argued it was a privately-owned utility company, not a public entity subject to inverse condemnation claims because it could not spread its losses from the cost of wildfires as a matter of right by raising its rates, like a public entity can do. As a privately-owned utility, SCE needed approval from the Public Utilities Commission (“CPUC”) to raise its rates. Barham rejected that argument because there was no rational basis for distinguishing publicly owned utilities from privately owned utilities. Thus, Barham expressly held that “SCE may be liable in inverse condemnation as a public entity.” Pacific Bell reviewed the California Supreme Court decision in Pettis v. General Tel. Co. (1967) 66 Cal.2d 503, that held that a privately owned utility could be liable for inverse condemnation.

Here, the Court of Appeal recognized that SCE lacked the authority to raise rates without the CPUC’s approval. But that did not preclude liability for inverse condemnation because there was no evidence the CPUC would not allow SCE to raise its rates to pass on damages. Also, the court reasoned that “although the Legislature has chosen not to do so, nothing in the Constitution prevents the Legislature from placing municipally owned utilities under the regulations of the Public Utilities Commission, including regulation of rates… We do not believe such regulation would immunize municipal utilities from inverse condemnation liability under the theory that they were no longer able to spread the cost of public improvements.” Therefore, the court concluded that SCE did not provide any persuasive reason to depart from Barham and Pacific Bell.

SCE also argued that the master complaint failed to allege the necessary elements for an inverse condemnation claim under City of Oroville v. Superior Court (2019) 7 Cal.5th 1091, which requires a plaintiff to show that the property damage was “substantially caused by an inherent risk in the deliberate design, construction, or maintenance of the public improvement.” But the court found the master complaint sufficiently alleged these facts because SCE knew its infrastructure was outdated but took no action to prevent potential disasters caused by the aging equipment, thus SCE deliberately ignored necessary inspections and maintenance finally leading to the Thomas Fire.

Glen Hansen is Senior Counsel and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

Temple of 1001 Buddhas v. City of Fremont (2024) 100 Cal.App.5th 456

In Temple of 1001 Buddhas v. City of Fremont (2024) 100 Cal.App.5th 456, the Court of Appeal for the First District held that the City of Fremont holding hearings for appeals of determinations related to building code violations in front of a single administrative hearing officer conflicts with the mandatory duty established by California Building Code, section 1.8.8 (“section 1.8.8”) requiring local governments to hold such hearings before a board.

Between 2013 and 2021 Miaolan Lee and her successor in interest, Temple of 1001 Buddhas, (“Plaintiffs”) received multiple notices and orders for public nuisances premised on violations of municipal building and zoning codes. Plaintiffs appealed, and Fremont appointed Ann Danforth as the hearing officer for the appeal in accordance with the provisions of Fremont’s municipal code governing appeals. Danforth issued a decision in favor of Fremont. Plaintiffs appealed, and the trial court upheld Danforth’s determination. Plaintiffs appealed again, this time to the Court of Appeal.

Plaintiffs argued that Fremont’s appeal process is preempted by section 1.8.8, and that they received an unfair hearing due to (1) evidentiary rulings Danforth made; (2) financial bias related to Danforth’s hiring; and (3) violations of due process caused by Deputy City Attorney Bronwen Lacey acting as both an advocate for Fremont and an advisor to Danforth. The court first addressed preemption before turning to the unfair hearing arguments.

Fremont’s Appeal Process is Preempted by California Building Code Section 1.8.8

Section 1.8.8 states that “[e]very city, county, or city and county shall establish a process to hear and decide appeals of orders, decisions and determinations…relative to the application and interpretation of this code and other regulations governing construction, use, maintenance and change of occupancy. The governing body…may establish a[n]…appeals board to serve this purpose…Where no such appeals boards or agencies have been established, the governing body…shall serve as the…appeals board.” The court in Lippman v. City of Oakland (2017) 19 Cal.App.5th 750, considered a challenge to the City of Oakland’s administrative citations appeal process which allowed for the appointment of a hearing officer, as Fremont’s does here. The Lippman court held that section 1.8.8 creates a mandatory duty for local governments to either (1) establish an appeals board or agency to hear appeals relating to building codes, or (2) hold such hearings before the governing body and found that Oakland’s municipal code violated this mandatory duty by allowing for appeals to be held before a single hearing officer.

Fremont argued that Lippman is distinguishable because this case involved public nuisance determinations rather than administrative citations for building code violations. The court reasoned that nuisance determinations premised on building code violations are necessarily determinations that the building codes were violated, so the nuisance determinations “fall[] squarely within the scope of Building Code section 1.8.8.” Accordingly, the court decided to follow the Lippman case in finding that Fremont’s process of settling appeals before a single hearing officer violated their mandatory duty under Section 1.8.8.

Fremont further urged the court to adopt the trial court’s “gravamen” rule to find that, where zoning code violations are at issue in addition to building code violations, the addition of the zoning code violations renders section 1.8.8 inapplicable. However, while the court agreed that section 1.8.8 is inapplicable to appeals relating to the application of zoning codes, it did not accept that this invalidates section 1.8.8’s mandatory duty with regards to building code violations and maintained that Fremont violated this duty..

Apart From Section 1.8.8 Preempting Fremont’s Appeal Process for Building Code Violations, Plaintiffs Did Not Receive an Unfair Hearing

a. Plaintiffs Failed to Establish Violations of Their Due Process Based on Evidentiary Rulings

Plaintiffs argued that evidentiary rulings Danforth made during the hearing excluding evidence violated their due process rights. The court determined that Plaintiffs’ claims were factually inaccurate or not supported by the record. Further, Plaintiffs failed to provide any reasoned argument as to how the rulings resulted in prejudice. The court explained that evidence exclusion at administrative hearings does not provide grounds for reversal absent a showing that the error resulted in a miscarriage of justice. Absent such a showing, even presuming the factual validity of Plaintiffs’ allegations, the claims could not provide grounds for reversal.

b. There was no Financial Bias in Danforth’s Hiring

Plaintiffs argued that Fremont’s process for hiring a hearing officer violates due process. In Haas v. County of San Bernardino (2002) 27 Cal.4th 1017, the California Supreme Court held that hiring temporary administrative hearing officers on an ad hoc basis and paying them according to the amount of work performed could give the hearing officers an impermissible financial interest in the outcome of cases they decide. However, if local governments appoint the officers in a way that does not create the risk that favorable decisions will be rewarded with future work, it is not a due process violation. Though the Haas court did not lay out specific rules, it suggested that a local government could appoint a panel of attorneys to hear cases under a pre-established system of rotation. Finding that Fremont followed a rotation procedure like that described in Haas, the court held Danforth’s hiring did not create financial bias by incentivizing her to issue a decision favorable to Fremont.

c. Plaintiffs Forfeited Their Dual Role Claim by Not Raising it At the Hearing

Plaintiffs asserted that Deputy City Attorney Bronwen Lacey acted as both an advocate for Fremont and an advisor to Danforth at the hearing, violating their due process. The court agreed that an attorney cannot act as an advocate for an agency and as an adviser to the decision maker reviewing the decision for which the lawyer advocated. Despite this rule, the court found no error with respect to Lacey for two reasons. First, Plaintiffs failed to show that they objected to Lacey’s alleged dual rule at the hearing. The court explained that when a litigant suspects bias on the part of a member of an administrative hearing body, the issue must be raised in the first instance at the hearing. Second, while Lacey undisputedly served as Fremont’s counsel, Plaintiffs failed to establish that Lacey advised Danforth at the hearing.

Conclusion

Because Fremont’s process for appeals premised on building code violations conflicted with the mandatory duty established by section 1.8.8, the court remanded the case to the trial court with orders to compel Fremont to set aside the hearing determinations premised on the building codes, and to provide an appeal in accordance with section 1.8.8. However, because section 1.8.8 is inapplicable to appeals for determinations related to zoning codes, and because the court found that Plaintiffs did not receive an unfair hearing with regards to those determinations, the aspects of the hearing with respect to zoning code violations were left undisturbed.

Jack Sandage is a Law Clerk at Abbott & Kindermann, Inc. and J. Gage Marchini is a Senior Associate Attorney at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.