Multiple § 998 Offers: Which One Controls?

The California Code of Civil Procedure § 998 is a powerful tool for settlement purposes.  (For the full text of the statute, click here.)  If a plaintiff makes a § 998 offer and the defendant rejects the offer or allows it to expire, and the defendant does not achieve a better result at trial, then the plaintiff may be entitled to expanded costs—such as its expert witness fees—incurred after the offer was made.  The same applies in reverse: if a defendant makes a § 998 offer which is not accepted, and the plaintiff does not achieve a better result at trial, then the defendant may be entitled to expanded costs.  (Note that in both cases, the rejecting party must obtain a better result than the offer to avoid the cost-shifting effect.  A tie goes to the offeror.)

When there are multiple § 998 offers, things get a bit more confusing.  In Distefano v. Hall, 263 Cal. App. 2d 380 (1968) (link here), the Court of Appeal applied basic contract law principles to reach its determination that a subsequent § 998 offer extinguishes an earlier offer.

In DiStefano, the defendants made an offer for $20,000, and the plaintiff obtained an award of $28,500, which was reversed on appeal.  The defendants then made a 10,000 offer, and on retrial, the plaintiff recovered $12,559.96.  Defendants attempted to recover their post-offer costs dating back to the first $20,000 offer.  The court held that the latter offer extinguished the first one, and awarded the defendants none of their costs.

In T.M. Cobb Co. v. Superior Court, 36 Cal. 3d 273 (1984) (link here), the California Supreme Court approved of the DiStefano court’s reasoning, and said that general contract law principles may properly govern the statutory offer and acceptance process so long as they “neither conflict with the statute nor defeat its purpose.”  Id. at 280.

In Martinez v. Brownco Construction Co., Inc. (link here), the state Supreme Court was confronted with a slightly different situation, and rejected the “last offer” rule in that instance.  In Martinez, the plaintiff Mrs. Martinez made two settlement offers, one for $250,000 early in the case, and another for $100,000 shortly before trial.  At trial, she obtained a $250,000 award.  The issue is whether she could recover her costs from the date of the first offer, or only from the date of the second offer.

The Court reasoned that applying the DiStefano rule to these facts would actually frustrate the intent behind § 998.  The policy behind § 998 is to encourage the parties to settle, and applying the rule in this case limiting Mrs. Martinez to the costs incurred after only the second offer would discourage her (and others) from making more reasonable settlement offers as trial approached.

Instead, the Court held that allowing Mrs. Martinez to recover costs from the date of the first offer better fulfilled the purposes of § 998, stating “[w]here, as here, a plaintiff serves two statutory offers to compromise, and the defendant fails to obtain a judgment more favorable than either offer, recoverability of expert fees incurred from the date of the first offer is consistent with section 998’s language and best promotes the statutory purpose to encourage the settlement of lawsuits before trial.

Author: Amy Howse

Spendthrift Clauses and Choice of Law: How to Shield a Beneficiary’s Trust Assets in Bankruptcy

In an earlier blog post, we discussed choice of law provisions (commonly referred to as forum selection clauses) which control both the place where a contract dispute would be litigated and which jurisdiction’s laws would apply to the dispute.  A similar concept applies to trusts.

A trust is essentially a contract between the settlor (the person establishing the trust) and the trustee (the person holding title to the property).  It also governs the rights of third parties to the contract.  For example, if a beneficiary of a trust is sued, certain provisions in the trust could protect that beneficiary from having his or her trust property taken away in that lawsuit.

One of those protective provisions is a spendthrift clause, which can operate to prevent a creditor from seizing the beneficiary’s property.  Many trusts provide that the trust assets cannot be seized by a creditor, and courts routinely uphold those provisions.  However, in certain limited circumstances, the spendthrift clause will not protect all of the beneficiary’s trust interest.

Another way to protect the beneficiary’s interest is by including a choice of law provision.  In In re Zukerkorn, Sally Zukerkorn established a trust for the benefit of her children.  Her trust specifically selected Hawaii as the applicable law.

Thirty years later, Sally’s son, Herbert, filed for bankruptcy in his home state of California.  Herbert attempted to shield his trust income from the bankruptcy estate.  Under California’s bankruptcy laws, Herbert would have to turn over 25% of his trust income to pay his creditors in the bankruptcy.  Under Hawaii law, he wouldn’t have to turn over any of his trust income.

Ultimately, the court decided that Hawaii law applied.  Sally’s choice of law in her trust was upheld because Hawaii had a “substantial relation” to the trust.  At the time the trust was created, Sally lived in Hawaii, the trust property was located in Hawaii, and at least one of the beneficiaries lived in Hawaii.  Also, the court noted that the trust was currently being administered by a Hawaii corporate trustee.

The Court’s decision in Zukerkorn does not mean that every trust containing a choice of law provision will be governed by that state’s law.  A “substantial relation” must exist between the trust and the chosen state, and even still, a court might disregard the provision under certain circumstances, e.g., if the trust was a self-settled trust created for the sole purpose of shielding assets, or if certain public policy exceptions apply.

However, in cases like Zukerkorn, choosing the state law which will apply to your trust and ensuring that you establish a substantial relation between that state and the trust property could provide an additional protection for your beneficiaries.

If you’d like to create a trust for your own beneficiaries, or if you’d like us to take a second look at your estate plan to evaluate whether it achieves your goals, please feel free to give us a call.

In Re Zukerkorn, BAP No. NC-11-1506-JuKiJo (2012).

Author: Amy Howse

Mobilehome Park Owners Forbidden from Renting Their Own Mobiles?

Das Williams, a member of the California State Assembly, asked Attorney General Kamala D. Harris for an opinion on the following question: “If the management of a mobilehome park has enacted rules and regulations generally prohibiting mobilehome owners from renting their mobilehomes, is park management bound by these same rules and regulations?”  Opinion No. 11-703, available here.

The attorney general’s answer, somewhat surprisingly, is YES.

Why does this matter?  Because mobilehome park owners often have difficulty filling their parks with mobilehome owners.  On occasion, they have resorted to buying mobiles themselves and placing them in vacant park spaces, and then selling or renting them to potential residents.

In recent years, selling mobiles to residents has gotten much more complicated, as the state legislature is deliberating whether to adopt laws prohibiting park owners from financing the sale of park-owned mobiles to residents unless the mobile home park owner/manager is a licensed mortgage loan originator.   (See SB 376 from the 2011-12 legislative session.  It is still showing as “active,” although no hearings are scheduled as of the time of this writing.  The current status of the bill can be seen here.)  Federal laws may already require this, so the state of the law is a bit unclear.

Many mobilehome park owners have gone the easier route of purchasing mobiles to fill the vacant spaces and renting out those spaces to residents.  But now, based on the Attorney General’s opinion, park owners are prohibited from doing that if they have a park rule that prohibits tenants from renting their homes to third parties.

Many mobilehome parks have rules in place that prohibit mobilehome owners within the park from renting out or subletting their mobiles to others.  The policy behind the rule is that it is generally very difficult for mobilehome park management to enforce the park rules against those subtenants/sublessees, because there is no privity of contract between the park management and the resident.

However, Civil Code Section 798.23(a) states that the owners of the park and all employees of the park are subject to all of the same rules and regulations.  If the rules state that a mobile home owner cannot lease his or her mobilehome to a third party, then the rules also require that the mobilehome park owners are bound by the same restriction, even though the policy behind the no-subletting rule doesn’t apply when the mobilehome park owner is renting out a park-owned mobilehome.

So far, we have been unable to find any litigation that supports the attorney general’s new opinion, and that opinion is not binding law.  However, mobilehome park owners may want to play it safe by amending their park rules (giving the appropriate notice to the tenants, of course) to allow subleases only if the sublessee signs a contract with park management agreeing to abide by the community rules.

Author: Amy Howse

Where Do I Have to File My Lawsuit? Venue Selection Clauses May Now Be Enforceable

One issue that frequently arises in contract disputes is where to litigate the dispute.  This particularly becomes an issue when the parties to the contract are located in different states or countries, but can also arise when the parties are situated in different counties within the same state.

Forum selection clauses generally determine which state or country is the permissible location for litigating disputes.  Because the laws of states and countries vary, forum selection clauses are typically more about which choice of law will apply than about the physical location where the lawsuit will be brought.  The courts have long held that forum selection clauses are generally enforceable.  See The Bremen v. Zapata Off-Shore Company, 407 U.S. 1 (1972); Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991).

Venue selection clauses are a slightly different animal.  Venue selection clauses attempt to prescribe which location within a state will hear the dispute.  Thus, venue selection clauses aren’t about choice of law, they are about the convenience to one or more of the parties of litigating in a certain county.  If you have parties located in neighboring counties, the burden of litigating in one county versus the other is relatively small.  However, if one party is located in Shasta County, for example, and the other is in Orange County, the travel costs for one of the party’s attorneys, clients, and witnesses can add significant expense to the cost of litigating.

Back in 1929, the California Supreme Court decided that venue selection clauses were unenforceable.  General Acceptance Corp v. Robinson, 207 Cal. 285 (1929).  The court reasoned that the legislature was tasked with determining the appropriate venue for lawsuits, and the parties to a contract couldn’t change that.

However, in Battaglia Enterprises v. Superior Court, 215 Cal. App. 4th 309 (2013), the Court of Appeal determined that if multiple venues would be appropriate under the Code of Civil Procedure, and one of those venues is the one designated by the contract’s venue selection clause as the exclusive venue for disputes, that Court would enforce the clause and require the parties to litigate in that venue.

In light of this recent development, companies and individuals should take a fresh look at their contracts and determine whether a venue selection clause would be helpful.  The cost of having to litigate a dispute in a distant county could vastly outweigh the price of having an attorney review your key contracts in advance.  Give us a call if you’d like some assistance in reviewing your key contracts.

Battaglia Enterprises v. Superior Court, 215 Cal. App. 4th 309 (2013).

Author: Amy Howse

Domestic Partnership Agreement Is Enforceable Despite Subsequent Marriage

Two same-sex partners, Wilson and Konou, began a relationship in 2005.  In 2006, they became domestic partners.  Immediately prior to registering as domestic partners, the couple executed a domestic partnership agreement, in which each of them expressly waived any rights to the property of the other in the event of death, dissolution, or legal separation.

In June 2008, when same-sex couples were permitted to marry in California, Wilson and Konou married.  Less than five months later, Wilson committed suicide.

After Wilson’s death, Konou filed a petition with the probate court, seeking to inherit a portion of Wilson’s property as a pretermitted spouse.  (See Probate Code § 21610.  Note that the statute uses the term “omitted spouse” instead.)  Konou argued that the marriage license provided him different rights than what he was entitled to under the domestic partnership.

The court decided that a domestic partnership agreement was essentially the same as a prenuptial agreement.  Couples frequently execute prenuptial agreements prior to a marriage.  The fact that the couple later married does not invalidate the prenup, or change the parties’ rights to property under the prenup.  Likewise, the court held that the domestic partnership agreement was still in force despite the couple’s later marriage.

This case highlights the importance of re-examining your estate plan on a regular basis.  It is possible that Wilson and Konou intended to provide for each other later in life, and that they believed that by getting married in 2008, they would be entitled to inherit from each other as if the domestic partnership agreement had never existed.  It is also possible that they intended for the original domestic partnership agreement to remain in effect.  Either way, a re-examination of their priorities and a discussion about it could have prevented unintended consequences.

If you haven’t re-examined your estate plan lately, it’s a good idea to take another look at it to see if it still reflects your wishes.  If you haven’t executed an estate plan at all, particularly if you have a same-sex partner or if you wish to leave your property to those not in your immediate family (nieces/nephews, cousins, friends, charities), you should strongly consider talking to an attorney about setting up an estate plan that will help you achieve your goals.  If you like, give us a call and William L. Cates or Amy Howse can assist you with your estate plan.

Estate of Wilson, 211 Cal. App. 4th 1284 (2012).

Author: Amy Howse

Notaries Beware!

New for 2013, Government Code § 8206(G) is amended to provide that, for any notarized document affecting real property, the signer must place his or her thumbprint in the notary journal.  Prior to this change, a thumbprint was only required for deeds, quitclaim deeds, deeds of trust affecting real property, and powers of attorney.  The above change is effective as of January 1, 2013.  For a thorough discussion of notary rules and procedures, read the California Secretary of State’s Notary Handbook, found at http://www.sos.ca.gov/business/notary/forms/notary-handbook-2013.pdf.

The National Notary Association asked “What is a ‘document affecting real property’ exactly?”  In response to that question, the association  came up with the following examples: (a) any document in a loan package requiring notarization, (b) a revocable or irrevocable trust if funded with a family home or other real estate, and (c) any document containing an assessor parcel number to real property.  For more examples, see the National Notary Association’s December 2012 webinar materials, found at https://www.nationalnotary.org/webinars/new-law/california-december-2012.html.

Due to the generality of the thumbprint requirement, the prudent course may be for notaries to require a thumbprint for all documents.

If you have any questions about this issue, please feel free to contact William L. Cates.

Author: William L. Cates

Update on the American Taxpayer Relief Act of 2012 (ATRA)

Congress loves acronyms!  On January 1, Congress passed ATRA which extends (and makes permanent) the $5,000,000 + inheritance tax exclusion amount, the coupling of gift and estate tax, and the portability of the inheritance tax exclusion between spouses.

Under ATRA, the consequences of falling off the “fiscal cliff” were averted.  Also, many of the sunset provisions in our prior laws have been removed, making those laws permanent—at least until Congress passes a bill specifically changing them.

This is very good news for clients and others who resisted the temptation to jump on the year-end gift-giving bandwagon.  In our opinion, the 2012 year-end estate tax frenzy was good for a few, but done by many.  Those individuals who did not take the leap now have time for a deliberate, cautious approach to estate tax planning.

Here are some of the key provisions of the bill as it relates to estate taxes:

  • The $5 million exclusion amount, adjusted for inflation, was made permanent.  It does not expire. After adjusting for inflation, it is expected to be $5,250,000 in 2013.  This is the amount every individual may gift or bequest without the imposition of federal inheritance tax.  (California has no estate tax.)
  • The estate tax exclusion remains coupled with the gift tax exclusion.  It is a unified transfer tax exclusion.  In other words, the exclusion may be used to offset gifts during a person’s lifetime or bequests upon death, or any combination of gifts and bequests up to the amount of the exclusion, i.e., $5,250,000 for 2013.
  • The exclusion remains portable between spouses.  If a spouse has not utilized his or her entire exclusion upon death, the remaining exclusion is available for the surviving spouse, to be added to the surviving spouse’s exclusion.  For example, if a person dies in 2013 without utilizing any of his or her exclusion, the surviving spouse would have a $10,500,000 exclusion (or more, depending on the surviving spouse’s exclusion amount at the time of his or her death) to use during the surviving spouse’s life or upon his or her death.  Please note, however, that to obtain a spouse’s exclusion, an election must be made on a timely filed estate tax return for the deceased spouse.  It is not automatic.
  • The top transfer tax rate is now 40%, rather than the 35% provided in prior law.
  • The generation skipping transfer tax (“GST”) exemption is $5,000,000, adjusted for inflation.  The GST tax captures gifts and bequests where a generation is skipped (such as a gift from a grandparent to a grandchild).  As with prior law, the GST exemption is not portable.  With a married couple, traditional estate tax planning techniques, such as a credit shelter trust, may be utilized to preserve each spouse’s exemption.
  • As with prior law, state estate taxes are deductible on the federal estate tax return. (Again, California has no estate tax.)

Other provisions of ATRA may be discussed in future blogs.  Should you have any questions about the above content, please contact William L. Cates.

Please be advised that the information provided above is general in nature and is not intended to constitute tax, legal or other professional advice.  Each person’s particular situation is unique and requires specific review and analysis before advice can be provided.

Author: William L. Cates

Cates Peterson LLP Launches New Website!

We are proud to announce the launch of our revamped website. The new website offers fresh content and a better look at who we are and the services we offer. Additionally, we expect to bring value to clients by posting periodic updates on topical legal issues on our Blog/Articles page. Take a look around and let us know what you think!