In California, the Consumer Cooperative Corporation Law, enacted in 1982, regulates entities which operate as cooperatives.  However, cooperatives may be organized as corporations, limited liability corporations (LLC), or even remain unregistered with the State.

TYPES OF COOPERATIVES

The U.S. Tax Court has divided cooperatives into two categories: consumer and producer. In consumer cooperatives, the members are consumers, and the cooperative offers products to benefit the members. In producer cooperatives, the members are producers, and the product the members make is processed or marketed by the cooperative.

INDUSTRIES

Cooperatives exist in many industries, including agricultural (e.g. Sunkist, Blue Diamond, Sun-Maid); utility (e.g. Palo Alto Park Mutual Water Company, Central Florida Electric Cooperative); housing; consumer goods (e.g. REI, ACE Hardware); education. Cooperatives can be established in nearly any industry, for any purpose, so long as they are organized and conduct business activities primarily for the benefit of its members, and not to make a profit.

INVOLUNTARY DISSOLUTION of a CORPORATION (S-CORP/C-CORP) in CALIFORNIA

May be filed by:

• ½ or more of directors
• 33 1/3 or more of share holders or equity holders*

* can be 33 1/3 of total shares or 33 1/3 of total common shares; in any case, the total excludes shares of those who are in control of the corporation and are “guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers”

DISSOLUTION OF A CALIFORNIA LLC

A CA Limited Liability Company (LLC) is dissolved when any of the following occur:

• A specific event (e.g. a date set, a goal reached, etc.) that is specified in the operating agreement
• Members with 50% or more of the voting interest decide it is
• Generally, if it has no members for more than 90 days
• A Court Order

If an LLC is formed, it can be cancelled within a year if it does no business and meets certain other basic requirements (filing a Franchise Tax Board return)

If a court case for dissolution is filed, the member(s) that oppose the dissolution can prevent it by buying out the member(s) that want the dissolution.

• Purchase must be cash
• Purchase price is “fair market value”
• If the parties cannot agree on fair market value, the Court will halt the dissolution until it can determine the fair market value
• The Court determines fair market value by appointing 3 independent appraisers

First, the liquidated damages cannot be a penalty—the amount specified must be reasonable under the circumstances, and cannot be “designed to substantially exceed the damages suffered, and…to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss.” Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006); Cal. Civ. Code § 1671(b). A guiding principle is that any number picked cannot be arbitrary, and instead must be based on a reasonable attempt at determining a fair amount of compensation for the breach.

There are further rules if the clause is contained in a contract for the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is allowed only when “it would be impracticable or extremely difficult to fix the actual damage.” Cal. Civ. Code § 1671(c) and (d).

Every situation is different, and should be evaluated by a qualified attorney. After all, if the clause unenforceable, it won’t save time, and may even ultimately cost more. It is always better to prevent problems before they occur, rather than waiting, and a well-crafted liquidated damages clause can be very effective in doing so.

501(c)(3) ORGANIZATIONS*

Types of Organizations That May Qualify:

• Religious
• Charitable
• Scientific
• Testing for public safety
• Literary / Educational
• Amateur sports competition
• Prevention of cruelty to children or animals

* 501(c)(3) organizations are exempt from paying federal income tax, and, in some cases, charitable contributions to a 501(c)(3) organization are deductible by donors.

Note that 501(c)(3) status is a federal tax exemption, and state organization and other laws must still be complied with.

Every 501(c)(3) organization is either a Public Charity or a Private Foundation.  The classification is important because different tax rules apply to each one.  In general, Private Foundations are subject to more stringent requirements than a Public Charity.

(Note that the name of the organization has nothing to do with the classification.  For example, there are Public Charities with the word “Foundation” in the name).

If you do not qualify as a Public Charity, you are a Private Foundation.  Private Foundations are further broken down into Nonoperating Private Foundations or Private Operating Foundations.  Private Operating Foundations have more favorable tax rules in regard to donor contributions and grants, but your organization must qualify based on IRS tests.

PARTNER MUST BE BOUGHT OUT AT THE GREATER OF:

• Liquidation value*
• The going concern value**

* In the context of a partnership, liquidation value is not distressed sale value; in the context of a corporation, the fact that assets are being old under distressed conditions is considered

** What a willing buyer would pay a willing seller (includes goodwill); this amount is reduced based on the fact that the dissociated partner will not longer be involved; however, the dissociated partner does get value for the goodwill that was already built in the business

VALUATION BUYOUTS: S-CORP/C-CORP VS LLC

A corporation buyout is based on “Fair value”

An LLC buyout is based on “Fair Market Value”

* Fair Value “shall be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation” (CA Corp Code §2000)

** Fair Market Value has not been defined, but it appears to involve less “deductions” than Fair Value, meaning it will generally yield a higher buyout value

WINDING UP AN LLC : THE PROCESS[1]

1. Determine all the known debts and liabilities of the LLC (including debts and liabilities to members who are creditors of the LLC)
2. Pay or settle all debts and liabilities[2]
3. Distribute remaining assets according to member rights and preferences (paid in the following order):[3]
   1. Compensation for work in dissolution process
   2. Return of contributions
   3. Distributions to members

[1] CORP § 17707.05

[2] Even if dissolution has been filed, an LLC continues to exist as long as it is pursuing and defending court actions necessary for winding up

[3] CORP § 17707.05(a)

WINDING UP AN LLC : WHO CONTROLS?[1]

If dissolution is by Court Order, the order controls the winding up process.  If dissolution happened without a Court Order, the following person(s) are in charge of the process:

• The manager(s) who did not wrongfully dissolve the LLC, or if none:
• The members, or if none:
• A majority of the people who signed the Articles of Organization

* The person(s) responsible for winding up is/are entitled to reasonable compensation.

** Even if dissolution was not done by Court Order, members or managers can file action for an order determining how the winding up process should go.

[1] CORP § 17707.04

Pass-throughs may be assessed at different times (per the lease), and often commercial leases will allow a landlord to retroactively apply assessed charges.  Sometimes a landlord will not assess any charges for years, but then choose to.  Negotiating the exact provisions is critical to predicting expenses and running a successful operation.  The extent of rights to audit is also a negotiable and important issue.

An Estoppel Certificate is a document typically used in performing due diligence prior to the purchase of tenant-occupied property.  The purpose is for a lender and purchaser to have written confirmation from tenants of certain terms.  Important amongst these are: the rental amount; security deposit; duration of lease; and, as discussed further below, a “subordination” clause.

The subordination clause is used to confirm that the tenants have agreed, in their lease, that their interest is subordinate to future mortgages.  Without such confirmation, the tenants’ leases have priority over mortgages that are subsequently obtained.  Furthermore, only a tenant whose interest is subordinate to the mortgage can be evicted.  A purchaser (and their lender) may be stuck with tenants for an indefinite period without the ability to earn market rental values.  A tenant may be locked in for years, and potentially even forever—courts have upheld provisions giving the tenant the right to perpetual renewal of leases.

© 2018 ANAND LAW PC

First, the liquidated damages cannot be a penalty—the amount specified must be reasonable under the circumstances, and cannot be “designed to substantially exceed the damages suffered, and…to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss.” Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006); Cal. Civ. Code § 1671(b). A guiding principle is that any number picked cannot be arbitrary, and instead must be based on a reasonable attempt at determining a fair amount of compensation for the breach.

There are further rules if the clause is contained in a contract for the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is allowed only when “it would be impracticable or extremely difficult to fix the actual damage.” Cal. Civ. Code § 1671(c) and (d).

Every situation is different, and should be evaluated by a qualified attorney. After all, if the clause unenforceable, it won’t save time, and may even ultimately cost more. It is always better to prevent problems before they occur, rather than waiting, and a well-crafted liquidated damages clause can be very effective in doing so.

The PROs distribute royalties to the copyright owners of the musical composition, typically the publisher and songwriter(s). There is no public performance right in sound recordings, meaning that a singer/rapper that performs on a song, but is not a writer, does not receive any public performance royalty when their song is played on traditional radio. If the song is played on digital radio, the singer/rapper will get a royalty for the public performance of their sound recording, which is collected by SoundExchange.

The implied license originated as a concept in patent law, and was then adopted in copyright cases.  It is now also applicable to the right of publicity.

Generally, an implied license will be found where the following occurred:

1. At the request of a client
2. An author creates a work
3. Knowing the intended use by the client
4. And provides the work to the client

For singers, producers, songwriters, and artists, an implied license will allow others to use your most valuable IP, copyrights and rights to publicity (e.g., voice, image, likeness), without any compensation, or without further compensation.  Moreover, if a payment is found to have been made, the license will be nonrevocable.

Not only can you license your IP without any agreement, unless you explicitly limit the extent to which your IP is licensed, a Court will find the contours of the license to be as broad as reasonably possible.  In other words, unless there is evidence demonstrating that you limited the extent to which your IP may be used, an implied license will cover all uses reasonably anticipated, and without geographic limitation.

It is critical that creators understand the situations under which you may be found to have transferred rights, and to avoid the implied licensing of your work by having thorough, written agreements in place.  Without a written agreement, you may be giving your rights away without compensation, without adequate compensation, and without knowing the parameters of the license that you have given.

There may be situations where it makes sense to work for a low amount or even for free—e.g., in order to build a reputation, make connections, learn and develop skills—but, this should not be done without careful consideration of the pros and cons of doing so in the context of your career, and you should never give away your IP without knowing that you’re doing so.  Do it because you want and intend to, and because you are being fairly compensated in return (whether that compensation is monetary or otherwise).   And always, know what your rights are, and what you can expect for allowing other to use them, whether that is a one-time “buy-out” payment, or it includes residual payments based on the performance of the product, or is an alternative arrangement.

There are exceptions to the implied license doctrine, including fraud.  See e.g., Garcia v. Google, Inc., 743 F.3d 1258, amended by Garcia v. Google, Inc., 766 F.3d 929 (9th Cir. 2014).  However, you do not want to rely on exceptions, as this will mean spending a lot more money on attorneys battling out the legal nuances of your situation, whether in or out of court.  The far better practice is to make sure that you consult with an attorney prior to creating and handing over your work.  If you are an author, producer, actor, musician, singer, artist, set designer, etc., be sure to have an attorney review your situation and draft or review a written agreement.  The money you spend in legal fees to prevent fixing a bad situation will be a fraction of what it costs to remedy that situation.

© 2018 ANAND LAW PC

A mere idea is not protected as property in California (Desny v. Wilder). However, a promise to pay for the conveyance of an idea may be implied by the law from the circumstances surrounding the acceptance of that idea (Burtis v. Universal Pictures Co.).

In order to prevail on a breach of an implied-in-fact contract claim, it must be shown that the plaintiff not only conveyed an idea that was used by the defendant for a profit, but also that the idea was conveyed with the expectation that payment would be made if the idea were to be used. The plaintiff must show:

1. that he or she prepared the work;
2. that he or she disclosed the work to the offeree for sale;
3. under all circumstances attending disclosure it can be concluded that the offeree voluntarily accepted the disclosure knowing the conditions on which was tendered (i.e., the offeree must have the opportunity to reject the attempted disclosure if the conditions were unacceptable); and
4. the reasonable value of the work. (Faris v. Enberg)

A musical composition may be written (e.g. notes and lyrics), or in the form of a phonorecord (recording of the notes and lyrics). The owner(s) of the copyright to the musical composition may differ from the owner(s) of the copyright to the sound recording of that musical composition. A copyright in one is not the same as, or a substitute for, a copyright in the other. Compare with: sound recording.

Registration with SoundExchange does not necessarily eliminate the need for an artist/writer/producer to also affiliate with one of the PROs.

Compare with: ASCAP, BMI, and SESAC, the 3 U.S. public performance organizations (PROs) that collect royalties on behalf of copyright owners of musical compositions or the public performance of their works in “traditional” avenues (i.e., non-digital).

The owner(s) of the copyright to the sound recording may differ from the owner(s) of the copyright to the musical composition that is being recorded. A copyright in one is not the same as, or a substitute for, a copyright in the other. Compare with: Musical Composition.

or

A work specially ordered or commissioned for use

1. as a contribution to a collective work,
2. as a part of a motion picture or other audiovisual work,
3. as a translation,
4. as a supplementary work,
5. as a compilation,
6. as an instructional text,
7. as a test,
8. as answer material for a test,
9. as an atlas, or
10. if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.

In California, almost all foreclosure sales are “non-judicial foreclosure” sales, meaning they take place without any court action.  A “judicial foreclosure” takes place after a court case is filed, and a Judge rules that the foreclosure action can take place.

After a non-judicial foreclosure sale is held, you do not have the right to purchase the property back from the lender (unless they are willing to do so, but you don’t have the right to force the sale back to you), except for foreclosure sales held by the holder of an HOA lien, in which case you have 90 days to do so.

The proceeds from property sold at foreclosure sale must be distributed in the following order of priority:

1. to the foreclosure trustee for costs and expenses of conducting the sale;
2. to the lender(s) for the balances owed on their loan(s), in the order of their liens;
3. to the former owner or former owner’s successor-in-interest.

If you believe you are owed money after your property was sold at foreclosure auction, contact ANAND LAW PC today.

If your lender stated they would permanently modify your mortgage payments if you made three trial modification payments on time, they must honor this promise. If you are facing this situation or one similar to it, you more than likely have a valid claim for breach of contract against your bank. Call Anand Law, PC today to discuss your rights with a qualified attorney.

• 10% interest on a loan primarily for personal, family or household purposes;
• For loans that are not for for personal, family or household purposes, the higher of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan (including loans to be used primarily for home improvement or home purchase).

There are, however, exceptions to these limits including the “broker-arranged” exception.  Click here for more information on interest rate limitations.

If you have been charged a usurious rate, you are entitled to all amounts you have paid in excess of the principal. Call Anand Law, PC today to discuss your rights with a qualified attorney.

Security interests in real property in California are most often created through the execution of two documents, a deed of trust and a promissory note. A deed of trust grants the beneficiary a security interest in property that secures the loan, while the note creates an obligation for the borrower to pay the debt (a contract). The parties to a deed of trust are typically the trustor (the borrower), the beneficiary (the lender), and the trustee (the party in whom the deed to the property is placed, in trust, until the obligation memorialized in the accompanying note is paid). See generally 4-111 California Real Estate Law & Practice § 111.04.

The parties to a deed of trust are typically the trustor (the borrower), the beneficiary (the lender), and the trustee (the party in whom the deed to the property is placed, in trust, until the obligation memorialized in the accompanying note is paid).  If a borrower defaults on payment, the trustee is authorized to sell the property by virtue of the power of sale clause in the deed of trust.

As part of the California Homeowner Bill of Rights (a series of laws which took effect in January 2013 in response to the foreclosure crisis affecting the state), prior to filing a notice of default to commence a nonjudicial sale, the law now requires that a mortgage servicer, beneficiary, or trustee contact the trustor/borrower in person or by phone in order to assess the borrower’s financial situation and discuss options available to the trustor/borrower that may avoid foreclosure. Cal. Civ. Code § 2923.5(a)(2). After this initial contact is made, the mortgage servicer, beneficiary, or trustee must wait 30 days before attempting to record a notice of default. Cal. Civ. Code § 2923.5(a)(1)(A).

The law also prohibits a mortgage servicer, beneficiary, or trustee from recording a notice of default if the trustor/borrower has submitted a completed application for a first lien loan modification until the trustor/borrower has been provided a written determination of your application. Cal. Civ. Code § 2924.18(a)(1).

Record Notice of Default

After contacting the trustor concerning your financial circumstances in the manner described above, a beneficiary or trustee may record a notice of default in the county where the property is located to begin the process of nonjudicial sale. Cal. Civ. Code § 2924(a)(1). For residential property of no more than four units, the trustee or beneficiary must also provide to the trustor a summary of the notice of default and notice of the sale in English and other languages specified by statute. Cal. Civ. Code § 2923.3.

Notice of Sale if Default Not Cured

Three months after the notice of default is recorded, the trustee must give at least 20 days notice of the sale of the secured property. Cal. Civ. Code §§ 2924(a)(2), 2924f. The notice of sale must be posted conspicuously on the property, posted in a public place in the city where the property is located, and published in newspapers at least 20 days before the date of the sale of the property. Cal. Civ. Code § 2924f.

California law provides borrowers/trustors with the statutory right to reinstate defaulted loans. Cal. Civ. Code § 2924c(a)(1). Broadly speaking, this means that a borrower has until five days before the foreclosure sale to pay the amount in default plus other fees, such as interest, penalties, and costs of providing notice to the borrower, assessed by the lender/beneficiary. The lender (or its servicer) is required to provide the borrower with a “beneficiary statement,” which contains information on how much must be paid in order to reinstate the loan. Cal. Civ. Code § 2943.

In the event that a trustor (or borrower) defaults on the payments owed under the note, a beneficiary (or creditor) holding a deed of trust generally has three legal options to enforce his rights. The beneficiary can: (i) sue to enforce the note obligation by bringing an action to collect on the debt; (ii) seek judicial foreclosure of the property securing the debt; or (iii) have the trustee exercise its power of sale, if such power is expressly granted in the deed of trust. The timeframe in which a beneficiary can exercise these options (the “statute of limitations”) differs.

Suit for Nonpayment

In the event of default, a lender can file a lawsuit to force repayment of the obligation evidenced by a promissory note underlying a deed of trust. In other words, the creditor can sue the borrower for breach of contract. The statute of limitations for a breach of contract claim is four years. Cal. Code Civ. Proc. § 337. As such, after four years a creditor is barred from suing a debtor on the grounds that the debtor signed a promissory note containing an obligation to pay the creditor. This four year statute of limitations period begins once the cause of action accrues, or, at the time the debtor breaches the obligation by, for example, missing a payment. Cal. Code Civ. Proc. § 312; Spear v. Cal. State Auto Assn., 2 Cal. 4^th 1035, 1042 (Sup. Ct. 1992) (“A contract cause of action does not accrue until the contract has been breached.”).

Judicial Foreclosure

A lender may also institute an action in court to foreclose on the property. Similar to a suit for nonpayment or breach of contract, a creditor is barred from bringing an action to compel a judicial sale of a debtor’s property (a judicial foreclosure) after four years from the date a claim to collect on a debt accrues. Cal. Civil Code § 2911; Cal. Code Civ. Proc. § 725a. A debtor is sometimes entitled to redeem the property after a judicial sale under certain conditions. See generally 5-124 California Real Estate Law and Practice §§ 124.30-124.40.

Nonjudicial Foreclosure – Exercising Power of Sale

If a power of sale clause is expressly contained in the terms of the deed of trust, then the trustee, on behalf of a beneficiary, may exercise its power of sale even after the statute of limitations to collect on the underlying debt is barred. See e.g., Summers v. Hallam Cooley Enterprises, Ltd., 56 Cal. App. 2d 112, 113-14 (4th Dist. 1942) (“the power of sale under a trust deed may be exercised after an action on the note is barred.”); See also Carson Redevelopment Agency v. Adam, 136 Cal. App. 3d 608, 610 (2d Dist. 1982) (“The running of the statute of limitations on the note underlying . . . [a] deed of trust clearly bars an action to enforce the note itself and an action for judicial foreclosure. . . . However, it is equally well settled that the power of sale under a deed of trust is not barred, or never outlaws, and that the power of sale may be exercised by the trustee who holds the title even though the statute of limitations has barred any action on the underlying note.”) (Internal citations and quotations omitted.)

In 1982, with the passage of the Marketable Record Title Act (MRTA) (codified as Cal. Civ. Code § 882.020 et seq.), the legislature changed the common law rule that the power of sale under a deed of trust “never outlaws,” or never expires. Instead, under the MRTA, a creditor (through its trustee) may exercise its power of sale at any time before the final maturity date of the obligation and for ten years after the maturity date included in the record. Cal. Civ. Code § 882.020(a)(1). If the record contains no maturity date, then the creditor has 60 years from the date the instrument was recorded to exercise the power of sale. Cal. Civ. Code § 882.020(a)(2).^[1]

Note that unlike a judicial foreclosure, a creditor generally has no right to a deficiency judgment after a nonjudicial sale (see generally 5-120 California Real Estate Law & Practice §§ 120.22, 120.23) and also that a debtor is generally not entitled to redeem after a nonjudicial sale. Id. at §120.23.

In sum, although a beneficiary is barred from enforcing the note underlying its deed of trust and pursuing a foreclosure action in court, it can still choose, at any time up to either 10 years after the maturity date or, if no maturity date is included in the record, 60 years after recordation of the deed of trust, to compel a curing of the default and if it does not receive that repayment, elect to sell the property. Moreover, even if the beneficiary never exercises any of its rights with respect to its security interest, its claim will cloud title to the property until the expiration of the terms defined by the MRTA. This could adversely impact future sales or attempts to obtain other financing using the property as collateral.

[1] The wording of Cal. Civ. Code § 882.020 creates ambiguity because it refers to a time limit upon enforcement of “the lien of a mortgage, deed of trust, or other instrument” despite the fact that the need for the statute arose because the power of sale was considered something other than a lien and therefore never “outlawed.” As a result of this ambiguity, different appellate courts have reached opposing conclusions concerning the meaning and application of the statute. Compare Ung v. Koehler, 135 Cal. App. 4^th 186 (1^st App. Dist. 2005) (finding entitlement to 60 year statute of limitations remained even after filing a notice of default containing a maturity date on the loan) with Slintak v. Buckeye Retirement Co., L.L.C., 139 Cal. App. 4th 575 (2d App. Dist. 2006) (finding the filing of a notice of default containing a maturity date triggers the 10-year statute of limitations). Although the 2006 amendment to Cal. Civ. Code § 882.020 did not clarify things, it is unlikely that this issue will have any bearing on the specific issues the you faces and as such, a thorough analysis has not been undertaken.