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Posts on Jan 1970

A Litigator’s Guide to Avoiding Litigation through Mediation

With apologies to Richard Nixon, "now more than ever" is the time to consider mediation rather than expensive litigation.  Lawsuits are costly, in many ways.  The financial costs of litigation are no secret.  Attorneys typically bill at an hourly rate and the hours add up quickly considering all the work necessary to get a case to the point at which it's ready for trial.  Costs and fees mount even faster when the case gets to trial.  In addition to attorney's fees for 10 to 12 hours a day during trial, parties are responsible for expert witness fees, court reporter fees, and jury fees if the case is tried to a jury.  Indirect litigation "costs" that are often not considered can be as difficult to handle as the financial outlay.  People who have never been involved in litigation often do not anticipate the emotional impact of being involved in a lawsuit for months or even years.  Sleepless nights, domestic upheaval, missed work, and constant aggravation too frequently accompany involvement in lawsuits.  Like surgery, litigation should seriously be considered only after less drastic steps have failed.

One option that should seriously be considered before filing or proceeding with a lawsuit is mediation.  Mediation is generally defined as "a process in which a neutral person or persons facilitate communication between the disputants to assist them in reaching a mutually acceptable agreement."  Code of Civil Procedure section 1775.1(a).  Although this definition applies specifically in case filed in superior court, it captures what mediation is about in most situations.  For years, mediation has been the favored method of alternative dispute resolution ("ADR") in California.  Mediation, whether before or after the filing of litigation, can be used to resolve business disagreements, neighbor disputes, family disputes, personal injury claims, employment claims, and just about any other type of disagreement that could be the subject of a lawsuit.

Mediation has many benefits, some of which have already been identified.  Successfully mediating a dispute allows parties to avoid incurring substantial expenses and puts a relatively quick end to a dispute, which frees people to focus on their families, businesses, and other essential matters.  Furthermore, unlike a dispute that is submitted to a judge or jury for decision, mediation allows the parties to control the outcome.  The parties can agree in writing to just about anything, as long as it doesn't violate the law or public policy.  In other words, parties can't settle a family dispute with a mediated agreement that someone will kill Uncle Charlie.  However, mediated agreements can encompass issues that would not necessarily have been part of the litigation.

Especially with mediation before the filing of a lawsuit, the parties have substantial control over the ground-rules.  If the dispute is not legally complex, the parties might consider mediating without attorneys.  Although a mediator cannot provide legal advice, a mediator can help the parties narrow the legal issues involved in a dispute.  The parties also have substantial latitude in selecting a mediator.  Although many mediators are attorneys, many qualified mediators have no formal legal training.  Non-attorney mediators typically charge less for mediation than attorney-mediators.

In civil cases assigned to mediation under California statutes, the mediation is conducted under strict confidentiality to ensure that parties speak openly and candidly without fear that statements made at mediation will later be used against them.  With very limited exceptions, primarily in the case of commission of a crime at a mediation hearing, mediators cannot be called to testify as a witness about anything that occurred at mediation.  In pre-filing mediations, the parties can agree to conduct mediation under these confidential conditions.

Our attorneys have handled hundreds of mediations.  Although the most of these mediations have been in matters that had already proceeded to litigation, we have also represented clients in mediations that were undertaken in the hope of avoiding lawsuits.  If you are involved in a dispute that might benefit from mediation but need more guidance or assistance, plenty of information is available on the internet.  If you have more specific questions about potential mediation in San Luis Obispo County, please call us.

Mike McMahon

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For those folks who follow mobile home rent control an important development occurred last week in what seems to be the never ending battle by park owners over the issue of “vacancy control”.  In a case out of the City of Goleta, the 9th Circuit Court of Appeals has granted what is called “en banc” review for a case that was decided in September, 2009.

First, a bit of background for those of you who aren’t rent control aficionados.  Vacancy control is the idea that when a controlled unit changes hands the rent stays under rent control and isn’t allowed to increase.  For years, owners of mobile home parks have raised a variety of arguments based on the assumption that rent control keeps rents artificially low and that vacancy control is a “taking” under the 5th Amendment of the U.S. Constitution.   The idea is that by not allowing rents to rise to what park owners argue is the “market rate”, vacancy control creates a “premium” value that transfers from the park owner to the owners of the mobile home, since the mobile homes are more valuable as a result of rent control.

This argument has been the subject of a series of federal court lawsuits since the late 1980s.  One case, Yee v Escondido, even made it all the way to the U.S. Supreme Court in 1992 on the theory that vacancy control constituted a “physical occupation” taking.  Ultimately, the Supreme Court unanimously disagreed (  After Yee, another line of cases was initially successful under a different taking theory in the case Cashman v. City of Cotati ( ).   It was ultimately undone, however, by another Supreme Court case that changed the underlying taking theory that the park owners relied on (see  The result was that the 9th Circuit reversed an earlier ruling in favor the park owners and ruled in favor of the City of Cotati.

Mobile home park owners, however, are not folks who give up easily and they have continued their assault on the constitutionality of vacancy control.  Once again they have achieved what may be just an interim success.  Last September in the case of Guggenheim v. City of Goleta, another panel of the 9th Circuit Court of Appeals bought the argument that vacancy control transfers a “premium” from the park owner to the owner of the rent controlled mobile home, and that it constitutes a taking.  Here’s a link to the decision, but be forewarned you need to allow a long time to read it because it’s 75 pages long!

Last week, in a hopeful sign for folks disturbed by the ruling and its implications for the over 100 California cities and counties that have mobile home rent control, the 9th Circuit granted “en banc” review.   This means that a larger panel of 11 judges will now review the case.  So, stay tuned as the newest round of litigation over whether vacancy control is a “taking” plays out.  I’ll continue to report on this issue as information becomes available.


David H. Hirsch

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I Loaned Money to my Sister and All I Got was This Stupid 1099!

We are going to take a side trip from our recent discussions surrounding the wonderful world of ILITs in order to address one of the more insidious bamboozles the IRS pulls, imputed interest.

As we all know, family members mooch. I have been on both the giving and the receiving end of the less than enthusiastic family loan. What nobody told me was that in addition to lending money, the IRS might very well force me to recognize interest income on that loan regardless of whether I receive it or not.

Under Internal Revenue Code 7872, the IRS requires any lender to recognize interest on a “below market” or “gift” loan. Basically, if you lend someone money and do not charge adequate interest, the IRS is going to impute adequate interest to you as income.

There are de minimus exceptions that have other exceptions within exceptions, and all of those can be perused at your leisure in your tax code. We are in the business of pointing simply to the inherent unfairness (not really) of the tax code, and not the minor exceptions the IRS sparingly parses out.

Now, there are two types of loans, the both aptly named term loan and demand loan. Each has its own unique set of rules regarding imputed interest. This week’s blog will divulge the secrets of the demand loan.

A demand loan is a loan with no fixed term for repayment. When no fixed term for repayment exists, foregone interest must be calculated annually. For example:

Assume A lends 100,000 to B interest free, with the balance payable upon demand. At the end of year one, the IRS would impute interest income to A. Absent a stated interest rate, the IRS imputes the applicable federal rate to any gift or demand loans in order to determine income required to be recognized.

What is the Applicable Federal Rate? Basically, it is the current market interest rate as determined by a statutory formula that analyzes interest rates on Federal obligations of appropriate maturity. Each month, the IRS publishes AFRs for short-term, mid-term and long-term loans. Imputed interest computations for a demand loan under Sec. 7872(f)(2) are based on the blended short-term rate in effect for the period for which the amount of forgone interest is being determined. The blended short-term rate is basically an average determined by taking ½ * January’s published short-term AFR + ½ * July’s published short-term AFR.

Given the current economic climate and the Feds attempts at curtailing inflation, short term AFRs are at historic lows. However, blended short term AFRs have been as high as 9% and are historically around 3-5%, which means in our example above, A could have imputed interest income of $5,000.00. Let’s assume that A is in the highest federal tax bracket. This means that A has to come out of pocket with $1,750.00 to pay taxes on income he never received.

Brian J. Baker

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We have received a few inquiries lately asking what consumers’ rights are when an automobile dealer cannot get a buyer’s financing approved.  The short answer is that if a buyer cannot obtain a dealer-assisted loan, the conditional sales agreement is rescinded and all consideration must be returned to the buyer.  See Civil Code section 2982.9.


Can a dealer attempt to change the conditional sales contract to make it acceptable to another lender? 


The dealer can ask the buyer to pay a higher interest rate, make a larger down payment or obtain a co-signer, but the buyer is not obligated to do any of these things.  The buyer can simply drop off the car at the dealership and get all of his/her money back.  It makes no difference if the buyer has driven the new car for 10,000 miles; if a dealer cannot get the buyer financed under the terms and conditions of the original contract, the buyer gets all of his/her money back.


What happens if the buyer was trying to obtain a loan from someone other than the dealer but was unable to do so? 


If the dealer knows these facts and delivers the vehicle pursuant to a one-pay contract for which the buyer is unable to get approval from his/her credit union or bank, then the dealer has a duty to refund to the customer all the money he has received.


What happens when there is a trade-in involved? 


If the buyer leaves his/her motor vehicle with the seller as a down payment and it is not returned by the seller for whatever reason, the buyer may recover from the seller either the fair market value of the motor vehicle or its value as stated in the contract or purchase order, whichever is greater.



In this tight money market, financing is getting harder and harder to obtain.  Manufacturers have great incentives for those with perfect credit but little reward for the imperfect.   A dealer must be sure to qualify a buyer before delivery or he will find himself refunding the down payment and adding a used vehicle to his inventory.  


Erica A. Stuckey

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Easy Money

A woman had a legal problem; she was worried that her neighbors might sue her over a fencing issue.  At the first meeting with her new attorney he advised her that to put herself in the best possible legal position, she should post a $50,000 bond with the court so that any judge would see that she was acting in good faith.  In fact, he told her, the courts called this “the good faith bond”.  She wrote out the check right there in his office and the attorney amiably agreed to take the check and get the bond for her.  That same week the attorney met with another new client, this time a businessman who was having some difficulties with one of his adult bookstores.  The businessman immediately paid the attorney’s “retainer fee” and wrote out a check to the attorney for $75,000.00.

Neither client ever heard from their attorney again.


Yes, the attorney did ultimately lose his license to practice law. Yes, he was successfully prosecuted for grand theft.   And yes, the clients wisely applied for and received reimbursement (up to $50,000 each) from the Client Security Fund at the State Bar. The California State Bar has established the Client Security Fund to help reimburse clients who have had money stolen by their attorney.  A portion of the annual dues paid into the Bar goes into the fund. 

Next:  What happens when the attorney is the criminal?

Mara J. Mamet

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Be Sure It’s a “Work of Improvement” before Filing a Mechanic’s Lien

California's Mechanic's Lien law provides an effective tool for contractors and material suppliers to ensure payment on projects.  Although it clearly is not the only tool, it is effective because it potentially ties up the property where the work was performed and gives the owner extra incentive to pay.  However, Mechanic's Liens are not appropriate for every project and a contractor filing an invalid Lien runs the risk of paying the owner's attorneys fees if the owner brings a proceeding to release the real property from the Lien.  One area where care must be exercised, and our focus here, is whether work or materials were provided to a "work of improvement."

Civil Code section 3110 defines work of improvement to include "the construction …  or repair …  of any building, machinery, railroad, or road, the seeding, sodding, or planting of any lot or tract of land for landscaping purposes, the filling, leveling, or grading of any lot or tract of land, the demolition of buildings, and the removal of buildings."  However, California case law provides more useful guidance on what constitutes a work of improvement for Mechanic's Lien law.

The crucial factor in determining whether a project qualifies as a work of improvement is whether the improvement is "permanent" in nature or a "fixture."  In one case the court of appeal expressed skepticism about whether a contractor's work qualified where:

The findings affirm that none of the labor performed and materials furnished by the plaintiff and put into the building ever became a part of the said building or fixtures, or constituted or formed any improvement or alteration of or in said building, or any addition thereto, and that conduits, electric wiring, and switchboards were not so installed as to become permanently attached to said building, or to become fixtures therein.   Moses v. Pacific Building Co. (1922) 58 Cal. App. 90, 94.

Although some contractors may file Mechanic's Liens where work may not have been permanent in nature to bolster their chances of timely payment, the risk of doing so is being forced to pay the owner's attorney's fees in a proceeding to release the property from a Mechanic's Lien under Civil Code section 3154.  If a contractor receives a demand to release a Lien that does not actually involve a permanent improvement or fixture, the contractor should consider doing so rather than running the risk of an attorney's fees award.  As was mentioned at the beginning of this note, a contractor will still have other means of attempting to recover payment.

Mike McMahon

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Floral Arrangements by Tim Carmel









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Furlough Days and the Courts

 California Government Code section 68106 allows the Judicial Council to provide for the closure of courts as a result of the current fiscal crisis.  The third Wednesday of each month has been designated for closure in order to ameliorate the effects of the dire budgetary straits California is experiencing. 


The Code provides that the closure is treated as a holiday for purposes of performing judicial business.  The computation of time pursuant to the Code of Civil Procedure, holding court, the transaction of judicial business, and all other time-dependent provisions are pushed to the next court day.  Although a court may still receive papers for filing on a closed day by mail or by delivery into a specially designated drop box at the courthouse , the time of filing will be the next court day.  The fact that a court receives papers does not constitute opening of the court for any purpose.  A drop box is to be designated to permit documents to be filed.


The furlough days do not affect signing of emergency documents as a judicial officer must be available for this purpose on the same basis that a judicial officer is available on weekends, holidays and any other time a court is closed.


The code section governing the court furlough days is scheduled to become inoperative on July 1, 2010 and to be repealed as of January 1, 2011, unless a later enacted statute that becomes operative on or before January 1, 2011 deletes or extends those dates.


Ellen Sheffer



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