Hathaway Duke

Goldie Vicencio Santiago, 28, Redlands, California was sentenced to state prison resulting from felony charges connected to real estate fraud. Santiago appeared in San Bernardino County, Central District, Superior Court Friday, February 8, 2008, and wa…

Home foreclosure is a growing problem in Kansas and across the nation. Mortgage fraud and subprime lending have left many homeowners stuck with home loans they can no longer afford. We recently convened a task force to investigate this problem. Consume…

City Pages Feature Story ads some color to the mortgage/real estate fraud ring in Otsego: There were a dozen separate applications submitted on Clewette’s behalf. She saw only one of them. There were two requests per property—for a first and second mortgage, a not-uncommon practice in the market at the time—totaling nearly $2 million. On every one of Clewette’s loan applications, the box next to “primary residence” is checked and the box next to “investment property” is blank. Her reported income was more than triple her actual income of $27,000, and she was asked to sign only one of the 12 applications. On most of them, in the space reserved for the “interviewer” who filled out the form, the American Wholesale employee who signed was either the imprisoned John Searle or the disappeared Brian Matheson Sr. Meanwhile, one of the alleged crooks, unwinds the remnants of a high life built on other people’s money, lies, and who knows what else: Flavin’s yacht, the Nothin’ but Trouble, is up for sale on Craigslist. The party bus is up there, too (”Have your own rolling money maker”). His half-million-dollar Maple Grove estate is for rent, and his Minnetonka office suite—the one Owens raided in December—is totally cleared out. Nothing But Trouble [City Pages]

The following three defendants were indicted: Michael McFerron Pope, 43—Conspiracy, Money Laundering James Andrew Spike, 43—Conspiracy Marlin Sprouts, Jr., 52—Conspiracy The grand jury returned separate but related indictments c…

Douda v. California Coastal Commission (February 6, 2008, B188210) ___ Cal.App.4th ___

By Bry Martin

The Second Appellate District affirmed a lower court decision that when acting as the issuing agency for a Coastal Development Permit (CDP) application, the California Coastal Commission may designate a portion of the subject property as an Environmentally Sensitive Habitat Area (ESHA) during consideration of the CDP application.  And, the Commission may then reject the CDP application based in part on potential impacts to the newly designated ESHA.  The decision is a cautionary tale for parties seeking to develop – or purchase for development – property in the Coastal Zone, that the Commission retains broad authority to designate ESHAs and restrict development.

The Coastal Act establishes a regulatory program for development activities occurring within the California coastal zone.  Under the Act, local land use jurisdictions may develop and submit a local coastal program (LCP) to the state Coastal Commission.  (The LCP consists of the relevant portions of a local government’s general plan, or local coastal element, which may be submitted separately for certification, and also its zoning ordinances, zoning maps and other regulations that may implement the policies of the Act.)  If the Commission certifies an LCP as consistent with the requirements of the Coastal Act, the local jurisdiction then becomes the primary Coastal Act regulatory authority in accordance with its certified LCP.  Until such time as a local jurisdiction’s LCP is certified, however, the state Coastal Commission retains primary regulatory authority within that jurisdiction. 

In November 2001, Mr. and Mrs. Douda filed a CDP application with the California Coastal Commission to construct a large home with associated garage, pool and spa on their property.  The Commission had previously certified Los Angeles County’s land use plan covering the Doudas’ property, but not a full LCP.  Therefore, the Commission retained primary regulatory authority over the Doudas’ CDP application.  The Commission found that coastal sage scrub and chaparral habitat on the Doudas’ property constituted an ESHA.  The Commission then rejected the Doudas’ application because impacts associated with the Doudas’ proposal would thereafter prejudice the ability of Los Angeles County to prepare an LCP consistent with the ESHA-protection provisions of the Coastal Act.  The Commission also determined that the California Environmental Quality Act required less invasive proposals, and that the Doudas’ proposal would impermissibly impact scenic and visual qualities of the surrounding area.

The Doudas challenged the Commission’s designation of an ESHA on their property, arguing that under the Coastal Act, the Commission or a local jurisdiction could only designate ESHAs in the context of preparation or certification of an LCP or land use plan.  The Commission, conversely, argued it is obligated to designate and consider impacts to ESHAs and potential ESHAs when acting as the primary regulatory authority for a CDP application, as well as when certifying LCPs.  The court found the Coastal Act did not specifically address whether the Commission could designate ESHAs outside the context of LCP-certification.  Given this uncertainty, the court looked to the purposes of the Coastal Act, which, the court found, included heightened protection for ESHAs.  The court therefore rejected the Doudas’ interpretation that the Commission could only designate ESHAs in the context of LCP certification, since it would severely limit the protection of ESHAs or potential ESHAs in other circumstances, such as the current instance.  The court also found it significant that the Coastal Act provides the Commission primary responsibility for the implementation of all provisions of Coastal Act unless "specifically otherwise provided."

Similarly, the court found that potentially conflicting Coastal Act policies, on the one hand favoring protection of ESHAs, and on the other favoring local administration of land use decisions, must be balanced in favor of EHSA protection where, as here, it would be more protective of coastal resources.

The court also rejected the Doudas’ assertion that the Commission’s ability to designate ESHAs had expired pursuant to the terms of Coastal Act Section 30502.  That section gave the Commission until September 1977 to designate "sensitive coastal resource areas" within the coastal zone that needed heightened protection.  The court did not agree that the definition of "sensitive coastal resource areas" in Section 30502 was synonymous with that of "environmentally sensitive habitat area," and therefore the September 1977 deadline did not apply to ESHA designations.

The Doudas next argued that under the statutory scheme of the Coastal Act, local jurisdictions retained exclusive authority over the content of land use plans and LCPs, which authority the Commission had impermissibly infringed upon by designating the Doudas’ property as an ESHA.  The court disagreed, finding that while the Commission could not interfere, for example, with the local jurisdiction’s choice between two uses that equally conform to the policies of the Coastal Act, local jurisdictions could not use the Act’s preference for local decisionmaking to circumvent requirements of the Act, such as protection of ESHAs or potential ESHAs.  The Doudas argued the practical affect of the court’s interpretation was to allow the Commission to hold local jurisdictions hostage by refusing to certify a land use plan or LCP until the local government agreed to designations dictated by Commission.  The court was not deaf to this argument, but noted that it could not change the statutory scheme, and the court believed this situation would not be common because ESHAs or potential ESHAs represented a small portion of the coastal zone.

Regarding the existence of the certified Los Angeles County land use plan that had not designated any ESHA on the Doudas’ property, the court cautioned that the Commission could not simply ignore the plan.  Rather, the court stated that the Commission should consider the contents of certified land use plans when making CDP decisions.  And, if the Commission deems it necessary to deny a CDP application that is consistent with a certified land use plan, it should do so only when necessary to achieve the basic goals of the Coastal Act, and with a "good reason for ignoring the plan, such as a significant change of circumstances."  In this instance, the presence of a previously undesignated ESHA on the Doudas’ property met the court’s standard.

Lastly, the Doudas challenged the Commission’s authority to regulate scenic and visual resources in inland portions of the coastal zone (the Doudas’ property is four-and-a-half miles from the coastline).  The Coastal Act requires protection of scenic and visual resources of coastal areas, but does not define the term "coastal areas."  The Doudas argued that "coastal areas" were those "areas on or along the ocean," and the Commission’s authority to regulate of scenic and visual resources should be limited to such areas.  The court rejected this argument, holding that the court’s directive under the Act is to construe the provisions of the Act broadly to achieve its preservation purposes and objectives.  The court therefore upheld the Commission’s authority to regulate impacts scenic and visual resources up to the boundaries of the coastal zone, and not a smaller subset of property "on or along the ocean."  The court reasoned that this interpretation, unlike the Doudas’, would prevent "constant" litigation over whether certain properties were or were not "on or along the ocean." 

The Douda decision is distinguishable from the recent Security National Guaranty decision, which found the Commission could not designate an ESHA on the applicant’s property because the local jurisdiction’s certified LCP had not designated it as an ESHA, and did not provide a mechanism for future designation of ESHAs through administrative action.  Given the framework of the LCP, the SNG court found the Commission’s attempt to designate an ESHA was tantamount to an ad hoc amendment of the LCP, which was prohibited by the provisions of the Coastal Act.  In Douda, however, no LCP had been certified, and although the Commission-certified land use plan covering the Doudas’ property did not designate that property as an ESHA, it did allow for the future identification of additional ESHAs through biotic review or other means. 

Regarding the designation of ESHA and resulting regulation of development, it appears the lessons of this series of cases are: (1) the Commission retains broad authority to designate and regulate impacts to ESHAs absent prohibitive provisions in a certified LCP ; (2) to avoid the uncertainty of potential future ESHA designations within their boundaries, local jurisdictions should seek certified LCPs whenever possible; and (3) the regulated community should work with local jurisdictions to craft LCPs that permit future ESHA designations only by amendment to the LCP, rather than through administrative procedures.

For more information please contact Bry Martin.  Bry Martin is an associate in the San Diego office of Sheppard, Mullin, Richter & Hampton, LLP.  He is a member of the Real Estate, Land Use and Natural Resources, and Environmental Practice Groups.

Security National Guaranty, Inc. v. California Coastal Commission (January 25, 2008, A114647)  ___ Cal. App.4^th ___

By Aaron Foxworthy

The First Appellate District held that the California Coastal Commission does not have the authority to designate property an "environmentally sensitive habitat area" (ESHA) where a certified Local Coastal Program (LCP) is in place, and the LCP has neither designated the property as an ESHA, nor contains language anticipating later designation of the property as an ESHA through administrative action.  The decision stands to protect developers and local governments by recognizing the LCP as a bulwark against the uncertainty created by potential ESHA determinations rendered by the Coastal Commission in the appeals process.

In the case, the Coastal Commission had, on appeal, denied a CDP for a mixed-use development on oceanfront property, citing both a failure to meet LCP requirements regarding water supply and that the project site was an ESHA. The developer filed a petition for writ of administrative mandamus, as well as claims for inverse condemnation, breach of contract, and estoppel.  The breach of contract and estoppel claims involved a Memorandum of Understanding signed by the City, the Redevelopment Agency, the Monterey Peninsula Regional Park District, and the State Department of Parks and Recreations.  Both the trial court and the First Appellate District quickly disposed of these two claims, pointing out that the Coastal Commission had not been a party to the Memorandum of Understanding, and therefore could not be bound by the contract.  The stickier question was whether the Coastal Commission had exceeded its authority in denying the coastal development permit by declaring that the project site was an ESHA.  The First Appellate District noted that the trial court had largely ducked the issue by focusing on the water supply aspect of the analysis in holding for the Coastal Commission, but in reversing the trial court, the First Appellate District focused squarely on the Coastal Commission’s ESHA designation.

The court first looked past Coastal Commission’s argument that the developer had not exhausted its remedies.  The Coastal Commission had argued that there was no "final" decision on how much, if anything, the developer could build, and therefore the court should not review the claim.  The court believed this argument missed the point entirely; the Coastal Commission had made a "final" decision regarding the ESHA designation.

The court then turned to the Coastal Act and the scope of review powers granted to the Coastal Commission after a local coastal program had been certified.  Citing to the Coastal Act, the court confirmed that the LCP stands as the standard of review in Coastal Commission appeals, and that the developer was "entitled to have its development proposal judged by the standards of the certified LCP in effect at the time of its application."  By designating the project site an ESHA "the Commission imposed additional standards not found in Sand City’s LCP."  Such a designation would constitute an "amendment" to the LCP, which is a power reserved to local governments.  The court pointed to a specific provision in the City’s LCP, which had expressly stated there were no ESHAs in the area seaward of Highway 1 where the project was located.  In pointing to this provision, the court underlined a critical distinction: the language of the LCP at issue in the case had left no room to argue that future ESHA determinations over the property were left outstanding. 

Thus, Security National Guaranty is distinguishable from two recent decisions from the Second District Court of Appeal, LT-WR, L.L.C. v. California Coastal Commission (2007) 152 Cal.App.4th 770 and Douda v. California Coastal Commission (February 6, 2008, B188210) ___ Cal.App.4th ___.  In these cases, the court allowed the Commission to designate portions of the properties as ESHAs, despite the presence of a Commission-certified land use plan (one necessary part of an LCP) that did not designate any ESHAs on the properties.  The courts allowed the Commission to proceed because there was no certified LCP covering the properties that barred future designation of ESHAs, and the certified land use plan for the properties provided for the additional designation of ESHAs in unspecified areas through a biotic review process or other means.

It appears the lessons of this series of cases are: (1) the Commission retains broad authority to designate and regulate impacts to ESHAs, limited only through certified LCPs; (2) to avoid the uncertainty of potential future ESHA designations within their boundaries, local jurisdictions should seek certified LCPs whenever possible; and (3) the regulated community should work with local jurisdictions to craft LCPs that permit future ESHA designation only by amendment to the LCP, rather than through administrative procedures.

For more information please contact Aaron Foxworthy.  Aaron Foxworthy is an associate in the Real Estate, Land Use and Environmental Practice Group in the firm’s San Francisco office.

You have not made it as a distant suburb until a mortgage fraud ring gets busted: An alleged mortgage fraud case involving perhaps as many as 130 homes — mainly in one Otsego development — with mortgages totaling more than $40 million. It’s always the same sales pitch: The two firms ran newspaper ads promising $25,000 to $30,000 to investors with no up-front costs as long as their credit score was above 680…All investors had to do was apply to buy multiple properties. The firm promises to cover all the messy details, like finding rent-to-own tenants, managing the properties, and selling them to the renters in two years, at which point the profits would be split. Of course, none of that happens. The firm pockets the cash. The investors wind up with multiple mortgages in foreclosure, shredded credit, and their name in the paper. The renters are on the street trying to start over. The lenders are out millions on the fraudulent loans. The neigborhood gets pocked with foreclosures and values tank. When it is all said and done, the alleged perpetrators might get four years. The impacted people and neighborhood will be lucky to recover in as much time. Victims of Investment in Otsego [Strib]

By James G. Higgins

Prompt payment laws can pose significant risk to owners and contractors.  In S&S Cummins Corp. v. West Bay Builders, Inc. 2008 Cal. App. LEXIS 160, *, a public works general contractor was stung under Public Contract Code section 7107 for delaying retention payments to an electrical subcontractor.

The general contractor was hired to build an elementary school.  The overall project was delayed 337 days until its completion.  After a protracted fight with the owner, the general contractor was finally paid $517,000 in retention.  This retention payment included $131,000 in retention withheld from the subcontractor’s progress payments.

Although the owner paid the general contractor its full retention, the general contractor did not pay the subcontractor its share.  Under Public Contract Code section 7107(d), a subcontractor must be paid its share of retention within seven days from the time the general contractor receives all or any portion of the retention proceeds from a public agency.  And under section 7107(e), a general contractor may withhold from a subcontractor up to 150% of its portion of retention, but only if a bona fide dispute exists between the subcontractor and the general contractor.

Here, the general contractor argued that the subcontractor delayed the project, which in turn caused the general contractor to incur liquidated damages and additional overhead costs.  The jury found that the subcontractor did not delay the project and that the general contractor did not have a good faith justification for withholding the retention.  The trial court awarded $131,000 in unpaid retention plus $114,000 in prompt payment charges to the subcontractor.  The general contractor appealed.

On appeal, one issue was whether the trial court properly calculated statutory prompt payment charges.  Public Contract Code section 7107(f) states that where retention payments are not timely made, "the owner or original contractor withholding the unpaid amounts shall be subject to a charge of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due."   The subcontractor argued that the trial court erred by finding that the 2 percent per month charge was not applied on a compounded basis.  The subcontractor also argued that the 2 percent per month charge did not stop accruing upon entry of judgment.

The Court noted that whether prompt payment charges were compounded was an issue of first impression.  Based on its review of the statutory language and analogous case law, the Court held that section 7107(f) did not provide that the 2 percent charge was compounded.  Thus, section 7107(f) authorizes a 2 percent charge only for the improperly withheld amount rather than that amount plus any accrued but unpaid charges.  The Court reasoned that any other reading of the statute would produce "harsh and absurd" results.  For example, the general contractor here would have had to pay an additional $56,000 in compounded interest.

As to the second issue on appeal, the Court held that the 2 percent charge did not continue to accrue after entry of judgment.  Instead, the Court held that the "charge" defined in section 7107(f) was assessed in the same manner as interest.  And, under the California Constitution, interest is capped at a rate of 10 percent per annum after entry of judgment.  (Cal. Const., art. XV. § 1.)

For further information please contact James Higgins.  James Higgins is an associate in the Construction, Environmental, Real Estate and Land Use Litigation Practice Group in the firm’s San Francisco office.

Rachel Dollar, CMB, a partner in the law firm Smith Dollar PC in Santa Rosa, California testified on February 13, 2008, before the U.S. Senate Special Committee on Aging at a hearing titled, “Foreclosure Aftermath: Preying on Senior Homeowners.&#…

Keith Garner, 48, Gregg Savage, 24, Shalonda Harris, 36, all of Atlanta, Georgia, and Latesha Garner, 27, Durham, North Carolina, were convicted after a two week jury trial on charges of conspiracy to commit mortgage fraud and wire fraud related to $6 …