Limited Liability Company

In recent years Limited Liability Companies (LLC) have become widely used in California. The California Limited Liability Company Act became effective September 30, 1994. The Act is found in the California Corporations Code sections 17000 through 17705. The best definition of an LLC is a hybrid of a partnership and a corporation in which the members have limited personal liability. The members of a LLC are similar to shareholders of a corporation or partners of a partnership, depending on the management structure of the LLC.

The primary reason for creating an LLC is that it combines the corporate characteristics of limited liability for all members, while permitting the members to actively and generally participate in the management and operation of the business with the benefit of "pass through" tax treatment of a partnership. The "pass through" tax treatment is considered an important advantage because earnings passed through the corporation are in effect taxed twice. First, the corporation is taxed on its own income and then when it distributes earnings to its shareholders, the shareholders are then taxed again. A properly formed LLC is not taxed as an entity but rather the members are taxed one time on the earnings from the LLC.

The LLC is formed by the filing of articles of organization by one or more members with the Secretary of State. Once the Secretary of State receives the filing, the LLC is considered formed. It is an entity capable of buying, selling and encumbering interests in real property in its own name and can be dealt with, in that capacity, much in the same manner as a corporation or partnership. In general, LLCs are formed as "member managed" or "manager managed". The type of management will be set forth in the articles of organization. When title is being insured into or out of an LLC, the Title Company will ask for a copy of the articles for examination to determine the type of management and the parties who will have authority to execute documents on behalf of the LLC.

Bankruptcy and Judgement Liens

A bankruptcy alone does not eliminate an abstract of judgement as a real property lien.

One of the most commonly misunderstood facts about bankruptcy is the effect of discharge upon judgement liens.

Common scenario:

Your seller has an abstract of judgement recorded against him, he has recorded a homestead and filed a petition for bankruptcy. The seller has listed the judgement lien creditor in the bankruptcy and an order has been entered discharging the seller from his debts.

Immediately it is believed that the debt was discharged in the bankruptcy. A debtors discharge in bankruptcy eliminates the debtors personal liability for the judgement. This means the creditor can't pursue collection from the debtor, personally, provided the judgement is a dischargeable debt, but it does not extinguish the judgement lien from the property and can be enforced by execution sale.

Under the bankruptcy code, one course of action that may be taken in order to remove the lien from said property is for the debtor to petition the court for an order "avoiding the judgement lien". If said order is granted, the judgement lien is avoided and the property on which the lien attached cannot be sold at execution sale in an enforcement of the judgement.

Mobile Housing Units and Alta Endorsement Form 7

When a lender requests insurance on property which contains a manufactured housing unit (mobile home) They often require Alta Endorsement Form 7.

This endorsement provides an insured lender with assurance that the manufactured housing unit (mobile home) located on the land is included within the policy definition of "land".

Lenders request said endorsement since Federal National Mortgage Association (Fannie Mae) has indicated that it will generally accept a title policy with an ALTA Endorsement form 7 attacheä as sufficient proof that the mobilehome is real property.

The usual guidelines followed for issuing said endorsement are as follows:

First, you must determine that the mobilehome has been converted to real property pursuant to Health and Safety Code 18851 and the record reflects the existence of a Health and Safety Department (HSD) document in compliance therewith, describing the real property, the name of the owner(s) of the real property, and stating that a particular mobilehome has been affixed thereto.

Second, an inspection of said property must be made confirming the foregoing.

Third, determine the mobilehome is free and clear of personal property liens.

Fourth, determine that mechanics lien priority is not an issue.

Fifth, determine that the lender's mortgage ( or other loan documentation) identifies the mobilehome with sufficient particularity.

Generally, there is no charge for issuing said endorsement.

Facts About Bankruptcy

Many times the subject of bankruptcy seems baffling in its complexity. Actually the basic principals of bankruptcy are fairly simple even though the federal status on bankruptcy are extensive. The reason that the statutes are so complex is because in as effort at social engineering, the lawmakers want to cover every possible contingency. The very complexity of the Bankruptcy Code gives the lawyers ample opportunity to try to obtain interpretation of the law which best serves their clients interest. This results in extensive litigation and occasionally in interpretations of the Code which were not what legislature intended. This on turn results in additional legislation, which results in additional litigation and on and on. Nevertheless, the underlying principals are not as complex as the Code makes them seem. Here we will discuss the personal nature of bankruptcy.

The concept of bankruptcy is an old one in the English common law. If a person could not pay his debts, his creditors hauled him into court, took all of his assets, and used those assets to satisfy their debts. If the assets were insufficient to satisfy the debts, the debtor was taken from the bankruptcy court to debtors prison. Since this is a rather extreme remedy, Article 1 Section 8 of the U.S. Constitution gives the Congress the right to establish "….uniform Laws on the subject of Bankruptcies throughout the United States."

As the popularity of debtors prison declined, the concept of giving the debtor a fresh start became one of the primary purposes of the bankruptcy process. It is important to remember that a bankruptcy is a personal action which at time of discharge gives the petitioner (formerly the debtor) a fresh start. The property owned by the petitioner does not get the fresh start, the individual does.

The fact that bankruptcy is a personal action may shed some light on the effect of a homestead in a bankruptcy proceeding. The bankruptcy code acknowledges the validity of homesteads. A homestead is a personal exemption which, in an effort to preserve a person's home, protects a certain amount of an individual's equity in the homestead property. State law determines the extent and effect of a homestead. Thus, if state law says that a person can declare a homestead up to $75,000 and if there is less than $75,000 equity in the property, that equity in the property, that equity is protected by the homestead. This principal operates without regard to the Federal Bankruptcy Code.

Differences in Types of Bankruptcy

When a petition for bankruptcy is filed, it is as if the petitioner is saying to the bankruptcy court, "Here are all of my possessions, you figure it out." This is called a chapter 7 bankruptcy. (Chapter 11 and Chapter 13 bankruptcies involve the petitioner creating a plan to pay the creditor's back, and are a different breed of cat.) A trustee is appointed to represent the petitioners creditors and divvy up the petitioners assets among those creditors. If a states homestead law says that a certain amount of the petitioner's equity in his home cannot be used to satisfy certain debts, the trustee cannot use that equity to pay off creditors. The court is in no better position than the creditors would be. Thus, when the trustee allows the exemption of the petitioner's property, the trustee is saying that whatever equity the petitioner has in his home is protected by the petitioners declaration of homestead. If state law allows a $75,000 homestead, the exemption is $75,000. If the state has a $50,000 limit, the exemption is limited to $50,000 and so on.

The trustee also has the right to determine that a piece of property has too many liens or encumbrances. In this case, the trustee can abandon the property. If the property is exempt or abandoned, it is no longer subject to the bankruptcy, although the petitioner may still benefit from the protection of the automatic stay which prevents anyone from bringing an action against a petitioner while the bankruptcy proceeding is pending.

After the petitioner's property has been divided among the petitioner's creditors, and those debts which can be satisfied have been satisfied, the petitioner is discharged. This means that the creditors cannot look to the petitioner for payment of any remaining debts. This discharge of the petitioner has nothing to do with the petitioner's property. State law determines the effect of any liens recorded against the petitioners property.

The effect of all this is that if property is deemed exempt or abandoned or if the petitioner is discharged and retains title to the property, any recorded liens are still attached to the property and must be reckoned with. In most instances whatever equity the petitioner has in the property will be protected by the declaration of homestead. Had the equity exceeded the amount of equity protected by the homestead, the trustee would have probably used it to satisfy the creditors. Excess equity (or property upon which a homestead cannot be declared) is the usual reason that the trustee will ask the court to authorize the sale of the property free and clear of existing liens. The free and clear part is intended to make the property more attractive to a potential buyer, assuring the highest price and getting the most money to satisfy the greatest number of creditors.

Remember, a bankruptcy relieves the discharged petitioner of his debts. It has no effect on the petitioner's property. Unless the bankruptcy court decides otherwise and issues an order removing the lien of existing encumbrances, the property is still subject to the effect or recorded liens under state law.

Civil Code 1183 Compliance

Frequent inquiries are made regarding necessary procedures to be followed , to comply with California Civil Code 1183, when an acknowledgment of an instrument is taken outside the United States.

The code section provides that the following officers may take acknowledgment outside the United States:

a. A Minister, Commissioner, or Charge d' affaires of the United States.

b. A Consul, Vice consul, or Consular Agent of the United States.

c. A Judge of a Court of Record of the Country where the proof or acknowledgment is made.

d. Commissioners appointed by the Governor or Secretary of State for that purpose.

e. A Notary Public.

For the purpose of assuring that California County Recorders will accept the documents upon which the acknowledgments appear for recording, one should be aware that use of the Official set forth in (a) and (b) is the most certain manner in which to proceed. The use of a Foreign Notary Public can present special problems since the signature of that notary public must be proved or acknowledged by:

(1) A Judge of a Court of record of the country where the proof or acknowledgment is made.

(2) Any American Diplomatic Officer, Consul General, Consul, Vice Consul, or Consular Agent.

(3) By an apostille (certification) affixed to the instrument pursuant to the terms of the Hague Convention abolishing the requirement of legalization for foreign public documents.

Of the three prove-up methods, (3) is the most practical and reliable. Nations who are members of the Hague Treaty are Countries from which an apostille will be acceptable. The Apostille must be made in the Country where the proof or acknowledgment was made, by an authority designated to do so by that Country.

The Lis Pendens Explained

The Lis Pendens

A Lis Pendens gives constructive notice of a pending lawsuit relating to real property or affecting the title or the right of possession of real property.

The notice is recorded in the County Recorders Office in which the property is located at the time the complaint or cross complaint if filed, or at any time thereafter. Once recorded the Lis Pendens imparts constructive notice not only of its contents (provided it meets statutory requirements) but also of facts concerning the action that could be discovered by reasonable inquiry.

A Lis Pendens creates a cloud on title which could render the property unmarketable. Said Lis Pendens remains as long as the action is pending, unless it is voluntarily withdrawn or expunged (wipe out - erase) by motion to the court. Caution should still be used even if the Lis Pendens is not removed since danger may still exist for a Title Company.

The grounds for expungement include the following:

1) Underlying action does not Affect t title to or the right to possession to the real property described in the notice, or

2) the lawsuit was not commenced, or is not being prosecuted for a proper purpose and in good faith.

The court may also order the expungement, even if they decide the real property claim is probably valid, if the court decides that adequate relief can be secured by posting a bond an amount sufficient to indemnify the claimant against all resulting damages from removing the Lis Pendens.

If a motion to expunge is granted, a certified copy of an order expunging the Lis Pendens may not be recorded, until the period of time of filiing a petition for review by the court of appeals., has expired.