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Will the Court Find that Your House is Community Property or Separate Property Based on the Presumptions from In re Brace (California Bankruptcy and Family Law Court)? In re Brace (2020) California Supreme Court, July 23, 2020 – Case No. S252473 The California Supreme Court in In re Brace (Speier v. Brace) has come down...
The California Supreme Court in In re Brace (Speier v. Brace) has come down with a new published opinion purporting to help family law litigants and bankruptcy litigants alike, answer the question: is the house community or separate property?
Many married couples in California use community property funds to acquire real estate and take title in joint tenancy. Does that property presumptively belong to the community because the couple acquired the property during marriage with community funds? Or is the property presumptively the separate property of each spouse because they took title in joint tenancy? This issue can arise when parties seek a property division attorney in California or after one spouse uses a bankruptcy attorney to discharge their debts, which is followed by the bankruptcy trustee trying to sell the house of the debtor or non-debtor spouse.
Unfortunately, “California’s treatment of joint tenancies has a long and tortuous history and is still the subject of considerable legal concern and disagreement.” (Blumberg, Community Property in California (1987) p. 157.). The Legislature enacted a presumption that characterizes this property as community in a divorce (Family Code § 760); however, the presumption established by Evidence Code § 662-the owner of the legal title to property is presumed to be the owner of the full beneficial title-seems to be directly at odds with Family Code § 760. This dichotomy in the law has been the source of much debate in the family law and bankruptcy communities, as a “snarl of conflicting presumptions.” (Estate of Luke (1987) 194 Cal.App.3d 1006).
In this particular case, husband filed a Chapter 7 Bankruptcy in 2011. Husband and wife married in 1972, and during their marriage, the couple acquired a residence in Redlands and a rental property in San Bernardino. The Braces acquired both properties with community funds and took title to each property as “husband and wife as joint tenants.”
A Chapter 7 bankruptcy petition creates an estate to satisfy creditors’ claims. The estate generally includes “[a]ll interests of the debtor and the debtor’s spouse in community property” at the time the bankruptcy case is filed. (11 U.S.C. § 541(a)(2).) The Bankruptcy Code specifies that community property is part of the estate and bankruptcy courts look to state law to determine what property is considered community. (See Butner v. United States (1979) 440 U.S. 48, 54, 99).
The bankruptcy trustee sought a declaration that the Redlands and San Bernardino properties were community property under Family Code § 760. The distinction between community and separate property matters in this case because wife did not join in her husband’s bankruptcy petition.
If the properties are community, then the entirety of the Braces’ interests in the properties becomes part of husband’s bankruptcy estate. If the properties are separate, then only husband’s one-half property interest becomes part of the estate. (In re Reed (9th Cir. 1991) 940 F.2d 1317, 1332; see Code Civ. Proc. § 704.820). The bankruptcy court found that “the properties were acquired by the couple during the marriage with community assets and they presumptively constitute community property under applicable law. The Braces failed to establish that the… [p]ropert[ies] were not community in nature and, therefore, they constitute property of the Estate…” (In re Brace (Bankr. 9th Cir. 2017) 566 B.R. 13, 17.) The Ninth Circuit Bankruptcy Appellate Panel affirmed the finding reasoning that, pursuant to In re Marriage of Valli (2014) 58 Cal.4th 1396, which held that property acquired during marriage from a third party with community funds is community property upon divorce unless the statutory transmutation requirements have been met, the public policy and statutory construction support the extension of Valli’s holding to the bankruptcy context. The Braces appealed to the Ninth Circuit, which certified the question to the California Supreme Court (Case No. S252473).
On July 23, 2020, the California Supreme Court published its opinion in answer to the question above, as well as the following question: “When a married couple uses community funds to acquire property as joint tenants, is the joint tenancy deed alone sufficient to transmute the community character of the property into the separate property of the spouses?”
Family Code Section 852 provides that for property acquired on or after January 1, 1985, a transmutation “is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.” We hold that under this rule, joint tenancy titling of property acquired by spouses using community funds on or after January 1, 1985 is not sufficient by itself to transmute community property into separate property. For joint tenancy property acquired between January 1, 1975 and December 31, 1984, the act of taking title as joint tenants is, in itself, insufficient to prove a transmutation; however, a court may consider the manner of taking title in determining whether the spouses had an oral agreement or common understanding. Finally, as noted, joint tenancy property acquired with community funds before January 1, 1975 is presumptively separate property.
…we hold that the community property presumption in Family Code § 760 applies not only to dissolution actions but also to a dispute between one or both spouses and a bankruptcy trustee, and that Evidence Code § 662 does not apply when it conflicts with the Family Code § 760 presumption. In re Brace (July 23, 2020) Case No. S252473 (citation forthcoming).
This finding provides clarity on the battle of presumptions under the particular circumstances enumerated above, but the holding does nothing to prevent spouses from holding separate property as joint tenants or from transmuting community property into separate property held in joint tenancy as long as the applicable transmutation requirements are met. Further, the holding has no affect on the operation of the right of survivorship that typically accompanies joint tenancy title at death.
For joint tenancy property acquired with community funds on or after January 1, 1985, a valid transmutation under California law from community property to separate property requires a written declaration that expressly states that the character or ownership of the property is being changed pursuant to Family Code § 852 (a). A deed declaring that property is held in joint tenancy, by itself, does not suffice to transmute the property into separate property held in joint tenancy.
If you just received a letter in the mail from Thomas P. Riley, you may be wondering: Who is this guy, and why is he exaggerating or making false allegations that my business illegally displayed a boxing match?
If you just received a letter in the mail from Thomas P. Riley, you may be wondering: Who is this guy, and why is he exaggerating or making false allegations that my business illegally displayed a boxing match available on pay-per-view or a streaming service?
Well, you’re not alone! In just the Central District of California, covering Los Angeles County, Orange County, Riverside County, San Bernardino County, Ventura County, Santa Barbara County and San Luis Obispo County, Mr. Riley has filed a staggering 2,834 cases, all on behalf of boxing promoters claiming illegal showings of their boxing matches.
Nationwide, the number is a staggering 5,227 as of the writing of this blog post, and probably even more by the time you read this! We conducted some statistics on this mind-boggling number of federal cases relating to alleged piracy of boxing events, generally pay-per-view or modern streaming services, such as the DAZN and FITE app.
For starters, virtually every case filed by Thomas P. Riley relates to the same issue of piracy.
|Type of Lawsuit||Number of Cases filed by Thomas P. Riley|
|Other Statutory Actions||2150|
|Other Civil Rights||4|
|Other Personal Property Damage||2|
|Recovery of Overpayment & Enforcement of Judgment||1|
|Racketeer Influenced and Corrupt Organization||1|
|Constitutionality of State Statutes||1|
|Client/Plaintiff||Number of Cases Filed by Thomas P. Riley|
|J & J Sports Productions, Inc.||2957|
|Joe Hand Promotions, Inc.||886|
|Kingvision Pay-Per-View, Ltd.||420|
|G & G Closed Circuit Events, LLC||319|
|Garden City Boxing Club, Inc.||190|
|Event Entertainment, Inc.||151|
|Innovative Sports Management, Inc.||127|
|Top Rank, Inc.||46|
|Integrated Sports Media, Inc.||37|
|New Contenders, Inc.||28|
|National Satellite, Inc.||13|
|Circuito Cerrado, Inc.||9|
|Main Events/Monitor Productions||7|
|Traffic Sports USA||2|
|Don King Productions, Inc.||2|
|GoBox Promotions, Inc.||1|
|Year||Cases Filed by Thomas P. Riley|
|Federal Court||Cases Filed by Thomas P. Riley|
In case you’re curious, we’re releasing our full data set obtained through the Federal court system (PACER) for your review. Suffice to say, Thomas P. Riley is prolific in his litigation efforts.
To access Riley’s full data set as a Microsoft Excel file, please click here: Thomas P Riley Cases.
If you’ve received a letter or lawsuit from Thomas P. Riley, contact an experienced business attorney to advise you of your rights.
The Tricks and Tips to Proving Self-Employed Income for Spousal Support (Alimony) and Child Support That Your Ex Doesn’t Want You To Know Walking into a family law courtroom and swearing up and down that your ex-spouse or parent of your child makes more money than he/she claims is easy enough; but I have yet...
Walking into a family law courtroom and swearing up and down that your ex-spouse or parent of your child makes more money than he/she claims is easy enough; but I have yet to see a court order that reads: “Party A shall pay Amount X to Party B as and for support each month because Party B is 100% sure Party A makes a lot of money, and Party B seems pretty cool, so I’m just going to go with it.”
Family court in California may get a bad reputation for being loose with the rules as a court of equity, but if you plan to contest the opposing party’s claims regarding his/her income, you will quickly learn that even family court still requires a little thing called evidence.
This issue is highly litigated in California family courts, and the laws relating to the issue are continually changing. So far in the year 2020, two (2) major cases have come down affecting how income from self-employment is treated in California family courts in the context of spousal and child support: In re Marriage of Deluca (2020) 45 Cal.App.5th 184 and In re Marriage of Hein (Jul. 21, 2020) Case No. F076581 (citation forthcoming).
Whether these cases have made it easier for litigants, courts, and attorneys to calculate support is an issue for another day. The fact remains, these new cases (along with other landmark cases decided in recent years), provide the current landscape of the law in this area.
To start, Asfaw v. Woldberhan (2007) 147 Cal.App.4th 1407 provided a rather lengthy analysis of the issue of whether depreciation of rental property is deductible in calculating child support. That court began its analysis with the underlying premise that the amount of child support to be paid is determined by a formula, the components of which require the computation of each parent’s annual gross income and annual net disposable income. (Mejia v. Reed (2003) 31 Cal.4th 657, 669). Annual gross income is generally defined in Section 4058 as “income from whatever source derived.” (In re Marriage of Henry (2005) 126 Cal.App.4th 111, 118). Net disposable income, in turn, is computed by deducting from annual gross income amounts actually attributable to certain specified expenses. (Cal. Fam. Code § 4059).
The Asfaw court went on to identify various indicators the Legislature has placed in the Family Code which provide insight into the underlying principles of child support in California. In its broadest formulation, “California has a strong public policy in favor of adequate child support.” (In re Marriage of Cheriton (2001) 92 Cal.App.4th 269, 282-283) More specifically:
Whether depreciation is deductible in calculating net disposable income implicates essentially an income statute (§ 4058), and an expense statute (§ 4059).
The inquiry begins with Section 4059 since its “net disposable income” is an element of the actual child support formula. Section 4059 lists a number of items that are to be deducted from annual gross income in determining net disposable income: tax payments, FICA contributions, union dues and retirement benefits, health insurance premiums, other child support, job-related expenses, and hardship deductions. Depreciation does not fall within any of these categories, thus, if statutory support for the deduction of depreciation is to be found, it must come from that part of section 4059 which refers to “annual gross income.” The inquiry thus turns to Section 4058, for it is there that “annual gross income” is given meaning.
With one exception, Section 4058 defines “annual gross income” as “income from whatever source derived.” It identifies “rents” as one of 16 examples of income (§ 4058 (a)(1)). Also relevant is subdivision (a)(2) which states that income includes: “Income from the proprietorship of a business, such as gross receipts from the business reduced by expenditures required for the operation of the business.” There is no mention of depreciation.
From this scheme, it is clear that depreciation is not a “[j]ob-related expense” (§ 4059 (f)). This category appears to be reserved for those expenses actually incurred by an employee (Stewart v. Gomez (1996) 47 Cal.App.4th 1748, 1755 [tools, uniforms, on-the-job parking expenses, transportation and mileage for commuting to and from work, and other un-reimbursed costs that would not be incurred but for employment]).
Since rental income is expressly included as “annual gross income” under Section 4058 (a)(1), and business operating expenditures are deductible under Section 4058 (a)(2), the final question is: Does depreciation of rental property constitute an “expenditure required for the operation of this business?”
Although “income” is broadly defined in the statutory child support scheme, deduction provisions are specific and narrowly construed. The Legislature’s choice of the words “expenditure,” “required,” and “operation of the business” in Section 4058 are words of limitation. “Expenditure” suggests an actual outlay of cash or other consideration. Depreciating an asset does not involve a reduction of cash available for child support. Nor is depreciation “required” for the operation of a business. A proprietor cannot operate a business without inventory, without employees, without paying taxes, and so forth. A business can be conducted without a deduction for depreciation. Therefore, the Asfaw court concluded that “operation of the business” means ordinary and necessary business expenditures directly related to or associated with the active, day-to-day conduct of a business.
Following the Asfaw case, in 2018 the California Appellate Court rocked the family law community with In re Marriage of Rodriguez (2018) 23 Cal.App.5th 625, 635. In the decision, the Rodriguez court held that a self-employed parent’s depreciation deductions for motor vehicles did not constitute “expenditures required for the operation of the business” for purposes of Cal. Fam. Code § 4058 (a)(2). The Rodriguez court affirmed the order by the Superior Court of Stanislaus County directing the husband to pay wife child support for their three children. The Rodriguez court held that the trial court properly followed the Asfaw case by disallowing husband’s deduction of depreciation because depreciating an asset did not reduce available cash for child support, and asset depreciation was not among specific deductions permitted by statute (Cal. Fam. Code §§ 4058, 4059).
What was the factual analysis provided by the Rodriguez court? Good question. So what in the world does the Rodriguez decision mean? Are all business depreciation deductions disallowed? Is the decision limited to auto depreciation deductions? Or is the finding specific to disallowing this depreciation deduction for Mr. Rodriguez?
It is with the Asfaw and Rodriguez decisions in mind that the California Appellate Court made its recent findings in the Hein case.
In this case, the Fifth District clarified some of the questions that the Rodriguez case created regarding a self-employed parent’s depreciation deductions.
On appeal, the wife contends that the trial court did not properly determine the husband’s annual gross income under Family Code Section 4058 and thus erred in calculating the amount of child support owed. After the trial court issued its decision, the Court of Appeal decided the question of statutory construction involving depreciation in the Rodriguez case. In Rodriguez, the court held that a self-employed parent’s depreciation deductions for motor vehicles did not constitute expenditures required for the operation of the business for purposes of section 4058, subdivision (a)(2).
The Hein court extended the statutory interpretation for motor vehicles to depreciation deductions for equipment and other assets used in the self-employed parent’s businesses. The court explained that the term “expenditures required for the operation of the business” for purposes of Section 4058 (a)(2) describes an actual outlay of cash. The court held that claiming a depreciation deduction on an income tax return does not require an outlay of cash and, thus, does not reduce the funds available for child support.
This appeal raises issues about a self-employed parent’s annual gross income for purposes of determining child support under the statewide guideline. The mother contends the trial court did not properly determine the father’s annual gross income under Family Code section 4058(1) and, thus, erred in calculating the amount of child support owed. First, the trial court allowed the depreciation deductions claimed on the federal income tax returns of the father and his corporations to reduce his income available for child support. Second, the court presumed the income and expenses reported on the father’s individual and corporate tax returns were correct and, thus, assigned the mother the burden of proving the reported amounts were incorrect.
Stated from another perspective, we do not conflate (1) the outlay of money used to purchase a capital asset with (2) the accounting entries, such as depreciation, that occur after the acquisition of the asset and do not involve the actual outlay of funds in future years.
What this court is saying is that, especially beginning in year two and moving forward, the depreciation is artificial and is not deductible for purposes of calculating support because the items were acquired previously. It is an artificial paper deduction, not funded in cash outlay.
Note: The Hein decision did not address the issue of a Section 179 depreciation deduction (26 U.S.C. § 179). Section 179 allows a massive $1,000,000.00 depreciation deduction for one year as an income tax incentive to buy equipment. It is a tax deduction for actual expenditures in the year of claiming, and not based on economic reality (See Imputing Income to a Parent or Spouse via California Family Code 4058).
The Hein court further recognized the limited application of its decision in footnote 11: “Should the Legislature attempt to clarify a parent’s income from the proprietorship of a business, greater clarity would be achieved if, in addition to address the treatment of depreciation, the subjects of (1) capital expenditure and (2) principal payments on third party debt used to acquire a capital asset were addressed.”
The Hein decision went on to make a largely agreeable decision regarding another hotly contested issue when calculating support in family court when one party is self-employed.
The misnomer that a rebuttable presumption that the gross income on most recent tax returns is correct was found in the case, In re Marriage of Loh (2001) 93 Cal.App.4th 325, which found that: “A parent’s gross income, as stated under penalty of perjury on recent tax returns, should be presumptively correct. (See In re Marriage of Scheppers (2001) 86 Cal.App.4th 646, 650, 103 Cal.Rptr.2d 529 [‘Although federal law is not conclusive on the interpretation of section 4058, it is persuasive….’].) Returns are, after all, ultimately enforced by federal and state criminal penalties. Hence it is not surprising that tax returns are the core component of determinations under the guideline formula.”
However, the Hein court clarified this misnomer as follows: “In Loh, the court’s statement that ‘[a] parent’s gross income, as stated under penalty of perjury on recent tax returns, should be presumptively correct’ (Loh, supra, 93 Cal.App.4th at p. 332) was dicta because none of the father’s post-separation income tax returns were part of the record. As a result, Loh is not authority for the principle that gross income declared on an individual income tax return is correct, much less that the corporate income tax returns of a C corporation and an S corporation owned entirely by a self-employed parent are presumed correct. (See Riverside County Sheriff’s Dept. v. Stiglitz (2014) 60 Cal.4th 624, 641 [it is axiomatic that cases are not authority for propositions not considered].) ”
On the question of the burden of proof and the rebuttable presumption that the gross income stated on a parent’s tax returns is correct, the Hein court concluded such a presumption, if it exists, does not extend to the tax returns in this particular case. Here, the self-employed father’s businesses are organized into two wholly owned corporations (one taxpaying entity and one flow-through entity), the corporations’ operations are intertwined, and their total assets exceed $5 million. In such circumstances, the burden of proving that the expenses claimed on the tax returns constitute “expenditures required for the operation of the business[es]” is properly allocated to the self-employed parent who controls the corporations.
The Hein court concluded,
…the policy that seeks to advance children’s interest and considerations of fairness to the parents who are litigating the issue weigh in favor of giving Martin the burden of proof on the question of his business income and expenditure under section 4058 subdivision (a)(2). This conclusion recognizes that ‘a spouse who is the owner of a successful business and who has control of his or her income can structure income and the payment of expenses to depress income.’ (In re Marriage of Chakko (2004) 115 Cal.App.4th 104, 109.)… We conclude that considerations of public policy and fairness, informed by the judicial system’s experience in the cases involving the income and business expenses of a self-employed party, weigh in favor of assigning Martin the burden of proof on the factual questions that must be resolved to determine his business income and expenditures under section 4058 subdivision (a)(2).
The relevant issue raised in In re Marriage of Deluca (2020) 45 Cal.App.5th 184, is the husband’s contention that the trial court erred by failing to reduce his income available for spousal support by the amount of monthly loan principal payments he is required to make on his income-producing properties. He argues the court abused its discretion by “imputing” the amount of his monthly loan payments to him as “phantom income” and awarding wife monthly spousal support of $7,500, despite finding that the maximum monthly income available to him to support the children after making his loan payments was $7,281.
The applicable question raised on appeal is whether a trial court should deduct principal payments a spouse makes on business loans—including loans secured by income producing property—from income available for spousal support.
Free Calculator to Determine the Bankruptcy Trustee's Fee in a Chapter 7 and Chapter 11 Bankruptcy
Bankruptcy trustee compensation in Chapter 7 & 11 is fixed by many courts according to a specific statutory formula. The way that the formulate works is that the more the bankruptcy trustee distributes to creditors, the more money the trustee generally makes.
Specifically, the compensation of a trustee in a Chapter 7 bankruptcy or Chapter 11 bankruptcy is defined by statute under Section 326(a) of the Bankruptcy Code (11 U.S.C. Section 326(a)) as follows:
In a case under chapter 7 or 11, other than a case under subchapter V of chapter 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee’s services, payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.
Use the free bankruptcy trustee compensation calculator to determine the trustee’s fee that the bankruptcy court is able to award.
If you have questions about bankruptcy, trustee’s rights and how to properly negotiate with a bankruptcy trustee, contact an experienced bankruptcy attorney who represents trustees, creditors, debtors, and interested parties in bankruptcy to consider your rights.
Can California Family Courts Impute Income to a Parent or Spouse in Calculating Support? California courts have long asserted the power to impute income to supporting spouses and parents based on ability to earn income, as distinct from actual income. The first mention of the idea in the California reported decisions appeared at the very...
California courts have long asserted the power to impute income to supporting spouses and parents based on ability to earn income, as distinct from actual income. The first mention of the idea in the California reported decisions appeared at the very beginning of the Grant administration. (See Eidenmuller v. Eidenmuller (1869) 37 Cal. 364, 366).
Modernly, courts allow family law attorneys to apply standards and rules for imputing income to litigants. The reason behind the limitations California courts have placed on their own power to impute income lies in the simple fact that without evidence of ability or opportunity to earn, the power to impute income would easily devolve into a trial judge’s power to arbitrarily establish a support order at any given level, plucked from mid-air, just as long as it is over the level otherwise required by the payor’s actual, taxable income (See 3 Secrets to Proving Self-Employed Income for Child or Spousal Support in California – In re Marriage of Deluca & Hein).
The “Regnery rule” emerged from these self-imposed judicial limitations on imputation of income, and the rule is essentially a judicial gloss on the words “earning capacity” as they appear in Family Code Section 4058, subdivision (b). Citing from a digest of words and phrases and a workers’ compensation case, the Regnery court announced a “three-prong test before the capacity to earn standard may be applied.” The three tests are: “ability to work,” “willingness to work,” and “opportunity to work which means an employer who is willing to hire.” (In re Marriage of Regnery (1989) 214 Cal.App.3d 1367).
The court may, in its discretion, consider the earning capacity of a parent in lieu of the parent’s income, consistent with the best interests of the children, taking into consideration the overall welfare and developmental needs of the children, and the time that parent spends with the children.
The best way to present evidence of a spouse or parent’s ability, willingness, and opportunity to work is by serving a Request for Judicial Notice, pursuant to Evidence Code §453; Marriage of LaBass & Munsee (1997) 56 Cal.App.4th 1331, 1339 (trial court may take judicial notice of classified advertisements for job offers, which “want ads” may be admitted to establish available jobs in order to impute full-time income to an underemployed spouse). Pursuant to California Rules of Court, Rule 3.1306(c), a true and correct copy of the job opening must be attached to said Request.
How to Write a Lease Termination Letter Early Lease Termination Due to Coronavirus Pandemic, Force Majeure, Frustration of Purpose, Impracticability of Performance, Impossibility of Performance Are you a tenant are trying to terminate your lease without breaching a contract due to interruptions related to the Coronavirus (COVID-19) pandemic? Luckily, the Coronavirus pandemic has created a...
Are you a tenant are trying to terminate your lease without breaching a contract due to interruptions related to the Coronavirus (COVID-19) pandemic? Luckily, the Coronavirus pandemic has created a unique situation that is likely to be deemed by courts to be a force majeure (sometimes known as an act of God), and in consultation with a business attorney, frustration of purpose and commercial impracticability. These legal doctrines allows certain contracts to be terminated. Another affirmative defense to contract enforcement due to Coronavirus includes impossibility of performance.
However, walking away from a contract creates the uncertainty of whether the other party to the contract, such as a landlord, may file a lawsuit, send you to collections or damage your credit rating. To avoid this risk, it is best to obtain a written settlement agreement that the other party to the contract (e.g., the landlord) has released you in full from your obligations upon conditions deemed acceptable to them. Accordingly, the letter below has been drafted by Scott Talkov and Colleen Sparks at Talkov Law Corp., a law firm assisting clients with expertise as a real estate attorney in Riverside with a focus on commercial landlord-tenant disputes.
A few helpful tips to terminating a contract are as follows:
[Sender’s Address, Phone Number and Email]
VIA EMAIL ONLY
Phone: [Recipient’s Phone]
Facsimile: [Recipient’s Fax Number]
[Recipient’s Email Address]
Re: [e.g., Proposed Termination of Lease]
Property Address: [Property Address]
Tenant: [Tenant Name(s)]
Landlord: [Property Owner’s Name]
Dear [Mr/Ms.] [Property Manager/Property Owner/Other Party to Contract],
I hope this letter finds you well. Unfortunately, with regard to your lease with [name of tenant(s)], the State of Emergency following the Coronavirus pandemic and [governmental restrictions] in [name of county] County have made continued operations economic infeasible. Accordingly, this letter proposes terms that we suspect will be agreeable to the landlord to terminate the lease dated [date of lease] between [name of landlord] (“Landlord”) and [name of tenant] (the “Lease”), for the premises at [address of leased property] (the “Premises”).
Regretfully, the problems for [name of tenant] began immediately when the State of Emergency was declared by Gov. Gavin Newsom, which included stay at home orders effective March 19, 2020. This shuttered [name of tenant] by operation of law. In an effort to protect their employees and customers, effective the day before, [name of tenant] ceased its operations entirely. While many public leaders and business owners were optimistic at the time that the issues caused by this shutdown would be temporary, that is not what has occurred.
Unfortunately, since the Coronavirus pandemic began, the operations of [tenant], as reflected by its gross sales, have been a small fraction of what they were before the pandemic. Specifically, as shown in Exhibit 1 hereto, the sales from March 18 through [end date of calculation] were [specify small amount]. Thereafter, [the tenant] reopened for [limited operations, e.g., take-out] on [specify date]. However, this resulted in only about [specify percentage of sales] of the normal sales in [specify month of comparison]. Even when [normal operations, e.g. dine-in] was allowed in [specify date, e.g., June 2020], sales were a mere [specify percentage] of what [name of tenant] would normally enjoy.
Even more unfortunate for all parties, on July 1, 2020, the State of California issued new health orders, mandating that [type of tenant’s business, e.g., restaurants] in Orange County must cease indoor operations. An article published by the [name of newspaper] on [specify date] entitled, [name of article] is attached herein as Exhibit 2, for your reference. As for [name of tenant], there is no ability to comply with this new law by providing an alternative means of carrying on its business, meaning they must return to sales that they expect to be about [specify small percentage of sales while governmental restrictions continue] of the normal gross revenue.
Regretfully, this level of gross sales does not begin to cover the fixed costs of the business, most notably the rent to the landlord. While [tenant] has paid [all or most] rent through the date of this letter, the continued financial frustrations and uptick in Coronavirus transmissions has led to the undeniable conclusion that this will be a long recovery for any businesses that are similarly doing next to nothing during this pandemic. Accordingly, [tenant] plans to close its doors effective [specify date].
In connection with this closing, they would like to terminate the lease and turnover possession in a prompt fashion, despite the current Emergency Rules of Court in California that disallow any unlawful detainers from proceeding at this time.
As has become all too common these days, the Coronavirus pandemic has created a frustration of purpose and impracticability of performance defense to enforcement of the contract. Related thereto, Civil Code § 1511(2) provides that the performance of an obligation is excused “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” [In this case, there is no clause in the contract addressing what would occur in light of the irresistible, superhuman Coronavirus pandemic that has effectively shuttered certain parts of the American economy. Accordingly, the judicial decisions in California will control. Or, if there is a force majeure clause is the contract, quote the relevant portions of that clause that support your position that the clause applies to the Coronavirus pandemic.]
California liberally applies the force majeure defense, holding that “force majeure…is not necessarily limited to the equivalent of an act of God.” Pac. Vegetable Oil Corp. v. C.S.T., Ltd. (1946) 29 Cal.2d 238. The test for whether a force majeure or act of God situation is present is “whether…there was such an insuperable interference…as could not have been prevented by the exercise of due diligence.” Id.
Another California court specifically held that “force majeure is the equivalent of the common law contract defense of impossibility and/or frustration of purpose: performance of a contract is excused when an (1) unforeseeable event, (2) outside of the parties’ control, (3) renders performance impossible or impractical.” Citizens of Humanity, LLC v. Caitac Int’l, Inc. (Cal. Ct. App. Aug. 2, 2010) No. B215233, 2010 WL 3007771.
For example, in 20th Century Lites, Inc. v. Goodman (1944) 64 Cal.App.2d 938, the court discharged a defendant’s obligations to pay a plaintiff for a three-year lease of neon light advertising of the defendant’s business after a government regulation was enacted prohibiting the lighting of such signs.
The leading California case on frustration of purpose explains that “the applicability of the doctrine of frustration depends on the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into.” Lloyd v. Murphy (1994) 25 Cal. 2d 48, 53–54. Under doctrine of frustration of purpose, “performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.” Lloyd, supra. “This defense applies when performance is not impossible or impracticable, but has become pointless—i.e., the main purpose of a contract has become frustrated. [See La Cumbre Golf & Country Club v. Santa Barbara Hotel Co. (1928) 205 C 422, 425-426, 271 P 476, 477—hotel agreed to pay monthly amount to golf course for use by guests, but hotel burned down].” Cal. Prac. Guide Civ. Pro. Trial Claims and Def. (The Rutter Group) Ch. 9(I)-C, 9:18.
Moreover, impracticability of performance is yet another defense to performance of contract, which applies when “a thing is impracticable when it can only be done at an excessive and unreasonable cost.” City of Vernon v. City of Los Angeles (1955) 45 Cal. 2d 710, 719–20.
In this case, the terms of the Lease clearly delineate an intention and expectation, by both parties, that the tenant would use the Premises as a [specify nature of business]. As such, the March 19, 2020 mandatory stay at home restrictions and the [specify date of later order hindering business] order mandating the [termination of the tenant’s business] within [specify county name] County have effectively frustrated the purpose of the Lease, as [name of tenant] is unable to use the Premises for the specified purpose. This has also made the performance of the Lease impracticable where the only way for the tenant to perform is at an unreasonable cost, i.e., at a guaranteed, extraordinary loss month after month.
Lloyd placed limits on the application of frustration of purpose as follows: “The doctrine of frustration has been limited to cases of extreme hardship so that businessmen, who must make their arrangements in advance, can rely with certainty on their contracts. The courts have required a promisor seeking to excuse himself from performance of his obligations to prove that the risk of the frustrating event was not reasonably foreseeable and that the value of counterperformance is totally or nearly totally destroyed, for frustration is no defense if it was foreseeable or controllable by the promisor, or if counterperformance remains valuable.”
In this case, the Coronavirus pandemic was unforeseeable not only to the tenant, but also to the United States government, as has been reflected by its response. Even the President’s trusted advisor, Dr. Fauci, at one point estimated a death toll of a quarter-million Americans- even with the shutdown that has occurred. As of the writing of this letter, the death toll in America has surpassed [specify death toll in America from Coronavirus], despite the efforts at social distancing. This shutdown has nearly eliminated the need for the services provided by the tenant. Even further, this event was entirely outside of the tenant’s control, but, rather, has occurred due to the contagious nature of the virus and, at least arguably, the slow governmental response. What has occurred has rendered performance of the contract, by way of payment of the rent and operation of the business, impossible or impracticable [OPTIONAL: The [party writing this letter, e.g. the tenant] was already running without sufficient profitability such that there is simply no purpose for the continued performance of the contract.]
[OPTIONAL: While the Coronavirus pandemic ultimately [caused this request for termination or brought the tenants to close their business], there were issues with the [the contract or condition of the property due to the landlord’s lack of maintenance] that predated the Coronavirus pandemic that created the conditions for [this need to terminate the contract or this financial failure]. Specifically, Section [specify section] of the [lease or contract] identifies the [e.g., “Lessor’s Obligations” as follows: “Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2”] Contrary to those obligations, [specify the other party’s breaches, e.g., the roof has had repeated and ongoing leaks]. This is shown in the attached [e.g., pictures of the roof, the walls, and the floors attached as Exhibit 3]. These show [e.g., water damage on the roof, water seeping down the brick walls, and water on the floor]. These issues caused repeated damage to [e.g., the business, the tenants’ personal effects, while diminishing the tenant’s reputation as a reputable business].]
What the tenant believes would occur is an analysis requiring the tenant to pay a percentage of the rent relative to the non-frustrated portion of gross income following the Coronavirus pandemic. For example, in the month of [specify month] 2020, the gross sales were a mere [specify percentage] of the regular level. This would not relieve the tenant entirely, but would instead require the tenant to pay [specify the same percentage] of the rent.
When this analysis is applied to this case, it shows that the tenant has already overpaid by $[specify amount – see Excel spreadsheet analysis, below]. Even further, assuming that conditions improve by the end of the Lease such that gross sales are [specify a higher percentage, e.g., 67%] of the expected level, the tenant would have already paid through [specify a month, e.g. the end of the Lease]. Our full analysis is attached as Exhibit 1.
We suspect that the Landlord would prefer not to go without the payment of any further rent for [specify number of months remaining on lease] months at the Premises, but rather would prefer to find a new tenant that can make a viable use of the Premises in light of the Coronavirus pandemic.
Accordingly, the tenant offers the landlord a termination of the lease on the following terms. First, the tenant will pay the lump sum of $[specify amount, e.g., two months of rent]. Second, the landlord would retain the deposit already on hand with the landlord of $[specify amount of deposit]. Third, the Tenant will leave the property in broom-swept condition on [specify date that tenant will vacate]. In exchange, the landlord would all obligations arising under the Lease. The tenant is prepared to send a check to the landlord with the memo line “Lease Termination – Paid in Full – Landlord to Retain Deposit” in exchange for termination of the Lease as of [specify date that tenant will vacate]. This check can be sent as soon as the landlord indicates its acceptance.
I hope to hear from your office on these issues by [specify a date about one week away]. I can be reached at [add your phone number] and at [your email address]. [If there is something to be done if the offer is accepted, specify that it will be done promptly, e.g. I can overnight the keys as soon as you confirm your agreement as set forth herein].
Very truly yours,
/s/ [Sender’s Signature]
Notice: Please contact an attorney to advise you of your rights upon an assessment of the facts in your case before using this letter. If you are trying to terminate a contract where the amount still owed is significant (e.g., more than $25,000), it is strongly advised that you contact a business attorney or bankruptcy lawyer to consider all of your options.
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