Introducing the TVA Newsletter!
Since the time our firm started in 2010, Thomas Vogele & Associates has had the opportunity to represent several dozens of clients and work with many excellent colleagues, experts, and other professionals. Today, the team at TVA racks up several decades of combined litigation experience. Thank you for being a part of it!
We are launching this newsletter to share with you some dispatches from the litigation front lines. Some stories will point out updates in the law that might affect your business. Others will highlight some best practices. And some are simply novelties that, if you’ve had occasion to experience some of the good, bad, and ugly of the justice system, we think you might appreciate.
Why Litigation: “Getting the Mule’s Attention”
Many practical-minded people balk at litigation. It is expensive, lengthy, and zero-sum, the very opposite of how most businesses achieve success. Cooperation is superior to litigation.
That is what the neighbor told the farmer when selling him a mule in the old fable. “This mule will do anything you ask,” the neighbor said. “All you have to do is ask him nicely. Just make sure you never mistreat the mule.”
The farmer bought the mule and took it out to plow his field. But no matter how nicely the farmer asked the mule, it had no intention of pulling the plow.
The farmer called his neighbor over. As soon as the farmer finished explaining the problem, the neighbor walked over, picked up a two-by-four, and hit the mule right in the head. Then he whispered in the mule’s ear. The mule immediately started plowing the field.
“I thought you said never to mistreat your mule,” said the farmer. “You said all that I had to do was to talk nicely to him.”
“Well,” answered the neighbor. “You have to get his attention first.”
Litigation is that two-by-four. Sometimes people need to be hit over the head with it.
Attention Estate Planners: QPRTs May Be Deemed Revocable!
In a recent decision TVA obtained for the Chapter 7 bankruptcy trustee, the U.S. Bankruptcy Court held that a QPRT — generally irrevocable and commonly used in estate planning to hold personal residences — may nonetheless be revoked when the debtor retains an right to reacquire ownership of the residence.
A former savings-and-loan banker, Robert Ferrante, owned a beautiful 5,500 square foot home on an exclusive island in the harbor of Newport Beach, California, and which had fifty feet of bay frontage. In 1994, Robert transferred property into a QPRT — a qualified personal resident trust — with a 20-year term, to expire in 2014.
TVA successfully argued that, because Ferrante could terminate the QPRT by ceasing to use it as his own personal residence, the QPRT was thus de facto revocable (no matter what it said about being irrevocable), and thus it did not qualify as a QPRT for federal estate and gift tax purposes. The QRPT therefore failed, and the beautiful Newport Beach home reverted to Ferrante, and therefore to his bankruptcy estate.
In other words, Ferrante had the ability to effectively “toggle” into the off-position the QPRT at any time, simply by choosing to no longer live in the home, and this destroyed the QPRT’s protections as to his creditors and made the home available for liquidation.
The upshot: ALL QPRTs are revocable for Chapter 7 bankruptcy purposes because whatever a debtor can do, his/her Chapter 7 trustee can do. Since a debtor can move out, thereby voiding the QPRT, a trustee can impliedly move out and thereby revoke the QPRT. The BAP did not reach this issue, although it was a hotly discussed topic at oral argument, because it did not need to reach it to affirm Judge Albert’s ruling.
In addition, certain QPRTs will be revocable if the settlor retains an illegal right to redeem the property at any time before the end of the 20 year term. This will violate the 1997 regulations that specifically require an express statement that the settlor cannot redeem the property. Ferrante argued that his 1994 trust was grandfathered in, but the statute addressed that and gave such trusts 90 days to commence amendment of the trust agreement. Since Ferrante never did so, Judge Albert ruled that he waited too long.
TVA’s victory was written up by Forbes.
Brokers: Get Your Commission Agreements in Writing!
Last month’s decision in Westside Estate Agency, Inc. v. Randall (Cal. Ct. App. – Dec. 1, 2016) began its opinion saying:
“We are all familiar with the phrase, “caveat emptor”: Buyer beware. This case deals with its less renowned cousin, “caveat sectorem”: Broker beware.”
Section 1624 of the Civil Code says that a real estate broker can only be a broker for someone — e.g., get a commission — if there’s an agreement in writing. The broker here didn’t get a signed agreement authorizing his status as a broker, but instead relied upon an alleged oral agreement.
That’s not good enough.
Which means he loses out on a $925,000 commission on a $45 million sale.
Follow the statute. Get the agreement in writing.
Finding Justice in the Grinding Gears of Litigation
The right judgment is not always the just result — a judgment often fails to account for the time and expense invested to obtain it.
But sometimes, the grinding gears of litigation can be used to achieve some justice. In Leeman v. Adams Extract & Spice Co. (Cal. Ct. App. – May 21, 2015), plaintiff settled a Prop. 65 (toxic chemicals warning) case — cases typically driven by a cottage-industry of “sue and settle” lawyers. The settlement here was for a typically small amount of civil penalties, and a typically much larger amount of fees at $72,500, with hourly rates up to $895. Another victory for cottage-industry lawyers, it would seem.
But not so fast, says Judge Goldsmith. He cuts the requested fee award in half. Plaintiffs move, first ex parte, then on a noticed motion, to modify this award to the stipulated amount. Judge Goldsmith denies both attempts, without explanation.
Predictably, the Court of Appeal reverses, telling Judge Goldsmith that he can’t just whack the fees for no reason, and that he also can’t approve the settlement but reduce the fees, since the entire thing stands or falls as a whole.
So in the end, the cottage-industry lawyers get their fees, to which they have a statutory right. But as professor Shaun Martin explains, it’s Judge Goldsmith who gets the last laugh:
“I wonder if a part of him was thinking: “You bastards. You know full well this was a shakedown, and that the $72,500 fee award was excessive. You think I can’t do anything about that. And you’re largely right. I’m not going to keep a crappy case in my court (by disapproving the settlement) just to stop you from getting your fees. But you know what I can do? I can make it hard for you. I can slash your fee award. Once. Twice. Thrice. Make you file three motions. Make you prosecute an appeal. Make you wait a couple of years. And, yeah, you’ll get your $72,500. But you’ll at least have to work for it.””