I. Nature of the Lien

The Producer’s Lien is a California statutory lien. The lien is upon “any farm product” and upon all processed or manufactured forms of such farm product securing the producer’s labor, care and expense in growing and harvesting the product.² “Farm products” are essentially all agricultural products of the soil and includes honey and beeswax, oil seeds, poultry, poultry product, livestock product and livestock for immediate slaughter.³ Timber, timber products, milk, milk products and aquacultural products are excluded.⁴

The lien is in favor of every producer of farm products that sells the product grown by the producer
to any processor under either an express or implied contract.⁵ A “producer” is a person engaged in the business of growing or producing farm products.⁶ An Illinois Bankruptcy Court construing California law, In re S.N.A. Nut Co. 197 B.R. 642, 652(B.CT.N.D. Illinois, 1996) has held that a California processor could assert a Producer’s Lien as to products it may grow. In SNA Nut Co., supra the Debtor attempted to defeat the California Producer’s Lien by arguing that since the party asserting the lien (in that case Tulare Nut Company) was also a processor, it was precluded from asserting the lien. The Court denied summary judgment on that issue finding an issue of fact as to the extent of product delivered by Tulare Nut Company to the Debtor that was actually grown byTulare Nut Company. Id.

Courts have held that the California Legislature’s intent with the Producer’s Lien statute is that it be
liberally construed to promote and protect the agricultural industry. California Food and Agricultural Code § 3; In re TH Richards Processing Co., 910 F2d. 639643 fn. 3 (9th Cir. 1990); In re Loretto Winery Limited, 898 F2d. 715, 720-21 (9th Cir. 1990). The lien attaches to all delivered product from the date of delivery or any portion of it by a producer to any processor.⁷ The lien extends to every farm product and any processed form of the farm product which is in the possession of the
processor without segregation.⁸ Most controversial is the Producer’s Lien is a preferred lien prior in dignity to all other lien claims, or encumbrances except labor claims or personal services rendered to the processor after delivery of the product and Warehousemen’s Liens.⁹

The lien can be enforced by filing suit and such suit may contain other claims and remedies provided
by law. See California Food and Ag Code § 55631, 55636. A claimant can assert a personal action against the processor and in said action, seek to foreclose the lien.¹⁰ If the producer seeks a writ of attachment as part of the lawsuit, he is not required to state in his affidavit that the demand is not secured by a lien.¹¹ Should a judgment be entered against the processor in favor of the producer a judgment does not impair or merge any lien right or claim held by the plaintiff.¹² In the event there are more claims than value of processed product held by the processor, Producer’s Lien claims should have equal standing and payment is pro-rated among the claimants.¹³ The Producer’s Lien is truly a “secret” lien since it does not require the filing of a Financing Statement or other documentation as a lien under Article 9 of the Commercial Code or elsewhere under California Law. Arguments that the lien should be set aside because it is not effective against bona fide purchasers under 11 U.S.C. § 545 (2) have been rejected. See In re SNA Nut Co. supra.

II. Issues Relating to Producer’s Lien Enforcement

A. Extension of the Lien to Proceeds from Processor’s Sales.
California Food and Ag Code § 55631 states the extent of the lien is on farm products and upon all processed and manufactured forms of such farm products. California Food and Ag Code § 55634 defines the extent of the Producer’s Lien as on “every farm product and any processed form of the farm product which is in the possession of the processor without segregation of the product.” The issue is what happens when the farm product is sold by the processor. California Food and Ag Code § 55638 makes unlawful a processor’s removal of the farm product from its ownership or control to which the liens attach except the excess of what is sufficient to satisfy all existing liens or so long as the total proceeds of the sale are used to satisfy obligations to producers secured by the lien.

The United States Bankruptcy Court for the Eastern District of California held an US Bank N.A. v. Deseret Farms (In Re Sargent Walnut Ranches), 219 B.R. 880 (B.Ct.E.D. California, 1998) that a growers Producer’s Lien did not encumber the proceeds from the sale of walnuts when the processor had no available inventory. The Court noted that the Producer’s Lien was extinguished when the last of the walnut inventory was sold to third parties. Accordingly, in a priority dispute between a lender secured by inventory and inventory proceeds and the Producer’s Lien claimants, the lender with the inventory lien had higher priority.

The California Court of Appeal for the 5 District has th held otherwise and is the controlling authority in California on this issue. Frazier Nuts, Inc. v. American Ag Credit, 141 Cal.App. 4th 1263 (2006). In Frazier Nuts, a secured lender extended a $4,000,000 revolving line of credit to a processor. The line of credit was renewed a few times. The collateral securing the line of credit included the processor’s inventory, accounts receivable and equipment at the processor’s facility. When the processor could not pay off the line of credit after its last renewal, it filed a Chapter 11 bankruptcy petition. It was later converted to Chapter 7. Between the last renewal of the line of credit and its filing for bankruptcy, the processor made nearly $400,000 of payments to the lender. The growers delivered almonds to the processor and in return received a promise of payment. The growers filed a complaint against the lender claiming that the secured lender wrongfully diverted proceeds of the sale of their almonds. The trial court granted secured lender’s motion for summary judgment
holding in part that the grower’s statutory lien did not extend to the accounts receivable or sale proceeds arising out of the crop delivered by the almond growers. The secured lender’s primary argument was the growers legal theory failed because they had no lien or other right at any time in the processor’s almond sale proceeds. Frazier Nuts, supra 141 Cal. App. 4th at 1270.

The Court of Appeals looked at the legislative history of Food and Ag Code § 55638 which makes the processor removing any farm product from its control without payment of the lien unlawful unless the total proceeds of a sale is used to satisfy the liens. The Court noted that prior to the 1979 amendments to that section, the lien’s duration was limited to 60 days. Frazier Nuts, supra 141 Cal. App. 4th at 1272. The Court of Appeal focused on the provision of California Food and Ag Code § 55638 which provides that the sale of raw or processed farm product is not prohibited “so long as the total proceeds of the sale are used to satisfy obligations to producers.” Id. at page 1274. The Court of Appeal disagreed with the holding Sargent, supra and held that the provisions of California Food and Ag Code § 55638 that the total proceeds of the sale to be used to satisfy producer’s obligations imposed the duty upon processors and/or a right in favor of producers.

The next question is whether that right constituted a lien on the proceeds with priority over the secured lender. The Court of Appeal reasoned that the legal right of grower’s to be paid by the processor from the sale proceeds can be characterized as a lien. The Court continued its logic by stating that grower’s right to be paid from the proceeds (or its correlative, processor’s legal obligation to pay) before the debt processor owes growers is satisfied is an interest sufficient to be a lien. Frazier Nuts, supra 141 Cal. App 4th at 1277 (The Court extended the priority of the lien under California Food and Ag Code § 55633 to the proceeds as “promot[ing] the general purposes of the Producer’s Lien statute as well as the 1979 amendment’s specific purpose of seeing the producers would be paid for their product.”) Id. at page 1278.

Thus under current California Law, the Producers Lien statute’s penalty provisions provide the platform for producer’s assertion of liens with higher priority than general security interests in proceeds from a processor’s sale of encumbered product.

B. Can the Protections of the Producer’s Lien Statute be Waived?
In In re GVF Cannery, Inc. 202 BR 140 (N.D. California, 1996) The District Court for the Northern District California reviewed an appeal from the Bankruptcy Court which found that a subordination agreement that a processor’s lender required to be signed by a producer was a waiver of the statutory right which was ineffective due to the producer’s lack of information about the rights the producer was waiving. The District Court affirmed the Bankruptcy Court’s reasoning that a waiver analysis should be applied to the subordination agreement at issue but reversed and remanded for findings as to whether a valid waiver was obtained. In GVF Cannery, supra a tomato grower executed a subordination agreement which had the effect of waiving his first priority Producer’s Lien rights under the California Food and Ag Code. There were issues concerning whether the processors’ agent mislead the producer. After the Bankruptcy Court ruled in favor of the producer, the lender appealed the decision. The lender argued that the Bankruptcy Court should have analyzed the subordination agreement as an enforceable contract not as a waiver of the statutory right. The lender argued that the producer did not unequivocally relinquish any rights as a creditor by subordinating the lien but “suppressed” its rights until the obligation to the lender was satisfied. The District Court disagreed holding that the producer did give up a right forever by subordinating the Producer’s Lien the right to be first creditor in line. In re GVF Cannery, Inc. supra 202 BR at 144.

The District Court did disagree with the Bankruptcy Court’s ruling that a waiver needed to include a statement regarding the processor’s existing debt to the lender and the relation of the debt to the processor’s existing assets. Instead, the District Court held that the producer be informed that: (1) he had a statutory first priority lien in his tomatoes; (2) by subordinating his Producer’s Lien he was giving up his right to first priority; (3) this waiver would place him behind the lender as a creditor and (4) if the processor went bankrupt and the processor’s assets were not sufficient to cover the debts to the lender, the producer would not receive any further payments for his tomatoes.

Thus a waiver or subordination could be found effective provided the elements of a waiver are established by the parties claiming a waiver. Those elements are the party executing the waiver must be fully informed of (1) the existence of the right being waived; (2) the meaning of the waiver; (3) The effect of the waiver; and (4) a full understanding of the explanation of the waiver. Hittle v. Santa Barbara County Employees 39 Cal. 3rd 374, 389 (1985). The Producer’s Lien statute does provide when a release of the Producer’s Lien will occur by operation of law (e.g., a surety bond or cash deposit or payment or arrangements being made for such payments satisfactory to the producers, California Food and Ag Code § 55637; the processor either pays the value of the farm product, deposits with the director surety bond, deposit of cash sum or delivering the director a receipt;
provision of evidence to a Court that the processor has security or monies on deposit with the director if an action is filed, California Food and Ag Code § 55650).

C. Does Co-Mingling of the Producer’s Product Mean the producer has a Lien on the Entire Inventory?
Some tension exists between the provisions of California Food and Ag Code § 55631 which provides in part:

Every producer of any farm products that sells any product which is grown by him
to any processor under contract … has a lien upon such product and upon all processed or manufactured forms of such farm products for his labor, care and expense in growing and harvesting such product

This provision limits the extent of the Producer’s Lien to the product grown by the producer and held by the processor.

This lien however is extended by California Food and Ag Code § 55634:

Every lien which is provided for in this article is on every farm product and any processed form of a farm product which is in the possession of the processor without segregation of the product.

Thus the lien extends beyond that product which is produced by the farmer to product in the possession of the processor which is produced by other farmers “without segregation.” The United States Bankruptcy Court for the Eastern District of California in In re California Pacific Rice Mill, Ltd., 265 BR 237, 240 (B.Ct.E.D., California 2001) reasoned that which is not segregated is commingled. Id.at 240. The phrase “without segregation” is properly interpreted to mean “with commingling” or “that is commingled.” Id.

In California Pacific Rice Mill, supra the facts were that the rice processor segregated all the rights held by the processor by variety and crop year. Accordingly, the Bankruptcy Court denied the producer’s requests for a preliminary injunction prohibiting the debtor processor from disposing of, or relinquishing control of any of its rights to inventory regardless of variety or crop year. The Bankruptcy Court held that the extension of the scope of the Producer’s Lien would be only to the extent those farm products are commingled. Because of the facts in California Pacific Rice Mill, the Producer’s Lien was limited. Accordingly, in an appropriate case when crops are segregated, the extent of the Producer’s Lien may not be so vast.¹⁴

Conclusion

The Producer’s Lien provides a substantial remedy for producers who are unpaid. The scope of the lien can be the subject of some debate but California aw at present extends that coverage of the lien to proceeds. The coverage of the lien may be waived. The extent of the lien will be limited if the processor segregates crops

I. Introduction

The Dairy Cattle Supply Lien law in California provides for a statutory lien know as a “Dairy Cattle Supply Lien” in favor of those who provide feed or material (a defined term) to aid in the raising or maintaining dairy cattle.² The Dairy Cattle Supply Lien was added to the Food and Agricultural Code in 1987. Other than very minor amendments to conform with certain provisions the Commercial Code, the law remains as originally drafted. While there are no reported cases construing the law, certain issues have arisen in various bankruptcy cases dealing with enforcement of the lien law. Generally, two of the primary financing constituencies in a dairy bankruptcy case are a traditional lender and grain suppliers. In addition to the substantial defaults facing the traditional lender, grain suppliers often have large balances owed at the time of the petition is filed. Most grain suppliers are sophisticated enough to have filed Dairy Cattle Supply Liens with the Secretary of State.

However, even if the lien is filed with the Secretary of State, certain issues for the enforcement of the lien should be considered. Some of those issues are the subject of this article.

II. Frequent Issues Arising in Enforcing Dairy Cattle Supply Liens

A. Property Charged with the Lien
The Dairy Cattle Supply Lien is only upon the proceeds of the milk or milk products produced from the dairy cattle that have benefitted from the provision of “feed or materials” aiding in the raising or maintenance of the cattle.³ “Proceeds” is defined in the law as funds derived from the sale of milk or milk products which are payable to the lien debtor by the possessor of the funds.⁴ Interestingly, the lien does not extend to the milk itself or milk products produced from the dairy cattle.

The definition of “proceeds” under the law presumes certain deductions which are normally taken by dairy product processors.⁵ Those deductions include taxes, fees and assessments, court ordered deductions, deductions for hauling if the processor has provided hauling services as well as deductions for sums due a processor for the testing of milk. Most processor’s when having received a notice of an assignment of the rights to payment of proceeds respond with a standard disclaimer that certain costs and deductions will be taken from the assigned proceeds before disbursement accordance with the assignment. The Dairy Cattle Supply Lien law contemplates deductions in favor of the processor also.

B. What the Lien will Secure.
The Dairy Cattle Supply Lien is to secure the reasonable or agreed charges for the feed or the materials provided and for the costs of enforcing the lien.⁶ “Feed or materials” is defined as “commercial feed, grain, forage, feed ingredients, mineral feed, drugs, animal health products, customer formula feed, any mixture or preparation for feeding animals, any of the constituent nutrients of an animal ration, or any other food which is used for the feeding of dairy cattle.”⁷ Thus virtually anything used for the feeding of the animals can form the basis for the charges secured by the lien.

Curiously, the amount secured by the Dairy Cattle Supply Lien is affected by the time the “feed or materials” are furnished. The lien can not secure charges in excess of the amount equal to the reasonable or agreed charges for feed or material provided with in a 45 day period. The statute does not specify which 45 day period may be used.

In addition, the number of providers of feed or materials that can exercise lien rights is limited. The lien law permits only two providers of feed or material to have an enforceable lien at any time, according to statutory priority.⁸ Under the terms of the statute, the number of providers with “an enforceable lien” is limited. However, the statute does not by its terms limit the number of notices of lien that can be filed. Thus under the terms of the statute, it would be possible for more than two providers to file liens. However, at any one time only two could have an enforceable lien. As long as two of the providers either continue to supply the dairy with “feed or material” or remains unpaid, that supplier may have an enforceable lien.⁹

C. Determining Priority.
The Dairy Cattle Supply Lien does not have a “super priority.” Under the statute, the lien has priority in accordance with the time the notice of claim of lien is filed.¹⁰ The statute provides that just as a party with a security interest must perfect a lien by filing a Financing Statement, so does a Dairy Cattle Supply Lien claimant.¹¹ Division 9 of the Commercial Code is specifically incorporated into the Dairy Cattle Supply Lien law. California Food and Ag Code § 57407.

The usual scenario is the traditional lender has liens on not only the milk and milk products but also the dairy cattle and other personal property. Negotiation occurs between the Dairy Cattle Supply claimants and the traditional lenders to try to foster reorganization when that is possible. If it is not possible, there usually are not priority fights between the traditional lender and the Dairy Cattle Supply Lien claimant although that can occur at times.

D. Length of the Effectiveness of the Lien.
When considering a Dairy Cattle Supply Lien claimant and the rights that claimant might have, some consideration must be given to whether the lien is in fact effective. The Dairy Cattle Supply Lien law states that the claim of lien remains in effect as long as the person providing the feed or materials either (1) remains unpaid for amounts secured by the lien, or (2) continues to provide feed or materials on a regular basis to the lien debtor.¹² The statute provides if more than thirty (30) days elapses between supplier deliveries, that supplier is not making deliveries on a regular basis.¹³ Thus if there is an issue as to enforceability or priority of a Dairy Cattle Supply, some inquiry must be made as to frequency of delivery.

E. Enforcement of the Lien.
Initially, the lien itself must be examined to determine if it complies with what must be included in the claim of the lien. Generally, the same information that is required on a UCC Financing Statement must be included on a claim of lien. However, issues have arisen relating to the sufficiency of the lien because not all of the information has been included by the lien claimant. For example, a lien must contain the name and address of the lien claimant and the location of the diary to which the feed and materials were provided.¹⁴ The name and address of the lien debtor must also be provided. Accordingly, care must be taken as to whether the name and the address of the lien debtor and the location of the dairy to which the feed is delivered are the same. If not, both locations must be specified as appropriate in the notice of claim of lien.

In addition, the lien must contain the statement that the lien claimant “has a dairy cattle supply lien pursuant section 57402.”¹⁵

The statute also requires that the notice of claim of lien “should be signed by the lien claimant.”¹⁶ The Commercial Code since 2001 has not required a physical signature by a lien claimant. A lien claimant need only “authenticate” the record.¹⁷ There is no controlling authority dealing with this supposed “tension”. However, in an unpublished decision one Court has addressed the issue and has found that the type written signature of the lien claimant was sufficient.¹⁸

Also, the Dairy Cattle Supply Lien law requires the lien claimant to provide written notice of the claim of lien to the lien debtor within 10 days of the date of the filing of the lien with the office of the Secretary of State.¹⁹ There is no provision in the current law which says that failure to provide that notice does not effect the validity of the lien. That is likely the intent of the law or certainly would be a consistent construction of the law in light of the Commercial Code. However, there is nothing currently dealing with that issue addressed in the law.

Finally, the enforcement of the lien is covered by the statute. First, the only the way the lien is “foreclosed” is by an action to recover the reasonable or agreed charges for feed and material delivered.²⁰ Once a judgment is entered, it can be enforced in accordance with the California Code of Civil Procedure.²¹ However, as a prerequisite, the statute requires the lien claimant provide written notice to secured creditors at least 30 days prior to enforcing the claim of lien.²² Curiously, other than the notice to the lien debtor within 10 days of the date of filing the lien, no further notice needs to be given the debtor before the lien can be enforced. However, secured creditors must receive notice.²³ The creditors that receive notice are not necessarily the creditors who have liens as defined by the statute on the date the action is going to be filed. Rather, the 30 day notice needs to be given to those secured creditors having liens on file when the lien claimant files the notice of lien. Also, not all “secured creditors” need to be notified. Only those having a perfected security interest in the specified collateral need to be notified.

III. Proposed Legislation

In the 2011 legislative session, SB 592 has been introduced which proposes certain changes to the California Dairy Supply Lien law. Currently, the bill is “inactive” although it has passed the senate judiciary committee in May 2011.²⁴ The proposed changes are relatively extensive. First, the proposed change would allow the lien to be placed upon the dairy cattle and offspring. That is not the case under the current law. Second, the 10 day notice required under California Food and Ag Code § 57405 is still required but the proposed law identifies the party to receive the notice depending upon the type of entity the dairy may be. Third, the law as amended would provide that failure to give the written notice would not affect the priority of the lien or the validity of the lien. Fourth, if an enforcement action is filed, the lien holder can apply to the Court for a right to attach order and writ of attachment. Finally, the proposed law would permit a supplier to notify “any person obligated on any proceeds subject to the lien” to pay the claimant.

Whether these provisions will be enacted remains to be seen.²⁵

Conclusion

The Dairy Cattle Supply Lien law provides a valuable remedy for grain suppliers to financially troubled dairies. However, as a statutory lien there are numerous issues that surround lien enforcement that must be considered. Certain clarifying and other changes are proposed but are not yet enacted. Until then the lien law must be carefully consulted by analyzing the enforcement of the lien and its affect on other creditors.

Lang, Richert & Patch congratulates the following Super Lawyers: personal injury and wrongful death specialist Robert L. Patch II; construction and complex litigation attorney Val W. Saldana; bankruptcy and insolvency advocate Rene Lastreto II; employment and labor law attorney Charles T. Taylor; and construction law specialist Mark L. Creede.

Among Lang, Richert & Patch’s up-and-coming attorneys are Rising Stars: Matthew W. Quall, construction litigation attorney; Craig B. Fry, corporate and business transactions and bankruptcy specialist; Scott J. Ivy, business litigation, attorney; and Ana de Alba, business litigation attorney.

These 9 Super Lawyer and Rising Star honorees come from diverse practice areas and represent nearly half of all attorneys practicing with Lang, Richert, & Patch. Lang, Richert & Patch is proud to have among the largest contingent of Super Lawyer and Rising Star honorees in the Central Valley.

A call to action heard loud and clear in the legal community was answered last month during the Fresno County Women Lawyers’ “Women Helping Women” luncheon. The luncheon featured speakers Jenny Bates, Director of The Hacienda Drug/Alcohol Rehabilitation Center for Women and Deborah Torres, Director of Samaritan Women. The speakers shared stories of how their organizations help women who have been incarcerated get back on their feet. Those attending the luncheon were asked to donate career clothing, toiletries, postage stamps, and bus tokens to help these wonderful organizations improve the lives of the women they serve. Generating donations for both organizations, FCWL members took up the call to action and made the luncheon an amazing success.

Despite the generosity of FCWL members, the need for donations and volunteers is still great. If you are interested in donating items, the following wish lists may help steer you in the right direction:

Samaritan Women Wish List
• Volunteers
• Pen-pals
• Donations
• Personal hygiene products
• Toilet paper
• Paper towels
• Garbage bags
• Bus tokens
• Forever postage stamps
• Clothing
• Shoes
• Accessories
• Linens
• Cleaning products

*If you would like more information and/or to make a donation, please contact Deborah Torres at (559) 227-2190 or at dtorres@fresnorescuemission.org.

The Hacienda Drug/Alcohol Rehabilitation Center for Women Wish List
• Volunteers
• Adopt a room
• Build a park
• Create toys for on-site play
• Refurbish building
• Donations
• Golf carts
• Game room supplies
• Arts and crafts supplies
• Washer/Dryers
• Carpet and installation
• Camping supplies
• Gift cards for manicures, pedicures, haircuts, etc.
• Wrought iron fence for property
• Repaving parking lots
• Trash compactor
• Replanting
• Picnic tables with umbrellas

*If you would like more information and/or to make a donation, please contact Jenny Bates at (559) 977-5515 or at jbates@mhsinc.org.

The Court of Appeal for the First Appellate District in Nadaf-Rahrov v. Neiman Marcus Group, Inc., et al. (Sept. 10, 2008, Cal. Ct. App. 1st) __ Cal.App.4th __ [2008 DJDAR14314] held the federal definition of “reasonable accommodation” applies to disability-based discrimination claims under California’s Fair Employment and Housing Act, Government Code section 12940 et seq. (the “FEHA”), perpetuating a split among California Courts of Appeal regarding the scope of protections available under the FEHA to qualified disabled workers.  The following holdings are of particular significance.

First, Nadaf-Rahrov holds that an employer is liable for failing to provide a reasonable accommodation under Government Code section 12940, subdivision (m) (“Section 12940(m)”) “only if the work environment could have been modified or adjusted in a manner that would have enabled the employee to perform the essential functions of the job.”  (Id. at p. 14322, italics added.)  This holding directly conflicts with that in Bagatti v. Department of Rehabilitation (2002, Cal. Ct. App. 3d,) 97 Cal.App.4th 344, which rejected application of the ADA definition of “reasonable accommodation” under the FEHA and held that liability under Section 12940(m) may attach even if the plaintiff is not able to perform the essential functions of the position held or desired.  (Id. at p. 362.)

Second, Nadaf-Rahrov holds that the availability of an effective, reasonable accommodation is a material element of a claim against an employer for failing to engage in a good faith, interactive process under Government Code section 12940, subdivision (n) (“Section 12940(n)”). (Nadaf-Rahrov, supra, __ Cal.App.4th at p. __ [2008 DJDAR at p. 14325].)  Thus, absent proof of the availability of a reasonable accommodation, an employer cannot be held liable for failing to engage in the interactive process.  This directly conflicts with Wysinger v. Automobile Club of Southern California (2007, Cal. Ct. App. 2d ) 157 Cal.App.4th 413, which held that the FEHA imposes liability on employers under Section 12940(n) regardless of the availability of a reasonable accommodation.  (Id. at p. 425.)

Third, under Nadaf-Rahrov, the employee bears the burden of proving  the availability of a reasonable accommodation for purposes of Sections 12940(m) and (n), to wit: that he or she was qualified to perform the essential functions of the job held or desired and that the job was available.  (Nadaf-Rahrov, supra, __ Cal.App.4th at pp. __ [2008 DJDAR at pp. 14323, 14325].)  In so holding, the Nadaf-Rahrov court recognized that “[a]lthough it would be unfair to require and employee in the workplace to unilaterally identify available accommodations, an employee in litigation can use discovery procedures to do so.”  (Id. at p. __ [2008 DJDAR at p. 14325].)  Thus, while it is the employee’s burden under Section 12940(n) to identify the availability of an accommodation for which he or she is qualified, the employer is liable if such a position is identified to have existed for the first time during litigation.

Finally, regarding Section 12940(n), it is not enough that an employer consider reassigning an employee only to vacant positions in the employee’s immediate workplace or to those which the employee specifically requests reassignment if a vacancy exists elsewhere in the employer’s organization that would not amount to a promotion.  (Id. at p. __ [2008 DJDAR at pp. 14319-14320].)  Thus, an employer’s failure to consider vacancies outside the employee’s immediate workplace may provide grounds for liability under Section 12940(n), as well as justify broad discovery regarding vacancies within the employer’s organization.

In adopting the federal definition of “reasonable accommodation,” Nadaf-Rahrov harmonizes certain protections afforded to disabled workers under the FEHA and the ADA.  Other California courts, however, continue to view the FEHA’s protections as broader.  Because this division among California’s Courts of Appeal runs to the very elements required to state a claim under Section 12940, subdivisions (m) and (n), the issue is ripe for Supreme Court review.

Understanding the Intentions
At first read, the legislation seems straightforward and reasonably defined. However, when applying real-world scenarios, the ambiguities begin to appear. The aim of SB 1137 is to avoid residential, non-judicial foreclosures whenever possible, by requiring additional communications between the borrower and lender.

What Loans are Affected by the New Foreclosure Law?
The answer is not as clear as one might hope, but the text of the legislation identifies loans made between January 1, 2003, and December 31, 2007 that are “secured by residential real property and are for owner-occupied residences.” Loan agreements signed and dated during these periods meet this initial requirement. Whether these loans are “secured by residential property and…are for owner-occupied residences” is the more difficult determination. Many legal professionals agree that this section is not limited to “1-4 residential properties.” More likely this covers any loan secured by property on which the borrower principally resides.

What are the New Notification Requirements for Affected Loans in Default?
The new notice provisions affect both Notice of Default (“NOD”) and Notice of Sale (“NOS”) requirements. The new laws require lenders to contact borrowers at least 30 days prior to filing a NOD. If contact cannot be made, lenders must file a declaration with their NOS stating that “due diligence,” as defined by the statute, has been followed. Some very limited exceptions exist.
The new NOS provisions require increased compliance for any loan secured by residential property, where the mailing address of the borrower is different from the mailing address of the property. Presumably, the legislature included these provisions for the protection of tenants who might not otherwise get notice. Lenders are required to provide statutory language to tenants including posting and mailing notices in English, Spanish, Chinese, Tagalog, Vietnamese, and Korean. There are statutory fines for anyone tearing down the notices.

Conclusion
In addition to notice requirements, the new laws also have post-foreclosure implications for lenders. Any REO’s (properties retained by the lender after an unsuccessful foreclosure sale) that are not properly maintained may expose lenders to fines of up to $1000 per day by local government entities. While this is just a brief introduction to the new compliance regulations, it is easy to see that lenders need to make immediate changes to their current foreclosure practices. Policies and procedures need to be implemented to ensure that lenders are following the proper time line and notice requirements. Although the laws may be more complex and ambiguous than they first appears, compliance is mandatory, but manageable.

If you have questions or concerns related to this or any other legal issue, please contact Lang, Richert and Patch at (559) 228-6700.

Regardless of the industry, almost every business has been faced with an increasingly common dilemma. Your star salesperson or employee, to whom you have devoted significant amounts of time and money training and developing, suddenly announces he or she is leaving to join a direct competitor. Will your customers follow? Will the employee divulge your confidential information in an attempt to lure his or her former customers to his new firm? The hiring company faces similar issues. Will the employee’s former customers follow him or her to your business, a key issue given that you have likely agreed to pay a sizable salary or bonus with the expectation that is exactly what will occur. Will the former employer sue, thereby preventing those very customers from transferring their business and/or at the very least tie your company up in expensive litigation for the next several years? Unfortunately, as many companies learn too late, whether or not the former employer can successfully prevent the new employer from “stealing” these customers is often set in stone by the time litigation is commenced.

In California, the scales are heavily weighted in the favor of the departing employee’s right to join a competitor and accept business from his former customers. California Business & Professions Code Section 16600, one of the strongest such provisions in the nation, provides that any contractual provisions that directly or indirectly impede an individual’s right to engage in lawful employment or competition is void. Thus, no matter how artfully drafted or narrowly drawn, covenants not to compete may not be enforced by California courts in the absence of limited statutorily created exceptions.¹

Section 16600 does not, however, invalidate provisions precluding use or disclosure of trade secrets or narrowly drawn “non-solicitation” provisions, although the law again still favors the departing employee even when such provisions are at issue. For example, California law is clear that a departing employee is entitled to lawfully “announce” his or her change of employment to the former clients regardless of the existence of a non-solicitation provision.² The basic right to announce his or her change of employment permits “announcements” to trade secret clients of the former employer, and if done properly, even allows the departing employee to possess and use trade secret customer lists for purposes of making such announcements.³ However, the line between unlawful “solicitation” and lawful “announcements” becomes somewhat blurred when anything more than a bland statement indicating the employee’s new affiliation is attempted.⁴ That being said, assuming the employee limits the communication to a pure “announcement,” the willingness of the employee to discuss business (i.e. “solicit”or convince them to move their business to the new firm) will not be deemed unlawful solicitation so long as it was at the invitation of the customer receiving the announcement.”⁵

Despite the breadth of Section 16600 and the fundamental policy allowing employee “announcements,” the former employer is not left without remedy to prevent a departing employee from using its confidential and proprietary information to solicit his or her former customers with impunity. While covenants not to compete are generally unenforceable in California, California law has long recognized the propriety of provisions by which employees agree not to use or disclose an employer’s confidential and trade secret information, as well as agreements not to solicit their employer’s customers upon terminating their employment.⁶ Moreover, California has adopted the Uniform Trade Secrets Act, which prohibits the acquisition, use or disclosure of trade secret information, even in the absence of a non-disclosure and/or non-solicitation agreement. California Civil Code Section 3426.1, et seq.

Even more so for the former employer, whether the employee will be precluded from seeking to obtain business from his or her former customers is again largely dependent upon events which occurred when and often long before the employee departs. Was there a written employment agreement containing a non-solicitation provision? Did the former employer take reasonable steps to maintain the confidentiality of the trade secrets as required by the UTSA, such as identifying to the employee certain information it considers “trade secrets,” having written confidentiality agreements, restricting access to the information on a “need to know” basis, and password protecting computer information?⁷ Did the employer conduct an “exit interview” to reiterate its policies and confirm that no trade secret information was taken? Did the employer preserve and inspect the departing employee’s computer to identify unauthorized downloading or copying of confidential information in preparation for the move?⁸ Did the employer notify the new employer of the existence of any non-disclosure agreements to establish any future use was “wrongful” or to support a claim for interference with existing or prospective advantage? While none of the above factors is itself determinative, California Courts have generally identified similar policies and procedures which, if not absolutely required, will weigh heavily on whether the former employer will be entitled to relief.

While the legal issues implicated in these situations are specialized, they are fairly well defined. Thus, whether on the side of the former or new employer, the law provides a framework under which the potential damages and/or risks can be significantly decreased if the proper steps are followed before and immediately after the employee departs. The moral of the story is clear: If a company is considering legal action against a former employee who has already joined a competitor, or is faced with the threat of litigation regarding the completed hiring of an employee from a competitor, the chances for success in that litigation will in all likelihood be determined in large part based upon events that have already occurred.

SCOTT J. IVY
Mr. Ivy is currently Of Counsel to the law firm of Lang, Richert & Patch in Fresno, California. Prior to joining Lang, Richert & Patch, Mr. Ivy was a partner with Musick, Peeler & Garrett LLP in Los Angeles, specializing in trade secret and general business litigation.

1. Edwards v. Arthur Anderson LLP (2006) 142 Cal.App.4th 603 (review granted)
2. Aetna Bldg. Maintenance Co. v. West (1952) 39 Cal.2d 198, 2004 (California law is clear that “[m]erely informing customers of one’s former employer of a change in employment, without more, is not solicitation.”)
3. MAI Systems Corp. v. Peak Computer, Inc. (9th Cir. 1993) 991 F.2d 511 521; Hilb, Rogal & Hamilton Ins. v. Robb (1995) 33 Cal.App.4th 1812, 1821.
4. Reeves v. Hanlon (2004) 33 Cal.4th 1140; Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514.
5. Hilb, Rogal & Hamilton Ins., supra, 33 Cal.App.4th at 1821.
6. See, e.g. John F. Matull & Associates, Inc. v. Cloutier (1987) 194 Cal.App.3d 1049, 1055; Gordon v. Wasserman (1957) 153 Cal.App.2d 328.
7. Courtesy Temporary Services, Inc. v. Camacho (1990) 222 Cal.App.3d 1277, 1288; Whyte v. Schlage Lock Company (2002) 101 Cal.App.4th 1443, 1452-56
8. Penal Code Sections 502(c), (e).