TO SIGN OR NOT TO SIGN?

Ever think about how many contracts or agreements you enter into every year? Certainly, you take the time to read each one before you sign or “click” your assent, right? Be honest, do you have even a clue as to what’s in that 60 page software or user agreement to which you just clicked “I Agree?”
The truth is that most people sign contracts and click away with reckless abandon. And most of the time it doesn’t matter because everything goes as planned. The supplier provides the product or service as agreed, and the consumer pays or otherwise meets the terms that were agreed to.  In fact, except for the few times when something goes wrong, or one or both of the parties don’t perform as agreed, the contract is meaningless and can gather dust. So in contract law, we say that it doesn’t matter till it matters – but then when it does matter, it can really matter.
The question arises as to how one can remain protected without having to hire an attorney every time he or she enters into a routine transaction.  That answer includes several steps.
It’s first important to determine the significance of the contemplated transaction. For example, you can be justifiably less concerned when clicking your assent to the terms of your latest iPhone app than you should be when signing a loan agreement for the purchase of a car or a home.  Loan agreements commit you to significant and often long-term obligations for which the ramifications for noncompliance can be substantial and costly.  An iPhone app can usually be cancelled at will.
If you’ve determined that the contract / agreement is one that requires more thoughtful consideration, next identify if it is one that is subject to further negotiation, or is an “adhesion” contract. This is an important distinction for several reasons.
An adhesion contract is one that is presented in final form for acceptance and is not subject to further negotiation. It is offered by a party with superior bargaining power on a “take it or leave it” basis.  Examples of adhesion contracts include cell phone agreements, insurance policies and the liability disclaimers that are always printed on the back of the claim tickets you receive in a parking garage.
If you determine that the contract you’re contemplating may be subject to further negotiation, then take advantage of the opportunity. Even some agreements that appear to be adhesion contracts, such as leases, may present opportunities for the negotiation of some material terms.
When negotiating, be aware that if a court is ever invoked to enforce your agreement, it will view its job as one of interpretation – to evaluate the legal enforceability of the terms – and rarely the “fairness” of what was agreed to. For example, in a contract for the purchase of a vehicle, it is no defense and, frankly, is a waste of time and good oxygen, to try to convince a court that you should be let off the hook from any further payments because the seller charged you too much for the car in the first place. If you knowingly agreed to the price, and you were of age to contract, sober at the time and there are no allegations of fraud or misrepresentation, you will not be protected from your own ignorance or stupidity if you agreed to overpay for something.
Because adhesion contracts are not subject to negotiation, sometimes courts will refuse to uphold them if they determine that the unequal bargaining power of the parties resulted in a situation that is so unfair that enforcing the terms would be unconscionable due to the procedural circumstances surrounding the procurement of the agreement, or the substantive terms of the agreement itself.
Realize that it is an extreme case when a court will not enforce an adhesion contract. The mere fact that a contract is one of adhesion will not singularly provide the basis to relieve a party of its obligations under such an agreement.
It’s not possible to address all of the preferred contract terms for inclusion – and exclusion – in one article. However, when negotiating a contract, here are some noteworthy terms to consider including – and NOT including:
1) Term – Every contract should include a defined term for the period during which it is operative and, specifically, when it terminates. Make sure the contract term is one you can live with based on your current and anticipated life circumstances, and resources.

2)Subject Matter – Ensure the product, service or other subject matter of the contract is clearly defined, and consistent with your understanding.  For example, if you contract for a brand new refrigerator, verify there is no right of the seller to substitute a remanufactured or demonstrator model.

3)Responsibilities, Liability and Risks of Loss – At its core, the primary intent of a contract is to allocate the duties of the parties in the event that things do go wrong, there is an understanding as to which bears responsibility. Be clear about such things as:
a.Which party bears the risk of loss if the product is damaged in transit?
b.What happens if the product fails after a week? A month? A year?
c.Who is responsible if a third-party is injured by the product?
d.Who maintains “title” to the property? (Hint: Bet you didn’t know you probably don’t “OWN” the rights to your wedding photos)
e.Are there use, resale or other restrictions on your ownership?  (Ex:  A friend who purchased a rare breed of cat had to agree it would never be allowed to roam outdoors)

4)Venue – Ensure that disputes arising under the contract are heard in your local jurisdiction. In our age of Internet commerce, many companies establish in the contract that disputes must be brought within their local jurisdiction. Do you really want a requirement to bring your small claims case for $400 in West Virginia?

5)Attorney Fees – In most cases, it makes sense to include a provision allowing for the prevailing party in a lawsuit to recover reasonable costs and attorney fees from the losing party. This type of provision may discourage frivolous lawsuits because there is a certain amount of risk involved when filing. However, with an attorney fee provision also be aware of the following:
a.You may not want to include an attorney fee provision if the other side does not have sufficient resources to pay your attorney fees.  In such a case, if you’re the prevailing party, the provision could only work against you and

b.Be aware that some attorney fee provisions are written in such a manner as to only award attorney fees to one party if that party prevails in litigation. This goes in the “nice try” category. Under Civil Code §1717, a one-way attorney fee provision applies equally to both parties.  Therefore, regardless of the contract language, the attorney fees will be granted to whichever party prevails.

6)Mediation – Mediation is a process whereby a neutral third-party assists disputants in resolving their issues by facilitating communication between the parties, rather than evaluating evidence or rendering a decision. The process is quite successful, and many contracts include a provision whereby the parties agree to attempt to resolve their disputes at mediation prior to the filing of any subsequent lawsuit.

7)Arbitration Clause – Beware the arbitration clause. Simply put, a binding arbitration clause in a contract allows the parties to bypass the judge, jury and courthouse and go directly to a private arbitrator.  There they will receive a judgment (called an award) that, except under very rare circumstances is final and binding (cannot be appealed), and which, according to the California Supreme Court1, does not have to follow the law even if it causes a “substantial injustice to the parties2.”

The frequent use of arbitration started innocently enough many decades ago as a voluntary process between contracting parties to solve the problem of lengthy court delays, logistics and rising costs of litigation. It has morphed over the years into a mandatory provision of most employment, banking, consumer, health organization and other agreements. It remains an opt-in provision for most real estate agreements. The simple click of assent, or the stroke of a pen invoking an arbitration provision makes a huge difference in the rights of the parties, and how subsequent disputes under that agreement will be handled.

This is not to say that arbitration is always a bad alternative. But it is important for contracting parties to be aware of the significant decision that is being made, and the rights that are being exchanged, when agreeing to such a provision. Also, on balance, most of us like some predictability. And knowing that an arbitrator is not required to follow the law in rendering a decision may be a bit more gamble that most of us are willing to take.
So the next time you decide to click that “I Agree,” or sign away like it doesn’t matter, be informed. Because someday, it might matter.

Stephen Gizzi is the Managing Partner of Gizzi & Reep, LLP in Benicia.  He is an attorney, mediator and serves on the faculty of the National Judicial College in Reno, NV.  The information in this article is intended to be general in nature and does not constitute legal advice.  Consult your own legal counsel for your particular circumstances.

Sue Your Television!

By Stephen Gizzi

Gizzi & Reep, LLP

Do you love Judge Judy?  Can’t bear to miss a moment of Judge Joe Brown?  What is it about “reality” court TV shows that keep viewers hooked?  It seems the greatest attraction for many viewers is watching others “get what’s coming to them.”  There’s nothing like watching some arrogant know-it-all get a smack down and a trip behind the woodshed from Judge Judy.  One never needs to wonder about her opinions – and she has plenty of them.

While these shows provide great entertainment for many, the problem is that they give a very distorted view of how the court system actually works.  This becomes problematic when those who only know a courtroom from what they’ve seen on a 42” screen, are faced with the real thing for the first time.

Certainly the greatest distortion on these shows is the way judges are portrayed.  Simply put, if a judge was as rude, condescending, argumentative and insulting as some television judges are, s/he would probably be unemployed in short order.  Real judges must follow a set of rules called the Judicial Canon of Ethics.  Among them, a judge must endeavor to promote public confidence [CJE 2A], maintain order and decorum in the court [CJE 3B(3)] and be patient, dignified, and give courteous treatment to all parties, counsel, and court personnel [CJE 3B(4)].  These noble statutes are not just idle words, as one Contra Costa County judge found out in 2003, when he became the first judge in the state to be tossed from the bench for his courtroom demeanor, by the state Commission on Judicial Performance.

Of additional concern are the lessons learned about what constitutes appropriate behaviors for litigants.  For example, parties in a real small claims court should provide clear testimony and submit any physical evidence that may be relevant and supportive of their position.  I can think of no better way to ruin a presentation than to argue with the judge, interrupt the other party during their presentation or, worse yet, spend your presentation time telling the judge what a miserable person the other side is. This last point is particularly important.  People forget that one of the great things about our country is that even miserable people are entitled to legal rights – and really kind people can be in the wrong, legally speaking.

Finally, court TV shows sacrifice the judicial process itself in the interest of entertainment. There are no rules of evidence, no apparent avenues for appeal and clearly, there are no legal guidelines that television judges have to follow.

If one accepts that these shows are intended to provide entertainment – mental bubblegum and nothing more – then no harm is done. However, due to the nature of the subject matter, there is no avoiding a certain educational component. The problem is, the “education” is largely counterproductive because it is misleading, and having bad information is worse than no information.  So…enjoy that occasional “slam down” on TV.  But don’t ever try it in a real courtroom or you might find yourself with some new jewelry – a nice, shiny new pair of silver bracelets!

Stephen Gizzi, Managing Partner, and Scott Reep, Senior Partner are partners at Gizzi & Reep, LLP of Benicia.  Steve is an Attorney, Mediator, Judge pro tem with the Solano County Superior Court and also serves as the President of the Solano County Bar Association.

Steve Gizzi to be sworn in as 2010 Solano County Bar Association President

Gizzi & Reep is proud to announce that our own Steve Gizzi is the 2010 Solano County Bar Association’s President. Steve was the Vice-President of the SCBA in 2009.

You Ask-We Answer- “It Depends”

For this week’s column, we answer some questions that were recently submitted by readers (questions have been edited for space):

Dear Steve and Scott:

I have a small business that I’ve put my heart, soul and last dime into.  Unfortunately, I have a lot of retail competition and it seems the only way I’ll survive is to close my storefront and keep only the Internet business portion, which I can run out of my house.  The problem is that I still have 22 months left on my three year lease.  There is no way I can afford to keep the retail location.  Can I legally get out of my lease so that my business can have a chance to survive?

Hanging On (Barely)

Dear Hanging On:         Time for the standard lawyer answer…it depends. 

Not that we think this will make you feel much better to hear, but know that yours is a tale of woe we’ve heard many times before. 

First point, when you use the word “legally,” it’s important to remember that there is nothing “criminal” involved in not complying with all of the terms of your commercial lease.  It is strictly a civil matter – you’re not going to jail for bailing on your lease early. 

You should first try to find someone to sublease your retail space and assume your lease obligations.  Check your lease for any restrictions on the sublease or assignment of your space.  Though you’ll still be on the hook if the sublessee defaults, it may provide some relief for the time being and could work out in the long run.    

If you can’t find someone to take over the space, discuss the matter with your landlord to see if you can negotiate an early lease termination.  Though the landlord technically can hold you to the value of the unpaid rent for 22 months, every landlord, when faced with an early lease termination, has a duty to mitigate damages.  This means that, the landlord must be diligent in trying to re-lease the space and not just leave it empty under the assumption that, since you’ll be paying the rent anyway, there’s no hurry to find a replacement tenant.  In fact, if you left the premises before the end of your lease and the landlord later were to sue you to recover for lost rent, she would have to prove to the court’s satisfaction that reasonable, good faith efforts were made to re-lease the space.  This would include evidence of reasonable marketing efforts, timely preparation and availability for showing, fair market lease rate, etc., before being awarded any damages.  Good luck.

Dear Scott and Steve:

My aging mother lives with my brother and up until several months ago was doing fine.  However, after a series of small strokes, she is now unable to take care of her daily activities and she requires live-in help.  She has plenty of money to pay for this but neither of us is on any of her financial accounts and she is beyond the point where she can sign checks or do any banking.  Though she previously spoke of doing so, she never got around to appointing either of us to handle her affairs.  Is there anything we can do now to get access to her money to pay for the help she needs?  We both work and neither can afford the time or money that her care now requires.

Help

Dear Help:        We’re sorry to hear of your dilemma and, again, it’s not an uncommon occurrence.  The good news is the problem can be resolved by getting the court to appoint you or your brother as a conservator for your mother.  Initially, the court may grant you or your brother a temporary conservatorship, pending a hearing for more permanent status.  Unfortunately, the entire process is rather cumbersome and lengthy and involves several court hearings, extensive documentation, ongoing court monitoring and $4000 or more. 

By comparison, if your mother planned ahead and executed a power of attorney (which would have cost less than $500), the transition would have been instantaneous and could have been accomplished without court supervision.  It really does pay to plan ahead because one never knows when these types of documents may be needed  Good luck.

Dear Scott and Steve:

When I started my new job, my boss said I would be an “at-will” employee.  Now that my probation period has ended, can they still fire me anytime they want?

Wondering

Dear Wondering:  It depends – though probably yes.  California is an “at-will” employment state which means that, in the absence of an employment contract providing for a specific employment term, the employer or the employee may end the employment “at-will” meaning – at any time and for any reason – without notice.  Naturally, the “reason” must be a legal one and must not be based on discrimination, harassment or a retaliatory or wrongful purpose.

Voting Matters Too!

 

Legal Matters matter – but so do some other things.  If you only like to read this column to learn about all things legal, you may want to sit this one out  because this disclaimer is about as “legal” as it’s going to get.  This week Scott’s going to take the week off and our column is going to divert a bit into an area of something else that matters – politics and voting. 

By now, you’re probably looking forward to Tuesday’s election if for no other reason than the campaign signs will come down and your mailbox will at last be free from all of those fancy, multi-colored flyers.  By my calculations, I figure the candidates must have spent about $500 on each voter this election season.  That’s a far cry from the $4500 I spent the first time I ran for City Council in 1992.  Those of you in town at that time may also recall the national news story that resulted from that election when I lost by ONE vote out of over 11,000 cast, to my formidable opponent, Pepe Arteaga.

I like to remind people of the one vote story at election time to impress upon them just how important their one vote is.  This is a particularly important story in a small town such as ours.  Many don’t vote unless it’s a state or national election. But the reality is that those in our local City Hall have a much greater effect on our daily lives than those far off politicians in Sacramento and Washington. Questions like: How much will we pay in taxes and assessments? How confident are we that our children’s education will be adequate and that school resources will be fairly and effectively allocated? Are city services responsive? No one deals with these issues more effectively and directly than our local representatives. They are our neighbors – not remote elected officials with a soundbite who couldn’t find Benicia without a map or a GPS.  One vote DOES matter – and nowhere does it matter more than when it is cast in a local election.

I’ve been off the City Council for five years now and have not run a campaign in about eight years.  As I recall, my total expenses in that last campaign were about $12,000.  I’m amazed at how dramatically campaigns have changed in that time and how expensive they’ve now become – about five times as much.  As an observer, it seems like such a waste of money.  But the problem is that to be competitive, you have to match what your opponent is spending and that becomes a vicious cycle that only the printers and media outlets benefit from (sorry, editor).  The unfortunate thing is that, like the big elections, with all that money being thrown around it’s hard to hear beyond the sound bites.  (Er…of course, maybe that’s the point.)

Because our law firm serves as special counsel to the City of Benicia, we have a policy of avoiding any formal campaign endorsements.  There are several great candidates in the race and we hope you’ll take the time to get educated about who they are – beyond the pretty pictures (some of our favorites are not so pretty actually) – and what each represents before you vote.  It really is worth the five minute time investment every two years to get to know the candidates that you’re going to entrust with our wonderful community.  As a general guideline, I hope you choose candidates that are willing to represent the entire community and not just a select constituency.  Think about selecting candidates who will thoughtfully consider matters brought before the Council and then vote based on the issue presented and not personalities or other biases.  Only this kind of approach will result in a governing body that will exercise the proper custodial stewardship and care to properly and thoughtfully guide us through the next several years.

Whoever are your choices for City Council and Mayor, please take the time to vote next week – or vote absentee, because your vote really DOES count.  Just ask Pepe.

Legal Matters

Starting today, and continuing on a weekly basis, my law partner Scott Reep and I will be writing a legal information column for the Benicia Herald.  The purpose of this column is to answer reader’s questions about various aspects of civil, commercial and estate law in simple language, in an effort to demystify the legal process.  We will be assisted in this effort by attorneys Jeffrey Hall, Mark Mitchell, Duane Oliveira and Geoffrey Steele, all of whom work of-counsel with our firm, Gizzi & Reep, LLP.   In addition, we will rely on local legal experts for responses to your suggested topics in practice areas that our firm does not specialize in, such as divorce or criminal law. 

Legal answers can be a funny thing.  As much as we would like them to be solid, indisputable conclusions, legal analysis rarely results in black and white, yes or no, definitive answers because the slightest variation in the facts or law can change everything.  For example, on a recent road trip, I asked my kids if it was wrong for someone to steal from another person to which they quickly responded “Yes, absolutely.”  When asked if their answer would change if they knew that the person had only stolen because she was lost in the woods and needed to steal from an unoccupied cabin in order to survive, their answer changed – the theft was OK in that case. But…again a different response resulted when asked if it was still OK to steal to survive if the person got lost because she was escaping from the police at the time, etc., etc.  . . . You get the idea.

In the real world, these layers of changing facts, some very minute, most often determine the ultimate outcome of a case and it is the attorneys’ job to work with the best facts possible when advocating for a client. Therefore, because the answers to legal questions often change as more information becomes known, often the best answer for an attorney to give when prospective clients ask if s/he has a winning case is: “it depends.”

The point in discussing the fluid nature of legal answers and analysis is to establish your expectations for this column: 

First, if all legal answers were black and white, we would just feed information into a computer and it would spit out the proper legal conclusion and there would be no need for judges, juries or (heaven forbid) lawyers.

Second, no matter what answer one of our attorneys provides, be assured that somewhere there is another lawyer who will have a different spin on things. That, and the fact that your individual circumstances will vary (like a fuel mileage disclaimer) explain the reason our responses will be general in nature and cannot be construed as legal advice in any particular circumstances.

Finally, Scott and I will be more like Click and Clack® than Dear Abby®.  Sometimes we’ll have a different interpretation of the same facts and it is that kind of synergy and evaluation techniques of potential outcomes that we believe provides the best legal analysis and advocacy.

To Sue or Not to Sue?

To sue or not to sue – that is the question.  Whether tis nobler to seek justice for every wrong; or suck it up and move on.  Now THAT is the real question.

For many attorneys, the sweetest words ever spoken by a client are “I don’t care what it costs, I just want to get the * &%$#*#!”  At that point, the attorney usually excuses himself to call his spouse and inform her that yes, in fact, we will be buying the new Lexus after all.

Litigation is very expensive – often prohibitively so.  The decision of whether or not to litigate against a perceived wrongdoer is one that must be given thoughtful consideration.  Sometimes, of course, you won’t have a choice if you’re the one being sued.  But generally, if you’re in a dispute or otherwise feel wronged, explore all viable alternatives before deciding to bring a lawsuit.

When prospective litigants come into our firm for a case evaluation, the first line of inquiry is “Can you win?” (We never answer the question “Will I win” because no attorney in her right mind would try to predict what a judge or jury will do.)  If the response to the first question is positive, the next is “Can you collect?” Does the prospective defendant have sufficient assets to pay any judgment that our client is awarded?  Will the prospective defendant file bankruptcy in response to an adverse judgment?  Unless the first two questions can be answered affirmatively – the client can win and can collect – other options should be considered because litigation is very expensive and will likely be a waste of time and resources.

If the client decides to proceed with litigation, an upfront retainer is collected for time and expenses, a complaint (lawsuit) is filed and the parties are off to the races.   As the parties proceed down the “litigation highway” there are many exit ramps.  Sometimes attorneys negotiate a settlement directly, or are assisted by an arbitrator, mediator or judge.  Despite how it appears in the glamorous world of LA Law, Boston Legal and their television progeny, in the end, less than 10% of cases filed ever are tried in court, because the parties become weary of the burden and expense of litigation and settle or drop their case.

Did I mention that litigation is very expensive?  An average one-day deposition costs approximately $4000 – and that’s for each witness!  Written interrogatories (questions for the other side to answer) can easily total $2500 in fees.  Add to that expert witnesses, trial exhibits, filing fees, etc.

It’s not my intent to discourage readers from pursuing legitimate claims.  After all, suing people is part of my job. I like my job and I have two kids to put through college!  However, attorneys have a legal, moral and ethical obligation to ensure that prospective litigants know exactly what they’re getting into when choosing the litigation path.  And if the case is weak, the defendant judgment proof, the amount in controversy small or the client lacks the physical and emotional strength to deal with what is often a lengthy, roller coaster process, then other alternatives should be considered because litigation – is very expensive.

I Have a Judgment…What’s Next?

Last week, Steve wrote about the expense of litigation.  It is expensive in terms of time, emotions and money.  Each week, we consult with people who have gone through the litigation process and now have a piece of paper saying that the other side now owes them money.  People are often surprised to learn that the court does not actively force the defendant to pay the judgment.  Some people find out for the first time that we don’t have debtors’ prison in the United States and that the court will not be putting the defendant in jail until the judgment is paid.  To the contrary, in the United States, we have bankruptcy court where we forgive people’s debts and give them the opportunity to enjoy a new debt-free start. 

Here is some basic information about California judgments: (1) judgments are good for 10 years and are renewable, if renewed before the 10-year period ends; (2) the unpaid portion of the judgment collects interest at the rate of 10% simple interest per year; (3) if the judgment is renewed, the accrued interest is compounded; (4) if the judgment is against a person, it will likely show up on their credit report and lower their credit score; (5) it is possible to collect an out-of-state judgment in California by converting that judgment to be a California judgment.

There are a number of unusual words that are used in the judgment collection process.  The party that won is called the “judgment creditor” and the losing party is referred to as the “judgment debtor.”  The term “levy” means to seize or take.

Although the court does not actively force the debtor to pay the judgment, the court has a number of procedures to help the creditor collect.  Because each debtor is in a different position relating to the assets that they have, it is up to the creditor to determine the best procedure for collection. 

The first step to collect a judgment is to determine what assets the debtor has.  Sometimes you are lucky enough to know where the debtor works, where they bank and where the house that they own is located.  Sometimes, you may have a judgment against a person that survives on government assistance, lives in an apartment and keeps what little money they have under their mattress. Good luck collecting a judgment if that is your situation.   Some people simply don’t have any assets.  If you find yourself in that situation, it may be best to renew the judgment and hope that the debtor wins the lottery or that their rich Uncle Thurston, leaves them money.  If you know little about the debtor’s assets there is a procedure, called a “debtor’s examination” where you can force the debtor back into court and ask the debtor to produce information about their financial condition.

Once you have an idea of what assets the debtor has, we usually follow these steps: (1) contact the debtor and work out a voluntary payment plan.  It is better to receive the judgment in payments over time than to have a piece of paper stating that you are entitled to the whole amount; (2) put liens on the debtor’s real property and personal property; (3) have the court issue a writ of execution [sounds ominous, but is merely a court order authorizing the sheriff to seize the debtor’s personal property]; (4) decide whether to go forward with a bank levy, a wage garnishment or perhaps a third-party levy.

You may see the debtor driving around town in a new car . . .  perhaps even a car that you would like to own yourself.  We do not usually recommend levying on a vehicle . . . it is an expensive process, typically costing the creditor $1,500 to $1,800 out-of-pocket with little hope of actually recovering anything.  The sheriff’s fees are expensive because the car has to impounded, stored, advertised for sale and then sold at public auction.  Vehicles often have little equity, so after the court and sheriff’s fees are paid, the lien holder (lender) is paid and the debtor is paid their $1,900 exemption, there is probably nothing left to pay the judgment.   However, even though you may not recover any money from the sale, you may get satisfaction in seeing the debtor walking or on their bike.

For more information about collecting judgments, visit the State Court’s website at www.courtinfo.ca.gov .

Good News/Bad News

So, you just sold your Benicia home for a significant gain!  (The good news)  Now, the question is, how much of that gain is reportable as taxable income to the Internal Revenue Service?  (the bad news)

One client recently told me he had sold his home and needed a “replacement” property that was at a cost “equal to” or “greater than” the cost of his previous home, so as to avoid taxes on the sale.  What surprised me about his comment was that he seemed to be referring to the old tax law, and not the relatively new IRS Code 121 exclusion governing personal residence sales.

Under I.R.C. 121, a homeowner can now exclude from income up to $250,000 of gain from the sale of a personal residence as often as every two years.  If married, the exclusion increases to $500,000. No longer does the homeowner need to look for replacement property as under the old law.  What’s fantastic about this is that the proceeds from the sale can be used for anything – an around the world cruise, a lifetime trip to Vegas, plastic surgery – there are no restrictions. However, to take advantage of I.R.C. 121, the taxpayer must meet the following two tests:

1)      Ownership and Use.  The homeowner(s) must have owned and used the home as a principal residence for at least two out of the five years prior to the sale.

2)      Frequency limitations.  The exclusion applies to only one sale every two years.

The IRC 121 combined $500,000 exclusion even applies to a married couple where only one spouse holds title, provided the non-title holder satisfies the occupancy test above.  Property held in a living trust also qualifies.  However, if two unmarried people are co-tenants in the property, then both must be on title to take advantage of the $500,000 exclusion.  This unmarried rule also applies to domestic partners since federal law does not recognize state domestic partnership laws. 

The IRS allows the I.R.C. 121 exclusion provided that the owner occupied the residence for at least 24 months at anytime within the 60-month period.  The use period doesn’t need to be consecutive, nor does the period need to immediately precede the date of sale.  If this use-test is met, the exclusion is allowable.  This is particularly beneficial to individuals who convert a rental property to their personal residence for at least two years prior to the property’s sale.

One interesting aspect of IRC 121 relates to divorcees.  Where one spouse moves out of the community property and the other remains to raise the kids, if the I.R.C. 121 requirements are satisfied, the non-resident ex-spouse may exclude half of all gain (not to exceed $250,000) even if the property is sold many years after the 60-month period. 

Another exception is for those who had a spouse die during 2007.  The surviving spouse is eligible to take advantage of the combined I.R.C. exclusion of $500,000 even though the other spouse is deceased.  For the surviving spouse to take advantage of this exception, the spouse must sell the property no later than December 31 in the year of the spouse’s death.  After December, the surviving spouse is only eligible for a $250,000 exclusion.  There are many non-tax reasons why a surviving spouse may choose not to sell the property at year-end, but this option certainly provides an incentive to do so.

Many clients seek to sell a residence in which their gain far exceeds the I.R.C. 121 exclusion.  What then?  One way to legally avoid any gain is to convert the primary residence into a rental property before sale.  This allows the property owner to take advantage of the I.R.C. section 1031 tax-deferred exchange, also known as the “Starker Exchange.”  With a Starker exchange, when an investment property is sold, all of the taxable gain can be deferred provided the owner identifies “like-kind” replacement property of “equal to” or “greater than” the value of the first property within 45 days of the initial sale, and the escrow is completed within 180 days.  There is no limit to the number of times the owner may exchange into other properties, nor any time limits for the tax deferral.  Note that a rental can be converted back into a primary residence should it become necessary to do so though there may be significant tax implications associated with such a transfer. 

When  taking advantage of IEC 121 and 1031, a property owner could potentially defer capital gains tax forever.  With the estate tax exception currently expected to be repealed in 2010, the property owner just might get away without ever paying Uncle Sam for any capital gains from the sale or exchange of real property.  Maybe you really can “take it with you” after all!

ADR- The Judicial Lifering

In a recent column, I referenced the fact that only 10% of civil cases filed ever get tried in court.  Several readers were curious about what became of the remaining 90%, which clearly represent the vast majority of those filed.   While some cases simply fade away as the litigants lose interest or confidence in their case over time, most get resolved through one of the many alternative dispute resolution (ADR) processes. ADR is the umbrella term covering a wide variety of dispute prevention, management and resolution processes that are currently available to those in conflict, before or after litigation is initiated.   

The Constitution mandates that every criminal defendant is entitled to a speedy trial.  Therefore, criminal cases are given priority use of judicial assets.  This means that civil cases must wait until courtrooms are available.  Due to heavy criminal calendars, this has created a backlog of civil cases. Add to this fact the reality that there is a shortage of judges – nine alone just in Solano County – and it is easy to see why ADR has been embraced by the judicial system in a big way for the past 20 years or so.  Frankly, without ADR, the civil justice system would have fallen apart years ago.

Obviously, the best way to avoid a lawsuit is to prevent one from occurring in the first place.  We always advise business clients for example, to examine their operations to look for areas of repetitive conflict.  In that way, if they can identify and plan out those operational challenges through intelligent system design, they will reduce the likelihood of future litigation.  In a sense, this preemptive action is a form of ADR.  Unfortunately, most people are too busy or simply aren’t proactive enough to think that far ahead. 

When a dispute does arise, often an attorney is consulted.  A diligent attorney will contact the other side, or the legal representative for the other party, and attempt to resolve the matter prior to initiating litigation.  This form of counseling and prelitigation negotiation is also a form of ADR.

Once a lawsuit has been filed, the attorneys are required to provide clients with an ADR information package.  This contains details concerning the many alternatives to a court trial that are available for resolving lawsuits.  Some of the more common forms of ADR include:

-          Early neutral evaluation –in this form of ADR, an experienced, impartial attorney, with an understanding of the subject matter of the underlying lawsuit, hears a summary of the case, and then writes an evaluation that typically prompts further settlement discussions.

-          Private Judging – this is commonly referred to as “rent-a-Judge” and is often utilized by large corporations that are involved in cases involving matters that the parties would rather not litigate in the public eye, or not wait for the lengthy litigation process like ordinary plebeians.

By far the most common forms of ADR are mediation and arbitration.  Often these two are used interchangeably.  However, they are quite different from one another.

Arbitration is similar to the trial court process in that a neutral third party, such as an attorney, retired judge or an individual with subject matter expertise, listens to the parties present evidence, weighs that evidence and then renders a decision, or arbitration award, in favor of one party or the other.    Depending on the circumstances, the arbitration award can be binding or nonbinding.

Mediation is a process whereby a neutral third party assists disputants in better understanding all aspects of the conflict between them, and then by utilizing that knowledge, helps the parties develop an acceptable resolution of their differences.

The key distinction between these two forms of ADR is that arbitration results in a decision being imposed on the parties, following an evaluative analysis by a finder of fact.  Mediation, on the other hand, produces an outcome that is entirely of the parties’ making.  The parties have full control of any outcome – or whether there is to be an outcome.  It is no wonder that 80% of the cases brought to mediation settle during that process.

Finally, civil cases that have not settled during the course of litigation typically have one last chance to be resolved short of trial.  Almost every civil case must include a mandatory settlement conference before the trial judge or a settlement mentor.  During this conference, the judge or settlement mentor strongly encourages the parties to settle rather than taking the case to trial.  Settlement conferences have several benefits.  First, the case might settle.  Second, the trial judge is able to get a preview of the issues and is therefore in a better position should the case proceed to trial.

It should be clear that without ADR, the 90% of cases that currently vanish during the litigation process would be clogging our trial courts, and it would likely be our grandchildren who would be trying these cases many years down the road.