DATE: November 2nd, 2005

TO: Legal Eagles, LLP

RE: Rebecca Warren v. Mechanics National Bank

As requested, we have prepared a report covering the case of Rebecca Warren v. Mechanics

National Bank. Through this report we will be looking into offer and acceptance of a contract

between Rebecca Warren and Mechanics National Bank, as well any negligence on the part of

Mechanics National Bank. Furthermore, we have also included the cash flows of the Hotel

California to help us calculate the present and future value of the hotel that Ms. Warren

originally planned on purchasing. With this in mind you should find this report informative and

conclusive.

REBECCA WARREN V. MECHANICS NATIONAL BANK

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Executive Summary

Rebecca Warren, graduated from California State University, Chino in the year

of 1982 with a degree in Business Administration, specializing in the hospitality industry

has sued her former mortgage lender, Mechanics National Bank. She is arguing that

Mechanics National Bank was negligent by not removing the lien on her Lagoon Beach

property after the mortgage was paid off in full and is seeking a recovery for her damages

of lost opportunity to purchase the first Palm Desert hotel. The contract between Ms.

Warren and Mechanics National Bank was a valid contract and stated that once Ms.

Warren paid the 20 year mortgage on the property to its entirety Mechanics National

Bank was obligated to promptly remove the lien. We can conclude that in performing

services for a client, a lending company in this case Mechanics National Bank has the

duty to strictly follow instructions drafted in the agreement. The lending bank should

have removed the lien as stated in the agreement, by not doing so Ms. Warren was unable

to use her Lagoon property as collateral for a loan to purchase Hotel California. Ms.

Warren was able to purchase a hotel later on in the year but had to paid 4.7 million

400,000 more than the original hotel which she had planned on purchasing. With the cash

flow statement we were able to find the future and present values of any current and

future revenue and we applied those findings into the discovery of any expected values.

Our team found that if Ms. Warren won in court she would receive damages for

negligence on the part Mechanics National Bank. Ms. Warren would be compensated on

the difference she had to pay to purchase the second hotel as well as the loss in potential

revenue she could have earned if she was successful in purchasing the Hotel California.

REBECCA WARREN V. MECHANICS NATIONAL BANK

 A Team 3

In the case of Rebecca Warren v. Mechanics National Bank, Warren is suing for

negligence due to the fact Mechanics National Bank (MNB) failed to remove a lien on her

Lagoon Beach property after the mortgage had been paid in full. As a result, Warren was unable

to use the property as collateral for a new purchase, and is therefore seeking to recover damages

from the loss of that property. First, we must look at the contract between Warren and MNB, and

determine if there was in fact a valid contract in place. We will determine this based on the

requirements to make a contract valid: offer, acceptance, and the contract being in writing.

Then, we will evaluate the negligence claim and determine if there was duty of care owed, if that

duty was breached, if the breach of the duty was the cause of the injury, and what was the injury.

Analysis of Liability for Breach of Contract and Negligence

Legal Issue:

Was there a breach of contract when Mechanics National Bank did not promptly remove

the lien from Ms. Warren’s Lagoon Beach property after she paid the mortgage in full? Was

there any negligence on the part of Mechanics National Bank?

1. To determine whether a contract was entered into between Warren and MNB the courts

require that there be an offer and acceptance of a contract. An offer is comprised of three

elements:

a. They look for some objective indication of a present intent to contract on the part

of the offeror.

b. They look for specificity, or definiteness, in the terms of the alleged offer.

c. They look to see whether the alleged offer has been communicated to the offeree.
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2. When determining if an offeree accepted an offer and created a contract, a court will look
for

evidence of three elements:

a. The offeree intended to enter the contract.

b. The offeree accepted on the terms proposed by the offeror.

i. Mirror Image Rule

1. The traditional contract law rule is that an acceptance must be the

mirror image of the offer.

2. Attempts by offerees to change the terms of the offer or to add new

terms to it are treated as counteroffers because they impliedly

indicated an intent by the offeree to reject the offer instead of being

bound by its terms.

c. The offeree communicated his acceptance to the offeror.1

3. Regarding Warren’s negligence claim we must first look at the rule of law for negligence,

which includes four elements:

a. A duty of care was owed to the plaintiff by the defendant.

b. The defendant breached the owed duty of care.

c. The plaintiff suffered actual injury.

d. There was an actual and proximate causation between the breach and the injury.

Application:

1
CSUN C oll eg e of Bus i nes s and Econom i cs . (2009). Under s t and t he r ul es of off er and
ac cept anc e i n t he f or mati on of a cont r act . R et ri ev ed from ht t p:/ / www.cs un. edu/
%7Eb z51361/ gat ew ay/ off er.pd f
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Based on the text, we find that there is sufficient evidence that proves the existence of an

offer and intent on the part of Mechanics National Bank (the offeror) to enter into contract

between themselves and Ms. Warren (the offeree). The second rule of law then looks at the

definitiveness of the terms within that contract, which in this case require that MNB remove the

lien against the property located in Lagoon Beach promptly after Ms. Warren pays off the

mortgage on the property. The third rule of offer is concerned with the clear communication of

the intent to offer and enter into contract, and the terms of the contract by MNB (the offeror) to

Ms. Warren (the offeree). We find that this communication did occur and that both MNB and

Ms. Warren were aware and in agreement to the terms there in.

Beyond question is the fact that Ms. Warren meets the requirement to prove the first rule

of Acceptance, since she willingly entered into the contract with Mechanics National B with the

intent to take ownership of the land in Lagoon Beach. She then meets the second rule of

acceptance which pertains to the mirror image rule that dictates, in order for a legally binding

contract to exist, all the terms must mirror each other both in offer and acceptance. In this case

the terms in question regard the removal of the lien on Ms. Warren’s property once she paying

off the mortgage. This then brings us to whether Ms. Warren communicated her acceptance to

the terms of the agreement. This communication is assumed since both parties to the contract

acknowledge the existence of the contract, and by the action of Ms. Warren eventually paying of

the mortgage.

Under the State of Green Civil Code, Warren’s Lagoon Beach property that she

purchased in 1984 and paid off in 2004 is a 20 year loan that requires the contract between

Warren and Mechanics National Bank to be in writing to be valid. The Green Civil Code states

that “An agreement for the leasing for a longer period than one year, or for the sale of real
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property, or of an interest therein; such an agreement, if made by an agent of the party sought to

be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party

sought to be charged” (Green Civil Code Section 1624, 2003)2. Based on this code, the contract

was valid between Warren and Mechanics National Bank because it was in writing. This can be

determined from the reference to the “language in the deed of trust requiring it to promptly

record a reconveyance of its lien on the property upon payment in full of the underlying loan” 3

First, to establish that a duty of care was owed we will apply the foreseeable zone of

danger. A previous case ruled in the State of Green states that “Specifically, in performing

services for a client, an escrow company has the duty to strictly follow instructions drafted in the

escrow instructions” (Commercial Escrow Company, Appelant, v. Rockport Rebel, Inc.,

Appellee, 1989)4. So to apply that to the case of Warren v. Mechanic National Bank, we can

conclude that in performing services for a client, a lending company has the duty to strictly

follow instructions drafted on the agreement, and “under the typical ‘reconveyance clause’ in a

deed of trust, upon full repayment of the debt, the lender must request the trustee to promptly

reconvey the property and release any liens on it too”5. This acknowledges that a lending

company’s client is within the foreseeable zone of danger, and that they owe a duty of care to

their client.

Second, we must ask if Mechanic National Bank breached their duty of care that they

2
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The Ga tew ay Ex pe rie nc e : B us 3 02 : 2 00 9/ 2 01 0 Edi ti on , 1 74 .
3
B el l , J ., & Efrat, R. (2 00 9 ). Hotel C al i forni a. The Ga tew ay Ex pe rie nc e : B us
3 02 : 2 00 9/ 2 01 0 Edi ti on , 1 66 .
4
C SUN C ol le ge of B usi ne ss an d Ec ono mi c s. (2 00 9 ). Hote l C ali fo rni a l i brary.
The Ga tew ay Ex pe rie nc e : B us 3 02 : 2 00 9/ 2 01 0 Edi ti on , 1 71 .
5
B el l , J ., & Efrat, R. (2 00 9 ). Hotel C al i forni a. The Ga tew ay Ex pe rie nc e : B us
3 02 : 2 00 9/ 2 01 0 Edi ti on , 1 66 -1 68 .
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owed to Warren. We can apply the reasonable person standard and determine what a reasonably

prudent person would do in the same or similar circumstances. We believe that a judge or jury

would determine that a reasonably prudent lending bank would follow the agreement in the deed

of trust and release their lien at the time or full repayment. According to this, then Mechanic

National Bank breached their duty to Rebecca Warren because they should have promptly

reconveyed and released their lien on the Lagoon Beach property upon Warren’s full repayment

of her mortgage on November 1, 2004.

Third, we will determine if Warren experienced actual injury. Based on the claim made

by Warren it is clear that she believes that following the breakdown of the transaction between

Bank of the West and Warren, she was unable to purchase Hotel California for $4.3 million. She

ended up buying another hotel for $4.7 million, $400,000 more than Hotel California had been

offered to her for. Furthermore, monetary damages could be extracted from any potential profit

she could have gained from buying the hotel months earlier.

Finally, actual and proximate causation must be linked to the breach of duty and the

injury suffered. When determining if there was actual cause from the defendant’s breach a “but

for” test is typically used. So we can state that, but for, Mechanics National Bank’s failure to

follow their lending agreement and promptly release the lien, Warren would have been able to

receive a loan from Bank of the West using the Lagoon Beach property as collateral for a new

loan to purchase Hotel California for $4.3 million. The proximate cause can be determined

through Warren’s efforts to pursue all other options to acquire the Hotel California. In an effort

to get the loan from Bank of the West without the additional property she had Desert Mirage

Accounting prepare an appraisal for the hotel property using techniques that banks generally use

to determine the loan value of small hotels, but the appraisal amount did not result in enough
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loan value to justify the hotel property as sole collateral for the loan which we will look further

into under the evaluation approach.

Analysis of Cash Flows, Present, and Expected Values

We will now look at the cash flow statement for Hotel California which focuses on three

years which span from 2002 through 2004. The following table will go into further detail regards

to operating, investing, financing activities as well as net increase in cash for the years stated.
Statement of Cash Flows for Hotel California

2004 2003 2002

Operating Activities

Cash Receipts:

Rental Revenue 892,513 796,500 759,656

Revenue from goods and services 212,432 183,195 171,923

1,104,94 979,695 931,579

5

Cash Paid:

Payroll, Service, Utilities, and Bed (231,978) (210,972) (222,211)

Taxes

General and Administrative Expenses (265,286) (231,721) (215,211)

(494,264) (442,693) (437,422)

Net Cash Flow From Operations 607,681 537,002 494,157

Investing Activities

Cash Paid:

Marketing Expenses (110,495) (97,970) (93,158)

Net Cash Flow From Investing Activities (110,495) (97,970) (93,158)

Financing Activities

Cash Paid:

Sole Proprietorship Drawings (75,000) (72,000) (70,000)

Net Cash Flow From Financing Activities (75,000) (72,000) (70,000)

Net Increase in Cash 422,186 367,032 330,999

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With the cash flows in hand it will allows us to calculate the present and future values of Hotel

California as well as any expected values that need to be determined

Based on the cash flow statement we need to calculate the average cash flow for the three

years in order to find the future value. The average is $373,406 (422,186 + 367,032 + 330,999 /

3). We then use the following formula to then predict the future value for Ms. Warren.

FV = P (1-i)n

In the case for Ms. Warren we will use $373,406 for the principal, in addition we will use

.08 in place of i which is the interest or discount rate, lastly we will use 10 as n this shows the

number of periods. After imputing all this data in this Future Value formula we accumulate

$162,058.20 as the future value. We then need to find the present value so that we can calculate

60% of the figure. This calculation is PV = FV / (1+i)n in the case of Ms. Warrant the formula is

PV = 162,058.20 / (1+.08)10. Thus our PV is $75,026.94. Present and future value is calculated

on cash flow and not on income because Warren already knows the hotel will become a

profitable idea for a bed and breakfast Inn.

An evaluation approach that is used by most bank appraisers and was also applied by the

Desert Mirage Accounting team which Ms. Warren hired involves taking the last two years’

average gross margin and multiplying it by four. In the case of Hotel California it is ($662,967 +

$586,223) / 2 is $615,595. Then we multiply $615,595 by for ($615,595 x 4) which is

$2,462,380. Since appraisers assume this figure to be right 40% of the time we will then multiply

$2,462,380 by .4 which is $984,952. Another way to approach the expected value is taking the

present value of $75,026.94, which we calculated earlier, and multiplying it by 60%. We use

60% because appraisers use this as a weight to make expected value more accurate. Therefore

our expected value using this approach is 45,016.16 ($75,026.94 x 0.6). Due to the findings by
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the accounting team Ms. Warren hired she realized that the valuation did not result in enough

loan value to justify the property which she was trying to purchase as the sole collateral for the

loan as we had stated earlier. To give you a better understanding of how the expected values

work with appraisers the following table will guide you as a visual aid:

Appraisal Approaches

Using Gross Margin $2,462,380 x (0.4) = $984,952

Using Weighted PV $75,026.94 x (0.6) = $45,016.16

According to the general accepted accounting principles (GAAP), this accounting cycle

has identified and analyzed the transactions of Warren’s attempt to purchase the property.

Although, the information is credible it was not certified by a CPA, therefore it may be

inaccurate.

Conclusion

In conclusion, in Rebecca Warren’s case it is clear that a contract between herself and

Mechanics National bank did in fact exist. The contract was breached when Mechanics National

Bank failed to promptly remove the lien on Ms. Warrens’ Lagoon Beach property after she made

the last mortgage payment. The failure of Mechanics National Bank to abide by the contract

forced Ms. Warren to stop the pursuit of purchasing the Palm Desert hotel location which she

had originally planned on purchasing. Ms. Warren then settled on a second location which she

purchased for 400,000 dollars more than she had originally planned on paying for the Palm

Desert property. This loss in money and time have led us to assume that if Ms. Warren were to

win in court she would be awarded not only for the difference in money which she had to pay for
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the second hotel, but also for loss of potential current and future revenue which she could have

earned if she would have purchased the Palm Desert property.