REALTY OR PERSONALTY?

    There are matters of law that have forever remained unclear. And presumably, always will be.

 

    Pornography vs. obscenity is one. Limitations to constitutionally-protected free speech are another.

 

     Realty vs. personalty is a third.

 

            Bryce Corp operates a manufacturing plant in Searcy, Arkansas. Bryce makes flexible packaging, such as potato chip bags and zip pouches. As part of the production process, the Searcy plant operates an 80-foot-long industrial lamination line with multiple machines.

 

            A roll of unlaminated material is placed on a spindle. The material is then unwound and fed through a series of machines for lamination. At the end, another machine rewinds the laminated material into a new roll.

 

            This last machine is a “rewinder.”

 

            In 2010 a new rewinder was purchased from Bobst Italia, transported to the Searcy plant in sections, and assembled there over a 10-day period with the help of a forklift. The machine weighed 10 tons and was affixed to the floor of the Searcy plant with metal ties. The rewinder’s electrical and air pressure systems were then connected to the plant’s systems to make the rewinder operational.

 

            Vernon Holland worked at the Searcy plant as a laminator helper. In November 2016 the material on the lamination line became miswound, and production was stopped. Vernon opened the rewinder and entered the machine to fix the issue.

 

            When Vernon entered the rewinder, one of the two spindles was still turning. While pulling the miswound film, Vernon backed into the turning spindle and was propelled through the rewinder.

 

            Vernon died in May 2017 as a consequence of his injuries.

 

            Robert Cearley, the personal representative of Vernon’s estate, sued Bobst Group North America, the equipment manufacturer’s affiliate. Bobst’s primary defense was based on a statute of repose.

 

            The district court granted Bobst’s motion for summary judgment. Cearley appealed.

 

            Arkansas has a statute of repose for claims arising from personal injury or wrongful death caused by construction defects. The statute provides that all claims must be asserted within four years after substantial completion of the improvement to real property.

 

            As a consequence, Cearley’s case could proceed only if the lamination equipment is personal property. However, if it constitutes real property, then Cearley’s case must fail as the claim was not filed within four years after the new rewinder became “an improvement to real property.”

 

            The Court of Appeals determined that the machinery: (a) was affixed to the real property, (b) furthers the purpose of the realty, and (c) was designed for long-term use in connection with the real estate. As a consequence, the machinery is a permanent improvement to the realty for purposes of the statute of repose.

 

            The lamination machine was determined to be realty. Not personalty. This conclusion was reached although the equipment was secured to the floor only with metal ties.

 

            Since the equipment was incorporated into the (and thus becomes) realty, the statute of repose applies. Claims involving this rewinder, installed in 2010, must be asserted by 2014.

 

            Not 2023.

 

Cearley loses; Bobst Group NA again prevails. See Cearley v. Bobst Group North America; US Court of Appeals, 8^th Circuit; Case No. 23-1101; February 21, 2025:  https://cases.justia.com/federal/appellate-courts/ca8/23-1101/23-1101-2025-02-21.pdf?ts=1740155438.

 

            Questions / Issues:

 

1.         Why Is This Realty? This case gives little guidance about its conclusion. The only elements to justify this result are that the machinery: (a) was “affixed” to the real property; (b) “furthers the purpose” of the realty, and (c) was designed for long-term use in connection with the real property.

 

            While (c) is undoubtedly true, one must wonder what evidence was submitted and compelled the Court of Appeals to find that (a) and (b) are also true. Because all we know from the appellate decision is that the equipment was secured to the floor with metal ties. Then, electrical and air pressure systems were connected.

 

2.         Alt-Recourse. Is it possible that the Court took judicial notice of parallel litigation asserted by Cearley against Siemens and others, and perhaps assumed that Cearley would prevail there?

 

3.         Practice Point. This Court finds that a large, expensive, but replaceable fixture lost its character as personalty and instead was converted to realty at installation. I am unconvinced that other courts would follow a similar path.

 

Regardless, the message is that timely filing of claims is essential. Ignoring or missing these deadlines can prove to be a fatal mistake.

 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law,

Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York 

TENANT ESTOPPEL CERTS REDUX

         While working with commercial real estate buyers, sellers, landlords, tenants, title agents, and lenders, I am often asked to assist in developing Estoppel Certificates. Properly worded Estoppel Certificates assure no claims or defaults exist in critical third-party documents.

            The need for clear, current Certificates looms large when buying or leasing income-producing property. Transaction parties and their lenders need to know there are no significant issues regarding those whose financial obligations make the investment worthy, and to cover title and survey matters.

 Usually the estoppel request relates to tenants, but sometimes the signatories are other parties who have an interest in the asset such as option beneficiaries, easement estate holders, prime and ground lessors, mortgagees, past owners, HOAs and POAs, those responsible for shared amenities, and similar.

            Sometimes an exact form of Estoppel is attached to a purchase and sale agreement and Seller or Landlord must furnish it as a condition to Closing. In other situations the parties agree to cooperate to obtain Certificates before Closing or within an inspection period.

            In 2022 CEZ entered into a contract with 755 N Prior Ave. The agreement provided that for $26 million CEZ would purchase from 755 a building occupied by commercial tenants.

The contract obligated 755 to “reasonably cooperate” with CEZ to obtain tenant estoppel certificates.

            Before Closing the parties discovered errors in the square footage measurements of tenants’ units. These measurements were used to assess and collect base rents, common area maintenance charges for taxes, insurance, OpEx, property management fees, and other amounts identified in the leases. Because of these errors some tenants owed base rent and others owed additional NNN reimbursements.

            Some owed both rent and expenses.

            Due to the computational errors determined as a function of the new measurements, the parties agreed to reduce the purchase price to $15.1 million. Closing was scheduled for October 30, 2023.

            As Closing approached, CEZ asked to delay Closing to February or March 2024, while suggesting that tenants needed to be notified that lease rental rates would increase after the purchase was concluded. The opinion doesn’t clearly state it, but the implication is that CEZ proposed that the form of Estoppel Certificate reflect the new rate structure.

            755 refused. 755 asserted that its duty to “reasonably cooperate” did not include addressing CEZ’s requests, which – 755 claimed – would have necessitated the pre-Closing renegotiation of lease terms of almost 50 tenant leases.

            755 believed that 755 had already assumed responsibility for rental deficits caused by the erroneous measurements, which was reflected in the 40% purchase price deduction provided in the Contract amendment. Consequently there was no need to further address the issue in the Estoppel Certificates.

            The matter was not resolved. On the date set for Closing CEZ demanded that 755 furnish satisfactory Estoppel Certificates. When Estoppel Certificates were not delivered and the deal failed to close, 755 notified CEZ of its intent to terminate the Contract.

            CEZ sued 755 in November 2023 for breach of contract and to prevent 755 from terminating it. The district court denied CEZ’s request for preliminary injunction.

            CEZ appealed.

            The Appellate Court reviewed the factors required to issue an injunction. And agreed with the district court.

            There was no abuse of discretion and even assuming the possibility of irreparable harm, CEZ failed to demonstrate a probability of a successful outcome at trial. 755 prevails. See CEZ Prior LLC v 755 N Prior Ave LLC; US Court of Appeals, 8^th Circuit; Case No. 24-1389; January 24, 2025: https://law.justia.com/cases/federal/appellate-courts/ca8/24-1389/24-1389-2025-01-24.html.

            Questions / Issues:

1.         For Want of a Nail. The contracting parties failed to agree upon an exact form of Estoppel and attach it as an exhibit to the Contract. All that remained of this mission-critical issue was an obligation of the parties to reasonably cooperate. It could have been dangerous for CEZ (and its lenders) to proceed without the minimal assurances in a properly worded Estoppel Certificate.

2.         Purchase Price Reduction. Danger of a missing or incomplete Estoppel Certificate notwithstanding, wasn’t the purpose of a 40% purchase price reduction intended to serve as an incentive for overlooking the estoppel requirement? And if that is correct, why didn’t the contract amendment waive that obligation, or otherwise address it by attaching a form of Certificate?

3.         Practice Point. Be sure your Contracts have both an Estoppel Certificate form attached as an exhibit as well as language requiring insertion of such additional provisions as buyer or tenant (or its lenders or the title agent) may require after site inspections and review of diligence docs. If the executed Certificates don’t contain what is needed or reveal issues, then properly drafted Contracts should give buyers and tenants the right to exit and recover all earnest monies and deposits.

 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

 

 

CAN AN UNRECORDED AGREEMENT BE AN EASEMENT?

             425 Soledad bought an office building in 2005 from a Seller who owned an adjacent hotel and parking garage. At Closing, Buyer and Seller executed a parking agreement, reserving 150 parking spaces on the fourth floor of the garage for office occupants. 

            The parking agreement stated that it would “run with the land and inure to the benefit of, and be binding upon, [the parties] and their respective successors and assigns in title.” For reasons unstated in the Opinion, the agreement was not recorded in the County’s real property records. 

            In 2006 HEI San Antonio Hotel purchased the adjacent parking garage and hotel in a financed transaction. The loan included a $33 million A-Note and $26 million B-Note both payable to Merrill Lynch, secured by a mortgage on the garage and hotel property. 

            Merrill Lynch requested an estoppel from the office owner to the effect that the parking agreement remained in full force and effect. 

            Cypress Real Estate then purchased the B-Note from Merrill Lynch in 2008, without representation by Merrill Lynch regarding the parking agreement. The parking agreement was contained in materials delivered to Cypress. 

            In 2010 Cypress placed the hotel and garage into a receivership through an action in State district court. Cypress formed an affiliate – CRVI – to buy the garage and hotel from the receiver. 

            Then in 2016 an office tenant requested garage space for its occupants. CRVI refused, so the office owner, 425 Soledad, asserted litigation to enforce the parking agreement through a judicial declaration. 

            425 Soledad’s principal claim was that the parking agreement runs with and continues to burden ownership of the parking garage. Like an easement. CRVI asserted that the parking agreement was merely an agreement between two contracting parties, not an easement, and not binding against other parties. 

            Recall that the parking agreement was never recorded with the County Clerk. 

            The trial court concluded that, although unrecorded, the parking agreement is an enforceable easement. And further, knowledge of its existence was imputed to CRVI because “there was enough information to trigger reasonable inquiry by a prudent purchaser . . . which inquiry would have led to the discovery of the parking agreement.” 

            CRVI appealed. 

            The court of appeals agreed with the trial court’s conclusion that the unrecorded parking agreement is an easement, but found that 425 Soledad could not enforce it against CRVI. The court of appeals relied on Texas Property Code Section 13.001(a), which provides that an unrecorded interest in real property “is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice.” 

            425 Soledad appealed. 

            The Supreme Court focused on several issues. But one is prominent – notice. Following the chain of ownership, Merrill Lynch had actual notice of the parking agreement because it requested that 425 Soledad confirm that the agreement remained “in full force and effect.” The closing binder from Merrill Lynch, available to both Cypress and CRVI, contained materials that revealed the existence of the parking agreement. 

            The Supremes concluded that CRVI possessed sufficient information to cause a reasonable person to inquire further. And that CRVI is held to the knowledge such an inquiry would have revealed. 

            CRVI had received multiple appraisals describing the parking agreement. HEI had a copy of it, but CRVI never requested it. One charged with the duty of conducting diligence may not ignore readily available facts (to paraphrase the Supremes). 

            Because the parking agreement was unrecorded, a subsequent buyer or lender without notice of it would take the property free of it. But in this case, CRVI had a duty to inquire. The facts available to CRVI, if examined, would have revealed the agreement. The agreement was drafted in a manner that was intended to bind future property owners and lenders. 

            Consequently, even though unrecorded, the parking agreement satisfies all easement requirements, regardless of the Texas Property Code. At least between the parties that are before the Supreme Court of Texas. 

            The judgment of the court of appeals is reversed; the unrecorded parking agreement is an easement and binds CRVI. 425 Soledad wins; CRVI loses. See 425 Soledad v CRVI Riverwalk; No. 23-0344; Texas Supreme Court; December 31, 2024: https://cases.justia.com/texas/supreme-court/2024-23-0344.pdf?ts=1735657823. 

            Questions / Issues: 

1.         Why Didn’t 425 Soledad Record It? It seems clear that 425 Soledad needed the right to use the 4^th floor of the parking garage for its office tenants. I am struggling with the reasons why 425 didn’t record it. Further, why 425’s mortgage lenders didn’t require it. And I see no ability of 425 to include it as an insured estate in the owner policy of title insurance obtained by 425 at the time of purchase, as well as the title policies issued to 425’s lenders. 

2.         Supercharged Diligence Obligation. Some may read this case to conclude that a right to review documents is equal to an obligation to review documents, which then imputes knowledge to the person who may have failed to review everything in the binders, data room, online, or on-site. After all, this is now Supreme Court authority from a State that understands commerce. 

3.         This Slope Has a High Moisture Content. Is it reasonable to charge a buyer or lender with knowledge of matters unknown to the lender or buyer, which could have been discovered before Closing with a more stringent review? Instead, shouldn’t the aggrieved buyer or lender seek post-Closing recourse against the party with whom they have privity, that failed to disclose? 

4.         And What of the Legislation? Texas Property Code 13.001(a) provides that only recorded documents bind creditors and buyers. The current version of the law was enacted in 1983. Why – he asks rhetorically – is it ignored? 

                                                                        Stuart A. Lautin, Esq.*

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

PERFORMANCE DEED OF TRUST

              So everyone knows that mortgages and deeds of trust are used to secure debt repayment. Right? Yes of course. But they can do more than that. 

            And when they do more they are called “Performance” documents. 

            The Colony at California Oaks is a property owner’s association, charged with the duty of governing open spaces in a community of 1,586 homes in Murrieta California. Within the community is an 18-hole golf course including landscape features that extend into open spaces. 

            The golf course was sold in 2007 to Majestic Asset Management. By the terms of the purchase and sale contract, Majestic assumed the obligations of the prior owners to use the property only as a golf course, and to maintain it in a condition to similar courses in the area. 

            The maintenance obligation includes the landscape extensions. 

            To secure its maintenance and use duties, Majestic executed a performance deed of trust for the benefit of the sellers. In 2012 the sellers transferred the PDOT to the Association. 

            After Majestic received title to the golf course, grass and trees died, a lake dried, landscaping deteriorated, and the golf course property was used for events inconsistent with a golf course. 

            When Majestic stopped paying for maintenance costs shared with the Association in 2013, litigation started. Although Majestic was the Plaintiff, the Association asserted claims against Majestic for foreclosure under the PDOT based on the failure of Majestic to continue golf course operations and maintenance of the landscape extensions. 

            The trial court found that Majestic was required to use the golf course only as such. And that Majestic must maintain it. And that Majestic must maintain the landscape. And that Majestic must maintain the extensions. 

            The court ruled that Majestic had breached its obligations. 

            The court rendered judgment for the Association in 2016. Also included in the judgment was an injunction directing Majestic to repair and restore the golf course. 

            In 2019 the Association petitioned the trial court to enter an order finding that Majestic breached the deed of trust and failed to discharge its injunction obligations. The Association also asked the trial court to appoint a receiver to take control of the golf course and bring it into compliance with the judgment. 

            First, the court appointed a receiver in 2020, holding the foreclosure issue for later. 

            Second, two years later after it became clear that the receiver could not rehabilitate the golf course, the court ordered foreclosure pursuant to the PDOT. 

            Third, the court convened a hearing and in 2023 entered a decree directing the clerk to issue a foreclosure writ of sale on the golf course. 

            Majestic appealed. 

            The Appellate Court reviewed the purpose of a deed of trust. The Court had no issue determining that a deed of trust can authorize foreclosure if the borrower fails to perform a required action. 

            Typically, the required action is payment. But the deed of trust can also secure nonmonetary obligations rather than loan repayment. 

            The Court then reviewed the valuation assigned to the performance deed of trust. Good stuff for those that work in this small space. But I won’t bore my loyal readers with it. The conclusion is that security documents can be breached in ways that cannot be compensated in dollars. Secured parties may then take the action allowed by the deed of trust or mortgage – foreclosure. 

            The Association wins and is allowed to foreclose; Majestic loses. See Majestic Asset Management v. The Colony At California Oaks; Case D082407 and D082907; California Court of Appeals, 4^th Appellate District, Division One; December 16, 2024: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2024/2024-Ohio-5432.pdf. 

            Questions / Issues: 

1.         PDOT. Why aren’t PDOTs used more? Institutional lenders commonly include ‘performance’ obligations in their loan docs – particularly regarding construction, use, leasing, transfers, subordinate debt, discharge of senior obligations, &tc. But ‘performance’ duties are not as common in non-institutional security documents. 

2.         Right to Redeem. Attorneys know from their law school property classes that borrowers have a right to “redeem” the mortgaged property by payment of the amounts owing. But this is difficult to quantify when the breach relates to use and maintenance and there is neither a loan nor a lender. What type of testimony is needed to establish and monetize a change in use or failure to maintain that causes permanent and extensive damages? How does the mortgagor / grantor obtain a release from a PDOT – ever – without consent of the secured party? What would motivate a secured party to consent in a situation involving a use obligation that could continue forever? 

3.         Foreclosure. What will happen at this foreclosure sale? Is the PDOT removed by operation of law at the moment of sale, or does it continue? If it continues, which buyers will be willing to purchase this property, knowing that it must be used only as a golf course and previous owners did not find it economically possible to do so? 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

EASEMENT HERBICIDE

            Some of my astute readers may well wonder the connection between easements and herbicides. You’ll want to gird your loins for the fascinating journey. 

            Ohio Edison holds easements for the installation and maintenance of electrical transmission lines and structures in Harrison County, Ohio. First granted in 1948, the easements allow Oh Ed to erect and maintain the easement areas, and also grant to Oh Ed the right to “trim, cut and remove . . . trees, limbs, underbrush or other obstructions.” 

            70 years later, Oh Ed notified Craig Corder, Jackie Corder, and Scott Corder that herbicides would be used to control vegetation growth in the easement area. This action, explained Oh Ed, was part of its Transmission Vegetation Management Program. 

            The Corders responded with a lawsuit seeking a declaratory judgment that Oh Ed did not have the right to use herbicides to manage vegetation. 

            The trial court dismissed the case for lack of jurisdiction. The intermediate Appellate Court determined that the Easement Agreements were ambiguous, and remanded the case back to the trial court to resolve the ambiguity. 

            Looking at this again as instructed by the Appellate Court, the trial court agreed that the easement language is ambiguous. So it awarded judgment to the Corders. 

            Once again, the case bounced up to the intermediate Appellate Court. After confirming (again) the ambiguity in the Easement Agreement, the Court decided that the Easement language does not allow Oh Ed to remove vegetation by any means it chooses.

            So Oh Ed appealed the issue to the Supreme Court of Ohio. Citing a fictitious Will clause leaving the testator’s estate to “my mother, Jane and Sally” and the fabricated provision “He teaches French, German, Italian and Spanish,” the Supreme Court undertook a fun exercise interpreting conjunctive phrases, appositives, and Oxford commas. 

            Fun for some of us. But likely less than all of us. 

            The Supremes drill down into the word “remove.” Deciding that Oh Ed was granted the right to “remove” vegetation was obvious. From there, the Supremes decided that the method of removal should be defined broadly to include elimination and eradication, and even just getting rid of an object. 

            The Easement language is expansive; there are no limits, inhibitions, or prohibitions. If herbicides will remove vegetation through destruction, then that method is permitted. 

            Ohio Edison wins; Corders lose. See Corder v Ohio Edison Company; Slip Opinion 2024-Ohio-5432; Ohio Supreme Court; November 20, 2024: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2024/2024-Ohio-5432.pdf. 

            Questions / Issues:

1.         Herbicides. This Court is focused on the singular word “remove.” But do herbicides remove vegetation? Or instead, just prevent or inhibit regrowth? 

2.         Down This Path We Go. Still focused on the right of Oh Ed to “remove,” would this Court grant Oh Ed the right to cause removal by controlled burn? Explosion / implosion? Napalm? Death ray? Aren’t all of those used to “remove” an obstacle? 

3.         Grammar Nerds Unite. There’s a well-written treatise in this Opinion for grammar nerds. This may be required reading for future law students. Grammarians, too. 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

OPTION CONSIDERATION AND NOTIFICATION

             Francesco Scotti sold real property to Matthew Mimiaga in 2015. The deal was seller-financed: Mimiaga executed a Note for $870,000, due in five years, payable to Scotti. 

            Mimiaga also granted Scotti an option to repurchase the property in five years for $900,000. Scotti alleges that he timely exercised the repurchase option, although Mimiaga claims he never received the notice from Scotti. 

            So Scotti filed a lawsuit seeking specific performance of the option agreement and an order requiring Mimiaga to sell the property to Scotti for $900,000. 

            Mimiaga’s answer asserted that the option agreement lacked consideration and alternatively, had expired. Scotti took the position that the discount in the purchase price ($900,000 option price minus $870,000 initial sales price) constitutes valid consideration to support the option. 

            The trial court held that the option consideration must be distinct from the sale consideration. And since the purchase price for the property had been established before the option was negotiated, the option was unsupported by separate consideration. 

            The trial court further found no evidence to support that Scotti had timely exercised the option, as Scotti did not ensure that his notice letter was delivered. 

            Francesco Scotti appealed.

             The Appellate Court first reviewed the agreements reached between the parties. Scotti and Mimiaga had executed a two-page document titled “Option Agreement.” Which states that the purchase option was supported by “good and valuable consideration.” 

            The Court found that phrase – good and valuable consideration – to be conclusive and not subject to further litigation. 

            Mimiaga’s next defense relates to proper option exercise. The Option Agreement did not require that the notice be sent by certified or registered mail, or in any other manner that could be used as evidence of delivery such as courier or FedEx. Instead, Scotti claims that he merely mailed it. 

            The Appellate Court made short work of this one too, concluding that “if notice was mailed, [then] notice was received.” The initial issue is not delivery. Instead, the first hurdle is merely determining if sufficient evidence was presented that the notice was mailed. 

            If sufficient evidence has been presented that the notice was sent, then a rebuttable presumption is created that it was received. It is then incumbent upon Mimiaga to offer evidence that he did not receive it. 

            These are fact-intensive matters that are inappropriate for summary judgment. The case must be returned to trial court to further develop these facts. 

            Scotti wins; Mimiaga loses this round. See Scotti v Mimiaga; Case No. 2023-91; Rhode Island Supreme Court; October 18, 2024: https://casetext.com/case/scotti-v-mimiaga. 

            Questions / Issues: 

1.         Peppercorns. In many States it appears that a mere recitation of ‘good and valuable’ consideration suffices to create, well, consideration. Evidently lawyers have been arguing this point since the times of King Aethelred the Unready, who ruled from 1013-1014 (or maybe 865-871 or could be 978-1016), when contracting parties exchanged peppercorns to support consideration. 

2.         Enlightenment. Some States take a more enlightened view and boldly proclaim by statute that “Consideration means any consideration” (see by example UCC 3.303(b): https://www.law.cornell.edu/ucc/3/3-303#:~:text=The%20drawer%20or%20maker%20of,promise%20has%20not%20been%20performed.) *So* glad we got that one resolved. 

3.         Notice. A notice clause that doesn’t indicate the manner of notice delivery? Cue President Biden: C’mon man! 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

WRAP FINANCE

       Pablo Garcia signed a real estate contract with Anthony Turner for a purchase price of $169,000. The terms included a $15,000 cash down payment and a $154,000 “Wrap” promissory Note. The note was payable to Turner over eight years, accruing interest at 7.2% APR. 

      Turner’s deed to Garcia was made subject to an existing lien securing Turner’s debt to DHI Mortgage Company, Turner’s acquisition lender. At Closing Garcia executed a Deed of Trust to Turner, to secure Garcia’s obligation to pay the Wrap Note. 

      The effect of the Wrap financing was that the underlying debt of Turner to DHI was not released. Nor was Garcia required to pay it, since Garcia did not assume it. Instead, the Wrap Note to Turner included the balance owing on the underlying debt to DHI. In that scenario, Garcia pays Turner, Turner pays DHI, and if the plan works then all debts are timely satisfied and ultimately discharged. 

      The plan didn’t work. 

      Initially, Garcia made Wrap Note payments to a management company arranged by Turner. When the management company was sold, Garcia was unable to connect with its successor for months. The next communication was a notice from Turner of Turner’s intent to foreclose, caused by Garcia’s failure to tender payments for the previous six-month period. 

      Garcia immediately brought the account current. 

      Five years later Turner approached Garcia with a document, requesting execution by Garcia to prove “you’re the owner and you made the payments for the other home.” Garcia signed it, unaware that it was a warranty deed conveying ownership of the property back to Turner. 

      When Turner was challenged, a “Cancellation of General Warranty Deed” was filed a year later, with the intent of rescinding the transfer. 

      Shortly after, Turner commenced foreclosure proceedings by accelerating the balance of the Wrap Note. The property was ultimately sold in 2018 at public auction. 

      Garcia asserted a lawsuit, claiming he was unaware of the foreclosure proceedings. Garcia testified that English is not his primary language and that he struggles to read English documents. The trial court found Turner liable and awarded damages to Garcia of almost $90,000. 

      Turner appealed. 

      Turner’s main issue on appeal was that Turner was justified in foreclosing because Garcia failed to make payments in 2012 or 2013, six years prior to the foreclosure date. The Appellate Court determined that Turner waived Garcia’s failure since Garcia paid all that was owing. 

It didn’t help Turner’s cause that Turner accepted Garcia’s late payment without protest. See Turner v. Garcia; Case No. 07-24-00124-CV; Texas Court of Appeals, 7^th District; August 20, 2024: https://casetext.com/case/turner-v-garcia-2. 

      Questions / Issues: 

1.      Wrap Financing. Years ago, mortgages did not contain verbiage that prohibited property transfers (“due on sale” clauses). Prior to the advent of due-on-sale provisions, buyers could elect to assume existing mortgages if the existing loan documents did not prohibit debt assumption. Clever property owners determined that they could sell properties “subject to” existing mortgages, and – if the underlying debt had a low interest rate – then the seller could enjoy the arbitrage between the lesser rate charged in the existing mortgage and the new rate to be charged to the new buyer. The result was known as “Wrap Financing.” 

2.      Advent of Due On Sale Provisions. Real estate lenders added due-on-sale provisions to mortgages in the 1970s. These clauses effectively ended wrap financing, as a transfer of the real estate triggered the election of the lender to accelerate the debt. And in 1982 federal laws were changed to make such due-on-sale provisions enforceable in almost all mortgage contracts. 

3.      Application to Turner v. Garcia. Turner’s original mortgage debt, created in 2008 to DHI Mortgage Company, Ltd., contained a due-on-sale provision in Section 9(b)(i). However, given Garcia’s testimony that he was challenged to understand English documents, it may be that Garcia did not attempt to review the underlying DHI mortgage. Or if he did, perhaps he was incapable of understanding these provisions. And consequently, one might wonder if this influenced the decision of the trial court and Court of Appeals in favor of Garcia. 

                                                            

                                                                                                Stuart A. Lautin, Esq.* 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

QUANTUM MERUIT

             The US Army Corps of Engineers awarded RLB Contracting a contract to dredge the Houston Ship Channel. RLB entered into a subcontract with Harbor Dredging who, in turn, entered into a sub-subcontract with Diamond Services for the actual dredge work. 

            Diamond was responsible for “traversing the hopper barges from [the] excavation site to the unloading site.” I have no clue what that means but presumably it is not relevant to this analysis. 

            More importantly to the quantum meruit issue, Diamond was required to perform all work necessary or incidental to complete its part of the job. 

            The parties encountered site conditions that were not anticipated where Diamond’s dredge was excavating. The presence of tires in the channel, as well as other issues, slowed the job considerably. After Diamond threatened to abandon the project, RLB petitioned the Corps for an equitable adjustment. 

            The Corps responded that to consider pricing adjustments RLB would need to release all claims it may have for differing site conditions at the project. In response, RLB withdrew its request to adjust pricing. 

            Due to Diamond’s obligation to perform all necessary work, Diamond continued its efforts. At project completion, Diamond sent an email to Harbor requesting approximately $2 million. Using this cost submission and similar reports sent by Harbor, RLB amended its bid to include an additional $9 million for excess costs associated with differing site conditions. 

            After negotiations, the Corps and RLB reached a settlement obligating the Corps to pay an additional $6 million for Diamond’s added work. RLB then issued payment to Diamond for $1 million. 

            Expecting a $2 million paycheck, Diamond was displeased. So Diamond filed a lawsuit. 

            The trial court dismissed most of Diamond’s claims, but preserved a claim for equitable adjustment expenses under a theory of quantum meruit. Diamond appealed, giving it the opportunity to litigate its quantum meruit claim. 

            Initially, the Appellate Court offered that “quantum meruit is an equitable theory which permits a right to recover . . . based upon a promise implied by law to pay for beneficial services rendered and knowingly accepted.” Recovery is limited to situations in which non-payment for the services rendered would result in an unjust enrichment to the party benefited. 

            However, recovery based on an express contract and on quantum meruit are inconsistent, as the damaged party’s remedies are contained in the contract. This express-contract bar applies not only to the plaintiff seeking quantum meruit recovery from the party with whom it contracted, but also when the plaintiff seeks recovery from third parties who benefitted from plaintiff’s performance. 

            Because the express contract between Diamond and Harbor covers the damages that Diamond alleges under quantum meruit, Diamond’s quantum meruit claims have no merit. 

            Despite that, the Appellate Court seemed to be willing to consider Diamond’s claim for expenses related to work performed outside of its contract with Harbor. But since Diamond “failed to present any meaningful evidence on the amount of expenses it incurred for work it performed for which it has not already been paid,” those claims also fail. 

            Judgment for RLB and Harbor is affirmed; Diamond lost this case because it failed to satisfy an evidentiary burden in the trial court. See Diamond Service Corp v. RLB Contracting; Case No. 23-40137; US Court of Appeals, 5^th Circuit; August 16, 2024: https://casetext.com/case/diamond-servs-corp-v-rlb-contracting-inc. 

            Questions / Issues / Comments: 

1.      Cases on QM can be confusing. The benchmark seems to be the existence of a contract (or not), and the question of whether or not the contract governs the delivery and pricing for what was furnished. By analogy, if a contract for car repairs includes replacement of the engine but the service shop also replaces the transmission, then presumably the shop has a valid QM claim for the value of the added transmission parts and labor, assuming it was necessary to make the car operable. But no QM claim will exist for engine replacement as the contract will govern that issue, even if the vendor’s expenses far exceed what was anticipated. 

2.      Damages for QM claims are difficult and subjective. If I did not request delivery of the Wall Street Journal and yet it is delivered to me daily, am I required to pay for it although I never read it? If my neighbor voluntarily mows my gnarly lawn on Saturday without my knowledge, must I pay fair market value for that service although I had planned to do it myself on Sunday? 

3.      Family Relations. My conclusion is that the theory of unjust enrichment must be the sibling of quantum meruit. Perhaps the theories of quasi-contract, constructive contract, and contract implied by law are first cousins. 

                                                                       Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

TITLE INSURANCE COMPENSATION

             Martin Tait, Jane Tait, and Bry-Mart LLC purchased real estate in 2016 for $1.25 million. Commonwealth Land Title Insurance Company issued an Owner Policy of Title Insurance, insuring the Taits against “actual loss” from various risks, to a limit of $1.25 million. The policy does not define “actual loss.” 

            Insured risks include someone else having an easement on the property. Excluded from coverage are recorded building restrictions and a drainage easement. 

            As they had intended when they contracted to purchase the property, the Taits proceeded with plans to subdivide the property into two lots, and started informal talks with the City’s development services coordinator. The City’s staff was supportive, and suggested that both the drainage easement and building restrictions could be either eliminated or modified to permit the subdivision. However, after their purchase, the Taits learned about a separate 1988 maintenance easement covering the same area as the drainage easement. 

            The 1988 maintenance easement was not excluded from coverage in the Owner Policy. Believing that the maintenance easement would impact the value of the property and interfere with development, the Taits tendered a claim to Commonwealth. 

            Commonwealth obtained an appraisal. The appraiser analyzed the highest and best use of the property on the date of loss. Making the assumption that the City would extinguish the building restrictions and drainage easement, but also assuming the maintenance easement would prohibit development, the appraiser concluded that the valuation of the property without the maintenance easement was $1.3 million. The valuation of the property with the maintenance easement in place was $1.1 million. 

            And consequently, the Taits suffered a diminution in value of $200,000. 

            Displeased with this result, Commonwealth asked the same appraiser to revise the appraisal by omitting the assumption that the City would eliminate the drainage easement and building restrictions which were in place when the Taits purchased the property. And also assuming that the newly discovered maintenance easement would indeed prohibit development. 

            The appraiser’s second effort concluded that the Taits would suffer a loss of $43,500. Not $200,000. Commonwealth sent the Taits a check for $43,500. 

            Taking a different approach, the Taits obtained their own appraisal. Their appraiser determined that the Taits could likely succeed in removing the building restrictions and drainage easement, but for the existence of the newly discovered 1988 maintenance easement. The second appraiser valued the property without the maintenance easement as two separate, developable parcels. 

            With the maintenance easement in place, the property could not be subdivided into two developable lots, so the Taits’ appraiser valued it as a single parcel. Consequently, the Taits’ appraiser concluded that the value of the property without the maintenance agreement was $2.08 million, and with it was $1.38 million, resulting in a total diminution in value of $700,000. 

            The Taits furnished Commonwealth the new appraisal and requested a total payment of $700,000. When Commonwealth refused, the Taits filed a lawsuit. 

            The trial court granted Commonwealth’s motion for summary judgment, reasoning that the legal standard for title insurance losses did not permit consideration of a property’s highest and best use, but only its actual use. Which was vacant land at the time of purchase. Disregarding the Taits’ appraisal, the trial court determined that Commonwealth had already paid all that was owing. 

            The Taits appealed. 

            The Court of Appeals decided initially that a property’s value for any given use can change over time, sometimes dramatically over a short period, due to external market factors such as financing costs, supply of similar properties, and changes in demand. 

            What remains is the question of whether the Taits’ “actual loss” under their title insurance policy should be measured based on the value of their property’s highest and best use, or merely its current use at the date of purchase. Finding that the title policy is ambiguous regarding the computation of “actual loss,” the Court used recent case authority to determine that all ambiguities will be resolved against the insurer. 

            The Court concluded that title insurance protects against future losses, and owners should be reimbursed for additional losses they suffer in reliance on the policy after it was purchased. 

            Valuing a property based on the highest and best use in the reasonably near future affords fair compensation to an owner and avoids the need to speculate about distant future development possibilities. Accordingly, since there is no language in the title policy to the contrary, the measure of a property owner’s loss is the diminution in value caused by a title defect on the date of discovery, measured according to the property’s highest and best use. 

            Judgment for Commonwealth is reversed; the Taits win and Commonwealth loses. See Tait v. Commonwealth Land Title Insurance Company; Case A166676; California Court of Appeals, 1^st District, Division Four, June 28, 2024: https://cases.justia.com/california/court-of-appeal/2024-a166676.pdf?ts=1719615677. 

            Questions / Issues / Comments: 

1.      Is this holding fair to insurance companies? How can underwriters anticipate the development possibility of each insured parcel, particularly when title insurance has no time limit and no expiration date? 

2.      Based on this new case, how many insured owners will now submit claims if they are struggling with development? 

3.      Are those who write title insurance policies (and the State agencies that approve them) now rushing to limit losses by revising owner policy forms?

 

                                                                     Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.