Monday, November 30, 2020

HOGS, OLFACTOMETERS, & XENOPHOBIC APPEALS

              Murphy-Brown, LLC is a commercial hog producer, who contracted with Kinlaw Farms to operate an industrial hog feed facility. Joyce McKiver and others owned residential properties near Kinlaw Farms. They sued Kinlaw for nuisances associated with hog operations, claiming they could no longer enjoy their outdoor gardens, hold cookouts, or even keep their windows open.

             Kinlaw maintained 15,000 hogs at the farm. The hogs generated 153,000 pounds of feces and urine daily. Kinlaw housed the hogs in sheds that used vents and fans to move fumes to the outside of the building. By design, the hog waste in the sheds fell through slats in the floor. Then, the waste was stored in three open-air pits within view of McKiver’s home.

             The lagoons contained millions of gallons of hog waste.

             Kinlaw periodically drained waste from the pits and spread it as fertilizer across open fields on Kinlaw’s property. Approximately 8 million gallons of hog feces were sprayed in the air annually at Kinlaw Farms.

             Kinlaw was aware that residential housing was in close proximity to its farm and as a consequence, instructed its personnel to refrain from discharging the hog waste to spray fields if the neighbors planned to entertain guests for a wedding or cookout. Despite the policy, spraying of hog waste in summer months occurred at Kinlaw Farms three to five days each week, for an average of six hours each day.

             Additionally, trucks regularly delivered new hogs, removed live hogs, and retrieved dead hogs, at an all-day, all-night pace.

             Dead hogs were stored in “dead boxes,” which were dumpsters placed in open fields at Kinlaw Farms. Hog carcasses would pile up and rot in the dumpsters. The dead boxes attracted buzzards, gnat swarms, and flies that would also frequent neighboring properties.

             In 2013 McKiver and her neighbors had enough and asserted a lawsuit in State court, then removed it to federal court in 2014. The federal district court consolidated 26 related cases filed by neighbors.

             In Spring 2018 the jury returned a verdict awarding $75,000 in compensatory damages to each of 10 plaintiffs, and also awarding $5 million in punitive damages. The district court applied the State’s punitive damages cap, reducing the total punitive award to $2.5 million.

             Kinlaw appealed.

             Kinlaw claimed on appeal that McKiver and neighbors were not entitled to damages for loss of use and enjoyment of their property, as State laws including a “Right to Farm Act.” The federal Court of Appeals made short work of that argument, citing that “. . . it is beyond debate that North Carolina case law dating back over 100 years includes recognition of loss of use and enjoyment from annoyance and discomfort, as well as other forms of damages . . .”

             Next, Kinlaw pivoted to a challenge of McKiver’s experts. First up was Dr. Shane Rogers. Dr. Rogers had testified that DNA markers for hog feces could be found on the homes surrounding Kinlaw Farms. His specialty was described as “the fate and transport of fecal pathogens.”

             I won’t go into graphic detail regarding the feces collection, sampling, analysis, and labeling issues litigated by Kinlaw. Suffice it to say that the Court of Appeals determined that Dr. Rogers’ opinions were both reliable and relevant.

             Judgment for Joyce McKiver and her neighbors was mostly affirmed, in a decision that took 144 pages to explain. Of which the first 67 pages constitutes the formal opinion of the Court, while the remaining 77 pages consists of various concurring and dissenting criticisms. Some of the dissenting and concurring opinions offered suggestions regarding Chinese racial issues, xenophobic appeals, and olfactometer readings.

             See Joyce McKiver v. Murphy-Brown, LLC: Case No. 19-1019: US Court of Appeals; 4th Circuit; November 19, 2020: https://law.justia.com/cases/federal/appellate-courts/ca4/19-1019/19-1019-2020-11-19.html.

           Lessons / Questions / Issues:

  1. Issue: So, no surprises here – the outcome is exactly as you expected, right? I look at this differently. What if the neighbors knew of the hog farm operations, nuisance, stink, and related health issues when they bought their properties, and then assumed the risk by moving in and occupying the properties as their residence. Should Kinlaw be liable in that situation? 
  1. Question: Does this case suggest that you can buy residential property near an airport or toxic dump site which is publicly disclosed or visibly apparent, move in, then later assert a valid claim?
  1. Statement: There is no question but that McKiver and her neighbors were and likely still are substantially damaged, for which money may not be compensatory if their health was adversely impacted. As one of the appellate judges stated, nobody wants another situation like Flint, Michigan. I hope this is not further appealed, that the money recovery is enough for them to move far away, and that science can provide a better answer for this issue that must be recurrent in every State.
          PS v1: One stinkin’ year; one stinkin’ post. 

          PS v2: Happy Holidays!

                                                                                     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.

 

Thursday, October 29, 2020

LEASE RADIUS RESTRICTIONS

             The Shops at Legacy is a successful mixed-use commercial development in Plano, Texas. Del Frisco’s Grille of Texas LLC entered into a Lease Agreement with Shops in October 2014. The Lease contains a provision prohibiting Del Frisco from owning, operating, or managing a business with the same or similar trade name or similar concept within five miles.

            If Del Frisco breaches the covenant, then base rent is increased 10%, and percentage rents are increased 25%, or 75% if the other store is within a two-mile radius.

            The Lease further defines the tenant’s trade name as Del Frisco’s Grille, “. . . or other trade name used by Tenant . . . operating the same restaurant concept in a majority of its and their locations . . .”

            In November 2015 Del Frisco signed a lease to open “DF Steakhouse” in Legacy West, a newly developing retail complex less than two miles from The Shops at Legacy. In January 2016 Shops notified Del Frisco that it was aware of the new lease and it would consider the opening of DF Steakhouse at Legacy West to be a competing business.

            Del Frisco responded that DF Steakhouse was not a competing business primarily because Del Frisco was prohibited under the terms of the Shops Lease from having steak sales exceed 20% of gross sales. This accommodation was included in the Shops Lease so that Del Frisco would not compete with Bob’s Steak & Chop House, a pre-existing tenant at Shops at Legacy.

            Shops replied that a competing business under the Shops Lease was not limited to the same restaurant concept, but also covered businesses with a similar trade name.

            In May 2017 Shops advised Del Frisco that, in anticipation of the opening of DF Steakhouse in Legacy West, rent was increasing due to the violation of the radius restriction clause. Del Frisco refused to pay over $350,000 in excess rents. Shops filed a lawsuit.

            Shops argued to the trial court that Del Frisco opened a competing business within two miles from The Shops at Legacy, and that both businesses had similar trade names. Del Frisco responded that DF Steakhouse did not compete, and in any event, the rent increase was an unenforceable liquidated damages penalty.

            The trial court granted judgment in favor of Del Frisco. Shops appealed.

            The Court of Appeals elected to focus solely on the liquidated damages issue. Shops argued that it is merely an agreed rent adjustment mechanism, which did not constitute a breach of the Lease. Instead, close-quarters competition was an action permitted by Del Frisco. But, an action with consequences.

            The Appellate Court stated that there is no meaningful difference between a provision expressly prohibiting competition and a clause that imposes damages for engaging in competition. And as such, the provision must stand the test of a liquidated damages evaluation.

            From there, the Court evaluated the “universal rule” that damages must be limited to “just compensation for the loss or damage actually sustained.”

            As written, the Lease provides Shops with the same measure of damages regardless of whether the competing business diverts customers from the property owned by Shops, or whether there is no connection or similarity between the trade names and businesses. The Court used the example of Del Frisco opening Del Frisco’s Grill Supplies, selling BBQ grills and grilling accessories. The names might be similar, but the business concepts are not. And in that situation, Del Frisco should not be deemed to have violated its radius restriction clause, incurring a significant financial penalty.

            The radius restriction imposes an impermissible penalty. Judgment for Del Frisco is affirmed. See Shops at Legacy v. Del Frisco’s Grille of Texas: Case No. 05-19-01274-CV; Texas 5th District Court of Appeals; August 17, 2020: https://scholar.google.com/scholar_case?case=11554703078941256642&q=the+shops+at+legacy+v.+del+frisco&hl=en&as_sdt=6,44&as_vis=1.  

            Lessons / Questions / Issues:

  1. Question: Your retail Lease has a radius restriction clause, right? Might want to rethink it next time you sign a new Lease or amend an existing one.
  1. Issue: What does your Lease say about direct competition vs. merely a similarity in trade name?
  1. Issue: How does your Lease compute damages if tenant defaults or triggers a situation where tenant owes additional money? Is there a relation to a reasonable forecast of future damages, or is it just an artificial tabulation intended to act as a deterrent?

                                                                                     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.

Monday, September 28, 2020

WHEN LIQUIDATED DAMAGES PROVISIONS FAIL

             John and Rosa Castro leased residential property from Fred Graylee in May 2015, for $3105 rent per month. In June 2018 Fred sent the Castros notice that they had three days to vacate, and that they owed $27,120 in unpaid rental.

             The Castros neither paid nor vacated, so Fred filed an eviction lawsuit.

             On October 2, 2018, the parties entered a stipulation with the Court. Under the stipulation, Fred was awarded possession as well as a judgment for $28,970 if the Castros failed to return the keys and vacate by October 31, 2018. The stipulation worked much like a settlement agreement.

             In January 2019 Fred filed a motion for entry of a $28,970 judgment against the Castros. Fred’s motion was based on both the stipulation as well as the declaration of Fred’s Property Manager, who claimed that the tenants had not vacated by October 31 but instead moved out the following day – November 1, 2018.

             The trial court entered judgment for Fred; Castros appealed.

             The Castros claim that the judgment amount of $28,970 was based upon a liquidated damages provision in the stipulation, but it is unenforceable as it bears no reasonable relationship to the range of actual damages the parties could have anticipated based on a short-term tenancy holdover.

             The appellate court accepted Castros’ position that the stipulation contained a “liquidated damages” clause. From there, the court considered “liquidated damages” as compensation to be paid in the event of a breach of contract, as determined by an agreement. The court further allowed that liquidated damages clauses become an unenforceable penalty if it bears no reasonable relationship to actual damages.

             LD clauses must provide for fair average compensation for an anticipated loss.

             In situations where the parties do not attempt to anticipate actual damages but instead merely select an arbitrary amount, the provision can fail. Also, LD provisions that provide for penalties in order to motivate a party to pay are unenforceable.

             Courts can look at the efforts undertaken by the parties to calculate the amount of damages that can be anticipated. The result can be measured, after a party has been damaged, against the amount of such damages.

             This “look back” procedure automatically makes delicate any LD provision.

             In the stipulation, the Castros did not concede the merits of the eviction claim. Neither did they admit to owing $27,100 in unpaid rent. Seeing “no meaningful relationship between the $28,970 judgment and the tenant’s failure to [timely vacate]” allowed the appellate court to determine that the $28,970 amount is an unenforceable penalty.

             The trial court’s judgment was reversed; Castros win and Fred loses. See Graylee v. Castro; Case Nos. G057901 and G058409; California 4th Appellate District; Division Three; July 13, 2020: https://cases.justia.com/california/court-of-appeal/2020-g057901.pdf?ts=1596564065.       

            Lessons / Questions / Issues:

  1. Question: How many disputes have you resolved that require a future payment? Have you added something extra to motivate a party? Might want to rethink that.
  1. Question: How can you anticipate future damages? Perhaps the mechanism you used should be inserted into your settlement agreement / stipulation / judgment. That way, if later contested, a Court can review your algorithms and spreadsheets to better understand how you arrived at the LD amount.
  1. Question: Why do Courts have the ability to review LD provisions after the event that triggers the LD payment, to determine if it was, at the time the LDs were contemplated, a reasonable forecast of future damages? Ok so that one might be rhetorical, but still . . .

                                                                                                            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

Wednesday, September 2, 2020

WHOOPS, PERHAPS I SHOULD HAVE DISCLOSED THAT

             Bryan Parmelly owned 700 acres in Taylor County. The acreage was naturally divided by a steep bluff into “upper” and “lower” portions. In 1999, Bryan signed a surface lease covering most of the property, for a 20-year term with renewal options.

             Under the lease, Vulcan Construction had the right to remove rock, dump dirt and waste, construct plants, and conduct mining operations. Vulcan started its operations upon the upper portion of the property, although its lease allowed it to conduct similar operations on the lower part as well.

             Bryan hired A.E. Nelson Jr. to sell the lower tract in 2013, consisting of 225 acres. Gary McCall, principal of McCall Motors and experienced real estate investor, saw an advert and expressed his interest.

             Gary viewed the property several times and observed Vulcan’s mining operations on the upper tract. The lower tract border was merely feet from the edge of the rock quarry.

             McCall Motors elected to purchase the 225-acre lower parcel for $1,500 per acre. The Contract of Purchase and Sale failed to disclose the existence of any surface leases and instead affirmatively provided: “None at time of closing.”

             Remember those five words – they become relevant later.

             Before closing Gary received a title commitment which specifically excluded coverage for the Vulcan lease and two other oil and gas leases that were recorded in Taylor County. Under the terms of the contract, Gary had the right to object to adverse title matters and if Bryan did not provide a remedy, then Gary could terminate the deal and receive the full return of all earnest monies.

             Gary acknowledged receipt but claimed he did not review. Regardless, Gary neither objected nor terminated. So, McCall Motors purchased the lower acreage subject to the Vulcan lease.

             McCall Motors elected to sell the property in 2015 to Jeremy and Jennifer Britten, who offered $500,000 – a substantial and quick profit. Ultimately M/M Britten terminated the deal when they objected to the title commitment, which disclosed the existence of the Vulcan lease.

             McCall Motors sued Bryan Parmelly, A.E. Nelson Jr., and others claiming the existence of the Vulcan lease was not properly disclosed; Bryan Parmelly settled his portion before trial. 11 members of the jury determined that Nelson committed fraud. The jury awarded McCall Motors $16,000 in damages and $30,000 for lost profits on each of McCall’s fraud claims.

             The trial court ultimately converted the jury’s award into a judgment for McCall of $130,660 for actual damages and $177,500 attorney’s fees. Nelson appealed, claiming that McCall had no right to claim it relied upon the statement in the Contract of Purchase and Sale.

             On appeal McCall contended that Nelson made a representation that there would be no surface leases on the property at the time of closing. See the magic five words. Although the Vulcan lease was in existence at the time the Contract was signed, Seller would cause it to be terminated by closing at least to the target 225-acre parcel.

             That was McCall’s position, anyway.

             The Appellate Court started by enumerating “red flags” (that’s the term in the decision): (a) the neighboring quarry operation was “very apparent”; (b) there was a sign present on the site identifying Vulcan; (c) Parmelly intended to maintain ownership of all minerals at and under the property; (d) Gary McCall, a sophisticated real estate investor, failed to object to the Vulcan lease when he received the title commitment; and (e) Gary had been engaged in over 160 real estate deals and understood the significance of a title commitment.

             The Court of Appeals concluded that McCall did not justifiably rely on the statement “None at time of closing” with regard to the Vulcan lease. Consequently, the trial court’s Judgment was reversed; Nelson wins and McCall loses. See Nelson v. McCall Motors; Case No. 11-17-00307-CV; Eastland Court of Appeals of Texas, 11th District; May 29, 2020; https://scholar.google.com/scholar_case?case=2214463018347336545&hl=en&as_sdt=6&as_vis=1&oi=scholarr.    

            Lessons / Questions / Issues:

  1. Question: Is this the correct decision – what gives an appellate court the right to re-examine the facts and determine that Gary McCall did or did not rely – isn’t that the sole job of the trial jury?
  1. Question: Will this cause you to rethink how you disclose title and survey matters?
  1. Question: Why was the broker tagged with this trial court Judgment anyway – shouldn’t it have been only against the property owner since the broker is merely the agent for the owner?

                                                                                                                         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