Tuesday, June 30, 2020

SPECIAL WARRANTY DEEDS – ARE THEY REALLY DIFFERENT?


            William England and Medardo Garza owned real estate in Houston, subject to a mortgage held by EMC Mortgage. In September 2009 England conveyed his interest to Garza. Three months later, a bankruptcy proceeding was started against England, in which England’s conveyance to Garza was declared void as a fraudulent transfer.

            In December 2010 EMC Mortgage foreclosed its lien. Cochran Investments, Inc. was the foreclosure purchaser.

            Six months later Cochran entered into a contract whereby Cochran agreed to sell Michael Ayers the Houston property. In June 2011 Cochran and Ayers closed their transaction. Cochran delivered a Special Warranty Deed whereby Cochran “GRANTED, SOLD AND CONVEYED and by these presents does hereby GRANT, SELL AND CONVEY” to Ayers the property “without limiting the grant or the warranty of title provided herein.”

            The Deed also bound Cochran and its successors and assigns “to WARRANT AND FOREVER DEFEND, all and singular the Property, subject to the matters stated herein, unto [Ayers, his successors, and his assigns], against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under [Cochran], but not otherwise.”

            I added the underscored words, because those seven added words have the effect of converting a General Warranty Deed into a Special Warranty Deed.

Seven. Powerful. Words.

            Ayers received an Owner Policy of Title Insurance at or shortly after closing, issued by Chicago Title Insurance Company. The policy covered Ayers in the event he did not have “good and indefeasible title.”

            Four days after closing the trustee overseeing England’s bankruptcy sued EMC Mortgage and Cochran, asserting that the foreclosure sale violated the automatic stay imposed by bankruptcy law. Ayers was later added to the lawsuit, and Chicago Title assumed his defense pursuant to his Owner Policy of Title Insurance.

            To obtain case dismissal, Chicago Title paid $45,000 to the bankruptcy trustee and $20,000 to Garza. Then, subrogated to Ayers’ position under the title policy, Chicago Title sued Cochran claiming breach of the “implied covenant of seisin.

            Seisin. Breach of seisin. I am so happy I can finally find a place to write that word, as I have neither seen it nor heard it since law school. Basically, seisin is the legal ownership and possession of a feudal fiefdom or estate in land, typically referred to simply as a “fee” or “fee estate.”

In medieval times it referred to both possession and ownership. Now we separate those interests, but that’s a digression.

            The case proceeded to trial. A Judgment was rendered for Chicago Title, finding that the foreclosure sale and the sale to Ayers were void and that Cochran had breached the covenant of seisin (one cannot sell real estate which one does not own, unless a quitclaim deed is used). The court awarded Chicago Title $125,000 damages and $11,000 attorney’s fees.

            Cochran appealed.

            The Texas court of appeals reversed, finding that a special warranty deed does not imply a covenant of seisin and further, this particular Special Warranty Deed did not make a representation or claim of ownership. The reason, says the court of appeals, is that the Deed stated that Cochran’s title warranty is only regarding claims “by, through or under [Cochran], but not otherwise.”

The claim of Ayers, says the Texas court of appeals, was not by Cochran, was not through Cochran, and was not under Cochran.

            Chicago Title appealed.

            The Supreme Court of Texas was presented with a narrow issue: Do Special Warranty Deeds contain an implied covenant of seisin (ownership) or not? The Texas high Court determined that various Texas appellate courts have made inconsistent decisions regarding this issue and as a consequence, “Texas law on this issue is thus far from settled.”

            The Texas Supreme Court first defined a General Warranty Deed as an agreement by the grantor to pay damages if title fails, no matter the date of failure as long as it is on or before the date of the Deed. A Special Warranty Deed, however, limits the scope of that indemnity obligation to losses and injuries arising only “by, through, or under the grantor.”

            The Supremes voted in favor of Cochran by deciding that Cochran did not breach the title covenant in the Deed that was signed, as Cochran did not create the circumstances that caused the Deed to fail. Those events occurred in the preceding deed – the foreclosure deed – where the foreclosing lender and its trustee evidently lacked the lawful ability to proceed with the public auction.

            This implicitly means that if Cochran had signed a General Warranty Deed then the outcome would have been different. But no. Cochran signed a Special Warranty Deed to Ayers in 2011. Cochran is only liable for title defects occurring during Cochran’s period of ownership. This title failure occurred when Cochran received a defective foreclosure deed from EMC Mortgage in 2010.

            Cochran wins; Chicago Title loses. See Chicago Title Insurance Company v. Cochran Investments, Inc.; Case No. 18-1676; Supreme Court of Texas; June 19, 2020: https://law.justia.com/cases/texas/supreme-court/2020/18-0676.html.
           
            Lessons Learned / Questions Asked / Issues Presented:

  1. Issue: Did you think that a Grantor in a Special Warranty Deed implicitly warranted to the Grantee that the Grantor owned title and had the legal ability to transfer it? I’ll admit it – I did.

  1. Issue: Will this cause you to rethink your purchase and sale strategies regarding executing and accepting Deeds?

  1. Issue: Will you now start reviewing title ownership prior to the date of your closing? Will you now start evaluating the net worth and liquidity of the title insurance companies you have been using?
                                                                                                              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

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888

Thursday, May 28, 2020

BROKERAGE LICENSING – A SURPRISE ENDING




            Sara Ladd owns two vacation properties. To supplement her income and after her employment as a digital marketer ended, she leased the first in 2009 and the second in 2013. Using her job experience, she created an online system to reserve the rental units.

            Neighbors learned of her success and asked her to manage their properties too. In 2013 Sara formed a business entity and in 2016 she launched a corresponding website.

            Sara’s objective was to “take the hassle out of short-term vacation rentals by handling all of the marketing and logistics that property owners would otherwise have to coordinate themselves.”

            Sara Ladd acted as an independent contractor, and entered into written contracts with second home, vacation property owners. In those contracts, she agreed to market her clients’ properties on the internet, respond to inquiries, coordinate bookings, manage billings, accept and account for rent payments and security deposits, pay herself a commission and remit the remainder to her clients, and cause the property to be properly cleaned between rentals.

            Those same contracts obligated her clients to execute a Lease with tenants identified by Sara, provide a list of available dates, coordinate rental rates with Sara, certify that the property was legally compliant, pay all applicable taxes, maintain short-term rental liability insurance, provide a list of household rules and instructions, and stock the property with necessary supplies.

            Sara Ladd was not a party to the Leases.

            Sara managed her business entity by herself. Most business operations were conducted from her home. Her fees were modest – perhaps a few hundred dollars. Sara Ladd never managed more than five clients’ properties at any one time.

            Her services did not include identifying target properties or assisting her clients to buy or sell properties.

            In January 2017 the Bureau charged with administration of the Real Estate Licensing and Regulation Act called Sara to inform her that she had been reported for the unlicensed practice of real estate. Sara Ladd reviewed the laws and, after determining that her short-term vacation property management services were covered by the statute and licensure was required, she closed her property management business to avoid civil and criminal sanctions.

            Sara then filed a lawsuit against the State claiming that the licensing requirements violated her substantive due process rights because they impose unlawful burdens on her right to pursue her chosen occupation.

            In ruling for the State, the trial court dismissed Sara’s complaint, holding that the State’s brokerage licensing requirements are constitutional and applicable to Sara. The underlying reasoning supported the court’s decision that the purpose of licensing is “to protect buyers and sellers of real estate, the most expensive item many persons ever buy or sell, from abuse by persons engaged in the business.” [I added the underscoring]

            Sara Ladd appealed, challenging the trial court’s reasoning that, without consideration of her limited services, application of the State’s licensing requirements bear a substantial relationship to the stated purpose of “protecting buyers and seller . . . from abuse.” And further, as applied to her unique and non-traditional situation, application of the licensing statutes were unduly burdensome and patently beyond the necessities of the case.

            Basically, Sara argued that her limited services allow her to challenge occupational licensing laws in a manner that full-service brokers could not.

            To satisfy the State’s licensing requirements, Sara would minimally need to undertake 315 hours of irrelevant coursework and pass two exams on real estate practices that do not bear a relation to her ability to provide safe and quality short-term vacation property management services. The classes and exams can take three years to conclude.

Sara Ladd also argued that the ‘brick and mortar’ office requirement is archaic and bears no relation to her online, home-based business.

            The Supreme Court held that the licensing requirements, as applied to Sara Ladd, are unconstitutional, and further, that the laws are unreasonable, unduly oppressive, and patently beyond the necessities of her situation.

            I wasn’t expecting this.

See Sara Ladd v. Real Estate Commission; Case No. J-71-2019; Supreme Court of Pennsylvania; May 19, 2020: https://law.justia.com/cases/pennsylvania/supreme-court/2020/33-map-2018.html.
           
            Lessons Learned / Questions Asked / Issues Presented:

  1. Lesson / Question: You thought that real estate brokerage / sales agency licensing statutes could not effectively be contested? Yeah, me too.
  1. Issue: Will this cause similar challenges in other jurisdictions and force State legislators to respond, or risk the possibility that Courts will rewrite their laws?
  1. Issue: Does this kick open the door to other ‘niche’ limited real estate service providers that now require licensure? Apartment locators? Short-term leasing? Property management without property sales, purchases, or leases?

                                                                                                                  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

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888