Monday, September 30, 2024

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, 7th 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

Friday, August 30, 2024

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, 5th 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.

Wednesday, July 31, 2024

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, 1st 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.

Friday, June 28, 2024

INVOLUNTARY DEED RESTRICTION WAIVER

             McDaniel Homes owned real estate in Houston. The Meyerland Community Improvement Association was in charge of enforcing deed restrictions. One of the restrictions allowed stairs, steps, and ramps to be located up to five feet outside of the front building setback line. 

            McDaniel sought a declaratory judgment that the restriction had been waived through abandonment. 

            The POA denied the allegations, and filed a motion to dismiss, asserting that McDaniel’s claims have no basis in fact or law. The trial court granted the motion of the POA and dismissed McDaniel’s claim. 

            McDaniel Homes appealed. 

            The Court of Appeals reviewed McDaniel’s assertions that: (a) the POA has not enforced restrictions consistently; (b) there are dozens of properties throughout the neighborhood that violate the restrictions; and (c) the POA has decided to selectively enforce the restrictions against McDaniels and no other developers or property owners. 

            This yielded an analysis of the facts required under Texas law to conclude that restrictions have been abandoned, and enforcement waived. To successfully establish this position, the Court of Appeals determined that the litmus test is: “violations of the covenant then existing are so great as to lead the mind of the average person to reasonably conclude that the restriction in question has been abandoned and its enforcement waived.” 

            To make that evaluation, the Court must consider the number, nature, and severity of existing violations, any prior enforcement of the restriction, and whether it is still possible to realize to a substantial degree the benefits of the restriction despite the violations. 

            The Court of Appeals decided that the facts presented have a basis in law, and cannot be dismissed as overly broad or vague, or improperly fail to allege a claim. The Court refused to rule for McDaniel based on the facts claimed, but presumably if McDaniel can prove the facts alleged in trial court, then the restrictions will fail. 

            The trial court’s judgment is reversed and the case returned for a full trial to allow a jury or judge to evaluate the facts McDaniels alleges. McDaniel wins this round. See McDaniel Homes v Meyerland Community Improvement Association; Case Number 14-22-00854-CV; Texas 14th Court of Appeals; May 23, 2024: https://scholar.google.com/scholar_case?case=12496832388846844844&q=mcdaniel+homes+llc+v.+meyerland+cmty.+improvement+ass%27n&hl=en&as_sdt=6,44&as_vis=1. 

            Questions / Issues / Comments: 

1.      Am I the only one looking for a timing requirement – at least a suggestion – to support the conclusion that deed restrictions have been abandoned or waived? I find it compelling that timing of the acts leading to the alleged waiver or abandonment was not addressed by this Court of Appeals. Was that omission purposeful? 

2.      Can restrictions be waived or abandoned this easily, and if so, are POA and HOA directors, lenders, developers, tenants, and property owners aware? 

3.      If McDaniels ultimately receives a final Judgment in support of McDaniels’ position, will that be sufficient to cause a title insurance underwriter to remove or amend the exception in an Owner’s Policy and Lender’s Policy related to recorded restrictions at least with respect to stairs, steps, and ramps? 

                                                                        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, May 30, 2024

HOW NOT TO RELEASE A MORTGAGE

             Starting in 2010, Jerome Cohen and Shaun Cohen, through their entities EquityBuild, Inc. and EquityBuild Finance, LLC, sold promissory notes to investors. Each note represented a fractional interest in a specific real estate property. Investors were assured returns ranging from 12% to 20%. 

            Separate mortgages on underdeveloped areas of Chicagoland secured the notes. 

            The Cohens had each investor sign a contract granting to EquityBuild the right to service the loans. Consequently, the mortgages were structured so that EquityBuild was the borrower and individual investors were the lenders, “in care of” EquityBuild. 

            The contracts authorized EquityBuild to issue monthly statements and payoff demands, and collect loan payments. The contracts also limited EquityBuild’s power, by requiring written instructions from investors before foreclosure, amendment, or termination of the mortgage debt. 

            However, separately and in addition to the contract, many investors also signed a document providing EquityBuild with the authority to receive payments and issue mortgage releases. 

            In 2017, BC57 loaned $5.3 million to EquityBuild, in exchange for a first mortgage on five properties located on the south side of Chicago. Those five properties were already owned by EquityBuild, and were already subject to preexisting mortgage liens securing individual investors. 

            To deal with the problem of competing first-lien security interests, EquityBuild provided payoff letters and Releases to BC57 and the escrow agent at closing, purporting to pay and discharge the existing loans. The Releases were executed by EquityBuild, with Shaun Cohen signing as the manager of EquityBuild. 

            Individual investors did not sign the Releases. Neither did individual investors receive any monies from BD57’s payment. 

            All of this collapsed in 2018, when the Cohens admitted to the US Securities and Exchange Commission that EquityBuild had funded investor interest payments with later investments. The SEC filed a lawsuit, obtained a temporary restraining order, and the district court authorized the appointment of a Receiver to liquidate the assets of EquityBuild. 

            With approval from the district court, the Receiver sold the five Chicagoland properties and recovered $3 million. The individual investors asserted a claim to those proceeds, arguing that they never received payment or released their mortgages. 

            BC57 disagreed and asserted it had priority. 

            The district court ultimately awarded the funds to the individual investors, concluding that the mortgage releases were defective and that EquityBuild lacked the authority to execute them. 

            BC57 appealed, claiming that its $5.3 million payment was made in exchange for first-lien mortgages. And that the lien positions of the individual investors had been discharged through full payment of their mortgages. 

            The baseline rule, as determined by the Appellate Court, is that payment of a debt secured by a mortgage automatically extinguishes the security interest. BC57 contends that this rule yields the inescapable conclusion that BC57 is entitled to all net funds recovered by the court’s Receiver. 

            In reviewing other appellate decisions, the Court found that there can be circumstances when payment alone does not extinguish a debt. To cause a mortgage debt to be fully discharged, a properly executed, valid Release instrument, is also required. 

            The Releases that were tendered contained fundamental errors. As the most glaring example, the Releases list EquityBuild as the party issuing the releases, even though EquityBuild was the borrower – not the lender or the lender’s agent. 

            BC57’s response is that discrepancies do not invalidate the Releases, because they fall under the legal doctrine of mutual mistake. In reviewing that position, the Appellate Court approved the district court’s decision concluding the opposite. There was no mutual mistake here, rather all of this pertains directly to the Cohens’ business model operated to purposefully obscure legal responsibility and asset ownership. 

            The Releases were facially invalid. Mortgage payment alone does not extinguish a preexisting security interest without a valid Release. Individual investors win; BC57 loses. See SEC v. EquityBuild; US Court of Appeals 7th Circuit, Case No. 23-1870, May 6, 2024: https://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2024/D05-06/C:23-1870:J:St__Eve:aut:T:fnOp:N:3206589:S:0. 

            Questions / Issues / Comments: 

1.      Title insurance for the individual investors and BC57 is not mentioned in this case. My conclusion is that all of this occurred without such coverage. I could be wrong – perhaps there are separate claims against escrow agents and title underwriters – but if so then presumably it all would have been consolidated here, for judicial economy. 

2.      Even if lender title insurance policies had been issued, the same claims and defenses would still have been asserted. But at least one or more “deep-pocket” insurance companies could possibly have been induced to pay claims. 

3.      Putting aside title insurance, the underlying issue is the legal effect of Lien Release documents. It is my impression that not enough real estate lawyers, title agents, underwriters, and escrow officers review these documents other than possibly to verify that the Property description and recording data are correct. The assumption is that mortgage payment equals mortgage release. That will now (should!) change, based on this case. 

                                                                       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.

Tuesday, April 30, 2024

ARBITRATION, ROUND NEXT

             Mohammad Rafiei bought a new house from Lennar Homes in 2018. Three years after purchase, Rafiei alleges that the garbage disposal exploded, injuring him. 

            Rafiei sued Lennar for damages over $1 million. The lawsuit was asserted in a Texas District Court. 

            The contract executed between Lennar and Rafiei required that all disputes be submitted to arbitration, including claims of personal injury and issues regarding the enforceability and validity of the arbitration provision. The arbitrator was vested with sole authority to decide everything. 

            The provision incorporated the rules and procedures of the AAA, following its construction industry regulations. If claimed damages exceed $250,000, three arbitrators must resolve the dispute. 

            Each party is required to pay its own costs and expenses of arbitration. 

            Lennar requested that the trial court stop the litigation proceedings, and instead require arbitration as provided in the contract. Rafiei opposed Lennar’s motion, arguing that the arbitration provisions are unconscionable because arbitration costs are prohibitively expensive. 

            To support his response Rafiei submitted evidence that arbitration would cost him $8,025. And that all he could afford was $6,000. If Rafiei is required to use only arbitration he would effectively be precluded from pursuing his claim. 

            The trial court denied Lennar’s motion to stop the lawsuit and instead, require arbitration. Lennar appealed. 

            The court of appeals analyzed the situation and concluded that the trial court was correct. It is unconscionable that Rafiei was forced to use a dispute-resolution forum that he could not afford. This meant that, on a practical basis, he had no access to justice as he could not pay the fees and costs. 

            The court of appeals affirmed in 2022. Lennar again appealed. 

            The Supreme Court considered the concept of unconscionability. A contract is unconscionable and unenforceable when a transaction is so one-sided, with so gross a disparity in values exchanged, that no rational contracting party would have entered it. When a court applies an unconscionability standard to arbitration, the critical issue is whether arbitration is an adequate and accessible substitute for litigation. 

            To be enforceable, the alternative to litigation must be a forum where parties can effectively vindicate their rights. Anything less fails. 

            At trial, Rafiei presented no evidence that he sought a waiver or reduction of AAA arbitration fees and related costs. The court transcripts indicated that Rafiei failed to include a comparison of costs between litigation and arbitration. Further, Rafiei offered no testimony regarding his ability to afford litigation, but not arbitration. 

            Lacking submittals from Rafiei regarding costs between both alternatives other than the conclusion of Rafiei’s lawyers that arbitration costs are “astronomically higher” than litigation, out-of-pocket expenses in litigation are “minimal,” and litigation hearings and trials are “free,” the Supreme Court concluded that Rafiei failed to establish that he could afford litigation but not arbitration. 

            The Judgments of the trial court and court of appeals are reversed. Lennar wins this round but Mohammad Rafiei will have another chance to present evidence that arbitration costs preclude him from seeking justice. The case is sent back to the trial court for further proceedings consistent with the Opinion of the Supreme Court. 

            See Lennar Homes of Texas v. Rafiei; Texas Supreme Court; Case 22-0830, April 5, 2024: https://scholar.google.com/scholar_case?case=3185182584592779686&hl=en&as_sdt=6&as_vis=1&oi=scholarr. 

Questions / Issues / Comments: 

1.      It seems basic that Rafiei would furnish evidence of the cost disparity between litigation and arbitration, and his ability to afford only litigation. Could this have been a trial strategy, hoping Lennar would settle instead of appealing to the Supreme Court? Because if this had gone poorly for Lennar, it could mean that all of its contracts containing arbitration procedures are subject to challenge. 

2.      I am not a trial lawyer. But I am constantly discussing trial and arbitration strategies with litigators in my Firm. It feels like corporate America prefers arbitration for reasons of privacy and the perceived inability of a claimant to present facts to a jury, hoping to receive punitive and exemplary damages. And that plaintiffs typically prefer litigation, wanting to avoid the situation where a win in arbitration results in merely a Decree, which still requires conversion to Judgment via litigation to be capable of court-ordered enforcement. 

3.      In general, Courts find a way to uphold the enforceability of arbitration provisions. Builders, engineers, architects, surveyors, and construction contractors continue to insist on adding arbitration into their contracts. Mandatory arbitration provisions are difficult to challenge. 

                                                                        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, March 28, 2024

CAN YOU RELATE TO CONSTRUCTION LIENS?

             S&H Holdings purchased commercial real estate in 2014. In 2018, S&H engaged Integrated Construction Management Service to construct a new Burger King at the site. 

            ICMS contracted with Nore Electric to furnish materials and services in the construction of the BK. Ultimately, ICMS failed to pay Nore and other subcontractors. 

            S&H sold the BK site to Realty Income Properties, and the deal closed on January 18, 2019. The warranty deed was recorded with the County Clerk two weeks later. 

            In March and April 2019, Nore and other subcontractors recorded construction liens against the BK site. Since neither S&H nor RIP were willing to pay the subcontractors, Nore Electric asserted a lawsuit to enforce its liens. 

            The district court concluded that Nore’s liens were valid and properly attached to the BK site, placing RIP at risk of losing its ownership interest if the liens were foreclosed. The court issued a decree of foreclosure, holding that the transfer from S&H to RIP did not cause the liens to lapse or the subcontractors to waive their lien rights. 

            S&H and RIP appealed. 

            S&H and RIP contend that construction liens can only attach to the contracting owner’s real estate. The appellants further argued that because S&H incurred the debts, but the liens were not recorded until after RIP had become the owner, the liens must fail. 

            The Supreme Court disagreed and found that construction liens relate back to the time work began at the site. Construction liens are considered “inchoate” or “hidden” liens. Consequently, one who buys property within the time a contractor is allowed to perfect the lien takes title subject to construction liens recorded after the date of closing. 

            As a result, even though the liens were not recorded at the time of the sale from S&H to RIP, Realty Income Properties could not be a “bona fide” purchaser. 

            The Supreme Court determined that the ability of a contracting owner’s interest to be subjected to future construction liens passes to the next owner. Perfection of construction liens that relate back in time may lawfully occur following the recordation of a Deed. Or a Mortgage. Security Agreement. Deed of Trust. Financing Statement. Assignment of Rents. UCC-1. &tc. 

            The liens filed by Nore Electric and other subcontractors are valid, and are superior to RIP’s Deed, even though the liens were filed after the date the Deed was recorded. The foreclosure decree is affirmed. The Judgment of the district court is also affirmed; Nore wins; S&H and RIP lose. 

            See Nore Electric v. S&H Holdings; Nebraska Supreme Court; Case Number S-23-282; March 15, 2024: https://casetext.com/case/nore-elec-v-s-h-holdings-llc. 

            Questions / Issues / Comments: 

1.      You are a buyer. Or lender. Maybe even a tenant. You checked title and there is nothing untoward. How do you protect yourself from this anomaly? Obtain affidavits from the seller and borrower. Conduct site inspections to determine if the property has been recently repaired or improved. Obtain construction escrows and holdback accounts, to secure the need to later pay the contractors. Get all-bills-paid affidavits from all major contractors and subcontractors. And of course, purchase the best title insurance policy with extended endorsements. 

2.      This is not an issue unique to Nebraska. It is my impression that most States have a similar process. The lien power of contractors, subcontractors, laborers, material providers, architects, surveyors, engineers, and similar labor and service providers, can be derived from States’ constitutions and supplemented by statutes. Perhaps this is a reflection of our agrarian-based USA societies from 200+ years ago, and the desires of those State legislators who wrote the constitutions and statutes to support the workers and laborers who were (and still are) pivotal to our economic success. 

3.      Conversely, you are a contractor, engineer, architect, laborer, surveyor, custom manufacturer, or material provider, and you haven’t been paid? Happy news, you may not be too late to assert your rights, even if the real estate has been sold. Mortgaged. Leased. Foreclosed by others. 

                                                                        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.

Wednesday, February 28, 2024

IS PROCURING CAUSE [STILL] A THING?

            Catalyst Strategic is a consulting firm that advises companies regarding mergers, acquisitions, and similar. Three Diamond Capital is an equipment rental company based in Houston. Three Diamond engaged Catalyst to help with a sale of its company, and executed a contract accordingly. But in October 2018, Three Diamond decided to stop pursuing a sale and ended the agreement. 

            Still, the two companies continued a working relationship. And in 2019, Three Diamond again sought a buyer and executed another engagement agreement with Catalyst. That agreement stated that Three Diamond would pay Catalyst $25k per calendar quarter, plus a commission upon the sale of Three Diamond. The commission was payable if the deal was concluded from the date of the agreement through the 18th month following the date of termination of the agreement. 

            Due to the onset of COVID-19, Three Diamond terminated its contract with Catalyst in March 2020. 

            The rental industry recovered, so the CEO of Three Diamond contacted the CEO of Herc Rentals. Herc had initially been sourced through the efforts of Catalyst during the term of the agreement. This time Herc agreed to purchase Three Diamond for $190 million; the deal closed in August 2021. 

            Three Diamond refused to pay Catalyst the separate fee, even though the transaction took place within 18 months after Three Diamond terminated the contract with Catalyst. So Catalyst sued Three Diamond for breach of contract. 

            The trial court determined that Catalyst substantially performed its obligations, and granted judgment for Catalyst. Three Diamond filed a motion for reconsideration, premised on the ‘procuring cause’ doctrine in Texas. The trial court, unmoved by Three Diamond’s request, awarded Catalyst close to $4 million, plus interest. 

            Three Diamond appealed. 

            The Appellate Court reminded us that the procuring cause doctrine is a ‘settled and plain’ rule in Texas, as announced in a Texas Supreme Court case of 2022. Its function is to credit a broker or agent for a commission-generating sale when a buyer is produced through the efforts of a broker or agent. As a consequence, the commission entitlement vests at the moment of procurement, not when the deal closes. 

            The theory of ‘procuring cause’ is only operational when there is no contract that governs how to handle post-termination commissions. Contractual silence, however, leaves the procuring cause doctrine intact. 

            In this situation, the Catalyst contract contained a ‘robust accounting’ of fees, interim fees, completion fees, and post-termination commissions; there is no claim that the agreement was silent on these points. 

            So, although the procuring cause doctrine is indeed still very much a thing, at least in Texas, it is inapplicable here as the contract is crystal clear. 

            Catalyst must win; Three Diamond will lose. See Catalyst Strategic Advisors LLC v Three Diamond Capital SBC LLC; US 5th Circuit Court of Appeals No. 23-20030; February 22, 2024: https://casetext.com/case/catalyst-strategic-advisors-llc-v-three-diamond-capital-sbc-llc. 

Questions / Issues: 

1.      Be careful. Although the ‘procuring cause’ doctrine may be alive and well, there are statutes that supplant it. As just one example, it is not enough for a real estate broker or sales agent to be the procuring cause of a deal in many States; strict licensure and other requirements must be met before the agent or broker may assert a lawful claim for commission entitlement. 

2.      Further, and although not addressed in this Opinion because there was no need to do so, most States have adopted statutes of fraud that generally preclude oral agreements above a minimum threshold amount, like $500. Do not make the mistake of concluding that a solid argument for a ‘procuring cause’ entitlement means that a written contract is not needed. 

                                                                        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.