Friday, April 28, 2023

LEASE RENEWAL OPTIONS REQUIRE EXACT COMPLIANCE. RIGHT?

            Robert and Dorothy Pitz owned a 320-acre farm. In 1988, M/M Pitz agreed to lease six acres to US Cell Corporation for a cell tower. US Cell then constructed a 380-foot tall cell tower on the farmland.

            The lease term commenced November 14, 1988.

            Rent was $20,000 for the total 30-year lease term, payable in one sum not later than January 5, 1989. That equates to $666.67 per year. A whopping $55.55 per month.

            The Lease contained a renewal option for 30 more years. To exercise it, US Cell was required to send notice at least 60 days before term expiration and pay $20,000 “at the exercise of the option,” as increased by CPI.

            In 2009 M/M Pitz transferred ownership of the farm to their son, William Pitz, and his spouse Lynn. US Cell was not advised of the conveyance, although the Deed was recorded.

            US Cell sent a certified letter of lease renewal exercise to Robert and Dorothy Pitz on September 1, 2017 – more than one year before the September 14, 2018 deadline. US Cell’s letter contained IRS Form W-9 and a direct deposit form.

There was no rent payment accompanying the letter. Instead, the letter advised that “Once we have these documents [W-9 and deposit form], we will be able to disburse the option rental payment to you.”

No response was made to US Cell’s letter. So on October 29, US Cell sent to Will and Lynn a check for $41,439, less income tax withholding, intended to represent advance rent for the 30-year option term.

Will and Lynn returned the payment with an explanation that the payment was not tendered at the time of renewal exercise. As required by the Lease. And therefore the renewal term was not properly exercised.

Will and Lynn filed a lawsuit for declaratory judgment on June 19, 2019, asking for a determination that the option had not been properly exercised since payment was not timely made. The district court concluded that US Cell had indeed properly exercised the renewal option because rental payment was not a condition precedent.

Will and Lynn appealed. The court of appeals affirmed. So Will and Lynn further appealed to the Court of Last Resort.

The Supreme Court commenced its analysis by stating that renewal option exercise must strictly comply with all conditions precedent. The Court dug out a case from civil war years to support the conclusion that both notice and payment are required to effectively renewal a lease.

 Then, the Court used the phrase “On the other hand” to signify a sea-shift change in ideology. Not finding a hard notice-and-payment provision as found in other contracts, the Court viewed the option-to-renew provision in isolation – not connected to the obligation-to-pay-rent sentence. The Supreme Court, struggling with precedent to support the position it wanted to reach, turned to cases from North Dakota and Illinois.

Deciding that there is “less absurdity than might appear at first blush,” US Cell is evidently allowed to send notice of lease renewal without tendering the prepaid rent, even though both are clearly required by the Lease.

US Cell wins, again; Will and Lynn lose. Again.

See Pitz v. US Cellular Operating Company; Case No. 22-0038; Supreme Court of Iowa; April 21, 2023: https://cases.justia.com/iowa/supreme-court/2023-22-0038.pdf?ts=1682085886.

             Questions / Issues:

  1. Maybe I am the one that is in isolation, but this is not the result I had anticipated. In most States, renewal options are strictly construed and deviation is now allowed. This option required both notice and payment. Only one of the two conditions was satisfied.
  1. Note that Lease Section 3.2 contained the option renewal verbiage; Section 4.2 stated the new rent requirement. Would merely reordering the provisions have saved the intent of the parties? What if the timing for renewal (60 days), method of renewal (written notice), and rent obligation (prepaid for the term; old rent + CPI) were all combined in Section 3.2 – would that have saved it from this disastrous result? Or was this Supreme Court intent on forging new law to give other tenants and lessees some breathing room, unless or until fixed by the Iowa legislature?

 

                                                                                    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, March 31, 2023

DAMAGES; TEXAS STYLE

            In 2011 Gulley-Hurst sold a partial interest in a landfill to MSW Corpus Christi for $7.5 million in a seller-financed transaction. Following some disagreements, MSW and GH entered into a contract that allowed MSW to purchase the remaining interest from GH within 120 days.

But if the closing did not occur within the 120-day deadline, then MSW was required to convey its interest back to GH.

            MSW did not close the purchase by the deadline. As a result, in a role-reversal MSW became the seller and GH became the buyer of MSW’s partial interest in the landfill. As partial consideration, it was also GH’s obligation to refinance a $5 million mortgage loan from AmeriState Bank, for which MSW was liable.

            MSW fulfilled its requirements as seller, and timely conveyed the property to GH subject to the AmeriState bank loan. Thereafter, GH failed to refinance the AmeriState debt.

            So MSW sued GH for breach of contract, requesting damages caused by GH’s failure or refusal to pay off the mortgage debt incurred by MSW to purchase the partial interest in 2011, which release MSW required to protect MSW’s credit standing and that of the loan guarantors, and so MSW could borrow more funds for more projects.

            At the time of trial the value of MSW’s ownership interest in the landfill had appreciated from $7.5 million to $17+ million. So, through some fancy footwork, the jury was convinced to reach a verdict awarding MSW “benefit of the bargain” damages of $10+ million.

            Again, remember that MSW was pursuing a breach of contract claim, caused by the failure of GH to pay off or refinance a $5 million mortgage loan. This is not a damages claim asserted by a buyer, caused by a seller’s refusal to convey the property.

In any event, after return of the jury’s verdict the trial court reduced it to $00, stating “I did not submit the proper measure of damages to the jury.”

MSW appealed, hoping for reinstatement of the $10+ million jury verdict. The Court of Appeals affirmed the trial court’s $00 judgment.

MSW further appealed to the Supreme Court of Texas, again requesting reinstatement of the “benefit of the bargain” damages of $10+ million.

The Supreme Court starts by stating the general rule for measuring benefit of the bargain damages is to calculate the difference between what was promised and what was received. But when the property’s market value at the time of breach exceeds the contract price, the correct measure of damages is the difference between the promised contract price and what the seller received.

Permitting a seller to recover more than the contract price would be an unlawful windfall, at buyer’s expense.

Had the contract been fully performed, MSW was entitled to receive $7.5 million for its ownership in the landfill – not $10+ million. As MSW expected to receive $7.5 million, the damages to which MSW is entitled are the difference between $7.5 million and what MSW actually received.

MSW expected to receive $7.5 million. MSW received $7.5 million. 7.5 – 7.5 = 00.

And, since GH still remains obligated to finance the AmeriState Bank loan, MSW is not entitled to more.

            GH wins, again. See MSW Corpus Christi Landfill, Ltd., v. Gulley-Hurst, L.L.C.; Supreme Court of Texas; March 24, 2023: https://scholar.google.com/scholar_case?case=16400040108480824489&hl=en&as_sdt=6&as_vis=1&oi=scholarr.

             Questions / Issues:

  1. What happened here? A seller sold real estate “subject to” existing debt. The deal closed, on time and without issues. It was, thereafter, buyer’s obligation to pay off or refinance the debt, but buyer failed to do so. How was seller able to convince a jury that seller was entitled to anything more than what was stated in the contract?
  1. Why was this litigated all the way to the Supreme Court, since the outcome seems obvious?

                                                                                    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, February 27, 2023

SHARED FRAUD LIABILITY

            In 2005 Kate and her boyfriend David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel and sell it. David took charge by hiring an architect, structural engineer, designer, and general contractor. David monitored their work, reviewed invoices, and signed checks.

            Kate was uninvolved.

            David married Kate. Kieran Buckley bought the house. In conjunction with the sale, David and Kate stated that they had disclosed all material facts related to the property. But after closing Buckley discovered a leaky roof, defective windows, missing fire escape, and permit problems.

            Buckley sued Kate and David in State court. The jury awarded damages to Buckley of $200,000+.

            Kate and David could not pay Buckley, not to mention their other creditors. So they filed for Chapter 7 bankruptcy relief, which allows debtors to get a “fresh start” by discharging their debts.

            Unfortunately, however, not all debts are dischargeable. The Bankruptcy Code bars the discharge of debts to the extent obtained by false pretenses, false representation, or actual fraud.

            Buckley filed an adversary complaint alleging that the monies owed on the State-court Judgment fall within this exception, and should not be discharged. After trial, the Bankruptcy Court agreed that neither Kate nor David could discharge their debt to Buckley.

            Based on the testimony from the parties, real estate agent, and contractors, the Bankruptcy Court found that David had knowingly concealed the defects from Buckley. And – the compelling part for lawyers – the Bankruptcy Court imputed David’s fraudulent intent to Kate.

            Meaning, neither could discharge the Buckley debt in the context of their Chapter 7 bankruptcy.

            Recall that Kate had virtually nothing to do with this, other than formation of a partnership. So Kate appealed.

            The Bankruptcy Appellate Panel agreed as to David’s fraudulent intent but disagreed as to Kate’s. So the case was remanded back to Bankruptcy Court, where this time the Court concluded that Kate lacked the requisite knowledge of David’s fraud and therefore Kate could discharge her liability to Buckley.

            Liking this outcome better, the Bankruptcy Appellate Panel affirmed the judgment. So Buckley appealed.

            The Supreme Court of the United States of America agreed to review it. Doing so, SCOTUS used 10 pages of legal prose to determine that it hardly matters who perpetrates the fraud. The statutory analysis goes like this:

(1) Question: Is there an individual debtor? Answer: Yes, Kate.

(2) Question: Is there a debt? Answer: Yes, owing to Buckley.

(3) Question: Did the debt arise due to false pretenses, false representation, or actual fraud? Answer: Yes, as determined previously by other courts.

             Not relevant to the analysis is who, exactly, committed the fraud.

            What is relevant here is that a debt + fraud = non-discharge in bankruptcy. Full stop. “The debt must result from someone’s fraud, but Congress was ‘agnostic’ about who committed it.”

            Kate Bartenwerfer’s debt is not dischargeable in her bankruptcy proceeding. See

Kate Bartenwerfer v. Kieran Buckley; Supreme Court of the United States; February 22, 2023: https://www.supremecourt.gov/opinions/22pdf/21-908_n6io.pdf.

 Note that this case had its inception in 2005, close to 20 years ago!

             Questions / Issues:

  1. Did that result surprise you? I had guessed that a debtor required some level of active participation to be stuck with a non-dischargeable debt. But then I am not a bankruptcy lawyer. Perhaps the bankruptcy specialists anticipated exactly this result. However, if this was the obvious result then an appeal to SCOTUS would not have been required.
  1. What does this mean to your investments in partnerships, corporations, joint ventures, limited liability companies, and similar passive entities? If those in a control position make poor choices, could the liability extend to you?
  1. If you are nervous about Q2, then do you have / can you get indemnities from those in a control position? But indemnities are just more words on more paper. Can you get collateral or security to backstop the indemnity?

                                                                                 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.