Tuesday, December 10, 2013

When a Guaranty Agreement Is Not

In early 1997 Border Patrol of Wisconsin, Inc. purchased nine Taco Bell franchises from Pepsico. In connection with financing the purchase, Scot Wederquist signed a Guaranty Agreement in favor of PFS, a division of Pepsico. At the time, Wederquist owned a 25% interest in Border Patrol and served as its Treasurer, and PFS supplied goods and services to Taco Bell franchisees.

PFS sold its assets including USA and Canadian operations to Ameriserve a few months later. And in January 2000, Ameriserve went bust and filed a Chapter 11 bankruptcy petition in Delaware. The Bankruptcy Court approved the sale of substantially all assets of Ameriserve to McLane Foodservice, Inc. in late 2000.

In June 2010 McLane contracted with Table Rock Restaurants to sell it food supplies and services. Wederquist owned 40% of Table Rock and also served as its Treasurer. Table Rock closed its doors in November 2010, owing McLane approximately $450,000.

In December 2010 McLane sued Table Rock and Wederquist to recover the delinquency. The trial court entered Judgment for McLane against Table Rock, but not against Wederquist, holding that he was not personally liable under the Guaranty Agreement he had signed 13 years before in the Border Patrol – Pepsico deal.

Probably sensing that a Judgment against Table Rock had limited collection value, McLane appealed.

It may have been a hint to the outcome of the case when the first substantive paragraph began with “A guarantor under Texas law is a so-called favorite of the law and as such, a guaranty agreement is construed strictly in [his] favor. . . Thus, where uncertainty exists as to the meaning of a contract of guaranty, its terms should be given a construction which is most favorable to the guarantor.”

The Federal District Court closely examined the language of the Guaranty Agreement. Section 1 of the Guaranty stated that Wederquist unconditionally guaranteed the punctual payment when due of the all indebtedness owing “. . . to Creditor” now or hereafter existing.” The preamble of the Guaranty Agreement defined “Creditor” as PFS and all affiliates of PFS.

McLane was of course not an affiliate of PFS but rather a purchaser of its assets. As such, McLane cited a provision in the Guaranty Agreement stating the Guaranty “. . . shall inure to the benefit of and be enforceable by Creditor and its successors, transferees and assigns.”

McLane argued that since it was a purchaser of PFS’s assets, McLane was also its successor, transferee and assign. And as such, McLane was entitled to the benefits of the Guaranty Agreement.

The Federal Court did not need to decide if McLane was a successor, transferee or assign. It wasn’t relevant to the decision. The definition of “Creditor” in the Guaranty Agreement applied only to PFS. Not McLane. If PFS and Wederquist had intended it to apply to others, then PFS and Wederquist could have easily expanded the definition, instead of limiting it to only PFS.

The US District Court Judgment is affirmed. Wederquist wins; McLane loses. The Guaranty Agreement is not binding.

See McLane Foodservice v. Table Rock Restaurants; No. 12-50980; U.S. Court of Appeals – 5th Circuit, November 15, 2013.

Lessons learned:

1.      Sometimes Guaranty Agreements are, well, you know – Guaranty Agreements. But not always. Commercial Guaranty Agreements in the context of purchase and sale agreements, financing and leasing need to be carefully reviewed.

2.      Practice Tip: In my world there are all kinds and variations of Guaranty Agreements. Some are limited by time; others by amount. Others are “backup” only – recourse must be pursued against the primary debtor first, without success. Still others expire mid-term automatically if the debtor has not defaulted, while in other iterations the Guarantor might be bound to the original debt but to no further credit or time extensions. Many are joint and several such that a creditor has 100% recourse to all Guarantors, but others are only several and limited to each Guarantor’s pro-rata allocated amount.

3.      Don’t assume any Guaranty Agreement is lawful and binding. You might be unpleasantly surprised.

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

Friday, November 1, 2013

Non-Disclosure is Bad. Fraud is Worse.

Tukua Investments entered into a commercial listing agreement with Century 21 Charlotte Banks, to sell Tukua’s commercial property in Eagle Pass, Texas. The property was advertised as being benefited by a triple-net, licensed nursing and rehab center, with a Tenant paying base rental of $300,000 per year. The listed sales price was $2.75 million.

C-21 found a California buyer at the tail end of an IRS Section 1031 tax-deferred exchange. The Contract was prepared on August 16, 2007. In order to attain the benefits of IRS Section 1031, the buyer needed to identify exchange property candidates not later than October 1, 2007, and close not later than February 13, 2008.

The Contract was signed on September 12, 2007, and presumably Buyer timely identified the nursing / rehab center as a deferred exchange candidate. Buyer first learned of a problem with the new tenant, Signature Healthcare, one month later. At that time, it became evident that Signature was not going to fulfill the terms of the Lease.

As Buyer was exploring the reason and basis for the problem, Buyer inadvertently received a copy of a letter referring to an eviction notice from Tukua to Signature of August 8, 2007 – about one week before the first Contract was prepared and submitted to Tukua.

Since it was then too late for Buyer to designate new replacement property candidates, Buyer could only withdraw from the Contract and pay the gains generated from the sale of Buyer’s California property. The extra income tax bite was over $240,000.

Buyer filed a lawsuit for fraud and negligent misrepresentation against the Seller, Tukua. The jury found for Buyer on both counts, and the trial court converted the verdict into Judgment, awarding over $1.3 million to Buyer. Since the underlying damages were $240k, one might assume that a substantial part of the verdict and Judgment was composed of exemplary or punitive damages – the type that is reserved only for fraud cases.

Tukua appealed.

The Court of Appeals carefully analyzed all of the elements of fraud, Texas style. Buyer claimed that Tukua represented to Buyer that there was a valid 10 year lease. The Appellate Court found that Tukua’s representation was true when it was made. There was indeed a valid 10 year lease. The fact that Tukua claimed that Signature was in default did not affect the validity of the lease. That only gave Tukua the right to terminate the lease, evict Signature, or exercise other remedies.

Further, the Court allowed that the lease did not automatically terminate on default. In point of fact, even the delivery of an eviction notice does not serve to terminate the lease. Termination of rights of possession – yes; full-on lease termination; no.

On the fraud point the Appellate Court concluded that representations about future rents or income are typically statements of opinion. Not representations of fact. As such, there can be no actionable fraud claim.

The Buyer then claimed that Tukua had not truthfully represented the conditions, rights, benefits and validity of the lease and that there were serious issues existing with Signature Healthcare.

The Court of Appeals found an appellate decision from Dallas in 1961 stating “A company does not have a duty to disclose all of its financial difficulties while conducting business if it is actively working towards remedying the situation. Silence on the issue alone is not enough to constitute fraud.”

Standing alone it seems this position is subject to challenge, given the facts of this case. However, the Appellate Court then uses several pages to investigate further, and conclude that for an unknown reason this Buyer did not complete the normal due diligence of a typical commercial real estate purchaser. No one from the Buyer’s team really questioned Signature about why they weren’t paying rent. No one asked about unresolved licensing issues.

It seems possible that no Estoppel Statement (or equivalent) was requested of Signature by the Buyer and basically the Buyer just assumed that all was well. That leads me to think that perhaps Buyer was purchasing this parcel for cash, since normally a lender would insist on an Estoppel in this situation.

The Appeals Court overturned the lower court’s judgment. Tukua wins; Buyer loses.

See Tukua Investments, LLC v. Spenst; No. 08-11-00014-CV; Texas 8th Court of Appeals, August 14, 2013.

Lessons learned:

1.  This case was decided on very narrow facts. Don’t count on getting the same results. Our rule of law, to avoid the courthouse, is unchanged: Disclose too much, not too little. Err on the side of over-communications.

2.  Доверяй, но проверяй. What’s the matter - your Russian a bit rusty? It’s from an old Russian proverb and rhyme – doveryai, no proveryai. Trust, but verify.

3.  Practice Tip: I live in the world of Tenant-Estoppels. We don’t obtain them in multi-family transactions because as a practical matter it is impossible. But we obtain them in every other commercial transaction involving tenants of a significant size. Even if a lender is not involved, commercial buyers need to receive updated, current Tenant Estoppel Certificates, signed by each Tenant. Not the kind that the Landlord signs through a lease-derived power-of-attorney paragraph.

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

Friday, October 4, 2013

Hate It When This Happens

In June 2004 AGF Spring Creek / Coit II, Ltd. leased office space in Richardson Texas to Atrium Executive Business Centers Richardson, LLC

Later there were three Lease Amendments. Each was signed by Curtis for the tenant, as its President or CEO. The last Amendment extended the lease term into 2015.

Atrium, however, was never formed. Instead, Curtis formed “AEBC-Richardson, Inc.” After formation, AEBC occupied the leased premises and operated a business there for six years. Although AEBC offered executive suites at the leased premises to subtenants, it was Atrium that was shown as the tenant in the Lease and all Amendments, and Dawn Curtis signed each on behalf of Atrium, not AEBC.

In March 2010 Curtis sent an email to representatives of the Landlord stating that revenues were too low to continue in operations, and asking AGF to handle the details of the pending lease default. No further rent was paid and AGF terminated the Lease by written notice issued later that month.

In April 2010 AGF initiated a lawsuit against Dawn Curtis individually for breach of the 2004 Lease, as extended and amended. AGF contended that although Atrium was the named tenant, in fact (and in law) Atrium never existed as it was never formed. And consequently, Dawn Curtis was 100% liable as if she had signed an unconditional Guaranty.

The jury entered a verdict in favor of AGF in trial court, and the judge converted it into a Judgment. Curtis appealed.

On appeal Curtis acknowledged her mistake in failing to change the name of the tenant on the Lease, and her further mistakes in signing the Lease Amendments as President of an LLC that did not exist. She requested however that the Court overlook these mistakes and instead impose a lease agreement between AGF and AEBC through the action and conduct of the parties.

To support her argument, Curtis provided evidence that reimbursement of the tenant’s move-in expenses, all rental payments, fax transmissions, insurance policies, sales and use tax permits and subtenancy agreements with executive suite customers were all made in the name of AEBC rather than Atrium, and further – that Landlord was aware of these documents and payments.

However, Landlord refuted those arguments by stating that the Lease was unambiguous. Atrium Executive Business Centers Richardson, LLC was identified as the Tenant. Not AEBC-Richardson, Inc. The Lease also contained an “incorporation” clause providing that the Lease could not be altered, waived, amended or extended unless by written agreement.

Obviously changing the identity of one of the parties to the Lease is serious business and not easily accomplished without a written agreement between both parties.

Curtis’ lawyers found an interesting case from Fort Worth. An Appeals Court decided in 1997 that, in a similar situation as this case, “a promoter is relieved of personal liability only when the corporation subsequently adopts the contract either expressly or by accepting its benefits.”

But in our case the entity was never formed, and could not “subsequently adopt” the Lease. AEBC was ultimately formed. Not Atrium. And if Landlord had sued AEBC for breach of Lease, AEBC could have easily defended claiming it never signed the Lease or any of the modifications or anything else (such as a Lease Guaranty) leading to imposition of liability against AEBC.

Ultimately the Appeals Court overturned the lower court’s judgment, but due to entirely other issues: the jury had miscalculated the proper amount of the award. So while I must truthfully tell you that Curtis won this round, I must also conclude that if this case isn’t settled but instead is retried, Curtis will surely lose again.

See Curtis v. AGF Spring Creek / Coit II, Ltd.; No. 15-12-00429-CV; Texas 14th Court of Appeals, August 28, 2013.

Lessons learned:

1.  Dawn Curtis made the cardinal mistake of signing an important legal document on behalf of an entity before the entity was formed. I see this problem daily. Ok daily is an exaggeration, but I see it very often.

2.  If a document is signed for a non-existent entity, personal liability is typically imposed upon the person signing. There is a way to finesse this when you know the entity has not yet been formed. Write in a special provision eliminating all personal liability once the entity has been formed and evidence of formation and adoption by the new entity is sent to the other parties who have signed the contract.

3.  Practice Tip: When I encounter an entity (whether as a client, adverse party, service provider, vendor, etc.) I check to be sure it is formed in its state of organization, and qualified to do business in Texas. Typically I start here. It’s a free search: https://ourcpa.cpa.state.tx.us/coa/Index.html. Then if it will be a client or adverse party, I’ll dig further, but be prepared to pay $1 per search: https://direct.sos.state.tx.us/acct/acct-login.asp.

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

Wednesday, September 4, 2013

Sick of Paying Excess CAM Charges?

In 1995, Garden Ridge leased space from Fiesta Mart. Fiesta Mart sold the shopping center to Clear Lake Center in 2003. Garden Ridge audited its allocated share of common area maintenance charges and sued its Landlord, Clear Lake Center.

This comprehensive commercial lease obligated the Landlord to operate, manage, maintain and repair the common areas, but Tenant was required to pay its prorate share of the expenses. The long list of allowable common area costs had virtually no limitations, although Landlord’s fee for “supervision” of the common areas was capped at 7.5% of the total of all CAM charges.

Evidently Garden Ridge had no issue with the CAM computations made by Fiesta Mart. However – Clear Lake added the 7.5% “supervision” fee to its CAM management fee. As well, Garden Ridge wasn’t pleased that both of such fees were paid to an affiliate of Clear Lake.

From 2003 to 2009 Garden Ridge paid $470,000 to Clear Lake for both management and supervisory fees. In 2009 Garden Ridge’s auditor concluded that Clear Lake charged an exorbitant amount.

So Garden Ridge sued Clear Lake in 2009 for breach of the Lease Agreement. The trial court awarded Garden Ridge $470,000 in damages and $530,000 in attorney’s fees, for an even $1 million dollar judgment. The judgment for $470,000 represented the full return of all management fees and supervision charges during that six year period.

Clear Lake appealed and, hoping to overturn the judgment, attempted to delineate between management fees and supervision fees.  As you would expect, Clear Lake mostly failed in that endeavor.

Clear Lake’s backup position was that even if the supervision fees were duplicative of the management fees, surely Garden Ridge was obligated to pay one or the other or some portion of both. And that even if Clear Lake had no right to upcharge the management fees with a 7.5% supervisory fee overlay, still Clear Lake paid honest expenses to operate, manage, maintain and repair the common areas and Garden Ridge should be responsible for its allocated share. Which share, if not $470,000, should have been something fairly close to it.

The Texas Court of Appeals agreed with Clear Lake. Clear Lake was not prohibited from contracting with a third party (although affiliated) for management of the common areas and passing on to Garden Ridge a pro rata share of those expenses. And if “supervision” fees were indeed separate from management expenses, then presumably Clear Lake could recover those too.

The Appellate Court sent the case back to the trial court to start over. The trial court can then determine what part of “management” fees are the same as “supervision” fees, if any, subtract such amount from $470,000 and enter a judgment accordingly.

Clear Lake wins, sort of. Garden Ridge also wins, sort of. I guess the lawyers in this litigation are the ones that really won.
See Clear Lake Center, L.P. v. Garden Ridge, L.P.; No. 14-12-00414-CV; Texas 14th Court of Appeals, July 18, 2013.

Lessons learned:

1.      Garden Ridge, presumably a very sophisticated tenant, signed a Lease obligating it to pay both “management” and “supervision” fees. If those two terms are duplicative then Garden Ridge will win this case. Otherwise if Clear Lake can prove a meaningful distinction, then Clear Lake will win.

2.      CAM provisions, allocations and pro rata / sharing clauses are inherently difficult to comprehend and challenging to explain, particularly to 12 people sitting in a jury box or a judge who is unfamiliar with commercial leasing practices. From the Tenant’s perspective, capping controllable expenses (typically everything but taxes and insurance) and allowing only marginal annual increases will go a long way to preparing a meaningful expense budget. And keeping a Landlord from using CAM charges as a hidden profit center.

3.      Even with all the right verbiage in place, placing limits on the Landlord’s CAM charges is only as good as the Tenant’s investigation abilities, due diligence and audit. Without a meaningful way to review the Landlord’s books a lawsuit will be required. So – be sure you have both appropriate caps and limits as well as the right of Tenant to easily peek into the books and records of the Landlord, and force the Landlord to pay for the audit too if the overcharges are excessive.

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

Monday, August 5, 2013

Indemnity Equals Guaranty

Michael Smuck and Edwin White wanted to purchase an apartment complex known as “The Falls,” located generally in the southeast quadrant of I-30 and Loop 820 in Fort Worth. They formed a special purpose entity (SPE) called MBS-The Falls, Ltd. for that purpose, and yet another SPE to serve as the general partner of MBS-The Falls.

To acquire the apartments, MBS-The Falls signed a $9 million note, deed of trust, security agreement and other loan docs pledging the real estate. Wells Fargo Bank became the owner of the loan docs through an assignment.

The loan provided for non-recourse financing. As such, the liability of MBS-The Falls was limited to its equity in the apartment complex, unless a non-recourse exception was triggered. The non-recourse exceptions that could impose liability upon MBS-The Falls were listed in the Note.

MBS-The Falls defaulted on the Note, and Wells Fargo foreclosed. Wells Fargo filed suit in Tarrant County alleging waste and that the owner allowed liens to be filed against the property, which impaired the value of Wells’ collateral.

At trial in Tarrant County, Wells Fargo obtained a judgment against MBS-The Falls for $10+ million. With that judgment in hand, Wells Fargo then sued Messrs. Smuck and White in Harris County for that amount. Wells Fargo claimed that Smuck and White were 100% liable for the judgment obtained in Tarrant County against the owner of the apartments.

The basis for Wells’ Harris County lawsuit is contained in a document signed personally by Smuck and White captioned “Non-Recourse Indemnification Agreement.” In that agreement both Smuck and White agreed to indemnify the lender for all losses incurred.

Smuck argued that he would be liable to Wells Fargo only if a third-party asserted a claim, and not merely if Wells Fargo had incurred losses.

White claimed that the judgment rendered in Tarrant County was not based on the non-recourse exceptions, and further that Wells Fargo failed to establish that any non-recourse exceptions had been triggered.

The Harris County court agreed with Smuck and White. Wells Fargo appealed.

The Harris County Court of Appeals first looked at the Indemnification Agreement. Despite the terminology of “Indemnity,” the Court had little problem concluding that it was essentially a “Guaranty,” for which Smuck and White were jointly and severally 100% liable for all losses suffered by Wells Fargo.

And from there it wasn’t difficult for the Court of Appeals to toss out all the secondary arguments used by Smuck and White.

The Harris County Court of Appeals reversed the trial court’s judgment. Wells Fargo won; Smuck and White lost.

See Wells Fargo Bank, N.A. v. Smuck and White; No. 14-12-00574-CV; Texas 14th Court of Appeals, July 9, 2013.

Lessons learned:

1.   It’s easy to be lazy and not carefully read loan docs, leases and contracts; goodness knows they are as boring as watching a little league baseball game. In August. In Texas. With a 4p start time. The only surprise here is that Smuck and White were able to convince a trial court that the Indemnity Agreement they signed did not impose liability on them for Wells Fargo’s substantial losses.

2.  Don’t assume that non-recourse means no liability can be imposed. There is a new theory being used across the nation right now that even diminishment in value caused by recessionary market conditions can impose personal liability. Most of us don’t think that was the real purpose of non-recourse, “bad boy” or “carve out” provisions but at least some Courts do not agree.

3.  Come see me at the NTCAR Commercial Real Estate Expo on August 28 at the Sheraton in downtown Dallas, and tell me how I can approve these articles and what I should write about. I’ve got a booth!

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

Wednesday, July 17, 2013

Jumpin' Jack's Party Shack

In 2006 Jim and Jeneane Cremer formed Jumpin’ Jack’s Party Shack, Inc., to operate a children’s party center. The Cremers found a warehouse in Tyler owned by Morris Hallman, and signed a four year lease.

The leased premises consisted of a 20 x 20 foot sheet metal over steel frame air-conditioned office, with an attached 50 x 80 foot warehouse structure. The warehouse portion was not air conditioned, and contained only a bare concrete floor and open-air roof extension. It had been previously used as a car wash bay.

The Cremers spent $36,950 for dirt work, concrete and materials to make a 50 x 50 foot warehouse extension and enclose it. Also the Cremers expended another $115,000 to install six air conditioning units, HVAC duct work, lighting, plumbing, toilets, cabinets, party rooms and more offices.

In December 2010 – the end of the lease term – the Cremers removed the six air conditioning units, HVAC ducts, lighting, kitchen and bathroom fixtures, doors, door jambs, insulation, electrical wiring and sheetrock as they vacated the buildings. All of those components had been installed by the Cremers after the beginning of the lease term.

Morris Hallman was not pleased and sued the Cremers. Hallman’s position was that the Cremers had no right to remove valuable improvements, and by doing so, Hallman was substantially damaged.

The trial court ruled for Hallman, finding that in the lease agreement “. . . the parties expressly agreed that at the expiration of the lease, improvements to the property made by lessees . . . belonged to lessor, Morris L. Hallman, and were to be returned to the lessor by the lessees in good operation condition.”

The trial court awarded Hallman damages of $67,339. Cremers appealed.

The Appellate Court took a hard look at the 2006 lease, particularly focusing on the obligation of the tenants to repair everything the tenants installed, modified, replaced or added. Otherwise, if the landlord had installed it (meaning: it was in the buildings when the Cremers received the keys), then it was the landlord’s obligation to repair and maintain.

Due to procedural issues, the argument that Cremers installed trade fixtures into the buildings which became permanently annexed and incorporated into the real estate, was not litigated. Presumably the outcome might have been different.

But – based on the pleadings before the Court of Appeals – Cremers win; Hallman loses. Cremers had the right to remove the improvements they installed, much to Hallman’s disappointment and financial loss, as the Court of Appeals concluded that the trial court had not properly analyzed the 2006 lease agreement.

See Cremers v. Hallman; No. 06-13-00011-CV; Texas 6th Court of Appeals, May 16, 2013.

Lessons learned:

1.      Commercial leasing is inordinately difficult. Purchase and Sale Agreements are easier. Leasing is like a marriage. Sometimes a beautiful partnership is formed. Other times not so much.

2.      Don’t assume that the lease form you are using contains all the concepts that are important to you, the landlord and the tenant. Or the lenders financing the project or tenant’s leasehold interest. Even the ‘boilerplate’ clauses can be incomplete, confusing, or MIA.

3.      It’s unfortunate this Texas Appellate Court did not fully address the issue of trade fixtures and permanent annexation into the realty. But, regardless, if it’s important to you then be sure it is properly stated in your lease!

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

Wednesday, July 3, 2013

ROFRs and Options

Ben Jarvis and Calvin Smith jointly owned a 12-acre parcel in Smith County, Texas. Jarvis owned 2/3rds; Smith owned 1/3rd. In Texas law this made them ‘cotenants.’

In 1998 the parties negotiated a partition of the property, with the added requirement that Jarvis would receive an option to buy Smith’s parcel should he elect to sell it. Jarvis and Smith exchanged deeds to divide the property into 8-acre and 4-acre tracts. And Smith signed a notarized document granting to Jarvis an option to buy Smith’s parcel.

The document provided that if Smith decided to sell it and received an acceptable offer, Smith would submit the offer to Jarvis who had 30 days to accept it and then purchase the property on the same terms. Someone – presumably Jarvis – had the foresight to record it in the Smith County Deed Records.

In December 2007 Smith entered into a contract to sell his 4-acre piece to Robert Peltier for $80,000. Smith signed a Deed to Peltier the following month when the deal closed. The title commitment issued to Peltier prior to closing provided that the parcel was burdened by the instrument that Smith had signed.

So clearly Robert Peltier knew (or should have known) of the pre-existing rights of Jarvis. But Peltier bought it anyway.

It took two more years for Jarvis to learn that the parcel had been sold. Immediately on discovery, he sent both Smith and Peltier a letter attempting to exercise his option. In his letter he asked for a copy of the Closing Statement, cancelled check and title policy “. . . before declining or accepting any offer.” That statement followed the one in which he wrote “At this time, I would like to exercise the option.”

Yes those two statements seem inconsistent. But stay tuned and you’ll find out what Jarvis was really trying to say.

When neither Smith nor Peltier sent Jarvis the intel he requested, Jarvis filed suit against both of them. The trial court granted judgment for Smith and Peltier. Jarvis appealed.

The Court of Appeals looked hard at the document Smith signed. Jarvis contended that it gave him a right of first refusal, meaning, if Smith decided to sell the property then Smith was required to allow Jarvis the opportunity to buy it on the same terms as offered by the purchaser. In other words, a preemptive right. We know it as a “ROFR.”

Peltier and Smith argued, however, that Jarvis was furnished an option, being a privilege that the owner grants to another to buy the piece at a fixed price and at a definite time. And that Jarvis failed to properly and timely exercise his option because he did not send unconditional notice of the exercise within 30 days after he learned of the sale.

Jarvis responded that he did everything he could to find out the purchase price within the 30-day period, but neither Peltier nor Smith would give him the data he needed to make the final decision and remove the condition. Ultimately, Jarvis said, he was able to learn the purchase price only by filing a lawsuit and conducting discovery.

The Court of Appeals evaluated the differences between a ROFR and an option and concluded that Jarvis was the beneficiary of a lawful ROFR. Jarvis was not required to unconditionally exercise the ROFR when the purchase price was neither apparent nor forthcoming. The Court of Appeals concluded that the trial court erroneously granted judgment for Peltier and Smith.

The judgment for Peltier and Smith was reversed. Jarvis had an enforceable ROFR. Ben Jarvis wins. Robert Peltier and Calvin Smith lose.

See Jarvis v. Peltier; No 12-12-00180-CV; Texas 12th Court of Appeals, April 24, 2013.

Lessons learned:

1.      It can be difficult to draft an enforceable ROFR, ROFO (right of first option) and other similar agreements. Look here if you want more info on the differences between the two: http://en.wikipedia.org/wiki/Right_of_first_refusal. We use those concepts in both leasing and contracting for the purchase and sale of property.

2.      It can also be challenging to properly preserve and exercise a ROFR or ROFO.

3.      Jarvis was smart to record his ROFR in the Smith County Deed Records. In doing so, he preserved recourse against future buyers and lenders of Calvin Smith.

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

Monday, June 17, 2013

How a $50 Fine Became a $71,500 Debt

Dominion Estates Homeowners Association defended a lawsuit brought by Gabriele and Edward Duncan in Harris County. DEHA had asserted fines and penalties for violation of a Declaration and related Guidelines. The Duncans wanted clarification from the Court that DEHA was not entitled to receive either.

The Duncans owned a home in Dominion Estates. There were recorded restrictions which obligated each homeowner to “keep and maintain their lot, its yard and landscaping, and all improvements . . . in a well maintained, safe, clean and attractive condition.” As well, the DEHA’s Architectural Control Committee had adopted “Design Guidelines” which provided for fines for non-compliance.

In May 2007 DEHA sent the Duncans a letter stating that they had violated the Declaration and Guidelines, and needed to remove foil that had been wrapped around some exterior pipes. When M/M Duncan failed to comply, a second letter was issued to the same effect one month later.

At that time, a $50 fine was asserted with a statement that if the foil wasn’t removed within a few more weeks, an additional fine of $50 per week would be assessed.

Evidently M/M Duncan removed the foil, but replaced it with gray tape. So, a month later DEHA sent the Duncans a third letter instructing them to remove the tape from their pipes and to pay the $50 fine. When the fine was not paid, DEHA began to assess weekly fines of $50 caused by the Duncans’ failure to pay the initial $50 fine. As DEHA had promised / threatened to do.

In November 2007 the Duncans filed a lawsuit against DEHA alleging that neither the initial $50 fine nor the $50 weekly fines were authorized by the Declaration and Guidelines. M/M Duncan then challenged an additional $250 fine that was levied by DEHA against all homeowners as a special assessment for legal fees incurred by DEHA.

Later, as the Duncans attempted to sell their home they learned that DEHA had filed a Notice of Lis Pendens in the public records, effectively prohibiting them from selling their property. At that juncture DEHA believed that the Duncans owed $4800, and the fine was increasing $50 per week.

A trial was held in October 2009. The jury offered a conflicting verdict regarding the placement of foil and tape on exterior pipes. But regardless, the jury concluded that DEHA did not give M/M Duncan adequate notice of the implementation of the Design Guidelines before taking enforcement action. And also the jury stated that DEHA did not furnish the Duncans a reasonable amount of time to correct the alleged violations.

Further, the jury found that DEHA was not entitled to any unpaid fines and late charges.

The trial court rendered a Judgment that DEHA was not entitled to a recovery. Still, the Duncans appealed, claiming they should receive an award providing that DEHA breached the Declaration and Guidelines. It’s confusing but don’t forget that M/M Duncan brought this claim against DEHA. Usually it’s the opposite.

On August 11, 2011, the Harris County Appellate Court reversed the trial court’s judgment. In doing so the Appellate Court accepted the position asserted by the Duncans that they did not owe any money to DEHA. As well, the Appellate Court found that DEHA at least owed the Duncans the attorneys fees incurred by M/M Duncan to prove their point.

The Appellate Court instructed the trial court to hold a hearing and determine the amount of attorneys fees that should be paid by DEHA to M/M Duncan.

In the first week of May I learned that the jury in the 207th Judicial District Court had issued a verdict a few months prior allowing M/M Duncan to recover $68,000 in attorneys fees. In April the trial court added $3,500 in appellate fees for a grand total of $71,500 in attorneys fees to be paid by DEHA to the Duncans.

Not yet through with the Judgment, the trial court also tacked on an additional $25,000 for any additional appeals undertaken by DEHA. And I understand that DEHA is now considering its own appeal.

See Duncan v. Dominion Estates Homeowners Association; No 01-09-01086-CV; August 11, 2011. That’s where you will find the Appellate decision from two years ago, reversing the trial court’s judgment and providing for another hearing at the trial level. The results of the second hearing regarding attorneys fees that was just concluded, although public, is not located in a place that is easy to find on the web or in other reported services.

Lessons learned:

1.      I understand why DEHA took this action. And I understand why M/M Duncan defended their position and ultimately were forced to bring a lawsuit. All of the litigants had solid business and economic reasons.

2.      Even so, a $71,500 judgment based on an initial $50 fine is excessive. If DEHA isn’t insured for this loss, they may need to further specially assess their members or file bankruptcy. And don’t forget that in addition to the $71,500 judgment DEHA must now pay, DEHA must also pay its own attorneys whose fees may be comparable. And further, don’t lose sight that if DEHA appeals and loses, DEHA might owe another $25,000 as instructed by the trial court in the second hearing.

If that were to happen DEHA would owe the Duncans almost $100,000. All chasing a $50 fine.

3.      And you are doubtless asking – how does this relate to commercial brokerage? The connection is with late charges, lease compliance and fees. An overly aggressive landlord, property manager or agent might encounter the same type of defenses as asserted by M/M Duncan: inadequate notice; improper authorization of charges; unequal enforcement of rules, policies, procedures and guidelines.

The answer is that property owners, managers and agents must use discretion in enforcement obligations, or be potentially slapped by jurors and Courts. It’s not the slap that stings; it’s the attorneys fees that accompany it. Particularly when you may have to pay the fees incurred by both sides.

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

Monday, May 20, 2013

Brokerage Commissions [redux]

Dean A. Smith Sales, Inc. (out of Pflugerville – what is the right way to pronounce Pflugerville anyway) entered into a listing agreement with Metal Systems, Inc. Dean, as broker, was engaged in 2008 to sell Metal’s business for $4.5 million, which amount included real estate owned by Metal.

Two years later Dean sued Metal for $160k in damages. The trial court ruled for Metal. Dean appealed.

The Listing Agreement stated that Dean was to receive a 7% commission if real estate was included. Evidently, although not specifically stated, when Metal learned that Dean did not have a TREC issued real estate brokerage license Metal refused to pay.

One can only assume that real estate was included in the deal. And the license issue was the cause of the non-payment.

Dean first argued that the transaction did not involve real estate, so no TREC license was required. However, the listing agreement stated otherwise.

Argument Number Two was that there was an oral amendment to the written listing agreement, removing real estate from it. Dean Smith submitted an affidavit stating that:

“I never had any expectation of a commission for the sale of real estate . . . The sale . . . was expected to be a stock transfer . . . The sales price listed in the contract was based on the value of the business without any real estate.”

The Court of Appeals used Dean’s own Listing Agreement against him to refute this contention.

The Court then evaluated the Texas Real Estate License Act regarding commission claims. Section 1101.806(b) of the TRELA states that a party may not collect a real estate commission unless the party proves it was a license holder at the time the act [for which a commission became payable] was commenced.

And so the Court of Appeals concluded: (a) a listing agreement was signed; (b) the listing agreement provided for the disposition of real estate (and fairly, other assets too); (c) real estate services were provided by Dean as defined by the TRELA; and (d) Dean did not hold a brokerage license issued by TREC.

Do you recall the previous article about quantum meruit? Well, of great interest to me anyway, the Court teased us with that as Argument Number Three, but then dismissed it on a technicality.

So, Metal Systems, Inc. wins again, and Dean A. Smith Sales, Inc. loses again.

See Dean A. Smith Sales, Inc. v. Metal Systems, Inc.; 05-11-01449-CV; Texas Court of Appeals 5th District, Dallas; March 11, 2013.

Lessons learned:

1.      If you want to get paid a commission for a deal involving real estate, you’d better have a TREC brokerage license. And a written commission agreement too. Which describes the property with specificity.

2.      Business brokers not holding TREC licenses might be wise to engage TREC brokers for the real estate component of the deal.

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

Thursday, May 2, 2013

Quantum Meruit [To know it is to love it]

Quantum meruit is of course a Latin phrase. It means “what one has earned.” In the context of contract law, it used something like “reasonable value of services."

Northeast Independent School District (San Antonio) hired STR Constructors to renovate a middle school. In turn, STR engaged Newman Tile as a subcontractor, to install about 3500 square feet of tile in the kitchen.

Problems arose between STR and Newman right away. STR demanded that Newman use epoxy grout to install the quarry tile. Newman insisted that its bid excluded epoxy grout. Under protest and claiming that epoxy grout and the added labor necessary to use it were unnecessary, Newman complied with STR’s instructions.

And then Newman submitted a change order seeking recovery of its added costs.

And then STR refused to pay it.

And then Newman sued STR for quantum meruit and breach of contract. Newman won in trial court; STR appealed.

We don’t get many cases involving quantum meruit, probably because appellate courts have told us for years that the remedy of being paid “the value of your services” is inapplicable when the parties have signed a contract. As STR and Newman did in this case.

Regardless, Newman claimed that it was entitled to quantum meruit damages – the value of its services – because STR and ultimately Northeast ISD accepted and retained the benefits of Newman’s work.

The evidence submitted by Newman was that it provided labor and materials for STR’s benefit, including additional mortar bed on the kitchen floor, blue bullnose tile as a finishing trim on a tile wall, epoxy grout, restocking fees, and weekend and overtime work. Newman submitted five Change Orders and Payment Requests aggregating approximately $25,000 for such labor and materials.

The Appeals Court determined that, if the trial court judgment is not upheld, STR would be unjustly enriched while Newman would be unfairly penalized. The Court then reviewed the [relatively] small claims submitted by Newman and compared to the overall contract price of $5.2 million paid by Northeast ISD.

And just to seal the deal, the Court concluded with “STR now seeks to escape liability on a contract it drafted by claiming that its behavior should be ignored because a strict construction of the contract imposes no liability on it.” In English I read that to mean that “STR had an airtight contract which Newman breached, but we are not going to let STR beat up a small subcontractor.”

The Appeals Court then ends with “STR, by [its] course of conduct, has violated the reasonable expectations and values that permeate business transactions.” Yes that is exactly what it says on the 8th page. Serious.

Newman wins, again. STR loses, again. And good news for us lawyers – we have a new case on quantum meruit!

See STR Constructors Ltd v. Newman Tile, Inc.; 08-10-00210-CV; Texas Court of Appeals 8th District, El Paso; February 20, 2013.

Lessons learned:

1.      The theory of “quantum meruit” still lives in Texas.

2.      Although not part of this case, you should know that TREC laws and rules prohibit real estate commission claims based on quantum meruit. In Texas you need a written commission agreement to be lawfully entitled to receive payment.

3.      Little guys confronting “The Machine” don’t always get beat up in Court. Thankfully.

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

Monday, April 15, 2013

Puffery vs. DTPA

Paul Kramer builds houses in Tarrant County. Expensive houses. He built a $2 million house for Melissa and Scot Hollmann.

As construction progressed, the house developed a moisture leak. Kramer sent an email to the Hollmanns telling them not to worry because it had been fixed.

After the Hollmanns moved into the house, it developed additional moisture problems involving the windows, HVAC and roof. The Hollmanns continued to receive assurances from Kramer, but when mold moved in the Hollmanns moved out.

And then in 2010 the lawsuits started.

Hollmanns asserted claims against the architect and several subcontractors, and then added Kramer for violations of the Texas Deceptive Trade Practices Act, breach of contract, breach of warranty and negligence. Most of the parties settled before trial, but not Paul Kramer.

The jury awarded approximately $1 million in damages to the Hollmanns after finding that Kramer engaged in false, misleading or deceptive acts. The trial court rendered judgment for the plaintiffs. Paul Kramer appealed.

Kramer’s appeal was primarily based on the theory of “puffery.” That is, that the statements he made and emails he sent contained merely his own opinions, not factual representations.

The trial court found that Kramer told the Hollmanns that the house would be a “magnificent home with a quality level rarely seen in Tarrant County,” that it would be a “kick butt house,” that “this is going to be a really great house,” that it would be “one of the finest homes in the city” and that the Hollmanns would be “pleased as punch.”

The Court of Appeals, perhaps after checking with Urban Dictionary or their 13-year old children, decided quickly that the term “kick butt house” and “pleased as punch” are slang terms comprising opinions, not statements of fact or factual representations.

The Court further advised that Kramer’s claim that the house will be “really great” is too indefinite to constitute an actionable misrepresentation.

Then the Court took a hard look at the other two statements made by Kramer: “magnificent home with a quality level rarely seen in Tarrant County,” and “one of the finest homes in the city.

Careful evaluation and consideration of previous Texas appellate decisions led the Court of Appeals to decide that these statements were also subjective impressions and did not contain specific representations. Consequently and according to Texas law, all five statements were mere puffery and expressions of opinion – not representations of fact.

But wait there’s more. Kramer made other statements such as “Please don’t worry about the leak that was recently fixed,” and “We feel very strongly we have now identified the problem. Moisture in the walls by the leak will be handled immediately and will not pose a future problem . . . [T]he sills are the culprit” and “You can be sure that any nonsense associated with the resolution of all open issues will cease as of this moment.”

I think it was Kramer’s claim that “there is nothing inherently wrong with the house” that likely put the Hollmanns over the edge, after the house had been infested with mold. The Hollmanns vacated one month later.

The jury found that the latter statements were actionable under the DTPA. The trial court agreed, as did the Court of Appeals.

Hollmanns win. Kramer loses.

See Kramer v. Hollmann; 02-22-00136-CV; Texas Court of Appeals 2nd District, Fort Worth; November 21, 2012.

Lessons learned:

1.      There is a thin line between statements of opinion and statements of fact or representations.

2.      Although not part of this case, TREC agents and brokers can be held liable and accountable for their statements of fact and misrepresentations, as can Texas property owners, builders, developers, contractors, sellers and landlords.

3.      Paul Kramer filed for bankruptcy protection on December 31, 2012, in Case Number 12-46996-DML-11, US Bankruptcy Court Northern District of Texas, Fort Worth Division. So, sometimes even when you are sure you have won . . . you haven’t really.

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

Friday, March 29, 2013

Oral deals aren't binding. Right?

David Duarte and Daniel Rojas were long-term friends. Duarte learned how to repair, maintain and program ATM machines. Knowing that Congress passed legislation permitting individuals to own and operate ATMs, Duarte sensed a sure-fire business.

David found several ATMs sitting in an El Paso warehouse. He bought one and approached Daniel about buying the others together. In the fall of 2002 they agreed to enter the ATM business together, splitting profits and losses equally.

So David Duarte testified.

Daniel Rojas had a different memory of the deal. Daniel recalled that he and David were not partners, but rather that Daniel was an independent contractor who was engaged to help David operate the ATM business.

For the initial three years the business was quite successful, but in May 2005 the parties were ready to end their relationship. Daniel told David he was keeping all of the ATMs and was going to pay David $1,000 per month. Duarte received a total of $2,500. Unhappy with the payout, David Duarte sued Daniel Rojas.

At trial Duarte presented evidence that the business was worth $420,000 and that he and Rojas had formed a lawful (but oral) general partnership. Duarte won the lawsuit. Rojas appealed.

Predictably, Rojas claimed that there was no evidence of a partnership.

The Court of Appeals determined that there are five factors to consider regarding the creation of a Texas general partnership: (1) right to receive profits; (2) intent to be partners; (3) right to participate in control of the business; (4) agreement to share losses or liabilities; and (5) agreement to contribute money or property to the business.

The Appellate Court evaluated all five factors and compared each to the facts as presented to the trial court. All five factors were proven to the satisfaction of the Appellate Court. Judgment was affirmed that a Texas oral partnership agreement existed and was enforceable.

And so, dear reader, I am sure you are wondering why this is newsworthy enough to place in my valuable blog. Right?

And here is the answer. Note the total, unmitigated absence of any facts or laws that the partnership agreement must be in writing. It’s not there. Purposefully. Texas law has always been, in my 30-year career and much longer, that general partnerships and joint ventures need not be written and signed to be enforceable.

Texas limited partnerships must be written and signed. Texas general partnerships and JVs – not so much.
See Rojas v. Duarte; 08-11-00072-CV; Texas Court of Appeals 8th District, El Paso Texas; November 30, 2012.

Lessons learned:

1.      Texas general partnerships and joint ventures might be enforceable even though they are not written.

2.      Oral / verbal partnerships and JVs are tailor-made for problems. Be sure that all of your personal agreements to share income are written and suggest to your principals that they do the same (but without practicing law!).

3.      Best wishes for a healthy, happy and prosperous 2013!

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

Friday, March 15, 2013

8.00% interest = 00.00% or maybe 5.00%

In 2008 Aneita Weaver loaned her nephew John Jamar $193,000 so that John could purchase a Harris County townhouse. The two parties prepared and signed a loan agreement, without the help of lawyers or title agents. That was their first (well maybe their second) mistake.

The funds were loaned at 8.00% interest for one year. Jamar was supposed to pay Weaver $1,400 per month during the term of the loan, which by my math establishes an amortization of 31.5 years.

The loan agreement stated: “If the . . . property does not sell [by January 1, 2010, then] . . . Aneita J. Weaver has the right to assume the title to the property free and clear from John Jamar, for the balance of the loan.”

Seriously. That’s what it says.

Jamar neither sold the property by January 1, 2010, nor did he make his payments to Weaver. So Weaver sued, asking the trial court for specific performance under the loan agreement, unpaid interest at the stated rate of 8.00% and attorney’s fees.

Weaver sued because Jamar did not sign a Deed of Trust, which would have otherwise allowed her to foreclose. Without a Deed of Trust Weaver’s only choices were to ignore the default or assert a lawsuit and ask the Court to force Jamar to convey the property to her.

Weaver won the case. The trial court ordered Jamar to convey the Property to Weaver. However, Weaver did not receive 8.00% interest in the Judgment. Instead, the trial court awarded her only 5.00% interest on all post-judgment amounts.

So Weaver appealed.

The Appellate Court looked at the security clause and focused on Weaver’s right to “. . . assume the title to the property . . . for the balance of the loan.”

The Court decided that the everyday meaning of “balance” includes principal and interest. And that Weaver’s exercise of her right to get title to the townhouse extinguished the balance of the loan, including interest.

So, Weaver’s interest rate of 8.00% was reduced to 00%. However, once the Judgment was entered by the trial court, the full Judgment amount accrued interest at the statutorily-mandated rate of 5.00%. Which wasn’t quite as painful. But still.

All of this pain was caused by the preparation by the parties of their own loan agreement, written with terms and provisions they could understand. And we can appreciate that.

But the other side is that Weaver was inadequately protected. I shudder to think of her legal expenses to clean up this mess, when a properly worded Promissory Note and Deed of Trust would likely have avoided both courthouses entirely.

See Weaver v. Jamar; 14-11-00516-CV; Texas Court of Appeals 14th District; October 30, 2012.

Lessons learned:

1.      Loan documents written by non-lawyers cause problems.

2.      Loan docs with problems generate lawsuits.

3.      Lawsuits keep lawyers employed.

4.      It is probable that Weaver and Jamar could have avoided the Courthouse if they had proper loan docs.

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

Friday, March 1, 2013

How Not to Foreclose

Lawrence Mathis owned and operated a commercial laser printing and direct mail business in Austin. In March 2000 he bought a 20,000 SF building, and arranged SBA financing. A first lien Note for $440,000 (approx. 50% of the purchase price) was given to Norwest Bank, NA, and SBA through its affiliate CenTex Certified Development Corporation accepted a second lien Note for $365,000 (approx. 40% of the purchase price).

Mathis had difficulty servicing the debts and he started making late payments in 2003. In 2006, CenTex acquired the Norwest Note. At that time, Mathis was still several months behind on his payments.

For years Mathis continued to make late payments, and CenTex continued to accept them. Until 2009. In February 2009 Mathis sent CenTex a check for three installment payments. This was the first time that a payment was rejected, but not until April 2009. Shortly thereafter CenTex sent Mathis a letter of intent to foreclose on the property in May 2009.

Mathis sued to stop the foreclosure, claiming the debt was improperly accelerated. And as a consequence, CenTex had no right to foreclose. The trial court initially granted Mathis’ request to stop the foreclosure, but at a full trial in 2010 the court reversed itself and ruled for CenTex.

Displeased with that final Judgment, Mathis appealed.

While Texas law requires notice of intent to accelerate a real estate debt, it can also be waived if done so properly. At least with regard to commercial transactions. The waiver must be clear and unequivocal. And from my experience, most commercial loans contain a full waiver clause, giving the lender the option to send a notice of intent to accelerate the debt and opportunity to cure a default, or bypassing it and instead sending a notice of foreclosure.

It is also my experience that many times the notice waiver can be negotiated and eliminated. Then, lenders are forced to give a written notice of intent to accelerate and an opportunity to cure the default before acceleration. But the loan docs in this case did not contain the type of clause that would have been of great benefit to Mathis. Instead, the scales were tilted in the lender’s behalf.

The Texas Court of Appeals looked at the waiver provision in the Note and the waiver provision in the Deed of Trust. They were not the same. The waiver provision in the Note appeared to be ‘clear and unequivocal.’ But not so in the Deed of Trust. The Deed of Trust stated: “If [Mathis] defaults . . . and the default continues after [Lender] gives [Mathis] notice of the default and the time within which it must be cured, as may be required by law or by written agreement . . .”

Feeling confused by the two clauses, the Court of Appeals concluded that the waiver provisions in the Note and Deed of Trust could not be rectified. Absent clear and unequivocal evidence that the Lender and Mathis intended to waive any formal requirement to send notice of default and intent to accelerate the debt before foreclosure, the Judgment of the trial court was reversed because the attempted Note acceleration was ineffective.

Mathis wins. CenTex loses. Well not really. All CenTex has to do now is to send out a notice of intent to accelerate, then accelerate the debt and foreclose next month. But I digress.

See Mathis v. DCR Mortgage III Sub I L.L.C.; 08-10-00310-CV; Texas Court of Appeals 8th District; October 10, 2012.

Lessons learned:

1.      Be wary of commercial loan docs. Yes they are one-sided and intended to be so. But that doesn’t mean that Borrowers must be in default the moment they sign the docs. Many lenders are willing to make reasonable accommodations. But you have to know what to ask for. And then ask.

2.      Texas law will usually help consumer-borrowers and residential tenants. Not so in a commercial context. Don’t count on Texas laws helping you. Many provisions that are non-waivable in Texas consumer and residential law are waivable in Texas commercial law.

3.      Exercise your Democratic right / obligation. Even if you are a Republican. Vote!

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