Monday, December 8, 2014

When Friends Become Business Partners

Carlo and Denise Bazan went into business with their long time friend, Luis Muoz, by opening a restaurant in Laredo called Vamp Ultra Lounge & Café. Two years later Luis sued Carlo and Denise, claiming they had wrongfully taken money from the café.

The partnership decision was made when Carlo, Denis and Luis were vacationing together in Cancun in 2008. A year later they signed a contract designating Denise as the Manager of their new enterprise. But as a matter of practicality, Denise delegated her management duties to Carlo.

According to the contract, the Bazans owned a 50% interest in the business, and Luis owned the remaining 50%. Initially, Luis contributed $80,000 to buy an existing nightclub, while Bazans contributed $15,000 which was used to remodel.

The business opened on October 31, 2009. Carlo collected cover charges at the door and installed cash controls in a point-of-sale system. It seems Luis may not have been consulted and expressed his displeasure about the cover charges, and his unhappiness was likely accelerated when Denise and Carlo started paying themselves a salary without Luis’ consent.

Record-keeping was poor or non-existent as cash receipts were counted at Denise’s residence. More often they were not counted at all. Distributions were made, also without Luis’ consent or participation, to Carlo and Denise.

The business did not make bank deposits for months, and as a consequence, bank accounts were frozen. When questioned, Carlo claimed that vendors, staff and DJs were paid by cash and that explained whey receipts were not deposited at the bank.

Finally, Luis asserted a lawsuit against Carlo and Denise. It seemed the business was making $60,000 to $70,000 a month, but the bank records only reflected deposits of $20,000 per month.

A jury found in favor of Luis on his claims for breach of contract, breach of fiduciary duty and fraud. The jury awarded Luis $120,000 and the trial court converted the jury award into Judgment.

Denise and Carlo appealed.

In a lengthy decision, the Court of Appeals found there was ample evidence of fraud committed by the Bazans’ failure to disclose information. Business partners owe fiduciary duties to each other – the same high standard that brokers and agents owe to their principals.

There was a special relationship of trust, confidence and loyalty in the café business. As such, Carlo and Denise had a duty to disclose material information to Luis.

Secretly taking money from the business breaches that duty, and supports the jury’s finding of fraud by nondisclosure.

The Appellate Court agreed with the Luis. Luis Muoz won and the Bazans lost. See Bazan v. Muoz; No. 04-13-00184-CV; Texas Court of Appeals; 4th District; November 5, 2014.

Lessons learned:

1.      It’s not newsworthy to state that friends don’t always make good business partners. In fact, I see the opposite is also true: sometimes friends make the best business partners. But, be sure that the relationship is properly documented.

2.      This appellate decision states something we all know – the highest duties in law are imposed upon those who have a special relationship or duty of trust. Like brokers and agents. Breach of that duty means a lawsuit.

3.      Practice Point: All parties in a business venture should have their own separate lawyers. When that is not possible, at least be sure that the Contract has a provision where anyone who needs to exit can do so.

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

Friday, October 31, 2014

Jackin' with Effective Dates

Pursuant to a Lease of September 3, 2004, Sidney Wicks leased various commercial properties in Addison Texas to Transcontinental Realty Investors. On May 17, 2006, Sidney formed the Sidney Wicks Revocable Trust and assigned all of his properties to the Trust. The assignment was not made in the traditional form of Deed, but rather in a more general form of “Assignment and Declaration,” which presumably was not recorded with the Dallas County Clerk.

TRI began making rental payments to the Trust on receipt of the Assignment and Declaration.

On December 2, 2010, Sidney filed a lawsuit against TRI for breach of the Lease, then later amended it to substitute the Trust as the Plaintiff instead of Sidney. TRI answered the lawsuit by contending that the Trust lacked standing to assert claims, stating that Sidney should have been the correct party – not his Trust – as Sidney failed to convey his property interests by Deed.

TRI’s point was that the 2006 Assignment and Declaration is not effective in Texas to transfer ownership in real estate. Only Deeds in Texas would suffice for that purpose. And, if the Assignment and Declaration is ineffective, then the Trust lacked standing or capacity to sue TRI as only Sidney would have that right.

On July 1, 2011, the trial court granted the Trust’s Motion for Judgment, finding that there were no material issues of fact in controversy, and that the Trust was entitled to Judgment by operation of Texas law.

The trial court did not deal with damages though, and reserved that issue for a jury trial to be conducted more than one year later.

On September 6, 2011, Sidney executed and recorded a General Warranty Deed which transferred his real estate to the Trust. On the same date Sidney also executed an “Assignment and Assumption of Lease.” Both the Assignment and the Deed stated that although the documents were signed on September 6, 2011, they each had an “effective date” of May 17, 2006. Over five years prior to the date that each was executed and the Deed recorded.

Having already won Round One, the issue of damages owed by TRI to the Trust proceeded to a jury trial. In October 2012 the jury determined in Round Two that TRI owed the Trust $1 million plus interest, attorney’s fees and expenses.

The trial court converted the jury’s award to Final Judgment. TRI appealed.

TRI again claimed that the Trust lacked standing in Court. That Sidney failed to timely sign and record a Deed to the Trust. That using an artificial “effective date” was not lawful. And that Sidney would have been the proper party in interest at the time of the lawsuit. Not the Trust.

The Trust countered by arguing that there was no provision in Sidney’s Lease with TRI requiring that an assignment would only be effective upon execution. And, consequently, Sidney was not prevented from executing the docs in 2011, with a 2006 “effective date.”

The Appellate Court agreed with the Trust. Sidney’s Trust won and Transcontinental Realty Investors lost. See Transcontinental Realty Investors, Inc. v. Sidney Wicks, Trustee of the Sidney Wicks Revocable Trust; No. 05-13-00362-CV; Texas Court of Appeals; 5th District; August 5, 2014.

Lessons learned:

1.  I see this issue often. Parties want to make documents “effective” as of a date that is not identical to the date the documents were actually signed, notarized and / or recorded. Title companies see this daily. In my world, the documents and the Settlement Statements very rarely line up 100% with the actual date of closing / funding / recording.

2.  This appellate decision makes clear that, at least in Texas and assuming there is no prohibition against it in documents already signed by the parties, using an artificial “effective date” can be lawful.

3.  Practice Point: Although using an “effective date” that does not exactly line up with the “execution date” may be Ok generally, I suspect it may not be acceptable for tax purposes, including federal income tax, Texas franchise / margin tax, Texas sales tax, and even local ad valorem tax. Be careful and get professional advice before you go jackin’ with effective dates.

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

Wednesday, October 1, 2014

How Not to Evict

Jessica Briones was a tenant at Brazos Bend Villa Apartments, Richmond, Texas (has Richmond been subsumed by Houston yet?). She had occupied her unit since January 2007. Jessica’s lease obligated Brazos to furnish her 10 days notice to discuss with Brazos a possible breach or allegation of lease termination, before Brazos could take any action adverse to her possession.

Evidently Brazos was concerned that Jessica was using or possessing marijuana in her apartment, so on April 30, 2012, Brazos furnished Jessica notice of lease termination coupled with a written statement that she had the right to meet with a property manager within 10 days to discuss the termination. The notice also demanded that she vacate by June 1, 2012. Jessica did not go gentle into that good night (that’s from a famous villanelle written by Dylan Thomas a century ago . . . oh never mind).

Consequently, on June 6, 2012, Brazos filed a lawsuit for eviction in JP Court in Fort Bend County. Brazos won so Jessica appealed.

The appeal was heard in Fort Bend County Court At Law, where according to Texas procedural rules both parties were granted an entirely new trial. A full-on mulligan. Brazos again won a Judgment for exclusive possession, plus attorneys’ fees of $2,950 through trial, and $10,000 for an appeal to the next level.

Brazos then obtained a Writ of Possession placing Brazos in possession of Jessica’s apartment. Regardless of the fact that Jessica was now on the outside of the apartment community, she again appealed claiming that Brazos failed to furnish her proper notice.

Basically, Jessica’s position was that Brazos was required to furnish her 10 days in which to discuss any alleged breach with Brazos before demanding that she vacate. And that the notice given, being a lease termination coupled with a statement that she could discuss the termination with a manager within the next following 10 days, did not comport with the Lease she had signed and both parties had honored in the previous five years.

The appellate court agreed with Jessica. Brazos was required to furnish Jessica at least two written notices. The first should have given her 10 days to discuss the proposed breach or lease termination with a property manager. The second should have given Jessica notice that her lease was terminated and she needed to vacate if she wanted to avoid legal proceedings.

Jessica won; Brazos lost. See Jessica Briones v. Brazos Bend Villa Apartments; No. 14-12-01125-CV; Texas Court of Appeals; 14th District; September 9, 2014.

Lessons learned:

1.      Even when tenants have been removed from the premises – voluntarily or involuntarily – they may still litigate and if they lose, then they may appeal. It’s an interesting dichotomy in law that protects rights of tenants. And if you consider it, there can be no other logical way as appeals take years to conclude. This one was completed in a bit more than two years, but a further appeal to the Texas Supreme Court would have added two more years.

2.      We handle many tenant evictions here. It is a rarity that the notices furnished to the tenants 100% comply with the lease and laws. Property managers use preprinted eviction forms and they work well for normal evictions where the tenant doesn’t pay rent. However, those same notices often are insufficient when the lease obligates the Landlord to furnish notices and opportunities to cure defaults before the lease can be terminated. Or when tenant’s breach is not related to the failure to pay rent, but is something unusual instead.

3.      Read your form lease. Do it now. Find all the ways the tenant can breach and make a list. Is it complete? Then review the lease to determine what steps the landlord must take before terminating the lease. Another list. After that – one more task – find out exactly what type of notice must be furnished before you can terminate a lease, to whom it must be given, by whom, how it is to be posted / mailed / delivered, at what address must it be posted, delivered or sent, and at what timing interval. Then, compare it to Texas laws. And make a final list.

Are you satisfied?

See for residential self-help rules.
See for commercial self-help rules.
See http//, and for Texas rules that apply to both residential and commercial judicial evictions.

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

Wednesday, September 3, 2014

Commercial Leasing (times two)

1.  Arbitration

On March 15, 2001, 175 Broad Street LLC (landlord) entered into a five-year lease with The Nead Organization, Inc. (tenant) for 12,017 SF in a commercial building. The lease was amended and extended in September 2005.

The holdover provision stated that if Nead continued occupancy after March 31, 2011 without the Landlord’s consent, then Nead would pay double the amount of base rent.

Nead was evidently not ready to vacate by the end of the stated lease term. Nead actually paid double rent from April through July 2011, but then stopped paying rental altogether. Nead ultimately vacated the premises on August 16, 2011.

175 Broad sued Nead for breach of the lease. 175 Broad alleged that Nead vacated the premises without proper notice, failed to pay rental and other charges, neglected to remove fixtures and failed to restore the premises to its original condition. 175 Broad alleged total damages of $224,468.

Shortly after 175 Broad filed its lawsuit, Nead asked the court to dismiss the complaint, citing a mandatory arbitration provision contained in the lease. 175 Broad defended by claiming that the arbitration provision was not intended to cover money disputes.

The court agreed with Nead and dismissed the lawsuit. 175 Broad appealed.

The Court of Appeals reviewed the arbitration section closely, which stated: “All disputes under this Lease, other than those relating to the payment of rent or other charges by Tenant, must be submitted to arbitration.”

Concluding that a part of the dispute related to rent but other claims did not, the Court of Appeals agreed that, regardless, the case must be dismissed to allow the parties to pursue arbitration.

The tenant Nead won and the lawsuit was dismissed. See 175 Broad Street, LLC v. The Nead Organization, Inc.; Docket No. A-3600-11T4; Superior Court of New Jersey – Appellate Division; January 10, 2013.

The results of the arbitration were not publicized.

2.  The Pain of Non-Payment

N. Providence LLC leased property to The Great Atlantic & Pacific Tea Company, Inc. Some of you will recognize the tenant as “A&P.” In the Lease, A&P promised to construct a new grocery store for itself in the shopping center, and Providence agreed to pay A&P a construction allowance of $1.9 million within 90 days following the date that A&P opened its store.

A&P opened for business on September 24, 2010, thereby giving Providence 90 days or until December 23, 2010 to pay the construction allowance. Providence secured a loan from UBS and advised A&P that it was ready to fund the $1.9 million allowance.

All was proceeding well. Until A&P filed bankruptcy on December 21, 2010. UBS informed A&P it was prepared to fund the construction allowance as soon as A&P assumed the Lease in the context of the bankruptcy proceeding.

A&P then assumed the Lease. Six months later. On June 22, 2011.

The first obvious result was that the construction allowance wasn’t funded within the 90-day window. The second not-so-obvious result was that A&P withheld all rent and other charges from December 23, 2010 (the last day to properly fund the construction allowance) until September 29, 2011 – being the date the allowance was finally paid.

Providence filed a lawsuit against A&P, claiming that the $1.9 million allowance must be reduced by the amount of rent withheld. The court ruled for A&P in holding that the Lease plainly stated no rental was due until the construction allowance was paid.

Providence appealed.

It took 20 pages for the appellate court to decide that indeed A&P had the right to withhold rent payments to Providence. And that A&P’s bankruptcy filing and delayed receipt of the construction allowance had saved A&P a substantial sum. See The Great Atlantic & Pacific Tea Company, Inc. . N. Providence, LLC; Case No. 13-CV-5588 (CS); United States District Court – Southern District of New York; April 28, 2014.

And this makes me wonder if the A&P bankruptcy filing was followed by Providence’s bankruptcy filing. How many landlords can survive without rental payments for nine months relative to a ‘big box’ lease?

Lessons learned:

1.      I am not a big fan of arbitration and usually I work to delete the provision regardless of the side I am representing. Yes a case can be resolved faster in arbitration, but at significantly greater expense and then the winner receives an “Award” which is unenforceable without filing litigation too. I prefer litigation over arbitration. But even when arbitration is appropriate, be careful how the provision is drafted to avoid unintended results.

2.      The A&P case involved two uber-sophisticated parties, yet the offset / abatement language wasn’t as clear as it might have been to prevent this catastrophic result. Lawyers and parties cannot think through every possible scenario. Such as the tenant’s bankruptcy that delayed the landlord’s construction allowance payment and the unintended results that followed.

3.      Do you see the relationship between these two cases? I should have captioned this article *Unintended Consequences*.

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

Friday, August 1, 2014

Commissions Reboot!!!

In September 2010 Buffy Lawrence and Reyna Realty executed a listing agreement. The listing agreement engaged Reyna for three months to market and sell her property, in exchange for a 5% commission, to be shared with a cooperating broker if one was used in the deal by the buyer.

Although the listing term ended December 31, 2010, Reyna Realty’s broker continued to list the property, post signage and generally market the property after it expired. Buffy never objected to these continuing services and efforts.

Reyna Realty received an offer to purchase the property and assisted Buffy by negotiating a higher purchase price. The deal was poised to close in March 2011, and the Seller’s Statement provided for a commission payment to Reyna. Buffy, however, instructed the title agent to reduce the commission amount by 30%. Reyna rejected this proposal, so Buffy withdrew her offer and refused to pay Reyna anything.

The purchase and sale funded, and in October 2011 Reyna Realty sued Buffy Lawrence to recover a real estate commission. Reyna Realty attached the Purchase and Sale Contract to Reyna’s lawsuit pleadings, which Contract contained a statement to the effect that “all obligations of the payment of brokers’ fees are contained in separate written agreements.”

It was Reyna’s position that although the stated listing term had indeed expired three months before the sale date, both the Contract and Settlement Statement contained written evidence of an extension of the listing at least through the date of sale.

Buffy defended Reyna’s claim by using a statute of frauds defense. Basically, that defense means that all commission obligations in the State of Texas must be in writing, signed by the party obligated to pay it, and no oral or unwritten modifications are typically allowed.

The trial court awarded Reyna its commission of $14,440, plus $36,000 in attorney’s fees. Buffy appealed.

The Appellate Court, looking at the initial Listing Agreement, Purchase and Sale Agreement and Settlement Statement, concluded that the documents constituted a written extension agreement and defeated a statute of frauds defense. Similarly, even though the Seller’s Statement that was eventually signed provided no compensation to Reyna Realty, it still indicated that Reyna Realty was serving as the broker for the Seller.

And further, Buffy had willingly accepted the benefits of the services offered by Reyna Realty, which services were beneficial to Buffy.

From there it was an easy leap to legal conclusions of “ratification” and “non-repudiation.”

Judgment for Reyna Realty was affirmed. Reyna wins; Buffy Lawrence loses. See Lawrence v. The Reyna Realty Group; Cause No. 01-13-00819-CV; Court of Appeals of Texas, First District, Houston Division; May 15, 2014.

Lessons learned:

1.      Reyna Realty forgot to get its listing agreement extended, or maybe Reyna made the request but Buffy Lawrence was unwilling to sign it. Either way, if the listing agreement had been properly extended then one might assume that a lawsuit would not have been necessary and Reyna would have been paid in full at closing.

2.      While this case was ultimately won by the broker, a slight variation in facts would yield a different result. If the broker’s name was not included in the Purchase and Sale Agreement, then I suspect Buffy would have prevailed.

3.      Do not assume that just because you continue working for a principal’s benefit after the expiration of your contract that you will get paid if your efforts result in a closing. Get it in writing, *before* expiration of your agreement.

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

Wednesday, July 2, 2014

Commissions! Commissions!! COMMISSIONS!!!

So. My 50th Counsel’s Corner article. Seems appropriate that this article should be about that which is nearest and dearest to the hearts of my readers . . . commissions!

James Murphy was licensed as a Texas real estate broker. He sued Reed Williams (not a licensee) for a brokerage commission regarding the sale of five tracts of property in the Frisco Medical Center subdivision.

Murphy was working with the Sellers in 2010 to secure financing for their Frisco Medical Center properties. When Murphy learned that the Sellers might consider marketing the properties, he approached Jim Williams to request authority to serve as their broker.

Reed Williams was a Vice President of the general partner entity of the various Sellers. Jim Williams (Reed’s father) was the President of one of the Sellers, and was the individual who initially discussed an exclusive listing agreement with Murphy.

Murphy was given limited authority to market the properties, but only to one prospect. Either that prospect or an affiliate of the prospect then contacted Healthcare Realty Trust to present the purchase opportunity. Healthcare was not approved as a prospective buyer, and James Murphy had no authority to consent to the delivery of information from the prospect or affiliate to Healthcare.

Evidently Healthcare then approached representatives of the Sellers directly including Reed Williams, and the target parcels were sold to Healthcare at the end of 2010. For $133 million. Since no commissions were paid to James Murphy, Murphy sued Reed Williams and others for various claims including tortious interference with contract or contractual expectation.

James Murphy likely felt that he prepared or delivered the information and materials that ultimately found their way to the purchaser, and at least in part may have induced the purchaser to close the deal. And consequently, absent Murphy’s actions, the target properties may not have been sold.

The Collin County trial court, concluding that Williams had the better case, entered a Judgment for the Reed Williams. James Murphy appealed.

On appeal Murphy contended that Reed Williams acted as an unlicensed broker and interfered with Murphy’s expectation to receive a commission. Reed Williams defended the claim by stating that his limited actions in the deal did not constitute brokerage activities.

The first part of Texas law regarding brokerage is clear. A person may not recover a commission unless that person is a licensed broker, the agreement is in writing and the agreement is signed by the person obligated to make the payment.

The second part of Texas law is more obscure. Brokers are allowed by law to sue each other for “. . . interference with business relationships.” See Texas Occupations Code 1101.806(a)(2):

The facts in this case establish that Reed Williams was not acting as a broker. Even James Murphy admitted as much in his pleadings. As such, the Court of Appeals had little trouble finding that Murphy was not entitled to a judgment against Reed Williams.

And why did this case get my attention? Because James Murphy and his lawyers cleverly used an obscure portion of Texas law and coupled it with a novel theory that one does not have to hold a brokerage license in Texas to act as a broker. As by analogy one does not have to hold a driver’s permit to drive an 18-wheel truck, or hold a pilot’s license to fly a helicopter.

All of those actions require licenses and permits to do them lawfully, but even without a license or permit one who is flying a plane is still, well, flying the plane.

So, Murphy and his lawyer constructed an argument that if Williams’ actions constituted brokerage, then his license status was irrelevant and Murphy should be able to sue one who acts as a broker (licensed or not) and interferes with business relationships. That, so the argument goes, was the purpose of Section 1101.806(a)(2).

Regardless of licensure status, James Murphy was unable to show that Reed Williams was acting as a broker. So, the Court of Appeals did not need to delve further. Judgment affirmed for Reed Williams. See Murphy v. Williams; Cause No. 05-12-1730-CV; Court of Appeals of Texas, Fifth District, Dallas Division; May 5, 2014.


This case may be appealed to the Supreme Court of Texas. Stay tuned.

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

Tuesday, June 3, 2014

Read This and Judge. Send Me a Message and Tell Me Who is Right.

On August 10, 2000, Samuel N. Zagaria, Jr. disappeared from all contact with his family and friends. On July 6, 2009, an Illinois probate court declared that he was “presumed dead” and appointed his sister, Joanne Corlett, to administer his estate.

Sam’s estate consisted primarily of a stock account worth $518,000.

Joanne hired attorneys John Lesch and Thomas McCauley to assist her with her brother’s affairs. The lawyers filed a petition for letters of administration. The probate court, believing that Sam died without a Will, appointed Joanne as independent administrator. Joanne was Sam’s only heir at law.
The attorneys then prepared personal tax returns and recovered unclaimed assets from the State of Illinois. By contacting governmental officials, the attorneys learned that someone using Sam’s name or social security number had filed an application for food stamps at a homeless shelter near Sam’s last known address. And then through researching a state database, the attorneys were convinced that Sam’s death pronouncement was, to borrow a line from Mark Twain, greatly exaggerated.

On June 8, 2010, the lawyers met Sam face-to-face at the shelter for the first time, along with Sam’s counselor, representatives of the shelter, and Sam’s lawyer. Evidently Sam was unwilling to meet with his sister Joanne.

On August 4, 2010, Sam’s lawyer interceded in the probate case to end Joanne’s authority as administrator. The court revoked the presumption of death and Joanne’s authority.

After the estate was closed, Lesch and McCauley filed a petition against Sam for attorneys fees and costs totaling $30,859. Sam’s lawyer opposed the petition, claiming that the attorneys had breached their fiduciary duty to Sam.

The trial court entered an Order for Lesch and McCauley and imposed a Judgment for $27,359.

Lesch and McCauley detected that Sam had a new Merrill Lynch account with a balance of $366,096, so they attempted to recover their fees from the new fund. Presumably Sam’s sister had depleted the old brokerage account by some $150,000, which explains the large difference in value in the two brokerage accounts.

The trial court allowed Lesch and McCauley to recover from the new account. Sam appealed, again claiming (among other matters) that Lesch and McCauley breached their fiduciary duty owing to him.

The appellate court looked to the most recent case it could find where one legally presumed to be dead later returned to claim his property. That case was in 1922, but the theory was the same in 2013, which is that state laws allow one to petition the Court after an unexplained absence for seven years to declare that the individual has died and the estate should be settled. And, dead or alive, the estate is responsible for legal fees and related costs.

Judgment affirmed for lawyers Lesch and McCauley. See In re Estate of Samuel N. Zagaria, Jr.; 2013 IL App (1st) 122879, September 30, 2013. The attorneys won; Sam lost.

Lessons learned:

1.      Illinois may not be a great place for wealthy people who are presumed dead but are actually alive. It can be tricky in India too where His Holiness Shri Ashutosh Maharaj was declared clinically dead in January 2014, but his followers believe he has achieved a transcendent state where he is at one with the universe: So his followers are keeping him “alive” in a freezer in his ashram. Meanwhile the Punjab High Court has dismissed the police report certifying to his death, ruling instead that his alleged death is a “spiritual matter.”

2.      Tell your family and friends where you are going. A seven-year absence, at least in Illinois, might have the effect of depleting your financial statement. I don’t know if the same rule is true in Texas but I fear it may be. Conversely, I suspect a seven-year absence in India might only allow one to transcend a bit further into the universe. This is presently unclear.

3.      Keep your annual vacations to two weeks, tops. Well maybe three. But for sure not more than four. Although, again in India, . . .
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Monday, May 5, 2014

Now Tell Me Again: How Big Is That Property?

Bowen Zhu and Jain Yu contracted to buy a house in Harris County for $180,000. Seemingly, they intended to live there. But for this purpose it doesn’t matter.

The seller, listing agent, Harris County Appraisal District and Kai Lam all represented that the house had 2,722 square feet of living area. Kai Lam was the TREC-licensed broker representing Zhu and Yu. When Zhu and Yu initially viewed the property, Zhu told Lam that the house seemed smaller than 2,722 SF, but Lam assured Zhu that it only seemed smaller because it had an open floor plan.

On the day before closing Zhu told Lam he wanted to back out of the deal. Zhu claims that Lam told him he would get sued if he changed his mind. Lam gave Zhu a 1% purchase price rebate, and Lam persuaded the seller to discount the purchase price by $250 as a further inducement for Zhu to close.

After the closing and at Zhu’s request, the Harris County Appraisal Districted re-measured the house and found that its living area was only 1,967 square feet. The difference of 755 square feet is approximately 28% less than the square footage as represented to Zhu and Yu.

On a straight square footage basis, it is conceivable that Zhu and Yu paid $50,000 too much for the property.

The buyers sued Lam, Lam’s brokerage company Housesold Realty, Inc., the seller, the seller’s listing agent and others. All parties were dismissed (perhaps they settled?) but for Lam and HRI.

Finding no genuine issues of material fact, the trial court granted summary judgment for the broker Lam and his brokerage company HRI. Zhu and Yu appealed.

The buyers did not properly appeal the issue of monetary damages, and instead claimed that “damages are effectively presumed in this case.” Zhu and Yu’s testimony that the house had a value of $140,000 was given no probative value by the trial court. Also, it appears there was no expert testimony on this point, and so Zhu and Yu’s opinion of market value, without supporting comparables or other credible evidence, was merely conclusory, unsubstantiated and unreliable.

Since no authority was cited and since the buyers did not raise the argument in their response to Lam’s request for judgment in the trial court, the Court of Appeals had no choice but to forego awarding Zhu and Yu any compensation.

Buyers did, however, properly perfect their appeal regarding Lam’s and HRI’s breach of fiduciary duty owing to Zhu and Yu. To prevail under Texas law, the buyers must prove: (1) a fiduciary duty existed between Buyers and Lam; (2) Lam breached that duty; and (3) Buyers were damaged.

Lam and HRI defended the claim of breach of duty by asserting that Lam did not know the actual square footage, and that under Texas law Lam was neither required to measure nor investigate the size of the home.

Zhu and Yu were unable to prove that Lam knew or should have known the house was substantially smaller than 2,722 SF. Instead, the evidence seemed to show that Lam merely repeated what he was told from the seller and listing agent, and what he discovered by reviewing the HCAD website.

And Lam was correct on this point: unlike California and some other states, under 1992 Texas case law authority Lam had no duty to measure the property or further investigate.

The trial court’s Judgment was affirmed for Kai Lam and Housesold Realty, Inc. See Zhu v. Lam; No. 14-13-00368-CV, Texas Court of Appeals – Houston 14th District, March 18, 2014. The broker won; the buyers lost; Lam did not breach his fiduciary duty to the Buyers by merely repeating information he had gained from the seller and public sources.

Lessons learned:

1.  Yes it is true that the broker was vindicated. However, a close reading of the appellate decision leads me to think this could have gone badly for the broker just as easily if the damages issue was properly presented.

2.  Don’t offer square footage representations. If you must do so, then clarify in writing that they are not your representations but rather come from the seller, appraiser, landlord, Central Appraisal District records or some other (hopefully public) source. And, that the buyers / tenants should independently verify the data before making any decisions.

3.  I don’t have a third lesson learned. It just felt a little, je ne sais quoi, empty without some text here.

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

Thursday, April 3, 2014

Stop the Presses! [reboot]

Remember last month’s article? Well, evidently the same Texas appellate court came to an opposite conclusion just a few weeks ago. As Ricky Ricardo would say, "let me ‘splain."

Moody National Kirby Houston S, LLP, entered into a contract to sell a vacant lot in Houston to Capcor at KirbyMain, LLC. Seller and Buyer used TREC Form 9-10 “Unimproved Property Contract” for that purpose.

Capcor deposited $25k with Moody National Title Company, LP. Note the similarity in names? Both Moody Title Company and Moody Kirby were owned by Brett Moody.

On the day before closing Moody Title escrow agent Kay Street told Capcor’s lawyer that Moody Title needed to receive the purchase funds in the form of a wire transfer. Kay Street told Capcor’s principal, Josh Aruh, the same requirement when he arrived at the title agency offices the next morning to sign closing docs.

Capcor’s lender timely wired funds to Moody Title. Regardless, sometime after 5p.m. on the day of closing Capcor principal Avi Ron arrived at Moody Title with a cashier’s check.

Kay Street told Ron that she was leaving for the day and could not accept the check. Ron left it with her anyway. Capcor’s attorney offered to replace it the next day with a wire transfer. Moody Kirby however, sent notice that it was terminating the contract.

Capcor refused to sign a Release and instead sued Moody Kirby and Moody Title. Moody Kirby counterclaimed, demanding the earnest money and three times the amount of the earnest money, as provided by Section 18.D. of TREC Form 9-10.

Starting to sound familiar? See last month’s article if it doesn’t.

The jury found that Capcor had breached the contract and that Moody Kirby had the right to terminate the deal since Capcor had not timely performed its obligations. Paying for land with a check on the day of closing was not allowed when, the jury held, Kay Street had specifically told Capcor that Moody Title needed to receive all funds by wire.

The jury also found that Moody Title did not breach any fiduciary duties owing to Capcor. So the trial court entered judgment against Capcor, awarding Moody Kirby its attorney’s fees, escrowed funds, and earnest money plus liquidated damages equal to three times the amount of the earnest money.

Capcor appealed.

The Appellate Court first analyzed Moody Title’s obligations and whether or not they were properly discharged. They were. Then, the Court turned its attention to Moody Kirby’s right to terminate the deal because Capcor attempted to buy the land with a check when a wire was required and Capcor had been advised of that requirement.

Moody Kirby evidently had the right to terminate.

Strangely, there is nothing written about liquidated damages, other than to uphold the jury’s verdict and the trial court’s judgment. How interesting from the same Court that, barely eight months ago, invalidated TREC’s concept of “liquidated damages are always equal to three times the earnest money.”

The trial court’s Judgment was affirmed for Moody Title and Moody Kirby. See Capcor at KirbyMain, LLC v. Moody National Kirby Houston S, LLC; No. 01-13-00068-CV, Texas Court of Appeals – First District, March 13, 2014.

Lessons learned:

1.      In July 2013 the same Appellate Court reached the opposite conclusion regarding liquidated damages. Could it be that liquidated damages were not contested by Capcor in this appeal?

2.      Contact the title agent well before closing, so you will know their unique requirements and be prepared.

3.      I counsel my clients to avoid the situation where a party to a contract is also affiliated with the title agency. Although it appears that Kay Street was impartial in this case and should be commended for it, I am painfully aware of other circumstances where those who are connected receive more favorable treatment.

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

Friday, February 28, 2014

Stop the Presses!

Your erstwhile reporter has found a biggy. At least I think it is. A BIGGY. Send me an email and tell me that you do or do not agree.

In 2008 Albert and Jennifer Magill entered into a contract to purchase real estate from The Estate of William H. Watson, Sr. The Magills deposited $8,000 in earnest money with the title company.

The Magills were unable to renovate / construct due to a truculent Property Owner’s Association. So the Magills terminated the deal by sending notice to the Estate. The Magills signed a Release Agreement providing for the return of all Earnest Money to them.

Instead of signing the Release, the Seller (well actually their assignee but no matter for this purpose) sent a notice to the Magills demanding the earnest money. When the Magills did not comply, the Seller filed a lawsuit against them alleging breach of contract.

The lawsuit requested not only the earnest money, but also three times that amount based on a damages provision in the Contract as follows:

"D. DAMAGES: Any party who wrongfully fails or refuses to sign a release acceptable to the escrow agent within 7 days of receipt of the request will be liable to the other party for liquidated damages in an amount equal to the sum of: (i) three times the amount of the earnest money; (ii) the earnest money; (iii) reasonable attorney's fees; and (iv) all costs of suit."

The case was tried to a jury, which found the Magills had breached the contract. Judgment was entered for the Seller (again, actually their assignee) for $32,000, representing the $8,000 earnest money amount plus liquidated damages of three times the earnest money, as well as attorneys fees, interests and costs.

The Magills appealed, contending that the liquidated damages clause is an unenforceable penalty.

And why is this interesting to us? Because this clause was written by the Texas Real Estate Commission and is presently contained in their on-line forms site, here:

But wait there’s more. Unless an exception exists, TREC licensees are mandated by law to use that exact form in residential transactions.

They. Have. No. Choice.

And – still more. Some users of commercial real estate contracts and leases in Texas (and outside of Texas too), taking their cue from TREC, have incorporated similar provisions.

The Texas Appellate Court reviewed the clause, and determined that it must be enforced if (1) the harm caused by the breach is incapable or difficult of estimation; and (2) the amount of liquidated damages is a reasonable forecast of just compensation. That follows the ruling given us by the Texas Supreme Court in 1991.

The Appellate Court found authority that if the amount stipulated in the liquidated damages clause is shown to be disproportionate to the actual damages, the clause is a penalty and will not be enforced.

The Court concluded that, because the contract simply takes the value of the earnest money and multiplies it times three, the provision is an unlawful penalty and does not attempt to forecast actual damages.

In fact, the Court used the TREC’s own commentary to defeat the TREC’s own contract: “This conclusion is supported by the comment promulgated by [TREC] . . . that the purpose of the clause was ‘to provide for additional incentives for prompt release of the earnest money.’ ”

WOW. Probably without intending to do so, Al and Jen Magill just gutted TREC’s most important contract, and similar provisions contained in commercial contracts and leases too. My surmise is that TREC is busy re-writing the statutorily-mandated sales contracts to comply with this ruling.

The trial court’s Judgment was reversed for the Magills; damages were reduced from $32,000 to $8,000. See Magill v. Watson; No. 01-12-00051-CV, Texas Court of Appeals – First District, July 9, 2013. I am not aware of any further appeals.

Lessons learned:

1.      Just because TREC wrote it – or it’s contained in a form – doesn’t make it enforceable!

2.      Liquidated damages clauses are inherently suspect and susceptible to challenge.

3.      This might be an opportune moment for you to closely examine your contracts and leases!

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