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.

Wednesday, February 5, 2014

Power of Attorney!

In August 2002 Vinh Nguyen purchased property in Pflugerville Texas which was financed with a loan from Finance America. Finance America sold the loan to Wells Fargo. Wells appointed Ocwen Loan Servicing as Wells’ agent to collect loan payments, assure that the tax payments were timely made and that the property was insured.
In July 2003, the property was purchased by Francis Montenegro. Diem Thi Nguyen signed a Warranty Deed to Francis Montenegro as “Vinh Nguyen, by his attorney in fact, Diem Thi Nguyen.” Diem’s claim to be Vinh’s attorney-in-fact was supported by a Power of Attorney document signed by Vinh in June 2003.
The Warranty Deed was recorded with the Travis County Clerk about a week after closing. The Power of Attorney document was not recorded.
Montenegro made monthly payments to Vinh until April 2006; presumably Vinh was, in turn, supposed to pay Ocwen but Vinh failed to do so. In May 2006 Montenegro sent a letter to Ocwen requesting authority to make loan payments to Ocwen instead of Vinh.
Ocwen never expressly allowed Montenegro to make direct payments, but regardless Montenegro sent an $8128 payment to Ocwen to cure Vinh’s default. Thereafter Montenegro made monthly mortgage payments to Ocwen for one year.
In August 2007 Ocwen sent Vinh a Notice of Default and Intent to Accelerate. The notice was not sent to Montenegro. When the default was not cured, Ocwen sent a Notice of Acceleration and Notice of Foreclosure to both Vinh and Montenegro in October 2007.
Montenegro filed a lawsuit to stop the foreclosure sale. A temporary restraining order was granted, but Ocwen foreclosed anyway. So Montenegro sued Ocwen for wrongful foreclosure.
In February 2012 the trial court ruled for Ocwen. Montenegro appealed.
Montenegro claimed that Ocwen should have furnished Notice of Default and Intent to Accelerate to accelerate the loan to Montenegro, not solely to Vinhn. That analysis involves privity, or a legal connection between Ocwen and Montenegro.
In order to determine if Montenegro had privity with Ocwen, the Appellate Court had to review the 2003 transaction to determine its validity. If the Power of Attorney was ineffective, then so was the Deed. If that is true, then Montenegro would have no standing to contest Ocwen’s foreclosure.
The Appellate Court first turned its gun turrets towards that lonely piece of paper, the Warranty Deed transferring the Pflugerville property to Montenegro in July 2003, recorded in Travis County the week after. The Deed was signed by Diem Thi Nguyen, purportedly as attorney-in-fact for Vinh Nguyen. Vinh, you will recall, was the true property owner, having purchased the property in 2002.
The Deed appeared to be Ok, subject to the Power of Attorney provisions. So, next up was an evaluation of the POA document.
Texas law provides that Power of Attorney documents must be recorded if they will be used in real property transactions. There was no evidence to show that the Power of Attorney was recorded, at least not in the County that counts – Travis County.
Consequently, the Power of Attorney document failed.
Failure of the Power of Attorney meant that Diem did not have authority to convey Vinh’s title to Montenegro. In turn, that means that although Vinh could have properly contested Ocwen’s foreclosure despite the existence of a temporary restraining order, Montenegro did not have such standing as Montenegro was, at least in law, a stranger to the transaction.
Hopefully Montenegro received a title policy at the 2003 purchase (or after) so he would have recourse against a title underwriter if his ownership is later challenged. Otherwise, I suppose he might have recourse against Diem and Vinh, but it is unknown if either are solvent and doubtless both will raise statute of limitations and other defenses.
The trial court’s Judgment was affirmed for Ocwen Loan Servicing. Ocwen wins; Montenegro loses. See Montenegro v. Ocwen Loan Servicing, LLC; No. 07-12-00297-CV, Texas Court of Appeals – Amarillo, November 18, 2013.
Lessons learned:
1.      Power of Attorney documents are inherently risky business. Sometimes there is no alternative, as the Seller, Buyer, Lender, Landlord or Tenant is unavailable. In other situations such parties will execute a POA simply out of convenience. Avoid the issues presented in a POA by demanding signature of important documents by the real parties, not by their agents and attorneys-in-fact through a POA document.
2.      Of course title insurance is available in purchase and financed transactions, but did you know that title insurance is also available for leasing, easements and virtually every other estate in land? As a failsafe, always get title insurance. Title policies can insure the Buyer, Lender, Tenant, easement holder and a host of other holders of Texas estates in land.
3.      Always. Get. Title. Insurance. Or did I already write that?

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