Monday, December 31, 2018

Bank Fraud

            Francisco Calleja-Ahedo, a resident of Mexico, opened an account with Compass Bank in 1988. He may or may not have signed an account card directing the Bank to hold all correspondence. Conversely, he may or may not have instructed the Bank to send statements to his brother in The Woodlands, Texas.

            Regardless, the Bank sent monthly statements c/o Calleja’s brother at the Texas address from 2008 until 2012. Calleja’s brother routinely ignored all statements, but furnished them to Francisco when he visited.

            In May 2012 the Bank statement provided that Calleja had a balance of approximately $43,000. This would be the last statement provided by the Bank to the brother at the Texas address.

            Neither Calleja nor his brother nor the two other signatories on the account (Calleja’s wife and father) complained to the Bank that statements were no longer being received in The Woodlands.

            In June 2012 an unknown person identified himself as Calleja and instructed the Bank to change the address on file to a California address. Then, another California address. Later, a Georgia address. Still later, a new Georgia address.

             A forged check for $38,700 was paid from the account in July 2012. The imposter then drained the account balance through a series of smaller transactions.

             Calleja claims that he first learned of the change of address and fraudulent activity in January 2014, when a buddy told him a check from Calleja had been returned marked “account closed.” Calleja went to the Bank to sign an affidavit disputing the charges and demand reimbursement.

             Calleja sued the Bank when it refused to pay the unauthorized withdrawals. The Bank’s employee testified through an affidavit that: (1) Calleja never complained about his brother’s non-receipt of statements, (2) copies of Bank statements are available at any branch office, (3) Calleja could have reviewed the statements online, and (4) all statements have a toll-free number Calleja could have used to get statement copies or setup online banking for free.

            The trial court granted judgment for the Bank, holding that Calleja failed to exercise diligence by waiting too long to notify the Bank of the fraud.

             Calleja appealed.

             The Texas court of appeals reversed and rendered judgment for Calleja, concluding that sending statements to the imposter did not amount to sending the statements to Calleja. The appellate court further rejected the Bank’s contention that it made statements available by providing them at its offices, offering free online banking, and providing a toll free number that Calleja could have used to inquire about his missing statements and overdrawn account balance.

             The Bank appealed.
            The Supreme Court evaluated Texas laws found in Section 4.406 of the Texas Business and Commerce Code. That section states that if a bank sends or makes available a statement of account, the customer must exercise reasonable promptness in examining the statement. If the customer discovers an unauthorized payment, the customer must promptly notify the bank.

             Further, Texas laws provide that if a customer fails to promptly notify the bank, the customer is precluded from asserting claims against the bank for improper payment.
            Focusing on the disjunctive “. . . or makes available . . .,” the Court concluded that Calleja could have used the toll free number to inquire about his account. Or appeared at any bank branch to review statements. Or used online banking for the same purposes and verifications. Or asked his brother why statement delivery had been suspended for 18 months.
            The Texas Supreme Court held that due to Calleja’s failure to exercise reasonable diligence, the Bank could not be responsible for his losses. Compass Bank wins; Francisco Calleja-Ahedo loses.

See Compass Bank v. Francisco Calleja-Ahedo; Texas Supreme Court; Case No. 17-0065; December 21, 2018:
            Lessons Learned / Questions Asked:

1.      Most of us would consider it irresponsible to ignore a $43,000 bank account. And yet I can envision that an individual, living in a foreign country and likely unaware of Texas banking laws, may have trusted his USA-resident brother to oversee the account and review statements mailed to his brother. And press the alert button when delivery of the statements ended. 

2.      Texans are charged with the duty of promptly reviewing banking and credit union statements (likely brokerage and similar accounts as well), and asking hard questions if there are errors or improper transactions. Trusting that things will work themselves out without taking affirmative action could jeopardize a significant account balance.

3.      Past that, Happy New Year to all my loyal readers. Let me know if there are any subjects you want me to explore this year.

                                                                                              Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

 Licensed in the States of Texas and New York

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888


Monday, December 3, 2018

Why Write About SSDI Benefits?

             Stay with me a few moments and I’ll answer that question.

             The Fair Housing Rights Center in Southeastern Pennsylvania received a complaint regarding the denial of a request for “reasonable accommodation” by an individual seeking residential housing. FHRC dispatched testers and checkers to three properties in the greater Philadelphia area to determine the validity of the complaint. Not satisfied with the results of the tests, FHRC filed a federal lawsuit against the professional management company – Morgan Properties.

             Morgan manages over 35,000 residential rental units in 130 communities in 10 States. As policy, Morgan refuses to adjust rental payment dates for tenants with disabilities who receive Social Security Disability Insurance – SSDI – later than the rent due date.

             The average monthly rent for a one-BR in a Philadelphia-area Morgan property is $1,200. Rent is due on the 1st. If rent is not paid by the 5th day of the month, a 10% late fee - $120 - is charged.

             More than 20 years ago the Social Security Administration changed the SSDI monthly payment dates from the 3rd day of the month to the second Wednesday, third Wednesday or fourth Wednesday of the month, depending on the birthdate of the recipient.

             Since the second Wednesday of any month can be no earlier than the 8th and may be as late as the 14th, all SSDI recipients in the last 20 years receive monthly checks at least three days past the due date for Morgan’s properties.

             SSDI benefits vary according to contributions the worker made during her / his working life. Two years ago the average SSDI check to a disabled worker was $1,166 per month. More than 10 million Americans receive SSDI benefits; many rely on it as their sole source of income.

             FHRC’s testers asked Morgan for an accommodation by adjusting the rent due date to coincide with the receipt of a Social Security payment, so that Social Security recipients could pay rental on time without monthly late fees. FHRC alleges that each tester was told that their refusal to grant the accommodation was due to Morgan’s company-wide policy.

             In 2016 FHRC sued Morgan to challenge its policy, claiming it discriminated against residents with disabilities by imposing financial hardships on them because of their disabilities and their need to receive Social Security benefits to pay rent.

             Morgan denies that it discriminates by requiring all tenants to pay rent by the 5th day of the month, or be liable for late fees (and possible court fees and eviction). Morgan further claims that FHRC’s challenge to Morgan’s rental policy is not a request for an accommodation based on SSDI recipients’ disabilities, but is rather a purely economic accommodation and would pose a significant monetary hardship on Morgan.

            Morgan also claims that such an accommodation would place an undue burden on them and is therefore not reasonable by definition.

             The Court hearing this matter has concluded that the financial circumstances of disabled tenants may be considered in determining the legal need for a HUD “reasonable accommodation.”

             Through this date, 79 documents have been filed in the lawsuit. More are coming. The Court has ordered a settlement conference which, if not delayed, will take place on December 10, 2018. If not resolved at mediation, this case could set new national precedent requiring residential Landlords to adjust their rent payment schedules to coincide with the receipt by tenants of governmental benefits.

             Key this case name into the search engine of your choice after December 10, 2018: Fair Housing Rights Center In Southeastern Pennsylvania v. Morgan Properties Management Company, LLC; US District Court, Eastern District of Pennsylvania, Eastern Division, Case 2:16-cv-04677-RBS; If you have own, finance, lease or manage residential properties, you will [should be!] keenly interested in this case.
            Lessons Learned / Questions Asked:

1.      Residential Landlords have mortgages and bills to pay that are due on the first day of the month. Landlords don’t have the ability to threaten their creditors with a lawsuit if the creditors fail to offer Landlords a “reasonable accommodation” merely because the tenants aren’t making payments between the 1st and 5th day of each month. If this case results in a new requirement that residential Landlords must adjust rental due dates to match the date that tenants receive governmental benefits, then there will be an economic cost to Landlords that will be passed on to all residential tenants including those same tenants who are requesting the accommodation.

2.      Even if this case is settled and we hear nothing further about it after December 10, the fact that it has been filed and that the Court seems receptive to the position asserted by the plaintiff means that other similar cases will also be filed.

3.      Yes Virginia, this is indeed my 100th blog article. Congratulations to me, and Happy Holidays to all my readers.
                                                                             Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

 Licensed in the States of Texas and New York

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888

Wednesday, October 31, 2018

The Fortuity Doctrine

            This is a bit complicated. But follow along until you see the words “The Fortuity Doctrine.Доверяй, но проверяй.

Kernell and Stanley Thaw were married in 2001. In 2002 Stan Thaw and Leslie Schachar began operating a business together. When the business failed, Schachar paid business debts that were guaranteed by both Stanley and Schachar.

            Schachar sued Stanley in 2008 to recover Stanley’s share of the debt.
            While the lawsuit was pending, the Thaws contracted to purchase a home in Frisco Texas. In 2009 Schachar obtained a final judgment against Stanley, and Stanley appealed.
            While the appeal was in process, Schachar recorded an Abstract of Judgment in Collin County before any Deeds to the new home were recorded. Kernell and Stanley Thaw moved into their new home in 2010.

            In 2011 the Thaws paid off the mortgage debt and only then recorded a Deed in a transaction insured by Fidelity National Title. One month later the Texas Court of Appeals affirmed Schachar’s judgment, so Stanley countered by filing a bankruptcy petition near the end of 2011.

            Schachar filed a proof of claim in the bankruptcy for a $400,000 secured interest in the Frisco property. The bankruptcy court held that both the claim and lien were valid, finding that Schachar had recorded his Abstract of Judgment lien before the Thaws had made their new Frisco property their Texas homestead.

            As a consequence, when the Frisco property was sold in 2013 the Schachar lien attached to the net proceeds of the sale, approximately $500,000.

            In 2014 the bankruptcy Trustee as well as Stanley and Kernell Thaw made demand upon Fidelity for insurance benefits, as the title insurance policy insured title without exclusion for Schachar’s judgment. In 2016 the bankruptcy court approved a settlement in which Schachar received $444,000 from the net proceeds of the sale, in full satisfaction of his claim.

At that juncture the Trustee and Kernell Thaw determined they could recover the amount paid to Schachar from their title insurance carrier. As you likely guessed, Fidelity Title resisted and refused to pay.

            So Kernell and the Trustee sued Fidelity Title, arguing that Fidelity had breached its Policy by denying the claim. The bankruptcy court reviewed the policy and these unique facts, and issued an Order that coverage under Fidelity’s insurance policy was barred. The reasoning was partly due to application of the “Fortuity Doctrine.”

            The Trustee and Kernell Thaw appealed the bankruptcy court’s Order.

            The Fortuity Doctrine relieves insurers from covering some behaviors that the insured undertook prior to purchasing the insurance policy. Under this doctrine, the insured cannot obtain coverage for losses of which the insured had knowledge when the policy was bought, but failed to disclose to the insurance carrier.

            Kernell claimed that she had no actual knowledge that Schachar had recorded an Abstract of Judgment lien and further – she would not have understood the effect of such a filing if she had known of it.

            Evidently the Fortuity Doctrine covers this event, as it precludes insurance coverage when the insured is or should be aware of a known loss at the time the policy is purchased. Not understanding the legalities or process is not a great defense.

            The Court rationalized that even if Kernell had no knowledge of the recordation of the Abstract of Judgment, she knew or should have been aware that her husband’s failure to pay his debts resulted in a Judgment against him in 2009. And that due to appeals, the Judgment was uncollected at the time the Thaws purchased the Frisco property. And that the Judgment remained unpaid when the Thaws paid off the mortgage debt and purchased the title insurance policy in 2011.

            The Court reasoned that was a “loss in progress” and for that reason, Fidelity Title is not responsible for the claims asserted by Kernell Thaw and the Trustee.

            Fidelity Title wins; Kernell Thaw and the Trustee lose. See Christopher Moser and Kernell Thaw v. Fidelity National Title Insurance Company; US District Court; Eastern District of Texas; Case 4:17-CV-104; March 21, 2018;

            Lessons Learned / Questions Asked:

1.      Now I know what the Fortuity Doctrine is!

2.      Insurance companies have abilities to defend that many of us (meaning: me) could never contemplate. This is one among many.

3.      This is my 99th blog posting over a period of almost 10 years. Shouldn’t I get a watch, pen, or tuna sandwich? I mean, for the love of Pete it’s been fun but 99 blogs, really?

                                                                                                                            Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization
Licensed in the States of Texas and New York

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


Friday, September 28, 2018

Wire Transfer Fraud V2

In February 2016 Jerry Bain was looking to purchase investment real estate. Kathryn Sylvia Coleman and her broker, Platinum Realty, LLC, represented the seller. When the deal was ready to close, Jerry alleges that Coleman instructed him to wire almost $200,000 in closing proceeds.

Jerry followed the instructions furnished to him.

Unfortunately, however, the amount wired was sent to the wrong account, with the result that Jerry lost it all. It appears that a hacker gained knowledge of the pending transaction, and inserted wire transfer account data that dumped the funds directly into the control of the hacker instead of the title company.

Jerry sued Coleman and Platinum Realty to recover the amounts lost, claiming that they were negligent in their misrepresentation of the bank account data to him. The jury agreed, and found that Coleman and Platinum were 85% responsible for Jerry’s loss. Jerry was responsible for the balance.

Accordingly, the Court entered Judgment against Coleman and Platinum for $167,000. Defendants then filed a Motion with the Court claiming that the evidence is insufficient to support the jury’s finding of negligent misrepresentation.

The first test of negligent misrepresentation is a failure to exercise reasonable care or competence in obtaining or communicating the false information. Platinum and Coleman responded by claiming that Coleman did not send the email with the false data, inducing Jerry to wire funds to a third-party criminal’s account.

Coleman admitted that she had received the fake wiring instructions and attempted to forward them to Jerry. That email from Coleman to Jerry, however, was sent not to Jerry’s correct email address, but instead was sent to a very similar address from which Coleman had received a prior communication.

Presumably the hacker had created the similar address. And regardless, Jerry received the email with the hacker’s account number a few minutes after Coleman sent it.

To be sure he was wiring funds properly, Jerry then called Coleman, who confirmed by phone that the funds must be wired prior to closing. And so the funds were wired . . . to the hacker.

Once Coleman conceded that she did not confirm that she had sent correct wire instructions or that she had the responsibility to make sure the instructions were correct, the jury could safely conclude that Coleman failed to act with reasonable care.

And from there it was no stretch to impose liability upon Coleman and Platinum Realty for innocently participating in wire transfer fraud. See Jerry Bain v. Platinum Realty, LLC and Kathryn Sylvia Coleman; US District Court; District of Kansas; Case 16-2326-JWL; June 25, 2018;

Lessons Learned / Questions Asked:

1.      Neither Coleman nor Platinum Realty represented Jerry Bain. And yet the Court still imposed liability on both without a fiduciary duty analysis.

2.      This Court is telegraphing the message that brokers and agents must exercise extreme caution not only with their principals, but also with other parties in their transactions.

3.      There’s at least one more point worthy of mention (besides the obvious which is that every email from a broker or agent to every party in every deal should state “We don’t send wire transfer information; contact the wire recipient to verify data before you send funds” or similar) – note that the jury found Jerry only 15% responsible for wiring funds to the wrong party. And this is after testimony that Jerry was an experienced commercial real estate investor. And that evidently Jerry never called the title agent to verify.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888

Thursday, August 30, 2018

Bankruptcy Fraud

Full disclosure: I don’t know much about bankruptcy fraud. I know that bankruptcy courts have the authority to find that some debts are non-dischargeable. And in that event, filing the bankruptcy may not be the answer the debtor is seeking.

Regardless of my lack of knowledge, it’s a topic that is worth exploring. A recent case will illustrate the point.

In 2004 Humberto Saenz Jr. entered into a Franchise Agreement with Pizza Patron in south Texas. The Franchise Agreement prohibited Saenz from transferring franchises without the consent of the franchisor.

Saenz formed Estrella Ventures, LLC, for the purpose of operating four Pizza Patron restaurants. He financed his accounts receivable, inventory, equipment, furniture and fixtures with the International Bank of Commerce and a $480,000 loan. Sales must have been good, as the debt was reduced to $336,000 in five years

In 2009 Jose Maria Gomez approached Saenz to purchase one store. Gomez and Saenz reached a deal for Gomez to acquire the Rio Grande City Pizza Patron franchise for $350,000, just enough to pay off the IBC debt. Neither Gomez nor Saenz obtained written consent to the transfer from Pizza Patron.

Saenz furnished sales reports, tax returns and income statements to Gomez. Gomez used them to substantiate the purchase price, and predict future revenues and expenses.

Due to health concerns, Gomez closed the store in 2011. Saenz reopened it under the Pizza Patron name.

Gomez, unhappy with a $70,000 loss and believing that Saenz made material wrongful misrepresentations to Gomez which induced Gomez to purchase the store, sued Saenz for fraud. Saenz countered by filing a Chapter 7 bankruptcy petition. The lawsuit was dispatched to bankruptcy court, where the court found for Gomez, entered judgment for $412,000 against Saenz, and determined that since the claim was based in fraud a discharge in bankruptcy would not serve to avoid the judgment.

In other words, the underlying purpose of the Chapter 7 bankruptcy filing – to duck the claim of Gomez – would not succeed and Gomez would still be able to collect monies owed to him even after the bankruptcy was concluded.

Saenz appealed.

The United States Court of Appeals looked at the evidence presented and determined that Saenz “lied frequently whenever it suited him.” Income Statements furnished by Saenz were false; discrepancies in accounting procedures and royalty payments were “problematic and unacceptable.”

The bankruptcy court had the right to weigh the credibility of both Gomez and Saenz, and determine that Saenz’s fraudulent conduct induced Gomez to make business decisions. And that substantial losses were incurred.

Fraud claims are not dischargeable in bankruptcy. Gomez wins. Saenz loses. Gomez may now continue to extract the amount owing to him from Saenz regardless of Saenz’s Chapter 7 bankruptcy proceeding.

See Humberto Saenz v. Jose Maria Gomez; No 17-41004; United States Court of Appeals of Texas, 5th Circuit, August 7, 2018:    

Lessons Learned / Questions Asked:

1.      Fraud claims are not dischargeable in bankruptcy.

2.      Independent due diligence and analysis is critical not only in real estate deals, but also in general business transactions. Complete trust in one party’s statements without verification can yield money losses and litigation.

3.      There’s an unreported piece to this case. Although Gomez ultimately prevailed in our legal system – did he really? He likely spent an exorbitant amount in legal fees to obtain a Judgment. And now what? Our Texas homestead and other debtor-exemption laws are still available to Saenz. What happens if Saenz uses those laws to his benefit and doesn’t pay Gomez – then who won?

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC