ELECTION OF REMEDIES

            Mountain Classic Real Estate, as Buyer, entered into a contract with Rocky Mountain Hospitality, Seller, to purchase a 65-room Super 8 motel for $3.4 million. Buyer deposited $30,000 as earnest money with an independent title company, in escrow. Presumably the title agency was not owned or controlled by Buyer or Seller.

            If Buyer defaulted, a contract provision allowed Seller to either receive and retain the earnest money as liquidated damages, or forego the EM and instead pursue litigation for specific performance or damages.

            Buyer defaulted. Seller eventually sold the motel to another purchaser for $2.75 million - $650,000 less than what Buyer had agreed to pay, as COVID destroyed hotel and motel pricing when travel across the USA was severely curtailed.

            Seller sued Buyer seeking damages of $780,000 +. When Seller filed the lawsuit, it had not instructed the title company to return the earnest money to Buyer.

            Buyer defended by arguing that since Seller did not release its interest in the EM before filing the complaint, Seller had elected to keep the deposit as liquidated damages. And in that event, Seller could not pursue other remedies.

            11 days after Seller received Buyer’s motion to dismiss, Seller released its interest in the EM. Buyer refused to accept the delivery of the earnest monies.

            The district court granted Buyer’s motion to dismiss, finding that Seller had failed to return the EM before filing the litigation. Due to such failure, Seller had elected to retain the EM as liquidated damages and could not pursue other remedies.

            Seller appealed.

            The Appellate Court found that Seller maintained “constructive control” over the earnest money for 36 days after Seller filed its lawsuit. And in doing so, Seller effectively attempted to elect all contractual remedies simultaneously, which is inconsistent with the contract provision allowing Seller to only elect one remedy to the exclusion of all others.

            By retaining control over the deposit Seller chose to relinquish the opportunity to seek other remedies, even if Seller did so inadvertently. So says this Court.

            Buyer wins, again. Seller loses, again. See Rocky Mountain Hospitality v. Mountain Classic Real Estate; Supreme Court of Utah, Case No. 20210798, December 22, 2022: https://scholar.google.com/scholar_case?case=10498530107806036099&q=rocky+mountain+hospitality+v.+mountain+classic+real+estate&hl=en&as_sdt=6,44&as_vis=1.

            Questions / Issues:

1. Am I the only one surprised by this outcome? This Supreme Court draws the conclusion that Seller had control over the earnest money, when the reality is that the only party truly in control of the EM is the title agent. Regardless of instructions received from Seller or Buyer, the title agent may have refused to release the EM and instead retained it until a satisfactory Release Agreement was signed, a Court Order issued, or otherwise the title agent could have deposited the EM into the registry of the Court.

2. Is it really that simple for a party to elect remedies, with land mines for those are neither wary nor experienced? And, once Seller realized Buyer’s position but before the trial court had dismissed the claim, couldn’t Seller have released its complaint, instructed the title agent to refund the EM to Buyer, then refiled its lawsuit before anything was concluded?

       3.  At least in Utah, default provisions must be carefully worded to avoid the result in this case. I wonder how many other States follow this same unusual path traversed by the Supreme Court of Utah.

 

                                                                                    Stuart A. Lautin, Esq.*

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

Licensed in the States of Texas and New York

  

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

INSURANCE NEGLIGENCE!

            I Square Management LLC is a hotel management company that also builds and renovates existing hotels. I Square and an affiliate, AKH Hotel, LP, purchased a hotel in Knoxville, Tennessee, and planned significant renovations. As part of the renovations, I Square and AKH bought furniture, fixtures, and equipment, and stored it in a warehouse pending project completion.

            During the project their insurance agent, McGriff Insurance Services, Inc., advised that a “builder’s all-risk” policy was unnecessary. After a flood destroyed much of the property in the warehouse, I Square and AKH filed claims with their insurers.

            AKH and I Square sued McGriff when claims against their insurance carriers were denied. The theory of the lawsuit was that McGriff negligently rendered advice that AKH and I Square need not purchase a builder’s all-risk policy. And that an all-risk policy would have adequately covered the loss.

            The district court, finding that McGriff had no duty to give advice to its customers regarding the availability of different coverages or that adequate coverage existed, granted judgment for defendant McGriff.

            Plaintiffs AKH and I Square appealed.

            The first test undertaken by the appellate court was to determine if McGriff owed a duty to its customers to explain and recommend various coverages. Absent a duty, I Square and AKH have no recourse.

            The appellate court found, at least in this State, the “long established rule placing a responsibility on the insured to educate himself concerning matters of insurance coverage.” An agent may inform the customer of the availability of various insurance products, but the agent has no obligation to do so.

            However, where an agent and insured have a “special relationship” then a duty may be imposed on the agent to advise the customer of appropriate insurance coverage.

            To utilize that exception, AKH and I Square claim that McGriff is a highly skilled expert, and that both I Square and AKH completely relied upon assurances offered by McGriff. To their detriment.

            Unconvinced by this position, the appellate court responded with “It would be the rare agent who does not hold himself out as highly skilled, and the rare insured who doesn’t rely on the agent’s skill in making insurance selections.”

            As a counterpoint, the Plaintiffs offered that McGriff sought to do business with I Square and AKH. Not the other way around. McGriff then met with I Square at I Square’s offices to pitch McGriff’s insurance prowess and a plan that would streamline I Square’s insurance practices and save it money.

            McGriff also promised to service I Square’s existing policies for free and when the policies were ripe for renewal, McGriff would recommend one universal policy to cover all projects instead of multiple and more costly policies.

            Induced by those assurances, I Square abandoned its existing agent and turned to McGriff.

            Remaining unpersuaded by any of this, the appellate court determined that no special relationship exists that would merit the imposition of liability upon McGriff. Absent that duty, it is irrelevant that Plaintiffs relied on McGriff’s suggestions, and that Plaintiffs suffered significant damages.

            McGriff wins; AKH and I Square lose, again. See I Square Management and Arkansas Knoxville Hotel v. McGriff Insurance Service; US Court of Appeals, 8^th Circuit, Case No. 21-3256, November 9, 2022: https://law.justia.com/cases/federal/appellate-courts/ca8/21-3256/21-3256-2022-11-09.html.

            Questions / Issues:

1. Did the outcome of this case surprise you – did you expect Plaintiffs to receive a Judgment against their insurance agent for Plaintiffs’ damages? I did.

2. How will you change your practice based on this case? Engage risk managers or paid insurance consultants, perhaps, to render written reports upon which you may rely? Because otherwise, you may have no recourse against a negligent insurance agent.
   

                                                                                      Stuart A. Lautin, Esq.*

 

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

Licensed in the States of Texas and New York

  

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

AUCTION!

            David Williams and Frank Hendrick own 32 acres of land. In May 2017, they decided to sell it using an auction process. Their advertisement required a non-refundable deposit of $5,000, balance due in 14 days after the auction, with no financing contingencies.

            John Janson attended the auction and bid $35,000. Williams told Janson that $35,000 was the highest bid. However, Williams informed Janson that the property would not be conveyed for that amount.

            So Janson sued Wiliams and Hendrick, asking the Court for a Judgment of specific performance requiring transfer of the land to Janson for $35,000. The trial court agreed with Janson and ordered conveyance of the land to Janson, upon payment of $35,000.

            Williams and Hendrick appealed.

            On appeal Williams and Hendrick argue that the trial court erred in categorizing the auction as “absolute.” According to Williams and Hendrick, neither the advertisement nor the pre-auction announcements explicitly identified the auction as absolute, so therefore the auction remained with “reserve.”

            Janson claims that the proper approach is to review the conditions of the auction to determine if it is absolute or not. In support of his position, Janson states that no minimum price was ever identified.

            The Appeals Court turned its attention to the difference between the two types of auction. In an auction with reserve, no offers are accepted unless the owner or its agent declares that the auction is completed. Until that time, the property can be withdrawn.

            Conversely, in an absolute auction the property is sold to the highest bidder regardless of the amount of the highest and last bid. Neither the owner nor the owner’s agent can withdraw the property after the first bid has been received in an absolute auction. Nor may they reject any valid bids or otherwise cancel the sale.

            The advertised terms of an auction dictate the type of auction that will be conducted. By default, an auction is with reserve unless expressly made otherwise. As well, the owner or its agent may make oral modifications and additions to the advertised terms before the sale is opened for bids.

            At trial Janson conceded that the auction, as advertised, was an auction with reserve because the advertisement did not state that it was an absolute auction. On appeal Janson instead focuses on the pre-auction announcements made by Williams regarding payment of a $5,000 deposit and that the buyer has 14 days to conclude the purchase.

            Williams never explicitly stated that the auction was absolute or without reserve. Consequently, the Appellate Court concluded that the auction was indeed made with reserve, allowing the owners to withdraw or stop the process at any time.

            Accordingly, no contract was formed between the parties because of Williams’ rejection of Janson’s $35,000 offer. The judgment of the trial court is reversed. Williams and Hendrick win; Janson loses. See Williams v. Janson; Supreme Court of Virginia; Record No. 210972; October 20, 2022: https://caselaw.findlaw.com/va-supreme-court/1972027.html.

            Questions / Issues:

1. It appears that the landowners elected to sell their property as a DIY auction, perhaps not fully understanding the risks inherent in doing so without a licensed auctioneer. Most States require education and licenses of auctioneers, perhaps to avoid exactly this type of problem.

2. Although not stated in the case, one might wonder if the primary goal of the landowners was to avoid real estate brokerage and auctioneer fees. One could then wonder what the owners spent in attorney’s fees to defend this lawsuit and appeal it to Judgment reversal, five years later.

 

                                                                                     Stuart A. Lautin, Esq.*

 

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

Licensed in the States of Texas and New York

  

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