CAN YOU RELATE TO CONSTRUCTION LIENS?

             S&H Holdings purchased commercial real estate in 2014. In 2018, S&H engaged Integrated Construction Management Service to construct a new Burger King at the site. 

            ICMS contracted with Nore Electric to furnish materials and services in the construction of the BK. Ultimately, ICMS failed to pay Nore and other subcontractors. 

            S&H sold the BK site to Realty Income Properties, and the deal closed on January 18, 2019. The warranty deed was recorded with the County Clerk two weeks later. 

            In March and April 2019, Nore and other subcontractors recorded construction liens against the BK site. Since neither S&H nor RIP were willing to pay the subcontractors, Nore Electric asserted a lawsuit to enforce its liens. 

            The district court concluded that Nore’s liens were valid and properly attached to the BK site, placing RIP at risk of losing its ownership interest if the liens were foreclosed. The court issued a decree of foreclosure, holding that the transfer from S&H to RIP did not cause the liens to lapse or the subcontractors to waive their lien rights. 

            S&H and RIP appealed. 

            S&H and RIP contend that construction liens can only attach to the contracting owner’s real estate. The appellants further argued that because S&H incurred the debts, but the liens were not recorded until after RIP had become the owner, the liens must fail. 

            The Supreme Court disagreed and found that construction liens relate back to the time work began at the site. Construction liens are considered “inchoate” or “hidden” liens. Consequently, one who buys property within the time a contractor is allowed to perfect the lien takes title subject to construction liens recorded after the date of closing. 

            As a result, even though the liens were not recorded at the time of the sale from S&H to RIP, Realty Income Properties could not be a “bona fide” purchaser. 

            The Supreme Court determined that the ability of a contracting owner’s interest to be subjected to future construction liens passes to the next owner. Perfection of construction liens that relate back in time may lawfully occur following the recordation of a Deed. Or a Mortgage. Security Agreement. Deed of Trust. Financing Statement. Assignment of Rents. UCC-1. &tc. 

            The liens filed by Nore Electric and other subcontractors are valid, and are superior to RIP’s Deed, even though the liens were filed after the date the Deed was recorded. The foreclosure decree is affirmed. The Judgment of the district court is also affirmed; Nore wins; S&H and RIP lose. 

            See Nore Electric v. S&H Holdings; Nebraska Supreme Court; Case Number S-23-282; March 15, 2024: https://casetext.com/case/nore-elec-v-s-h-holdings-llc. 

            Questions / Issues / Comments: 

1.      You are a buyer. Or lender. Maybe even a tenant. You checked title and there is nothing untoward. How do you protect yourself from this anomaly? Obtain affidavits from the seller and borrower. Conduct site inspections to determine if the property has been recently repaired or improved. Obtain construction escrows and holdback accounts, to secure the need to later pay the contractors. Get all-bills-paid affidavits from all major contractors and subcontractors. And of course, purchase the best title insurance policy with extended endorsements. 

2.      This is not an issue unique to Nebraska. It is my impression that most States have a similar process. The lien power of contractors, subcontractors, laborers, material providers, architects, surveyors, engineers, and similar labor and service providers, can be derived from States’ constitutions and supplemented by statutes. Perhaps this is a reflection of our agrarian-based USA societies from 200+ years ago, and the desires of those State legislators who wrote the constitutions and statutes to support the workers and laborers who were (and still are) pivotal to our economic success. 

3.      Conversely, you are a contractor, engineer, architect, laborer, surveyor, custom manufacturer, or material provider, and you haven’t been paid? Happy news, you may not be too late to assert your rights, even if the real estate has been sold. Mortgaged. Leased. Foreclosed by others. 

                                                                        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.

IS PROCURING CAUSE [STILL] A THING?

            Catalyst Strategic is a consulting firm that advises companies regarding mergers, acquisitions, and similar. Three Diamond Capital is an equipment rental company based in Houston. Three Diamond engaged Catalyst to help with a sale of its company, and executed a contract accordingly. But in October 2018, Three Diamond decided to stop pursuing a sale and ended the agreement. 

            Still, the two companies continued a working relationship. And in 2019, Three Diamond again sought a buyer and executed another engagement agreement with Catalyst. That agreement stated that Three Diamond would pay Catalyst $25k per calendar quarter, plus a commission upon the sale of Three Diamond. The commission was payable if the deal was concluded from the date of the agreement through the 18^th month following the date of termination of the agreement. 

            Due to the onset of COVID-19, Three Diamond terminated its contract with Catalyst in March 2020. 

            The rental industry recovered, so the CEO of Three Diamond contacted the CEO of Herc Rentals. Herc had initially been sourced through the efforts of Catalyst during the term of the agreement. This time Herc agreed to purchase Three Diamond for $190 million; the deal closed in August 2021. 

            Three Diamond refused to pay Catalyst the separate fee, even though the transaction took place within 18 months after Three Diamond terminated the contract with Catalyst. So Catalyst sued Three Diamond for breach of contract. 

            The trial court determined that Catalyst substantially performed its obligations, and granted judgment for Catalyst. Three Diamond filed a motion for reconsideration, premised on the ‘procuring cause’ doctrine in Texas. The trial court, unmoved by Three Diamond’s request, awarded Catalyst close to $4 million, plus interest. 

            Three Diamond appealed. 

            The Appellate Court reminded us that the procuring cause doctrine is a ‘settled and plain’ rule in Texas, as announced in a Texas Supreme Court case of 2022. Its function is to credit a broker or agent for a commission-generating sale when a buyer is produced through the efforts of a broker or agent. As a consequence, the commission entitlement vests at the moment of procurement, not when the deal closes. 

            The theory of ‘procuring cause’ is only operational when there is no contract that governs how to handle post-termination commissions. Contractual silence, however, leaves the procuring cause doctrine intact. 

            In this situation, the Catalyst contract contained a ‘robust accounting’ of fees, interim fees, completion fees, and post-termination commissions; there is no claim that the agreement was silent on these points. 

            So, although the procuring cause doctrine is indeed still very much a thing, at least in Texas, it is inapplicable here as the contract is crystal clear. 

            Catalyst must win; Three Diamond will lose. See Catalyst Strategic Advisors LLC v Three Diamond Capital SBC LLC; US 5^th Circuit Court of Appeals No. 23-20030; February 22, 2024: https://casetext.com/case/catalyst-strategic-advisors-llc-v-three-diamond-capital-sbc-llc. 

Questions / Issues: 

1.      Be careful. Although the ‘procuring cause’ doctrine may be alive and well, there are statutes that supplant it. As just one example, it is not enough for a real estate broker or sales agent to be the procuring cause of a deal in many States; strict licensure and other requirements must be met before the agent or broker may assert a lawful claim for commission entitlement. 

2.      Further, and although not addressed in this Opinion because there was no need to do so, most States have adopted statutes of fraud that generally preclude oral agreements above a minimum threshold amount, like $500. Do not make the mistake of concluding that a solid argument for a ‘procuring cause’ entitlement means that a written contract is not needed. 

                                                                        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.

DEFECTIVE ACKNOWLEDGMENT MEANS DEFECTIVE DEED?

             In August 1990 John and Virginia Turcato created separate Living Trusts. John and Virginia each conveyed one-half of their home to each Trust so that title to the residence was owned 50% by John’s Trust and 50% by Virginia’s Trust. 

            John died in 2009. In 2020 Virginia was 94 years old and continued to live at the residence. Virginia wanted to transfer 100% of the home to Darrell Turcato and Robbin Wilkins, two of the grantors’ four children, in recognition of the physical and financial assistance they provided her. 

            A Deed was prepared conveying the home from both Trusts to Darrell and Robbin. Robbin, acting as a Co-Trustee, signed the Deed before a notary. Virginia’s signature was also required, but evidently Virginia signed the Deed out of the presence of a notary since Robbin did not want to take her mother out in public due to COVID and her mother’s frail health. 

            The notary who witnessed Robbin’s signature also acknowledged the deed for Virginia, as the notary had known the family for 20+ years and had previously notarized Virginia’s signature. 

            Virginia died in 2020. Jan Frady and Larry Turcato, the two remaining children of John and Virginia, sought a judicial declaration that the transfer of the home to their siblings was invalid based on the defective acknowledgment and for other reasons. The trial court granted their petition, ruling that the Deed failed and consequently Jan and Larry would become part owners of the property, as provided in the Trusts. 

            Darrel and Robbin appealed, claiming that the Deed was valid and consequently, Jan and Larry have no interest in the residence. 

            To start, the Appellate Court reviewed statutes which require that all deeds must be acknowledged before any notarial officer. Failure to have the instrument properly acknowledged prevents the document from being recorded. And, failure to record it means there is no public record of the transfer. The result is that third parties are unaware of the previous transfer. 

            However, this issue has been litigated previously in many States, as an imperfect acknowledgment or failure to obtain execution by proper witnesses is common. As are other administrative and mechanical errors. 

Consequently, some States have concluded that the failure of parties to follow a statutory requirement like notarization does not always render ineffective a deed or other transfer document as between those who know of its existence, presumably the parties identified in the document. 

            And, depending on the circumstances, perhaps other parties too. 

            The trial court Judgment is reversed; Darrell and Robbin own this property by virtue of the deed signed by all those who are required to sign it, even without a valid notary acknowledgment. See Turcato v. Frady; Wyoming Supreme Court; Case 2024 WY 8; January 23, 2024: https://casetext.com/case/turcato-v-frady. 

Questions / Issues: 

1.      This outcome may be a surprise to some of my loyal readers. And for fair reasons, as who can say for sure which parties to an unrecorded instrument know of its existence, except only for those who signed it. And to that point, absent notary acknowledgments and witnesses, all signatures are subject to challenge as forgeries. 

2.      This must be another place where State legislatures responded to a common problem – failure to dot each i and cross each t – but in making it easier to mortgage and transfer properties perhaps worse problems were created. 

3.      If you were a member of your State’s legislature, would you vote for a law that rendered void all important documents (deeds, mortgages, deeds of trust, ground leases, easements, deed restrictions, wills, trusts, oil and gas reservations, &tc) unless those instruments are either witnessed or signed before a notary? Or is this one of the situations where there is no middle ground and any resolution is imperfect because people will always make inadvertent, ministerial mistakes. 

                                                                        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.