PERFORMANCE DEED OF TRUST

              So everyone knows that mortgages and deeds of trust are used to secure debt repayment. Right? Yes of course. But they can do more than that. 

            And when they do more they are called “Performance” documents. 

            The Colony at California Oaks is a property owner’s association, charged with the duty of governing open spaces in a community of 1,586 homes in Murrieta California. Within the community is an 18-hole golf course including landscape features that extend into open spaces. 

            The golf course was sold in 2007 to Majestic Asset Management. By the terms of the purchase and sale contract, Majestic assumed the obligations of the prior owners to use the property only as a golf course, and to maintain it in a condition to similar courses in the area. 

            The maintenance obligation includes the landscape extensions. 

            To secure its maintenance and use duties, Majestic executed a performance deed of trust for the benefit of the sellers. In 2012 the sellers transferred the PDOT to the Association. 

            After Majestic received title to the golf course, grass and trees died, a lake dried, landscaping deteriorated, and the golf course property was used for events inconsistent with a golf course. 

            When Majestic stopped paying for maintenance costs shared with the Association in 2013, litigation started. Although Majestic was the Plaintiff, the Association asserted claims against Majestic for foreclosure under the PDOT based on the failure of Majestic to continue golf course operations and maintenance of the landscape extensions. 

            The trial court found that Majestic was required to use the golf course only as such. And that Majestic must maintain it. And that Majestic must maintain the landscape. And that Majestic must maintain the extensions. 

            The court ruled that Majestic had breached its obligations. 

            The court rendered judgment for the Association in 2016. Also included in the judgment was an injunction directing Majestic to repair and restore the golf course. 

            In 2019 the Association petitioned the trial court to enter an order finding that Majestic breached the deed of trust and failed to discharge its injunction obligations. The Association also asked the trial court to appoint a receiver to take control of the golf course and bring it into compliance with the judgment. 

            First, the court appointed a receiver in 2020, holding the foreclosure issue for later. 

            Second, two years later after it became clear that the receiver could not rehabilitate the golf course, the court ordered foreclosure pursuant to the PDOT. 

            Third, the court convened a hearing and in 2023 entered a decree directing the clerk to issue a foreclosure writ of sale on the golf course. 

            Majestic appealed. 

            The Appellate Court reviewed the purpose of a deed of trust. The Court had no issue determining that a deed of trust can authorize foreclosure if the borrower fails to perform a required action. 

            Typically, the required action is payment. But the deed of trust can also secure nonmonetary obligations rather than loan repayment. 

            The Court then reviewed the valuation assigned to the performance deed of trust. Good stuff for those that work in this small space. But I won’t bore my loyal readers with it. The conclusion is that security documents can be breached in ways that cannot be compensated in dollars. Secured parties may then take the action allowed by the deed of trust or mortgage – foreclosure. 

            The Association wins and is allowed to foreclose; Majestic loses. See Majestic Asset Management v. The Colony At California Oaks; Case D082407 and D082907; California Court of Appeals, 4^th Appellate District, Division One; December 16, 2024: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2024/2024-Ohio-5432.pdf. 

            Questions / Issues: 

1.         PDOT. Why aren’t PDOTs used more? Institutional lenders commonly include ‘performance’ obligations in their loan docs – particularly regarding construction, use, leasing, transfers, subordinate debt, discharge of senior obligations, &tc. But ‘performance’ duties are not as common in non-institutional security documents. 

2.         Right to Redeem. Attorneys know from their law school property classes that borrowers have a right to “redeem” the mortgaged property by payment of the amounts owing. But this is difficult to quantify when the breach relates to use and maintenance and there is neither a loan nor a lender. What type of testimony is needed to establish and monetize a change in use or failure to maintain that causes permanent and extensive damages? How does the mortgagor / grantor obtain a release from a PDOT – ever – without consent of the secured party? What would motivate a secured party to consent in a situation involving a use obligation that could continue forever? 

3.         Foreclosure. What will happen at this foreclosure sale? Is the PDOT removed by operation of law at the moment of sale, or does it continue? If it continues, which buyers will be willing to purchase this property, knowing that it must be used only as a golf course and previous owners did not find it economically possible to do so? 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

EASEMENT HERBICIDE

            Some of my astute readers may well wonder the connection between easements and herbicides. You’ll want to gird your loins for the fascinating journey. 

            Ohio Edison holds easements for the installation and maintenance of electrical transmission lines and structures in Harrison County, Ohio. First granted in 1948, the easements allow Oh Ed to erect and maintain the easement areas, and also grant to Oh Ed the right to “trim, cut and remove . . . trees, limbs, underbrush or other obstructions.” 

            70 years later, Oh Ed notified Craig Corder, Jackie Corder, and Scott Corder that herbicides would be used to control vegetation growth in the easement area. This action, explained Oh Ed, was part of its Transmission Vegetation Management Program. 

            The Corders responded with a lawsuit seeking a declaratory judgment that Oh Ed did not have the right to use herbicides to manage vegetation. 

            The trial court dismissed the case for lack of jurisdiction. The intermediate Appellate Court determined that the Easement Agreements were ambiguous, and remanded the case back to the trial court to resolve the ambiguity. 

            Looking at this again as instructed by the Appellate Court, the trial court agreed that the easement language is ambiguous. So it awarded judgment to the Corders. 

            Once again, the case bounced up to the intermediate Appellate Court. After confirming (again) the ambiguity in the Easement Agreement, the Court decided that the Easement language does not allow Oh Ed to remove vegetation by any means it chooses.

            So Oh Ed appealed the issue to the Supreme Court of Ohio. Citing a fictitious Will clause leaving the testator’s estate to “my mother, Jane and Sally” and the fabricated provision “He teaches French, German, Italian and Spanish,” the Supreme Court undertook a fun exercise interpreting conjunctive phrases, appositives, and Oxford commas. 

            Fun for some of us. But likely less than all of us. 

            The Supremes drill down into the word “remove.” Deciding that Oh Ed was granted the right to “remove” vegetation was obvious. From there, the Supremes decided that the method of removal should be defined broadly to include elimination and eradication, and even just getting rid of an object. 

            The Easement language is expansive; there are no limits, inhibitions, or prohibitions. If herbicides will remove vegetation through destruction, then that method is permitted. 

            Ohio Edison wins; Corders lose. See Corder v Ohio Edison Company; Slip Opinion 2024-Ohio-5432; Ohio Supreme Court; November 20, 2024: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2024/2024-Ohio-5432.pdf. 

            Questions / Issues:

1.         Herbicides. This Court is focused on the singular word “remove.” But do herbicides remove vegetation? Or instead, just prevent or inhibit regrowth? 

2.         Down This Path We Go. Still focused on the right of Oh Ed to “remove,” would this Court grant Oh Ed the right to cause removal by controlled burn? Explosion / implosion? Napalm? Death ray? Aren’t all of those used to “remove” an obstacle? 

3.         Grammar Nerds Unite. There’s a well-written treatise in this Opinion for grammar nerds. This may be required reading for future law students. Grammarians, too. 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

OPTION CONSIDERATION AND NOTIFICATION

             Francesco Scotti sold real property to Matthew Mimiaga in 2015. The deal was seller-financed: Mimiaga executed a Note for $870,000, due in five years, payable to Scotti. 

            Mimiaga also granted Scotti an option to repurchase the property in five years for $900,000. Scotti alleges that he timely exercised the repurchase option, although Mimiaga claims he never received the notice from Scotti. 

            So Scotti filed a lawsuit seeking specific performance of the option agreement and an order requiring Mimiaga to sell the property to Scotti for $900,000. 

            Mimiaga’s answer asserted that the option agreement lacked consideration and alternatively, had expired. Scotti took the position that the discount in the purchase price ($900,000 option price minus $870,000 initial sales price) constitutes valid consideration to support the option. 

            The trial court held that the option consideration must be distinct from the sale consideration. And since the purchase price for the property had been established before the option was negotiated, the option was unsupported by separate consideration. 

            The trial court further found no evidence to support that Scotti had timely exercised the option, as Scotti did not ensure that his notice letter was delivered. 

            Francesco Scotti appealed.

             The Appellate Court first reviewed the agreements reached between the parties. Scotti and Mimiaga had executed a two-page document titled “Option Agreement.” Which states that the purchase option was supported by “good and valuable consideration.” 

            The Court found that phrase – good and valuable consideration – to be conclusive and not subject to further litigation. 

            Mimiaga’s next defense relates to proper option exercise. The Option Agreement did not require that the notice be sent by certified or registered mail, or in any other manner that could be used as evidence of delivery such as courier or FedEx. Instead, Scotti claims that he merely mailed it. 

            The Appellate Court made short work of this one too, concluding that “if notice was mailed, [then] notice was received.” The initial issue is not delivery. Instead, the first hurdle is merely determining if sufficient evidence was presented that the notice was mailed. 

            If sufficient evidence has been presented that the notice was sent, then a rebuttable presumption is created that it was received. It is then incumbent upon Mimiaga to offer evidence that he did not receive it. 

            These are fact-intensive matters that are inappropriate for summary judgment. The case must be returned to trial court to further develop these facts. 

            Scotti wins; Mimiaga loses this round. See Scotti v Mimiaga; Case No. 2023-91; Rhode Island Supreme Court; October 18, 2024: https://casetext.com/case/scotti-v-mimiaga. 

            Questions / Issues: 

1.         Peppercorns. In many States it appears that a mere recitation of ‘good and valuable’ consideration suffices to create, well, consideration. Evidently lawyers have been arguing this point since the times of King Aethelred the Unready, who ruled from 1013-1014 (or maybe 865-871 or could be 978-1016), when contracting parties exchanged peppercorns to support consideration. 

2.         Enlightenment. Some States take a more enlightened view and boldly proclaim by statute that “Consideration means any consideration” (see by example UCC 3.303(b): https://www.law.cornell.edu/ucc/3/3-303#:~:text=The%20drawer%20or%20maker%20of,promise%20has%20not%20been%20performed.) *So* glad we got that one resolved. 

3.         Notice. A notice clause that doesn’t indicate the manner of notice delivery? Cue President Biden: C’mon man! 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

WRAP FINANCE

       Pablo Garcia signed a real estate contract with Anthony Turner for a purchase price of $169,000. The terms included a $15,000 cash down payment and a $154,000 “Wrap” promissory Note. The note was payable to Turner over eight years, accruing interest at 7.2% APR. 

      Turner’s deed to Garcia was made subject to an existing lien securing Turner’s debt to DHI Mortgage Company, Turner’s acquisition lender. At Closing Garcia executed a Deed of Trust to Turner, to secure Garcia’s obligation to pay the Wrap Note. 

      The effect of the Wrap financing was that the underlying debt of Turner to DHI was not released. Nor was Garcia required to pay it, since Garcia did not assume it. Instead, the Wrap Note to Turner included the balance owing on the underlying debt to DHI. In that scenario, Garcia pays Turner, Turner pays DHI, and if the plan works then all debts are timely satisfied and ultimately discharged. 

      The plan didn’t work. 

      Initially, Garcia made Wrap Note payments to a management company arranged by Turner. When the management company was sold, Garcia was unable to connect with its successor for months. The next communication was a notice from Turner of Turner’s intent to foreclose, caused by Garcia’s failure to tender payments for the previous six-month period. 

      Garcia immediately brought the account current. 

      Five years later Turner approached Garcia with a document, requesting execution by Garcia to prove “you’re the owner and you made the payments for the other home.” Garcia signed it, unaware that it was a warranty deed conveying ownership of the property back to Turner. 

      When Turner was challenged, a “Cancellation of General Warranty Deed” was filed a year later, with the intent of rescinding the transfer. 

      Shortly after, Turner commenced foreclosure proceedings by accelerating the balance of the Wrap Note. The property was ultimately sold in 2018 at public auction. 

      Garcia asserted a lawsuit, claiming he was unaware of the foreclosure proceedings. Garcia testified that English is not his primary language and that he struggles to read English documents. The trial court found Turner liable and awarded damages to Garcia of almost $90,000. 

      Turner appealed. 

      Turner’s main issue on appeal was that Turner was justified in foreclosing because Garcia failed to make payments in 2012 or 2013, six years prior to the foreclosure date. The Appellate Court determined that Turner waived Garcia’s failure since Garcia paid all that was owing. 

It didn’t help Turner’s cause that Turner accepted Garcia’s late payment without protest. See Turner v. Garcia; Case No. 07-24-00124-CV; Texas Court of Appeals, 7^th District; August 20, 2024: https://casetext.com/case/turner-v-garcia-2. 

      Questions / Issues: 

1.      Wrap Financing. Years ago, mortgages did not contain verbiage that prohibited property transfers (“due on sale” clauses). Prior to the advent of due-on-sale provisions, buyers could elect to assume existing mortgages if the existing loan documents did not prohibit debt assumption. Clever property owners determined that they could sell properties “subject to” existing mortgages, and – if the underlying debt had a low interest rate – then the seller could enjoy the arbitrage between the lesser rate charged in the existing mortgage and the new rate to be charged to the new buyer. The result was known as “Wrap Financing.” 

2.      Advent of Due On Sale Provisions. Real estate lenders added due-on-sale provisions to mortgages in the 1970s. These clauses effectively ended wrap financing, as a transfer of the real estate triggered the election of the lender to accelerate the debt. And in 1982 federal laws were changed to make such due-on-sale provisions enforceable in almost all mortgage contracts. 

3.      Application to Turner v. Garcia. Turner’s original mortgage debt, created in 2008 to DHI Mortgage Company, Ltd., contained a due-on-sale provision in Section 9(b)(i). However, given Garcia’s testimony that he was challenged to understand English documents, it may be that Garcia did not attempt to review the underlying DHI mortgage. Or if he did, perhaps he was incapable of understanding these provisions. And consequently, one might wonder if this influenced the decision of the trial court and Court of Appeals in favor of Garcia. 

                                                            

                                                                                                Stuart A. Lautin, Esq.* 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

QUANTUM MERUIT

             The US Army Corps of Engineers awarded RLB Contracting a contract to dredge the Houston Ship Channel. RLB entered into a subcontract with Harbor Dredging who, in turn, entered into a sub-subcontract with Diamond Services for the actual dredge work. 

            Diamond was responsible for “traversing the hopper barges from [the] excavation site to the unloading site.” I have no clue what that means but presumably it is not relevant to this analysis. 

            More importantly to the quantum meruit issue, Diamond was required to perform all work necessary or incidental to complete its part of the job. 

            The parties encountered site conditions that were not anticipated where Diamond’s dredge was excavating. The presence of tires in the channel, as well as other issues, slowed the job considerably. After Diamond threatened to abandon the project, RLB petitioned the Corps for an equitable adjustment. 

            The Corps responded that to consider pricing adjustments RLB would need to release all claims it may have for differing site conditions at the project. In response, RLB withdrew its request to adjust pricing. 

            Due to Diamond’s obligation to perform all necessary work, Diamond continued its efforts. At project completion, Diamond sent an email to Harbor requesting approximately $2 million. Using this cost submission and similar reports sent by Harbor, RLB amended its bid to include an additional $9 million for excess costs associated with differing site conditions. 

            After negotiations, the Corps and RLB reached a settlement obligating the Corps to pay an additional $6 million for Diamond’s added work. RLB then issued payment to Diamond for $1 million. 

            Expecting a $2 million paycheck, Diamond was displeased. So Diamond filed a lawsuit. 

            The trial court dismissed most of Diamond’s claims, but preserved a claim for equitable adjustment expenses under a theory of quantum meruit. Diamond appealed, giving it the opportunity to litigate its quantum meruit claim. 

            Initially, the Appellate Court offered that “quantum meruit is an equitable theory which permits a right to recover . . . based upon a promise implied by law to pay for beneficial services rendered and knowingly accepted.” Recovery is limited to situations in which non-payment for the services rendered would result in an unjust enrichment to the party benefited. 

            However, recovery based on an express contract and on quantum meruit are inconsistent, as the damaged party’s remedies are contained in the contract. This express-contract bar applies not only to the plaintiff seeking quantum meruit recovery from the party with whom it contracted, but also when the plaintiff seeks recovery from third parties who benefitted from plaintiff’s performance. 

            Because the express contract between Diamond and Harbor covers the damages that Diamond alleges under quantum meruit, Diamond’s quantum meruit claims have no merit. 

            Despite that, the Appellate Court seemed to be willing to consider Diamond’s claim for expenses related to work performed outside of its contract with Harbor. But since Diamond “failed to present any meaningful evidence on the amount of expenses it incurred for work it performed for which it has not already been paid,” those claims also fail. 

            Judgment for RLB and Harbor is affirmed; Diamond lost this case because it failed to satisfy an evidentiary burden in the trial court. See Diamond Service Corp v. RLB Contracting; Case No. 23-40137; US Court of Appeals, 5^th Circuit; August 16, 2024: https://casetext.com/case/diamond-servs-corp-v-rlb-contracting-inc. 

            Questions / Issues / Comments: 

1.      Cases on QM can be confusing. The benchmark seems to be the existence of a contract (or not), and the question of whether or not the contract governs the delivery and pricing for what was furnished. By analogy, if a contract for car repairs includes replacement of the engine but the service shop also replaces the transmission, then presumably the shop has a valid QM claim for the value of the added transmission parts and labor, assuming it was necessary to make the car operable. But no QM claim will exist for engine replacement as the contract will govern that issue, even if the vendor’s expenses far exceed what was anticipated. 

2.      Damages for QM claims are difficult and subjective. If I did not request delivery of the Wall Street Journal and yet it is delivered to me daily, am I required to pay for it although I never read it? If my neighbor voluntarily mows my gnarly lawn on Saturday without my knowledge, must I pay fair market value for that service although I had planned to do it myself on Sunday? 

3.      Family Relations. My conclusion is that the theory of unjust enrichment must be the sibling of quantum meruit. Perhaps the theories of quasi-contract, constructive contract, and contract implied by law are first cousins. 

                                                                       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.

TITLE INSURANCE COMPENSATION

             Martin Tait, Jane Tait, and Bry-Mart LLC purchased real estate in 2016 for $1.25 million. Commonwealth Land Title Insurance Company issued an Owner Policy of Title Insurance, insuring the Taits against “actual loss” from various risks, to a limit of $1.25 million. The policy does not define “actual loss.” 

            Insured risks include someone else having an easement on the property. Excluded from coverage are recorded building restrictions and a drainage easement. 

            As they had intended when they contracted to purchase the property, the Taits proceeded with plans to subdivide the property into two lots, and started informal talks with the City’s development services coordinator. The City’s staff was supportive, and suggested that both the drainage easement and building restrictions could be either eliminated or modified to permit the subdivision. However, after their purchase, the Taits learned about a separate 1988 maintenance easement covering the same area as the drainage easement. 

            The 1988 maintenance easement was not excluded from coverage in the Owner Policy. Believing that the maintenance easement would impact the value of the property and interfere with development, the Taits tendered a claim to Commonwealth. 

            Commonwealth obtained an appraisal. The appraiser analyzed the highest and best use of the property on the date of loss. Making the assumption that the City would extinguish the building restrictions and drainage easement, but also assuming the maintenance easement would prohibit development, the appraiser concluded that the valuation of the property without the maintenance easement was $1.3 million. The valuation of the property with the maintenance easement in place was $1.1 million. 

            And consequently, the Taits suffered a diminution in value of $200,000. 

            Displeased with this result, Commonwealth asked the same appraiser to revise the appraisal by omitting the assumption that the City would eliminate the drainage easement and building restrictions which were in place when the Taits purchased the property. And also assuming that the newly discovered maintenance easement would indeed prohibit development. 

            The appraiser’s second effort concluded that the Taits would suffer a loss of $43,500. Not $200,000. Commonwealth sent the Taits a check for $43,500. 

            Taking a different approach, the Taits obtained their own appraisal. Their appraiser determined that the Taits could likely succeed in removing the building restrictions and drainage easement, but for the existence of the newly discovered 1988 maintenance easement. The second appraiser valued the property without the maintenance easement as two separate, developable parcels. 

            With the maintenance easement in place, the property could not be subdivided into two developable lots, so the Taits’ appraiser valued it as a single parcel. Consequently, the Taits’ appraiser concluded that the value of the property without the maintenance agreement was $2.08 million, and with it was $1.38 million, resulting in a total diminution in value of $700,000. 

            The Taits furnished Commonwealth the new appraisal and requested a total payment of $700,000. When Commonwealth refused, the Taits filed a lawsuit. 

            The trial court granted Commonwealth’s motion for summary judgment, reasoning that the legal standard for title insurance losses did not permit consideration of a property’s highest and best use, but only its actual use. Which was vacant land at the time of purchase. Disregarding the Taits’ appraisal, the trial court determined that Commonwealth had already paid all that was owing. 

            The Taits appealed. 

            The Court of Appeals decided initially that a property’s value for any given use can change over time, sometimes dramatically over a short period, due to external market factors such as financing costs, supply of similar properties, and changes in demand. 

            What remains is the question of whether the Taits’ “actual loss” under their title insurance policy should be measured based on the value of their property’s highest and best use, or merely its current use at the date of purchase. Finding that the title policy is ambiguous regarding the computation of “actual loss,” the Court used recent case authority to determine that all ambiguities will be resolved against the insurer. 

            The Court concluded that title insurance protects against future losses, and owners should be reimbursed for additional losses they suffer in reliance on the policy after it was purchased. 

            Valuing a property based on the highest and best use in the reasonably near future affords fair compensation to an owner and avoids the need to speculate about distant future development possibilities. Accordingly, since there is no language in the title policy to the contrary, the measure of a property owner’s loss is the diminution in value caused by a title defect on the date of discovery, measured according to the property’s highest and best use. 

            Judgment for Commonwealth is reversed; the Taits win and Commonwealth loses. See Tait v. Commonwealth Land Title Insurance Company; Case A166676; California Court of Appeals, 1^st District, Division Four, June 28, 2024: https://cases.justia.com/california/court-of-appeal/2024-a166676.pdf?ts=1719615677. 

            Questions / Issues / Comments: 

1.      Is this holding fair to insurance companies? How can underwriters anticipate the development possibility of each insured parcel, particularly when title insurance has no time limit and no expiration date? 

2.      Based on this new case, how many insured owners will now submit claims if they are struggling with development? 

3.      Are those who write title insurance policies (and the State agencies that approve them) now rushing to limit losses by revising owner policy forms?

 

                                                                     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.

INVOLUNTARY DEED RESTRICTION WAIVER

             McDaniel Homes owned real estate in Houston. The Meyerland Community Improvement Association was in charge of enforcing deed restrictions. One of the restrictions allowed stairs, steps, and ramps to be located up to five feet outside of the front building setback line. 

            McDaniel sought a declaratory judgment that the restriction had been waived through abandonment. 

            The POA denied the allegations, and filed a motion to dismiss, asserting that McDaniel’s claims have no basis in fact or law. The trial court granted the motion of the POA and dismissed McDaniel’s claim. 

            McDaniel Homes appealed. 

            The Court of Appeals reviewed McDaniel’s assertions that: (a) the POA has not enforced restrictions consistently; (b) there are dozens of properties throughout the neighborhood that violate the restrictions; and (c) the POA has decided to selectively enforce the restrictions against McDaniels and no other developers or property owners. 

            This yielded an analysis of the facts required under Texas law to conclude that restrictions have been abandoned, and enforcement waived. To successfully establish this position, the Court of Appeals determined that the litmus test is: “violations of the covenant then existing are so great as to lead the mind of the average person to reasonably conclude that the restriction in question has been abandoned and its enforcement waived.” 

            To make that evaluation, the Court must consider the number, nature, and severity of existing violations, any prior enforcement of the restriction, and whether it is still possible to realize to a substantial degree the benefits of the restriction despite the violations. 

            The Court of Appeals decided that the facts presented have a basis in law, and cannot be dismissed as overly broad or vague, or improperly fail to allege a claim. The Court refused to rule for McDaniel based on the facts claimed, but presumably if McDaniel can prove the facts alleged in trial court, then the restrictions will fail. 

            The trial court’s judgment is reversed and the case returned for a full trial to allow a jury or judge to evaluate the facts McDaniels alleges. McDaniel wins this round. See McDaniel Homes v Meyerland Community Improvement Association; Case Number 14-22-00854-CV; Texas 14^th Court of Appeals; May 23, 2024: https://scholar.google.com/scholar_case?case=12496832388846844844&q=mcdaniel+homes+llc+v.+meyerland+cmty.+improvement+ass%27n&hl=en&as_sdt=6,44&as_vis=1. 

            Questions / Issues / Comments: 

1.      Am I the only one looking for a timing requirement – at least a suggestion – to support the conclusion that deed restrictions have been abandoned or waived? I find it compelling that timing of the acts leading to the alleged waiver or abandonment was not addressed by this Court of Appeals. Was that omission purposeful? 

2.      Can restrictions be waived or abandoned this easily, and if so, are POA and HOA directors, lenders, developers, tenants, and property owners aware? 

3.      If McDaniels ultimately receives a final Judgment in support of McDaniels’ position, will that be sufficient to cause a title insurance underwriter to remove or amend the exception in an Owner’s Policy and Lender’s Policy related to recorded restrictions at least with respect to stairs, steps, and ramps? 

                                                                        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.

HOW NOT TO RELEASE A MORTGAGE

             Starting in 2010, Jerome Cohen and Shaun Cohen, through their entities EquityBuild, Inc. and EquityBuild Finance, LLC, sold promissory notes to investors. Each note represented a fractional interest in a specific real estate property. Investors were assured returns ranging from 12% to 20%. 

            Separate mortgages on underdeveloped areas of Chicagoland secured the notes. 

            The Cohens had each investor sign a contract granting to EquityBuild the right to service the loans. Consequently, the mortgages were structured so that EquityBuild was the borrower and individual investors were the lenders, “in care of” EquityBuild. 

            The contracts authorized EquityBuild to issue monthly statements and payoff demands, and collect loan payments. The contracts also limited EquityBuild’s power, by requiring written instructions from investors before foreclosure, amendment, or termination of the mortgage debt. 

            However, separately and in addition to the contract, many investors also signed a document providing EquityBuild with the authority to receive payments and issue mortgage releases. 

            In 2017, BC57 loaned $5.3 million to EquityBuild, in exchange for a first mortgage on five properties located on the south side of Chicago. Those five properties were already owned by EquityBuild, and were already subject to preexisting mortgage liens securing individual investors. 

            To deal with the problem of competing first-lien security interests, EquityBuild provided payoff letters and Releases to BC57 and the escrow agent at closing, purporting to pay and discharge the existing loans. The Releases were executed by EquityBuild, with Shaun Cohen signing as the manager of EquityBuild. 

            Individual investors did not sign the Releases. Neither did individual investors receive any monies from BD57’s payment. 

            All of this collapsed in 2018, when the Cohens admitted to the US Securities and Exchange Commission that EquityBuild had funded investor interest payments with later investments. The SEC filed a lawsuit, obtained a temporary restraining order, and the district court authorized the appointment of a Receiver to liquidate the assets of EquityBuild. 

            With approval from the district court, the Receiver sold the five Chicagoland properties and recovered $3 million. The individual investors asserted a claim to those proceeds, arguing that they never received payment or released their mortgages. 

            BC57 disagreed and asserted it had priority. 

            The district court ultimately awarded the funds to the individual investors, concluding that the mortgage releases were defective and that EquityBuild lacked the authority to execute them. 

            BC57 appealed, claiming that its $5.3 million payment was made in exchange for first-lien mortgages. And that the lien positions of the individual investors had been discharged through full payment of their mortgages. 

            The baseline rule, as determined by the Appellate Court, is that payment of a debt secured by a mortgage automatically extinguishes the security interest. BC57 contends that this rule yields the inescapable conclusion that BC57 is entitled to all net funds recovered by the court’s Receiver. 

            In reviewing other appellate decisions, the Court found that there can be circumstances when payment alone does not extinguish a debt. To cause a mortgage debt to be fully discharged, a properly executed, valid Release instrument, is also required. 

            The Releases that were tendered contained fundamental errors. As the most glaring example, the Releases list EquityBuild as the party issuing the releases, even though EquityBuild was the borrower – not the lender or the lender’s agent. 

            BC57’s response is that discrepancies do not invalidate the Releases, because they fall under the legal doctrine of mutual mistake. In reviewing that position, the Appellate Court approved the district court’s decision concluding the opposite. There was no mutual mistake here, rather all of this pertains directly to the Cohens’ business model operated to purposefully obscure legal responsibility and asset ownership. 

            The Releases were facially invalid. Mortgage payment alone does not extinguish a preexisting security interest without a valid Release. Individual investors win; BC57 loses. See SEC v. EquityBuild; US Court of Appeals 7^th Circuit, Case No. 23-1870, May 6, 2024: https://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2024/D05-06/C:23-1870:J:St__Eve:aut:T:fnOp:N:3206589:S:0. 

            Questions / Issues / Comments: 

1.      Title insurance for the individual investors and BC57 is not mentioned in this case. My conclusion is that all of this occurred without such coverage. I could be wrong – perhaps there are separate claims against escrow agents and title underwriters – but if so then presumably it all would have been consolidated here, for judicial economy. 

2.      Even if lender title insurance policies had been issued, the same claims and defenses would still have been asserted. But at least one or more “deep-pocket” insurance companies could possibly have been induced to pay claims. 

3.      Putting aside title insurance, the underlying issue is the legal effect of Lien Release documents. It is my impression that not enough real estate lawyers, title agents, underwriters, and escrow officers review these documents other than possibly to verify that the Property description and recording data are correct. The assumption is that mortgage payment equals mortgage release. That will now (should!) change, based on this case. 

                                                                       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.