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January 10, 2014

Supreme Court Rules in Fannie Mae-Freddie Mac Case


The U.S. Supreme Court recently refused to permit non-party banks accused of violating federal and state securities laws in connection with the purchase of billions of dollars of residential mortgage-backed securities by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) between 2005 and 2007 to intervene in a test case against another bank, thereby preserving a decision of the U.S. Court of Appeals for the Second Circuit in favor of the Federal Housing Finance Agency (FHFA).


In July 2011, the FHFA, as conservator of Fannie Mae and Freddie Mac under the Housing and Economic Recovery Act of 2008 (HERA), filed suit against UBS Americas, Inc., and related defendants. As amended, the complaint asserted violations of, inter alia, the Securities Act of 1933 and state securities statutes. The claims were based on allegations that Fannie Mae and Freddie Mac suffered substantial losses on their mortgage-backed securities caused by UBS’s material misrepresentations regarding the creditworthiness of borrowers and the underwriting standards of home loans serving as collateral for those investment vehicles.


In September 2011, the FHFA brought 17 similar suits against additional banks, including Citigroup, Inc., General Electric Co., and JPMorgan Chase & Co. Ultimately, 16 cases, including the UBS action, were assigned to the Hon. Denise L. Cote in the U.S. District Court for the Southern District of New York. The UBS action was eventually designated as a test case for the resolution of common grounds for dismissal motions, such that any rulings would apply to all banks.


UBS then moved to dismiss, arguing primarily that the securities claims were untimely. The District Court rejected this argument in a pair of opinions issued in May and June 2012. The Second Circuit affirmed in April 2013, holding that HERA’s extender statute of limitations applied to securities claims brought by the FHFA as conservator, and concluding that the securities claims were timely brought within the three-year period after the appointment of the FHFA as conservator. In July 2013, UBS settled its case with the FHFA.


The remaining banks moved to intervene to file a petition for a writ of certiorari, on the basis that the Second Circuit’s decision would also apply to their cases. The Supreme Court denied their motion in JPMorgan Chase & Co. v. Fed. Hous. Fin. Agency, No. 13M30 (Oct. 7, 2013). The Supreme Court’s ruling effectively leaves intact the Second Circuit’s decision in favor of the FHFA, forcing the banks to choose between costly settlement and expensive litigation. Some banks, including GE, Citi, and JPMorgan, have already responded to these adverse opinions by settling with the FHFA. The other banks will likely face mounting pressure to avoid litigation now that the courts have struck down their strongest defense.


Matthew D. Rodgers, Boston, MA


 

January 7, 2014

MA High Court Considers the Role of Pre-Foreclosure Notices


The Massachusetts Supreme Judicial Court (SJC) heard oral argument in U.S. Bank National Association v. Schumacher on November 7, 2013, the latest in the line of cases addressing foreclosures and the statutory power of sale in Massachusetts. In Schumacher, the SJC is considering whether a lack of strict compliance with the notice provisions of M. G. L. c. 244, § 35A renders an extrajudicial foreclosure sale void, voidable, or otherwise affects its validity.


In Schumacher, the required Section 35A notice listed the name and address of the mortgage servicer, rather than the mortgagee, and identified U.S. Bank as the current mortgagee despite the fact that the mortgage at issue had not yet been assigned to U.S. Bank.  The bank went on to foreclose, after being formally assigned the mortgage, and Schumacher raised the issue of the Section 35A notice during the subsequent eviction proceeding in the Massachusetts Housing Court. Judgment subsequently issued in favor of U.S. Bank, granting the bank possession of the foreclosed premises and costs. Schumacher appealed and the case was transferred to the SJC.


To date, the major foreclosure decisions from Massachusetts have not addressed the notice requirements and their effect on the foreclosure process. Thus, Schumacher presents yet another issue of first impression in the Massachusetts foreclosure arena. Is the notice required by Section 35A part of the statutory power of sale, such that a failure of strict compliance voids the foreclosure sale ab initio, like the issues addressed in Ibanez and Eaton previously covered in articles and developments posted here? Or does a failure to strictly comply render the foreclosure sale voidable, subject to a review of the specific facts on a case-by-case basis?


One of the issues raised by the SJC at oral argument was whether there was actual prejudice to a borrower who receives a notice that (1) provides an accurate recitation of the debt due, (2) provides contact information that the borrower can use to reach out regarding options, and (3) notifies the borrower about options available but which identifies the mortgagee as an entity that does not yet hold the mortgage.


In Schumacher, the question is further muddied by the fact that U.S. Bank, the identified mortgagee, was the holder of the note in question at the time the Section 35A notice was sent. Thus, did Schumacher suffer any actual prejudice? Conversely, Schumacher’s argument does not rely on any finding of prejudice. Rather, Schumacher points back to Ibanez and the SJC’s holding that the requirements of the statutory power of sale necessitate strict compliance. However, Schumacher’s position necessarily requires the SJC to determine that the Section 35A notice is part of the statutory power of sale and it is unclear how the court will come down on that question.


A determination that the Section 35A notice requires strict compliance will add yet another layer of vigilance to the foreclosure process. The SJC did not do much to telegraph its position on this issue and so, again, the real estate bar will await guidance from the state’s highest court on foreclosures in Massachusetts.


Kendra L. Berardi, Robinson & Cole, Boston, MA


 

November 21, 2013

Environmental Indemnifications Only as Good as their Specific Language


In a case demonstrating how carefully the language of an environmental indemnity must be drafted and how exacting the court’s analysis can be, the First Circuit reversed in part the decision of the U.S. District Court for Massachusetts, ruling on the basis that the language of such an agreement that more than $100,000 in environmental testing costs were not recoverable.


In VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC, the First Circuit evaluated an indemnity agreement between Cadlerocks Centennial Drive, LLC, which owned a mixed-use commercial and industrial property in Peabody, Massachusetts, and its mortgage company, Salmon Brothers Realty Corporation.


Prior to entering into the mortgage in 1999, Salmon Brothers conducted a Phase I site assessment to determine if there were any hazardous substances that may affect the property. The assessment revealed the possible presence of tetrachloroethylene, also known perchloroethylene (PCE), a hazardous substance under Massachusetts Contingency Plan, 310 CMR 40.1600. Salmon Brothers did not conduct a Phase II site assessment, instead relying on an environmental insurance policy that Cadlerocks purportedly obtained naming Salmon Brothers as the insured.


Salmon Brothers assigned the mortgage and related loan documents to Wells Fargo in 2000 and ORIX Capital Markets, LLC began servicing the loan in 2009. Cadlerocks did not make the mortgage payment in 2010, thereby defaulting on the loan. When offered a “deed-in-lieu” to avoid foreclosure proceedings, ORIX conducted a Phase I site assessment just as Salmon Brothers had done in 1999, which again revealed PCE on the property. ORIX declined the “deed-in-lieu” and appointed a receiver to take control of the property and engage in further environmental testing.


After the appointment of the receiver, ORIX conducted Phase II testing, which included integrity testing of an underground storage tank, soil-vapor testing, and indoor air-quality testing. Upon receipt of these results, the receiver ordered additional air-quality testing and sought repayment from Cadlerocks for the environmental tests under the indemnity agreement. When Cadlerocks did not respond, the Receiver then sought reimbursement from ORIX. Eventually, ORIX filed suit against Cadlerocks for breach of contract and the District Court found that Cadlerocks was responsible for $102,536.00 for expenses incurred to perform the 2011 environmental testing. Cadlerocks appealed this finding.  Cadlerocks appealed to the First Circuit.


Carefully parsing the language of the indemnity agreement, the First Circuit disagreed with the district court’s interpretation on two fundamental points.  First, the court found that ORIX could only recover liabilities “sought from or asserted against” those parties indemnified by the indemnity agreement. Because ORIX itself had ordered and paid for much of the environmental testing, these were not liabilities that met this requirement. In short, they were not “sought from or asserted against” ORIX because ORIX incurred and paid them itself. Second, the court ruled that because the remainder of the testing expenses were not costs “required to take necessary precautions to protect against the release of any Hazardous Materials” in or around the property as required by specific language of the indemnity agreement but were instead either due diligence or used to determine the scope of existing contamination, the costs were again beyond the scope of the indemnification agreement.


While limited to the specific language at issue, the case is instructive in how carefully indemnity language, including environmental liabilities, must be drafted to cover the contemplated contingencies.


—Sam DeLuca, Suffolk Law School, Boston, MA


 

October 16, 2013

Massachusetts Supreme Judicial Court Affirms Validity of Late-Recorded Variance


The Massachusetts Supreme Judicial Court (SJC) has upheld the Land Court’s ruling that a variance is effective even if it is recorded outside the statutory one-year period where there was substantial reliance on the variance and no harm to interested parties and the variance was recorded less than two weeks after the one-year recording deadline. Grady v. Zoning Board of Appeals of Peabody, 465 Mass. 725 (2013).


The Zoning Act provides that “If the rights authorized by a variance are not exercised within one year of the date of grant of such variance such rights shall lapse….” M.G.L. c. 40A, § 10.  Further, it states that “No variance…shall take effect until a copy of the decision…is recorded in the registry of deeds….” M.G.L. c. 40A, § 11.  In short, “a variance does not take effect until it is recorded and...the recording of a variance within one year of its grant is necessary to exercise it.” Cornell v. Bd. of Appeals of Dracut, 453 Mass. 888, 891 (2009). However, the Cornell Court also noted that, “We leave for another day whether the failure to record a variance may void a variance on which a variance holder substantially has relied.” Id. at 891 & n.7.  Based on the facts in Grady, the SJC answered this question in the negative.


The Stefanidis obtained a frontage variance in order to construct a two-family house in Peabody, Massachusetts. No appeal was taken and a certificate of no appeal was issued by the town clerk in July 2008. Although the Stefanidis failed to record the variance within the one-year period, they had hired a general contractor, applied for and received a building permit, employed an architect to review the work progress and prepare reports, obtained a construction loan secured by a mortgage, drew substantial funds from the loan, and began clearing the site—all within this period. Shortly after the recording deadline, an abutter requested that the building inspector revoke the building permit due to the failure to record the variance with timeliness. Learning of this appeal, the Stefanidis recorded the variance 11 days after the one-year period expired.  The building inspector denied the revocation request and the Zoning Board of Appeals upheld his decision. The abutter appealed to Land Court which, in turn, upheld the Zoning Board. The SJC took the case on its own motion.


The SJC held that the variance became effective in the “unusual circumstances here” consisting of (1) the performance of “substantial steps within the one year period” in reliance upon the variance, (2) the absence of “harm to any interested parties, including the plaintiff, other than any harm resulting from the original, uncontested grant of the variance,” and (3) the recording of the variance “less than two weeks” after the one-year period. In a footnote, the SJC further ruled that Chapter 40A does not “mandate that actions taken to exercise a variance, such as obtaining a building permit… must be undertaken only after the variance has been recorded.” Reciting the purpose of the variance recording requirement—ensuring timely recording and notice to subsequent purchasers and others of a limited right to deviate from the requirements of the zoning code—the SJC found nothing in the record suggesting that the plaintiff, other abutters, or any potential purchasers, were prejudiced by this “de minimis recording delay.”


The SJC affirmed the Land Court’s decision upholding the ZBA’s ruling not to revoke the building permit.


Brian C. Levey, Beveridge & Diamond, P.C., Wellesley, MA


 

October 15, 2013

Massachusetts Appeals Court Rules in Historic Site Case


The recent Massachusetts Appeals Court decision in Kelley v. Cambridge Historical Commission is noteworthy less because of its novel legal findings than as a documentation of the delays incumbent in the development process.


Developer Oak Tree Development, LLC, acquired property adjacent to a historic church in North Cambridge with the intention of working with the church to develop both its and part of the church’s property.  The church, its outbuildings, and a park/garden on the property are of historical significance and over the years were protected by restrictions entered into by the church with the Massachusetts Historical Commission (MHC) and a written agreement with the Cambridge Historical Commission (CHC) governing how any development of the property could proceed.  With the church and its property in disrepair and in need of financial support to maintain the historic structure, the church agreed to allow redevelopment of part of its property in conjunction with the demolition of an adjacent car wash into 46 residential condominium units with retail space, a rebuilt parish hall, and a reconfigured garden area.


Several neighbors opposed the project, seeking designation of the church as a landmark.  However, when the developer and the church supported the designation provided the project was allowed to move ahead and that proceeds from the project would fund maintenance and preservation of the church building from an endowment, the CHC recommended both the project and the landmark designation to the Cambridge City Council, which approved both. A modification to the project to relocate the entrance to the parking garage kicked off another round of complaints and ultimately a lawsuit challenging the project.


Despite some exasperation with the plaintiffs’ inartfully drawn complaint, the court nonetheless demonstrated the judiciary’s willingness to (re)interpret the challengers’ claims. The court stated that,


Before turning to the plaintiffs' individual claims, we frame the overall merits. The amended complaint is thirty-three pages long, and it incorporates several hundred pages of attachments. The complaint is written in a discursive, stream of consciousness style, it lacks any organizational coherence, and it is riddled with overblown language and inappropriate ad hominem attacks. As a result, the specific legal theories on which the plaintiffs purport to rely are not readily discernible. We appreciate the difficulties the motion judge faced as he diligently tried to make sense of the plaintiffs' alleged causes of action. We attempt to do the same, mindful that we should not provide the plaintiffs the undue benefit of arguments they did not fairly raise.


The Superior Court and ultimately the Appeals Court dismissed each of the plaintiffs’ possible theories in turn:


  • The plaintiffs lack standing to enforce the terms of a preservation restriction entered into between the church and the MHC. The Appeals Court distinguished the Court’s holding in Rosenfeld v. Zoning Bd. of Mendon, 78 Mass. App. Ct. 677 (2011) that held that “an owner of land that adjoins the restricted land is entitled to enforce a deed restriction, whether or not the instrument imposing the restriction contains an express statement that the adjoining land is intended to benefit from the restriction.”  The Appeals Court noted the different statutory schemes, the narrowness of the issue in Rosenfeld, and the fact that the plaintiffs are not even adjacent to the church site. However, the Appeals Court noted that it remains unresolved (and the plaintiffs fail to raise here) that whether a party lacks a right to seek judicial review of an administrative decision made by the holder of the restriction just because it lacks the right to enforce the government-held restriction itself.


  • The property is not in a “historic district” under Chapter 40C and the “plaintiffs’ suggestion that the area is a ‘de facto Historic District’ relies on a concept that the law does not recognize.” As a result, the “adverse effect” standard of M.G.L. c. 40C, § 27C plays no role.


  • The plaintiffs cannot demonstrate as a matter of law that they are intended third-party beneficiaries of the agreement between CHC and the developer and the church regarding development of the property. However, the Appeals Court noted again a lost potential opportunity for the plaintiffs, acknowledging that where “a government body enters into a contract in lieu of utilizing available regulatory vehicles, such a regulatory agreement implicates more than mere contract law, and the modification of such an agreement may not be immune from all judicial review.” However, the court said that the plaintiffs lost their chance because the plaintiffs never filed a timely action seeking review of the 2010 certificate of appropriateness (the means taken by the CHC to effectuate its decision).


The Appeals Court affirmed the lower court’s dismissal, demonstrating the difficulties and pitfalls for developers and challengers in effectively litigating appeals of decisions in project development.


Marc J. Goldstein, Beveridge & Diamond, P.C., Wellesley, MA


 

September 30, 2013

Make-Whole Doctrine Does Not Apply to Insurance Deductibles in CT


In a case arising out of insurance policies covering a housing development, the Supreme Court of Connecticut held that the make-whole doctrine is the default rule under Connecticut law, but that the doctrine does not apply to insurance policy deductibles. Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 309 Conn. 449, 451 (2013).


Haynes Construction hired TD Banknorth as its agent to arrange insurance for a housing development project. TD Banknorth, acting for Haynes, obtained a builder’s risk policy from Peerless Insurance Co. and an inland marine policy from Hartford Insurance Co. TD Banknorth purchased “errors and omissions” coverage from Fireman’s Fund, with a $150,000 deductible. A fire destroyed a house on Lot 14 of the project, but Peerless denied coverage of the loss because TD Banknorth had accidentally omitted Lot 14 on the builder’s risk policy. Haynes sued TD Banknorth for its negligent omission of Lot 14. Haynes settled with TD Banknorth and Fireman’s Fund for $354,000, with TD Banknorth contributing $150,000 (its deductible) and Fireman’s Fund contributed the remaining $204,000. As part of the settlement, Haynes assigned its rights against Peerless and Hartford to Fireman’s Fund and TD Banknorth, collectively. Fireman’s Fund and TD Banknorth sued Peerless and Hartford for the $354,000. In the settlement, Peerless paid $88,000 and Hartford paid $120,000, both in exchange for complete releases; the total, $208,000, was deposited in an escrow account.


Fireman’s Fund sued TD Banknorth in federal district court, seeking a declaratory judgment that it was entitled to all $208,000 in the escrow account (claiming it was owed $214,000—the $204,000 it had paid Haynes plus $10,000 in defense costs). TD Banknorth counterclaimed for a declaratory judgment, arguing that under the make-whole doctrine that restricts the enforcement of an insurer’s subrogation rights until after the insured has been fully compensated for his or her injuries, it was entitled to recover its $150,000 deductible from the $208,000 in the escrow account. The U.S. District Court for the District of Connecticut granted summary judgment to Fireman’s Fund after concluding that the “errors and omissions” provision in the contract nullified the make-whole doctrine. Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 2010 U.S. Dist. LEXIS 7944 (D. Conn. Feb. 1, 2010). On appeal, the Second Circuit concluded the district court had incorrectly determined that the terms of the “errors and omissions” coverage in the contract had abrogated the make-whole doctrine and certified to the Connecticut Supreme Court the question of whether the make-whole doctrine applies to insurance deductibles. Fireman’s Fund Ins. Co. v TD Banknorth Ins. Agency, Inc., 644 F.3d 166 (2d Cir. 2011).


TD Banknorth argued that before Fireman’s Fund may assert any right of equitable subrogation against a responsible third party, TD Banknorth is entitled to recover its $150,000 deductible—which it contended represented the amount it paid to settle the Haynes claim. Fireman’s Fund argued that the deductible was not part of the loss to which the make-whole doctrine applied, and that to conclude otherwise would essentially convert the policy into one without a deductible, providing TD Banknorth with an unbargained-for windfall at the expense of Fireman’s Fund.  Ultimately, the Connecticut Supreme Court agreed with Fireman’s Fund.  309 Conn. at 452. But first, the court held that the make-whole doctrine is sound policy and made it the default rule in Connecticut.  Id.


In arriving at this conclusion, the court considered the purposes of subrogation, finding that it promotes equity by preventing an insured entity from receiving more than full indemnification by recovering from both the wrongdoer and the insured for the loss. Id. at 456. The insured is entitled to indemnity from an insurer pursuant to coverage provided under a policy of insurance, but the insured is entitled only to be made whole, not more than whole.  For instance, subrogation prevents an insured from obtaining one recovery from the insurer under its contractual obligations and a second recovery from the tortfeasor under general tort principles.  Id. (citing E. Rinaldi, “Apportionment of Recovery Between Insured and Insurer in a Subrogation Case,” 29 Tort & Ins. L. J. 803, 803 (1994)). However, when the amount recoverable from the responsible third party is insufficient to satisfy both the total loss sustained by the insured and the amount the insurer pays on the claim, the subrogation can lead to inequitable results. This is where the make-whole doctrine steps in to prevent injustice by restricting the enforcement of an insurer’s subrogation rights until after the insured has been fully compensated.  Id. at 455–57.  Because the make-whole doctrine effectively requires the burden of loss to rest on the party paid to assume the risk of loss, the court found it to be equitable and just policy and held that it should be the default rule in Connecticut.  Id. at 457–58.


Despite the fact that the court considered the doctrine sound policy, it declined to apply it to insurance deductibles. The court agreed with Fireman’s Fund that the insured should be considered compensated for the loss if the insured recovers all but the amount of the deductible. Id. at 468–69.  If the insured were to be reimbursed for its deductible before the insurer is made whole, the insured would be receiving a windfall that would contradict the terms of the insurance agreement. Such unjust enrichment should not be allowed, the court concluded, because the insurer accepted only the risk of paying if the loss exceeded the amount of the deductible, and should not, after the fact, be faced to pay for the deductible as well. The court expressed deference to the contract, noting that if it were to hold for TD Banknorth, it would effectively disturb the bargain the parties struck and create a windfall for TD Banknorth for a loss that it did not see fit to insure against in the first instance when it decided to contract for lower premium payments in exchange for a deductible.


Sara L. Vink, Beveridge & Diamond, P.C., Washington, D.C.


 

September 19, 2013

Antideficiency Protections Apply to Short Sales, Says California Appellate Court


California’s antideficiency statutes protect against a deficiency judgment after a short sale as well as after a foreclosure, according to a decision by the Fourth Appellate District Court of California in Coker v. J.P. Morgan Chase Bank, N.A. 218 Cal.App.4th 1 [159 Cal.Rptr.3d 555] (2013).


By way of background, California Code of Civil Procedure § 580b protects borrowers against a deficiency judgment on certain kinds of real estate-secured loans.  For example, purchase money deeds of trust (often called mortgages in other jurisdictions) on residential dwellings of four or fewer units where the owner occupies at least one unit are non-recourse against the borrower as a matter of law.  “Carry-back” loans secured by a deed of trust in favor of the vendor are also non-recourse against the borrower.  Moreover, no deficiency judgment can be had on any loan that is used to refinance a purchase money loan, unless the lender advances new principal not applied toward the original loan.  The lender may seek recourse only by foreclosure against the property, and not against the borrower, in the event of default.


The purposes of the antideficiency statute are (1) to stabilize purchase money-secured land sales prices by preventing overvaluing the property and (2) to ensure purchasers as a class are harmed less than they might otherwise be during a time of economic decline because if property values drop, the purchaser's loss is limited to the land that he or she used as security in the transaction.


In this case, as part of its approval of the short sale, Chase Bank required the borrower to agree that he would be liable for any deficiency after a short sale.  Thus, Chase Bank urged that by express agreement between the parties, Section 580b does not apply.  The court rejected that argument, reasoning that there is no requirement in the statute that a foreclosure must occur to trigger its protections, thus the statute applies after a sale of the property. And because the statute applies to short sales, the parties could not agree to waive the anti-deficiency protection.  Those protections are non-waivable by statute, the court said.


—Kenneth Van Vleck, GCA Law Partners, LLC, Mountain View, California


 

August 7, 2013

New Jersey Approves Tax Reduction for Contaminated Site


An owner of a contaminated site in New Jersey is entitled to $12 million in market value adjustments for tax assessment purposes due to environmental contamination, according to the Tax Court of New Jersey in the consolidated cases of Orient Way Corp. and Red Roc Realty, LLC. v. Township of Lyndhurst and Red Roc Realty LLC v. Township of Lyndhurst. More generally, owners of contaminated land in New Jersey are entitled to an adjusted tax valuation due to contamination even if (1) no remediation plan has been approved by a government agency and (2) the owner is partially occupying the property.


Between 2006 and 2008, Red Roc Realty, LLC, owned a contaminated parcel in Lyndhurst, New Jersey. The former locomotive facility was heavily polluted with dangerous chemicals as a result of activities that took place before Red Roc purchased the property. Because Red Roc hoped to clean up and redevelop the property, it assumed the previous owner’s obligations to remediate the property, and consequently “engaged environmental experts to advance a remediation program and to coordinate efforts with the DEP to clean the property.” Red Roc’s repeated efforts to obtain approval of a remediation program “were frustrated by the agency’s slow response to repeated inquiries,” and no remediation was approved before Red Roc sold the property in September 2008. During Red Roc’s occupancy, it used the property for outdoor storage of contracting materials and for office space for eight employees. None of its activities resulted in further contamination.


In 2006, 2007, and 2008, the Township of Lyndhurst assessed taxes on the “unencumbered, clean” value of the property, which is nearly $2.5 million higher than the contaminated value.  Red Roc appealed the valuation for each tax year, arguing that it was entitled to an adjustment for environmental contamination. The township defended its assessment, arguing that, first, an adjustment “for environmental contamination cannot be made without a cleanup plan approved by a government agency” and, second, that an adjustment is inappropriate because Red Roc was using the property on the dates of valuation.


The tax court ruled against the township on both arguments. First, the court held, in a reaffirmation of existing case law, that “a government-approved cleanup plan is not a necessary predicate for an adjustment” due to environmental contamination. Second, it held that partially occupied property can still receive an environmental assessment. If “the use of the property is incidental, generates no substantial income, and takes place during good faith attempts by the owner to advance the cleanup of the property,” the property is still eligible for an assessment for environmental contamination. On the other hand, if the use is “extensive, income generating, and unhindered by pending remediation,” no assessment is appropriate. Here, Red Roc’s use of the property was sufficiently minimal to qualify for an assessment.


Lisa D. Liebherr, Alston & Bird, New York, New York


 

August 2, 2013

MA High Court: Title Insurer's Duty to Defend is Narrowly Construed


The Massachusetts Supreme Judicial Court ruled in a case of first impression that a title insurer’s duty to defend is much narrower than the duty to defend in a general liability context in Deutsche Bank National Association v. First American Title Insurance, SJC-11265 (July 11, 2013).


This standard articulated by the court in reliance on its decision earlier this year in GMAC Mortgage, LLC v. First American Title Insurance Co., 464 Mass. 733 (2013), marks a departure from the broad standard for determine an insurer’s duty to defend in the general liability context.  In Massachusetts, a general liability insurer has a broad duty to defend and must defend where “the allegations in the underlying complaint are ‘reasonably susceptible’ of an interpretation that they state or adumbrate a claim covered by the policy terms” and any uncertainty as to whether a claim is covered is resolved in favor of the insured.


However, in examining the unique nature of title insurance, the SJC noted that title insurance is “fundamentally different” from general liability insurance in that title insurance indemnifies the holder for defects existing in the title when the policy is issued, while general liability insurance is intended to protect against future risks. Simply put, title insurance is not forward looking.


Based on the limited nature of a title insurance policy and its fundamental difference from general liability insurance, the court held that “a title insurer’s duty to defend is triggered only where the policy specifically envisions the type of loss alleged.”


The case arose out of First American Title Insurance Company’s denial of coverage to Deutsche Bank when it and others were sued by a mortgagor seeking rescission of a note and the mortgage securing that note originated by Deutsche Bank’s predecessor in interest in connection with the purchase of a home in Boston. Deutsche Bank’s predecessor had obtained a title insurance policy from First American, but First American denied coverage for the lawsuit causing Deutsche Bank to sue First American alleging violation of M.G.L. c. 176D, § 3(5).


In announcing this newly articulated standard, the SJC determined that because the title insurance policy at issue did not envision the type of claims and loss set forth in the complaint against Deutsche Bank, First American did not have a duty to defend. As the SJC noted, the underlying complaint was directed at the validity of the loan secured by the mortgage and whether it was predatory by its terms. The attempt to rescind the security interest was merely a consequence of the alleged predatory loan. That type of loss was not contemplated by the title insurance policy and, under the new standard articulated by the SJC, First American’s duty to defend was not triggered.


By its holdings in Deutsche Bank National Association v. First American Title Insurance and GMAC Mortgage, LLC v. First American Title Insurance Co., the court has made it clear that, in Massachusetts, standards applicable to general liability insurance are not necessarily applicable to title insurance policies. Certainly, the duty to defend is narrower and the explanation articulated in the court’s latest decision is sure to be used in the future to litigants seeking to further distinguish title insurance policies from their general liability counterparts.


Kendra L. Berardi, Robinson & Cole LLP, Boston, MA


 

July 30, 2013

New Jersey Changes Formula for Determining Just Compensation


When protective sand dunes are built on an individual’s property in New Jersey, just compensation is determined by considering both the quantifiable increase in the property’s value due to storm-protection benefits and any diminution in value due to loss of ocean view, according to the New Jersey Supreme Court in the case of Borough of Harvey Cedars v. Harvey Karan and Phyllis Karan (Docket No. A-120-11, 070512).


More broadly, the court decided the proper amount of just compensation in partial takings cases is the change in the fair market value of the property, including any increase in value caused by the taking.  This decision will likely have significant ramifications for New Jersey as the state rebuilds from Superstorm Sandy and takes measures to prevent damage from future storms.


As part of a large post-Sandy public works project, the Borough of Harvey Cedars, located along the New Jersey coastline, exercised its power of eminent domain to take a portion of Harvey and Phyllis Karan’s property to construct a 22-foot high sand dune.  The dune, which connected with a row of other dunes to provide protection from ocean waves and storms, occupied a portion of the Karans’ property and obscured the ocean view from the first floor of the their house. The borough and the Karans disagreed about what just compensation was due, and as a result, the matter went to trial.


At trial, the Ocean County Superior Court instructed the jury that when determining just compensation, the jury should disregard any benefit from storm-protection provided by the dune project. The court reasoned that such protection was a general benefit, which applied to neighboring houses and the community at large, and not a specific benefit, which applies directly to a specific house. Under existing case law at the time of the trial, general benefits were excluded from just compensation calculations. The jury awarded $375,000 as compensation for the easement. The Appellate Division affirmed.


The New Jersey Supreme Court disagreed. It rejected the distinction between general and specific benefits as outdated and unworkable. Instead, it held that the proper measure of just compensation was fair market value, including all “reasonably calculable benefits that increase the value of property at the time of the taking.” “Whether those benefits are enjoyed to some lesser or greater degree by others in the community” is irrelevant to the calculation.  The court noted that both general and specific benefits must be considered, because failing to do so would result in a financial windfall to homeowners. The matter was remanded for a new trial to determine just compensation under a fair market value standard. 


Keywords: real estate litigation, just compensation


Lisa D. Liebherr, Alston & Bird, New York, New York


 

July 9, 2013

Supreme Court Says Takings Claims May be Brought Outside Court of Federal Claims


A farmer who is fined for violating an assessment may bring a takings claim in U.S. District Court without first paying a fine and is not required to bring the claim in the Court of Federal Claims according to the U.S. Supreme Court’s recent unanimous decision in Horne v. Department of Agriculture (Docket No. 12-123). Justice Thomas’s opinion for the Court may have broad implications for other regulatory programs under which the government imposes fines for failure to use property in a particular manner.


This case concerns a Depression-era agricultural price-stabilization scheme, called the Administrative Marketing Agreement Act (AMAA), which gives the “Raisin Administrative Committee” authority to require raisin producers to turn over a percentage of their raisins to the government for little or no compensation. Petitioners, Marvin and Laura Horne, were California raisin producers who argued that this regulatory scheme was a taking. The Hornes refused to surrender title to their raisins, and thus, the U.S. Department of Agriculture began administrative proceedings against them that resulted in the imposition of fines of $438,843.53 (the approximate market value of the raisins that the Hornes allegedly owe), $202,600 in civil penalties, and $8,783.39 in unpaid assessments. Petitioners sought judicial review at the U.S. District Court and then before the Ninth Circuit. The government ultimately argued that the Hornes’ action had to be dismissed because they were required to pay the outstanding amounts in dispute and bring their claims in the Court of Federal Claim instead. The Ninth Circuit agreed that it lacks jurisdiction.


The Supreme Court reversed, holding that the Ninth Circuit had jurisdiction to determine petitioners’ takings claims. The Court noted that, under the Tucker Act, takings claims must be brought in the Court of Federal Claims unless Congress has withdrawn Tucker Act jurisdiction through an alternate statutory scheme. The Court went on to find that the AMAA’s “comprehensive remedial scheme” withdraws the case from the Tucker Act’s jurisdiction, and as a result, takings claims that are raised as an affirmative defense in an AMAA enforcement proceeding may be decided in that enforcement proceeding or in a subsequent appeal. The Court took “no position on the merits of petitioners’ takings claim.”


Keywords: real estate litigation, takings, Supreme Court, Horne v. Department of Agriculture


Lisa D. Liebherr, New York, New York


 

June 27, 2013

U.S. Supreme Court Expands Takings Claims to Include Permit Denials and Monetary Conditions


The U.S. Supreme Court expanded private property rights in a takings case Tuesday that has broad implications for those in the real estate industry. The decision opens the door for takings claims where the government has denied approvals because the landowner refused to agree to unacceptable conditions that do not satisfy the nexus and proportionality requirements, even where those conditions are pure monetary exactions rather than easements or other interests in property.


The Court’s 5–4 decision in Koontz v. St. Johns River Water Management District (Docket No. 11-1447), written by Justice Alito, considered a regulatory taking case in which the public entity denied a development permit because the owner would not agree to conditions that he alleged did not satisfy the requirements of nexus and rough proportionality between the government’s demand and the effects of the proposed land use established in the Court’s decisions Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994).


Koontz owned an undeveloped 14.9-acre tract east of Orlando, Florida. The state had classified the entire parcel as wetlands, although the northern section drained well and had little standing water other than in ruts along an unpaved road used to access transmission lines on the property.  Under Florida statutes, a landowner wishing to develop such a property must obtain a Management and Storage of Surface Water permit and comply with a wetlands protection act, both of which authorized the imposition of conditions on development of wetlands property.  Koontz sought to develop the 3.7-acre northerly portion of his property in exchange for which he would grant a conservation easement on the 11.2-acre southerly portion of the property. The district informed Koontz that it would approve construction only if he either reduced the size of his development to one acre and deeded to the district a conservation easement over the remaining 13.9 acres or, alternatively, agreed to hire contractors to make improvements on district-owned land several miles away. Believing the district demands excessive, Koontz filed suit in state court to recover monetary damages under a Florida statute that allowed such damages if a state agency’s action is “an unreasonable exercise of the state’s police power constituting a taking without just compensation.”


After the Florida Circuit Court dismissed the complaint, the Florida District Court of Appeal reversed, and the trial court then held a two-day bench trial in which the trial judge concluded that the demand for payment of off-site improvements lacked both a nexus and rough proportionality.  The Florida District Court of Appeal affirmed, but the state Supreme Court reversed, concluding that “unlike Nollan or Dolan, the District did not approve [Koontz’] application on the condition that he accede to the District’s demands; instead, the District denied his application because he refused to make concessions.”  The Florida Supreme Court also distinguished a demand for an interest in real property, as occurred in Nollan and Dolan, with a demand for money.


The U.S. Supreme Court reversed. The Court made short shrift of the lower court’s distinction between conditional approval and conditional denial, citing the “unconstitutional conditions doctrine, that vindicates the Constitution’s enumerated rights by preventing the government from coercing people into giving them up.” The Court ruled that “the principles that undergird our decisions in Nollan and Dolan do not change depending on whether the government approves a permit on the condition that the applicant turn over property or denies a permit because the applicant refuses to do so.” The Court said that the unconstitutional conditions cases “have long refused to attach significance to the distinction between conditions precedent and conditions subsequent.” As the Court noted, “Extortionate demands for property in the land-use permitting context run afoul of the Takings Clause not because they take property but because they impermissibly burden the right not to have property taken without just compensation.” The Court distinguished the situation where a permitting entity simply denied the permit, instead of providing the unconstitutional option: “Where the permit is denied and the condition is never imposed, nothing has been taken.” Because the action was brought under state law, the Supreme Court declined to discuss remedies for Nollan/Dolan unconstitutional conditions.


The Supreme Court then discussed the Florida court’s alternative holding that Koontz’ claim failed because the district asked him to spend money rather than give up an easement on his land.  The majority noted that “a predicate for any unconstitutional conditions claim is that the government could not have constitutionally ordered the person asserting the claim to do what it attempted to pressure that person into doing.”  Noting that so-called in lieu fees (in which the government requires developers to pay fees in lieu of granting easements) are commonplace, the Supreme Court held that “so called ‘monetary exactions’ must satisfy the nexus and rough proportionality requirements of Nollan and Dolan.” The district argued that if monetary exactions are made subject to Nollan/Dolan scrutiny, there will be no principled way of distinguishing impermissible land use exactions from property taxes. The majority stated that the need to distinguish taxes from takings “is not a creature of our holding today that monetary exactions are subject to scrutiny under Nollan and Dolan” and that “teasing out the difference between taxes and takings is more difficult in theory than in practice.” The Court said that it need not decide, in this case, “at precisely what point a land-use permitting charge denominated by the government as a ‘tax’ becomes ‘so arbitrary …that it was not the exertion of taxation but a confiscation of property.”


The dissent, written by Justice Kagan, essentially agreed that the Nollan/Dolan standard applies to conditions subsequent and conditions precedent imposed by the government in the permitting process but disagreed on the application of that standard “to cases in which the government conditions a permit not on the transfer of real property, but instead on the payment or expenditure of money.” Justice Kagan argued that the majority’s decision makes every fee a city or town may charge subject to Nollan and Dolan’s nexus and proportionality tests and that the majority’s distinction between monetary exactions and taxes hard to apply. Finally, she argued that there was no governmental demand to turn over property, as required by Nollan and Dolan.

 

Keywords: real estate litigation, takings, Supreme Court, Nollan, Dolan, Koontz


Kevin H. Brogan, Hill Farrer, Los Angeles


 

May 7, 2013

Company Enjoined from Constructing Pipeline on Landowners' Property


Construction of a natural gas pipeline across three landowners’ property in Parker County, Texas, was blocked by an injunction issued by the Texas Second District Court of Appeals in In re: Tracy D. Williams, et al., Case No. 02-13-00087-CV (2nd Dist. – Fort Worth). In an opinion by Justice Anne Gardner, the court enjoined Atmos Energy Corp. from cutting more than 700 trees outside of a 50-foot easement area that crossed land owned by the plaintiffs, represented by Shannon Gracey Ratliff & Miller, effectively stopping the construction of the proposed pipeline. The Texas appeals court granted the landowners’ application for writ of injunction restricting Atmos to the 50-foot easement pending resolution of their interlocutory appeal of the trial court’s denial of their request for a temporary injunction.


Blake M. Hedgecock, Shannon Gracey Ratliff & Miller LLP, Fort Worth, TX


 

May 7, 2013

Mortgagors in MA Have Standing to Challenge Validity of Mortgage Assignment


The First Circuit held that a mortgagor in Massachusetts had standing to contest an assignment of her mortgage, but that Mortgage Electronic Registration Systems, Inc. (MERS) had the authority to assign the mortgage to the foreclosing entity in the much-anticipated decision of Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282 (1st Cir. 2013).


In 2006, Oratai Culhane, the plaintiff-mortgagor, refinanced the mortgage on her home in Massachusetts. She delivered a promissory note to Preferred Mortgage Services, which was secured by a mortgage granted by Culhane to MERS, as nomine for Preferred and its successors and assigns. Preferred Mortgage subsequently assigned the note to Deutsche Bank, as trustee for a securitized trust. At all relevant times, Aurora Loan Services was the servicer for all Deutsche Bank loans.


In 2009, MERS assigned the Culhane mortgage to Aurora, and the assignment was duly recorded in the appropriate registry of deeds. When Culhane fell behind in her mortgage payments, Aurora commenced foreclosure proceedings on behalf of Deutsche Bank. Culhane filed suit, asserting that Aurora was not the valid holder of Culhane’s mortgage because MERS did not have the authority to assign its interest. Aurora challenged Culhane’s standing to question whether MERS had authority to assign Culhane’s mortgage.


The First Circuit held that Culhane did indeed have standing. In Massachusetts, only the current holder of the mortgage was authorized to commence foreclosure proceedings. Thus, if Culhane was successful in her claim, Aurora would not be permitted to foreclose the mortgage. This was sufficient to give Culhane standing. However, the First Circuit went on to reject Culhane’s argument that MERS could not assign the mortgage. The court simply found that the mortgage identified MERS as the mortgagee and, accordingly, Culhane’s mortgage, on its face, permitted MERS to assign its interest to Deutsche Bank.


In addition, MERS was authorized to act on behalf of Deutsche Bank, as a successor to Preferred. Since Aurora was Deutsche Bank’s identified servicer, MERS was also authorized to assign its interest in Culhane’s mortgage by its status as nominee for Deutsche Bank.


Kendra L. Berardi, Robinson & Cole LLP, Boston, MA


 

March 26, 2013

Federal Court Decertifies Class Against Chicago Title Where PA Claims Are Too Fact-Intensive


A federal court decertified a class proceeding against Chicago Title Insurance Company for Chicago’s Title’s alleged failure to offer discounted title insurance rates on refinanced loans. The United States District Court for the Eastern District of Pennsylvania granted Chicago Title’s motion to decertify a class on March 7, 2013, in a lawsuit in which the class representative alleged that as a member of the Title Insurance Rating Bureau of Pennsylvania, Chicago Title was required to charge a discounted rate of 80 percent for loan refinances where the consumer had purchased title insurance within the three years on the same property.


The opinion of U.S. District Judge Juan R. Sánchez in Cohen v. Chicago Title Insurance Co., Docket No. 2:06-873 (E.D.Pa. March 7, 2013), turned on Federal Rule of Civil Procedure 23(b)(3)’s requirement that common questions of law or fact predominate over any question affecting only individual members. Because the only remaining claim by the putative class was based on violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL), and because the Third Circuit Court of Appeals, in Hunt v. United States Tobacco Company, 538 F.3d 217 (3d Cir. 2008), ruled that, in the absence of a fiduciary duty, justifiable reliance was an essential element of an UTPCPL claim, the court found that individualized questions of fact predominated, making class treatment inappropriate.


Keywords: real estate litigation, title insurance, title companies, class action, decertification, Rule 23(b)(3), Chicago Title Insurance Company


Jeffrey S. Tibbals, Nexsen Pruet LLC, Charleston, SC


 

March 14, 2013

AZ Law Bars Claims for Failure to Disclose Sex Offender Next Door


Six months after moving in to their new home, Glen and Robynn Lerner allegedly discovered that they had purchased a house next door to a sex offender. The Lerners sued the couple who sold them the home, Jeff and Marissa Currier, as well as the real estate broker that represented both couples in the transaction, DMB Realty, for failing to disclose that the property was within the vicinity of a sex offender.


In their complaint, the Lerners allege that the Curriers and DMB Realty failed to disclose that a sex offender lived within the vicinity of the property and that the Curriers fraudulently misrepresented their true reason for wanting to move by telling the Lerners they wanted to live closer to friends, when they really wanted to move away from the neighboring sex offender. They also alleged that DMB Realty breached fiduciary duties it owed to the Lerners when they failed to disclose that the property was located in the vicinity of a sex offender.

However, the residential seller’s property disclosure statement given in this sale and the dual representation agreement entered into by DMB Realty both contained an explicit notice that, by law, the sellers and brokers were not obligated to disclose that the property is or has been located in the vicinity of a sex offender. Based on these documents and A.R.S. §32-2156(A)(3), which provides that “[n]o criminal, civil or administrative action may be brought against a transferor or lessor of real property or a licensee for failing to disclose that the property being transferred or leased is or has been: … Located in the vicinity of a sex offender,” the Superior Court granted the defendants’ motion to dismiss.


On appeal, the Lerners argued that A.R.S. § 32-2156(A)(3) is unconstitutional because it violates Arizona's anti-abrogation clause, which guarantees the right of action to recover damages for injuries. The court disagreed, noting that the clause only encompasses claims based in or evolved from the common law, and failure to disclose a “defect” in real property was not a claim at common law. The court upheld the trial court’s ruling in all respects except for one: it sent the fraud claim back to the trial court because the statute does not protect a seller or broker from outright fraud, and the Lerners had plead facts sufficient to state a claim for fraud against the sellers. 


Lerner v. DMB Realty, LLC, et al, Case No. 1 CA-CV 11-0339 (Ariz. Ct. App. 2012) can be found here.


Keywords: real estate litigation, sex offenders, real estate brokers


D. Cody Huffaker, Quarles & Brady LLP, Phoenix, Arizona


 

February 26, 2013

California Appellate Court Reverses Trial Court's Exclusion of Appraisal


The California Court of Appeals reversed a lower court’s decision excluding a real estate appraiser’s opinion in a condemnation case where the appraiser sought to adjust improved comparables to arrive at the fair market value of the vacant land.


In County of Glenn v. Foley, 212 Cal.App.4th 393 (2012), the County of Glenn, California, had condemned Foley’s property and contended that the highest and best use was for grazing land; the property owner contended it was conversion to orchard land, perhaps olive trees.  Before trial, the County brought a motion in limine to exclude the owner’s appraiser from testifying.


The motion was based on several grounds, including that the owner’s appraiser, not able to find any directly comparable properties, used comparable sales of some improved properties, and adjusted those sale prices of those comparables to exclude the value of the improvements thereon to arrive at the fair market value of the condemned land in its current vacant state. The county argued that the owner’s appraiser had improperly violated “the rule against appraising the comparable.” The court distinguished earlier cases in which appraisers had simply incorporated the opinion of third parties as to the allocation of the sales price of the comparable from a situation where the adjustments were based upon third-party studies. If the adjustments were just the appraiser’s guesswork, the sales would be excludable. However, the court found that the county failed to establish guesswork as opposed to “the consultation having some basis in sales of properties that had and did not have similar improvements."


The court went on to consider the comparable sales presented by the owner’s appraiser and concluded that even those sales that were dissimilar in that they already contained orchards as of the time of sale, were not so dissimilar that they did not "shed light" on the value of the subject property, the standard for admission of comparable sales in California under Section 816 of the Evidence Code. The court concluded “it was a comparison of feasible use of the subject property with recent sales of property used for that purpose, with the differential for the costs of improvements either documented in university studies (the cost of establishing the orchards) or not impossible to determine (the other improvements).” As a result the sales had some tendency in logic to establish the fair market value of the subject property, and the granting of the motion in limine excluding the entire appraisal was improper. 


The court tried to avoid mixing metaphors, noting that this case did not present the “risk of comparing apples with oranges” but provided the defendant an olive branch, giving him another shot in his quest for just compensation. 


Keywords: real estate litigation, condemnation, fair market value, experts, valuation, motion in limine


Kevin H. Brogan, Hill Farrer, Los Angeles, California


 

February 11, 2013

I Spy a Floating Home or a Vessel?


The U.S. Supreme Court held in January 2013 that a certain floating home in Florida could not be defined as a “vessel” under federal admiralty law, applying a new “reasonable observer” test in an effort to resolve uncertainty about whether such floating structures as casinos are subject to federal admiralty jurisdiction and, by extension, other federal employment, tort, and maritime laws.


The question in Lozman v. City of Riviera Beach, Florida, 133 S. Ct. 735(2013) arose from various disputes between Lozman, the owner of a floating home, and the City of Riviera Beach, the owner of the marina where Lozman’s floating home was moored. The city eventually filed suit against the floating home in rem based on federal admiralty law. Lozman sought dismissal of the suit for lack of federal admiralty jurisdiction, arguing that the floating home did not meet the definition of “vessel” in 1 U.S.C. § 3: “every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water.”


The district court and Eleventh Circuit held that Lozman’s floating home was a vessel subject to federal admiralty law. The Eleventh Circuit held that the floating home was “capable” of transportation and subject to admiralty law because the home could float, the home could be towed, and the home’s connections to the shore were non-permanent. The Supreme Court accepted review to resolve “uncertainty among the Circuits” and define the scope of federal admiralty jurisdiction in such situations.


In its decision, the Supreme Court rejected the Eleventh Circuit’s interpretation of 1 U.S.C. § 3 as overbroad, stating: “Not every floating structure is a ‘vessel.’” The Court adopted a narrower interpretation holding that “a structure does not fall within the scope of [1 U.S.C. §3] unless a reasonable observer, looking to the home’s physical characteristics and activities, would consider it designed to a practical degree for carrying people or things over water.”


When applying this newly-crafted “reasonable observer” standard, the Court highlighted the following “physical attributes and behavior” of Lozman’s floating home.


  • The structure had no self-propulsion capability (the floating home could move over water only by being towed).
  • The structure had no rudder or steering mechanism.
  • The hull was “unraked” and the structure had “a rectangular bottom 10 inches below the water.”
  • The rooms, windows, and doors of the structure were “nonmaritime.”

Justice Breyer, writing for the Court, concluded: “But for the fact that it floats, nothing about Lozman’s home suggests that it was designed to any practical degree to transport persons or things over water.”


Although the dissenters in Lozman,Justices Sotomayor and Kennedy, “agreed with much of the Court’s reasoning,” they described the reasonable-observer standard as “novel and unnecessary.” In addition, the dissenters were concerned that permitting courts to consider aspects of the structure “that have no relationship to maritime transport” introduced an impermissible element of subjectivity. The dissenters recommended remanding the case to gather more facts regarding the features and capabilities of Lozman’s floating home. Despite the concerns of the dissenters, the reasonable observer standard is now the test for determining the scope of federal admiralty jurisdiction in these situations.


A ruling by the Court expanding federal admiralty jurisdiction might have made owners of such structures, including floating hotels and casinos, subject to federal employment, tort, and maritime law. In addition, the Court’s ruling might have limited the regulatory authority of local and state governments while creating an enforcement burden for the U.S. Coast Guard.


Implications
The Court admits that the reasonable-observer standard “is neither perfectly precise nor always determinative.” However, based on the Lozman decision and prior precedent in this area, lower courts should have sufficient guidance in applying the “reasonable observer” standard. In addition, homeowners and operators of floating hotels and casinos can reasonably anticipate the regulatory authority to which they will be subject. Lastly, the U.S. Coast Guard can avoid “unnecessary and undesirable inspection burdens” for matters only tangentially related to maritime issues.


Keywords: real estate litigation, Lozman, Riviera Beach, admiralty, maritime, vessel, houseboat, hotel, casino


Paul M. Gales, Greenberg Traurig, LLP, Phoenix AZ. Greenberg Traurig represented the petitioner in this case.


 

January 25, 2013

New Time Limitations for Enforcing Rights on Ohio Mechanic's Lien


An Ohio Court of Appeals decision finally provides a clear method to calculate the statute of limitations for filing a complaint on an affidavit for claim (mechanic's lien) on an Ohio public construction project. However, the court's decision is complicated by a later change to Ohio Revised Code § 2305.06 reducing the limitation of actions to eight years on a written contract. These two separate claims—a contract claim against the contractor that owes the money to the lien claimant and a claim against the public authority that has improperly released the funds that were held by the filing of the lien—have very different beginning points to determine the deadline and a different length of time to determine the end.


In Akron Concrete Corp. v. Board of Education for the Medina City Sch. Dist., 2012 Ohio 2971 (Court of Appeals of Ohio, Ninth Appellate District, Medina, Ohio), the court determined that the cause of action against a public authority (PA) did not accrue until years after the lien was filed. In that case, Akron Concrete filed its mechanic’s lien in 2001. In 2003, the contractor, Moser Construction Co., filed suit against the school board, the public authority. That case remained pending in the Medina County Court of Common Pleas until it was settled in 2009 when the school board paid $27,428.21 to Moser from the escrowed funds. The problem for the school board was that it released the funds by settlement, without the agreement of Akron Concrete or order of the court, which violated the escrow provision of ORC § 1311.28, making the school board liable to Akron Concrete for that amount of money. Prior to that event there was no cognizable amount of money owed to Moser, so the provisions of ORC § 2305.07 requiring an action to be brought within six years could not yet apply on the claim against the PA. Thus, in this case, extending the limitation of action for a period of more than 14 years from the filing of the mechanic’s lien.


The issue is that while a lien claimant may have a contract action against the contractor, which it will have to preserve under the limitation of actions for contracts, the lien claimant’s action may not yet have accrued on its lien against the PA. This is because the lien only attaches to the funds that are still owed to the contractor by the PA when the PA receives service of the lien. Upon receipt of the lien, PA is to place the liened amount in an escrow account, only to be released pursuant to a court order or by the agreement of the parties, including the lien claimant pursuant to ORC § 1311.28. The court in Akron Concrete reasoned that although the contractor did not dispute the amount owed to Akron Concrete, the school board disputed the amount of money that it owed to the contractor. Only after that dispute was resolved did Akron Concrete’s cause of action accrue.


Because there is no specific provision contained within the Ohio public project mechanic’s lien statute itself, the court reasoned that ORC § 2305.07, which provides, “an action upon a liability created by statute other than a forfeiture or penalty, shall be brought within six years after the cause thereof accrued,” applies, leaving only the question of when the cause accrued. Because the PA denied that it owed any money to the contractor, the lien claimant would arguably have no enforceable claim against the PA until the contractor was able to prove otherwise. In this case that proof came six years after the filing of the lien.


Going forward, this will be somewhat limited by the September 2012 amendment to ORC § 2305.06, which provides, “an action upon a . . . contract . . . in writing shall be brought within eight years after the cause of action accrued.” While the claim on the lien might last for some undetermined amount of time because of pending litigation between the PA and the contractor, the claim on the written contract between the contractor and the lien will be limited to six years from the date the action accrued on the contract. Because the lien claim is based in contract, if a lawsuit is not timely filed to protect the contract claim, the underlying contract claim will not be enforceable and the claim on the lien will be ineffective.


Absent the service of a notice to commence suit under ORC § 1311.311 that permits a public owner, a contractor, or a subcontractor that receives a lien to serve such a notice requiring the lien claimant to file a lawsuit to enforce its mechanic’s lien within 60 days, the simple rule assuming that the lien claimant has protected its contract claim, is that the lien claimant’s cause of action against the PA for its share of the liened funds arises only after the liened funds have been released from the escrow by the PA. At that point in time, a six-year limitation-of-actions clock begins to run under ORC § 2305.07.


If there is any doubt that the lien claimant will be paid, the best action for the lien claimant, even if not faced with a notice to commence suit, would be to file a complaint on its contract with the contractor and for declaratory judgment, asking the court to enter judgment that if and when money becomes due to the contractor from the PA that the lien claimant be paid its lien balance from the escrow account.


The real problem for the hopeful lien claimant arises when the contractor is no longer in business and will realize little or no proceeds from the dispute with the PA. At that point the contractor is not likely to prosecute or defend any action by or against it by the PA. The contactor is more likely to default and eradicate any ability of the lien claimant to recover on its lien rather than expend its time and legal fees on a lawsuit against the PA solely for the benefit of the lien claimant. The lien claimant would be forced to intervene in the case and prove the remaining balance due on the contract between the PA and the contractor. Hopefully, the lien claimant has also perfected its bond claim on the contractor’s payment bond, as that will provide it some avenue for recovery. Be wary, however, as the limitation of actions on a payment-bond claim is set forth in ORC § 153.56 (B), which provides,


A suit shall not be brought against sureties on the bond until after sixty days after the furnishing of the statement described in division (A) of this section. If the indebtedness is not paid in full at the expiration of that sixty days . . . the person may bring an action . . . not later than one year from the date of acceptance of the public improvement for which the bond was provided.


Keywords: real estate litigation, mechanics lien, public improvement Lien, Ohio, bond claim, statute of limitations, limitation of actions, Ohio Lien Law, ORC 2305.06, ORC 2305.07, statute of limitations for debt, accrual of cause of action


R. Russell O'Rourke, O'Rourke & Associates Co., LPA, Cleveland, Ohio


 

January 18, 2013

VAPs: A Creative Solution to Property-Value Disputes


Allegations of property-value diminution often stem from a property owner’s fears about the current and future value of his or her property—usually as a result of some actual or perceived nuisance. A value assurance program, or VAP, sponsored by the party taking responsibility for the property-value diminution, speaks directly to those fears by guaranteeing the property owner will receive fair market value in the event of a sale. In exchange for a release from property-damage claims, among other VAP agreement terms and conditions, the VAP sponsor compensates participants for any difference between fair market value and an arms-length sale price. When the nuisance is environmental contamination, the VAP duration is often tied to the remediation period.


Program Design and Development
VAPs are not “one size fits all” and can be structured to meet the unique needs of each situation. Design flexibility offers several negotiable components that can facilitate compromise during settlement negotiations. Key steps include selecting the VAP-eligible geographic area, choosing an appropriate program duration, identifying approved service providers (brokers and appraisers), and estimating program expenses such as appraisal costs, fees for legal counsel, and VAP administration.


The determination of fair market value is crucial to a VAP because it directly affects the amount of compensation due, if any, to the property owner. Typical methods for estimating fair market value when a participant’s property sells include traditional appraisal, a guaranteed appreciation rate applied to a baseline unimpaired market value; adjustment to the county appraised value; or statistical modeling. Each method has its own advantages and disadvantages in terms of cost, accuracy, efficiency, and consistency, and the choice should be evaluated carefully based on the specific characteristics of the program area’s real-estate market, including diversity of property types, anticipated VAP participant sales activity, availability of suitable control areas, and volume and quality of comparable sale data.


Advantages and Benefits
The perceptions and attitudes of real-estate market participants (owners, brokers, appraisers, lenders, and the media) toward a neighborhood nuisance are of far greater influence on market activity than the actual merits of the nuisance. Negative perceptions regarding a real or perceived nuisance can adversely affect market fundamentals by increasing time on market, decreasing sales volume, and reducing sale prices. In addition, the responsible party’s public-relations challenge deepens over time with mounting media attention. A well-designed VAP, along with a proactive public outreach campaign, will counteract these potential consequences and reduce market fears by preserving property values, providing liquidity to the market, and building public trust. Further, a VAP spreads the VAP sponsor’s payments over the course of the program duration and reduces the size of the initial cash outlay at the time of settlement. This is possible because, while the entire area benefits from the VAP due to the improved market fundamentals, only the property owners who sell their properties during the program term and demonstrate actual damage receive monetary compensation.


Summary
Whether the source of the property owners’ concerns is long-time emissions, a one-time spill, or simply plans for a landfill, cemetery, or airport whose construction has not yet begun, it is a natural impulse to be protective of the market value of what for most people is their single largest investment. A value assurance program is specifically designed to address those concerns by intervening in the real-estate-market cycle in a way that supports ongoing normal market activity at normal market prices. Through market-specific design, careful implementation, and open communication, a VAP can restore real-estate market fundamentals while providing benefits to both property owners and VAP sponsors. For further reading, please see Jerry M. Dent, “Value Assurance Programs: An Alternative Response to Property Value Disputes”, The Environmental Litigator, Spring 2009.


Keywords: real estate litigation, value assurance program, property value diminution, real estate damages


Christina M. McLean, Alvarez & Marsal Global Forensic and Dispute Services, LLC, Birmingham, AL


 

December 1, 2012

Sewer Connection Charges: Allowable Fees or Impermissible Taxes?


As more communities undertake costly efforts to upgrade their sewage collection and treatment systems, the Massachusetts Supreme Judicial Court recently held that, at least in some circumstances, municipalities may assess fees related to such work on developers seeking new connections to a community’s sewer system.


At issue in Denver Street LLC v. Saugus, 462 Mass. 651 (2012), was whether a $670,460 inflow and infiltration (I/I) reduction contribution assessed by the Town of Saugus on a developer of new single- and multiple-family homes was a legal fee or impermissible tax. Massachusetts’s supreme court overturned lower court decisions and concluded that the charge was a permissible fee, dealing a blow to developers, although the reasoning of the case may mean it has somewhat limited applicability.


The assessment in question was intended to help compensate Saugus for repairs to its sewer system that were required by an administrative consent order that the town entered into with the Massachusetts Department of Environmental Protection in 2005. In evaluating the legality of the I/I reduction contribution, the supreme court applied the test it developed in Emerson College v. Boston, 391 Mass. 415 (1984), for distinguishing fees from taxes. This test consists of three inquiries:


  1. Is the contribution charged in exchange for a particular government service that benefits the party paying in a manner that is not shared by other members of society (known as a sufficiently particularized benefit)?
  2. Is the contribution paid by choice? (Can the paying party choose to avoid the charge by not using the service?)
  3. Is the contribution collected to compensate the government entity providing the services for its expenses, as opposed to the purpose of general fundraising?

In analyzing whether the connection charge was a “sufficiently particularized benefit,” the supreme court criticized the lower court’s failure to focus on the impact of the administrative consent order, which created a moratorium on any new connections to the town’s sewer system until the system’s I/I problem was addressed. To avoid a complete moratorium while the town took incremental steps to address I/I issues, the administrative consent order allowed the town to set up a sewer bank, which permits new flow based on I/I reductions at varying but greater than one-to-one ratios. Saugus developed a policy for new connections in which developers could connect to the system by making a payment calculated as the amount of I/I (at up to a 10-to-1 ratio) that would be required to be removed to accommodate the new development.


As the supreme court viewed it, had the sewer bank not been created by the town, the developer would have been subject to the administrative consent order’s moratorium on new connections and unable to occupy or sell its homes. Thus, by paying the I/I charge, the developer gained immediate access to the sewer system and avoided the moratorium, a benefit particular to that developer that satisfied the first Emerson criteria. The court also determined that the I/I charge was designed to compensate the town for its expenses rather than raise revenue, another hallmark of a fee versus a tax under Emerson. As a result, the SJC concluded that the charge was an allowable fee rather than an impermissible tax.


However, the decision in Denver Street LLC does not mean that all sewer connection charges will constitute fees rather than taxes. The Supreme Judicial Court’s analysis made clear its view that the existence of the administrative consent order made this a different case than other circumstances in which sewer connection fees are imposed. However, in light of a string of enforcement actions against municipalities arising from their storm water and sewage systems and citizen suits compelling such upgrades, more municipalities may decide to invest in sewer upgrades under consent orders or use sewer banks and attempt to pass along some of those costs. These towns and cities may find means for recouping some of these costs from developers under the SJC’s thinking in this case.


Keywords: real estate litigation, Denver Street LLC v. Saugus, developers, municipalities, revenue raising


Marc J. Goldstein and Aladdine D. Joroff, Beveridge & Diamond, P.C., Wellesley, MA


 

December 1, 2012

Old Theories Can Succeed in Challenges to Condo Termination Plans


Lending institutions finding themselves the majority owners of condominiums in Florida as a result of the economic downturn are increasingly using the revised termination plan statutes in Florida in a strategy aimed at gaining full ownership and selling the entire property. However, some owners have been successful in challenging the terminations on the very basic theory of freedom to contract.


In 2007, the Florida legislature substantially rewrote the condominium termination provisions of the Florida Condominium Act, lowering the threshold required for a termination plan. The statute provides for retroactive application. Under the revised act, the termination of a condominium requires only 80 percent approval and less than 10 percent opposition (by vote or written objection). It is important to note that approval by a lien holder is not required, although lien holders do have the right to contest if not paid in full. Of additional note, a termination pursuant to the revised act is not classified as a material amendment under the act. Therefore, any condominium document recognizing that unanimous approval or a supermajority is required for an amendment is extinguished.


Although the revisions are not new, the revised act is being increasingly applied. Lenders who are continuing to face an overwhelming number of foreclosures and a stable of bad debt are often majority owners in condominium projects and are moving forward to exercise their rights under the act to seize control of the project and sell it in its entirety.


Individual unit owners, however, have mounted successful challenges to these attempts under the simple theory of freedom to contract. See, e.g., Amended Complaint, Paradise Family, LLC v. Marker 1 Dockominium Ass’n, Inc., No. 12-2071-CI (6th Jud. Cir. Ct. Pinellas Cnty. Apr. 20, 2012). The declarations or articles of the condominium association often contain a specific section for termination and generally require approval in writing of all unit owners and all record owners of the mortgages to terminate the condominium. It is has been argued successfully in Florida that the new relaxed termination requirements under the act are unconstitutional and impair the contracting rights of the condominium owners. The challenge provides an age-old lesson that the document speaks for itself and parties should have the ability to negotiate their own terms. It is important to perform a careful review of all documents prior to agreeing to a termination.


The difficult economic times are causing new theories and applications of termination plans. Although this update is particular to the Florida act, owners in other states may be facing similar situations. Creativity and exploration of traditional theories sometimes afford a good defense to these new challenges.


Keywords: real estate litigation, contracting rights, freedom to contract, lender, owner


J. Travis Godwin, Weekley Schulte Valdes, LLC, Tampa, FL


 

November 15, 2012

Equitable Subrogation is Alive and Well in California


Equitable subrogation is alive and well in California, to the relief of lenders in title-insurance claims, according to the California Court of Appeals in JPMorgan Chase Bank, N.A., v. Banc of America Practice Solutions, Inc., 209 Cal.App.4th 855 (2012).


Subrogation is the substitution of one person in the place of another with reference to a lawsuit, claim, demand, or right, where the substituted party succeeds to the rights of the other in relation to the debt or claim and its rights, remedies, or securities. Home Owners’ Loan Corp. v. Baker, 299 Mass. 158, 162 (1937). Equitable subrogation arises where one lender pays off a senior lien thinking that it will substitute its own mortgage or deed of trust in the place of that senior lien and another lien “sneaks in” before the senior lender records (and that lender does not know about the intervening lender). The lender that paid off the senior lien will be able to assert priority over the intervening lien by a claim of equitable subrogation. A finding of a lien to be in superior position to one that is arguably senior in time, is an equitable remedy that gives effect to the intentions of the parties. Katsivalis v. Serrano Reconveyance Co. (1977) 70 Cal.App.3d 200, 211. The concept has existed since at least 1928, when the California Supreme Court held that where a lender advances money to pay off an existing encumbrance on real property, with the understanding that the money lent will be secured by a first lien on the property, that lender will hold a priority lien over any intervening lienors. Simon Newman Co. v. Fink,206 Cal. 143 146 (1928).


In JPMorgan Chase, JPMorgan Chase Bank had paid off two prior liens with the intent of substituting its own lien in the place of those two senior liens. Banc of America Practice Solutions held a lien with lower priority than those two senior liens. The Fourth District Court of Appeal upheld the right of equitable subrogation by affirming the lower court’s ruling that Chase held an equitable lien of superior position to the lien held by Banc of America Practice Solutions. The court found that Chase was entitled to a superior lien over Banc of America Practice Solutions’ lien, holding that Banc was not deprived of its expected lien position. Banc of America Practice Solutions was left in the same position that its lien had previously occupied: third priority. Allowing Chase to hold a lien with first priority ensured that both lenders were secured in the priority position for which they had bargained.


 

November 15, 2012

Finders Aren't Always Keepers in Arizona


Who owns the money found in the walls of a home—the estate of the home's former owner, the couple who owned the home at the time of the discovery, or the construction boss whose crew found the money?


The Arizona Court of Appeals ruled in May 2012 that the estate of the former owner of a home in Paradise Valley, Arizona, was entitled to money that the former owner had hidden in the walls of the home in Grande v. Jennings, Docket No. 1 CA-CV 11-0148 (May 31, 2012). Robert Spann, the former owner of the house, was in the habit of hiding valuables in many of the homes in which he had lived. In this particular house, his daughter Karen Grande (the personal representative of his estate) found stocks, bonds, and hundreds of military-style green ammunition cans containing gold or cash hidden in unusual places before the house was sold.


After Robert Spann died, the house was sold “as is” to Sarina Jennings and Clinton McCallum, who quickly began to remodel the home. During the demolition, a construction worker found four cash-filled ammo cans in the walls of the home. The worker turned the cash over to his boss, Randy Bueghly, who tried to hide the cash from Jennings and McCallum. In a noble move that probably got him fired, the worker told Jennings and McCallum about the money, who proceeded to call the police. The police found and seized the cash in Bueghly's floor safe—to the tune of $500,000.


Jennings and McCallum sued Bueghly, who sued them in return, to determine the rightful owner of the money. In the meantime, Karen Grande filed a petition in probate court on behalf of the estate to recover the money. After consolidation, the lower court ruled that Grande was the rightful owner of the cash.


Jennings and McCallum appealed, which forced the Arizona Court of Appeals to address the law related to lost and found property. The case boiled down to whether the hidden cash should be classified as “mislaid” or “abandoned.” Property is mislaid if the owner intentionally places it in a certain place and later forgets about it. Abandoned property has been intentionally thrown away or voluntarily forsaken by its owner. A finder of abandoned property has a right to keep the property against the entire world—except for the rightful owner. A finder of mislaid property must turn the property over to the premises’ owner, who has a duty to safeguard the property for the true owner.


In the end, the court of appeals ruled that Grande was the rightful owner because the property had been mislaid—not abandoned—by her father. In reaching its decision, the court relied on the fact that Grande immediately filed a petition to recover the money once she learned about it and the fact that no one intentionally throws away or abandons large sums of cash. Jennings and McCallum tried to argue that by selling the house “as is,” the former owners had given up any right to the hidden cash. The court did not buy it. Unfortunately for Jennings and McCallum, it was so much for "finders keepers”—the money went to Grande.


Darin Cody Huffaker, Quarles & Brady LLP, Phoenix, AZ


 

October 18, 2012

Circuits Split over TILA's Statute of Repose on Rescission


Several federal courts of appeal have recently considered—or will soon consider—how to apply the Truth in Lending Act’s statute of repose on rescission. TILA grants some borrowers a three-year right to rescind if the lender fails make certain disclosures. Trouble arises when a consumer purportedly rescinds by sending his or her lender a notice. Is this “notice” sufficient to make the claim for rescission timely?


The question has generated a circuit split. Two decisions, McOmie-Gray v. Bank of America Home Loans, 667 F.3d 1325 (9th Cir. 2012), and Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012), recently held that such notice is not sufficient; the borrower actually needs to file suit within three years. But in Gilbert v. Residential Funding LLC, 678 F.3d 271 (4th Cir. 2012), the Fourth Circuit determined that notice from the borrower within the three-year period was enough to timely rescind.


Other courts are now considering the issue. Oral argument was just held in one such case in the Third Circuit, and oral argument is also scheduled in the Eighth Circuit. Perhaps indicating that some judges in the Fourth Circuit are having second thoughts, that court is also set to hear argument in another rescission case. Meanwhile, the question has drawn attention from the Consumer Financial Protection Bureau and industry trade groups, who have filed amicus briefs (and presented argument) in some of these cases.


If the split continues to deepen, it seems an answer will need to come directly from the Supreme Court.


Kirk D. Jensen, Buckley Sandler LLP, Washington, D.C. Mr. Jensen represented trade associations that filed amicus briefs in cases on this subject in several circuit courts of appeals.


 

October 18, 2012

Title Defects Must Be Raised Before Foreclosure Sale in MD


Borrowers alleging defects in a foreclosing lender’s chain of title must raise the issue prior to the conduct of the foreclosure sale under a recent decision by Maryland’s highest court.

The Maryland Court of Appeals ruled in Thomas v. Nadel, 427 Md. 441; 48 A.3d 276 (2012) that borrowers were barred from raising alleged irregularities in the lender’s ownership of the mortgage debt by way of post-sale exceptions.


Rather, the court held, allegations concerning the lender’s ownership of the promissory note must be raised prior to the foreclosure sale. Post-sale exceptions to sale are generally limited to irregularities in the conduct of the sale itself and are not the proper vehicle to challenge the validity of the lender’s title under Maryland law, the court ruled.


In Thomas, the borrowers filed post-sale exceptions to a foreclosure sale based on an alleged gap in the chain of ownership of the promissory note secured by the borrowers’ deed of trust. The borrowers claimed that the note was transferred to an entity that did not exist at the time of the transfer and therefore a subsequent transfer to the foreclosing lender was ineffective.


The court rejected the argument, noting that foreclosing trustees had possession of the original promissory note indorsed in blank, which was all that was required under Maryland law to establish the lender’s right to foreclose. Further, the court noted that there was no dispute as to the authenticity of the note.


The court left open the possibility that a mortgage that was the product of fraud could be challenged by way of post-sale exceptions but ruled that purported gaps in the chain of title of the note did not constitute fraud.


The decision is good news for mortgage lenders and servicers in that it limits the procedural avenues for borrowers to challenge a lender’s ownership of a mortgage.


Robert A. Scott, Ballard Spahr LLP, Baltimore, MD


 

September 18, 2012

Fifth Circuit Reverses Class Certification Challenging Title Insurer


A class certified by the Northern District of Texas was deemed not to satisfy the commonality requirements of Federal Rule of Civil Procedure 23(a) by the Fifth Circuit, where the class challenged a title insurer’s practice of not granting discounts to mortgagees for premiums previously paid during a refinancing under the federal Real Estate Settlement Procedures Act (RESPA).


The Texas Insurance Code requires title insurance companies to discount the premium charged for mortgagee policies issued on refinances where the original mortgage was insured by a title insurance policy—provided that the new policy is issued within seven years of the policy on the initial mortgage. Gary and Mirvat Ahmad, as named plaintiffs in a putative class action, sued Old Republic National Title Insurance Co. under RESPA and state common law alleging that Old Republic “commonly fails to grant the discount to mortgagees who are entitled to it.”


Because there is often no definitive way for a title insurer to determine, based on the documents available to it, whether a prior mortgage was covered by a title policy—even one of its own policies—the Ahmads argued that insurers like Old Republic should assume that the refinanced mortgage was eligible for a credit (1) if it has a guarantee file number, (2) if the recorded mortgage was returned to a title company, or (3) if the mortgage represents a first lien to an institutional lender. The federal district court certified a class of individuals whose files contained at least one of these three indicators suggested by the plaintiffs, and Old Republic filed an interlocutory appeal to the Fifth Circuit Court of Appeals.


In Ahmad v. Old Republic National Title Ins. Co., No. 11-10695 (5th Cir. Aug. 13, 2012), the Fifth Circuit overturned the class certification, relying on Benavides v. Chicago Title Ins. Co., 636 F.3d 699 (5th Cir. 2011), and holding that the issues present in this dispute did not satisfy the commonality requirement of Rule 23(a) of the Federal Rules of Civil Procedure. Because a court or jury would have to determine whether each individual qualified for the discount based on the information available in his or her file—some would qualify and some would not. This level of individualized analysis has proven fatal to a number of purported class actions against title-insurance companies in recent years. See “Denial of Class Certification for RESPA Kickback Claims Upheld” in the June 13, 2012, News & Developments.


Keywords: real estate litigation, Texas, Title Insurance, RESPA, Class Action


Marcus R. Chatterton, Balch & Bingham LLP, Birmingham, AL


 

August 16, 2012

Mass. SJC Formally Recognizes Absolute Judicial Deliberative Privilege


The Massachusetts Supreme Judicial Court (SJC) recently ruled that a judge cannot be compelled to testify as a witness nor to provide documents regarding his or her deliberative process in particular cases.


In In re The Enforcement of a Subpoena, SJC-11117 (Aug. 9, 2012), the SJC formally recognized an absolute privilege regarding a judge’s mental impressions and thought processes, including those recorded in nonpublic materials, as well as confidential communications among judges and between judges and court staff made in the course of and related to their deliberative processes in particular cases.


Read the full case note.


Benjamin H. Carlis, J.D., Boston, MA


 

August 16, 2012

Mass. Automatic Extension of Development Permits Increased


On August 7, 2012, Governor Deval Patrick of Massachusetts signed into law a sweeping amendment to the Permit Extension Act enacted in 2010. The law affords owners and developers a broader class of automatic permit extensions than ever before in two distinct ways. First, the new law doubles the length of the automatic extension of most local, regional, and state land-use permits from two to four years. This extension is completely self-executing and requires no action by either the permit-granting authority or the developer. Second, the new law also doubles the time period to which the automatic extension applies: The four-year extension applies to permits and approvals obtained anytime during the four-year period of August 15, 2008, through August 15, 2012, two years longer than the original law. A complete discussion of Permit Extension Acts throughout the country was part of the most recent ABA Real Estate Litigation Newsletter.


The act covers permits and approvals issued under the Massachusetts Environmental Policy Act, Zoning Act, Subdivision Control Act, Wetlands Protection Act, and many other pieces of land-use legislation. Comprehensive permits issued under G.L. c. 40B for affordable housing projects remain a notable exception to the act.


Found at sections 74 and 75 of H. 4352, An Act Relative to Infrastructure Investment, Enhanced Competitiveness and Economic Growth in the Commonwealth, this legislation will provide much needed relief to owners and developers who have been unable to proceed with residential, commercial, or industrial projects due to the continued slow pace of the economic recovery and a lack of available financing.


Keywords: litigation, real estate, permitting, extensions, Massachusetts


Marc J. Goldstein, Beveridge & Diamond, P.C., Wellesley, MA


 

July 9, 2012

APA Challenge to Acquisition of Lands for Casino May Proceed


Neighboring residents to land acquired by the federal government for use by Native Americans have standing to challenge the government’s acquisition of such land under the Administrative Procedure Act (APA) and their claims are not barred by sovereign immunity, according to the U.S. Supreme Court’s decision in Match-E-Nash-She-Wish Band of Pottawatomi Indians v. Patchak, No. 11-246, (June 18, 2012).


The Match-E-Nash was formally recognized as a tribe in 1999 and asked the secretary of the interior to take a tract of land into a trust for the tribe. The secretary, acting under the Indian Reorganization Act (IRA) of 1934, took title in trust for the tribe in 2009. Soon after, David Patchak, a neighboring resident, filed suit challenging the acquisition, alleging various harms from the tribe’s proposed use of the land: building a casino. Patchak sued under the APA, alleging that section 465 of the ITA did not permit the secretary to acquire into trust property that the tribe intended to use for “gaming purposes” because the tribe was not a federally recognized tribe when the IRA was enacted in 1934. After the tribe intervened, the district court ruled that Patchak lacked prudential standing to challenge the secretary’s actions. The D.C. Circuit Court of Appeals reversed the district court’s decision and rejected the alternative argument that sovereign immunity prevented the suit from proceeding.


The Court in an 8–1 decision written by Justice Kagan affirmed the D.C. Circuit’s decision, rejecting the challenges to Patchak’s suit on the bases that he lacked prudential standing and that the government was not subject to suit because of sovereign immunity. The Court noted that the APA waives sovereign immunity, unless another statute that permits suit expressly prohibits the relief sought in an action under the APA. The tribe cited the “Indian Lands” exception to the Quiet Title Act (QTA), which permits quiet-title actions against the federal government but prohibits such actions involving “trust or restricted Indian Lands.” The Court held that the “Indian Lands” exception did not revive sovereign immunity because the statute does not address Patchak’s claims; it only addresses quiet-title actions.


On standing, the Court held that Patchak’s claims were within the “zone of interest” created by the IRA, and as such, he had standing to challenge the acquisition. The Court remanded the case to the district court to allow Patchak to try his case.


Darin Cody Huffaker, Quarles & Brady LLP, Phoenix, AZ


 

July 9, 2012

Actual Notice of Foreclosure is Sufficient in Colorado


The Colorado Supreme Court recently sided with a foreclosing bank in Amos v. Aspen Alps 123, LLC, 2012 CO 46, No. 10SC187 (Colo. June 18, 2012) when it refused to disturb a completed foreclosure sale where the bank failed to strictly comply with state notice requirements but the debtor received actual notice.


In Amos, a bank sought to foreclose on a $1.6 million Aspen condominium unit pursuant to a deed of trust. Colorado’s statute and rules authorizing the sale of real property by a public trustee require foreclosing persons to file a motion for a court order authorizing the sale and that a copy of such motion be served to the debtor’s last known address. In this case, the bank attempted to comply by mailing a copy to the debtor’s address listed on the deed of trust as well as the address of the now-deceased debtor’s estate. However, a typographical error transposed the street-address numbers so that the mail to the address listed in the deed of trust was undeliverable.


The debtor acknowledged receiving actual notice but urged the court to void the completed foreclosure sale because the bank failed to send notice to the correct address. The debtor also argued that the bank failed to notify the estate of her co-debtor. The court noted that jurisdictions across the country are divided as to whether the standard for foreclosure notification is actual or strict compliance. The court stated that the notice requirements were devised to provide interested persons actual notice and a meaningful opportunity to be heard. The undisputed facts showed that the debtor received timely actual notice and that she co-represented the estate of her co-debtor. The court held that when a procedural irregularity does not injure or harm the complaining party, a foreclosure sale will not be set aside. The court reasoned that it would “not elevate form over substance and void a completed foreclosure sale at this juncture when the [e]state had constructive notice, made no timely objection to the [sale], and no injury resulted.”


Richard F. Rodriguez, Duncan, Ostrander & Dingess, P.C., Denver, CO. Mr. Rodriguez represented the foreclosing bank in this case.


 

June 28, 2012

Broker Not Personally Liable For Fraudulent Activities of Agent


A real-estate broker is not personally liable for the fraudulent activities of his or her agent even where the broker has not adequately supervised the agent under California Business & Professions Code § 10159.2, according to a decision of the Second Appellate District Court of California in Sandler v. Sanchez, 12 C.D.O.S. 6761; 2012 Cal. App. LEXIS 713 (June 18, 2012).


California Business & Professions Code § 10159.2 requires that a real-estate broker supervise the agents operating under his or her license. The Sandler case raised the issue of whether the broker’s failure to supervise an employee agent alone can subject the broker to direct personal liability to third parties for harm caused by the broker’s failure to supervise. In this case, the plaintiffs asserted a claim for breach of fiduciary duty against the broker when his agent failed to disclose important financial details of the conversion of an apartment building to condominiums based on the broker’s failure to adequately supervise the agent, even though the broker played no role in the transaction.


Read the full case note.


Kenneth R. Van Vleck, GCA Law Partners LLP, Mountain View, CA


 

June 14, 2012

Robo-signing Claims Barred if Not Raised in Original Foreclosure


Claims by borrowers related to alleged "robo-signing" in mortgage foreclosures must be raised in the original foreclosure action and not in a subsequent lawsuit for damages, the U.S. District Court for the District of Maryland ruled in a recent decision.


In Smalley v. Shapiro & Burson, 2012 U.S. Dist. LEXIS 9131 (D. Md. Jan. 26, 2012), the court held that borrower claims for alleged common-law fraud, violations of the Fair Debt Collection Practices Act (FDCPA), and other statutes were barred by res judicata because the borrowers had failed to raise the claims in the underlying foreclosure case.


The class-action plaintiffs, two Maryland homeowners, sued over alleged improprieties in the foreclosure process, including the alleged use of affidavits that were "robo-signed" by lawyers and paralegals that allegedly had failed to verify that the foreclosing lender was entitled to foreclose. The plaintiffs also claimed that non-lawyers signed attorneys’ names to certain documents used in the foreclosures.


After the state-court foreclosure cases were litigated to final judgments, the plaintiffs filed a separate class action lawsuit in federal court, seeking damages under the FDCPA, the Maryland Consumer Protection Act, and other statutes. The plaintiffs argued that attorney fees assessed against them in the state-court foreclosure cases were improper because of the alleged robo-signing activities.


The court dismissed the case in its entirety, ruling that the plaintiffs could have raised their claims in the state-court foreclosure proceedings. Because those proceedings were litigated to final judgments, the court ruled that res judicata barred the plaintiffs from bringing a new lawsuit for damages allegedly incurred in the foreclosure case.


The court rejected the plaintiffs' argument that res judicata did not apply because the plaintiffs did not become aware of the alleged "robo-signing" until after the foreclosure cases were fully litigated. The court ruled "the fact that plaintiffs may not have been aware of the existence of their claims during the litigation of the previous action does not render the doctrine of claims preclusion from being applicable."


The case is now on appeal in the U.S. Court of Appeals for the Fourth Circuit.


Robert A. Scott, Ballard Spahr LLP, Baltimore, MD (Mr. Scott represented the defendants in this case.)


 

June 13, 2012

Title Insurance Companies Owe No Independent Duty of Due Care


Negligence claims cannot be asserted against title-insurance companies, where the terms of the title-insurance contract dictate the scope of the obligations, according to the Maryland Court of Special Appeals in Columbia Town Center Title Co. v. 100 Investment Ltd. Partnership, 203 Md.App. 61, 36 A.3d 985 (February 2, 2012). Similarly, the court found that a title insurer cannot be liable under a theory of vicarious liability as the terms of the policy control.


In Columbia Town Center Title Co., the Maryland intermediate appellate court reversed a circuit-court judgment, holding that two title-insurance companies and a title insurer, Chicago Title Insurance Co., were not liable to the insured under negligence and vicarious-liability theories. The title companies had overlooked a record conveyance of the subject property to a third party prior to the sale to the plaintiff partnership of a larger tract that included the subject parcel. The partnership later sold the property, remaining unaware of the prior conveyance, until the true owner conveyed the property. Forced to buy the property back to clear the chain of title for its purchaser, the partnership, after years of litigation over the terms of the policies, asserted negligence theories against the title companies and the title insurer.


The court of special appeals held that a simple negligence claim will not lie against a title company where the terms of a contract control the scope of the obligations. In so holding, the court distinguished title companies from areas of professional skill and judgment such as attorneys, physicians, architects, and accountants. The court further held that the title insurer, Chicago Title, could not be liable under a theory of vicarious liability, and that the terms of the policy must control. A dissenting opinion by Judge Meredith agreed with the majority on the vicarious-liability bar, but would have kept the negligence theory intact.


Keywords: Title insurance, title companies, negligence, vicarious liability


Jeffrey S. Tibbals, Nexsen Pruet LLC, Charleston, SC


 

June 13, 2012

Denial of Class Certification for RESPA Kickback Claims Upheld


The Seventh Circuit Court of Appeals affirmed that a putative class asserting title-insurance kickback claims under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601 et seq.,lacked sufficient common issues because the claims would require individual analysis of each alleged kickback to compare the services performed with the payment made. In affirming the district court’s decision, the appeals court in Howland v. First American Title Ins. Co., 672 F.3d 525 (7th Cir. Mar. 6, 2012), found that such claims were therefore “inherently unsuitable for class action treatment.”


The Seventh Circuit cited decisions from the Fifth, Eighth, Ninth, and Eleventh Circuit Courts of Appeal to support its position that RESPA section 8 kickback claims nearly always require an individualized analysis. The court distinguished an Eleventh Circuit opinion upholding class certification on a RESPA section 8 claim where the plaintiff had alleged the wrongful assessment of a “fee for which no service was performed.” The opinion noted that the plaintiff in Howland alleged only that fees were charged where the title agent made no changes or additions to the summary sheet transmitted by First American. The Seventh Circuit agreed with the district court that such an allegation did not prove that a title agent had performed no work, because a title attorney may have found no reason to modify the summary sheets after independent examination. Thus, the nature of the work performed by each title agent required an individualized inquiry, rendering class certification inappropriate.


Jeffrey S. Tibbals, Nexsen Pruet LLC, Charleston, SC


 

May 21, 2012

California Court Reiterates Support for MERS System


Plaintiffs seeking to delay or invalidate foreclosures have been regularly challenging the right of the Mortgage Electronic Registration System, Inc. (MERS) to foreclose. Throughout the country, notes and deeds of trust often involve MERS as an assignee of certain property rights. Although there are a few outliers, for the most part, using MERS has been accepted and approved by courts as a means of securitizing real property debt. Courts have concluded that MERS is an appropriate intermediary that allows for the packaging and sale of mortgage-backed securities without losing the ability to foreclose. MERS’s validity was most recently reaffirmed by California’s Fourth Appellate District Court in Herrera v. Federal National Mortgage Association, which provides a good review of exactly what MERS is and does, its usefulness in real-estate funding and securitization, and the treatment these kinds of lawsuits have been receiving throughout the country.


Read the full case note.


Kenneth R. Van Vleck, GCA Law Partners LLP, Mountain View, CA


 

May 15, 2012

Top Mass. Court Rejects Another Challenge to Cape Wind Project


The Massachusetts Supreme Judicial Court (SJC) dismissed yet another challenge to the Cape Wind project that would construct an offshore wind farm in Nantucket Sound in Melone v. Department of Public Utilities, SJC-10921 and 10922 (May 9, 2011). Having cleared the most significant legal hurdles in Alliance to Protect Nantucket Sound, Inc. v. Energy Facilities Siting Bd., 457 Mass. 663 (2010), individuals and groups made last-ditch efforts to derail the project in proceedings before the Massachusetts Department of Public Utilities (DPU) regarding power-purchase agreements between Massachusetts Electric Co. and Nantucket Electric Co. (owned and operated by National Grid) and Cape Wind Associates, LLC.


After National Grid filed a petition with the DPU to approve the power-purchase agreements pursuant to Mass. St. 2008, c, 169, § 83, a number of individuals, corporations, and groups sought to intervene in that proceeding. Thomas Melone, an individual who owns beachfront property on Martha’s Vineyard, was one of those seeking to intervene, claiming that the proposed wind farm would alter the view from this property, diminish property values, and deposit oil and other contaminants from the turbines onto his property. He also claimed standing as an abutter and a ratepayer. The DPU hearing officer denied the requests of all individuals, including Melone, but allowed certain groups and corporations to intervene. Melone ultimately presented evidence as part of one of the intervenor groups. Melone took his claim of standing to the top Massachusetts court.


The SJC ruled that the DPU proceeding concerned the cost effectiveness of the power-purchase agreements and that the environmental and other concerns that Melone raised were beyond the scope of the proceeding. Noting that Melone was, in fact, not a National Grid ratepayer, because Grid does not supply electricity to Martha’s Vineyard, the SJC stated that such status would not “give him any particularized interest entitling him to intervene in this matter, especially where the Attorney General has intervened to represent ratepayers’ interests.”


Keywords: litigation, real estate litigation, alternative energy, standing, wind, intervention


Marc J. Goldstein, Beveridge & Diamond, P.C., Wellesley, Mass.


 

May 15, 2012

Check Mass. Land Court Rules on Your iPad or Kindle


Massachusetts real-estate litigators anxious to check how much time they have to file an opposition or how to serve a complaint can consult their Kindle or iPad now that various Massachusetts rules of court are available for free for those and other devices. The Massachusetts Trial Court Law Libraries website has made the Massachusetts Rules of Civil Procedure and Appellate Procedure and the Land Court and Superior Court Rules available as e-books in EPUB or Kindle format. The webpage has step-by-step instructions for installation on Apple, Android, and Nook devices.


Keywords: litigation, real estate litigation, rules of court, iPad, Kindle, mobile access, technology for lawyers


Marc J. Goldstein, Beveridge & Diamond, P.C., Wellesley, Mass.


 

May 15, 2012

Class Certification Denied in Massachusetts Foreclosures Action


The federal district court for Massachusetts denied class certification in a putative class action brought by Massachusetts homeowners who allege that their mortgages were invalidly foreclosed. In Manson v. GMAC Mortgage, LLC, 2012 U.S. Dist. LEXIS 59492 (D. Mass. Apr. 30, 2012), the plaintiffs filed suit against various financial institutions and law firms alleging that the foreclosure proceedings on their loans were invalid. Specifically, the plaintiffs claimed that the defendants violated Massachusetts statutory requirements by foreclosing, or aiding in foreclosure, without first obtaining valid assignments of the underlying mortgages. The plaintiffs pursued certification of various classes with respect to these financial institutions and law firms and sought declaratory relief in the form of notification to class members who defaulted on their mortgages that they may have an interest in the property. The plaintiffs also requested that the foreclosure costs and fees assessed against class members be deducted from any remaining mortgage balance and that class members who lost their homes due to invalid foreclosure be reimbursed for any consequential damages. The court denied certification of any class, finding that the plaintiffs did not satisfy the criteria of commonality because the determination of whether the defendants violated G.L. c. 244, § 14 (the Massachusetts foreclosure statute) would require “highly individualized and case-specific inquiries” pursuant to U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 646 (2011). The court further found that the plaintiffs did not satisfy the criteria of typicality, predominance, and superiority. Finally, with respect to the law-firm defendants, the court concluded that the law firms did not owe a duty to mortgagors and were not engaged in trade or commerce under G.L. c. 93A (the Massachusetts unfair-trade-practices statute).


Keywords: litigation, real estate litigation, foreclosure, class certification, mortgages


Danielle Andrews Long, Robinson & Cole LLP, Boston, MA


 

May 15, 2012

Broker Expects Commission on Offer, Not Sale


In RealPro v. Smith Residual Company, a real-estate broker listed real property for sale on behalf of a seller at an asking price of $17 million.


The broker procured a full-price, all-cash, offer from a buyer, who was "ready, willing, and able" to purchase at that price. But the seller refused, asking for a higher price ($19.5 million).


Read the full case note.


Kenneth R. Van Vleck, GCA Law Partners LLP, Mountain View, CA


 

May 15, 2012

Tenant Prevails Despite Defaulting on Rent


In Kumar v. Yu, a landlord sued a commercial tenant for unlawful detainer and breach of lease. At trial, it was determined that the landlord had re-rented the property to others after the original tenant vacated, at a rate that exceeded the lease rate for the original tenant. The tenant asserted he was entitled to show all of that excess rent income as mitigation, and the trial court agreed.


Read the full case note.


Kenneth R. Van Vleck, GCA Law Partners LLP, Mountain View, CA


 

May 3, 2012

Program Featuring Chief Judge of U.S. Court of Federal Claims


On April 19, 2012, at the ABA Litigation Section Annual CLE Conference, the Real Estate Committee presented a luncheon program featuring Chief Judge Emily Hewitt of the U.S. Court of Federal Claims. Judge Hewitt gave an overview of the court, including the history from the late 1800s and its landmark role in decisions that opened the court to allow women to practice not only before that court, but in all federal courts. Judge Hewitt offered practice tips for litigators, described the types of cases that account for the largest portions of the court’s docket, compared and contrasted litigating cases in the U.S. Court of Federal Claims with district court practice, and offered insights into new trends and challenges facing the court. Judge Hewitt also commented on current cases in a variety of substantive areas included within the scope of the court’s jurisdiction. The program was co-sponsored by the Condemnation, Zoning and Land Use Committee, the Construction Litigation Committee, the Civil Rights Committee, the Commercial and Business Litigation Committee, the Mass Torts Committee, the Intellectual Property Committee, the Trial Practice Committee, and the Young Advocates Committee.  The presentation materials can be accessed here.


Dipali Parikh, Hahn Loeser & Parks LLP, Cleveland, OH


 

March 2, 2012

Wash. Supreme Court Clarifies Mechanic's Lien Requirements


In Williams v. Athletic Field, Inc., 261 P.3d 109 (Wash. 2011), the Washington Supreme Court addressed the proper form of a mechanic’s lien under RCW 60.04.091.


Read the full case note.


Nathan Luce, Foster Pepper PLLC, Seattle, WA


 

March 2, 2012

Wash. Court: Association Has Authority to Deny Subdivision Requests


In Jensen v. Lake Jane Estates, 267 P.3d 435 (Wash. Ct. App., 2011), the court of appeals held that a homeowners’ association had authority to assume powers originally granted to a now-defunct developer under a set of restrictive covenants.


Read the full case note.


Nathan Luce, Foster Pepper PLLC, Seattle, WA


 

October 26, 2011

Massachusetts Supreme Judicial Court Issues First Post-Ibanez Decision Regarding Title


On October 18, 2011, the Massachusetts Supreme Judicial Court issued its decision in Bevilacqua v. Rodriguez, 2011 Mass. LEXIS 918 (Oct. 18, 2011). Francis J. Bevilacquapurchased a home from U.S. Bank after U.S. Bank foreclosed a mortgage granted by Pablo Rodriguez on the property. However, MERS, as nominee for the original lender, did not assign the mortgage to U.S. Bank until after the foreclosure sale had been conducted. Seeking to clear any cloud on title that might exist as a result of the SJC’s recent decision in U.S. Bank Nat’l Assn. v. Ibanez, 458 Mass. 637 (2011), Bevilacqua brought an action in the Land Court pursuant to G. L. c. 240, §§ 1–5, the so-called “try title” statute.


Read the full case note.


 

October 26, 2011

California Court Rules on Priority of Parties' Liens Against the Same Real Property


First Bank filed a declaratory relief action against East West Bank seeking a determination about the priority of the parties' liens against the same real property. The trial court held that the deeds of trust had equal priority because they were recorded on the same date, and the court of appeal affirmed. The parties' liens were both deposited in the Recorder's Office drop box before business hours.


Read the full case note.


 

August 15, 2011

Arizona Court of Appeals Extends Doctrine of Equitable Subrogation to Cash Purchasers


In Sourcecorp, Inc. v. Dean D. Norcutt, 1 CA-CV 10-0212 (Ariz. Ct. App., 8/2/2011), the Arizona Court of Appeals answered a question of first impression in Arizona—whether a cash purchaser of property who pays off an existing lien is equitably subrogated to that position over a junior lien holder. Arizona had previously applied the doctrine of equitable subrogation to mortgagee and lien holders, but not to a purchaser who pays off an encumbrance as part of the purchase of real property. Recognizing a split in authorities, the Arizona Court of Appeals held that the Norcutts, the buyers of the property who paid cash ($667,500), the majority of which ($621,307.36) was used to pay off a first position lien against the property held by Zions Bank, were equitably subrogated to the lien position previously held by Zions Bank.


Read the full case note.


 

July 14, 2011

Indiana Court of Appeals Recognizes Fraud Claim Related to Sale of Home


For more than 125 years, Indiana courts have followed the common law rule that “a seller of property [may] lie with impunity as long as the prospective buyer had a reasonable opportunity to inspect the property.” See Dickerson v. Strand, 904 N.E.2d 711, 715–716 (Ind. Ct. App. 2009) (citing Cagney v. Cuson, 77 Ind. 494 (1881)). A recent decision from the Indiana Court of Appeals, Wise v. Hays, 943 N.E.2d 835 (Ind. Ct. App. 2011), highlights an important change by recognizing a statutory fraud claim pursuant to the Residential Real Estate Sales Disclosure Act, Indiana Code Section 32-21-5-1(the Act). A seller of residential property may be liable for any knowing misrepresentation on a sales disclosure form required under the Act.


The plaintiffs in the Wise case, Deborah and Travis Wise, purchased a residence and surrounding real estate from David and Amanda Hays in 2007. After viewing the property, Ms. Wise requested additional information from the Hayses concerning the 16-acre property, including the amount of the property designated as wetlands. The Hayses responded verbally to Ms. Wise’s inquiries and also completed a sales disclosure form required under the Act. The Hayses failed to identify any defects on the property. The licensed home inspector hired by the Wises identified no defects before purchase.


After purchase, the Wises obtained correspondence previously sent to Mr. Hays from the Army Corps of Engineers (ACE), citing certain Clean Water Act violations. The Wises also hired an engineer who identified several structural problems and code violations. The Wises sued the Hayses for fraudulent misrepresentation based on the Hayses’ failure to disclose known defects in the sales disclosure form. The trial court granted the Hayses’ motion to dismiss, holding that the Wises did not reasonably rely on the Hayses’ representations and that the Wises had reasonable opportunity to inspect. The Wises appealed.


The Wise court began its analysis by citing the well-established elements for fraudulent misrepresentation under Indiana common law: (1) the seller made false statements of past or existing material facts; (2) the seller knew the statements to be false or made the statements with reckless disregard for their truth or falsity; (3) the seller intended to induce the buyer to rely upon the statements; (4) the buyer justifiably relied on the statements; and (5) the buyer suffered injury. As a general rule, a buyer has no right to rely on representations from a seller as to the quality of property when the buyer has reasonable opportunity to inspect. However, the Wise court also noted that the Act requires a seller of residential real estate to submit an executed sales disclosure form to the prospective buyer before an offer is accepted. The Act requires a seller to disclose, among other things, the condition of the foundation, mechanical system, roof, structure, and water and sewer system. The question before the Wise court was whether knowing misrepresentations in a sales disclosure form could give rise to a statutory fraud claim, even if such a claim otherwise did not exist at common law.


Read the full case note.


 

July 14, 2011

Palm Beach Circuit Court Suspends Foreclosure Trials Effective July 1, 2011


On May 17, 2011, Palm Beach Circuit Court Judge John J. Hoy canceled all foreclosure trials in Palm Beach Court. The cited reason was a “lack of funding by the Florida Legislature resulting in the unavailability of judges to preside over foreclosure trials.”


Florida’s courts are short $6 million after state lawmakers declined not to extend a one-time stipend aimed at reducing a foreclosure backlog. Court budgets in Florida operate on a fiscal year that runs July 1 through June 30, and last year, Palm Beach County received $640,000 of the statewide stipend to add senior judges, case managers, and assistants to do foreclosure work. In June 2010, there was a 462,339 case backlog which was reduced by 139,615 cases, leaving more than 322,700 cases clogging the system.


At this point, it is uncertain as to how this will play out, but the ramifications will be felt in those communities like condominiums, which have to cover expenses for units in foreclosure until the case is adjudicated and the bank is liable for the condominium fees.


Keywords: litigation, real estate, foreclosure, Palm Beach Circuit Court, court system budget cuts


Source: "Fewer Judges will be hearing Florida foreclosures as state money runs out." The Palm Beach Post, Kimberly Miller, May 19, 2011.


 

May 2, 2011

California Court of Appeals Settles "Spite Fence" Allegation


The California Court of Appeals resolved an unclear issue about whether a row of trees could be considered a "spite fence" under California Civil Code section 841.4. (Vanderpol v. Starr [PDF], 2011 Cal. App. LEXIS 443 (Cal. App. 4th Dist., Apr. 15, 2011).


Read the full case note.


 

April 6, 2011

Defective Foreclosure Titles Due to Incorrect Legal Descriptions


The epidemic of foreclosures that has swept across the country is well publicized. Irresponsible loan underwriting, sloppy loan documentation, poor handling of foreclosure files by “foreclosure mills,” coupled with an avalanche of defaults, has created turmoil and havoc in state courts across the country. Although small in percentage, a portion of these mortgages working their way through the court system are defective due to inaccurate legal descriptions.


A troubled foreclosure involving an erroneous legal description typically unfolds as follows. The legal description attached or referenced in the mortgage is incorrect. The foreclosure attorney fails to discover this defect and uses the improper legal description in the lis pendens for the property, the publication for service of process on the defendants, the foreclosure final judgment, and the clerk’s advertisement of the foreclosure sale.


A foreclosure speculator then purchases the property at the foreclosure sale and is issued a certificate of title with the erroneous legal description. The purchaser improves the property only to be told by a buyer’s title underwriter that his or her title is void due to the incorrect legal description used in the mortgage and foreclosure proceedings. The purchaser then seeks a refund of the purchase price and reimbursement for his or her carrying costs and monies expended improving the property.


Under the well-settled law of Florida, an erroneous legal description utilized throughout a foreclosure proceeding renders the certificate of title void. Lucas v. Barnett Bank of Lee County, 705 So. 2d 115 (Fla. 2d DCA 1998). See also, Fisher v. Villamil, 56 So. 559 (1911). The reason being is that the mortgage never “closed” on the property because of the erroneous legal description. Id. The appropriate course of action is to vacate the certificate of title and begin the foreclosure proceedings anew after the incorrect legal description has been reformed. Id.


Any purchaser whose title has been vacated in this circumstance is entitled to be restored to his or her position before the purchase. Bridier v. Burns, 4 So. 2d 853 (1941), opinion supplemented on other grounds, 7 So. 2d 142 (1942). Restoration includes any sums paid out in good faith, relying on the validity of the title transferred under the certificate to title, for example, improvements on the property, taxes, etc. Id.


After the certificate of title has been vacated, recovery by the purchaser of the foreclosure sale proceeds is ministerial. The lender/mortgagee, upon proper application to the foreclosure court by purchaser, will be required to refund the purchase price into the court registry. The clerk of the court then issues a refund check to the purchaser.


Recovery by the purchaser of other sums expended in reliance on the validity of the certificate of title—for example, taxes, insurances, and the cost of improvements—is more difficult because there is no clear, bright line rule as to who is responsible to the purchaser and under what circumstances. The Florida Supreme Court, in Brider v. Burns, provided instructions to a trial court in this situation, stating that “[i]t is the duty of [the trial court] upon the proper application by petition or motion to investigate the facts, and by proper order cause [the purchaser] to be restored to all things which they have by reason of the decree which has been reversed.” Brider at 4 So.2d 853, Fla. 1941. To a real property litigator, this means that the court can render what it perceives, in its discretion, as an equitable result. The court did not give any guidance as to what factors the trial court should consider, but such factors should include the extent to which any improvements made by the purchaser increased the value of the lender/mortgagee’s collateral, whether the lender/ mortgagee has a claim under a lender’s title insurance policy, and whether, in the cases of taxes and insurance, the lender likely would have paid for those costs in the first instance.


Jason R. Alderman is a partner in Alderman & Kodsi.


 

January 11, 2011

Massachusetts Court Ruling Calls into Question Foreclosure Validity


This consolidated lawsuit was brought by two homeowners challenging the validity of the foreclosures of their properties. The banks that carried out the foreclosure actions were not the original mortgagees. The respective notes had been transferred into trusts for which the foreclosing banks were the servicers. The mortgages, however, had not been assigned to the foreclosing banks.


Read the full case note.


 

Purchaser's Right to Resend a Purchase Contract Expands to Three Years Under the ISLA


The U.S. District Court for the Southern District of Florida denied the defendant’s motion for summary judgment with respect to defendant’s claim of exemption from the Interstate Land Sales Disclosure Act (ILSA) notice requirements and, alternatively, defendant’s claim that plaintiff failed to invoke rescission of the purchase contract within the two-year time frame prescribed by Section 1703(c). Jankus v. The Edge Investors, L.P., 2009 U.S. Dist. LEXIS 29110 (S.D. Fla. 2009).


Read the full case note.


 

Fore! Express Easement Precludes Any Action in Nuisance and Trespass


A Georgia appellate court ruled that an express easement allowing golf balls to enter a homeowner’s property precluded any action in nuisance and trespass regardless of the number of golf balls falling into the property. DeSarno v. JAM Golf Management, LLC, 295 Ga. App. 70, 670 S.E.2d. 889 (Ga. Ct. App. 2009)


Read the full case note.