Read This and Judge. Send Me a Message and Tell Me Who is Right.

On August 10, 2000, Samuel N. Zagaria, Jr. disappeared from all contact with his family and friends. On July 6, 2009, an Illinois probate court declared that he was “presumed dead” and appointed his sister, Joanne Corlett, to administer his estate.

Sam’s estate consisted primarily of a stock account worth $518,000.

Joanne hired attorneys John Lesch and Thomas McCauley to assist her with her brother’s affairs. The lawyers filed a petition for letters of administration. The probate court, believing that Sam died without a Will, appointed Joanne as independent administrator. Joanne was Sam’s only heir at law.
The attorneys then prepared personal tax returns and recovered unclaimed assets from the State of Illinois. By contacting governmental officials, the attorneys learned that someone using Sam’s name or social security number had filed an application for food stamps at a homeless shelter near Sam’s last known address. And then through researching a state database, the attorneys were convinced that Sam’s death pronouncement was, to borrow a line from Mark Twain, greatly exaggerated.

On June 8, 2010, the lawyers met Sam face-to-face at the shelter for the first time, along with Sam’s counselor, representatives of the shelter, and Sam’s lawyer. Evidently Sam was unwilling to meet with his sister Joanne.

On August 4, 2010, Sam’s lawyer interceded in the probate case to end Joanne’s authority as administrator. The court revoked the presumption of death and Joanne’s authority.

After the estate was closed, Lesch and McCauley filed a petition against Sam for attorneys fees and costs totaling $30,859. Sam’s lawyer opposed the petition, claiming that the attorneys had breached their fiduciary duty to Sam.

The trial court entered an Order for Lesch and McCauley and imposed a Judgment for $27,359.

Lesch and McCauley detected that Sam had a new Merrill Lynch account with a balance of $366,096, so they attempted to recover their fees from the new fund. Presumably Sam’s sister had depleted the old brokerage account by some $150,000, which explains the large difference in value in the two brokerage accounts.

The trial court allowed Lesch and McCauley to recover from the new account. Sam appealed, again claiming (among other matters) that Lesch and McCauley breached their fiduciary duty owing to him.

The appellate court looked to the most recent case it could find where one legally presumed to be dead later returned to claim his property. That case was in 1922, but the theory was the same in 2013, which is that state laws allow one to petition the Court after an unexplained absence for seven years to declare that the individual has died and the estate should be settled. And, dead or alive, the estate is responsible for legal fees and related costs.

Judgment affirmed for lawyers Lesch and McCauley. See In re Estate of Samuel N. Zagaria, Jr.; 2013 IL App (1^st) 122879, September 30, 2013. The attorneys won; Sam lost.

Lessons learned:

1.      Illinois may not be a great place for wealthy people who are presumed dead but are actually alive. It can be tricky in India too where His Holiness Shri Ashutosh Maharaj was declared clinically dead in January 2014, but his followers believe he has achieved a transcendent state where he is at one with the universe: http://cir.ca/news/indian-guru-dead-or-meditating. So his followers are keeping him “alive” in a freezer in his ashram. Meanwhile the Punjab High Court has dismissed the police report certifying to his death, ruling instead that his alleged death is a “spiritual matter.”

2.      Tell your family and friends where you are going. A seven-year absence, at least in Illinois, might have the effect of depleting your financial statement. I don’t know if the same rule is true in Texas but I fear it may be. Conversely, I suspect a seven-year absence in India might only allow one to transcend a bit further into the universe. This is presently unclear.

3.      Keep your annual vacations to two weeks, tops. Well maybe three. But for sure not more than four. Although, again in India, . . .
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Stop the Presses!

Your erstwhile reporter has found a biggy. At least I think it is. A BIGGY. Send me an email and tell me that you do or do not agree.

In 2008 Albert and Jennifer Magill entered into a contract to purchase real estate from The Estate of William H. Watson, Sr. The Magills deposited $8,000 in earnest money with the title company.

The Magills were unable to renovate / construct due to a truculent Property Owner’s Association. So the Magills terminated the deal by sending notice to the Estate. The Magills signed a Release Agreement providing for the return of all Earnest Money to them.

Instead of signing the Release, the Seller (well actually their assignee but no matter for this purpose) sent a notice to the Magills demanding the earnest money. When the Magills did not comply, the Seller filed a lawsuit against them alleging breach of contract.

The lawsuit requested not only the earnest money, but also three times that amount based on a damages provision in the Contract as follows:

"D. DAMAGES: Any party who wrongfully fails or refuses to sign a release acceptable to the escrow agent within 7 days of receipt of the request will be liable to the other party for liquidated damages in an amount equal to the sum of: (i) three times the amount of the earnest money; (ii) the earnest money; (iii) reasonable attorney's fees; and (iv) all costs of suit."

The case was tried to a jury, which found the Magills had breached the contract. Judgment was entered for the Seller (again, actually their assignee) for $32,000, representing the $8,000 earnest money amount plus liquidated damages of three times the earnest money, as well as attorneys fees, interests and costs.

The Magills appealed, contending that the liquidated damages clause is an unenforceable penalty.

And why is this interesting to us? Because this clause was written by the Texas Real Estate Commission and is presently contained in their on-line forms site, here: http://www.trec.state.tx.us/pdf/contracts/20-11.pdf.

But wait there’s more. Unless an exception exists, TREC licensees are mandated by law to use that exact form in residential transactions.

They. Have. No. Choice.

And – still more. Some users of commercial real estate contracts and leases in Texas (and outside of Texas too), taking their cue from TREC, have incorporated similar provisions.

The Texas Appellate Court reviewed the clause, and determined that it must be enforced if (1) the harm caused by the breach is incapable or difficult of estimation; and (2) the amount of liquidated damages is a reasonable forecast of just compensation. That follows the ruling given us by the Texas Supreme Court in 1991.

The Appellate Court found authority that if the amount stipulated in the liquidated damages clause is shown to be disproportionate to the actual damages, the clause is a penalty and will not be enforced.

The Court concluded that, because the contract simply takes the value of the earnest money and multiplies it times three, the provision is an unlawful penalty and does not attempt to forecast actual damages.

In fact, the Court used the TREC’s own commentary to defeat the TREC’s own contract: “This conclusion is supported by the comment promulgated by [TREC] . . . that the purpose of the clause was ‘to provide for additional incentives for prompt release of the earnest money.’ ”

WOW. Probably without intending to do so, Al and Jen Magill just gutted TREC’s most important contract, and similar provisions contained in commercial contracts and leases too. My surmise is that TREC is busy re-writing the statutorily-mandated sales contracts to comply with this ruling.

The trial court’s Judgment was reversed for the Magills; damages were reduced from $32,000 to $8,000. See Magill v. Watson; No. 01-12-00051-CV, Texas Court of Appeals – First District, July 9, 2013. I am not aware of any further appeals.

Lessons learned:

1.      Just because TREC wrote it – or it’s contained in a form – doesn’t make it enforceable!

2.      Liquidated damages clauses are inherently suspect and susceptible to challenge.

3.      This might be an opportune moment for you to closely examine your contracts and leases!

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