Supremes Speak. I Listen. So Should You.

And yet here’s more from the Texas Supreme Court regarding commercial property. This one shocked me and I suspect you’ll be hearing / seeing / reading more about it.

Jay Cohen, trustee of various trusts, transferred several properties owned by the trusts into different partnerships. One involved the “West Newcastle” property, which Cohen transferred to Flat Stone II, Ltd. The controlling shareholder of Flat Stone’s general partner, Matthew Dilick, gave Regions Bank a mortgage to secure a personal loan.

When the loan wasn’t repaid because Dilick defaulted, Dilick transferred a piece from the West Newcastle property to a new entity. Cohen sued Dilick, alleging a fraudulent transfer and that Dilick lacked authority to mortgage the parcel. Cohen also filed notices of “litigation pending” (lis pendens) on the various pieces of property involved in the lawsuit.

One of the Notices of Lis Pendens stated that the purpose of the underlying suit was to invalidate the transfer of property and Regions Bank lien. The trial court granted the Dilick’s motion to expunge the Notices of Lis Pendens.

While Cohen was appealing the Expunction Order, Dilick sold one of the parcels to Sandcastle for $750,000.

Meanwhile the Texas court of appeals overturned the trial court’s Expunction Order, so Cohen added Sandcastle as a defendant to cancel its recent purchase. When Dilick sold another piece to NewBiss for $1.8 million, Cohen added NewBiss as a defendant to the same litigation.

And now to the important part: Both Sandcastle and NewBiss claimed that they lawfully relied on the trial courts Expungement Orders, which had the effect of voiding any notice derived from the Lis Pendens.

The trial court agreed that the Expungement Orders superceded the Notice of Lis Pendens, and that such Notices were void. That was the first win for Sandcastle and NewBiss. Cohen appealed.

The Texas Court of Appeals agreed with the trial court. That was the second win for NewBiss and Sandcastle. An appeal to the Texas Supreme Court followed.

At our State’s highest Court, Cohen argued that expunction of the Notices of Lis Pendens does *not* relieve a purchaser from the duty to review the underlying lawsuit to determine if it could impact future ownership. NewBiss and Sandcastle defended by stating the obvious: that is what the word “expunction” means, to remove from a record, erase or destroy.

The Supremes decided that, no, the word “expunction,” at least in the context of Notices of Lis Pendens, does not mean what we think it means. Rather, the word means that although the chain of title may be free from the recorded Notice, the E word does not have the affect of ignoring the underlying lawsuit altogether.

The Texas Supreme Court reversed the Judgment of the court of appeals and trial court. NewBiss and Sandcastle lost this last round and are now charged with knowledge of the contents of a lawsuit they believed was no longer relevant due to the Expunction Orders. See Sommers v. Sandcastle Homes and NewBiss Property.; Case No. 15-0847; Texas Supreme Court; June 16, 2017: http://cases.justia.com/texas/supreme-court/2017-15-0848.pdf?ts=1497621851.  

Lessons learned:

1.      The implication of this case is far-reaching. This means that if a Notice of Lis Pendens has ever been filed (even though later released / discharged / expunged), purchasers, tenants and lenders are still charged with understanding what was contained in the Notice as well as the underlying lawsuit. This appears to be the case even though after release / discharge / expungement, the Notice would not typically appear in a commitment for title insurance.

2.      If a purchaser, tenant or lender fails to review the Notice (again, even though it’s been released), the purchaser / tenant / lender may find itself defending a claim regarding fraudulent transfer or other legal issue. And, the title insurer may refuse to defend or indemnify claiming that the Notice (even though released) was a matter of public record, accessible to anyone who looked for it online.

3.      Our Texas legislators will need to fix this when they next meet. In 2019. We’ll need new laws to the effect that the word “expunge” means exactly what we think. Otherwise and until that happens, smart buyers, lenders and tenants will need to instruct title agents to specifically search for all Notices of Lis Pendens affecting the target property, even though they may appear to have been subsequently released. Because a recorded Release – and I’m struggling writing this – but it appears that a recorded Release of Lis Pendens is ineffective and provides no safe harbor to buyers, lenders and tenants and everyone else who trusts that the word “release” or “expunge” means exactly that.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

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

How a $50 Fine Became a $71,500 Debt

Dominion Estates Homeowners Association defended a lawsuit brought by Gabriele and Edward Duncan in Harris County. DEHA had asserted fines and penalties for violation of a Declaration and related Guidelines. The Duncans wanted clarification from the Court that DEHA was not entitled to receive either.

The Duncans owned a home in Dominion Estates. There were recorded restrictions which obligated each homeowner to “keep and maintain their lot, its yard and landscaping, and all improvements . . . in a well maintained, safe, clean and attractive condition.” As well, the DEHA’s Architectural Control Committee had adopted “Design Guidelines” which provided for fines for non-compliance.

In May 2007 DEHA sent the Duncans a letter stating that they had violated the Declaration and Guidelines, and needed to remove foil that had been wrapped around some exterior pipes. When M/M Duncan failed to comply, a second letter was issued to the same effect one month later.

At that time, a $50 fine was asserted with a statement that if the foil wasn’t removed within a few more weeks, an additional fine of $50 per week would be assessed.

Evidently M/M Duncan removed the foil, but replaced it with gray tape. So, a month later DEHA sent the Duncans a third letter instructing them to remove the tape from their pipes and to pay the $50 fine. When the fine was not paid, DEHA began to assess weekly fines of $50 caused by the Duncans’ failure to pay the initial $50 fine. As DEHA had promised / threatened to do.

In November 2007 the Duncans filed a lawsuit against DEHA alleging that neither the initial $50 fine nor the $50 weekly fines were authorized by the Declaration and Guidelines. M/M Duncan then challenged an additional $250 fine that was levied by DEHA against all homeowners as a special assessment for legal fees incurred by DEHA.

Later, as the Duncans attempted to sell their home they learned that DEHA had filed a Notice of Lis Pendens in the public records, effectively prohibiting them from selling their property. At that juncture DEHA believed that the Duncans owed $4800, and the fine was increasing $50 per week.

A trial was held in October 2009. The jury offered a conflicting verdict regarding the placement of foil and tape on exterior pipes. But regardless, the jury concluded that DEHA did not give M/M Duncan adequate notice of the implementation of the Design Guidelines before taking enforcement action. And also the jury stated that DEHA did not furnish the Duncans a reasonable amount of time to correct the alleged violations.

Further, the jury found that DEHA was not entitled to any unpaid fines and late charges.

The trial court rendered a Judgment that DEHA was not entitled to a recovery. Still, the Duncans appealed, claiming they should receive an award providing that DEHA breached the Declaration and Guidelines. It’s confusing but don’t forget that M/M Duncan brought this claim against DEHA. Usually it’s the opposite.

On August 11, 2011, the Harris County Appellate Court reversed the trial court’s judgment. In doing so the Appellate Court accepted the position asserted by the Duncans that they did not owe any money to DEHA. As well, the Appellate Court found that DEHA at least owed the Duncans the attorneys fees incurred by M/M Duncan to prove their point.

The Appellate Court instructed the trial court to hold a hearing and determine the amount of attorneys fees that should be paid by DEHA to M/M Duncan.

In the first week of May I learned that the jury in the 207th Judicial District Court had issued a verdict a few months prior allowing M/M Duncan to recover $68,000 in attorneys fees. In April the trial court added $3,500 in appellate fees for a grand total of $71,500 in attorneys fees to be paid by DEHA to the Duncans.

Not yet through with the Judgment, the trial court also tacked on an additional $25,000 for any additional appeals undertaken by DEHA. And I understand that DEHA is now considering its own appeal.

See Duncan v. Dominion Estates Homeowners Association; No 01-09-01086-CV; August 11, 2011. That’s where you will find the Appellate decision from two years ago, reversing the trial court’s judgment and providing for another hearing at the trial level. The results of the second hearing regarding attorneys fees that was just concluded, although public, is not located in a place that is easy to find on the web or in other reported services.

Lessons learned:

1.      I understand why DEHA took this action. And I understand why M/M Duncan defended their position and ultimately were forced to bring a lawsuit. All of the litigants had solid business and economic reasons.

2.      Even so, a $71,500 judgment based on an initial $50 fine is excessive. If DEHA isn’t insured for this loss, they may need to further specially assess their members or file bankruptcy. And don’t forget that in addition to the $71,500 judgment DEHA must now pay, DEHA must also pay its own attorneys whose fees may be comparable. And further, don’t lose sight that if DEHA appeals and loses, DEHA might owe another $25,000 as instructed by the trial court in the second hearing.

If that were to happen DEHA would owe the Duncans almost $100,000. All chasing a $50 fine.

3.      And you are doubtless asking – how does this relate to commercial brokerage? The connection is with late charges, lease compliance and fees. An overly aggressive landlord, property manager or agent might encounter the same type of defenses as asserted by M/M Duncan: inadequate notice; improper authorization of charges; unequal enforcement of rules, policies, procedures and guidelines.

The answer is that property owners, managers and agents must use discretion in enforcement obligations, or be potentially slapped by jurors and Courts. It’s not the slap that stings; it’s the attorneys fees that accompany it. Particularly when you may have to pay the fees incurred by both sides.

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