The Fortuity Doctrine

            This is a bit complicated. But follow along until you see the words “The Fortuity Doctrine.” Доверяй, но проверяй.

Kernell and Stanley Thaw were married in 2001. In 2002 Stan Thaw and Leslie Schachar began operating a business together. When the business failed, Schachar paid business debts that were guaranteed by both Stanley and Schachar.

            Schachar sued Stanley in 2008 to recover Stanley’s share of the debt.

 

            While the lawsuit was pending, the Thaws contracted to purchase a home in Frisco Texas. In 2009 Schachar obtained a final judgment against Stanley, and Stanley appealed.

 

            While the appeal was in process, Schachar recorded an Abstract of Judgment in Collin County before any Deeds to the new home were recorded. Kernell and Stanley Thaw moved into their new home in 2010.

            In 2011 the Thaws paid off the mortgage debt and only then recorded a Deed in a transaction insured by Fidelity National Title. One month later the Texas Court of Appeals affirmed Schachar’s judgment, so Stanley countered by filing a bankruptcy petition near the end of 2011.

            Schachar filed a proof of claim in the bankruptcy for a $400,000 secured interest in the Frisco property. The bankruptcy court held that both the claim and lien were valid, finding that Schachar had recorded his Abstract of Judgment lien before the Thaws had made their new Frisco property their Texas homestead.

            As a consequence, when the Frisco property was sold in 2013 the Schachar lien attached to the net proceeds of the sale, approximately $500,000.

            In 2014 the bankruptcy Trustee as well as Stanley and Kernell Thaw made demand upon Fidelity for insurance benefits, as the title insurance policy insured title without exclusion for Schachar’s judgment. In 2016 the bankruptcy court approved a settlement in which Schachar received $444,000 from the net proceeds of the sale, in full satisfaction of his claim.

At that juncture the Trustee and Kernell Thaw determined they could recover the amount paid to Schachar from their title insurance carrier. As you likely guessed, Fidelity Title resisted and refused to pay.

            So Kernell and the Trustee sued Fidelity Title, arguing that Fidelity had breached its Policy by denying the claim. The bankruptcy court reviewed the policy and these unique facts, and issued an Order that coverage under Fidelity’s insurance policy was barred. The reasoning was partly due to application of the “Fortuity Doctrine.”

            The Trustee and Kernell Thaw appealed the bankruptcy court’s Order.

            The Fortuity Doctrine relieves insurers from covering some behaviors that the insured undertook prior to purchasing the insurance policy. Under this doctrine, the insured cannot obtain coverage for losses of which the insured had knowledge when the policy was bought, but failed to disclose to the insurance carrier.

            Kernell claimed that she had no actual knowledge that Schachar had recorded an Abstract of Judgment lien and further – she would not have understood the effect of such a filing if she had known of it.

            Evidently the Fortuity Doctrine covers this event, as it precludes insurance coverage when the insured is or should be aware of a known loss at the time the policy is purchased. Not understanding the legalities or process is not a great defense.

            The Court rationalized that even if Kernell had no knowledge of the recordation of the Abstract of Judgment, she knew or should have been aware that her husband’s failure to pay his debts resulted in a Judgment against him in 2009. And that due to appeals, the Judgment was uncollected at the time the Thaws purchased the Frisco property. And that the Judgment remained unpaid when the Thaws paid off the mortgage debt and purchased the title insurance policy in 2011.

            The Court reasoned that was a “loss in progress” and for that reason, Fidelity Title is not responsible for the claims asserted by Kernell Thaw and the Trustee.

            Fidelity Title wins; Kernell Thaw and the Trustee lose. See Christopher Moser and Kernell Thaw v. Fidelity National Title Insurance Company; US District Court; Eastern District of Texas; Case 4:17-CV-104; March 21, 2018; https://www.leagle.com/decision/infdco20180322h25

            Lessons Learned / Questions Asked:

1.      Now I know what the Fortuity Doctrine is!

2.      Insurance companies have abilities to defend that many of us (meaning: me) could never contemplate. This is one among many.

3.      This is my 99^th blog posting over a period of almost 10 years. Shouldn’t I get a watch, pen, or tuna sandwich? I mean, for the love of Pete it’s been fun but 99 blogs, really?

                                                                                                                            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 the North Texas Commercial Association of REALTORS®, Inc.

 

 

*

Disclose More. Never Less.

In 2009 Shawn and Stephanie Holloway hired Jeremy Williams, a sales agent with Keller Williams Realty Northeast, to help them sell their existing home and find a new one. M/M Holloway were shown a home owned by Jennifer Blalock – another sales agent with Keller Williams Realty NE.

Following intermediary protocol, Keller Williams Realty NE engaged Tina Martin, also a sales agent with Keller Williams, to assist Jennifer Blalock. Meanwhile Jeremy Williams continued to represent M/M Holloway.

A Contract was signed for the purchase and sale of Blalock’s property. Keller Williams NE was designated as the broker for both seller and buyers. The Holloways were allowed a 10-day inspection period, and so they hired Clint Simon (referred to them by Jeremy Williams) for a termite inspection.

Simon found no visible evidence of active termite infestation or previous infestation, although Simon did disclose his finding of evidence of previous treatment for subterranean termites.

M/M Holloway closed the purchase and soon after closing the Holloways started renovating the property. The contractors discovered extensive termite damage – substantial enough to cause the Holloways to move out.

The Holloways filed a lawsuit against Blalock, Simon and Keller Williams NE. Blalock filed bankruptcy; Simon paid $200,000 to be released. That left Holloways vs. Keller Williams NE.

The trial jury found liability against Keller Williams NE based primarily on a theory of failure-to-disclose under the Texas Deceptive Trade Practices Act. The trial court then converted the jury’s findings into a Judgment.

Keller Williams NE appealed, claiming that the evidence was insufficient to support the jury findings. The point made by Keller Williams NE was that the only means for the jury to find it liable would have been due to the actions (possible failure to disclose) of Jennifer Blalock. And – that Jennifer Blalock was not an agent for Keller Williams NE, because Jennifer Blalock was acting only for herself.

Now of course Jennifer Blalock had signed an Independent Contractor’s Agreement with Keller Williams NE, to perform services as a real estate agent. However, in the Holloway deal Blalock was not acting in an agency capacity but rather as an owner and seller of the property. As such, the ICA was inapplicable and the actions (inactions) of Blalock did not bind Keller Williams NE as no principal-agency relationship was intended by this one, unique transaction.

So the argument went.

The Court of Appeals evaluated evidence that Blalock’s agent did “very little” and instead Blalock represented herself, offered the Property for sale herself, negotiated the sale herself, and sold the Property for her own account.

Thus, no agency relationship existed between Blalock and Keller Williams NE.

Then the Court turned its attention to the question of Keller Williams’ knowledge of the existence of unrepaired termite damage. Again, the evidence did not support the conclusion that Keller Williams knew of the issue, and failed to disclose.

The trial court’s Judgment was reversed in favor of the Keller Williams franchisee.

See Flutobo, Inc., dba Keller Williams Realty Northeast v. Holloway; Nos. 14-12-00104-CV and 14-12-00170-CV, December 16, 2013.

Lessons learned:

1.  If the non-disclosure is significant enough, there will be a claim. If the claim is not resolved, there will be a lawsuit. If there is a lawsuit, the only winners will be the lawyers as attorneys’ fees might eclipse the amount of any judgment. Particularly if there are appeals.

2.  This case is residential in context. But the same rules regarding disclosure and intermediary relationships apply to commercial transactions. There is no difference in Texas law, as TREC makes no distinction between the types of transactions relative to the disclosures that must be made although the DTPA applies only to “consumers.”

3.  Err on the side of disclosing too much, after of course you have obtained your principal’s written authorization. You might need to consider withdrawing if your principal refuses to furnish that consent. Better a blown commission than a lawsuit!

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

When a Guaranty Agreement Is Not

In early 1997 Border Patrol of Wisconsin, Inc. purchased nine Taco Bell franchises from Pepsico. In connection with financing the purchase, Scot Wederquist signed a Guaranty Agreement in favor of PFS, a division of Pepsico. At the time, Wederquist owned a 25% interest in Border Patrol and served as its Treasurer, and PFS supplied goods and services to Taco Bell franchisees.

PFS sold its assets including USA and Canadian operations to Ameriserve a few months later. And in January 2000, Ameriserve went bust and filed a Chapter 11 bankruptcy petition in Delaware. The Bankruptcy Court approved the sale of substantially all assets of Ameriserve to McLane Foodservice, Inc. in late 2000.

In June 2010 McLane contracted with Table Rock Restaurants to sell it food supplies and services. Wederquist owned 40% of Table Rock and also served as its Treasurer. Table Rock closed its doors in November 2010, owing McLane approximately $450,000.

In December 2010 McLane sued Table Rock and Wederquist to recover the delinquency. The trial court entered Judgment for McLane against Table Rock, but not against Wederquist, holding that he was not personally liable under the Guaranty Agreement he had signed 13 years before in the Border Patrol – Pepsico deal.

Probably sensing that a Judgment against Table Rock had limited collection value, McLane appealed.

It may have been a hint to the outcome of the case when the first substantive paragraph began with “A guarantor under Texas law is a so-called favorite of the law and as such, a guaranty agreement is construed strictly in [his] favor. . . Thus, where uncertainty exists as to the meaning of a contract of guaranty, its terms should be given a construction which is most favorable to the guarantor.”

The Federal District Court closely examined the language of the Guaranty Agreement. Section 1 of the Guaranty stated that Wederquist unconditionally guaranteed the punctual payment when due of the all indebtedness owing “. . . to Creditor” now or hereafter existing.” The preamble of the Guaranty Agreement defined “Creditor” as PFS and all affiliates of PFS.

McLane was of course not an affiliate of PFS but rather a purchaser of its assets. As such, McLane cited a provision in the Guaranty Agreement stating the Guaranty “. . . shall inure to the benefit of and be enforceable by Creditor and its successors, transferees and assigns.”

McLane argued that since it was a purchaser of PFS’s assets, McLane was also its successor, transferee and assign. And as such, McLane was entitled to the benefits of the Guaranty Agreement.

The Federal Court did not need to decide if McLane was a successor, transferee or assign. It wasn’t relevant to the decision. The definition of “Creditor” in the Guaranty Agreement applied only to PFS. Not McLane. If PFS and Wederquist had intended it to apply to others, then PFS and Wederquist could have easily expanded the definition, instead of limiting it to only PFS.

The US District Court Judgment is affirmed. Wederquist wins; McLane loses. The Guaranty Agreement is not binding.

See McLane Foodservice v. Table Rock Restaurants; No. 12-50980; U.S. Court of Appeals – 5^th Circuit, November 15, 2013.

Lessons learned:

1.      Sometimes Guaranty Agreements are, well, you know – Guaranty Agreements. But not always. Commercial Guaranty Agreements in the context of purchase and sale agreements, financing and leasing need to be carefully reviewed.

2.      Practice Tip: In my world there are all kinds and variations of Guaranty Agreements. Some are limited by time; others by amount. Others are “backup” only – recourse must be pursued against the primary debtor first, without success. Still others expire mid-term automatically if the debtor has not defaulted, while in other iterations the Guarantor might be bound to the original debt but to no further credit or time extensions. Many are joint and several such that a creditor has 100% recourse to all Guarantors, but others are only several and limited to each Guarantor’s pro-rata allocated amount.

3.      Don’t assume any Guaranty Agreement is lawful and binding. You might be unpleasantly surprised.

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