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.

 

 

*

Good Faith & Fair Dealing

First, let me explain how this month’s topic landed on my desk and in your email inbox folder. I am a licensed lawyer in both Texas and New York. As such, my clients come from a diverse geographic area. Property owners, tenants, landlords, developers, brokers, agents and property managers in New York have a different view of The Way Things Work then we do in Texas.

Some of their differing views of TWTW relate to an obligation of good faith and fair dealing. And, this duty (or, non-duty) then trickles down to the choice of law clause found in virtually every Contract and Lease.

Let me [try to] explain by using a recent case to illustrate.

Hilfiker Square owns land in which Thrifty Payless is a tenant. Recorded covenants prohibit construction without first obtaining 90% consent of the those who own and those who occupy the shopping center.

In 2010 Hilfiker had an opportunity to sign a long-term ground lease with a restaurant tenant. In 2011 Hilfiker started to request the needed consents in order to proceed with development and leasing.

All parties including the City agreed to the plan. But not Thrifty. Thrifty objected to the plan for three distinct reasons – parking utilization, driveway operations, and visibility.

Hilfiker engaged a third-party engineering firm and a third-party architectural firm to analyze and address these concerns. Each specialist concluded that development would not materially impact Thrifty’s parking, driveways, or visibility.

Undaunted, Thrifty still refused to consent. So Hilfiker sued Thrifty Payless, alleging that Thrifty breached an implied covenant of good faith and fair dealing by depriving Hilfiker of its opportunity to enter into the ground lease with the restaurant-tenant. Hilfiker claims that its damages are $1.6 million, which corresponds to the amount the ground lease area would be worth if it were developed as projected.

Thrifty defended by claiming that the recorded covenants grant to Thrifty the absolute right to prevent Hilfiker from building a restaurant at Hilfiker Shopping Center. No reasons required. Consequently, Thrifty requested that the Court toss the case.

This case comes to us from Salem Oregon, and so far the only portion that has been litigated to completion is Thrifty’s request that the Court dismiss the lawsuit.

The Oregon Court found that Oregon law imposes a duty of good faith and fair dealing in the performance and enforcement of every contract. The purpose, writes the Court, is to prohibit improper behavior and ensure the parties will refrain from any act that would have the effect of destroying or injuring the right of the other party to receive the “fruits” of the contract.

I suppose that Oregon contracts bear “fruit.” But that’s a digression.

From there, it wasn’t a far stretch for the Oregon Court to conclude that Hilfiker had a reasonable expectation that Thrifty would negotiate, reasonably and in good faith, concerning any proposed amendments to the recorded covenants as long as such amendments are not materially adverse to Thrifty’s financial interest.

And so Hilfiker’s claim withstands Thrifty’s Motion to Dismiss. See Hilfiker Square, LLC v. Thrifty Payless, Inc., 6:16-cv-01855-MC; District Court of Oregon; November 29, 2016: https://casetext.com/case/hilfiker-square-llc-v-thrifty-payless-inc.

This is the place where I stress that Oregon’s laws are different than those in Texas, at least on this point. Texans don’t have a duty of good faith and fair dealing with respect to real estate purchases, sales, leasing, management, and development, unless that obligation is inserted into the document or unless a special relationship exists between the parties.

But Texas real estate brokers and agents do have a similar, implied duty!

Lessons learned:

1.      The laws of each State (take Louisiana, as an extreme example) can be radically different than other States. See above.

2.      This case illustrates why contracting parties need to be smart about the boilerplate choice of law clause hidden on Page 23 of the Contract or Lease. Depending on the clarity of your crystal ball, selecting Texas in that section may backfire.

3.      The B/L: Some “standard” Contract and Lease provisions deserve attention and consideration. The choice of laws clause, often overlooked, might require more scrutiny.

                                                                                    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.

Are Emails Binding?

Prentis Tomlinson is the President and CEO of PetroGulf, Ltd. Petro was formed to trade oil commodities from Iraq with regional markets. In 2009 Tomlinson met with John Khoury, seeking investment into Petro. Khoury invested $400,000.

Khoury, unhappy with the performance of his investment, met with Tomlinson in early 2012 to discuss Petro’s failure to disclose financial information. In that meeting, Tomlinson agreed to personally repay Khoury the $400k debt over a four or five-year period.

A week later Khoury sent an email to Tomlinson summarizing the meeting. Tomlinson replied by email with, in addition to other text: “We are in agreement.”

When Tomlinson failed to make the payments, Khoury brought a lawsuit. Tomlinson’s defense was that any recovery for breach of contract was barred by the Texas Statute of Frauds, which requires that many agreements must be in writing and signed to be enforceable.

At trial, Tomlinson admitted sending the email but claimed that his response of being in agreement referred to an agreement different from the terms identified in the email to which he replied.

The jury concluded that Tomlinson had obligated himself to repay the $400k investment, and that Tomlinson has breached that agreement. The jury found in favor of John Khoury on all claims and awarded him $400k plus attorneys fees.

Tomlinson then asked the trial court to enter a Judgment disregarding the jury’s verdict on the $400k breach of contract claim. The trial court, likely accepting Tomlinson’s position that emails do not satisfy the Texas Statute of Frauds, agreed and in doing so, gutted the jury’s verdict.

John Khoury appealed.

The Texas Appellate Court reviewed the Texas Statute of Frauds, providing that debt agreements must be written and signed. You can read it at TBCC 26.01(a)(1) and (2), and 26.01(b)(2): http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm.

Seems clear enough. The law requires a signed writing. There was no written paper agreement; there was no signature.

However, there was an email chain that basically ended with “We are in agreement.” The last email from Tomlinson does not contain Tomlinson’s name in the body of the text he wrote. But his name and email address do appear in the “From” field of the email.

The Appellate Court started by evaluating the Uniform Electronic Transactions Act as adopted in Texas at TBCC 322.001 – 021: http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.322.htm. UETA was added 10 years ago to remove barriers to electronic transactions by setting an expansive view of what constitutes electronic writings, records and signatures. The goal was to adopt our now-common practice of foregoing paper in favor of emails, texts and similar.

It took the Court three full single-line pages to analyze this one issue and conclude that a signature block in an email performs the same authenticating function as a “From” field. Consequently,  the Court concluded that the email satisfied the definition of a writing and signature; the Statute of Frauds could not be used to avoid enforcement of the agreement.

John Khoury won his appeal; Prentis Tomlinson owes him $400,000 plus attorneys fees. Whether or not Khoury will be able to collect his Judgment is an entirely different matter. See Khoury v. Tomlinson, Case No. 01-16-00006-CV, First District Harris County Court of Appeals, December 22, 2016: https://casetext.com/case/khoury-v-tomlinson.

Lessons learned:

1.      Our Texas Statute of Frauds has been hijacked. Writings and signatures are no longer strictly required. Emails can be sufficient to create binding agreements

2.      If emails suffice, then I suppose so do texts, social media, chat rooms, bulletin boards and similar e-platforms where one can identify who is communicating and agreements can be made electronically without paper or ink signatures.

3.      However – the Fort Worth Court of Appeals reached an opposite conclusion in 2011 and decided that an email was insufficient to serve as a “signature.” See Cunningham v. Zurich American Ins Co: http://caselaw.findlaw.com/tx-court-of-appeals/1580444.html.

4.      The B/L: be careful with email agreements and instead, until we have more guidance from our legislators or Supreme Court, insist on old-fashioned, ink-signed contracts, leases, amendments, loan docs, release and settlement agreements, and everything else related to what we do. Don’t type “agreed” in an email or similar unless you are prepared to be bound.

                                                                                    Stuart A. Lautin, Esq.

 

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

Closing Extension SNAFU

On January 28, 2013, KIT Projects entered into a Contract to purchase real estate from PLT Partnership. Closing was initially scheduled for March 26, 2013. Then it was extended two days to March 28, 2013.
 
On March 28 Buyer did not have the funds to close, so Buyer asked Seller for an extension – until April 30, 2013. Both Seller and Buyer signed and delivered an extension Amendment. It provides “In consideration for this 30 day extension, Buyer agrees to pay an additional $10,000 extension fee directly to [Seller]. This fee is non-refundable and not applicable to the sales price.”

A check was delivered to Seller on March 28. Also delivered was a suggestion that the check was not good. So Seller told Buyer that the check could be held for a few days, to give Buyer an opportunity to fund the check.

The check was deposited on April 3. Seller signed the Amendment on April 4. The check bounced on April 8. Buyer never replaced the check with good funds, although Buyer offered to do so on April 9. 

In the afternoon of April 9 Seller delivered to Buyer a letter by email stating that “there is no existing contractual agreement” between the two parties.

Buyer asserted a lawsuit to force Seller to honor the terms of the Contract and sell the property to Buyer. Seller denied that it had breached the Contract, claiming that Seller had the right to terminate the Contract since the $10k check bounced. The trial court agreed with Seller.

Buyer appealed.

On appeal, Buyer asserted that the consideration for the amendment was Buyer’s promise to pay the $10k extension fee. Seller asserted that the consideration was the $10k payment. The difference in Texas law, is a covenant vs. a condition.

The Court of Appeals recast Seller’s argument as an assertion that the payment was a condition to the extension of the closing date. We call this a condition precedent in law.

To determine if a condition precedent existed, the Court looked hard at the amendment for terms such as provided that, on condition that, if _______, then ________ and similar.
 
If no such language is used, the terms will typically be a covenant. Not a condition. When a covenant is breached, the contract is valid but a party has a claim or lawsuit for damages. When a condition is breached, the entire contract may be forfeited.

Courts do not favor conditions as they tend to have unintended and overly harsh consequences.

This Court of Appeals had little difficulty determining that the language used was indicative of a covenant, not a condition. And yes there was still ample consideration although the check failed, as consideration “. . . may consist of a benefit to one party or of a detriment to the other party.”

The Court concluded that the consideration for the extension of the closing date was Buyer’s agreement to pay, rather than Buyer’s tender of lawful payment. The Judgment of the trial court is reversed. The case is remanded back to the trial court for a do-over, but with instructions to the trial court that the Amendment did not fail just because Buyer’s check was rubber.

See KIT Projects, LLC v. PLT Partnership; Cause No. 14-14-00118-CV; Texas Court of Appeals; 14^th District; November 19, 2015.

            Lessons learned:

1.      If the parties intend to be allowed to terminate a Contract based on non-performance, there must be consistent provisions.

2.      Typically a Seller or Landlord will prefer a condition for the Buyer or Tenant’s obligations, and a covenant for the Seller or Landlord’s duties. And of course vice versa when you are representing a Buyer or Tenant.

3.      Still confused? You are not alone. Be sure your principal has an experienced Texas real estate attorney who knows the difference.

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

More Mistaken Moments

Last month I discussed how a mistake in a Contract can destroy it. This month I present Part Two.

On December 15, 2008, David Duckworth borrowed $1.1 million from the State Bank of Toulon. The bank’s loan officer prepared loan docs.

The Note was dated and signed December 15, 2008, but the Security Agreement was dated two days earlier – December 13, 2008. The Note referenced the Security Agreement. But the Security Agreement had a critical mistake. It stated that it secured a Note dated December 13, 2008. Not December 15, 2008.

There was no Note dated December 13, 2008.

David Duckworth filed a Chapter 7 bankruptcy petition, and the Trustee defended the Bank’s position that the mistaken date did not defeat the Bank’s secured position. The bankruptcy court issued two decisions in favor of the Bank, essentially validating the Bank’s collateral position.

The Trustee appealed both decisions to the US District Court, where the appeals were assigned to different judges. Both district judges affirmed, and the Trustee again appealed.

The Trustee’s basic argument was that extrinsic testimony (we call this “parol evidence”) should not used to correct the mistake in the Security Agreement. And that the Bank’s error should not be overlooked.

The Bank claimed an enforceable security interest, and even if there was a mistake it was readily apparent to anyone who had reviewed the papers. And, that it was a minor error. Also, that there was no question but that the Bank had loaned Duckworth $1.1 million, Duckworth had signed a Note and Security Agreement, Duckworth had defaulted and filed bankruptcy, and the Bank needed to seize its collateral under its Security Agreement.

The US Court of Appeals reviewed the Security Agreement and concluded that the Security Agreement could not secure the December 15 Note. The Court then further concluded that although the parol evidence rule could have fixed the mistake as between the Bank and Duckworth, the same legal theory could not be used against the bankruptcy trustee to correct the error.

The Appellate Court reasoned that bankruptcy trustees are in the unique position of maximizing the recovery of unsecured creditors. To assist in the job, trustees exercise a “strong-arm power,” which allows them to avoid secured interests that a subsequent creditor could have avoided.

Further, bankruptcy trustees  may “. . . void security interests because of defects that need not have misled, or even have been capable of misleading, anyone.”

And so the US Appellate Court determined that the mistaken identification of the debt to be secured cannot be corrected against the US bankruptcy trustee by using outside-the-contract testimony or evidence. The judgments of both US District Courts were reversed. The Trustee wins as the debt is converted from secured to unsecured; the Bank loses its collateral.

See In Re: David L. Duckworth; State Bank of Toulon v. Charles E. Covey, Trustee; No. 1:13-cv-01258-JBM and 1:13-cv-01087-JES; US Court of Appeals, 7th Circuit; November 21, 2014.

Lessons learned:

1.         Proofread your Leases, Contracts, correspondence, emails, texts, listings, buyer and tenant rep agreements, brokerage contracts, commission agreements, everything. Read it all closely. Then wait at least one hour before you read it again.

2.         Catch a mistake somewhere, even a minor one? Fix it now via an Amendment. If the previous doc was recorded (think Deed, Memo of Lease, Deed of Trust, etc.), then be sure the Amendment is also recorded.

3.         Practice Point: On the really important stuff, enlist the help of a buddy to proofread too.

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

When Friends Become Business Partners

Carlo and Denise Bazan went into business with their long time friend, Luis Muoz, by opening a restaurant in Laredo called Vamp Ultra Lounge & Café. Two years later Luis sued Carlo and Denise, claiming they had wrongfully taken money from the café.

The partnership decision was made when Carlo, Denis and Luis were vacationing together in Cancun in 2008. A year later they signed a contract designating Denise as the Manager of their new enterprise. But as a matter of practicality, Denise delegated her management duties to Carlo.

According to the contract, the Bazans owned a 50% interest in the business, and Luis owned the remaining 50%. Initially, Luis contributed $80,000 to buy an existing nightclub, while Bazans contributed $15,000 which was used to remodel.

The business opened on October 31, 2009. Carlo collected cover charges at the door and installed cash controls in a point-of-sale system. It seems Luis may not have been consulted and expressed his displeasure about the cover charges, and his unhappiness was likely accelerated when Denise and Carlo started paying themselves a salary without Luis’ consent.

Record-keeping was poor or non-existent as cash receipts were counted at Denise’s residence. More often they were not counted at all. Distributions were made, also without Luis’ consent or participation, to Carlo and Denise.

The business did not make bank deposits for months, and as a consequence, bank accounts were frozen. When questioned, Carlo claimed that vendors, staff and DJs were paid by cash and that explained whey receipts were not deposited at the bank.

Finally, Luis asserted a lawsuit against Carlo and Denise. It seemed the business was making $60,000 to $70,000 a month, but the bank records only reflected deposits of $20,000 per month.

A jury found in favor of Luis on his claims for breach of contract, breach of fiduciary duty and fraud. The jury awarded Luis $120,000 and the trial court converted the jury award into Judgment.

Denise and Carlo appealed.

In a lengthy decision, the Court of Appeals found there was ample evidence of fraud committed by the Bazans’ failure to disclose information. Business partners owe fiduciary duties to each other – the same high standard that brokers and agents owe to their principals.

There was a special relationship of trust, confidence and loyalty in the café business. As such, Carlo and Denise had a duty to disclose material information to Luis.

Secretly taking money from the business breaches that duty, and supports the jury’s finding of fraud by nondisclosure.

The Appellate Court agreed with the Luis. Luis Muoz won and the Bazans lost. See Bazan v. Muoz; No. 04-13-00184-CV; Texas Court of Appeals; 4^th District; November 5, 2014.

Lessons learned:

1.      It’s not newsworthy to state that friends don’t always make good business partners. In fact, I see the opposite is also true: sometimes friends make the best business partners. But, be sure that the relationship is properly documented.

2.      This appellate decision states something we all know – the highest duties in law are imposed upon those who have a special relationship or duty of trust. Like brokers and agents. Breach of that duty means a lawsuit.

3.      Practice Point: All parties in a business venture should have their own separate lawyers. When that is not possible, at least be sure that the Contract has a provision where anyone who needs to exit can do so.

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

Commissions! Commissions!! COMMISSIONS!!!

So. My 50^th Counsel’s Corner article. Seems appropriate that this article should be about that which is nearest and dearest to the hearts of my readers . . . commissions!

James Murphy was licensed as a Texas real estate broker. He sued Reed Williams (not a licensee) for a brokerage commission regarding the sale of five tracts of property in the Frisco Medical Center subdivision.

Murphy was working with the Sellers in 2010 to secure financing for their Frisco Medical Center properties. When Murphy learned that the Sellers might consider marketing the properties, he approached Jim Williams to request authority to serve as their broker.

Reed Williams was a Vice President of the general partner entity of the various Sellers. Jim Williams (Reed’s father) was the President of one of the Sellers, and was the individual who initially discussed an exclusive listing agreement with Murphy.

Murphy was given limited authority to market the properties, but only to one prospect. Either that prospect or an affiliate of the prospect then contacted Healthcare Realty Trust to present the purchase opportunity. Healthcare was not approved as a prospective buyer, and James Murphy had no authority to consent to the delivery of information from the prospect or affiliate to Healthcare.

Evidently Healthcare then approached representatives of the Sellers directly including Reed Williams, and the target parcels were sold to Healthcare at the end of 2010. For $133 million. Since no commissions were paid to James Murphy, Murphy sued Reed Williams and others for various claims including tortious interference with contract or contractual expectation.

James Murphy likely felt that he prepared or delivered the information and materials that ultimately found their way to the purchaser, and at least in part may have induced the purchaser to close the deal. And consequently, absent Murphy’s actions, the target properties may not have been sold.

The Collin County trial court, concluding that Williams had the better case, entered a Judgment for the Reed Williams. James Murphy appealed.

On appeal Murphy contended that Reed Williams acted as an unlicensed broker and interfered with Murphy’s expectation to receive a commission. Reed Williams defended the claim by stating that his limited actions in the deal did not constitute brokerage activities.

The first part of Texas law regarding brokerage is clear. A person may not recover a commission unless that person is a licensed broker, the agreement is in writing and the agreement is signed by the person obligated to make the payment.

The second part of Texas law is more obscure. Brokers are allowed by law to sue each other for “. . . interference with business relationships.” See Texas Occupations Code 1101.806(a)(2): http://law.onecle.com/texas/occupations/1101.806.00.html.

The facts in this case establish that Reed Williams was not acting as a broker. Even James Murphy admitted as much in his pleadings. As such, the Court of Appeals had little trouble finding that Murphy was not entitled to a judgment against Reed Williams.

And why did this case get my attention? Because James Murphy and his lawyers cleverly used an obscure portion of Texas law and coupled it with a novel theory that one does not have to hold a brokerage license in Texas to act as a broker. As by analogy one does not have to hold a driver’s permit to drive an 18-wheel truck, or hold a pilot’s license to fly a helicopter.

All of those actions require licenses and permits to do them lawfully, but even without a license or permit one who is flying a plane is still, well, flying the plane.

So, Murphy and his lawyer constructed an argument that if Williams’ actions constituted brokerage, then his license status was irrelevant and Murphy should be able to sue one who acts as a broker (licensed or not) and interferes with business relationships. That, so the argument goes, was the purpose of Section 1101.806(a)(2).

Regardless of licensure status, James Murphy was unable to show that Reed Williams was acting as a broker. So, the Court of Appeals did not need to delve further. Judgment affirmed for Reed Williams. See Murphy v. Williams; Cause No. 05-12-1730-CV; Court of Appeals of Texas, Fifth District, Dallas Division; May 5, 2014.

Post-script:

This case may be appealed to the Supreme Court of Texas. Stay tuned.

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

Now Tell Me Again: How Big Is That Property?

Bowen Zhu and Jain Yu contracted to buy a house in Harris County for $180,000. Seemingly, they intended to live there. But for this purpose it doesn’t matter.

The seller, listing agent, Harris County Appraisal District and Kai Lam all represented that the house had 2,722 square feet of living area. Kai Lam was the TREC-licensed broker representing Zhu and Yu. When Zhu and Yu initially viewed the property, Zhu told Lam that the house seemed smaller than 2,722 SF, but Lam assured Zhu that it only seemed smaller because it had an open floor plan.

On the day before closing Zhu told Lam he wanted to back out of the deal. Zhu claims that Lam told him he would get sued if he changed his mind. Lam gave Zhu a 1% purchase price rebate, and Lam persuaded the seller to discount the purchase price by $250 as a further inducement for Zhu to close.

After the closing and at Zhu’s request, the Harris County Appraisal Districted re-measured the house and found that its living area was only 1,967 square feet. The difference of 755 square feet is approximately 28% less than the square footage as represented to Zhu and Yu.

On a straight square footage basis, it is conceivable that Zhu and Yu paid $50,000 too much for the property.

The buyers sued Lam, Lam’s brokerage company Housesold Realty, Inc., the seller, the seller’s listing agent and others. All parties were dismissed (perhaps they settled?) but for Lam and HRI.

Finding no genuine issues of material fact, the trial court granted summary judgment for the broker Lam and his brokerage company HRI. Zhu and Yu appealed.

The buyers did not properly appeal the issue of monetary damages, and instead claimed that “damages are effectively presumed in this case.” Zhu and Yu’s testimony that the house had a value of $140,000 was given no probative value by the trial court. Also, it appears there was no expert testimony on this point, and so Zhu and Yu’s opinion of market value, without supporting comparables or other credible evidence, was merely conclusory, unsubstantiated and unreliable.

Since no authority was cited and since the buyers did not raise the argument in their response to Lam’s request for judgment in the trial court, the Court of Appeals had no choice but to forego awarding Zhu and Yu any compensation.

Buyers did, however, properly perfect their appeal regarding Lam’s and HRI’s breach of fiduciary duty owing to Zhu and Yu. To prevail under Texas law, the buyers must prove: (1) a fiduciary duty existed between Buyers and Lam; (2) Lam breached that duty; and (3) Buyers were damaged.

Lam and HRI defended the claim of breach of duty by asserting that Lam did not know the actual square footage, and that under Texas law Lam was neither required to measure nor investigate the size of the home.

Zhu and Yu were unable to prove that Lam knew or should have known the house was substantially smaller than 2,722 SF. Instead, the evidence seemed to show that Lam merely repeated what he was told from the seller and listing agent, and what he discovered by reviewing the HCAD website.

And Lam was correct on this point: unlike California and some other states, under 1992 Texas case law authority Lam had no duty to measure the property or further investigate.

The trial court’s Judgment was affirmed for Kai Lam and Housesold Realty, Inc. See Zhu v. Lam; No. 14-13-00368-CV, Texas Court of Appeals – Houston 14^th District, March 18, 2014. The broker won; the buyers lost; Lam did not breach his fiduciary duty to the Buyers by merely repeating information he had gained from the seller and public sources.

Lessons learned:

1.  Yes it is true that the broker was vindicated. However, a close reading of the appellate decision leads me to think this could have gone badly for the broker just as easily if the damages issue was properly presented.

2.  Don’t offer square footage representations. If you must do so, then clarify in writing that they are not your representations but rather come from the seller, appraiser, landlord, Central Appraisal District records or some other (hopefully public) source. And, that the buyers / tenants should independently verify the data before making any decisions.

3.  I don’t have a third lesson learned. It just felt a little, je ne sais quoi, empty without some text here.

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