Stop the Presses! [reboot]

Remember last month’s article? Well, evidently the same Texas appellate court came to an opposite conclusion just a few weeks ago. As Ricky Ricardo would say, "let me ‘splain."

Moody National Kirby Houston S, LLP, entered into a contract to sell a vacant lot in Houston to Capcor at KirbyMain, LLC. Seller and Buyer used TREC Form 9-10 “Unimproved Property Contract” for that purpose.

Capcor deposited $25k with Moody National Title Company, LP. Note the similarity in names? Both Moody Title Company and Moody Kirby were owned by Brett Moody.

On the day before closing Moody Title escrow agent Kay Street told Capcor’s lawyer that Moody Title needed to receive the purchase funds in the form of a wire transfer. Kay Street told Capcor’s principal, Josh Aruh, the same requirement when he arrived at the title agency offices the next morning to sign closing docs.

Capcor’s lender timely wired funds to Moody Title. Regardless, sometime after 5p.m. on the day of closing Capcor principal Avi Ron arrived at Moody Title with a cashier’s check.

Kay Street told Ron that she was leaving for the day and could not accept the check. Ron left it with her anyway. Capcor’s attorney offered to replace it the next day with a wire transfer. Moody Kirby however, sent notice that it was terminating the contract.

Capcor refused to sign a Release and instead sued Moody Kirby and Moody Title. Moody Kirby counterclaimed, demanding the earnest money and three times the amount of the earnest money, as provided by Section 18.D. of TREC Form 9-10.

Starting to sound familiar? See last month’s article if it doesn’t.

The jury found that Capcor had breached the contract and that Moody Kirby had the right to terminate the deal since Capcor had not timely performed its obligations. Paying for land with a check on the day of closing was not allowed when, the jury held, Kay Street had specifically told Capcor that Moody Title needed to receive all funds by wire.

The jury also found that Moody Title did not breach any fiduciary duties owing to Capcor. So the trial court entered judgment against Capcor, awarding Moody Kirby its attorney’s fees, escrowed funds, and earnest money plus liquidated damages equal to three times the amount of the earnest money.

Capcor appealed.

The Appellate Court first analyzed Moody Title’s obligations and whether or not they were properly discharged. They were. Then, the Court turned its attention to Moody Kirby’s right to terminate the deal because Capcor attempted to buy the land with a check when a wire was required and Capcor had been advised of that requirement.

Moody Kirby evidently had the right to terminate.

Strangely, there is nothing written about liquidated damages, other than to uphold the jury’s verdict and the trial court’s judgment. How interesting from the same Court that, barely eight months ago, invalidated TREC’s concept of “liquidated damages are always equal to three times the earnest money.”

The trial court’s Judgment was affirmed for Moody Title and Moody Kirby. See Capcor at KirbyMain, LLC v. Moody National Kirby Houston S, LLC; No. 01-13-00068-CV, Texas Court of Appeals – First District, March 13, 2014.

Lessons learned:

1.      In July 2013 the same Appellate Court reached the opposite conclusion regarding liquidated damages. Could it be that liquidated damages were not contested by Capcor in this appeal?

2.      Contact the title agent well before closing, so you will know their unique requirements and be prepared.

3.      I counsel my clients to avoid the situation where a party to a contract is also affiliated with the title agency. Although it appears that Kay Street was impartial in this case and should be commended for it, I am painfully aware of other circumstances where those who are connected receive more favorable treatment.

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.