PIERCE THAT LIABILITY SHIELD (OR NOT)

             Richard Belliveau provides lighting systems for high-profile events, concert tours, theater events, and showrooms. Richard entered into a License Agreement in 2007 with his company, High End Systems, Inc., which required that High End use Richard’s intellectual property for commercial gain. In exchange, High End agreed to pay Richard a substantial annual amount, in addition to sublicense proceeds.

            High End was sold to Barco, Inc. in 2008, for $55 million, and as a consequence High End became a wholly owned subsidiary of Barco. Richard worked closely with High End and Barco to negotiate new sublicense agreements for the following decade.

            Meanwhile, High end suffered financially. By 2016 Barco was looking for a purchaser. Barco signed a contract with a company in 2017 committing Barco to sell High End for $7.5 million to Electronic Theater Controls, Inc.

            Richard was displeased at the valuation.

            Negotiations between Barco and High End continued and resulted in a sublicense for High End’s current patent portfolio as well as Richard’s future intellectual property. Barco paid $75,000 for the license, but it agreed not to make or sell any licensed products for four years.

            Five days later, Barco sold High end to Electronic Theater Controls.

            Richard sued Barco in Texas State court, claiming that since Barco owned High End, Barco was responsible for High End’s sublicense of all of Richard’s intellectual property to Barco for an unreasonably low value. And that High End’s breach of a duty owing to Richard allowed Richard to prosecute a claim against High End’s owner, Barco.

            Barco removed the State litigation to Federal court. Richard lost at the district court level and appealed.

            The Federal appellate court, using Texas law, determined that in order to prevail Richard must show that Barco used High End to “. . . perpetrate an actual fraud . . . primarily for Barco’s direct personal benefit [italics added].”

            Richard argued that fraud was committed based on High End’s execution of the Barco sublicense for $75k, which Richard contends was far below market value. The appellate court noted that the lower court found that the execution of the Barco sublicense was permitted and not evidence of actual fraud. As well, Richard did not provide to the appellate court sufficient evidence that the Barco sublicense was undervalued.

            To refute, Richard tendered his expert’s opinion that the fair market value of Barco’s rights under the Barco sublicense was over $100 million. And consequently, the $75k amount actually paid was grossly inadequate and evidence of fraudulent intent.

            This argument seemed to gain traction with the appellate court.

            Traction ended when the appellate court determined that this is a breach of contract case, which does not authorize Richard to sue Barco, the shareholder, for operating according to the terms of a contract. Further, the appellate court stated that piercing the corporate veil is a remedy to be used when the actions of the entity’s owner amounting to “actual fraud” render the entity unable to pay its debts.

            Barco prevails, again.

            See Belliveau v. Barco, Inc.; Case 19-50717; US Court of Appeals, 5^th Appellate Circuit; Western District of Texas; January 28, 2021: https://scholar.google.com/scholar_case?case=13618133374852336339&hl=en&as_sdt=6&as_vis=1&oi=scholarr.             

            Lessons / Questions / Observations:

1. Observation: Laws and cases prohibit the formation of corporations, LLC, limited partnerships, and similar for the purpose of committing fraud and then hiding behind the liability shield offered by statute. But absent a clear showing of fraud, it is difficult to reach through the shield to the wallet of the shareholder, member, or partner.
   

2. Question: Richard Belliveau first asserted his claim against High End, then later dismissed High End and replaced it with Barco. Why do you suppose he did so?
   

3. Observation: For those interested in this case or how the “piercing” theory can be successfully used, there is a well-written dissent starting at page 20 from W. Eugene Davis, Senior United States Circuit Judge of the US Court of Appeals. Judge Davis would have returned this case back to the lower Federal court, to allow a jury to hear all the facts and render a verdict.
   

                                                                                    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.

 

EVICTION BASED ON NOTICE SERVED BY PRIOR OWNER

            Ever wonder what happens when a new property owner uses a demand to vacate served by the previous owner? Or to state it differently, if property is sold while evictions are pending, may the new owner succeed to the previous owner’s position or does the new owner have to restart?

             No? Well Ok, but I have wondered . . .

             Plaintiffs Johnny Ki Lee and Un Joong Lee sought to evict Defendant Sean Kotyluk for selling marijuana without a license. Sean claimed that Plaintiffs’ three-day notice was defective because it was served on June 4, 2019, but Plaintiffs did not become owners of the property until June 20, 2019 and the eviction litigation was started the following week.

             There was no landlord-tenant relationship between Plaintiffs and Defendant on June 4, the date the notice was furnished.

             In response to Sean’s defense regarding defective notice, Lee and Lee explained that the prior owner, Rosemarie Haynes, had served the notice before transferring ownership of the property to Plaintiffs. And that as direct successors to Haynes, Lee and Lee had the right to continue the eviction instead of being forced to start over with a new three-day notice.

             After the trial court examined the notice defect and made Plaintiffs aware that it was fatal to their eviction case since none of this sequencing was adequately explained in the litigation petition, Plaintiffs requested that the trial court allow Plaintiffs an opportunity to amend their pleadings. The revised pleadings, if permitted, would state that, sequentially, Haynes served the notice, Plaintiffs bought the property from Haynes, and thereafter Plaintiffs started the eviction lawsuit.

             The trial court rejected Plaintiffs’ request, and instead granted judgment for Defendant. Plaintiffs were not entitled to evict due to defective notice; Plaintiffs were not entitled to amend their pleadings to cure the procedural defect; Defendant wins the case and is entitled to recover $25,794 in attorney’s fees from Plaintiffs.

             Plaintiffs appealed.

             The Appellate Court reviewed a copy of the Lease was attached to the pleadings, which identified the landlord as the Living Trust of Rosemarie S. Haynes. The original petition further alleged that Sean was served with a three-day notice on June 4, 2019, and that Sean failed to vacate by June 7.

             Nothing in the pleadings stated that the eviction notice was served by the previous owner – Rosemarie Haynes. Further, the notice itself did not state that it was signed by Haynes. All Plaintiffs needed was a statement in the litigation pleadings to the effect that Haynes had served the notice (or an authorized agent for Haynes did so). Then, an appeal likely would not have been necessary.

             On appeal, the Court determined that Lee and Lee should have been allowed to fix this mistake at trial and doing so would have allowed the trial court to issue eviction Judgment for Plaintiffs.

            The trial court’s judgment was reversed; the lower court should have allowed Plaintiffs the opportunity to amend their pleadings to provide the sequencing of: (1) eviction notice by Haynes, (2) purchase by Lee and Lee, and (3) eviction lawsuit, which facts would have proven a satisfactory explanation.

             Plaintiffs Lee and Lee are ultimately victorious; Defendant Kotyluk loses.

             See Johnny Ki Lee v. Sean Kotyluk; Case G058631; 4^th Appellate District Court of California; Division Three; January 7, 2021: https://scholar.google.com/scholar_case?case=10858927393993309984&hl=en&as_sdt=6&as_vis=1&oi=scholarr.

           Lessons / Questions:

1. Question: How many times have property professionals taken over the management of commercial income-producing properties with not only demand and eviction notices pending, but also with litigation in process? And how many Defendants know to raise this defense? 

2. Question: Have you been asked to complete the prosecution of a pending lawsuit on behalf of an incoming landlord, because the property was sold before Judgment? Are you and your lawyers aware of the case management issues that can arise if not handled properly with the Courts, and Pleadings amended or drafted properly to identify and fix this issue?
   

3. Lesson: Landlords may tell their story in Pleadings. Do so. To limit surprises at trial, make the judge aware of the background and context in your litigation Petition, as well as what you are asking the court to do. Be specific. And if the judge questions your case, then ask for permission to amend the pleadings before judgment is rendered for your opponent. Sometimes even oral amendments are allowed – but only if you ask!

                                                                                     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.

 

ADEQUACY OF PROPERTY DESCRIPTION

            On October 24, 2017, Dayston LLC agreed to sell Jonathan Brooke acreage and improvements in Erath County, Texas. The Contract provided for two street addresses of the target assets in Stephenville, Texas, and then identified six parcels by abstract number, indicating a total of approximately 81.50 acres.

             Appended to the property description was the following: “*Please note the 81.50 acre parcel is being surveyed and renamed. Title company will convey the new legal address once completed.”

             Brooke asserted that the contract was void under the Texas statute of frauds because the property descriptions were legally insufficient. Dayston countered that Brooke had personally inspected the land on multiple occasions and additionally, the incorporation of a future survey would satisfy all statute of frauds issues.

             The trial court granted Brooke’s request and entered Judgment, finding that the land description was inadequate thus rendering the contract void. All monies held in escrow were ordered returned to Brooke.

             Dayston appealed.

             Citing Texas Supreme Court authority, the Appellate Court started the analysis by stating that “. . . the knowledge and intent of the parties has no effect on the validity of the contract.” The Appellate Court allowed that the contract must furnish, either within itself or by reference to other identified writings then in existence, the means or data by which property may be identified with certainty.

             Documents and surveys to be furnished in the future cannot be used to satisfy the statute of frauds; those writings must be in existence when the contract is signed. If those writings do not sufficiently describe the property to be conveyed, then the contract violates the statute of frauds and is voidable.

             Although the writing does not have to contain metes and bounds field notes, it must furnish data that identifies the property with reasonable certainty.

             A street address, with nothing more, may be insufficient if there is uncertainty regarding the amount of land included in the conveyance. And, essential elements of the writing may not be proved with extrinsic testimony.

             In this case, the Appellate Court examined the legal description of two street addresses, +/- 81.50 acres of A0681 Smith Hancock and A0057 DW Babcock, all in Erath County, Texas, and decided it fails for lack of clarity. As an interesting side note, it appears that if Dayston had added a note that the parcels were all the lands owned by Dayston in Erath County or similar, the Court might have reached a different result.

             Brooke wins; Dayston loses; the contract does not satisfy the statute of frauds test. See Dayston, LLC v. Jonathan D. Brooke: Case No. 11-18-00288-CV; 11^th District of Appeals of Texas, Eastland; October 8, 2020: https://scholar.google.com/scholar_case?case=6551208105501169766&q=dayston,+llc+v.+brooke&hl=en&as_sdt=6,44&as_vis=1.   

            Lessons / Questions / Issues:

1. Question: How many times have you used or seen incomplete property descriptions in real estate contracts; how often have you seen or used a provision like “to be provided in a Survey” or similar?
   

2. Question: Will you now change your practice to include a statement in each contract to the effect that the target asset is the only parcel of real estate owned by Seller in _________ County?
   

3. Question: For those States that have real estate commissions that promulgate contract forms, do you suppose that the forms will be revised to better guide brokers, agents, attorneys, buyers, and sellers to properly insert full property descriptions (maybe by stating that the failure to do so can invalidate the contract)?
   

4. HNY. Happy New Year 2021 to all my loyal readers!

                                                                                     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.

HOGS, OLFACTOMETERS, & XENOPHOBIC APPEALS

              Murphy-Brown, LLC is a commercial hog producer, who contracted with Kinlaw Farms to operate an industrial hog feed facility. Joyce McKiver and others owned residential properties near Kinlaw Farms. They sued Kinlaw for nuisances associated with hog operations, claiming they could no longer enjoy their outdoor gardens, hold cookouts, or even keep their windows open.

             Kinlaw maintained 15,000 hogs at the farm. The hogs generated 153,000 pounds of feces and urine daily. Kinlaw housed the hogs in sheds that used vents and fans to move fumes to the outside of the building. By design, the hog waste in the sheds fell through slats in the floor. Then, the waste was stored in three open-air pits within view of McKiver’s home.

             The lagoons contained millions of gallons of hog waste.

             Kinlaw periodically drained waste from the pits and spread it as fertilizer across open fields on Kinlaw’s property. Approximately 8 million gallons of hog feces were sprayed in the air annually at Kinlaw Farms.

             Kinlaw was aware that residential housing was in close proximity to its farm and as a consequence, instructed its personnel to refrain from discharging the hog waste to spray fields if the neighbors planned to entertain guests for a wedding or cookout. Despite the policy, spraying of hog waste in summer months occurred at Kinlaw Farms three to five days each week, for an average of six hours each day.

             Additionally, trucks regularly delivered new hogs, removed live hogs, and retrieved dead hogs, at an all-day, all-night pace.

             Dead hogs were stored in “dead boxes,” which were dumpsters placed in open fields at Kinlaw Farms. Hog carcasses would pile up and rot in the dumpsters. The dead boxes attracted buzzards, gnat swarms, and flies that would also frequent neighboring properties.

             In 2013 McKiver and her neighbors had enough and asserted a lawsuit in State court, then removed it to federal court in 2014. The federal district court consolidated 26 related cases filed by neighbors.

             In Spring 2018 the jury returned a verdict awarding $75,000 in compensatory damages to each of 10 plaintiffs, and also awarding $5 million in punitive damages. The district court applied the State’s punitive damages cap, reducing the total punitive award to $2.5 million.

             Kinlaw appealed.

             Kinlaw claimed on appeal that McKiver and neighbors were not entitled to damages for loss of use and enjoyment of their property, as State laws including a “Right to Farm Act.” The federal Court of Appeals made short work of that argument, citing that “. . . it is beyond debate that North Carolina case law dating back over 100 years includes recognition of loss of use and enjoyment from annoyance and discomfort, as well as other forms of damages . . .”

             Next, Kinlaw pivoted to a challenge of McKiver’s experts. First up was Dr. Shane Rogers. Dr. Rogers had testified that DNA markers for hog feces could be found on the homes surrounding Kinlaw Farms. His specialty was described as “the fate and transport of fecal pathogens.”

             I won’t go into graphic detail regarding the feces collection, sampling, analysis, and labeling issues litigated by Kinlaw. Suffice it to say that the Court of Appeals determined that Dr. Rogers’ opinions were both reliable and relevant.

             Judgment for Joyce McKiver and her neighbors was mostly affirmed, in a decision that took 144 pages to explain. Of which the first 67 pages constitutes the formal opinion of the Court, while the remaining 77 pages consists of various concurring and dissenting criticisms. Some of the dissenting and concurring opinions offered suggestions regarding Chinese racial issues, xenophobic appeals, and olfactometer readings.

             See Joyce McKiver v. Murphy-Brown, LLC: Case No. 19-1019: US Court of Appeals; 4^th Circuit; November 19, 2020: https://law.justia.com/cases/federal/appellate-courts/ca4/19-1019/19-1019-2020-11-19.html.

           Lessons / Questions / Issues:

1. Issue: So, no surprises here – the outcome is exactly as you expected, right? I look at this differently. What if the neighbors knew of the hog farm operations, nuisance, stink, and related health issues when they bought their properties, and then assumed the risk by moving in and occupying the properties as their residence. Should Kinlaw be liable in that situation? 

2. Question: Does this case suggest that you can buy residential property near an airport or toxic dump site which is publicly disclosed or visibly apparent, move in, then later assert a valid claim?

3. Statement: There is no question but that McKiver and her neighbors were and likely still are substantially damaged, for which money may not be compensatory if their health was adversely impacted. As one of the appellate judges stated, nobody wants another situation like Flint, Michigan. I hope this is not further appealed, that the money recovery is enough for them to move far away, and that science can provide a better answer for this issue that must be recurrent in every State.

          PS v1: One stinkin’ year; one stinkin’ post. 

          PS v2: Happy Holidays!

                                                                                     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.

 

LEASE RADIUS RESTRICTIONS

             The Shops at Legacy is a successful mixed-use commercial development in Plano, Texas. Del Frisco’s Grille of Texas LLC entered into a Lease Agreement with Shops in October 2014. The Lease contains a provision prohibiting Del Frisco from owning, operating, or managing a business with the same or similar trade name or similar concept within five miles.

            If Del Frisco breaches the covenant, then base rent is increased 10%, and percentage rents are increased 25%, or 75% if the other store is within a two-mile radius.

            The Lease further defines the tenant’s trade name as Del Frisco’s Grille, “. . . or other trade name used by Tenant . . . operating the same restaurant concept in a majority of its and their locations . . .”

            In November 2015 Del Frisco signed a lease to open “DF Steakhouse” in Legacy West, a newly developing retail complex less than two miles from The Shops at Legacy. In January 2016 Shops notified Del Frisco that it was aware of the new lease and it would consider the opening of DF Steakhouse at Legacy West to be a competing business.

            Del Frisco responded that DF Steakhouse was not a competing business primarily because Del Frisco was prohibited under the terms of the Shops Lease from having steak sales exceed 20% of gross sales. This accommodation was included in the Shops Lease so that Del Frisco would not compete with Bob’s Steak & Chop House, a pre-existing tenant at Shops at Legacy.

            Shops replied that a competing business under the Shops Lease was not limited to the same restaurant concept, but also covered businesses with a similar trade name.

            In May 2017 Shops advised Del Frisco that, in anticipation of the opening of DF Steakhouse in Legacy West, rent was increasing due to the violation of the radius restriction clause. Del Frisco refused to pay over $350,000 in excess rents. Shops filed a lawsuit.

            Shops argued to the trial court that Del Frisco opened a competing business within two miles from The Shops at Legacy, and that both businesses had similar trade names. Del Frisco responded that DF Steakhouse did not compete, and in any event, the rent increase was an unenforceable liquidated damages penalty.

            The trial court granted judgment in favor of Del Frisco. Shops appealed.

            The Court of Appeals elected to focus solely on the liquidated damages issue. Shops argued that it is merely an agreed rent adjustment mechanism, which did not constitute a breach of the Lease. Instead, close-quarters competition was an action permitted by Del Frisco. But, an action with consequences.

            The Appellate Court stated that there is no meaningful difference between a provision expressly prohibiting competition and a clause that imposes damages for engaging in competition. And as such, the provision must stand the test of a liquidated damages evaluation.

            From there, the Court evaluated the “universal rule” that damages must be limited to “just compensation for the loss or damage actually sustained.”

            As written, the Lease provides Shops with the same measure of damages regardless of whether the competing business diverts customers from the property owned by Shops, or whether there is no connection or similarity between the trade names and businesses. The Court used the example of Del Frisco opening Del Frisco’s Grill Supplies, selling BBQ grills and grilling accessories. The names might be similar, but the business concepts are not. And in that situation, Del Frisco should not be deemed to have violated its radius restriction clause, incurring a significant financial penalty.

            The radius restriction imposes an impermissible penalty. Judgment for Del Frisco is affirmed. See Shops at Legacy v. Del Frisco’s Grille of Texas: Case No. 05-19-01274-CV; Texas 5^th District Court of Appeals; August 17, 2020: https://scholar.google.com/scholar_case?case=11554703078941256642&q=the+shops+at+legacy+v.+del+frisco&hl=en&as_sdt=6,44&as_vis=1.  

            Lessons / Questions / Issues:

1. Question: Your retail Lease has a radius restriction clause, right? Might want to rethink it next time you sign a new Lease or amend an existing one.

2. Issue: What does your Lease say about direct competition vs. merely a similarity in trade name?

3. Issue: How does your Lease compute damages if tenant defaults or triggers a situation where tenant owes additional money? Is there a relation to a reasonable forecast of future damages, or is it just an artificial tabulation intended to act as a deterrent?

                                                                                     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.

WHEN LIQUIDATED DAMAGES PROVISIONS FAIL

             John and Rosa Castro leased residential property from Fred Graylee in May 2015, for $3105 rent per month. In June 2018 Fred sent the Castros notice that they had three days to vacate, and that they owed $27,120 in unpaid rental.

             The Castros neither paid nor vacated, so Fred filed an eviction lawsuit.

             On October 2, 2018, the parties entered a stipulation with the Court. Under the stipulation, Fred was awarded possession as well as a judgment for $28,970 if the Castros failed to return the keys and vacate by October 31, 2018. The stipulation worked much like a settlement agreement.

             In January 2019 Fred filed a motion for entry of a $28,970 judgment against the Castros. Fred’s motion was based on both the stipulation as well as the declaration of Fred’s Property Manager, who claimed that the tenants had not vacated by October 31 but instead moved out the following day – November 1, 2018.

             The trial court entered judgment for Fred; Castros appealed.

             The Castros claim that the judgment amount of $28,970 was based upon a liquidated damages provision in the stipulation, but it is unenforceable as it bears no reasonable relationship to the range of actual damages the parties could have anticipated based on a short-term tenancy holdover.

             The appellate court accepted Castros’ position that the stipulation contained a “liquidated damages” clause. From there, the court considered “liquidated damages” as compensation to be paid in the event of a breach of contract, as determined by an agreement. The court further allowed that liquidated damages clauses become an unenforceable penalty if it bears no reasonable relationship to actual damages.

             LD clauses must provide for fair average compensation for an anticipated loss.

             In situations where the parties do not attempt to anticipate actual damages but instead merely select an arbitrary amount, the provision can fail. Also, LD provisions that provide for penalties in order to motivate a party to pay are unenforceable.

             Courts can look at the efforts undertaken by the parties to calculate the amount of damages that can be anticipated. The result can be measured, after a party has been damaged, against the amount of such damages.

             This “look back” procedure automatically makes delicate any LD provision.

             In the stipulation, the Castros did not concede the merits of the eviction claim. Neither did they admit to owing $27,100 in unpaid rent. Seeing “no meaningful relationship between the $28,970 judgment and the tenant’s failure to [timely vacate]” allowed the appellate court to determine that the $28,970 amount is an unenforceable penalty.

             The trial court’s judgment was reversed; Castros win and Fred loses. See Graylee v. Castro; Case Nos. G057901 and G058409; California 4^th Appellate District; Division Three; July 13, 2020: https://cases.justia.com/california/court-of-appeal/2020-g057901.pdf?ts=1596564065.       

            Lessons / Questions / Issues:

1. Question: How many disputes have you resolved that require a future payment? Have you added something extra to motivate a party? Might want to rethink that.
   

2. Question: How can you anticipate future damages? Perhaps the mechanism you used should be inserted into your settlement agreement / stipulation / judgment. That way, if later contested, a Court can review your algorithms and spreadsheets to better understand how you arrived at the LD amount.
   

3. Question: Why do Courts have the ability to review LD provisions after the event that triggers the LD payment, to determine if it was, at the time the LDs were contemplated, a reasonable forecast of future damages? Ok so that one might be rhetorical, but still . . .

                                                                                                            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