E-SIGNATURE ATTRIBUTION

             Aerotek, Inc. hires hundreds of thousands of employees to work, globally, as contractors. To keep hiring efficient, Aerotek worked with a software developer to build an online-only hiring application. Aerotek uses the computerized hiring app exclusively to guide candidates through the hiring process.

            We recognize this system as “onboarding.”

            The hiring app sends a welcome email to the candidate, which email includes a hyperlink for the candidate’s use to navigate the online account-registration page. At that point a unique user ID and PW is created, and the candidate supplies answers to several personal security questions.

            At each subsequent log-in the candidate must correctly enter the user ID, PW, and answer the security question.

            If successfully navigated, the hiring app presents the candidate with employment information and various contracts to e-sign. First up is the Electronic Disclosure Agreement. By agreeing to the terms of the EDA, the candidate consents to “be bound” by Aerotek’s e-docs “as though . . . signed . . . in writing.” The next set of docs ask for the candidate’s personal info. Each successful completion unlocks the ability to continue deeper into the employment app.

            Included in the docs is a Mutual Arbitration Agreement.

            Trojuan Cornett, Michael Marshall, and Lerone Boyd each remotely completed Aerotek’s computerized hiring app; Jimmy Allen completed his in Aerotek’s office by going through the same computerized online app procedure. Aerotek hired all four to work on a construction project for Aerotek’s client. All four were terminated not long after starting work; all four sued Aerotek and others for racial discrimination and retaliation.

            Aerotek moved to compel arbitration, which dispute resolution mechanism was contained in the MAA. All four employees opposed the motion. Each submitted a sworn declaration acknowledging that he had completed the online hiring application but denying that he had ever seen, signed, or been presented with Mutual Arbitration Agreement.

            Aerotek responded with a time-stamped MAA and EDA, along with database records showing the timestamp for every other action taken by each of the four employees in completing the hiring application.

            At trial, Aerotek’s program manager testified that no employee could have completed the procedure without executing the MAA, and that the records could not have been altered or manipulated after submission. The four employees, unmoved by the program manager’s testimony, countered with their declarations.

            Based on the evidence presented, the trial court denied Aerotek’s motion to compel arbitration. The court of appeals affirmed.

            Aerotek appealed to the Supreme Court.

            To compel arbitration, a party must prove that a valid arbitration agreement exists. For the MAAs to be valid, the employees must have consented to them. The employees argue they did not consent to the MAAs because the e-signatures are not theirs.

            Texas law provides that if parties to a transaction have agreed to conduct it by electronic means, then a standard for attributing e-signatures is applied. That standard requires the showing of a security procedure to determine if the e-record or e-signature is valid. Adequate security procedures include the use of algorithms or other codes, identifying words or numbers, encryption, or callback procedures.

            A record that cannot be created or changed without unique, secret credentials, can be attributed to the one person who holds those credentials.

            The Supremes sifted through the evidence and came to a different conclusion, finding that each of the employees signed and therefore consented to the MAAs and as a consequence, each agreed to arbitration. Aerotek wins. See Aerotek, Inc. v. Lerone Boyd, Michael Marshall, Jimmy Allen, and Trojuan Cornett; Case No. 20-0290; Texas Supreme Court; May 28, 2021: https://law.justia.com/cases/texas/supreme-court/2021/20-0290-0.html.

            Lessons / Questions / Observations:

1. Lesson: My surmise is that the use of e-contracts already exceeds the use of paper contracts. This case is a great tutorial on how to be sure e-contracts are valid, and also how to challenge e-contracts.
   

2. Observation: This case comes to us from the world of employment law. However, it seems to have equal application to all areas of law including mine – real estate.
   

3. Questions: Do you use software to create e-contracts? Do you have a contract with the software supplier certifying that the supplier’s products comport with law, so you have recourse if your e-contracts are successfully challenged?
   

                                                                                    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.

CONVERTING DEBT TO EQUITY [INVOLUNTARILY]

             10 years ago Lisa Skye Hain was a Manager at WeWork in NYC, where she met Joel Schreiber, one of the original investors in WeWork. Joel was also the founder of Waterbridge Capital, a real estate investment firm in NYC.

            Lisa decided to start her own shared office space – Live Primary, LLC – in 2015, and Joel agreed to invest $6 million in exchange for a 40% membership interest. Lisa received 30%, and another member received the final 30% interest.

            Joel produced an Operating Agreement for the LLC that described his contribution as a loan, instead of equity. Joel then caused Primary Member LLC to be formed as the vehicle for the Live Primary project.

            Lisa received a salary from Live Primary. Primary Member did not, nor did the other 30% investor. Primary Member had no day-to-day involvement in business matters but retained consent rights related to major decisions.

            Lisa and Joel later formed Primary, LLC. The Operating Agreement for Primary, LLC, stated that Primary Member would make several loans to the entity totaling $6 million, to establish two shared office facilities and fund start-up expenses. Each loan was intended to be formalized with a Loan Agreement and Promissory Note; each of the loans accrued interest at 1% per year; accrued interest and the principal balance were payable only upon a “Liquidity Event.”

            All loans were required to be repaid before distributions to any other members.

            The Operating Agreement provided that the LLC Managers would deliver disbursement requests to Primary Member. If Primary Member failed to fund the request, then Primary Member became obligated to pay a 5% default fee and the LLC could recover portions of Primary Member’s ownership interest in the LLC, diluting Primary Member’s ownership accordingly.

            Although it was Primary Member’s obligation to fund disbursement requests, it never did so. Apparently Primary Member never opened a bank account. Instead, all advances came from Waterbridge Capital, the real estate investment company founded by Joel, even though Waterbridge was legally a stranger to the Live Primary transaction.

            More than 60 disbursements were made through Waterbridge in a three-year period, without issuance of any Promissory Notes or Loan Agreements. Then additional fundings occurred from June 2018 to July 2020, based on emails from Lisa to Joel.

            Live Primary, LLC, filed a bankruptcy petition and Primary Member filed a Proof of Claim stating that it was a lender-creditor and had loaned the debtor $6.4+ million. Live Primary challenged Primary Member’s lender-creditor position and requested that Primary Member’s interest be reconstituted as an equity investment in the start-up company.

            As background, in bankruptcy law creditors of the debtor may have a right to receive payment based on Proof of Claim forms tendered to the court. And bankruptcy courts can use equitable powers to review contested matters – evidently these are different from adversary proceedings – and potentially recharacterize a loan as an equity interest.

            Basically, recharacterization cases turn on whether a debt actually exists. If not, then the claim might be reconstituted as an equity investment.

            Lenders, particularly secured creditors, are entitled to priority treatment in the context of bankruptcy distributions. Equity investors are not. No lender desires to be reconstituted as an investor, and consequently surrender their priority status when distributions are made.

            In analyzing a determination of loan vs. equity, bankruptcy courts examine facts such as: (a) did the same persons or entities control both the transferor and transferee; (b) were funds paid to an enterprise with little or no expectation that they would be repaid; and (c) is an individual or entity merely attempting to thwart the company’s legitimate outside creditors.

            True loans, says this court: (d) are named as such; (e) have fixed maturity dates and payment schedules; (f) provide for a source of repayment; (g) can be secured but it is not a strict requirement; and (h) might involve reserve accounts and sinking funds to provide a source of repayment.

            The ultimate test is to ascertain the intent of the parties. Claims of creditors who were corporate insiders are closely scrutinized.

            Finding a failure to issue promissory notes and loan agreements, the absence of a fixed, realistic date for repayment, the minimal 1% per year interest rate, the lack of any security or requirement that Live Primary fund a reserve account to secure repayment, and the use of the funds for initial operating expenses “. . . all reveal the economic reality that the [purported loan] functioned as equity.”

            Consequently, Primary Member’s funding was recharacterized as equity. See In Re Live Primary, LLC; Case No. 20-11612 (MG), United States Bankruptcy Court, S.D. New York, March 21, 2021: https://scholar.google.com/scholar_case?case=11865234986206902320&q=in+re+live+primary+llc&hl=en&as_sdt=6,44.             

            Lessons / Questions / Observations:

1. Lesson: What do you think this means to Joel Schreiber – did he lose his investment due to the recharacterization of his funding?
   

2. Observation: I am not a bankruptcy lawyer, but some of this was a surprise to me. It seems logical that a bankruptcy court has the equitable power to make this decision to prevent people from gaming the system, but I would have guessed that the initial characterization of the funding as a “loan” would carry more weight.
   

3. Questions: Do you have investors who insist on making loans to avoid being recharacterized as equity? A close read of this case will grant those investors the safe harbors they need to avoid having their contributions be challenged and possibly reconstituted years later by a bankruptcy court.
   

                                                                                    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.

 

$1 MILLION RESIDENTIAL EVICTION

             Yvonne Martin and Petter Kristensen married in 1995. In 1999 they lived together at a home owned by Yvonne.

            Yvonne transferred ownership of the home to Petter’s father, Frank Kristensen, by quitclaim deed in 2004. The couple continued to live there as tenants, although neither Yvonne nor Petter paid rent or otherwise compensated Frank and there was no lease agreement.

            Petter left the home in May 2008 after Yvonne received a protective order against him, claiming that he had abused her. Yvonne filed for divorce soon thereafter. In the divorce litigation she received another protective order, granting her the use, control, and possession of the marital home.

            On July 1, 2008 Frank sent Yvonne a notice to vacate. Yvonne failed to do so, and instead added Frank as a defendant in the divorce proceeding, asserting that she had transferred ownership of the home to Frank under duress and that the quitclaim deed should be rescinded.

            In the divorce Yvonne sought an order granting her possession of the home until the court divided the marital property. After months of motions and argument, the divorce court entered an order awarding Yvonne temporary use and possession of the home pending final resolution of the divorce.

            Yvonne next received an order in June 2012 that prevented Petter from evicting her during the pendency of the divorce. Frank was incapacitated in Norway at the time, with Petter acting on Frank’s behalf through a power of attorney.

            Finally in 2014, after Yvonne had requested several delays, a trial was convened to resolve the ownership and eviction issues. At trial a jury rejected Yvonne’s assertion that she had transferred the property to Frank under duress. On that basis, the district court concluded that Frank was the rightful owner of the property and that Yvonne was guilty of unlawful detainer starting in July 2008.

            On October 12, 2015, Yvonne vacated the home. Several months later the court convened a new trial to determine damages based on Yvonne’s unlawful occupancy of the property for over seven years – the period from July 2008 to October 2015.

            The court concluded that the fair market rental value for the property during that period was $224,534. Since State law requires an award of treble damages, the total award was increased to $673,602 plus attorney’s fees and court costs of $227,000, for a final judgment for $900,663 in Frank’s favor.

            Yvonne appealed. The court of appeals affirmed.

            Yvonne appealed again. The Supreme Court agreed to review the case.

            The Supreme Court stated that Yvonne was in a precarious position. She could have relinquished possession in July 2008 and the resultant damages would have been minimal. Or, she could elect to contest the legality of the deed she signed conveying ownership of the property to Frank, but if she is proven wrong in her litigation strategy then the damages could be enormous.

            Although the divorce court’s orders protected her from eviction, they did not insulate her from liability for damages to the owner of the property. Once it was determined that Frank lawfully owned the property, Yvonne was responsible to pay the fair market rental value for the years between the initial filing and the date of the trial court’s judgment.

            The Supreme Court concluded that Yvonne’s “. . . gamble turned out to be a bad one.” Frank wins again; Yvonne loses again. See Yvonne Martin v. Frank Kristensen; Cause 20190797, Supreme Court of Utah, May 27, 2021: https://law.justia.com/cases/utah/supreme-court/2021/20190797.html.             

            Lessons / Questions / Observations:

1. Lesson: Do you have a tenant involved in a divorce? If the tenant attempts to seek a court order precluding the owner or manager from evicting, you’ll want to be actively engaged in that process.
   

2. Observation: This Opinion does not state whether Yvonne could pay a Judgment approaching $1 million. Very few consumers could do so, and I doubt there is insurance to assist her with this huge liability.
   

3. The BL: Just pure speculation, but my sense is that although the Supreme Court concluded that Frank won, I’m going with Frank lost. Frank had no rental income for over seven years and paid $227k in attorney’s fees to evict Yvonne and prove his lawful ownership of the residence. Although Judgment was rendered against Yvonne for $900k+, I’m guessing that she will pay little or none of it.
   

                                                                                    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.

TITLE INSURANCE V1

             I’ve been writing blog articles for over 10 years, but I have never written about title insurance. The time is nigh.

             Hall CA-NV funded the renovation of the Cal-Neva Lodge & Casino, near Lake Tahoe. Before Hall agreed to finance the project, the property owner engaged Penta Building Group to conduct some preliminary work.

            Hall knew of the contract, so Hall had Penta subordinate Penta’s construction liens to Hall’s finance documents. Based at least in part on that subordination, Hall then authorized $29 million in debt financing, for which Hall received a mortgage.

            At the same time Hall obtained a lender policy of title insurance from Old Republic. In doing so, Hall agreed to remove the standard Covered Risk 11(a) in the ALTA policy form. That provision protects the insured against losses sustained because of lack of priority of the insured mortgage.

            The project continued but the loan became out of balance due to significant change orders. Hall stopped advancing funds after the owner stopped obtaining additional equity. Penta, however, continued its work for months later.

            Finding itself unpaid, Penta started foreclosure on its mechanic’s lien claims, claiming super-priority over Hall because Penta’s liens related back to Penta’s initial work which predated Hall’s construction loan. Hall received partial payment for its debt position, and then filed claims against Old Republic since Old Republic was unwilling to indemnify Hall for a loss of almost $5 million.

            The federal district court concluded that Penta’s liens were for unpaid work incurred before the policy date, and the policy afforded no coverage to Hall due to the deletion of Covered Risk 11(a). The court entered judgment for Old Republic. Hall appealed.

            In the US Court of Appeals, Hall contended that other provisions of the title policy offer Hall insurance for this claim. Old Republic responded that Hall agreed to remove the one portion of the policy that would have protected Hall – Covered Risk 11(a).

            And further to that point, Old Republic offered that not only did Hall agree to remove Covered Risk 11(a) but Hall also agreed to ALTA endorsement 32-06, which provides that the policy does not insure against losses due to mechanic’s liens arising from services not designated for payment in the construction loan finance documents.

            Old Republic wins, again. Hall loses, again. See Hall CA-NV, LLC v. Old Republic National Title Insurance Company; Cause 20-10268, US Court of Appeals, 5^th Circuit, March 10, 2021: https://scholar.google.com/scholar_case?case=14431452547442516413&hl=en&as_sdt=6&as_vis=1&oi=scholarr.           

            Lessons / Questions / Observations:

1. Lesson: Title insurance, often overlooked because it is arcane, abstruse, obscure, abstract, abstruse, and generally no fun to read and comprehend, is critically important. Title insurance companies write policies to protect themselves and limit their exposure. Those policies must be negotiated by property purchasers and their lenders.
   

2. Observation: Why, you may ask, did Hall not seek recovery from the property owner? Although not clearly stated in the appellate opinion, it appears Hall may have done so but the owner’s bankruptcy precluded Hall from collecting all that was owing, leaving a balance under $5 million. And as a consequence, Hall then turned its gun turrets to Old Republic.
   

3. Questions: Do you know how to review title insurance, both from the owner’s and lender’s perspectives? Are there people on your team who are tasked with this important job? Are you working with an experienced title agent who can offer helpful guidance?
   

                                                                                    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.

REFUSING TO ALLOW A SUBLEASE

 

            H&B Realty leased a car lot to JJ Cars for a five-year term starting July 1, 2011. John Mokarzel, owner of JJ Cars, guaranteed the Lease obligations. JJ Cars was successful initially. But by February 2013 JJ Cars was in financial distress.

            John decided to close his business and sublet. From February 2013 until October 2015, three different businesses subleased the property from JJ Cars. Approval for the first and third was obtained from H&B’s owner Sterling Boyington. Evidently Boyington never objected to the second sublet although he knew of it and may have furnished tacit consent, if not actual approval.

            In November 2015 JJ Cars sought formal consent from H&B to sublease the property to Wholesale Motors. Boyington refused, claiming he disliked Wholesale’s owner, Dave McGovern.

            As a consequence, JJ Cars stopped paying rent. H&B evicted JJ Cars in March 2016, only a few months before the term was set to expire anyway. H&B sold the property two weeks later.

            Several months after the sale H&B filed a lawsuit against JJ Cars and John Mokarzel, alleging breach of the Lease and seeking damages for six months of rent. JJ Cars defended by claiming that H&B breached the Lease by refusing to allow the sublease to Wholesale Motors, and H&B failed to mitigate its damages.

            The trial court concluded that although JJ Cars failed to pay rent, H&B breached the Lease by unreasonably withholding its consent to allow the sublease to Wholesale Motors. The court further determined that H&B did not mitigate damages after JJ stopped paying rental. The court entered judgment in favor of JJ Cars and John Mokarzel, concluding that their breach – failure to pay rent – was excused by H&B’s Lease defaults – unreasonably withholding consent to sublease to Wholesale Motors and failing to mitigate damages.

            H&B Realty appealed.

            The Court of Appeals examined Article XIII of the Lease, and found that: (a) JJ Cars could not sublease without H&B Realty’s consent; (b) H&B could not unreasonably withhold its consent to a request for sublease; (c) H&B had the right to review each proposed subtenant’s credit, business experience, and financial statement; and (d) each subtenant had to agree to abide by the terms of the Lease.

            From there, the examination of the record revealed that no documents of Wholesale Motors were furnished to H&B. John Mokarzel testified that, simply put, H&B’s owner Sterling Boyington did not like Dave McGovern, owner of Wholesale Motors. Due to Boyington’s dislike of McGovern, there was no purpose in delivering documents and financial statements, and agreeing to abide by the terms of the Lease.

            The Court of Appeals determined that Boyington’s refusal to consider Wholesale Motors as a subtenant was a breach of Landlord’s duty to not unreasonably withhold consent. That breach ended any chance of JJ Cars to use the property in a way that would continue to generate income to pay rent.

            Boyington’s breach was material, and excused JJ Car’s failure to pay rent.

            JJ Cars wins again. See H&B Realty, LLC v. JJ Cars, LLC; Case 2021-ME-14, Maine Supreme Court; March 23, 2021: https://law.justia.com/cases/maine/supreme-court/2021/2021-me-14.html.           

            Lessons / Questions / Observations:

1. Observation: Most commercial Leases require Landlord’s approval before a Tenant can assign or sublease. Some prohibit subleasing and assigning entirely. It seems inconsistent that a Landlord can prevent a financially distressed Tenant from assigning or subleasing, and yet not be found liable for failure to mitigate damages when the Tenant could not pay rent.
   

2. Lesson: From this Court’s perspective, it is not enough for a commercial Landlord to reject a sublease application simply because the Landlord dislikes the owner of the proposed assignee or sublessee. If this Landlord had used the pretext of declining Wholesale Motors due to one of the reasons stated in the Lease (credit, business experience, financial statement), it likely would have sufficed and the outcome reversed.
   

3. Questions: What does your Lease form say about Lease assignments and Premises subleases? Do the laws of your State add an overlay to that analysis? Will your Courts uphold the right of a Landlord to unequivocally say NO, then successfully chase the Tenant and Guarantor for damages?
   

                                                                                    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.

 

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.