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.

 

 

*

Wire Transfer Fraud V2

In February 2016 Jerry Bain was looking to purchase investment real estate. Kathryn Sylvia Coleman and her broker, Platinum Realty, LLC, represented the seller. When the deal was ready to close, Jerry alleges that Coleman instructed him to wire almost $200,000 in closing proceeds.

Jerry followed the instructions furnished to him.

Unfortunately, however, the amount wired was sent to the wrong account, with the result that Jerry lost it all. It appears that a hacker gained knowledge of the pending transaction, and inserted wire transfer account data that dumped the funds directly into the control of the hacker instead of the title company.

Jerry sued Coleman and Platinum Realty to recover the amounts lost, claiming that they were negligent in their misrepresentation of the bank account data to him. The jury agreed, and found that Coleman and Platinum were 85% responsible for Jerry’s loss. Jerry was responsible for the balance.

Accordingly, the Court entered Judgment against Coleman and Platinum for $167,000. Defendants then filed a Motion with the Court claiming that the evidence is insufficient to support the jury’s finding of negligent misrepresentation.

The first test of negligent misrepresentation is a failure to exercise reasonable care or competence in obtaining or communicating the false information. Platinum and Coleman responded by claiming that Coleman did not send the email with the false data, inducing Jerry to wire funds to a third-party criminal’s account.

Coleman admitted that she had received the fake wiring instructions and attempted to forward them to Jerry. That email from Coleman to Jerry, however, was sent not to Jerry’s correct email address, but instead was sent to a very similar address from which Coleman had received a prior communication.

Presumably the hacker had created the similar address. And regardless, Jerry received the email with the hacker’s account number a few minutes after Coleman sent it.

To be sure he was wiring funds properly, Jerry then called Coleman, who confirmed by phone that the funds must be wired prior to closing. And so the funds were wired . . . to the hacker.

Once Coleman conceded that she did not confirm that she had sent correct wire instructions or that she had the responsibility to make sure the instructions were correct, the jury could safely conclude that Coleman failed to act with reasonable care.

And from there it was no stretch to impose liability upon Coleman and Platinum Realty for innocently participating in wire transfer fraud. See Jerry Bain v. Platinum Realty, LLC and Kathryn Sylvia Coleman; US District Court; District of Kansas; Case 16-2326-JWL; June 25, 2018; https://casetext.com/case/bain-v-platinum-realty-llc-1.

Lessons Learned / Questions Asked:

1.      Neither Coleman nor Platinum Realty represented Jerry Bain. And yet the Court still imposed liability on both without a fiduciary duty analysis.

2.      This Court is telegraphing the message that brokers and agents must exercise extreme caution not only with their principals, but also with other parties in their transactions.

3.      There’s at least one more point worthy of mention (besides the obvious which is that every email from a broker or agent to every party in every deal should state “We don’t send wire transfer information; contact the wire recipient to verify data before you send funds” or similar) – note that the jury found Jerry only 15% responsible for wiring funds to the wrong party. And this is after testimony that Jerry was an experienced commercial real estate investor. And that evidently Jerry never called the title agent to verify.

                                                                                    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

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com

Bankruptcy Fraud

Full disclosure: I don’t know much about bankruptcy fraud. I know that bankruptcy courts have the authority to find that some debts are non-dischargeable. And in that event, filing the bankruptcy may not be the answer the debtor is seeking.

Regardless of my lack of knowledge, it’s a topic that is worth exploring. A recent case will illustrate the point.

In 2004 Humberto Saenz Jr. entered into a Franchise Agreement with Pizza Patron in south Texas. The Franchise Agreement prohibited Saenz from transferring franchises without the consent of the franchisor.

Saenz formed Estrella Ventures, LLC, for the purpose of operating four Pizza Patron restaurants. He financed his accounts receivable, inventory, equipment, furniture and fixtures with the International Bank of Commerce and a $480,000 loan. Sales must have been good, as the debt was reduced to $336,000 in five years

In 2009 Jose Maria Gomez approached Saenz to purchase one store. Gomez and Saenz reached a deal for Gomez to acquire the Rio Grande City Pizza Patron franchise for $350,000, just enough to pay off the IBC debt. Neither Gomez nor Saenz obtained written consent to the transfer from Pizza Patron.

Saenz furnished sales reports, tax returns and income statements to Gomez. Gomez used them to substantiate the purchase price, and predict future revenues and expenses.

Due to health concerns, Gomez closed the store in 2011. Saenz reopened it under the Pizza Patron name.

Gomez, unhappy with a $70,000 loss and believing that Saenz made material wrongful misrepresentations to Gomez which induced Gomez to purchase the store, sued Saenz for fraud. Saenz countered by filing a Chapter 7 bankruptcy petition. The lawsuit was dispatched to bankruptcy court, where the court found for Gomez, entered judgment for $412,000 against Saenz, and determined that since the claim was based in fraud a discharge in bankruptcy would not serve to avoid the judgment.

In other words, the underlying purpose of the Chapter 7 bankruptcy filing – to duck the claim of Gomez – would not succeed and Gomez would still be able to collect monies owed to him even after the bankruptcy was concluded.

Saenz appealed.

The United States Court of Appeals looked at the evidence presented and determined that Saenz “lied frequently whenever it suited him.” Income Statements furnished by Saenz were false; discrepancies in accounting procedures and royalty payments were “problematic and unacceptable.”

The bankruptcy court had the right to weigh the credibility of both Gomez and Saenz, and determine that Saenz’s fraudulent conduct induced Gomez to make business decisions. And that substantial losses were incurred.

Fraud claims are not dischargeable in bankruptcy. Gomez wins. Saenz loses. Gomez may now continue to extract the amount owing to him from Saenz regardless of Saenz’s Chapter 7 bankruptcy proceeding.

See Humberto Saenz v. Jose Maria Gomez; No 17-41004; United States Court of Appeals of Texas, 5^th Circuit, August 7, 2018: https://www.law.com/texaslawyer/almID/1534478158TX1741004/.    

Lessons Learned / Questions Asked:

1.      Fraud claims are not dischargeable in bankruptcy.

2.      Independent due diligence and analysis is critical not only in real estate deals, but also in general business transactions. Complete trust in one party’s statements without verification can yield money losses and litigation.

3.      There’s an unreported piece to this case. Although Gomez ultimately prevailed in our legal system – did he really? He likely spent an exorbitant amount in legal fees to obtain a Judgment. And now what? Our Texas homestead and other debtor-exemption laws are still available to Saenz. What happens if Saenz uses those laws to his benefit and doesn’t pay Gomez – then who won?

                                                                                    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

Higier Allen & Lautin, PC

Commercial Lease Security Deposits

Our Texas Courts rarely give us insight into the interpretation of commercial lease security deposits laws. Until recently. New guidance awaits.

In August 2010 ProLogis Texas II leased real property in Sugar Land, Texas, to Daryl Flood Logistics. Daryl Flood assigned the lease to FP Stores in 2013, who, in turn, subleased part of it to Tramontina US in 2014.

I intuitively like Tramontina; they have an interesting spiced, citrus-glazed short rib recipe on their website: https://www.tramontina-usa.com/recipes/spiced-citrus-glazed-short-ribs. Ok so that was a minor digression and possibly reflects my ADD. I’ll take another pill now . . .

Tramontina paid FP a $50,000 sublease security deposit. The sublease required FP to refund the deposit, less proper deductions, within 60 days after Tramontina vacated.

The Master Lease between ProLogis and FP Stores terminated March 8, 2015, so by operation of law – the sublease also terminated. FP vacated but Tramontina stayed, as the direct tenant of ProLogis.

A week after termination Tramontina sent a letter to FP with Tramontina’s new forwarding address and demand to return the deposit within the time allowed by Texas law. Regardless, more than two months elapsed without either a return of the deposit or tender of an accounting that would provide for deposit offsets.

Tramontina sued FP for the refund of its security deposit, which by law is required to be returned within 60 days if a shorter time is not otherwise provided in the sublease. See Texas Property Code 93.011: https://statutes.capitol.texas.gov/Docs/PR/htm/PR.93.htm. That same law states that a landlord can be liable for triple damages if the monies are not timely returned, or otherwise a written description of damages and itemization of charges is not timely furnished.

The trial court agreed with Tramontina’s position and awarded Tramontina $150,100 ($50,000 times three, plus $100 statutory damages – exactly as stipulated in the Texas Property Code) and $25,000 in attorney’s fees.

FP appealed.

The Court of Appeals found – surprise to no one – virtually no cases on point in Texas regarding commercial leases although we have had this law for 29 years. So the Court reviewed parallel Texas statutes that are relevant to residential security deposits.

In doing so, the Court decided that the landlord must prove its good faith to avoid liability for treble damages. Good faith, the Court determined, is “honesty in fact in the conduct or transaction concerned” and that the landlord did not intend to deprive the tenant of its rights or of a lawfully due refund.

From there, it was a short stretch to determine that FP had presented at least some evidence that it had intended to act in good faith.

Judgment for Tramontina is reversed; the case is returned to trial court for a do-over. See FP Stores, Inc. v. Tramontina US, Inc.; No 01-16-00031-CV; Court of Appeals of Texas, Houston (1^st District), December 29, 2016: https://caselaw.findlaw.com/tx-court-of-appeals/1763335.html.    

Lessons Learned / Questions Asked:

1.                  This landlord was not found responsible for triple damages. But in doing so, it had to defend a lawsuit in trial court, appeal to the Texas Court of Appeals, and if the litigation was not settled, endure yet another trial back in the district court of Fort Bend County. What do you think this landlord spent in attorney’s fees - $100k? To save $50k?

2.                  While there is honor in defending your position, there is also a substantial cost in doing so. My assumption is that FP would have been *far ahead if it would have timely complied with Texas laws and the Sublease terms.

3.                  In my experience, the landlords that are most at risk are the ones that do not routinely engage in commercial real estate leasing. They don’t know the laws; they don’t have appropriate accounting procedures for deposit return. Brokers can help rookie landlords and tenants by tracking the termination dates of leases and subleases, and then making all parties aware that the security deposits must be timely processed.

                                                                                    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

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com