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.

 

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.