DAMAGES; TEXAS STYLE

            In 2011 Gulley-Hurst sold a partial interest in a landfill to MSW Corpus Christi for $7.5 million in a seller-financed transaction. Following some disagreements, MSW and GH entered into a contract that allowed MSW to purchase the remaining interest from GH within 120 days.

But if the closing did not occur within the 120-day deadline, then MSW was required to convey its interest back to GH.

            MSW did not close the purchase by the deadline. As a result, in a role-reversal MSW became the seller and GH became the buyer of MSW’s partial interest in the landfill. As partial consideration, it was also GH’s obligation to refinance a $5 million mortgage loan from AmeriState Bank, for which MSW was liable.

            MSW fulfilled its requirements as seller, and timely conveyed the property to GH subject to the AmeriState bank loan. Thereafter, GH failed to refinance the AmeriState debt.

            So MSW sued GH for breach of contract, requesting damages caused by GH’s failure or refusal to pay off the mortgage debt incurred by MSW to purchase the partial interest in 2011, which release MSW required to protect MSW’s credit standing and that of the loan guarantors, and so MSW could borrow more funds for more projects.

            At the time of trial the value of MSW’s ownership interest in the landfill had appreciated from $7.5 million to $17+ million. So, through some fancy footwork, the jury was convinced to reach a verdict awarding MSW “benefit of the bargain” damages of $10+ million.

            Again, remember that MSW was pursuing a breach of contract claim, caused by the failure of GH to pay off or refinance a $5 million mortgage loan. This is not a damages claim asserted by a buyer, caused by a seller’s refusal to convey the property.

In any event, after return of the jury’s verdict the trial court reduced it to $00, stating “I did not submit the proper measure of damages to the jury.”

MSW appealed, hoping for reinstatement of the $10+ million jury verdict. The Court of Appeals affirmed the trial court’s $00 judgment.

MSW further appealed to the Supreme Court of Texas, again requesting reinstatement of the “benefit of the bargain” damages of $10+ million.

The Supreme Court starts by stating the general rule for measuring benefit of the bargain damages is to calculate the difference between what was promised and what was received. But when the property’s market value at the time of breach exceeds the contract price, the correct measure of damages is the difference between the promised contract price and what the seller received.

Permitting a seller to recover more than the contract price would be an unlawful windfall, at buyer’s expense.

Had the contract been fully performed, MSW was entitled to receive $7.5 million for its ownership in the landfill – not $10+ million. As MSW expected to receive $7.5 million, the damages to which MSW is entitled are the difference between $7.5 million and what MSW actually received.

MSW expected to receive $7.5 million. MSW received $7.5 million. 7.5 – 7.5 = 00.

And, since GH still remains obligated to finance the AmeriState Bank loan, MSW is not entitled to more.

            GH wins, again. See MSW Corpus Christi Landfill, Ltd., v. Gulley-Hurst, L.L.C.; Supreme Court of Texas; March 24, 2023: https://scholar.google.com/scholar_case?case=16400040108480824489&hl=en&as_sdt=6&as_vis=1&oi=scholarr.

             Questions / Issues:

1. What happened here? A seller sold real estate “subject to” existing debt. The deal closed, on time and without issues. It was, thereafter, buyer’s obligation to pay off or refinance the debt, but buyer failed to do so. How was seller able to convince a jury that seller was entitled to anything more than what was stated in the contract?
   

2. Why was this litigated all the way to the Supreme Court, since the outcome seems obvious?
   

                                                                                    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.

SHARED FRAUD LIABILITY

            In 2005 Kate and her boyfriend David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel and sell it. David took charge by hiring an architect, structural engineer, designer, and general contractor. David monitored their work, reviewed invoices, and signed checks.

            Kate was uninvolved.

            David married Kate. Kieran Buckley bought the house. In conjunction with the sale, David and Kate stated that they had disclosed all material facts related to the property. But after closing Buckley discovered a leaky roof, defective windows, missing fire escape, and permit problems.

            Buckley sued Kate and David in State court. The jury awarded damages to Buckley of $200,000+.

            Kate and David could not pay Buckley, not to mention their other creditors. So they filed for Chapter 7 bankruptcy relief, which allows debtors to get a “fresh start” by discharging their debts.

            Unfortunately, however, not all debts are dischargeable. The Bankruptcy Code bars the discharge of debts to the extent obtained by false pretenses, false representation, or actual fraud.

            Buckley filed an adversary complaint alleging that the monies owed on the State-court Judgment fall within this exception, and should not be discharged. After trial, the Bankruptcy Court agreed that neither Kate nor David could discharge their debt to Buckley.

            Based on the testimony from the parties, real estate agent, and contractors, the Bankruptcy Court found that David had knowingly concealed the defects from Buckley. And – the compelling part for lawyers – the Bankruptcy Court imputed David’s fraudulent intent to Kate.

            Meaning, neither could discharge the Buckley debt in the context of their Chapter 7 bankruptcy.

            Recall that Kate had virtually nothing to do with this, other than formation of a partnership. So Kate appealed.

            The Bankruptcy Appellate Panel agreed as to David’s fraudulent intent but disagreed as to Kate’s. So the case was remanded back to Bankruptcy Court, where this time the Court concluded that Kate lacked the requisite knowledge of David’s fraud and therefore Kate could discharge her liability to Buckley.

            Liking this outcome better, the Bankruptcy Appellate Panel affirmed the judgment. So Buckley appealed.

            The Supreme Court of the United States of America agreed to review it. Doing so, SCOTUS used 10 pages of legal prose to determine that it hardly matters who perpetrates the fraud. The statutory analysis goes like this:

(1) Question: Is there an individual debtor? Answer: Yes, Kate.

(2) Question: Is there a debt? Answer: Yes, owing to Buckley.

(3) Question: Did the debt arise due to false pretenses, false representation, or actual fraud? Answer: Yes, as determined previously by other courts.

             Not relevant to the analysis is who, exactly, committed the fraud.

            What is relevant here is that a debt + fraud = non-discharge in bankruptcy. Full stop. “The debt must result from someone’s fraud, but Congress was ‘agnostic’ about who committed it.”

            Kate Bartenwerfer’s debt is not dischargeable in her bankruptcy proceeding. See

Kate Bartenwerfer v. Kieran Buckley; Supreme Court of the United States; February 22, 2023: https://www.supremecourt.gov/opinions/22pdf/21-908_n6io.pdf.

 Note that this case had its inception in 2005, close to 20 years ago!

             Questions / Issues:

1. Did that result surprise you? I had guessed that a debtor required some level of active participation to be stuck with a non-dischargeable debt. But then I am not a bankruptcy lawyer. Perhaps the bankruptcy specialists anticipated exactly this result. However, if this was the obvious result then an appeal to SCOTUS would not have been required.
   

2. What does this mean to your investments in partnerships, corporations, joint ventures, limited liability companies, and similar passive entities? If those in a control position make poor choices, could the liability extend to you?
   

3. If you are nervous about Q2, then do you have / can you get indemnities from those in a control position? But indemnities are just more words on more paper. Can you get collateral or security to backstop the indemnity?
   

                                                                                 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.

BACK TO ROFRs

            Barry Clarke owns a strip club. It is situated across the street from another strip club owned by Group Investment Company. In 1999, Clarke leased from GIC half of the parking lot, to support Clarke’s burgeoning business.

            The Lease contains a provision granting Clarke this ROFR: “Lessor grants the Lessee the right of first refusal should it wish to sell.” The Lease does not state what property – only the parking lot or perhaps the building plus the parking lot – is the subject of the ROFR clause.

            As well, there are no provisions in the Lease providing how the purchase price will be determined, timing and means to exercise the ROFR, inspection rights, title, platting, earnest money, type of deed to be used, tax proration, closing date, or anything else.

Just one vague sentence.

            In 2007 GIC conveyed its strip club to RRJR. Clarke testified he “probably” knew GIC transferred the property, but did not seek to exercise his ROFR because, in his view, GIC and RRJR contained the same shareholders.

            RRJR conveyed the property in 2013 to Fine Housing. Neither Fine Housing nor RRJR notified Clarke of the transaction.

            Clarke learned of the sale to Fine Housing and asserted a claim in 2015 against Fine Housing and RRJR to enforce Clarke’s ROFR. The trial court ruled the ROFR is enforceable as to the entire property (building plus parking lot), and ordered Fine Housing to convey it to Clarke upon his payment of $350k.

            The court of appeals reversed, holding that the ROFR is unenforceable. Clarke appealed to the Supreme Court.

            The Supreme Court started its evaluation by stating that “unreasonable restraints” on real property are unenforceable. And that ROFR clauses will be tested by that standard. Factors to determine reasonable vs. unreasonable are: (a) the legitimacy of the purpose; (b) pricing; (c) procedures to exercise the ROFR; and (d) clarity as to what real property is encumbered by the ROFR.

            Clarke claimed that there was no need for the ROFR provision to include pricing or procedures. And, that: the ROFR pertains to all of the property – building plus parking lot, the ROFR allows Seller to determine the pricing, and State law requires that the ROFR be exercised in a reasonable time.

            The Supreme Court, however, could not readily identify the precise subject of the ROFR, pricing, or mechanical procedures to exercise the right. Clarke’s ROFR must fail; Clarke must lose, again.

            See Clarke v. Fine Housing and RRJR; Supreme Court of South Carolina, Case No. 28126, January 4, 2023: https://scholar.google.com/scholar_case?case=15964625316625534298&hl=en&as_sdt=6&as_vis=1&oi=scholarr.

            Questions / Issues:

1. Who drafted this one-line ROFR and why is that not discussed – would it have made a difference if Lessor or Lessee had prepared it?

2. Or perhaps did a broker draft this, and if so did that lead to a malpractice claim against a broker licensed by the Real Estate Commission?

3. There is no reason that the use of the premises as a strip club had to be stated in this Opinion. The property could merely have been identified as a commercial building and adjacent parking lot. Did the utilization of the building influence the Appellate Courts, tilting their thoughts towards denying Clarke what otherwise could have been a valuable entitlement, as found by the trial 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.