ARE TITLE AGENTS FIDUCIARIES?

            Sam Higgins continuously owned one parcel of real property for the last 50 years. A deed was recorded on August 8, 2017, whereby Higgins conveyed it to CETA Invest Austin.

            CETA then agreed to sell it to Juanita William for $200k.

            On September 20, 2017, William offered to assign her purchase right to Houndstooth Capital for a $5k profit, and a contract was executed between William, CETA, and Houndstooth. Evidently the owner of Houndstooth thought that the asset was undervalued by $100k. Closing was scheduled for September 29, 2017, but was delayed when the title agent discovered in the County records a Memo of Purchase and Sale.

            William explained that she had previously assigned purchase contracts on the target asset and adjacent properties, heirship issues had been discovered, a previous assignee backed out of the deal, so William elected to find another buyer.

            Houndstooth approached the title agent with this issue, and was assured that the target asset had no heirship issues.

            The deal closed on October 6, 2017. The title agent had obtained a title commitment from WGF National Title Insurance Company. At Closing, the title agent produced a document to be executed by Houndstooth which provided that the agent may be unable or unwilling to issue an Owner Title Policy even though a premium had been paid, as a final down-date search could result in adverse findings.

            Houndstooth delivered $205k to the agent’s escrow account, as required by the contract. A Deed from CETA to Houndstooth was executed, and the agent wired the sale proceeds to CETA.

            Bank of America alerted the title agent, one week after Closing, that CETA was attempting to withdraw all of the closing proceeds from an account that had been recently opened. Which created a fraud alert. So BoA stopped payment on the withdrawal request.

            On October 18, 2017, the title agent informed Houndstooth that no title policy would be issued, the premium paid for the title policy would not be returned, and the escrowed funds would not be reimbursed, all because the chain of title had been questioned based on BoA’s fraud warning.

            On October 27, 2017, Higgins (recall that he had owned the realty for the last 50 years) signed a Fraud Affidavit stating that the deed transferring the real estate to CETA was a forgery.

            Subsequently, BoA sent $64k to the title agent who, in turn, sent it to Houndstooth one year after receipt by the agent. The US Secret Service recovered an additional $70k and returned that amount to Houndstooth, leaving Houndstooth to suffer a $71k loss.

            Houndstooth sued the title agent and WFG for breach of contract, fraud, breach of fiduciary duties, negligence, and violations of the Insurance Code. The trial court rendered judgment that Houndstooth take nothing on its claims.

            Houndstooth appealed.

            After disposing of claims related to fraud, negligence, breach of contract, and others, the Court of Appeals analyzed the issue of fiduciary duty. The Court reported that the agent’s duties were limited to the Closing and proper disbursal of earnest monies. Those duties did not extend to title investigation or title defect disclosure.

            The Court then reviewed the obligations of the title insurer, WFG. In this case and although title underwriters can also perform escrow duties, WFG merely acted as a title insurer. As such, WFG never became a fiduciary to Houndstooth.

            The title agent and underwriter win again. See Houndstooth Capital Real Estate v. Maverick Title of Texas and WFG National Title Insurance Company; Case No. 03-21-00093-CV; Texas Court of Appeals, Third District at Austin; February 28, 2023: https://law.justia.com/cases/texas/third-court-of-appeals/2023/03-21-00093-cv.html.

            Questions / Issues:

1. Presumably a Lender would require detailed escrow instructions to be signed by the title agent or escrow officer, prohibiting the underwriter to deny coverage after Closing. But how does the Buyer seek protection from this? Sophisticated commercial purchasers will also use escrow instructions, but my sense is that virtually all of the closings in which buyers do not engage lawyers will potentially leave such buyers exposed to fraud and negligence claims.
   

2. It is not uncommon for parties to allow a title agent to hold funds, but on the day of closing demand that the escrow holder transfer all funds to the national title insurance company for escrow disbursement that day. Would that have given this buyer better protection?
   

3. Is this a situation where the State legislature or Insurance Commissioner needs to step up, perhaps to allow the agent to sell an additional endorsement for an added modest fee that would provide both escrow and title coverage after the premium is paid but before the policies are issued?
   

                                                                                    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 RENEWAL OPTIONS REQUIRE EXACT COMPLIANCE. RIGHT?

            Robert and Dorothy Pitz owned a 320-acre farm. In 1988, M/M Pitz agreed to lease six acres to US Cell Corporation for a cell tower. US Cell then constructed a 380-foot tall cell tower on the farmland.

            The lease term commenced November 14, 1988.

            Rent was $20,000 for the total 30-year lease term, payable in one sum not later than January 5, 1989. That equates to $666.67 per year. A whopping $55.55 per month.

            The Lease contained a renewal option for 30 more years. To exercise it, US Cell was required to send notice at least 60 days before term expiration and pay $20,000 “at the exercise of the option,” as increased by CPI.

            In 2009 M/M Pitz transferred ownership of the farm to their son, William Pitz, and his spouse Lynn. US Cell was not advised of the conveyance, although the Deed was recorded.

            US Cell sent a certified letter of lease renewal exercise to Robert and Dorothy Pitz on September 1, 2017 – more than one year before the September 14, 2018 deadline. US Cell’s letter contained IRS Form W-9 and a direct deposit form.

There was no rent payment accompanying the letter. Instead, the letter advised that “Once we have these documents [W-9 and deposit form], we will be able to disburse the option rental payment to you.”

No response was made to US Cell’s letter. So on October 29, US Cell sent to Will and Lynn a check for $41,439, less income tax withholding, intended to represent advance rent for the 30-year option term.

Will and Lynn returned the payment with an explanation that the payment was not tendered at the time of renewal exercise. As required by the Lease. And therefore the renewal term was not properly exercised.

Will and Lynn filed a lawsuit for declaratory judgment on June 19, 2019, asking for a determination that the option had not been properly exercised since payment was not timely made. The district court concluded that US Cell had indeed properly exercised the renewal option because rental payment was not a condition precedent.

Will and Lynn appealed. The court of appeals affirmed. So Will and Lynn further appealed to the Court of Last Resort.

The Supreme Court commenced its analysis by stating that renewal option exercise must strictly comply with all conditions precedent. The Court dug out a case from civil war years to support the conclusion that both notice and payment are required to effectively renewal a lease.

 Then, the Court used the phrase “On the other hand” to signify a sea-shift change in ideology. Not finding a hard notice-and-payment provision as found in other contracts, the Court viewed the option-to-renew provision in isolation – not connected to the obligation-to-pay-rent sentence. The Supreme Court, struggling with precedent to support the position it wanted to reach, turned to cases from North Dakota and Illinois.

Deciding that there is “less absurdity than might appear at first blush,” US Cell is evidently allowed to send notice of lease renewal without tendering the prepaid rent, even though both are clearly required by the Lease.

US Cell wins, again; Will and Lynn lose. Again.

See Pitz v. US Cellular Operating Company; Case No. 22-0038; Supreme Court of Iowa; April 21, 2023: https://cases.justia.com/iowa/supreme-court/2023-22-0038.pdf?ts=1682085886.

             Questions / Issues:

1. Maybe I am the one that is in isolation, but this is not the result I had anticipated. In most States, renewal options are strictly construed and deviation is now allowed. This option required both notice and payment. Only one of the two conditions was satisfied.
   

2. Note that Lease Section 3.2 contained the option renewal verbiage; Section 4.2 stated the new rent requirement. Would merely reordering the provisions have saved the intent of the parties? What if the timing for renewal (60 days), method of renewal (written notice), and rent obligation (prepaid for the term; old rent + CPI) were all combined in Section 3.2 – would that have saved it from this disastrous result? Or was this Supreme Court intent on forging new law to give other tenants and lessees some breathing room, unless or until fixed by the Iowa legislature?

 

                                                                                    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.

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.