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Breaking bad; closing good. So is walking away.


The rebound of the real estate market in the Ozarks seems very real, judging from the calls I get from stressed out buyers and sellers who are approaching closing dates.

Buyers sometimes want break contracts, and sellers want to force the buyers to close.

If the buyer has not made objections to the condition of the property in the proper time, or if the reason for wanting out seem weak (by “weak” I mean petty or based on alleged fraudulent concealment that shouldn’t have fooled an inspector), I tell them to either close or buy their way out with money. It is difficult for a buyer to prove that a seller has breached a contract, and spending two or three years in a lawsuit  is a very expensive way to not have fun.

If a seller calls me because a buyer is threatening to walk away from the contract, I tell the seller that a suit for specific performance (asking the judge to force the buyer to close) is unlikely to be successful and would result in the property being taken off the market while the suit is pending.

The seller’s other alternative is to sell the house to someone else, then sue the buyer for damages, which are the difference between the contract price in the first contract and the price at which the property actually sells. In a rising market, there’s a good chance of finding another buyer and perhaps getting a better price, so litigation is unnecessary.

When I get these calls, here’s what I’m really thinking. I might have been able to prevent this situation if I had been asked to assist in the preparation of the contract. I would get to meet the client when the client was happy, rather than angry.

I could have looked at the title history to the property. I could have given advice based on my long experience in this market and knowledge about such things as:

  • subdivision covenants,
  • the developer of the subdivision,
  • the builder’s reputation,
  • how well the HOA is functioning,
  • drainage and road maintenance,
  • past or pending litigation involving the property or the subdivision

Instead, I speak to people who are already upset, who seem to resent that I don’t see the other party as a villain, and who have to make a decision in the next 24 hours.

It’s a joke among lawyers that a friend or client will call a lawyer to complain about a $200 traffic ticket, but will not talk to the lawyer about a $300,000 real estate contract. So when I get the call, I have to work really hard to be sympathetic.

Owner of philandering bull strictly liable but comparatively at fault for neighbor’s injuries


When Taylor’s bull crossed the fence, attracted by Coble’s heifers, Coble hopped on his ATV. The bull charged and the ATV flipped. The bull mounted–not the heifer–but the ATV, pinning Coble, who was seriously injured. In Coble v. Taylor, the Missouri of Appeals for the Southern District reviewed Missouri’s fencing laws to affirm that Taylor was liable for Coble’s injuries resulting from his attempt to drive the bull back home. The jury awarded damages for Coble’s injuries; however, the damage award was reduced, based on the jury finding that Taylor was 65% at fault and Coble was 35% at fault.

Under Missouri’s fencing laws, particularly section 272.030, an owner of livestock is liable for damages sustained if his animal trespasses by breaching a lawful fence.

Taylor (the owner of the bull) argued that the fence was not an “exterior” fence (one along a public road, not a fence that separates the land of two different owners), but a partition fence, and therefore was not the kind of fence that section 272.030 referred to. The appellate court stated that section 272.030 was a modern statute that didn’t follow the old common law that limited the livestock owner’s liability to injuries resulting only breaches of exterior fences, which was related to the 19th century concept of fencing out free-ranging animals, rather than fencing them in.

Taylor also argued that the he and his wife should not be strictly liable for injuries resulting from animal trespass, so that they should not be liable for injuries caused by Coble flipping his ATV. “Strict liability” essentially means liability without regard to the actions of the person who was injured. The appeals court reviewed the Restatement (Second) of Torts, section 518, which is a distillation of appellate court decisions of state and federal courts, with commentary, to find that “any trespassing bull may be expected to attack and gore any other animal or any person who gets in his way.” Thus it is reasonable to expect that people will try to control the bull and get hurt doing so, and the owner of the bull should be liable.

Coble argued that the jury should not have been instructed to determine that he was partly at fault for the way he drove the ATV, which led the jury to only compensate him for only 65% of the damages that he proved. The appeals court said that the jury was properly instructed to apply Missouri’s comparative fault statute, because the Missouri Supreme Court has determined that the legislature intended for comparative fault to be applied whenever possible (other than cases of intentional injury), even though the idea of strict liability and comparative fault seem incompatible.

Missouri’s Sunshine Law overrides confidentiality clause in settlement agreement and advice of counsel


On advice of its attorney, the Robinwood South Community Improvement District refused to provide a copy of a settlement agreement to John P. Strake, a member of the public who requested it.  Strake sued and filed a motion for summary judgment, stating that there was no fact question regarding whether the settlement agreement (relating to a personal injury suit) was a public record; Strake also wanted the imposition of a civil penalty and the recovery of his costs and attorney fees.

On November 10, 2015, a unanimous Missouri Supreme Court in Strake v Robinwood West Community Improvement District held that the District’s reliance on its attorney’s advice to not disclose the settlement agreement did not shield the District from being held liable for knowing and purposeful violations of the Sunshine Law.

The trial judge in St. Louis County ordered the District to provide a copy of the settlement agreement. But the trial judge also entered a judgment in favor of the District, denying the civil penalty, attorney fees and costs that were sought by Strake for the District’s knowing and purposeful violation of the Sunshine Law. The trial judge’s order did not explain why exactly she declined to impose the penalty and award costs and attorney fees, noting only that the District “was relying on the advice of counsel to avoid a lawsuit for breach of contract.”

When a city or other unit of local government enters into a settlement agreement to end a lawsuit,  officials often don’t want to encourage additional claims by disclosing how much was paid to make the plaintiff go away. Most settlement agreements contain a confidentiality clause, which may contain penalties for disclosure of the settlement terms, unless ordered by a court before the settlement is final.

Private corporations are no different, but governmental bodies in Missouri have to follow the Sunshine Law, which is Missouri’s body of statutes that require disclosure of most kinds of public records, as well as requiring that meetings of governmental business be conducted in public meetings. Some kinds of governmental records may properly be closed for a time–such as the details of negotiations to buy or sell real estate or terms of proposed settlement offers in litigation–but these records must eventually become public, unless a court determines that they should remain closed. The Sunshine Law specifies very limited grounds for keeping settlement agreements closed, not allowing courts to conceal the amounts paid by or to the governmental body.

A governmental body that knowingly violates the Sunshine Law may be penalized up to $1,000, plus paying the court costs and attorney fees of the party requesting the records. The penalty is up to $5,000 if the governmental body purposely violates the Sunshine Law, which requires proof that the governmental body had “a conscious design, intent or plan” to violate the law “with awareness of the probable consequences.” The District’s attorney had advised the District that “the most prudent course” was to refuse the request to produce the settlement agreement, while pointing out the statute that required the disclosure of the settlement agreement, apparently fearing that the consequences of breaching the confidentiality clause might be more serious than the consequences of violating the Sunshine Law.

The District’s attorney’s advice provided a basis for the Supreme Court to conclude that the District had actual knowledge of its obligations under the Sunshine Law to give the settlement agreement to Strake and the consequences of not doing so, such that its decision to withhold the settlement agreement was a purposeful violation.

The American Civil Liberties Union provided legal counsel to Strake. Those who criticize the ACLU for many of its activities should recognize that the ACLU’s action in this case was non-partisan and strongly in support in openness in government. The Missouri Press Association also participated in the appeal.

 

 

Indemnity clause in commercial lease does not allow recovery of attorney fees by tenant


A person who is fired up about filing a lawsuit believes he will win and will recover his attorney fees. Lawyers in Missouri and most of the United States have to throw cold water on the prospective client, because attorney fees are not generally recoverable unless provided for by a statute or a contract between the warring parties. This is called the American Rule, apparently because the general rule is different in other countries, where the rule is “loser pays.”

I was surprised to read today an imaginative litigant had been able to convince a trial judge that an indemnity clause in a lease of commercial property would support an attorney fee award. The case is Morris Branson Theatre v. Cindy Lee LLC.

The appeals court reversed the trial court’s judgment in favor of a tenant, finding that the landlord had failed to adequately repair the leased premises from tornado damage. The trial court also ordered the landlord to pay the tenant’s legal fees, on the basis of a clause in the lease that required each party “pay, protect, indemnify and save harmless” each other from liabilities arising out of the other party’s violation of the lease. This language is typical for an indemnity clause.

The appeals court sent the case back to the trial court for additional findings of fact, based on the appeals court having determined that the definition for “premises” applied by the trial court was too broad.

Because the trial court’s judgment in favor of the tenant was set aside by the appellate court, the attorney fee award was also reversed as being moot. Anticipating that the same issue would arise again when the trial court addressed the case again (unless the parties choose to settle), the court of appeals advised the landlord and tenant and trial judge that the indemnity clause is only to be applied when landlord or tenant is required to defend a claim made by another party. The indemnity clause does not apply to litigation between the landlord and tenant.

Even though people in the Ozarks sometimes think they are quite exceptional, the court of appeals let this landlord and tenant and a trial judge know that the American Rule still applies.

Missouri Court of Appeals upholds architectural committee’s ban on outbuildings


Stanley Sellers bought a home in Woodfield subdivision and wanted to build an outdoor kitchen. He applied to the Woodfield property owners’ association’s architectural committee, which approved his plans. Without asking for approval, he then built a storage building in his yard. The POA told him that the architectural committee had adopted a rule that prohibited storage and utility buildings. Sellers asked the POA and the architectural committee to change its rules or grant him a waiver, which did not happen.

(For clarification, the document that is referred to here as “covenants” is also referred to as a “declaration” or “subdivision restrictions” or “covenants, conditions and restrictions” or “master deed” or “subdivision indenture,” depending on where you are. An association of lot owners is called a property owners’ association (POA) or homeowners’ association (HOA). “Architecture committees” are sometimes called “architectural control committees (ACCs) or design review committees (DRCs), or some other variation.)

Sellers sued, arguing that the rule against storage buildings  was invalid, because Missouri law prohibits adoption of additional subdivision covenants (“new burdens”) without unanimous approval of all lot owners, unless the covenants permit addition of new burdens on real estate by less than unanimous consent. The trial court ruled for the POA, indicating that the covenants in place before Sellers’ purchase of a lot empowered the POA to regulate “accessory structures” and allowed the architecture committee to make “guidelines and policies for the development and [sic] a residential community which is harmonious and aesthetically pleasing.” Thus the prohibition of storage buildings was a burden within the scope of the recorded covenants rather than the imposition of a new burden.

The appeals court’s decision in Sellers v. Woodfield POA, upholding the trial court’s decision, makes a few points worth remembering:

  • A court reviewing the decision of an architectural committee reviews only for reasonableness and does not substitute its opinion (for the architectural committee’s opinion) as to harmony or disharmony.
  • It doesn’t matter whether the homeowner was aware of the requirements. Though the court of appeals didn’t explain this, a purchaser of a lot is deemed as a matter of law to have knowledge of subdivision covenants applicable to the lot, if the covenants are recorded.
  • If the covenants authorize the POA or the architecture committee to make additional rules not in the recorded covenants, the lot purchaser also is deemed to have notice of this rulemaking authority and should ask about the existence of additional rules.

Missouri appeals court reverses trial court, slaps down bank that manipulated HOA


The Missouri Supreme Court, on June 30, 2015, reversed much of this Court of Appeals decision discussed in this post, reinstating the judgment of the trial court, after determining that Jefferson Bank’s amendment of the covenants was proper. The amendment removed the requirement that the HOA’s board members be residents; the Supreme Court reasoned that unanimous consent of the lot owners was not required since the nature of the amendment was to remove rather than add a restriction.

After the real estate bubble burst, many Missouri banks ended up owning a majority of lots in subdivisions, standing in the shoes of the developers–the banks’ previous customers. Banks face many challenges in their effort to sell the lots that they had to take through foreclosure; not the least is high-end architectural standards imposed by the original developer that seem unworkable in this more austere era.

Jefferson Bank & Trust found itself in this fix after it became the owner of 13 of the 18 lots in the Arbors at Sugar Creek subdivision. In 2005, the developer had recorded covenants that gave the board of the homeowners’ association (HOA) approval rights over any new construction. The owners of the five existing homes  protested when the bank and its new partner proposed to build what the homeowners characterized as “tract houses.”

Because the original HOA had been dissolved by the Missouri Secretary of State for failing to file annual reports, the bank formed a new HOA and recorded a new declaration of covenants, since it had more than 67% of the voting power, as required by the old declaration for amendment. The new declaration eliminated the old declaration’s requirement that HOA board members be residents, and the bank appointed its executives to be the new board.

After a bunch of wrangling in court, the trial court ruled that the new HOA was legitimate, that the new board acted reasonably in approving the new building plans, asking that the HOA reimburse the bank for subdivision maintenance costs paid by the bank, and awarding other damages against the lot owners.

The appeals court in this October 28, 2014 decision, agreed that the new HOA was the successor to the old HOA, but threw out the rest of the trial court’s judgment, to find that the bank acted in bad faith, having

  • relied on its acquisition of majority voting power to unilaterally deny homeowners the benefit of self-governance that they received under the original declaration
  • used its command of the subdivision’s affairs to advance in own financial interest in redeveloping the subdivision in a manner contrary to the wishes of the newly disenfranchised residents
  • violated the implied covenant of good faith and fair dealing by amending the declaration and removing the residency requirement for board members so it could appoint its own executives to the board.

Having stacked the board of the new HOA, the appeals court ruled “all the board’s subsequent actions are null and void,” including the approval of development plans submitted by the bank’s partner.

The critical factor here is the requirement of the original declaration that the HOA board members be residents. The overreaching on this issue tainted everything else that the bank did.

It’s unusual to see a court roll over a bank in favor of homeowners. My guess is that the Missouri Supreme Court will be asked to review this decision.

Quitclaim deed to living trust can terminate title insurance coverage and trigger legal malpractice claim


When my clients discovered that a neighbor’s deed included a strip of land across their driveway, I advised them to make a claim on their title insurance policy. The claim was denied, not because it wasn’t real, but because my clients had inadvertently terminated their policy of title insurance by conveying their land to their living trust by quitclaim deed rather than by warranty deed.

Title insurance in the United States is usually issued on policy forms created by the American Land Title Association (ALTA), which are adapted for each state. Before the adoption of the 2006 ALTA title insurance form, when the insured conveys all its interest in the real estate without warranty, the owner’s policy of title insurance terminates.

The primary way of conveying title insurance without warranty is by quitclaim deed, which is a common way of conveying property when payment is not made. How this custom developed, I don’t know, but it can be devastating if there is an ownership dispute.

The 2006 ALTA owner’s policy form includes living trusts as insureds under the title insurance policy, but most owner’s policies of title insurance are made on pre-2006 forms.

A lawyer setting up a living trust–or preparing a conveyance of a gift of real estate to a relative, a church or another charity–has two choices to avoid potential malpractice liability:

  • review the existing owner’s policy of title insurance to make sure that the conveyance won’t leave the the client unprotected if an ownership dispute pops up.
  • avoid using quitclaim deeds except with respect to property that the client never owned and other very limited circumstances.

 

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