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Category Archives: real estate law

Subdivision developer gets nailed for assessments and has no special developer rights


Missouri Western District Court of Appeals just affirmed a trial court’s judgment in a way that will resound with homeowners’ association (HOA) boards across the state, many of which are struggling to raise sufficient revenues to take care of streets and amenities, even though many of the developer-owned lands that benefit from the streets are apparently exempt from assessments.

Lenders that have foreclosed on developers may find that this opinion undermines the lenders’ ability to claim to enjoy the developer’s exemption from assessments on lender-owned land. Parties purchasing land from lenders, hoping to have the status of the former developer, may find themselves heavily in debt to the HOA, perhaps blaming the lenders who sold them the land.

In Woodglen Estates Association v. Dulaney, Dulaney obtained 17 parcels of land from the FDIC. This land had once been owned the original developer Braeman, then passed through the hands of a few different parties, before ending up with the FDIC, which had taken the parcels of land from a failed bank.

The Woodglen Estates Association hired an auditor to review its finances. The auditor discovered that land owned by Dulaney had not been assessed for several years. The association then sued Dulaney, and Dulaney asserted two defenses:

  • As successor to the original developer, Dulaney should be exempt from assessments on land it owned.
  • Much of the land that Dulaney owned in Woodglen was in “parcels,” not having been subdivided into “units,” so that it should not be assessed.

The appellate court looked at the line of Missouri case law that holds that the special rights and privileges of a developer, typically reserved in the declaration of covenants for the subdivision, do not automatically pass with ownership of the developer’s real estate. These rights, called “developer rights,” “declarant rights” or “development rights,” may be assigned, but a party claiming to hold these rights has to be able to prove to have acquired them by assignment. Dulaney had no proof of assignment of declarant rights.

To make matters worse for Dulaney, the Woodglen declaration did not contain an exemption for the developer’s real estate–which is a common feature of declarations–and the appellate court noted that developers do not receive an automatic exemption. Under current Missouri law, other than in condominiums, a developer may lawfully reserve an exemption from assessment for its own real estate. The original developer simply failed to create the exemption when filing the declaration and made the mistake of including land in the declaration that was not ready to be developed.

Dulaney argued that its “parcels” were not subject to assessment, since only “units” and “unit owners’ could be assessed. The appellate court noted that some of the declaration’s provisions were ambiguous when addressing the respective rights of owners of units and parcels, but the assessment provisions were clear:  “each owner shall be obligated to pay to the Board such sum as shall have been established….,” without distinguishing between owners of units and parcels. The legal description attached to the declaration had included Dulaney’s parcel, placing this land under the provision of the declaration.

For lenders, the lesson is that any loan documents for a development loan should include a security interest in the declarant rights, and any documents showing the recovery of the developer’s real estate should include a specific assignment of the declarant rights. When the lender sells the former developer’s property, the conveyances to the purchaser should include the assignment of declarant rights. These issues are covered in more detail in this essay.

HOA needs to get the owner’s name right to collect assessments


Whenever a homeowner association (HOA) gives me an account for collection, the first thing I do is verify the name in which the lot or unit is held. Frequently, the books of the HOA show owner as an individual or couple, often with a nickname.

Failure to keep track of the name in which property is held can defeat a claim for assessments, as shown in River Oaks Homes Association v. Lounce, a case that originated in Jackson County, Missouri.

The HOA obtained a judgment against Zeria Lounce, individually and as trustee of her living trust, for several years’ worth of delinquent assessments. Lounce appealed to the Western District of the Missouri Court of Appeals, claiming that the trial court erred in finding her personally liable and in finding the trust liable.

The River Oaks covenants provided that assessments were secured by a lien against the lot assessed and were also a personal obligation of  “the person who was the Owner of such property at the time when the assessment fell due.” Fifteen months after purchasing her townhouse in River Oaks in 1993, Lounce conveyed it to her living trust, with herself as trustee.

Nobody paid the assessments after 2004, and the HOA sued Lounce in her individual capacity. After filing suit, the HOA discovered that Lounce had put the property in the name of her trust and added Lounce, as trustee, as a defendant in the suit. Because the covenant provided for the personal liability of the Owner only, the court of appeals reversed the judgment against Lounce, as an individual.

The court of appeals didn’t let the trust off the hook, stating that the payment obligation ran with the ownership of the property, regardless of whether the HOA was aware of the change in ownership.

Here are the lessons for associations:

  • Pay attention to the county records of ownership. The county assessors’ websites (in most counties in Missouri) are a fairly reliable place to look for the names in which property is held; the recorder’s office is the best authority, though not always the most accessible online. This is important for making sure the proper parties are casting votes in elections, as well as for collections.
  • Ask your collection agency or lawyer to confirm the owners’ identities when preparing liens, sending demand letters and filing collection suits.

Carelessness about ownership can result in the loss of the ability to collect, shifting the burdens to the paying members of the HOA.

 

 

Appellate court can’t rescue City of Monett from legal screw-ups


Appellate courts sometimes seem to make an extra effort to protect small towns and cities from the effects of unwise or unpopular decisions, if the governing body acted in good faith for what the officials believed to be in the public interest. In Inman v. St. Paul Fire & Marine Ins Co, the Southern District of the Missouri Court of Appeals held that the City of Monett’s insurance company would not have to pay a claim made against Monett, after the Monett city attorney failed to inform the insurance company that the papers filed in the lawsuit by Inman had been changed to avoid an exclusion in the City’s insurance policy. Monett is left on its own in working out something with Inman.

Monett’s attempt to solve drainage problems

Monett attempted to solve a stormwater drainage problem in a subdivision by reconfiguring and paving a ditch that ran through part of the Inman property. After a flood while the construction was underway, Monett re-engineered the project and filed a condemnation suit to take and pay for a portion of the Inman property. Inman and Monett entered into a written settlement agreement and the condemnation suit was dismissed.  In the condemnation suit, necessarily, Monett claimed that the drainage project was for public benefit.

Insurance company kept in the dark

After the completion of the project, Inman sued Monett for trespass and damages to Inman’s property. Monett’s attorney contacted Monett’s insurance carrier, St. Paul Fire & Marine, and learned that Monett’s policy didn’t cover damages arising out of the exercise of normal governmental powers, such as taking property for public uses. Ten months later, Monett’s attorney notified St. Paul that a trial would be immediately taking place, not informing St. Paul Fire & Marine that Read the rest of this entry

Coverdell decision set aside, as Branson Landing case goes back to trial court

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Using the “plain error” doctrine, rarely used in civil cases, the Court of Appeals for the Southern District of Missouri, in Empire District Electric Co. v. Coverdell, reversed and remanded a January 14, 2010 jury verdict that had awarded Douglas Coverdell and Coverdell Enterprises the north third of Branson Landing and adjacent areas. This decision is dated June 3, 2011.

The appellate decision is based on the City of Branson’s argument that the trial court made a serious mistake by allowing the jury to enter a verdict affecting the property interests of the City of Branson (and others) who did not participate in the trial.  The appellate court accepted the City’s argument that “plain error review” would be appropriate, because the court’s error was “so egregious as to ‘weaken the very foundation of the process’ and ‘seriously undermine confidence in the outcome of the case.’ ” Empire’s appellate arguments were not addressed in the decision, according to a footnote, since the court’s acceptance of the City’s arguments was sufficient to warrant reversal.

The City of Branson did not participate in the trial held in January 2010, though the City’s attorney was present in the gallery of the court room for much of the trial. In an earlier phase of the case, which took place in 2004, the City had won its effort of affirm its title to the west portion of the peninsula shared with North Beach Park. Thereafter, the City was in a monitoring mode, not aware that title to the City’s land, leased to Branson Landing, would be the subject of the trial.

The appellate court tied its decision to the words of Coverdell’s attorney, spoken to the jury, who told the jury in the January 2010 trial that the dispute with Empire concerned only the east part of the North Park Beach peninsula. Coverdell’s attorney is also quoted as telling the jury that the City “has nothing to do with this dispute between Empire and [Coverdell and Coverdell Enterprises.]”

However, the judgment that Coverdell’s attorneys submitted to the trial judge after the juy verdict included 27 acres that included the Belk store and parking lot at the between North Beach Park and the Belk store, as well as some of the area south and west of the Belk store. The trial court’s mistake was to cloud the title of the City and others who were did not participate in the 2010 trial. The owners of much of the 27 acres were not parties to the suit, which appears to be the fundamental reason for reversal of the trial court’s judgment. The appellate opinion refers to City’s statement that the City “as well as numerous other third parties, have interests in that southern tract of land such that Branson was aggrieved by the 2010 judgment.”

The appellate decision gives the City and Empire the right to amend their claims and face Coverdell in a new trial.

Can a city’s utility charges be a tax? It’s a tough case to prove.

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The City of Hermann provides water, sewer, natural gas, electricity and trash pickup to its residents, allowing them no choice of providers. When the City jacked up the rates and transferred the “profits” to other City accounts, some residents resented the City’s flexing of its monopoly power. They sued, claiming that the City’s governing board had sidestepped Missouri’s constitutional requirement (Article X, sections 16- 24, known as the Hancock Amendment) that tax increases be approved by voters. The court had to decide whether a utility rate increase was a disguised tax.

Here’s an overview of the Missouri Supreme Court’s 26-page opinion in Arbor Investtment Company LLC v. City of Hermann, released May 31, 2011, in which the court determined that the  City of Hermann’s utility fees were not taxes.

The Five (or Six or Seven) Factors

The Missouri Supreme Court identified five factors in the 1991 case Keller v. Marion County Ambulance District which may be applied to distinguish user fees (not requiring a vote of the people) from a tax (which requires a vote). These factors, the court pointed out, are not exhaustive, but provide a framework for analysis:

  1. When is the fee paid?
  2. Who pays the fee?
  3. Is the amount of the fee affected by the level of the service that it is for?
  4. Is the fee for a good or a service?
  5. Is the good or service one that has been historically provided by the government?

The City of Hermann’s utility charges are paid in response to monthly billing, after the services have been metered. This resembles a user charge, rather than a tax that is paid annually. Of course, it also resembles a sales tax that is paid upon a sale.

The City’s utility charges are assessed only against utility customers, unlike some kinds of taxes, which are charged without reference to who is using government services. For example, sales taxes are charged to non-resident and residents alike.

The amount of the City’s utility charges, at least above minimums and flat charges, is related directly to use, other than for Hermann’s “communications fee,” which is used to support the 911 network.

The City’s utility charges fees are imposed for goods or services, rather than being a general tax to be used however the City government chooses. This factor was not at issue in this challenge, though the plaintiffs claimed that the amount of the fees were in excess of the reasonable capital and operating costs incurred in providing the services.

The Supreme Court found the fifth factor in favor of a finding of a tax, though the City of Hermann has a long history of providing these services in Hermann. The court indicated that the City’s prohibition of any other provider offering these goods and services supports a finding that the utility charges are a tax, without explaining why, other than to state that the lack of alternatives was a part (a sixth factor?) of the analysis. Even so, a finding that the utility charges resembled a tax on this point was not enough to overcome the opposite findings on the other factors.

Borrowing from its opinion in Beatty v. Metropolitan St. Louis Sewer District, the court looked at a sixth factor, whether the payment was enforceable by imposition of a lien on the user’s property or merely by disconnection or discontinuance of the service. Without taking judicial notice of the fact that many if not most private and municipal utilities have the right to impose liens for non-payment of utility charges–in addition to disconnection– the court considered that a tax, such as a property tax, is secured by a lien, while utility providers have the right to disconnect the services to enforce payment.

The court upheld the City of Hermann’s utility rates, stating, “There simply has been no showing that the amount charged is so excessive as to not constitute the provision of a service or good in return for the amount paid.”

Municipal rates are unregulated, but does this lead to excessive rate levels?

We should be concerned with the quality of the facilities for providing our water supply, treatment and management of wastewater and stormwater, and delivery of electricity and telecommunications services. The infrastructure for these essential things was constructed in the 19th and 20th centuries. Repairing, replacing and upgrading them is enormously expensive and in many cases has been deferred.

But private and governmental providers face stiff resistance in raising revenues to confront these challenges. For many private providers, utility commissions determine the extent to which rate increases are allowed. For other providers, such as cooperatives, homeowner associations and local governments, rate increases are within the discretion of elected officials, who have wide discretion and motivations that may extend beyond the provision of utility services.

In my experience, local governments, looking at water and sewer rates, generally look around to neighboring communities and communities of the same size elsewhere in the state, hoping to stay somewhere below the top. While this strategy may be effective for helping elected officials to remain in office, it may not produce sufficient revenue for maintaining utility systems.

 

Missouri Supreme Court throws a lifeline to an HOA


If a homeowner association doesn’t have the power to impose liens to collect delinquent assessments for common expenses, the HOA is unable to perform its responsibilities. Often, no other entity has the legal authority to fill the gap in insuring, maintaining, repairing and replacing common properties such as streets, water and sewer facilities, clubhouses and pools, etc., which were the responsibility of the original HOA.

Many Missouri HOAs are dissolved by operation of law, having failed to file annual reports with the Missouri Secretary of State. Often a new HOA is formed, but a series of Missouri court decisions have made clear that the new HOAs lack any authority to perform the functions of the old HOA, unless there is an assignment of the old HOA’s powers to the new entity. I’ve summarized those court opinions here, including an update on Debaliviere Place Association v. Steven Veal, in which the Missouri Supreme Court reviewed a lower appellate court decision on April 12, 2011, changing the result and remanding the case for a new trial.

The Missouri Supreme Court’s opinion, written by Judge Michael A. Wolff, clarifies that a defunct HOA, even though it has been dissolved for more than 10 years, still has the power to assign its rights to collect assessments, impose liens and enforce covenants. This new opinion overruled a court of appeals opinion that had indicated that a defunct corporate HOA was a non-entity after it had been dissolved for 10 years, lacking the power to do anything. This new opinion is based on Missouri’s statute 355.691, which allows a dissolved non-profit corporation to “wind up and liquidate its affairs,” transferring its assets and liabilities.

Judge Wolff’s analysis limited the effect of a now repealed Missouri statute (section 355.507), which prohibited any non-profit corporation from coming back to life after it had been dissolved for at least 10 years, at which time its corporate charter is permanently forfeited. Even though the 10-year limit has been repealed, it still applies to many HOAs that had been dissolved before its repeal.

For new HOAs which need to establish their authority, the recording in the county land records of an assignment from the old HOA to the new HOA of the old HOAs powers will be effective, unless the objecting owner can prove that the assignment is made without authority, an a contention that Veal did not assert against Debaliviere.

Recording a real estate document gives notice, but lack of recording doesn’t?


By Missouri statute, the recording a document relating to real estate in the office of the county recorder of deeds gives notice to all of the contents of the recorded document (called an “instrument”):

Every such instrument in writing, certified and recorded in the manner herein prescribed, shall, from time of filing the same with the recorder for record, impart notice to all persons of the contents thereof and all subsequent purchasers and mortgagees shall be deemed, in law and equity, to purchase with notice.

Is lack of recording notice that something did not occur, even though it should have been recorded?

According to the Missouri Court of Appeals, in the case Warren County Concrete v. Peoples Bank & Trust and Warren County Title Company,  purchaser of real estate had no duty to check to see whether a release of a deed of trust had been recorded, even though the purchaser had provided the money to pay off the deed of trust to a title company that closed the transaction.

The purchaser claimed to have no idea that the bank had not released the deed of trust until four years later, when the purchaser received a notice that the bank was foreclosing on the property. A year later — more than five years after the purchaser closed its purchase of the property — the purchaser filed a lawsuit against the bank and the title company, alleging that they were obligated to record the release.

The bank and title company claimed that the five-year statute of limitations period had run for negligence and breach of contract, and the purchaser was out of luck. The trial court agreed.

The purchaser appealed, claiming that the statute of limitations only began to run when the purchaser became aware that he had been wronged, which would have been the date the notice of foreclosure was delivered to the purchaser.

In the appeal, the bank and the title company argued that the purchaser should have checked the recorder’s office after the closing to make sure that the release had been recorded. The appeals court reversed the trial court’s judgment, stating that the burden of searching the public records after the closing was “a duty we are unwilling to place on the purchaser.”

The Court of Appeals was probably influenced by the injustice that would result when a purchaser hires a title company to close a transaction and provides money to pay off an existing loan, but the title company fails to follow up to make sure that the lender receives the payoff and records a proper release.

The Court of Appeals’ opinion isn’t specific about the reason for the mix-up, but it looks like the bank recorded a release after receiving the payoff, but that the release described a different piece of real estate than the piece that purchaser bought.

Missouri hog farm flunks smell test, must pay $11 million to neighbors


I’ve heard that the vows of many vegetarians have been temporarily broken by the craving induced by the smell of bacon being cooked over a campfire.

But the process of creating bacon, ham and pork chops can create such awful odors that a Missouri jury awarded $11 million to those who could not escape the smell of hog farm effluent applied to neighboring fields.

Premium Standard Farms operates several hog farms in northern Missouri, where sparse population and proximity to feed grains hold costs down. These confinement feeding operations (CAFOs) produce lots of pork and staggering amounts of pungent effluent (urine and feces). PSF disposes of the effluent by tilling the fields around its hog houses and spraying the effluent into the air over the loosened soil. While the effluent is being sprayed (as much as 300 feet into the air) and as it soaks into the soil, it releases foul odors.

In one of many suits against PSF, sixty-one neighboring property owners sued PSF and its affilliates in 2002  for damages resulting from the bad smells wafting from PSF’s effluent application over an 11-year period ending in 2010. After much pretrial wrangling, with the plaintiffs being split up into groups based on distance from the hog farm, a four-week trial was held in Kansas City, and fifteen plaintiffs were awarded just over $11 million in compensatory damages.

The claims were made under the legal theory of temporary nuisance, which allows damages to be awarded if the plaintiffs can prove that the use of the defendant’s property was detrimental to the plaintiffs’ use and enjoyment of the plaintiffs’ properties. Plaintiffs are not required to prove that their property values were permanently diminished by the nuisance, only that their use and enjoyment of their properties were harmed during the time of the nuisance.

PSF appealed the jury verdict, claiming six different errors, a couple of which are interesting. The Western District of the Missouri Court of Appeals rejected all six. PSF’s most interesting arguments are:

  • owners of unoccupied farmland are not entitled to recover in a temporary nuisance suit because of their business use of their property.
  • the only measure of damages for loss of use of business property is the loss of  property value during the period of the nuisance, rather than whatever a jury thinks would compensate the owner for unreasonable interference with the use and enjoyment of the owner’s property.

The law of nuisance grew out of the common law. For nearly 150 years, law students have been told about Rylands v. Fletcher, an 1868 decision of an English court that changed the law of nuisance by establishing strict liability of those who produce or harbor dangerous or noxious substances on their land. Those who have the bad stuff on their land can be liable to their neighbors if the bad stuff escapes, regardless of whether the escape of the bad stuff happened as a result of negligence.

State legislatures don’t like to adopt regulations that create liability for those who create lots of jobs and tax revenues, so it remains the job of judges and juries to fashion remedies for dealing with some kinds of pollution. The Court of Appeals rejected PSF’s analysis of case law, concluding

there is no persuasive reason that land used for business purposes could not support an award for the loss of the use and enjoyment of such property by the business owner…We refuse to say as a matter of law that the owners of farmland are not entitled to the reasonable use and enjoyment of that land merely because business activities are conducted on it.

CAFOs provide markets for feed grains raised by neighboring farmers. That’s why many CAFOs are located in areas of fertile soil and ample water. Neighbors to a CAFO are likely to be substantial farmers, some of whom produce grains that feed the CAFO’s poultry, cattle or hogs. Many of their farms are large and highly mechanized and often owned by farming corporations or limited liability companies. CAFOs support local economies, generating tax revenues, income and jobs, keeping alive communities that would otherwise continue to wither.

CAFOs also consume huge amounts of water that becomes effluent, the smell of which can make it impossible to be outside during and shortly after it is applied to fields. Under Missouri law, users of private wells pay nothing for the withdrawn water, even though the withdrawals deplete shared acquifers. In other words, CAFO operators, like other businesses, don’t want to bear all the costs of their activities, hoping that these costs can be spread over the larger community. The judicial system, applying the common law, still allows juries to force polluters to bear more of their social costs than the polluters would voluntarily accept.

Never mind, Missouri cities can charge different tap fees in different parts of town


Earlier this year, I wrote that the Eastern District of the Missouri Court of Appeals, in  City of Sullivan v. Sites,  had struck down an ordinance of the City of Sullivan that established a higher tap fee for connecting to the city’s sewer main in a particular part of town. The voters of the City of Sullivan had approved a $3.3 million bond issue to extend sewers to a part of  the city without sewer service. The city’s board  of aldermen adopted an ordinance imposing a connection fee in the newly-served area that was higher than the connection fee charged in the remainder of the city.

The Sites trust challenged the constitutionality of the ordinance establishing the higher connection fee, claiming that the ordinance violated Article III, section 40(30), which prohibited the passage of local or special laws where a general law would suffice. A general law relates to persons or things as a class, while a special or local law relates to particular persons or places.

However, Missouri Supreme Court’s opinion in City of Sullivan v. Sites, reversed the Court of Appeals decision and affirmed the trial court’s decision upholding the ordinance. The Supreme Court reviewed court decisions that recognize that prohibitions against special or local laws “should not prevent necessary geographic classifications premised on legitimate distinguish characteristics.” The Supreme Court determined that the Site trust’s property was not singled out, but was a part of a geographic area n area that was defined as a class.

The Supreme Court held that “the city was justified in creating the class of new sewer connections charged higher connection fees,” having demonstrated good financial and practical reasons for requiring property in the newly-served area, noting that the imposition of higher fees in the new area “contributed to the City’s ability to fund the sewer project as a whole.”

Offshore company loses assets, while hiding from liabilities


 

It’s great to be hard to find, but sometimes it causes you to lose stuff.

In the case of United Asset Management v. Clark, United lost its real estate in Cass County, Missouri, having failed to pay its taxes. If United hadn’t played hard to find, there’s a good chance that it would have received the notices from the county collector and from Clark, who bought the property at the collector’s sale.

This 40-page opinion of the Western District of the Missouri Court of Appeals adds detail to Missouri’s rapidly growing body of law that interprets the Jones-Munger Act, which is the collection of Missouri statutes that set out the procedure for collection of property taxes by counties through the advertisement and sale of delinquent real estate.

The Jones-Munger Act provides a period for a property owner to redeem property after somebody else has paid the taxes. The United States Constitution’s protection of property owners from confiscation without due process requires strict adherence to statutory procedures to assure that nobody loses their property without notice.

According to this opinion (and the precedents that it cites), when a county collector receives a tax statement that is stamped with “return to sender, undeliverable at this address, unable to forward,” the collector may be required to do more, rather than merely include the property in the collector’s sales, held in Missouri counties on the fourth Monday of each August.

Similarly, when the purchaser of a property at a tax sale applies for a collector’s deed, the purchaser must make a diligent effort to give notice to the property owner and any lienholders (such as those holding a mortgage on the property) that their redemption rights will expire.

Just what is required of the county collector and the tax sale purchaser depends on the circumstances, especially since the Jones v. Flowers decision of 2006, one of the first United Supreme Court opinions written by Chief Justice John Roberts. But Roberts wrote that the return of the envelope triggers a process that must be appropriate under the circumstances. For a tax collector or a purchaser of a tax certificate, it’s usually a good idea to:

  •  send a notice by regular mail, in addition to certified mail
  • send a notice addressed to “occupant”
  • knock on the door or post a notice, if there’s a building on the property
  • look in the phone book or call directory assistance
  • use an internet search engine
  • check property tax records (including vehicle records) for another address for the same party

I’ve been able to persuade courts to set aside collector’s deeds when the purchaser at tax sale couldn’t demonstrate diligence.

But United Asset Management Trust Company was too hard to find, which might be desirable for one wanting to avoid paying taxes and other debts. But United paid a price for being elusive.

United was the trustee for Coast to Coast Holding Company, which had no address in the United States, but was domiciled in Grand Turk, Caicos, British West Indies. Somewhere along the line, its Missouri post office box was cancelled, with no forwarding address. United Trust’s manager was in another state. The Cass County Collector was diligent, but couldn’t locate United, Neither could Clark, who bought the property at the collector’s tax sale. There was no building on the property and nowhere to post a notice.

The appellate court agreed with the trial court. The county collector and the purchaser at the tax sale did all that was reasonable and practical under the circumstances created by United. So United lost its real property for a few dollars in taxes.

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