ABA Recent Developments Panel, August 2002

 

Recent Developments In Real Estate Law,

August 11, 2002

 

Speakers

 

Roger Bernhardt is Professor of Law at Golden Gate University in San Francisco. He is the author of two California Continuing Education of the Bar books: California Mortgage and Deed of Trust Practice, and Bernhardt’s California Real Estate Cases. He is also the Editor (and commentator) of CEB’s California Real Property Law Reporter.  His other publications for attorneys include Bernhardt’s California Real Estate Codes and Deskbook of Federal Real Estate Laws.  In addition to these books for attorneys, Professor Bernhardt has also written for law students: Casebook on Real Property, Real Property in a Nutshell, The Black Letter Law of Real Property, all for West, and also a Casebook on California Real Estate Finance.

Bernhardt is admitted to practice in the states of California and New York, and is also licensed as a real estate broker in California. He is Advisor to the Executive Committee of the Real Property Section of the California State Bar, Chair of the Legal Education Committee of the Real Property, Probate and Trust Section of the American Bar Association, and is a member of the American College of Real Estate Lawyers, the American College of Mortgage Attorneys, and the American Law Institute.

 

Paula A. Franzese is Professor of Law at Seton Hall University School of Law, where she teaches Property and Commercial Law. Prof. Franzese received her B.A. summa cum laude, Phi Beta Kappa, from Barnard College, Columbia University, where she received the Bryson Prize, Alpha Zeta Fellowship, Marion Churchill White Prize, Davidson-Foreman Foundation Scholarship and Barnard Alumnae Fellowship, and her J.D. from Columbia University School of Law, where she was an International Fellow, Teaching Fellow and recipient of the Rosenman Prize for Excellence in Public Law Courses. She was a litigator with Cahill Gordon & Reindel in New York City, and served as law clerk to the Hon. Alan B. Handler. Prof. Franzese has published extensively in the areas of property law, land use and zoning and legal ethics and is a national lecturer on property. She is co-author of Property and the Public Interest (Lexis 1998), is featured as a Legend of the Law on Property (Thomson, 2002) and is a contributor to Court TV. She is the five-time recipient of the Student Bar Association’s Professor of the Year Award and was ranked the Top Law Professor in New Jersey by the New Jersey Law Journal. In 1996, she was appointed by Governor Whitman to the New Jersey Election Law Enforcement Commission, and in 2000 was elected its Vice-Chair. In 2002, she was appointed to the Mayor’s Blue Ribbon Advisory Council to Rebuild Lower New York. She is President of the Justice Resource Center, founder of the New Jersey Mentor Program and the recipient of numerous awards and honors, including the Peter W. Rodino Humanitarian Achievement Award, the New Jersey State Bar Association’s Young Lawyer of the Year Award, and the YMCA Woman of Influence Award.


 

Arthur Gaudio is Dean and Professor of Law at Western New England College School of Law.  Dean Gaudio is the author and general editor of The American Law of Real Property (1991) and Real Estate Brokerage Law (1986).  He served as Reporter for the Iowa Bar Association Real Estate Modernization Committee in the research, development and drafting of the Iowa Electronic Recording Act, a proposed statute creating a statewide system for recording electronic documents.  He also serves as an advisor to the Connecticut Law Revision Commission, which is studying an electronic recording system.  He is the author of an article on electronic recording to appear shortly in the Western New England Law Review and of a chapter on the same subject to appear in the revised edition of Patton on Titles.

Michele Gilligan is on the faculty of the University of Baltimore School of Law where she has taught real property and real property related subjects since 1976.  During that time, she has been Reporter for the Governor’s Landlord-Tenant Laws Study Commission, a member of the Maryland State Bar Association Real Property Section Code Revision Committee, and a lecturer on real property under U.S. State Department grants in Ukraine and China.  Her current interest is preservation of open space and natural areas in the urban environment leading to her appointment by Maryland’s Governor in 2001 to the Cox Creek Citizen Oversight Committee and to her work on the board of the North County Land Trust.  She received her B.A. from Smith College and her J.D. and LL.M. from the National Law Center at the George Washington University.


Recent Developments in Real Estate Law

August 11, 2002

 

 

Tenancies By the Entireties

1. United States v. Craft, ___ U.S. ___, 122 S. Ct. 1414 (2002).

 

Husband and wife held Grand Rapids, Michigan property as tenants by the entireties.  Under Michigan law, tenancy by the entireties property can not be reached by the creditors of one spouse to satisfy that spouse’s debt.

Husband failed to pay $482,446 in federal income tax liabilities.  Under 26 U.S.C. § 6321, a federal tax lien attached to “all property and rights to property . . . belonging to . . .” him.  After notice of the lien was filed, the husband conveyed his interest in the property to the wife.  Subsequently, wife sold property to a third party and Government sought half proceeds of sale under the tax lien.

District Court granted Government’s summary judgment motion and held that federal tax lien attached at moment of transfer to wife because the transfer terminated the tenancy by the entireties..  Sixth Circuit reversed because under Michigan law, husband had no separate interest in property to which the federal tax lien could attach.

The U.S. Supreme Court reversed in an opinion by Justice O’Connor for the Court stating that the question of whether tenancy by the entireties property is “property or rights to property” under the federal tax lien statute, 26 U.S.C. § 6321, is a question of federal law that is not bound by state law characterization. State law is the source of rights the taxpayer has in the sought after property but does not determine if the sought after property is “ property” within the meaning of the federal tax lien statute.  According to Justice O’Connor under Drye v. United States, 528 U.S. 49, 58, 120 S.Ct. 474 (1999), the determination of what is “property” is a decision under federal law.  Reminding us of first year property, another way of stating this principle is that the state determines which sticks are in a person’s bundle of sticks, but federal law determines if the bundle of sticks is “property” under the federal tax lien statute.

Focusing on cases interpreting “property” under 26 U.S.C. § 6321 (homestead rights, partnerships, spendthrift trusts) and rejecting a series of earlier federal tax lien decisions (footnote 8) and IRS policy statements finding federal tax liens did not attach to tenancy by the entireties property (footnote 9), Justice O’Connor wrote that the husband had a substantial degree of control over the property:  he could use it, exclude others, receive income from it, transfer it with his wife’s consent, own it all on his wife’s death.  These rights added up to  “property” within the meaning of the federal tax lien statute and half the proceeds of sale could be reached.

The three dissenters (Justice Thomas, Stevens, and Scalia) criticize the majority for ignoring the role of states in defining what is property and property rights in favor of development of a federal definition  of property.  Prior to this case, the Government’s lien under 26 U.S.C. § 6321 would only extend to property as recognized under state law.  Michigan did not recognize an attachable interest so there was nothing for the lien to attach to.  This case changed the law.


Common Interest Communities

2. Mulligan v. Panther Valley Property Owners Association, 766 A. 2d 1186 (decided Feb. 16, 2001).

 

Plaintiff, the owner of home in Panther Valley, a private common interest community in Warren County, New Jersey, sued the homeowners’ association alleging that amendments to the Declaration of Covenants, Conditions and Restrictions (“Declaration”) failed the test of reasonableness. Specifically, the New Jersey Appellate Division ruled on the propriety of amendments which declared 1.) that the association would be authorized, without notice to the homeowner, to file with the Warren County Clerk a “Notice of Continuing Violation” if a homeowner persisted in violating any Declaration or bylaw or rule; 2.) that a homeowner’s entitlement to inspect the association’s books and records would be limited to a review of the books for the current fiscal year and the two preceding fiscal years and that the association would be vested with discretion in withholding from inspection any documents that in its “reasonable business judgment” would compromise privacy and 3.) that a homeowner could be liable for the association’s attorneys’ fees and costs if the association brought suit to enforce the Declaration. The court chose, as a matter of first impression in New Jersey, to apply the reasonableness standard (as opposed to the business judgment rule) in reviewing the propriety of the amendments. Significantly, the court refused to afford the amendments a strong presumption of validity, mindful that they were promulgated after plaintiff began residence in Panther Valley, and required no more than a simple majority vote for passage. The court concluded that the first amendment failed to pass muster, but that the second and third restrictions were reasonable. The second restriction, limiting homeowner inspection of the books and records, was deemed consistent with the association’s fiduciary responsibilities and not overbroad. The third, obliging an intransigent member to pay association costs and attorneys’ fees, was found to be consistent with considerations of basic fairness. The first amendment, however, leaves the arena of private enforcement and endeavors instead to create a publicly-recorded lien upon an owner’s property. This provision was struck down as unreasonable, insofar as it deprived the homeowner of notice.

 

3. Villa Milano Homeowners Association v. Il Davorge, 102 Cal. Rptr. 2d 1 (decided Nov. 6, 2000).

 

This decision is significant insofar as it finds the California Appellate Division striking down as unconscionable a binding arbitration clause contained in a common interest community Declaration. In this case, homeowners filed a complaint against the developer seeking damages for alleged construction and design defects. The developer filed a petition to compel arbitration, pursuant to the terms of the Declaration, and the Court of Appeal, affirming the trial court, struck down the arbitration clause as procedurally and substantively unconscionable as well as repugnant to public policy. The clause was infected by developer self-interest, insofar as it was unilaterally drafted, signed and recorded by the developer alone, and the nature of the homeowners’ complaint, alleging construction and design defects, rendered it subject to judicial review pursuant to the California Code of Civil Procedure.


4. Heath v. Uraga, 24 P.3d 413 (Wash. App. 2001).

 

Here, the Washington Appellate Court upheld an architectural decision to deny  homeowner Uraga permission to build a home deemed too high, with a pitch too steep, notwithstanding the fact that the appointed decision maker was not an elected member of the architectural review board and was potentially infected by self-interest. The relevant Declaration prohibits building a home unless the architectural committee or its representative approves the proposed plans. Thereafter, the architectural committee essentially ceased to exist, and its last member, just before resigning, designated one Heath as his “representative.” Heath owned the home adjacent to plaintiff Uraga’s, and was concerned with protecting his view from intrusion by Uraga  The court concluded that the appointment of a decision-maker with an interest in the outcome was not prohibited by the Declaration, that Heath had carefully evaluated the submitted proposal, and that his  refusal to approve the plans satisfied the “reasonableness and good faith” tests established by earlier Washington caselaw, most notably Riss v. Angel, 934 P.2d 669 (1997).

 

 

5. Woodside Village Condominium Ass’n, Inc. v. Jahren, 806 So.2d 452 (Fla. 2002).

 

In this case, the Florida Supreme Court ruled that condominium owners have the authority to amend their governing Declaration on a broad array of matters, including imposing restrictions on leasing. Here, the original 1979 Declaration was amended in 1997, by required two-thirds vote of the unit owners, to limit the leasing of units to a term of no more than nine months in any twelve month period. The amendment was passed in response to resident concerns that too many units were becoming non-owner occupied, and that this could adversely impinge upon overall quality of life in the community. Respondents, in violation of the amendment, argued that it was unreasonable, arbitrary and capricious and deprived them of uses that were permissible at the time of their purchase. The Florida Supreme Court rejected these contentions, noting that respondents were on notice that Declaration provisions could be amended. Moreover, in the court’s estimation, this particular amendment fosters the laudable goal of owner occupancy of condominium units, a goal consistent with the very purpose of common interest community living.

 


Landlord & Tenant

6. Faith Reformed Church of Traverse City, Michigan v. Thompson, 248 Mich. App. 487, 639 N.W. 2d 831 (2001).

 

In December 1996 lessee vacated leased premises one year before termination of the lease.  Abandonment occurred after many months of negotiation where lessee sought to have new lessor agree to a longer lease.  Lessor refused to agree to a long-term lease with lessee.  After abandonment lessee continued to pay rent to the lessor and referred several potential tenants to lessor’s management company for the abandoned space.  The potential tenants were discouraged from renting the space by the short term leases offered and the requirement that they remodel their own space.

In March 1997 lessor, during remodeling, encroached into lessee’s space and thereafter the management company offered a $970 credit  to lessee for the space utilized in the encroachment.  In June 1998 lessee sent lessor a check for the same amount as monthly rent with an accompanying letter stating the tender of payment is conditioned on the amount being “full and final resolution of any and all rental claims which the landlord has against the tenant.” The letter further described the dispute the lessee had with the lessor.  The check was deposited by an employee of the management company.  In July 1998 the lessor wrote the lessee that he did not accept the condition, but the lessor did not return the money.

In November 1998, lessor filed suit for seven months rent.  Lessee filed for summary disposition claiming lessor’s deposit of the check established an accord and satisfaction.  District Court granted motion which was affirmed by Circuit Court.  Michigan Court of Appeals reviewed the case de novo affirming the grant of summary disposition.

According to the Michigan Court of Appeals, to prove an accord and satisfaction, one must show:  (1) a good faith dispute; (2) an unliquidated claim; (3) conditional tender of money in satisfaction of claim; (4) acceptance of tender; and (5) knowledge of the conditional nature of tender.  The lessee’s June 1998 letter established the good faith dispute over lessor’s failure to mitigate [lessor discouraged potential tenants] and over the lessor’s renovations [lessor encroaching into tenants space terminated lease].  The claim is unliquidated because it is not clear how much rent, if any, is due.  The letter sets forth the conditional nature of offer.  The check was deposited.  The lessor’s July 1998 response rejecting the “accord and satisfaction” showed the lessor understood the conditional nature of the tender of money and, by failing to return the money, they had accepted the “accord and satisfaction.”

 


7. Summit Towne Centre, Inc. v. Shoe Show of Rocky Mountain, 2001 Pa. Super. 305, 786 A.2d 240 (2001)

Starting in 1994, lessee tried to negotiate the end of a 10 year lease it entered in 1992.  The  lease was for a 5400 square foot shoe store which the lease very specifically described.[1] The store was located in a 550,000 square foot regional shopping center with twenty to thirty tenants.  Lessor refused to terminate the lease and warned lessee that it would enforce its continuous operations clause[2].  Lessee abandoned January 30, 2000,  having lost $98,280 in 1998, $108,846 in 1999, and projecting a loss of $121,906 in 2000.

Lessor sought an injunction to force the lessee to reopen and to operate a shoe store in compliance with the lease.  Lessor was denied an injunction by the trial court because it had an adequate remedy at law and an injunction would disproportionately harm the lessee.  The lease contained a liquidated damage clause[3] which was an adequate remedy, and the lessee’s losses coupled with the costs of re-outfitting, -stocking and -staffing the store caused disproportionate harm to the lessee..

On appeal to the Superior Court, surprisingly, the lessor prevailed and the trial court was held to have abused its discretion in refusing to grant an injunction.  Specifically the lessor asserted that it had always reserved the right to pursue a legal or equitable remedy as seen in the liquidated damage clause in footnote 3 because it realized that money damages might be an inadequate remedy.  The failure to specifically enforce its continuos operations clause would harm its credibility as a commercial lessor and hurt its ability to attract and retain lessees.  The Court on appeal agreed with the lessor and determined that an injunction was a proper remedy.

The Court determined that the harm to the lessor was irreparable because it could not maintain the proper mix of stores, it lost shoppers, it faced the  loss of other stores, it would have trouble attracting new lessees because of the vacancies.  Further the enforcement of the “continuous operations”clause was necessary to restore the lessor’s intangible credibility with current and future lessees and the vitality of the shopping center.  Only an injunction would do that so the trial court abused its discretion in finding the liquidated damage clause was an adequate remedy at law.

On the question of disproportionate harm, the Court had little sympathy for the lessee and found it had losses only for two of the eight years it operated, and further any losses resulting from expenses to reopen were its own fault for vacating.  In addition the lessee voluntarily entered the lease with binding use and default provisions.  Consequently, the trial court abused its discretion in finding that the lessee would be disproportionately harmed by an injunction.


8. Musci v. Graoch Associates Limited Partnership #11, 144 Wn.2d 847, 31 P.3d 684 (2001)

The tenant, Musci, lived in landlord’s, Graoch Associates, extensive apartment complex and used the apartment complex clubhouse.  There was a heavy snow fall on Friday, January 26, 1996.  Tenant used the apartment complex clubhouse on Monday, January 29, 1996.  The front entrance to the clubhouse was free of accumulated ice and snow, however, tenant could observe that the side exit was not free of snow and ice.  Tenant used the side exit to leave the clubhouse and was injured when he slipped and fell.

Tenant sued the landlord for negligence.  At the close of the tenant’s case the landlord moved for dismissal for failure to present sufficient evidence of a breach of duty by the landlord.

The motion was granted.  The Washington Court of Appeals affirmed.  The Washington Supreme Court reversed and remanded holding that when the inferences are viewed most favorably to the tenant, the case must be submitted to the jury.

The Supreme Court explained that in Washington, a residential tenant is an invitee of the landlord.  The landlord has an affirmative duty to maintain the common areas in a safe condition for the tenants. The Court followed Restatement (Second) of Torts sec. 343 which states that a landlord is liable to the tenant for harm caused by conditions in the common areas if 1.  the landlord knows of the risk to the tenant, 2. knows the tenant will fail to protect against the harm and then 3. fails to exercise reasonable care to protect the tenant.

Applying this test to accumulations of snow and ice, the Court followed the Connecticut rule requiring a landlord to keep all common areas reasonably free of hazards including snow and ice.  In 1975 the Court rejected the Massachusetts rule, or “natural accumulations rule”, stating that a landlord had no duty to protect invitees from hazardous conditions caused by snow and ice which had been the law in Washington from 1910.  The Court emphasized here that, although the landlord has a duty to exercise reasonable care to remove snow and ice, the landlord is not a guarantor of the tenant’s safety and usually is not liable to a tenant for harm from obvious dangers.  Landlord liability is based on a failure to act reasonably under the circumstances and the tenant in this case presented extensive evidence of that failure: landlord should have known all exits from the clubhouse would be used, had actual knowledge that some of the exits were covered with snow and ice, had had two to three days to clear the snow and ice but chose not to, did not block the clubhouse exits even knowing of the hazardous conditions outside, and had available snow and ice melting granules but chose not to use them.  This evidence was sufficient to go to the jury.

Since the case was remanded for a trial several questions were left open such as whether the tenant exercised reasonable care, and if the landlord should have know the tenant would not protect himself from the harm.

The dissent was troubled by the majority’s failure focus on the “known or obvious danger” from snow and ice accumulations.  Ordinarily a landlord had no liability to an invitee for such an obvious harm except for the narrow circumstance outlined in Restatement (Second) Torts sec. 343A: “the invitee will proceed to encounter the known or obvious danger because to a reasonable [person] in [that] position the advantages of doing so would outweigh the apparent risk.”  The dissent pointed out that no evidence had been presented on the advantage of going out the side exit weighed against the possibility of slipping in the snow and ice.  The majority’s holding in the view of the dissent was too broad and made the landlord a guarantor of the tenant’s safety.


Land Use

 

9. Tahoe-Sierra Preservation Council v. Tahoe Regional Planning Agency, 122 S. Ct. 1465 (2002).

 

In this case, the Supreme Court refused to extend the Lucas v. South Carolina Coastal Commission (112 S. Ct. 2886) “categorical taking” standard to a temporary governmental moratorium of the sort at issue in First English Evangelical Lutheran Church of Glendale v. County of Los Angeles (107 S. Ct. 2378). While the Lucas test remains intact when a regulation permanently deprives property of all value, the Tahoe majority noted that Lucas represents a narrow holding, without application to a temporary, albeit protracted, moratorium on property development along the shores of Lake Tahoe. Plaintiffs, who had bought undeveloped lots for purposes of building homes on the lake, asserted that even the temporary restriction on development was a taking warranting compensation. Writing for the majority, Justice Stevens rejected this contention, noting that “a rule that required compensation for every delay in the use of property would render routine government processes prohibitively expensive or encourage hasty decision-making.” He added, in an interesting invitation to the coordinating branches of government, that “such an important change in the law should be the product of legislative rule-making rather than adjudication.” Those who would endorse a more private property rights’ protective posture, such as the Pacific Legal Foundation, view the decision as “an unfortunate blip in the forward progress of property rights.” By contrast, the National League of Cities called the ruling “the best news from the Supreme Court on takings law in more than 20 years.” The majority opinion was joined by Justices O’Connor, Kennedy, Souter, Ginsburg and Breyer. Chief Justice Rehnquist and Justices Thomas and Scalia dissented. The dissenters would have extended Lucas even to temporary governmental prohibitions.


 

10. Toll Brothers, Inc. v. Township of West Windsor, 772 A.2d 914 (2001).

 

On November 27-28, the New Jersey Supreme Court heard oral arguments in Tolls Brothers, a case popularly referred to as “Mount Laurel IV.” In Mount Laurel I, decided in 1975, the New Jersey Supreme Court ruled that as a matter of state constitutional imperative every developing municipality must provide its fair share of the overall regional need for low and moderate income housing. Mount Laurel II, decided in 1983, reaffirmed the mandate and imposed the notorious builder’s remedy, whereby builder-developers who succeeded in challenging a given township’s zoning scheme as exclusionary were awarded density bonuses in exchange for setting aside a small percentage of units for those of low and moderate income. Mount Laurel III, decided in 1986, deemed constitutional the state legislature’s planning and implementation response to the previous Mount Laurel rulings, the Fair Housing Act. Since then, approximately 61,000 affordable housing units have been built, with at least another 116,000 units needed. The Mount Laurel doctrine remains controversial, and the builder’s remedy in particular is often assailed as encouraging sprawl and overtaxing environmental resources. Toll Brothers presents the New Jersey Supreme Court with the opportunity to reconsider the propriety of the builder’s remedy and comment on the integrity of the larger mandate. In this case, the trial court awarded plaintiff-developer a builder’s remedy when it passed favorably on plaintiff’s challenge to the township of West Windsor’s zoning ordinances for their failure to satisfy the affordable housing obligation. The appellate division affirmed. The New Jersey Supreme Court granted certification, and during oral argument the justices seemed less concerned with sprawl or home rule considerations than with Mount Laurel’s failure to live up to its mission: giving the state’s poorest the opportunity to move out of impoverished urban settings. The decision is due any day now.

 


Real Estate Transactions

 

11. Electronic documents and electronic recording have been emerging for the past several years.  On June 28, 2002, Fannie Mae issued Announcement 02-08 stating its requirements for purchasing an electronic mortgage.  Its summary, in part, is as follows:

Selling Electronic Mortgages to Fannie Mae. “We are now ready to begin purchasing eMortgages from lenders that meet the legal, technological, and operational requirements that are necessary to create valid and enforceable eMortgages.  This Announcement summarizes the terms and conditions that must be satisfied in order for a lender to deliver and service eMortgages, and sets out the general procedures that will apply.

“An eMortgage is a mortgage for which the promissory note and possibly other documents (such as the security instrument and loan application) are created and stored electronically rather than by using traditional paper documentation that has a pen and ink signature.  Because of the limited number of recording jurisdictions that accept electronic documents for recordation, most eMortgages will initially consist of a paper security instrument and one of the electronic notes (eNote) that we have developed for use with the various eligible products (instead of using one of our standard paper notes).”

Certain Underwriters at Lloyd’s of London v. Superior Court, 24 Cal.4th 945, 16 P.3d 94, 103 Cal.Rptr.2d 672 (Cal.2001) and Western National Mutual Insurance Co. v. Westling Manufacturing, Inc., 2001 WL 1085005 (Minn.App.2001).

With a proliferation of state voluntary cleanup programs (VCPs), many parties are performing environmental cleanups pursuant to a VCP.  The process can streamline the cleanup and result in less cost.  However, because these cleanups are not performed in response to a suit, there may be an issue as to whether the insured can recover its cleanup costs under an insurance policy.  In California, the insured was denied recovery, while in Minnesota the insured was allowed recovery.

12. Certain Underwriters at Lloyd’s of London v. Superior Court – Where the policy stated that the insurer had a duty to indemnify the insured for “all sums that the insured becomes legally obligated to pay as damages” for covered harm, the court held that the insurance company was only responsible for cleanup costs resulting from court orders and was not required to reimburse the insured for costs incurred pursuant to a state administrative order.

13. Western National Mutual Insurance Co. v. Westling Manufacturing, Inc. – The court ruled that a property owner who was “invited” by the state environmental agency to remediate the site under the state VCP was entitled to coverage even though it did not notify its insurer prior to entering into the VCP program.  The court said that the state’s invitation to participate in the VCP constituted a “suit” triggering the insurer’s duty to defend.  The court said that the insurer was not prejudiced or adversely affected by the insured’s agreement to participate in the VCP because the insurer could bring a lawsuit against a responsible party if it later determined that its policyholder was not responsible for the contamination.


14. In re Marriage of Cloney, 91 Cal.App.4th 429, 110 Cal.Rptr.2d 615 (Cal.App. 1 Dist. 2001).

A judgment against James Michael Cloney attached to property titled in “Mike Cloney” when Cloney sold the property because the escrow officer saw Cloney’s full name when she asked him for his driver’s license in order to notarize a document.  The escrow officer’s knowledge gained as an escrow agent was attributed to the title company (agent), and then to the buyer (principal).

Dana Gregg and James Michael Cloney were divorced, and Gregg got a judgment against Cloney for child and spousal support.  Cloney and his second wife bought a house in 1991 and took title as “Mike Cloney.”  Gregg recorded the divorce judgment in 1997.  Cloney and his new wife contracted to sell the home in 1999.  First American performed the title work and acted as escrowee.  Cloney met with Holcomb, the escrow officer, to sign papers.  When notarizing some of the documents, she asked Cloney for identification, and he produced a driver’s license with his full name.  Holcomb noted the full name in her notary log but did not have the title officer search for liens against “James Michael Cloney.”  First American did not detect the judgment in favor of Dana Gregg.  Escrow closed and the house was conveyed to buyers by a deed from “Mike Cloney.”

Gregg noticed that the house had been sold and her attorney started the procedure to sell the house to pay off the judgment.  Buyer filed a motion to stop the sale.  The trial court ruled that the title insurer  had no duty to search  for “Mike” or “Michael” as a middle name, and that the knowledge of the escrow officer could not be imputed through her employer to the buyer.  Therefore, the buyer had no notice of the judgment and took free of it.  Gregg appealed, and the court reversed.

The appeals court dismissed the parties’ arguments about what names should been searched by First American in its role as title insurer.  It also admitted that there is a series of cases holding that the actual knowledge of a title insurer is not imputed to the insured.  The court then said:  “The question whether an escrow agent’s knowledge may be imputed to the purchaser, however, is an entirely different matter.”

“It is well-settled law in California that the holder of an escrow is agent for all parties up to the time that the escrow is closed . . . .  Because an escrow agent in a real property conveyance is a dual agent for both the purchaser and the seller, any escrow agency is of a limited and special nature, and the obligations imposed on an escrow agent to disclose matters to his or her principals are more limited than those imposed on an agent pursuant to a general agency.  For this reason, in order for any knowledge acquired by an escrow agent to be imputed to either principal, such knowledge must have been acquired by the escrow agent within the course and scope of his or her limited agency.  Nevertheless, insofar as the escrow agent – acting within the course and scope of his or her agency duties – acquires specific material information pertinent to matters within the same escrow that could have a substantial adverse effect on the principal, such knowledge will be imputed to the principal.

The court then held that Holcomb’s knowledge was acquired in the course and scope of her escrow agency.  She “asked for Cloney’s identification, not simply as a notary public, but as the escrow officer acting on behalf of both parties.  Before Cloney signed the grant deed . . ., it was necessary to ascertain that he was, in fact, the person he represented himself to be.  This information was necessary to Holcomb for her to carry out her duties as escrow agent to respondent. . . .  Because this information was obtained in the course of her escrow agency and was highly material to the subject matter of that agency, Holcomb was obligated by her agency to disclose this information to respondent as one of her principals.  As a matter of law, therefore, she is presumed to have fulfilled this duty of her agency.  The highly material knowledge of Cloney’s identity must therefore be imputed to respondent. . . .”

Buyer also argued that Holcomb learned of Cloney’s full name not as an escrow officer but as a notary, and therefore the knowledge should not be imparted to him.  The court said that this was too fine of a distinction and rejected it.

Zurstrassen v. Stonier, 786 So.2d 65 (Fla.App. 4 Dist. 2001) and Treglia v. Zanesky, 67 Conn. App. 447,  788 A.2d 1263 (2001).

In the former case a forged deed was found to be void and offered no protection to a subsequent bona fide purchaser, but in the latter case a forged deed was found only to be voidable and enforceable by a subsequent purchaser.

15. Zurstrassen v. Stonier – Two brothers acquired title, apparently as tenants in common.  While brother Klaus was out of the country, brother Rolf forged Klaus’ name on a deed transferring the entire estate to Rolf.  When Klaus returned they decided to sell the property; a broker informed Klaus that his name did not appear as owner.  Rolf explained to Klaus that some technical error had occurred.  The brothers then executed a document acknowledging that title was in Rolf, but that Klaus had an interest, after which Klaus left the country again.  Rolf sold the property by quitclaim and the purchaser resold it by warranty deed.  Neither the first nor second purchaser was aware that Rolf’s title had a defect.  The second purchaser, through an error, did not record until three months after the transfer.  Meanwhile, Klaus returned, discovered the forgery, and instituted a quiet title action.  The trial court held for the purchaser, and Klaus appealed; the decision was reversed.  The deed is void, although equitable grounds for relief may be brought out at trial.

The purchaser argued that Klaus was estopped to assert the forgery because he later became aware of the fact that his brother held sole title and entered into a document ratifying his brother’s sale of the property, with him sharing in the proceeds.  The court held that this document did not provide a foundation to an estoppel claim because the purchaser did not know of it or rely on it.  The court also pointed out that Klaus, at the time he signed the document, had no knowledge that Rolf had forged his signature.  He believed the reason that Rolf had sole title was an error in the original acquisition.  The court held that there could be no waiver argument because Klaus did not possess knowledge of all the relevant facts, i.e. that Rolf had forged the deed rather than had obtained title by accident.  Finally the court held that the purchaser had not shown as a matter of law that Klaus had ratified Rolf’s act in forging the deed since he signed the document agreeing that Rolf could sell the property and that Klaus would share the proceeds.

16. Treglia v. Zanesky – Plaintiff was co-owner of certain rental property with his father and brother.  Although he worked the property and contributed to its improvement, he did not participate in the business management.  A brokerage firm sought to acquire the property and before plaintiff became aware of the offer, a contract was executed and someone inserted plaintiff’s name.  Thereafter, the father put plaintiff’s name on the deed as well.  Plaintiff sued to have the transfer set aside and to quiet title.

The trial court found for defendants. The jury found that although plaintiff was unaware that the contract had been signed, he did know that the property was on the market.  He also learned of the contract before the closing and conducted himself in a way intended or calculated to induce the purchaser to believe they were receiving good title.  Finally, the jury found that the plaintiff was guilty of an inequitable delay (7 years) before challenging the transaction.  Plaintiff appealed.

The appeals court considered whether a deed executed by another, even with the authorization of the grantor, could be valid under Connecticut law, which appears to require a power of attorney to authorize the signature by another.  The court concluded, however, that the requirement of a power of attorney to authorize the surrogate execution of a deed was a formality, the absence of which renders the deed voidable, but not void.  As such the deed can be ratified, which apparently occurred here.

 


Real Estate Finance

17. Alternative Mortgage  Transactions Parity Act. Proposed Office of Thrift Supervision Rules.  FR 20468 (April 2002).

 

The Alternative Mortgage  Transaction Parity Act in 1982 preempted state regulations of alternative mortgages, i.e. those that were not fixed rate fixed term loans, by permitting lenders to comply with uniform federal regulations instead. Several recent cases have applied the act to defeat state regulation of various features of mortgages (see e.g., Shinn v Encore Mortgage Services 96 F.Supp.2d 419. D.N.J., 2000;  but see Black v Financial Freedom Senior Funding, 112 Cal. Rptr. 2d 445, 2001) Now the OTS proposes to eliminate prepayment penalties and late charges from the list of features which are subject to federal regulation rather than individual state regulation. If adopted, this would reinstate state laws governing these features.

 

 

18. In re Crystal Properties, 268 F3d 743 (9th Cir., Sept. 2002).

 

A series of notes provided that upon any default by the borrower, “at the option of the holder and without notice or demand, the entire balance . . . shall become immediately due and payable and thereafter bear interest [at a higher rate]”. The notes had long been in default and the successive lenders holding them had written several demand letters, but had never formally accelerated the loans.

The Ninth Circuit held that the wording of the notes meant that the interest rate did not step up under after the lender had exercised its option to accelerate, and that this prerequisite was not waived by the “without notice or demand” provision. Therefore the amounts owing were to be calculated at the note rate rather than the default rate.

 

 

19. Dressel v Ameribank, 635 N.W.2d 328 (Mich.App. Aug. 2001), appeal granted 643 N.W.2d 573 (Apr. 2002).

 

Preparation of documents for a loan to be made by the lender constitutes the unauthorized practice of law, if a separate fee is imposed for that service.


 

20. Glover v Standard Federal Bank, 283 F3d 953 (8th Cir., Mar. 2002); Schuetz v Banc One Mortgage Corp, 292 F3d 1004 (9th Cir., June 2002).

 

Yield spread premiums are paid to mortgage brokers by wholesale lenders for loan applications brought to them at rates above their own par rates. Last year, the Eleventh Circuit, in Culpepper v Irwin Mortgage Corp, 253 F3d 1324 held that they constituted illegal referral fees under the Real Estate Settlement Procedures Act, and could be attacked by way of class actions. This year, the Eighth and Ninth Circuits disagree, and side with HUD, which had taken the position that a YSPs was not per se illegal and  constituted a referral fee only when the total compensation received by the loan broker exceeded the reasonable value of services rendered. HUD has this year, also proposed new rules for RESPA disclosures and compliance.

 

 

21. In re Stanton, 285 F3d 888 (9th Cir., April 2002).

Further advances made to a debtor after the guarantor of the debt has filed for bankruptcy do not violate the automatic stay, but their security rank under the guarantor’s deed of trust is below that of the bankruptcy trustee since the advances were optional and were made with notice of the bankruptcy filing.

 



[1]“...shall be used for the sole purpose of the operation of a first-class modified rack family shoe store specializing in retail sale of brand name dress, casual, sport and work shoes, as well as handbags, hosiery and other related accessories.  Tenant recognizes that the specific limited use prescribed herein is a material consideration to Landlord in order that the Shopping Center will remain an appropriate tenant mix.”

[2]“...Tenant further agrees that during the entire term hereof, no part of the Demised Premises shall be abandoned or left vacant unless the Demised Premises have been destroyed by fire or other casualty...”

[3]“...because of the difficulty or impossibility of determining Landlord’s damages, should Tenant...abandon...Landlord, at its option, shall have the right: (a) to collect.....; and/or (b) to treat such failure to do business as a default....The rights and remedies given to Landlord by this Lease shall be deemed to be cumulative and no one of such rights and remedies shall be exclusive at law or in equity of the rights and remedies which Landlord might otherwise have by virtue of a default under this lease...”