 June 11, 2003 |
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Edited
by A. Burch Waldron, III. Waldron is a shareholder in the Fort Worth law
firm of Law, Snakard & Gambill and chairman of the TLTA Judiciary
Committee. Plaintiffs made arrangements with Woodforest, a Mortgage Broker, to borrow $200,000.00 to build a home on land they owned. When they approached Woodforest, they told Woodforest they could not afford to pay more than $1,500.00 per month in total loan payments. The loan was made, house constructed, and permanent loan closed with American Title Company of Houston, for a total amount of $209,750.00, with monthly payments of $1,608.00, of which $1,448.69 was principal and interest. Woodforest then sold the loan to Resource. Approximately one year after the closing of the permanent loan, Resource notified the Borrowers that due to a deficiency in the reserve escrow account, their payments would be increased to $2,541.42 for twelve months if they did not want to make a lump sum payment to catch up on the escrow. The Borrowers refused to pay and when foreclosure was threatened, filed suit against Woodforest, Resource, and American Title to prevent foreclosure and for damages. A summary judgment was granted on behalf of the Defendants, from which the Plaintiffs appealed. The Borrowers claimed that Woodforest and Resource had made misrepresentations to them concerning the amount of monthly payments, and that they had committed fraud, conspiracy, and violations of the Texas Deceptive Trade Practices Act, and that PMI charges had not been authorized. The Court of Appeals affirmed the trial court's granting of the Summary Judgment. The Court first reviewed the actions between the Borrowers, Woodforest, and Resource, and determined that there was no actionable fraud or misrepresentation. The parties agreed that American Title was a fiduciary in the closing of the loan and that a fiduciary has a duty of loyalty, a duty to make full disclosure, and a duty to conserve money in its possession and to pay it only to those entitled to it. The Borrowers alleged that American Title breached its fiduciary duties by not having a trained, licensed person to supervise and handle the closing of their loan, by concealing the misrepresentations made by Woodforest and Resource, and by not giving the Borrowers an opportunity to review the closing documents. They further alleged that the closing representative failed to identify interlineations and changes in closing documents and failed to disclose information pertaining to the disbursement of funds. They also alleged that the person who notarized the closing papers was not present when the papers were signed. According to the Borrowers, all of these misdeeds constituted a breach of American Title's fiduciary duties and also contributed to the conspiracy with Woodforest and Resource. The Court, while agreeing that the alleged manner in which American Title handled the closing was less than professional, disagreed with the Borrowers that American Title's alleged actions raised issues of fact to support the Borrower's claim that American Title had breached a fiduciary duty, failed to perform in a good and workman like manner, committed a fraud, or engaged in a conspiracy. The court opined that even though the actions of American Title, if true, were less than professional, in its opinion, their actions had nothing to do with material issues in the case of fraud and misrepresentations. Author's Note: The closing agent owes a fiduciary duty to all the parties in a transaction to act with utmost good faith and avoid self-dealing that places its interest in conflict with its obligations to the Beneficiaries. Despite any implied criticism in the court's opinion, the closing agent should resist temptation to interpret or explain closing documents beyond that which is required for the closing of the transaction. A "remembered" explanation in this case could have resulted in DTPA liability. TITLE COMMITMENT IS NOT A TITLE REPRESENTATION The parties negotiated an extension on the closing date, and HHEC deposited with Chicago Title an additional $30,000.00 in earnest money. On August 18, 1998, Chicago issued a revised commitment which showed on Schedule C an abstract of judgment against the seller in the amount of $650,000 which was filed on December 13, 1993. The parties agreed that the judgment was settled in March, 1995, although no release of the judgment was ever filed. HHEC could not get loan approval, so the contract did not close. Appletree subsequently offered to extend the contract if HHEC agreed to a $600,000 increase in the purchase price, but HHEC did not agree and it never closed on the purchase. Eighteen months after the date of the revised commitment, HHEC sued Chicago for negligent and fraudulent misrepresentation, breach of contact and breach of the duty of good faith and fair dealing. HHEC claimed that the first commitment constituted a misrepresentation that the property was "free of liens" although the abstract of judgment was of record. HHEC claimed that had the abstract of judgment been disclosed on the original commitment, it never would have deposited the additional $30,000 in earnest money and incurred other expenses in connection with its attempt to purchase the complex. HHEC also claimed that Chicago, in the revised commitment, misrepresented that the property was subject to the abstract of judgment, when in fact the judgment had been paid. The trial court granted Chicago's motion for summary judgment, and HHEC appealed. The Court of Appeals held: (1) A commitment is not an abstract of title. (2) A title insurance policy is a contract of indemnity, and the only duty imposed on the title insurer is the duty to indemnify the insured against losses caused by defects in title. (3) A title insurer has no duty to point out any outstanding encumbrances. (4) A title insurer may be held liable for an affirmative representation regarding title, if it is a producing cause of an insured's damages. (5) The original commitment, which showed only the mechanic's and materialmen's lien, did not constitute an affirmative representation that the lien was the only encumbrance on the property. (6) The revised commitment, which showed the abstract of judgment, did not state whether the judgment was paid in full or settled. (7) The plain language of the commitment demonstrates that Chicago made no representations as to title, and it did not impose on Chicago the duty to report all outstanding encumbrances affecting title. (8) Since HHEC never purchased a title insurance policy from Chicago, Chicago never owed a duty of good faith and fair dealing to HHEC. Author's note: This opinion does not present any new issues, but it is good to see an appellate court reaffirm the general principles of title insurance. A title insurer has no duty to disclose liens or other potential title defects. A commitment is not an abstract or a representation of title, and it is prepared for the purpose of advising the potential insured as to the contents of the title insurance policy, should a policy ever be issued. SPECIFIC PERFORMANCE IS POSSIBLE In In re Smith, 269 B.R. 629 (Bnkrtcy. E. D. Tex. 2001), after a state court had ordered specific performance, the United States Bankruptcy Court for the Eastern District of Texas rejected the debtor-sellers' effort to avoid their obligations to convey their home by attempting to reject the sales contract as an executory contract under the bankruptcy code. In this case, the debtor-sellers had entered an earnest money contract under which they agreed to sell their home. Prior to the closing, the debtor-sellers advised their real estate broker that they were unwilling to consumate the sale as required by the contract and failed to appear at the closing. The purchasers under the sales contract, nevertheless, appeared at the closing at the appropritate time with certified funds and tendered their performance under the contract. Afterwards, the purchasers filed suit in state district court seeking specific performance by the debtor-sellers under the contract of sale. The state court subsequently entered an order of specific performance requiring the debtor-sellers to convey the property to the purchasers in accordance with the sales contract. Prior to the actual conveyance under the state court's order, the debtor-sellers filed a petition for relief under Chapter 13 of the Bankruptcy Code and attempted to reject the sales contract as an executory contract. The purchasers objected to the putative rejection under the debtor-sellers Chapter 13 plan. The bankruptcy court sustained the purchasers' objection and allowed the enforcement of the state court's order of specific performance. In reaching this holding, the court first referred to the most frequently cited definition of an executory contract. A contract is executory if the "obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach and thus excuse performance of the other." Id. at 631. The court then reasoned that the entry of the specific performance decree in the state court precluded any attempt by the debtor-sellers to characterize the sales contract as executory, because the state court had implicitly found that the purchasers had performed all of their obligations under the contract or were otherwise excused from their obligations. The decree transformed any remaining obligations under the contract into merely ministerial acts. Id. at 632. Accordingly, the fact that the actual conveyance had yet to occur did not make the sales contract executory. The bankruptcy court reached this conclusion notwithstanding that the property under the sales contract was the homestead of the debtor-sellers. The court distinguished the familiar scenario of debtors facing eviction from their homestead through a threatened foreclosure from the situation before the court where the debtor-sellers "will receive a handsome purchase price upon closing through which they may obtain a new homestead . . ." According to the court, the fact that the debtor-seller desired to keep a particular homestead was neither compelling nor availing. Id. at 633. Author's note: This case is a reminder of the
powerful remedy of specific performance. Even a seller's bankruptcy may
not avoid the remedy, if a trial court has already ordered specific
performance. This is the case even if the sales contract provides for the
conveyance of the seller's homestead. |
REVERTER CLAUSES - NOT This case involves a reverter clause contained in a 1930 deed of 110 acres from the heirs of Henry MacGregor to the City of Houston. The deed provided that the land was to be used and maintained as a public park under the name MacGregor Park, with full right and authority in the City to police and regulate the use of the land and place limitations and restrictions thereon. The deed also provided that title to the property would revert to the grantor's heirs if the City abandoned the park, ceased to use and maintain the property for public park purposes or changed the name of the park. When Martin Luther King Blvd. was constructed in the 1950s, it bisected the original park acreage and separated a 47.54 acre tract from the rest of the park. Thereafter, the City ceased to make any effort to include the 47.54 acre tract as a part of the park and the tract was left entirely undeveloped. In its natural state, the tract was heavily wooded and overgrown with brush and not inviting even as a natural, passive use park. The City did not engage in any maintenance activity to clear brush or dead trees, and there were no hiking or nature trails through the tract. A park road that had previously circled through the 47.54 acres was abandoned and a locked gate with a "No Trespassing" sign was erected in front of the one dirt road leading into the area. The Court concluded that title to the 47.54 acres had reverted to the MacGregor heirs due to the non-use of the tract for public park purposes. The Court found that the 1930 deed did not grant the City the discretion to not use the property at all for public park purposes. The right of the City to police and regulate use of the land, and to place restrictions and limitations thereon, did not authorize the City to set the tract aside for non-use. The Court determined that the parties to the 1930 deed intended for there to be three separate and distinct reverter conditions (i.e. either abandonment or failure to use and maintain the land for public park purposes or a change in the name of the park) and that the jury's finding in the lower court that the City had not abandoned the 47.54 acres for public park purposes was not dispositive of the question of whether the reverter clause had been violated. The Court believed that the conditional conveyance manifested the grantors' intent that the City conduct some maintenance activity on the land that would make it accessible, attractive and usable to the public and that the non-use triggered the reversion of title. Since this case actually originated as a condemnation proceeding, wherein the State of Texas acquired 6.729 acres out of the 47.54 acre tract in question, the Court also granted the $425,000 condemnation award to the MacGregor heirs due to the reversion of title to the tract before the condemnation proceeding began. Author's Note: This case certainly serves as a reiteration of the importance of identifying reverter clauses in the chain of title and making appropriate exception in Schedule B of any commitment and title policy. Another point to be taken from this case is that the passage of a very long period of time since the reservation and/or condition to a conveyance was created, or breached, does not necessarily diminish or eliminate the risk involved. In the instant case, the only guidance as to when the City's violation of the reverter provision occurred was a jury finding that title had reverted before December of 1996. With many covenants, conditions, restrictions and reservations to title, the passage of more than seventy years since the item was created, or violated, can make a significant difference in the determination of insurability and can be relied upon in deciding that something is a "dead issue". Caution should be exercised in dismissing the risk of a reverter clause because of the passage of time. CONTRACTS - WHO GOES FIRST? Clark contracted to sell 340 acres to Roberts for $1.6 million. AgriLand Farm Credit Services (AFCS) agreed to lend Roberts $1.3 million of the purchase price. Roberts placed $300,000 with AFCS, and AFCS was to wire the entire purchase price to the title company at closing. The contract contained the following provision: "If the Buyers make the payment herein called for . . . the Sellers shall make, execute and deliver to the Buyers the Sellers' Warranty Deed . . . " On May 1, 2000, the scheduled date of closing, the Buyers and a AFCS agent, Harris, went to the title company. The Buyers signed the required paperwork. However, Harris refused to authorize the lender's wire into the title company until the Sellers' deed had been executed and delivered. The title company advised the Sellers that the purchase money would not be at the title company on May 1st, so the Sellers did not attend closing that day. When the Sellers went to the title company on May 2nd, they were told the money was not there and that it would not be there until they signed the deed. The Sellers refused to sign until they were given the money. The funds were never delivered to the escrow and the deed was never signed. The Sellers sued the Buyers alleging breach of contract, and won a summary judgment in the trial court. On appeal, the court looked to the language of the earnest money contract and decided that the payment of the purchase money by the Buyers was a condition precedent to the Sellers' obligation to deliver a deed. A "condition precedent" is an event that must happen or be performed before a right can accrue to enforce a contract. The appellate court found that the parties use of the word "if" as quoted above indicated their intent to require the Buyers to tender payment before the Sellers' duty to execute the deed arose. Since the condition precedent did not occur, the obligation to deliver a deed did not arise. The trial court judgment for the Sellers was affirmed. Author's note. The title agent must take care to examine the documents involved in each transaction. What might appear to be subtle differences can result in substantial changes in the parties' and the agent's legal obligations. Of course, a title agent must never give an opinion as to party's rights or obligations under a contract, and should never try to determine whether a party is in default. The TREC contract forms. Section 9 ("CLOSING") of the One to Four Family Residential
Contract (Resale) provides: B. At closing: (1) Seller shall execute and deliver a general warranty deed conveying title to the Property to Buyer . . . . (2) Buyer shall pay the Sales Price in good funds acceptable to the escrow agent. Note that this language is somewhat different from the language contained in the contract between Roberts and Clark. Although the Seller's obligation to deliver a deed is listed before the Buyer's obligation to pay the Sales Price, it is doubtful that this should be interpreted as meaning that the Seller's delivery of a deed is a condition precedent to the Buyer's duty to pay. Section 9 ("CLOSING") of the TREC Unimproved Property Contract and the TREC Farm and Ranch Contract provides: The closing of the sale will be on or before, or within 7 days after objections to matters disclosed in the Commitment or by the survey have been cured, whichever date is later (the Closing Date). If financing or assumption approval has been obtained pursuant to Paragraph 4, the Closing Date will be extended up to 15 days if necessary to comply with lender's closing requirements. If either party fails to close this sale by the Closing Date, the non-defaulting party will be entitled to exercise the remedies contained in Paragraph 15. Note that this language does not address the issue of whether tender of payment or tender of the deed must occur first. All three contracts provide that if third party financing is necessary, and if the buyer does not obtain the financing by a stated date, the seller may declare the contract terminated. |
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