Real Estate Law Update: Published Court Case: the Scope of a Construction Lien and consequential damages.

September 11, 2019 Leave a comment

I took this photo today – flags at half mast in downtown Grand Rapids.

I will #NeverForget where I was – at the cafeteria in McDonel Hall @michiganstateu watching the horror on the T.V.

Thank you all who gave their lives and prayers to all who lost loved ones 18 years ago today.

Flags at half mast outside of DeVos Place, Downtown Grand Rapids, Michigan

Yesterday a published court decision came out that affects the scope of a construction lien. Check out TSP Services, Inc. v National Standard Company, et al

Update: On September 17, 2019 the Court Vacated its Prior decision and issued a new decision – see here

This case involves a breach of contract claim and a construction lien foreclosure claim.

The case went to arbitration and, according to the Opinion, “the arbitrator approved a lien for $782,469.05, which is $641,386.05 greater than the unpaid balance under the contract.” –

Wow!

The very first page of the Opinion gives you much of the information you need to know to understand the holding:

” Michigan law limits a construction lien to the amount of the contract less any payment already made. Although a party suing for breach of contract might recover consequential damages beyond the monetary value of the contract itself, those consequential damages cannot be subject to a construction lien. “

The construction lien act provides: “Each contractor, subcontractor, supplier, or laborer who provides an improvement to real property has a construction lien upon the interest of the owner or lessee who contracted for the improvement to the real property.” MCL 570.1107(1).

“A construction lien acquired pursuant to this act shall not exceed the amount of the lien claimant’s contract less payments made on the contract.” MCL 570.1107(1)

“Michigan’s construction lien act authorizes a lien up to the unpaid balance of the amount contracted. A lien that includes an amount for consequential damages flowing from, but otherwise outside of the four corners of the contract, exceeds the authorized amount of the act. “

To summarize – consequential damages are not allowable under a construction lien.

consequential damages are a permissible damage under contract law – but you won’t get them added to your lien to foreclose on. You will need to find some other way to recover under a judgment.

A good question to ask: what happens if you file a lien and indicate too much?  Is your lien void? Typically. no.

In order to void a construction lien that is filed in an excessive amount a showing of bad faith is required.  Tempo Inc v Rapid Elec Sales & Services, Inc, 132 Mich App 93; 347 NW2d 728 (Mich Ct App 1984).  “A lien is not lost because the amount claimed is excessive, unless the claim was made in bad faith. In such instances, the proper remedy is to reduce the amount of the lien to the correct amount.” Id

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

http://www.dwlawpc.com

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Business Law Update: Business Owners: Bill Would Restrict Non-Competition Agreements with Employees.

September 9, 2019 1 comment
Cedarville, Michigan

I hope you all had a great Labor Day Weekend. I spent the long holiday weekend with my family in Michigan’s Upper Peninsula.

On September 4, 2019, Senate Bill 0483 was introduced in the Michigan Senate.

If passed it would limit the enforceability of a non-competition agreement signed between an employer and an employee.

In my opinion – in some pretty significant ways.

I have spent several articles discussing the legal consequences/enforceability issues of non-competes.

It appears the Legislature is wrestling with the question posed by Nick Manes previously with MIBiz in an article a few years back: “Are noncompetes a barrier to growth?

You can check out the text of the bill here

The Bill was referred to the committee on Government Operations.

The Bill has a few key components to it:

1. Require Employers to follow a Specific Procedure prior to executing a non-compete.

The Bill would only permit Employers to execute a non-competition agreement if the Employer followed a procedure intended to notify the Employee of the requirement of signing a non-compete as a condition of employment.

(A) INFORMED THE PROSPECTIVE EMPLOYEE IN WRITING OF THE REQUIREMENT AT OR BEFORE THE TIME OF THE INITIAL OFFER OF EMPLOYMENT.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

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(A) Informed the prospective employee in writing of the requirement or before the time of the initial offer of employment;

(B) Disclose the Terms of the Non-Compete in writing; and

(C) Post the Text of the Law at the Worksite in a CONSPICUOUS LOCATION

2. Non-Compete unenforceable if the Employee is a “low wage” worker.

Defined generally as $15.00/hr or $31,000 annually.

3. Voids Certain Provisions in a Non-Compete – shifts the burden to Employer.

The Bill also has some teeth in it for Employees, including:

  1. Prohibits an Employer from including a clause that states a different state’s laws control the Agreement – this would be an obvious attempt to circumvent the prohibition of non-compete against “low wage” workers;
  2. Gives the Attorney General power to prosecute a violation of the Act;
  3. Automatically places the Burden on the Employer to prove that the Non-Compete was reasonable, as to “scope, duration, time limit.”
    1. Moreover, if a Court limits the non-compete in any respect, the employee is entitled to recover attorney fees.

Wow. This bill has a lot of bite to it – particularly the fee shifting mechanism if a court limits a non-compete in any respect. My first thoughts – if this Bill does come out of Committee, I can’t imagine it will look the same as its current version.

I understand the legislature’s interest in protecting “low wage workers” from unreasonable restrictions. Check out my prior post on the subject of Jimmy John’s non-competes.

However, in my opinion the restrictions as written places an enormous burden on the employer to narrowly tailor the non-compete, to a judge’s definition of “reasonableness”. Otherwise, like I said, the fee shifting provision is a huge penalty.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

http://www.dwlawpc.com

For the benefit of all stakeholders – Pushing the Needle Forward on Business as a Force for Good.

August 22, 2019 Leave a comment

Good afternoon, all. I hope you all have been enjoying the summer. I took this photo this morning as the sun was rising over downtown Grand Rapids.

Just a few days ago Business Roundtable announced the release of a new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”

Thanks to Jeff Van Winkle for bringing this to my attention. You can check out the link to the Business Roundtable webiste and the announcement: https://lnkd.in/eYSTrxg

It is exciting to see the general acknowledgment and support for the idea that business exists for a purpose more than simply profit.

This is not a new thing, particularly in West Michigan.

West Michigan is truly a unique place where business and philanthropy intersect unlike any other place.  Giving of time, talents and treasure to worthy causes is embedded in the culture of this community.

We know of many businesses that have established core mission statements of social good as something beyond profit for quite some time. I look to Cascade Engineering, as one example. Check out the Blog of Fred Keller, Founder of Cascade – titled “Purpose & Profit”

Some groups are skeptical that this statement will lead to any real change – case in point Corporate America Says “Sorry” via @npquarterly

However, I am hopeful that this statement pushes the ball forward on business for good in the State of Michigan.

BCorps?

Last year the State House tantalized social entrepreneurs, once again, with the possibility of benefit corporations (“Bcorps”) becoming a viable legal option to do business in the State of Michigan.

House Bills 5867, 5868 & 5869 were introduced on April 24, 2018, that would allow BCorps to be formed under Michigan Law.

There was never any movement on those bills and they died in committee.

Back almost two years ago the legislature proposed similar legislation which also died in committee (are you recognizing a pattern?). For a review of the Former BCorp Bills, the House Fiscal Agency issued a Fiscal Analysis, check it out here. 

The Analysis provides good background on what the legislation would do. This is helpful for those who are not overly familiar with BCorps in general.

Education on the “why” for BCorps.

Interested groups and local politicians have been educating the public on why BCorp laws would be a good thing for our state.

State Rep Hank Vaupe gave a discussion to a local chamber group on B-Corps two Septembers ago:

As Rep. Vaupe indicated “benefit corporations provide an opportunity for businesses to use the markets, rather than traditional charity giving, to advance their philanthropic missions.”

Michigan is behind the ball.

Over the last several years Michigan legislators have repeatedly introduced BCorp legislation – to no avail.

Check out this handout from Rep Barnett almost 10 years ago in support of the BCorp legislation he proposed in September 2010.

I found particularly interesting the very last section – it provides some comment on why some Michigan businesses may have been averse to the introduction of BCorp legislation. Feel free to read it and reach your own conclusions.

Michigan now ranks as one of the vast minority of states that has not enacted benefit corporation legislation.

Check out the Benefit Corporation website for a state by state legislative analysis.

I hope Michigan can continue to make progress and recognize business as a force for good.

Questions? Comments?

Jeshua@dwlawpc.com

http://www.dwlawpc.com

Connect with me on Twitter: @JeshuaTLauka

Michigan Legal Update for Real Estate Investors: What Happens to a Surplus after Foreclosure Sale?

August 6, 2019 Leave a comment

Summer is going fast.

I read a  Court of Appeals decision that prompted me to write on the topic concerning real estate investors.

The market to purchase distressed real estate has become extremely competitive since 2008-09. Having multiple real estate investors bidding on properties can cause some serious problems. 

Some lenders/investors have tried some creative methods of recovery and made some interesting legal arguments in order to  maximize their profit at or after foreclosure sales. Complex legal issues can arise in a competitive market when there is money to be made.

For clients of mine that purchase investment real estate at foreclosure – an interesting situation can come up:

  1. Purchaser at foreclosure knows the bidding is competitive – is the highest bidder – overbids due to competitive bids.
  2. Purchaser, in order to “pocket” the overbid (and to extinguish the mortgagor’s right of redemption) – purchases the homeowner (mortgagor’s) interest via quitclaim deed prior to foreclosure and thereafter.
  3. The Sheriff conducting the sale receives and deposits the surplus with the County Treasurer.
  4. Purchaser seeks from the County Treasurer the overbid amount after the foreclosed debt is satisfied.

Facts of May 21 Decision in BAER CO v Specialized Loan Services

That’s presumably what the Plaintiff, purchaser expected to happen in this case.

With real estate, however, things don’t always go how you expect.

This case is helpful, because it provides some guidance to an area of the law that isn’t used very often and there simply isn’t a lot of case law about: what happens to surplus funds after foreclosure and who is entitled to those funds?

This case arises out of the foreclosure sale of property located in Grand Rapids, Michigan (the property). The original property owner took out a mortgage on the property, and he died approximately eleven years later. The mortgage was assigned to respondent SLS, and in the meantime, petitioner BAERE purchased the property via quit claim deed from the original property owner’s son. The mortgage eventually fell into default, whereupon respondent initiated a foreclosure by advertisement. As of the day of the foreclosure sale, the amount of the indebtedness on the mortgage was $51,915.75. Respondent made an initial bid of $20,300. The successful bidder, non-party RDG New Homes, LLC, bid $50,000. with $162,497.12 remaining owed. Id.

After the proceeds from the sale of the Property to Purchaser satisfied the first mortgage the Sheriff received and deposited the $77,490.54 in surplus funds with the St. Clair County Treasurer.

Purchaser filed a document with the Treasurer, “document titled “Verified Claim for Turn-Over of Proceeds of Sale.” seeking payment of the $77,490.54 surplus funds.

Defendant, the junior mortgage servicer, filed a competing document titled “Verified Claim for Surplus Proceeds of Sale

The result was that the funds were turned over to the Circuit Court for the proper disposition. The Court found Defendant, as junior mortgage holder, the proper party. Plaintiff appealed. A few interesting points to discuss came out of this case.

Law:

There are a couple of particular laws that come into play here:

I. Full Credit Bid

One general one to be aware of – the Full Credit Bid Rule – it basically stands for the proposition that: “An overbid at a Sheriff’s sale extinguishes the entire debt.” Pulleyblank v. Cape, 179 Mich.App. 690, 446 N.W.2d 345 (1989) (per curiam).

Practically speaking, if the bank bid the entire amount that was owed, regardless of whether or not the fair market value of the property is worth less than what is owed, the bank cannot come after the borrower for a deficiency.

II. MCL 600.3252 – Surplus Funds After Foreclosure. 

That statute states in relevant part:

If after any sale of real estate…there shall remain in the hands of the officer…making the sale, any surplus money after satisfying the mortgage on which the real estate was sold, and payment of the costs and expenses of the foreclosure and sale, the surplus shall be paid over by the officer…to the mortgagor…or assigns, unless at the time of the sale, or before the surplus shall be so paid over, some claimant or claimants, shall file with the person so making the sale, a claim…in which case the person so making the sale, shall forthwith upon receiving the claim, pay the surplus to, and file the written claim with the clerk of the circuit court of the county in which the sale is so made…

So, the mortgagor is entitled to receive the funds from the Sheriff – or if sent to the Court, an interested party making a “claim” to the funds may make a claim to the Court.

“The statute allows both (1) parties who filed a “claim” with the person making the sale, and (2) any person or persons interested in the surplus, to apply to the circuit court for distribution of the surplus funds after a foreclosure sale.” Id. page 10.

a. Mortgagor – “demand” v.s “claim” – all the same?

One of the primary issues on appeal concerns whether the Purchaser’s filing qualified as a “demand” or as a “claim” under MCL 600.3252. Plaintiff filed with the Treasurer a  document and did not use the word “demand.”

The Court held that, “because plaintiff conveyed to the Treasurer its assertion of its right to disbursement of the surplus funds, we conclude that plaintiff made a “demand” for purposes of MCL 600.3252.” Id. page 7

b.  Mortgagor’s demand needs to be “immediately” paid?

Purchaser argued that the Sheriff should have paid “immediately upon demand” and disregarded the junior mortgage holder. Basically a “you snooze you lose” argument.

The Court was not convinced, holding:

“Although plaintiff makes a valid point that an obligation to make payment “on demand”
generally requires immediacy, the specific facts of this case support the trial court’s ruling that the Treasurer was justified in delaying payment for seven days while it conducted its due diligence in evaluating plaintiff’s filing.” Id. Page 10.

In summary – if you are a Purchaser at foreclosure and have obtained the “mortgagor’s” rights – be careful to search the title for competing claims to that money.

You can’t rely on the fact that you immediately demand the funds to ultimately entitle you to them.

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Michigan Business Law Update on Bill that would allow LLCs to evict tenants without Attorneys. Despite Opposition, Bill Moves Forward.

Happy Friday!

It is summer – my favorite time of year. There really is no better place to be during summer than Michigan. I hope you are all enjoying it.

For those keeping track of House Bill 4509  proposed on April 25, 2019 that would allow some LLCs to evict tenants in limited circumstances without attorneys the Bill was dealt recent opposition from the State Bar of Michigan’s Real Property Section.

On May 15, 2019, The Real Property Section voted 16-0 (one abstaining) against the Bill.

The rationale given by the Section:

” HB4509 essentially creates a small claims type of case for landlord-tenant disputes by removing the requirement that LLCs be represented by attorneys in landlord-tenant proceedings for certain 1- or 2-member LLCs; the legislation is problematic for tenants and courts, as it would be difficult to ascertain whether an LLC meets the requirements set forth in the bill; and, further, the proposed legislation opens the door for unscrupulous landlords and property managers, who may have experience with court procedures but are not held to the same ethical rules as attorneys, to represent their LLCs and potentially take advantage of tenants, many of whom are not represented by counsel and are unfamiliar with court procedures

Despite this opposition, the Bill keeps moving forward.

On June 4, the Bill reported out of the Judiciary committee without an amendment. The Bill was passed by the House by a contested margin – 62-47. It is now sitting in the Senate Judiciary and Public Safety Committee.

It will be interesting to me if the comments of the section will prompt a proposed amendment from the Senate committee to attempt to address some of the valid concerns raised by the section.

I’ve been in enough courtrooms watching nonlawyers representing themselves on both sides – landlord and tenant – to know that the section’s concerns are valid. There is a reason lawyers need to be licensed in order to practice law.

As the saying goes – he who is his own lawyer has a fool for a client...

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Real Estate Law Update: Bill Would Impose Stricter Requirements on Recording a Construction Lien

Good afternoon, all. I hope you all are enjoying the beginning of summer.

Summer is here.

Residential Builders – check out this House Bill 4695 introduced on June 11, 2019.

This Bill would impose stricter requirements on licensed builders prior to recording a Construction Lien.

According to the Bill, a Contractor:

SHALL DISPLAY THE CONTRACTOR’S LICENSE AND, IF THE CONTRACTOR IS AN INDIVIDUAL, THE CONTRACTOR’S PERSONAL IDENTIFICATION, CONSISTING OF AN OPERATOR’S LICENSE, CHAUFFEUR’S LICENSE, OR PERSONAL IDENTIFICATION CARD ISSUED BY THE DEPARTMENT OF STATE, WHEN RECORDING A CLAIM OF LIEN UNDER SECTION 111. IF THE CLAIM OF LIEN IS NOT PRESENTED IN PERSON, THE CONTRACTOR SHALL ATTACH TO THE CLAIM OF LIEN COPIES OF THE CONTRACTOR’S LICENSE AND PERSONAL IDENTIFICATION.

Violating this law would result in a stiff penalty – criminal sanctions – punishable by a misdemeanor.

The the intent of this Bill would seem to encourage contractors to make sure their licensing is in order and would therefore discourage contractors from filing liens without lawful cause. Simply put, if a Lien doesn’t have a photo ID and proper licensing attached to it, then it wouldn’t be valid.

In reality, this extra hurdle could be an impediment from contractors who otherwise are entitled to payment from having perfected valid liens.

The Bill was sent to the committee on Regulatory Reform.

My sense is that this Bill does not come out of committee without some significant amendments. I’d love to hear your thoughts.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Michigan Business Law Update: Bill Would Allow Single Member LLCs To Evict Tenants without Legal Representation

Lake Macatawa, Holland, Michigan

Happy Wednesday, all. I took this photo back on Mother’s Day. Looking forward to spending more time enjoying Michigan summers. Summer is approaching!

Last December it looked like Landlords were going to finally be able to represent their LLCs under limited circumstances when evicting tenants. Check out my prior post here

That Bill, after undergoing some changes, died in committee.

Well, it is back!

On April 25, 2019 the law that would allow some LLCs to evict tenants in limited circumstances has revived as House Bill 4509 

History Behind the Bill…

As background, a common scenario in my legal practice:

Investor purchases property in an LLC. Investor locates a tenant. Tenant falls behind in rent. Investor hires attorney to evict Tenant.

Why hold real estate in an LLC?

Most of my investor clients own investment real estate in a Limited Liability Company.

This is for liability protection.

Once a limited liability company comes into existence, limited liability applies, and a member or manager is not liable for the acts, debts, or obligations of the company. “Duray Dev., LLC v. Perrin, 288 Mich. App. 143, 151 (2010).

Why not hold real estate in an LLC?

Some investment property owners decide not to do so. The primary driving reason from my experience is cost.

Cost associated with setting up the LLC; and

Cost associated with hiring an attorney and evicting non-paying tenants.

Some landlords don’t want to hire an attorney to evict a tenant.

Under current Michigan law, since an LLC is a separate legal person independent of the actual owners of the LLC, unless such owner is a licensed attorney, an owner of an LLC cannot file a lawsuit on behalf of the LLC.

To do so would be the unauthorized practice of law.

You can practice law on your own behalf – just not on behalf of someone else.

Although, the saying goes – he who is his own lawyer has a fool for a client.

House Bill 4509 – Would Allow LLCs to Evict without Legal Representation.

House Bill 4509 was introduced in April 2019 and referred to the judiciary committee.

The Bill would allow owners of a single-member LLC (or a married couple under certain conditions) to file their own eviction actions on behalf of the LLC without the need for legal representation.

If the Landlord is seeking money damages, the amount, not including taxable costs, must be under the small claims Court maximum.

I commented in the past that I would be surprised if this bill passes, although other states have similar laws.

The prior version of the Bill came out of the committee on law and justice and a substitute bill was referred for a second reading.  The Bill was passed by the House and sent to the Senate Judiciary Committee over a year ago and it eventually died.

The Major Difference in the Substitute Bill

The major revision that came out of the committee affects property managers.

The Bill as introduced would have allowed property managers or agents to represent the LLC under certain circumstances – e.g. – having personal knowledge of the relevant facts related to the Property and tenancy.

That language was removed from the first version of the bill.

Under the substitute bill, Property Managers or other Agents would not be allowed to represent the LLC.

Further, this is a “burden shifting” mechanism in the substitute bill – the law would place the burden on the LLC owner to prove he or she is in compliance with the statute. That makes sense – since the legislature would be creating an exception to the rule – only lawyers practice law.

It will be interested to see if this Bill stands a chance.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka