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Recent Case Law: Lesson to Real Estate Investors

August 12, 2015 Leave a comment

I represent a number of real estate investors, some of whom purchase and rehab distressed properties – before, at, or after a foreclosure sale has taken place.

Distressed properties are suited for entrepreneurs – they are “high risk, high reward” investments.

An investor can get a great deal at these sales. However, these sales are inherent with pitfalls – some of which can be costly for an unwary investor.

I was reminded of this today when I read a July 30, 2015 Michigan Court of Appeals case  – Hunter v BOA and Moma. You can check out the opinion here

Brief Facts:

There, Bank of America foreclosed on an approx. $200,000 mortgage.  BOA was the high bidder at the sale in March 2010.

The redemption period expired in September 2010 and Hunter, the mortgagor/ homeowner, failed to redeem. Thereafter Hunter sued BOA for unlawful foreclosure. The case was dismissed in 2011.

In 2012 BOA still had this property in its possession and sold it to Moma.

The lawsuit by Hunter against BOA was dismissed, so Moma is in the clear to pick up a good deal, right?

Not if Hunter has anything to say about it.

After purchasing the Property, Moma evidently noticed that mortgagor was still in possession of the Property and so in February 2013 Moma sued Hunter for eviction.

Hunter filed suit against BOA and Moma in Circuit Court alleging Moma has no rights to the Property because BOA fraudulently foreclosed.

The Circuit Court ended up dismissing Hunter/mortgagor’s lawsuit, and granting full ownership to Moma. The Court found, rightly, that since redemption had expired, the mortgagor had no interest in the Property and no standing to challenge the foreclosure. The Court of Appeals affirmed.

Lesson for Investors:

Certainly, a take away from this case is that investors need to do their due diligence when purchasing distressed property. Investors need to look at “red flags”. Here, the fact that the Bank was selling property that (a) was occupied (b) by someone who filed a lawsuit against the Bank should have been a red flag that purchasing this property could be costly.

Don’t hear me wrong – the investor, Moma, eventually got what he was entitled to. But at what cost?

Answer: Three years in litigation and who knows how much in legal fees.

To be sure, the Circuit Court did not think fondly of the mortgagor’s lawsuit. The Judge held:

I’m really quite frankly appalled by what’s gone on [in this case.] [Hunter] has failed at any turn here to establish any factual basis for the claims that are alleged. And the factual basis that is implied . . . is exactly the same as was previously decided by [the Oakland Circuit Court and the 46th District Court]

Be that as it may, mortgagor still maintained possession of the property for years after she was foreclosed on.

Distressed Property – high risk, high reward.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

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Recent Court Decision Provides an Important Lesson for Businesses

August 6, 2015 1 comment

I just read an interesting opinion from the Court of Appeals. The case involved  a dispute between a property management company and an out of state construction company.

You can check out the case here New River Construction LLC v National Field Network

Why this case was interesting to me…

This case illustrates a classic example of why you should read your contracts before and after you sign them.

The Facts…

The case involved a typical business dispute. National Field Network (NFN) hired New River Construction (New River) to perform property preservation work for real estate located in Michigan.

The Court notes at very beginning of its opinion (to emphasize the importance of this fact) at the onset of the relationship the parties signed an Agreement..

The parties’ Agreement included a “choice of law provision” and “arbitration” clause.

About two years ago I wrote a post about the merits of including arbitration clauses in contracts – you can check that post out here. My post provides business owners with points to consider when deciding whether or not to include such a clause in your standard business contracts.

But back to our story…

The business relationship deteriorated at some point. NFN began making “partial payments” on invoices to New River, protesting that it had not performed services properly.

NFN demanded arbitration in New Jersey, pursuant to the arbitration clause in the Agreement.

New River ignored the demand for arbitration and filed a lawsuit in Michigan claiming $728,740.89 in damages.

There were some interesting exchanges between the lawyers on both sides, which resulted in what the Trial Judge called “a race to the courthouse” but ultimately New River “won” that race and ended up with a default judgment for  $578,688.71 – about $150,000 less than it claimed it was owed. No explanation given as to why New River claimed a lesser amount..

NFN’s counsel filed a motion to set aside the default judgment.

It was denied by the Trial Court who upheld the default judgment.

The Court of Appeals REVERSED.

It held that the plain language of the arbitration clause was good cause enough to dismiss the case in its entirety. New Jersey law, like Michigan law favors resolving disputes through arbitration. the parties signed the Agreement and should be bound.

Important Lesson:

1. Understand Your Contract Before Signing. 

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away. I am sure in this case New River did not foresee a dispute arising, and therefore was willing to bear the risk in the event of a dispute to arbitrate, and to arbitrate in an inconvenient forum.

2. Understand  Your Contract After Signing.

Your business contract will dictate what your rights and duties are.  Here, New River had the contractual duty to pursue its dispute in arbitration, and in New Jersey. Its attempt to avoid abiding by the contract was a costly mistake.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Michigan Entrepreneurs: News and Info on Raising Capital and Crowdfunding

August 3, 2015 Leave a comment

Good morning and Happy Monday!

Entrepreneurs may want to take advantage of some free guidance provided by the State of Michigan.

The State of Michigan’s Department of Licensing and Regulatory Affairs (LARA) announced today that it is hosting a workshop – “Understanding Your Options for Raising Capital in Michigan”. You can Register here  The seminar will be held in Lansing and other locations all across Michigan.

According to the press release, the Seminar will discuss

  • legal and structural basics;
  • key formation and other often overlooked issues;
  • private offerings using regulation D or intrastate exemptions (504/SCOR, 504/202(1)(n) and 201(g));
  • Michigan intrastate crowdfunding;
  • crafting a winning investor pitch; venture capital; long-term planning for a potential IPO;
  • protecting yourself from arbitration, civil litigation and potential criminal liability.

Its good to hear that one of LARA’s topics will be crowdfunding under the MILE Act.

As I’ve previously written about, Michigan’s intrastate crowdfunding exemption could be a useful tool for entrepreneurs, but it hasn’t gained much traction. There are many “unknowns” that are detracting entrepreneurs from pursuing local crowdfunding (and many lawyers who are educating their clients about the risk of these “unknowns”).

Still, more and more states are enacting intrastate crowdfunding laws in order to provide another tool for local entrepreneurs in funding their ventures.

In Michigan, a house bill was proposed back in February to amend the MILE Act to permit issuers to open escrow accounts with financial institutions outside of the State of Michigan. You can see the text of the bill here. It doesn’t appear that the Bill has gained much traction. However, it is a good sign that the legislature is still evaluating ways to make the MILE Act a useful tool for local entrepreneurs.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com