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Recent Court Case Provides Good Lessons For Real Estate Investors.

September 28, 2016 Leave a comment

Its Wednesday and I wanted to share a court of appeals case that came out on September 15th.

Case: Key Bank v Lake Villa Oxford Assoc, et. al.

Lesson: be careful when drafting “personal guarantees”

I’ve written in the past about personal guarantees.

This particular case involved a real estate development gone bad.

Defendant, developer, Lake Villa and its principal Burnham apparently needed additional funding for the project.

Christopher Investment loaned Lake Villa Rochester $4.45 million, the loan was secured by a second mortgage on the subject property and Burnham, personally guaranteed the loan.

(Note – If I was an investor, and I knew that my mortgage was going to only be a 2nd mortgage, a personal guarantee from the borrower’s owner(s) is definitely a good idea.)

As it turned out, Lake Villa defaulted on its primary loan to KeyBank. KeyBank foreclosed on its mortgage.

Christopher assigned the mortgage and guarantee to Homestead Properties.

When Burnham and Lake Villa defaulted on its loan to Christopher, Homestead declared a default and sought to collect.

Problems arose in litigation.

Burnham claimed the guarantee was not assignable because the specific language in the personal guarantee provided “This Agreement shall be binding and inure to the benefit of the parties and…permitted assigns.” (emphasis mine). Burhman argued – “I never granted permission!”

Keep in mind, that there was no real argument that Burnham defaulted on his repayment obligation. The only relevant question was whether or not Homestead could enforce its rights as an assignee under the personal guarantee.

The trial court agreed!

The case went to a Jury Trial, where a jury returned a verdict in favor of Burnham individually, claiming that the assignment did not intend to benefit Homestead!

However the Court of Appeals did not agree with the Jury or with the trial court.

The Court of Appeals cited the following long standing rules of contract law:

  1. The parties are free to contract as they see fit. Citing Coates v Bastian Bros, Inc, 276 Mich App 498, 503 (2007).
  2. “Under general contract law, rights can be assigned unless the assignment is clearly restricted.” (emphasis added) Citing Burkhardt v Bailey, 260 Mich App 636, 652 (2004).
  3. The Court cited 3 Restatement Contract 2d for the notion that “contractual rights are assignable so long as the assignment is not ‘validly precluded by contract'”. KeyBank, pg 4.
  4. Michigan Courts have “striven to uphold freedom of assignability.” citing Detroit Greyhound Employees Fed Cred Union v Aetna Life Ins Co, 381 Mich 683, 689 (1969).

Conclusion:

The Court of Appeals found that given the legal authority in favor of freedom of assignability, unless clearly restricted, the language “permitted assigns” did not rise to the level that would forbid the assignment.

Burnham was therefore on the hook for the repayment of the debt under the personal guarantee.

Lesson:

Real estate investors: make sure the contractual language in your loan and security documents is clear. Particularly when executing personal guarantees. Courts have recognized that personal guarantees must be “strictly interpreted”.  Bandit Indus, Inc v Hobbs Int’l, Inc 463 Mich 504 (2001).

Here, the language was not clear. The result – undoubtedly significant attorney fees expended in pursuing a jury trial and an appeal.

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Why Startup Fintech Company “Lemonade” is so Intriguing.

September 22, 2016 3 comments

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CrowdFundInsider just posted an article on a new Fintech Startup – Lemonade. You should check the article out here

I’ll start by answering a basic question:

(By the way – the photo is one I took last year from Central Park – my limited experience with New York.)

What is Fintech?

According to FinTech Weekly:

Financial technology, also known as FinTech, is a line of business based on using software to provide financial services. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systemsand corporations that rely less on software.

The idea of a business’ purpose of “disrupting incumbent”…anything is intriguing to me.

Some systems need to be disrupted. I recently posted my own thoughts on being a disruptive force for good.

To that point, Lemonade seemingly fits the bill. Look no further than it’s mission statement on its homepage: “Instant everything. Killer prices. Big heart.

About Lemonade:

According to its website, Lemonade is the “World’s First P2P Insurance Company” (Peer-to-Peer).

Lemonade provides Renters and Homeowners Insurance to New Yorkers.

According to the CrowdFundInsider article: “Lemonade has positioned its platform in a David vs. Goliath battle to challenge antediluvian insurance incumbents by providing a far better service at a superior price.”

Who doesn’t root for the underdog?

Technology Driven.

Shai Wininger, co-founder and President of Lemonade, explained to CrowdfundInsider that technology drives everything at Lemonade.

“From signing up to submitting a claim, the entire experience is mobile, simple and remarkably fast. What used to take weeks or months now happens in minutes or seconds. It’s what you get when you replace brokers and paperwork with bots and machine learning.”

Disruptive Force for Good.

Daniel Schreiber, co-founder and CEO of Lemonade. told CrowdfundInsider “the opportunity is unusual. Disrupting an industry that has not changed for a hundred years ”

According to an article posted yesterday by Venture Beat:

Lemonade is also setting out to combat existing models through an annual “giveback,” where it donates unclaimed money to good causes.”

Conclusion.

It it is way too early to say what impact Lemonade will have, However, I love the concept of this startup –

a. taking a risk doing something different;

b. disrupting business as usual;

c. for the good of others.

That’s social entrepreneurship at its finest.

If you are a homeowner or tenant residing in New York, this company is worth checking out.

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Encountering the homeless in Downtown Grand Rapids and Mel Trotter’s Season of Hope.

September 20, 2016 Leave a comment

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Occasionally when I am walking in downtown Grand Rapids I will run into a guy with dirty clothes, smelling bad, looking homeless. When this guy asks me for money, my gut reaction is to want to help. Honestly though, oftentimes I have no idea what is the right response. I will invariably pray for them, but I’m faced with the hard decision:

  • do I give them money?

 

  • do I buy them food?

 

  • do I simply direct them to Mel Trotter?

 

“Giving to those in need what they could be gaining from their own initiative may well be the kindest way to destroy people.”

This is a quote from Bob Lupton, from his book Toxic Charity.
Join me in hearing what Bob Lupton has to say on these issues and more.
On Wednesday October 12, 2016 Mel Trotter Ministries will host its 2nd Annual Season of Hope Event at the Frederik Meijer Gardens with Bob Lupton as our guest speaker.
We are still looking for corporate sponsors. Tickets are available here

 

Thank you to our Honorary Leadership Committee!

Committee Chair: Greg & Meg Willit
Rick & Peg Breon
Gordon & Karla Oosting
Rick & Melissa DeVos
Janis Petrini
James & Nancy Engen
Jerry & Marcia Tubergen
Kenneth Graham & Linda Vos-Graham
Carol & David Van Andel
Tom & Marcia Haas
Harold & Lori Voorhees, Jr.
Cate & Sid Jansma, Jr.
Larry & Lisa Walt

E-mail: Jeshua@dwlawpc.com
http://www.dwlawpc.com
Twitter: @JeshuaTLauka

Grand Rapids’ Businesses: Lessons from a Recent West Michigan Court Case- Read Those Terms and Conditions.

September 19, 2016 2 comments

Business owner – let’s say you just signed a purchase order and agreed to buy some product for your business.

The product is not what you expected. In fact, its not going to help you in your business at all.

You don’t pay for it.

You get sued.

You take the contract to your lawyer and at the bottom of the contract are the words“Subject to Seller’s Terms and Conditions”.

You can’t be bound by those terms you never even looked at (whatever they are), right?

W-R-O-N-G.

On September 8th a Court of Appeals case was issued stemming from a business dispute initially decided in the Kent County Business Court. The case: Naturipe Foods, LLC v Siegel Egg Company, Inc.

This case involved a business contract dispute.

Naturipe offered to sell Siegel Egg Co. frozen blueberries.

Seigel Egg wrote in under the Offer “Grade A” and crossed out the reference to Georgia Blueberries.

Near the end of the first paragraph of the opinion tells you what you need to know about this case: Below DaCruz’s signature read, “Subject to Seller’s Terms and Conditions.

Plaintiff contracted to deliver 316,800 lbs of frozen Michigan blueberries to Defendant.

Plaintiff delivered two shipments.

The Blueberries delivered were “sub grade A” – so Defendant refused to pay.

So, Plaintiff sued Defendant for breach of contract.

The Trial Court held Defendant was liable, and the parties had a jury trial on damages.

The Jury awarded Plaintiff $723,578.83 – broken down to include costs, interest, and:

$327,644.98 in damages

$201,900.65 in attorney fees (yes – a lawsuit is expensive!)

Defendant appealed. Defendant argued that the Trial Court erred when it held that Plaintiff’s “Terms and Conditions” were incorporated into the parties’ contract.

You can check out some of my prior posts on Terms and Conditions. “TnCs” are important to review closely. They “allocate risk” among the two parties to the contract.

In this case, the Defendant asked the question: Can a business just state in its contract that the contract is “subject to Seller’s Terms and Conditions”?

The Court of Appeals told us a resounding – YES.

Law: Terms and Conditions are Part of the Contract.

The Court of Appeals laid out the law for clearly:

“Where one writing references another instrument for additional contract terms, the two writings should be read together.” Forge v Smith, 458 Mich 198, 207; 580 NW2d 876 (1998). That is, “[i]n a written contract a reference to another writing, if the reference be such as to show that it is made for the purpose of making such writing a part of the contract, is to be taken as a part of it just as though its contents had been repeated in the contract.” Id. at 207 n 21 (citations and quotation marks omitted).

Where additional documents or terms are made part of a contract by reference, the parties are bound by those additional terms even if they have never seen them. (Emphasis added) See Ginsberg v Myers, 215 Mich 148, 150-151; 183 NW 749 (1921). “It is well settled that the failure of a party to obtain an explanation of a contract is ordinary negligence. Accordingly, this estops the party from avoiding the contract on the ground that the party was ignorant of the contract provisions.” Scholz v Montgomery Ward & Co, Inc, 437 Mich 83, 92; 468 NW2d 845 (1991).

Take Away on Terms and Conditions

  1. Read the Terms and Conditions

Enough said.

2. Implement Terms and Conditions

I recommend business clients to always include a Terms and Conditions page that is either attached to the back of their physical Purchase Orders, or is included in their Website and incorporated by reference. The Terms and Conditions will, essentially, allocate risk and liability, on such items like:

  • warranties (what is the provider guaranteeing and what isn’t it?)
  • payment terms (when and how is payment accepted? Late fees?)
  • remedies (what is your recourse in the event the goods aren’t what the buyer expected? Are your damages limited to a refund, or can you get related damages as well? Can attorney fees be covered?
  • Venue – (where can you bring your dispute? An arbitrator? Who pays the fees? Is the location of the arbitration specified?

3. Enforce Terms and Conditions

And of course, its important that a business enforces its terms. I have had clients who have been sued before and forgot of their advantageous language in their terms and conditions. If a business is sued and it waits too long in the litigation before raising its right to arbitration, the court very well might consider the business to have “waived its right” to arbitration. Although, “Waiver of a contractual right to arbitrate is disfavored” by the Courts. Best v Park W Galleries, Inc, No. 305317, 2013 WL 4766678 (Mich Ct App September 5, 2013), app den 495 Mich 979 (2014).

Questions?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Michigan Construction Law Update

September 15, 2016 Leave a comment

Real estate transactions can be complex.

Real estate lawsuits can be complex.

Sometimes a statute or case does not speak directly on point to the exact circumstances of a legal dispute.

This latest case is a good reminder of those points.

 

Today I read a construction law case issued on September 13. The case involved  an issue of first impression – an issue not decided before, under the Michigan Construction Lien Act.

You can check out the case of Stock Building Supply, LLC v Crosswinds, et al.

This case involved a Construction Project gone bad.

In construction projects there are multiple levels of parties involved, from owners, to general contractors, to sub-contractors, to suppliers, tradesman, lenders, etc…

This is one of those cases.  You can read the facts, I will paraphrase:

  • Contractors obtained construction liens and foreclosed on those liens. Also, lenders foreclosed on their mortgages.
  • It appears that a receiver was appointed to sell off condo units.
  • The main issue in this case was that the receiver sold units “free and clear from all liens”.
  • One of the contractors came back years after such a sale and claimed it had mortgages on the property that were not discharged.

(The Trial Court would dismiss the case for the reasons set forth below. The trial court also dismissed the case under the doctrine of laches – see my prior post for a discussion on this topic.)

The issue that came up: Whether a trial court is permitted to discharge mortgages pursuant to a sale by a receiver of encumbered property.

The Statute in issue:

MCL 570.1123(2):

“The receiver may petition the court for authority to sell the real property interest under foreclosure for cash or on other terms as may be ordered by the court…

The Court of Appeals indicated in its opinion that it was concerned with that language – what did it mean?

The contractor who claimed it had a mortgage argued that nothing in that statute expressly provides a court with authority to discharge its mortgage.

The Court recognized that the particular language in the statute “on other terms” is not defined.

The Court went on to interpret the statute and held that its plain reading allowed the Court the authority to determine the terms that it would place on the sale.

In sum, the Court of Appeals saw no reason why a trial court could not place as a condition for “terms of sale” that property be sold “free and clear of all claims, liens and encumbrances.”

The courts in that county had been doing this in practice. Now they had legal binding precedent to do so.

 

Take away for Real Estate professionals:

This is now (unless appealed to the Michigan Supreme Court) a clarified issue of law that construction industry folk can rely on.

However, it is a good example that many sticky situations that those in the real estate industry find themselves  in (I’m particularly thinking about the application of MCL 600.3238, for example) are not as clear. Maybe the statute is silent. Maybe there is no case law developed on the issue.

 

http://www.dwlawpc.com

e-mail: Jeshua@dwlawpc.com

 

 

 

 

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