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Cautionary Tale for Real Estate Investors: Yesterday California Investor Sentenced to Prison for Bid Rigging at Foreclosure Sales.

There are many pitfalls for real estate investors who purchase distressed property.

In today’s market, good deals for real estate investors are getting harder to come by. With distressed property becoming a scarce resource and competition ever increasing, some real estate investors have resorted to less than legal  acts to boost their profit.

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Rosa Parks Circle in Downtown Grand Rapids

Investors should know that the Department of Justice as well as State Agencies are cracking down on unfair real estate practices.

 

As a follow up to a story that I have been keeping tabs on, just yesterday, the Department of Justice announced that a judge sentenced a real estate investor for his roles in a conspiracy to rig bids at public real estate foreclosure auctions held in Northern California.

This after a 3-week trial.

 

 

You can see the press release here

 

According to the press release: Alvin Florida Jr. was “sentenced to serve 21 months in prison and to serve three years of supervised release. In addition to his term of imprisonment, Florida was ordered to pay a criminal fine of $325,803.

Based upon the DOJ’s investigation – this was a large conspiracy “to rig bids to obtain hundreds of properties sold at foreclosure auctions. The conspirators designated the winning bidders to obtain selected properties at the public auctions, and negotiated payoffs among themselves in return for not competing. They then held second, private auctions at or near the courthouse steps where the public auctions were held, awarding the properties to conspirators who submitted the highest bids.”

 

What is particularly striking to me is that including today’s sentencing the DOJ report that:

68 individuals have pleaded guilty or been convicted after trial as a result of the department’s ongoing antitrust investigations into bid rigging at public foreclosure auctions in Northern California.

 

Question for Real Estate Investors:

What type of unfair practices do you believe is going on in your state? What are you seeing take place at foreclosure sales?

In Michigan the record numbers of foreclosed properties since 2008 has provided a market (albeit one that is slowing down) for flipping residential real estate. With this opportunity to profit has also created an opportunity for abuse and fraud.  The real estate legal landscape is complex enough, do yourselves a favor – follow the rules.

 

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: Court Lessons on Personal Guarantees.

Rosa Parks Circle in Downtown Grand Rapids

In the world of lending if a business wants to secure financing, you will be hard-pressed to find a bank that is not going to require some collateral, including a personal guarantee of the debt by the principal owner(s) of the business.

businesses don’t want to sign personal guarantees; it’s why businesses take on the corporate formalities of a limited liability company, or a corporation – to limit their personal liability. Therefore, it is understandable in a lawsuit over a promissory note that an individual would argue against the enforceability of a personal guarantee.
This is a reason why lenders, private investors, should make sure their legal documents are precise – so that in the event a lawsuit needs to be filed the document is not drafted so as to create an ambiguity.
Two cases come to mind that illustrate problems in enforcing personal guarantees – one recent and one a few years back.
June 29, 2017 Real Estate Development case
For an interesting case that went up and down the appellate courts, just look no further than a June 29, 2017 decision of WNC Housing LP v Shelborne Development Company
In that case a mortgage loan for a particular real-estate development project, the “Shelborne Park project,” was in default, and to avoid foreclosure, plaintiffs purchased the debt at a negotiated price.” Id.
The trial court found the general partner in a limited partnership of the development, Makino, to be a guarantor.
Makino appealed the trial court’s determination that she was personally liable, attacking the language of the general partnership agreement. The Court of Appeals affirmed the trial court’s decision that Makino was liable, but the Michigan Supreme Court, vacated that portion and essentially told the Court of Appeals to reconsider it.  The Court of Appeals reconsidered, reviewing the text of Makino’s partnership agreement and found, once again, Makino was liable under the language of the agreement (The pertinent language stated that Makino as general partner “hereby guarantees lien free Completion of Construction of the Apartment Housing on or before May 1, 2003”) . Id. at page 3.
October 9 , 2012 Case of the Ambiguously Signed Promissory Note.
Another example is illustrated in the 2012 unpublished Michigan Court of Appeals case of Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich. Ct. App. Oct. 9, 2012)
The promissory note was signed by Branoff twice: once as a “member” of Premiere Properties, and once “individually.” The note was also signed by defendants Mario and Antonio Giannandrea “individually.”
Premiere Properties defaulted on the promissory note so Marcuz sued the company and individuals on September 3, 2009.
In court, Branoff admitted that he signed the promissory note twice, but he claimed his second signature was not intended as a personal guarantee.  But his signature and the two other individuals were simply “because “we were showing…who were going to be the finalized members of the company.

Thus, an ambiguity exists.
Regardless, the trial court and the Court of Appeals disagreed with Branoff.
The Court held that “[w]hen Branoff signed the promissory note first as a “member” of Premiere and second “individually,” he manifested his intent to personally guarantee the note. Simply put, it would have been redundant for Branoff to sign the promissory note a second time if he did not intend that his second signature have some legal effect different from his first signature.”
LESSON from these two cases:Don’t Draft Legal Documents In a Manner That Creates Ambiguities.
Although the Lender in both instances did in fact win the day, the problem remained – they won after litigating a case that went to appeal, (and in Makino’s case, up to the Supreme court and back down to the Court of Appeals) which undoubtedly cost significant legal fees. The  drafter of the promissory note and the partnership agreement – much of the trouble could have likely been avoided if the partnership agreement and promissory note were more clearly drafted.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Real Estate Law Update – a Court Case Discussing Laches.

From a lawyer’s perspective, real estate disputes are often messy.

The parties are often driven by emotion. The facts are often complex.

Simply put – it is usually a mess.

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Often the doctrine of laches gets raised in such a lawsuit.

A few years back I wrote a post about the legal (technically, “equitable”) doctr ine of Laches and how laches is an often raised defense in real estate disputes.  

The argument usually goes something like this:

“Hey, Plaintiff! You should have brought your claim sooner! Because you were so late in suing me, there are specific related reasons that make it unjust for the court to hold me responsible!”

A June 2017 Michigan Court of Appeals decision came out, where laches was raised as a defense.

You can check out the case here:   DeGhetto v Beaumont’s, et al. (unpublished) No. 330972 (June 22, 2017).

In this case – the court opined that the facts were “muddled”.  (my interpretation – “a mess”)

But first, as a recap…

 

The Equitable Doctrine of Laches:

 

“Laches is an equitable tool used to remedy the inconvenience resulting from the plaintiff’s delay in asserting a legal right that was practicable to assert.” Public Health Dept v. Rivergate Manor, 452 Mich. 495, 507; 550 NW2d 515 (1996).

As such, “when considering whether a plaintiff is chargeable with laches, [a court] must afford attention to prejudice occasioned by the delay.” Lothian, 414 Mich. at 168. It is the prejudice occasioned by the delay that justifies the application of laches.Dunn v. Minnema, 323 Mich. 687, 696; 36 NW2d 182 (1949) .

 

Stated another way,

“the equitable doctrine of laches bars a claim “when the passage of time combined with a change in condition would make it inequitable to enforce the claim ag

 

ainst the defendant.” Township of Yankee Springs v Fox, 264 Mich App 604, 612; 692 NW2d 728 (2004) (Emphasis added.)

Therefore in deciding on the issue of Laches, a Court will ask two questions:

1. was there a delay in bringing the claim and, if so,

2. did it prejudice the Defendant?

Question: Why is laches relevant to real estate disputes?

Answer: Because many real estate claims are based in “equity” as opposed to “law”-  e.g. –an injunction, specific performance, action for quiet title…

 

The Case of DeGhetto v Beaumonts, et al.

The case involved homeowners and an Association.

The dispute was about the “ongoing viability of restrictive covenants o

 

n plaintiffs’ lots” and the ability of an Association to assess Association dues against Association members.

The Association believed it could enforce deed restrictions – the homeowners disagreed.

Certain disagreements arose, including l.iens recorded on some properties,

and thereafter the Homeowners sued the Association.

The Homeowners asked the Court to declare the deed restrictions were unenforceable, and that the Association had no rights to assess dues.

The Court admitted that the facts are a bit “muddled” – as is often the case in real estate disputes.

One of the Association’s defense was that laches should bar the homeowners’ lawsuit.

“Defendant argues that the doctrine of laches should apply to bar plaintiff’s suit
because there was a change in conditions that made granting relief to plaintiffs inequitable—plaintiffs’ sudden refusal to pay dues, which prejudiced defendant because it had relied on their payments for years.” DeGhetto. Pg 8

 

 

The Court of Appeals disagreed with the Association, holding that:

“Plaintiffs did not delay in filing suit. There was debate over whether the
dues were enforceable and two attorneys rendered different opinions on the matter. Plaintiffs asserted their right by filing suit after defendant indicated that the dues were mandatory as opposed to voluntary. Furthermore, defendant cannot show prejudice.” Id.

 
The Court held that Defendants did not satisfy the requirements to establish Laches.

As the Court held in Charter Township of Lyons v James E. Petty, et al. (unpublished) No. 327686 (Oct. 13, 2016):

“Prejudice is a mandatory element.” and

“The prejudice necessary to establish a laches or estoppel defense cannot be a de minimis harm…” Id. pg 5.

 

Lesson:

Laches is an often raised and valid defense, applicable in many real esta

te disputes. When raising a defense of laches in real estate disputes, Defendant must show Plaintiff delayed in bringing forth the claim.

Showing merely the passage of time is not sufficient.

Further, showing the presence of de minimis harm due to the passage of time is not sufficient.

Significant harm must be shown along with delay.

 

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Real Estate Investors and Property Managers Should Keep Track of this “Bed Bug Bill”

2015-11-05 11.34.56During the school year I mentor students at a local school in the West side of Grand Rapids. This school has a great supportive community behind it – as you can see from the photo I took a few years back.

I recall a conversation with one student whose family was transient – moving quite often and usually under unfortunate conditions.  This student recalled to me the time that he and his mom lived in an apartment for a brief time and had to leave because of bed bugs. The emotion on the kid’s face as he recalled the story was evident.  It was not a pleasant experience.

Last year a class action case against a Real Estate Owner reached a settlement involving payment of over $2 Million to 100 tenants – ABAJournal reported that story here

One of the primary complaints was that “the 26-unit building had a massive cockroach infestation.

Infestations can be an issue that every property manager or owner of residential investment real estate may face.

One June 9th Michigan House Bill 4719 was introduced – by Representative Brandt Iden -himself a Developer and Property Manager in South West Michigan. check out the text here – the Bill would amend the Michigan statute governing landlord tenant relationships to include addressing the control of certain pests – including bed bugs.

What the Bill seeks to do:

Impose certain duties on landlords regarding bed bugs:

1. Mandates specifically that the Landlord is to keep the rental space free from bed bugs and provide educational literature about bed bug infestations to new tenants.

2. Prohibits Landlords from renting out space that the landlord knows is infested with bedbugs

3. Provides specific requirements for a landlord to respond to a complaint of bed bugs:

  • within 7 days of receiving a complaint, Landlord shall order an inspection for bed bugs;
  • within 7 days of confirming infestation, Landlord shall begin control and schedule inspections of adjoining rental units.

4. Limits damages against Landlord for infestations unless caused by Landlord’s Negligence.

 

Impose certain duties on tenants regarding bed bugs:

1. Tenant shall inspect for bed bugs when first occupying the space;

2. Tenant shall not move “infested property” into a rental unit

3. Tenant shall notify Landlord within 2 days of notice of infestation.

4. Tenant responsible for damages due to bed bugs caused by Tenant, or guest.

 

 

The bill was referred to the Committee on Law and Justice.

 

My thoughts:

Bedbug infestation is a problem. It can cause tenants problems.  Unhappy tenants who withhold rent can cause landlord problems that end up in court.

 

This type of bill could provide clarity to landlords and tenants on their reciprocal duties and rights in such circumstances.

 

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Recent Michigan House Bill Would Repeal Prohibition on Rent Control – A Response to the Affordable Housing Crisis?

April 13, 2017 Leave a comment

2017-03-07 15.13.50

On March 30, 2017 House Bill 4456 was introduced. The Bill would repeal Michigan’s prohibition on Rent Control.

The Bill was presumably proposed in response to the affordable housing crisis in Michigan and all across the United States. Other local governments across the U.S. are exploring legislative avenues to address the housing crisis.

 

 

According to Representative Chang, who introduced the Bill, the current rent control prohibition “makes it increasingly difficult for seniors and some families to find affordable housing, or to stay in the apartments they’ve lived in for many years.”
Representative Chang was apparently referring to the affordable housing crisis in Detroit. From all accounts, Grand Rapids is facing an affordable housing crisis as well.

 

Grand Rapids Housing Crisis

As many of you may know, a few months back the Grand Rapids Chamber hosted an Issue Summit on the Housing Crisis in Grand Rapids.

The Summit brought speakers representing many community stakeholders, including representatives from 616 DevelopmentGrand Rapids Urban League,Rockford ConstructionICCFMSHDA, and many local non-profits, including Mel Trotter MinistriesHQHeartside Ministries, on this lack of affordable housing, what is as Mayor Bliss emphasized, admittedly, “a complex issue”.

I have previously offered my own perspective, both as a lawyer representing real estate developers/investors, and as Board Chairman at Mel Trotter Ministries.

 

Is there an Answer found in Social Enterprise?

A few months back, Jim Harger with MLive posted a thorough article on the affordable housing crisis.

One community partner highlighted was Pastor Jim Davis and his company “Purpose Properties

“The mission of Purpose Properties is to “raise enough money from local foundations and philanthropists to buy market-rate and affordable rental properties in the city.”

According to Jim Harger’s article:

Purpose Properties plans to charge market rates for its properties to those who can afford them and use their profits to subsidize the rents of those who cannot afford market rates.”

We need more businesses and community stakeholders to approach our community problems like Jim Davis and Purpose Properties.

 

Community Partners Collaborating

Recently Mel Trotter Ministries announced that it was partnering with 3:11 Youth Housing to provide housing for homeless males 18-24.

As Mayor Bliss stated at the Housing Summit – the affordable housing crisis presents a complex issue.

It will take all community stakeholders to do their part – businesses, churches, government, and non-profits.

 

The question we should all ask ourselves: Am I working to build a better community?

 

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

Real Estate Law Update: A Discussion on Laches

December 14, 2016 Leave a comment

 

A few years back I wrote a post about the legal doctrine of Laches and how laches relates to real estate disputes.  

Since then, I consistently get a lot of hits on that post – and a lot of searches for “laches in real estate.

Why?

I don’t know. Maybe because its an unfamiliar term, unless you went to law school (even then).

Maybe because it is a valid defense to some real estate related lawsuits. (which it is if you read my previous post).

An October 2016 Michigan court of appeals decision came out on the subject, so I thought I would write about it.

The case:   Charter Township of Lyons v James E. Petty, et al. (unpublished) No. 327686 (Oct. 13, 2016).

But first, as a recap…

The Equitable Doctrine of Laches:

“Laches is an equitable tool used to remedy the inconvenience resulting from the plaintiff’s delay in asserting a legal right that was practicable to assert.” Public Health Dept v. Rivergate Manor, 452 Mich. 495, 507; 550 NW2d 515 (1996).

As such, “when considering whether a plaintiff is chargeable with laches, [a court] must afford attention to prejudice occasioned by the delay.” Lothian, 414 Mich. at 168. It is the prejudice occasioned by the delay that justifies the application of laches.Dunn v. Minnema, 323 Mich. 687, 696; 36 NW2d 182 (1949) .

Therefore in deciding on the issue of Laches, a Court will ask two questions:

1. was there a delay in bringing the claim and, if so,

2. did it prejudice the Defendant?

Question: Why is laches relevant to real estate disputes?

Answer: Because many real estate claims are based in “equity” as opposed to “law”-  e.g. –an injunction, specific performance, action for quiet title…

 

 

Recent Case Discussing Laches: Charter Township of Lyon v Petty, et al.

The Lyons case emphasizes “what type of harm (or prejudice) is a party required to show in order to succeed in a laches defense.”

 

This case was highlight by the Michigan Small Business Association (“SBAM”), since it clarified certain restrictions of small businesses operated on residential lands.

As SBAM reported:

“Two families that operated small businesses out of their homes have to cease their activity on their land because it violated Lyon Township’s zoning ordinance, which had designated the land “residential agricultural.”

 

However, for our purposes, the Pettys, who were operating their businesses on the property, argued that the township’s “decades-long pattern of ignoring their zoning violations, and the investments they made in their business as a result, precluded the township from taking enforcement action…” Id. pg 4.

The Pettys claimed Laches as one of several defenses to the Township’s enforcement of its ordinance.

The Court went through the legal analysis for laches and noted:

“Prejudice is a mandatory element.” and

“The prejudice necessary to establish a laches or estoppel defense cannot be a de minimis harm…” but “…property owners must establish ‘a financial loss…so great as practically to destroy or greatly to decrease the value of the..premises…” Id. pg 5.

 

Lesson:

When utilizing a defense of Laches in real estate disputes, showing merely the passage of time is not sufficient.

Showing the presence of harm due to the passage of time is not sufficient.

Significant harm must be shown.

 

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

 

 

 

LINC Real Estate Development News, and Lessons from Recent Court Decision

Happy Friday!

News in local real estate development….

Yesterday, the Grand Rapids Planning Commission approved a $15 Million Project. Article here.

The Project, 70 housing units with retail on the first story, is being developed by LINC – a Grand Rapids based non-profit focused on Community Revitalization.

LINC is great example of a local non-profit doing good work in community revitalization. LINC, per its website defines its views on economic development efforts for local communities:

“to develop the entrepreneurial spirit of our community, boost business ideas and expand the business base of our communities, thus creating viable businesses that strengthen the fabric of our neighborhoods”

Business can strengthen local neighborhoods. That’s what local business should do.

I blog a lot about crowdfunding, and how I believe it has potential to be a tool for social entrepreneurship and community revitalization.

On the flip side, I am always reminded that any time an investor is considering taking part in a local project, they should take great care to perform their own due diligence. They need to understand the risks of what they are buying into.

Lessons for Investors in Real Estate Development: The Dinoto Case.

This morning I was reading a court case decided on May 21st,  regarding a dispute between an investor and a developer (and its various entities).

Dinoto v Nu Way Investments, LLC, et al

You can check out the case here

Brief facts;

  • Dinoto was an investor in a real estate development company owned by a relative of his.
  • Dinoto’s investment was apparently intended to fund the purchase and development of commercial real estate.
  • Ultimately, Dinoto lost his entire investment, and the real estate was foreclosed on.
  • Dinoto thereafter sued for an “Accounting” – apparently he suspected his money had been misused.
  • After undergoing discovery, Dinoto wanted to amend his lawsuit to file various claims for breach of fiduciary duty, embezzlement, and to pierce the corporate veils of various affiliate entities.
  • Ultimately his case was dismissed. The Court of Appeals affirmed the decision.

Lesson from Dinoto

I don’t believe there is any real significant legal holding that came out of this case.

I do think it provides a practical warning for investors in real estate.

Perform your due diligence ahead of time – not afterwards.

Dinoto apparently invested in the project and asked questions later. When it was too late. Finding out answers to key questions is not best left for your lawyer via a lawsuit – where it is going to cost you potentially your entire investment, plus additional tens of thousands of dollars in legal fees.

Questions? Comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com