Two Words Can Be Expensive

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            You just never know.

These days, there are many, many loans that are not being repaid.  The large majority of foreclosures undoubtedly happen because a loan was not repaid.  But what happens when a loan is in fact repaid, but the lender claims it wasn’t?

The United States Supreme Court ruled on just such a case in Jerman v. Carlisle (2010) 130 S. Court 1605.  In the Jerman case, a lawyer (who was acting as a debt collector) filed a lawsuit against a borrower.  The lawyer sought to foreclose a mortgage from a lender.  The complaint that was filed and served on the borrower included a Notice to the borrower that the mortgage debt would be presumed valid unless the borrower disputed the debt “in writing.”

The borrower’s lawyer sent a letter to the debt collector lawyer challenging the debt.  The lender eventually confirmed that the debt had been paid in full, and the debt collector lawyer dismissed the lawsuit.

After the debt collector lawyer dismissed the lawsuit, the borrower filed her own lawsuit against the debt collector lawyer for violation of the Fair Debt Collection Practices Act (which is sometimes known as the “FDCPA”).  The FDCPA is a federal law that contains certain steps that debt collectors must follow when collecting a debt.  According to the FDCPA, a debt collector must send a borrower a statement that a debt will be presumed valid unless the borrower disputes the debt within 30 days.  However, the FDCPA does not provide that the borrower must dispute the debt “in writing.”  Instead, the FDCPA only provides that the debt will be presumed valid unless the borrower disputes the debt.  Apparently, the borrower can dispute a debt by a telephone call or some way other than “in writing.”

The borrower’s lawsuit claimed that the debt collector lawyer had violated the Fair Debt Collection Practices Act by requiring that the borrower dispute the debt in writing instead of just disputing the debt.  The debt collector lawyer claimed that this mistake was a good faith error and that the debt collector therefore shouldn’t be liable to the debtor for violating the FDCPA.

The Supreme Court disagreed, and held that the debt collector lawyer could in fact be liable for violating the FDCPA by requiring that the borrower dispute the debt “in writing,” when the FDCPA didn’t require the borrower to dispute the debt “in writing.”

In this case, the phrase “in writing” consisted of two very expensive words.  Cases don’t usually get filed in the Supreme Court.  Instead, they almost always get filed in a trial court, and they usually reach the Supreme Court only on appeal.  In this situation, the borrower filed her lawsuit in Federal District Court, which eventually held that the debt collector lawyer wasn’t liable because the error was made in good faith.  The Court of Appeals for the Sixth Circuit agreed, and held that the debt collector lawyer wasn’t liable.  However, on further appeal the United States Supreme Court reversed the Court of Appeals and found that the debt collector lawyer could be liable for requiring the debt to be disputed “in writing.”  And that’s not the end of the story.  The Supreme Court didn’t render a final judgment in its opinion but instead sent it back to the lower court for further proceedings.

The FDCPA allows a court to award actual damages to a borrower. Where a violation is made through a good faith error, the FDCPA allows a court to also award a borrower up to one thousand dollars in additional damages.  In class actions, this additional damage award can be $500,000 or 1% of the worth of the debt collector, whichever is less.  But a debt collector can also be liable for a borrower’s attorneys fees,  which in this case could be very, very expensive.  (Where a lender violates the FDCPA with actual knowledge, the lender can incur civil penalties of up to $16,000 per day.)

Those two additional words “in writing” proved to be a very costly error for the debt collector.  But that is sometimes the nature of the law.  Words which are imprudently, or improperly, or unlawfully spoken or written can sometimes result in a big problem, and a costly situation.

Blank Forms Aren’t a Good Idea

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I remember when we bought our first home.  It was an exciting time.  Like many buyers, we stretched our finances almost to the breaking point in order to get in.  The house was a total fixer-upper, but we closed escrow and we were thrilled to be in a home of our own.

We experienced a steep learning curve with all the paperwork.  In those days, it was common for realtors to use a “Deposit Receipt.”  This was a multi-page document with lots of terms and conditions.  The title at the top of the document was simply “Deposit Receipt” and I thought the document was a complex form of receipt.  I kept waiting for a contract to be signed.  Only much later did I realize the “Deposit Receipt” was the contract.

One of the tasks we had was to get insurance.  We found out our lender wouldn’t make a loan until we purchased homeowner’s insurance.  So we got a referral for an insurance agent and I called him up.

I met with him, and he seemed fine.  He told me what he needed, and then he presented me with an application.  This application was to be sent to the insurance company before they issued the policy.  The application had blanks for all kinds of information about me, my family, my history and the property to be insured.

My agent surprised me.  He provided me with the form and asked me to sign it in blank.  None of the information was filled in.  He told me to sign it and give it to him with no information included.  With some surprise, I asked him how the form would be completed.  He told me that he would fill it in and that he’d complete the form and submit it to the company.

I was floored.  I’d never seen anything like this.  I couldn’t understand why he’d want to handle my situation like this.

In hindsight, I see what was happening.  This agent apparently had his own agenda.  Even though he represented only one insurance company, he had an interest in getting this policy issued so he could receive a commission.  It may have taken me a while to fill in the form.  Either he could fill in the form faster and save time or else he wanted to put a positive “spin” on my information.

Was this a good idea for me?  No.  There’s a brief sign at some retail stores that says “You break it, you buy it.”  The same is true of contracts and applications:  “You sign it, you buy it.”  Some people wonder if they are bound by contracts they sign without reading.  The clear answer, in almost every case, is “Yes.”  The same is true of applications.  What happens if an application for insurance is either inaccurate or incomplete?  Then the consumer is at risk.  If there’s a loss, the consumer will make a claim.  But the insurance company had a right to rely on the application when it issued the policy.  If the application was wrong or deceptive, then the insurer may be able to reject the claim.  The consumer may find out only at the last moment that because of inaccuracies in the application, their policy is worthless and their coverage for a loss is rejected.  If this were to happen, then the consumer would probably claim that the insurance agent filled in the application incorrectly.  But if the insurance agent denies this, or if the insurer believes the agent and not the consumer, then the consumer is still left with a problem.

This is something my agent years ago never explained to me.  The clear answer?  Consumers who sign forms in blank do so at their own risk.

Contract Terms Critical

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            The days of the “napkin deal” are almost legendary.  How many transactions have been sketched out on the back of restaurant napkin over lunch?  It seems like some of the biggest startup companies are born in someone’s garage, with some of their initial contracts being done on a piece of scratch paper, if at all.

Sometimes these startups do well – and sometimes they become wildly successful.  But certainly there are risks involved with casual, informal contract arrangements.  In reality, if everyone had perfect understanding, perfect memory, and perfect honesty, then many contracts could be done on the back of a napkin, or not at all.  Virtually everything could be done on a handshake.  And while some major transactions may still be done on a handshake, there are many, many others that are documented in fine detail.  No doubt millions of dollars are spent every day on attorneys who draft contracts and related documents for transactions of every kind.

So if deals and transactions can be done on a handshake, why spend all of the time, money, headache and hassle of preparing a written contract?  There are actually several important reasons.

First, some contracts must be in writing, or they aren’t enforceable.  For example, a real estate broker’s written listing agreement must almost always be in writing.  A listing agreement is an agreement whereby a broker agrees to list an owner’s property for sale.  If a licensed broker doesn’t get a signed, written listing agreement from the seller, then that broker may not be able to recover a real estate commission if the owner refuses to pay.

Second, written agreements help the parties focus on the transaction.  Sometimes in the rush or excitement of a transaction, the Parties might talk in general terms.  There can be key elements that are never discussed or agreed upon.  The parties might think they have agreement on all of the important terms, but in reality they may have two different sets of expectations.  Putting the terms into writing can help the parties identify any deal points that have not yet been addressed.  Putting things in writing can help things seem more formal, and if there’s not actual agreement on some points, then these different perspectives can be highlighted through the process of writing them down.

Third, memories can fade over time.  Some key elements may be important to one of the parties, and other key points may be more important to the other party.  Therefore, after a period of time each of the parties may remember key points of the contract that were important to them, but they may not remember other portions of the contract that were not as important to them.  A written contract can help everybody remember the actual terms of the agreement.

Fourth, people can be tempted to fudge.  Oral contracts can be “slippery.”  People can be tempted to change the terms of an oral contract – even if they know better.  It’s been said that an oral contract isn’t worth the paper its written on.  If one of the parties isn’t fully honest, then a written contract can be a lifesaver.

In some situations, an oral contract may be a legally binding contract that is every bit as enforceable as a written contract.  But it may be harder to prove the terms of that contract if the parties disagree as to its terms.

Special rules can apply to contract involving real estate.  A special rule called the “Statute of Frauds” can make some oral contracts unenforceable, especially if they concern real estate.  Therefore, when it comes to real estate, it’s always best to have a valid, written, legally enforceable contract.

Even if a contract is in writing, there can still be problems.  I remember one of the first law cases I ever read.  In the summer of 1984, I was finished with my undergraduate degree at Brigham Young University and was getting ready for my first semester of law school.  I had picked up my textbooks, and was thumbing through a book on contracts.  I stopped at a case with an unusual name: Raffles v. Wichelhaus.  It seemed like an odd name, and it caught my attention.

In the United States, we typically think of the five years from 1860 to 1865 as the period of the Civil War.  We don’t always spend a lot of time on other world events that happened during those years.  But in 1864 there was a ship named the Peerless that loaded up cargo in Bombay, India.  Part of the cargo on that ship was 125 bales of Surat cotton. The quality of the cotton was guaranteed to be “middling fair.”  After the cargo was loaded, the ship sailed for Liverpool, England.

It seems that a certain seller in Liverpool, England agreed to sell the 125 bales of cotton to a buyer when the ship arrived in port. The agreement was contained in a written contract between the parties.  Eventually, the ship arrived in port, and the seller demanded that the buyer complete the transaction and pay for the cotton.  The buyer refused.

And the reason why the buyer refused?  Because there were actually two ships named “Peerless.”  No kidding – what are the odds?  In 1864, two separate ships named “Peerless” loaded up cotton cargo in Bombay, India and sailed for Liverpool, England.  The first ship left Bombay in October, and the second ship left in December.  When the contract was formed, the seller intended to sell cotton from the first ship named “Peerless.”  But when they formed the contract, the buyer had intended to buy cotton from the second ship “Peerless.”  Neither the buyer nor the seller knew that there were actually two ships named “Peerless” that were to be sailing from Bombay.

This is almost like two ships passing in the night.  The seller claimed it didn’t matter what each of the parties had in mind.  The contract only said that the cotton was to be sold from a ship named “Peerless” that sailed from Bombay to Liverpool, and whether such ship sailed in October or December was irrelevant.  But the defendant disagreed, and said that no agreement had been reached because the parties never agreed on the same thing.

You be the judge.  What did the English court say about such a thing back in 1864?  If you guessed that the court ruled for the buyer, you’d be right.  This famous old English case stands for the proposition that the parties must agree on the same thing in order for a valid contract to be formed. A contract requires that the parties have a “meeting of the minds.” The court said because the parties had not agreed on the same thing, then no contract was formed even though the plain language of the contract would have fit the description for either one of the ships.

This is not some ancient, outdated legal principle.  The case of Raffles v. Wichelhaus was cited in a reported California court of appeal case as recently as 2009.

Contract formation and enforcement can involve complex legal considerations. Persons who are considering forming or enforcing a contract should consult competent legal counsel.

Contract Legalities Are Important

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I remember discussing a contract problem with a friend many years ago.  This person’s father-in-law was a college professor who had given him some advice about the contract.  I raised some questions about the legality of the contract.  The father-in-law was of the emphatically firm opinion that the contract was governed only by its printed terms – and nothing more.

This college professor was extremely educated and highly qualified. However, his credentials and background were in academic areas and not in law.  He didn’t know about one of the basic principles of contract law, which concerns legality.  The general rule is that in order to be enforceable, a contract must be legal.  Contracts which violate a point of law are frequently held to be unenforceable.

It might be difficult to imagine how a contract could be illegal, but such contracts do exist.  For example, if an unlicensed person agreed to provide legal or medical services which required a license, then such a contract would be illegal and would most likely be unenforceable.  If such a person provided unlicensed services but wasn’t paid for those services, then the law probably wouldn’t requirement payment from the person who received the services.  (There are other reasons why it’s not a good idea to enter into illegal contracts.  In addition to being unenforceable, there can be other laws that might be broken by such a contract, with additional undesirable consequences).

So how are real estate contracts concerned with this principle?  Here’s an example.  The city of Pasadena passed an ordinance which required that a “Certificate of Occupancy” be issued before a building could be used or occupied.  The city passed this ordinance to insure that occupied buildings met the health and safety provisions of the Pasadena municipal code.  A landlord leased a property to a tenant, and the tenant failed to pay the rent.  The landlord filed an eviction proceeding against the tenant, and sought a judgment for back rent in the amount of $600 and an order evicting the tenant from the property.

The trial court held that the landlord was entitled both to the past due rent and possession of the property.  However, the Court of Appeal held that the landlord was not entitled to any back rent.  The Landlord had rented the property to the tenant without first getting a Certificate of Occupancy.  This was an illegal arrangement, and the Landlord was at fault.  Because the Landlord had illegally rented the property to the tenant, the Landlord was unable to court proceedings to obtain a judgment against the tenant for the past due rent.  However, even though the Landlord was not entitled to collect any past-due rent, the Court specifically noted that the tenant wasn’t entitled to stay there “rent-free” until the Landlord got the Certificate of Occupancy.  The Landlord therefore received a judgment evicting the tenant from the premises because of the unpaid rent.  But due to the illegal nature of the contract, the Landlord wasn’t entitled to collect any of the past due rent.

Situations can differ, and the outcome in one legal situation can’t always be used to reliably predict the outcome in a different situations.  Persons with lease or contract questions should always consult competent legal counsel in determining their rights and obligations in any given situation.

Contracts and Real Estate

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“An honest man’s word is as good as his bond.”

Don Quixote – Part ii. Chap. xxxiii
Cervantes (1547-1616)

The truth is, if everybody did what they said they would do then nearly all business deals -and nearly all real estate transactions- could be done on a handshake.  So why do we spend so much time, money, and effort drawing up formal written contracts?

Part of the reason is because not everybody does what they say they will do.  Sometimes a party to a contract will get “Buyer’s Remorse” and wish they hadn’t struck a bargain.  Other times, a party might find a better deal “after the fact” and in those cases, they might breach their contract.  Contract performance is always a risk, and when it doesn’t happen, then the first thing the lawyers look to is the written contract as evidence of the deal.

A contract can be a very simple thing.  If property is being sold, then the actual terms of the sale could almost always be stated on a single sheet of paper.  But if this is so, then why are contracts sometimes dozens – or hundreds – of pages long?  The answer is that contracts often involve risk – and a great amount of contractual language deals with how any risk of loss, injury, damage, fire, catastrophe and Acts of God are going to be handled.  If no disaster or catastrophe happens, then all of the work in carefully drafting a contract will have been for nothing.  But if something goes wrong in the performance of the contract, then a court will look very closely at the language that the parties agreed to. In that situation one of the parties may be glad that they spent the necessary time and money to carefully negotiate the contract.

There are generally two distinct stages to contract issues.  They are 1) formation, and 2) performance.  Legal problems can arise at either one of these stages. Legal services by good legal counsel in the formation stage can help avert problems later on when performance issues arise. A real estate or business transaction that is skillfully negotiated and handled will likely give rise to far fewer problems than a deal that is put together in a rushed or thoughtless manner.

Despite good intentions by everyone involved, even if the world’s best contract is signed, there can still be problems when the time comes for contract performance.  There are a multitude of reasons why a party may not choose to -or be able to- perform a contract. Financing problems can arise; situations can change; values and intentions can shift. When performance problems arise, the assistance of skilled legal counsel can be critical to the outcome of a contractual issue.

Drama with Texas Deed

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            So what was going on in 1895?

In the United States (according to Wikipedia), the sport of volleyball was invented by William G. Morgan at Holyoke, Massachusetts.  The first American professional football game was played in Latrobe, Pennsylvania between the Latrobe YMCA and the Jeannette Athletic Club (Latrobe wins 12-0). George B. Selden was granted the first U.S. patent for an automobile.  Oscar Hammerstein opened the first theatre to be built in New York City’s Times Square District.  And the gold reserve of the U.S. Treasury was saved when J.P. Morgan and the Rothschilds loaned $65 million in gold to the U.S. Government.

Internationally (according to Tchaikovsky’s ballet “Swan Lake” opened in St. Petersburg. Frederick E. Blaisdell patented the pencil. Wilhelm Roentgen of Germany discovered x-rays. Alfred Nobel established the Nobel Prize.  The first shipment of canned pineapple from Hawaii was received. The world’s first movie theater opened in Paris. And Oscar Wilde’s “The Importance of Being Earnest” opened in London.

In Texas?  There was drama with respect to the sale of a parcel of real property. This sale ended up in a court case.  It seems there was man with the initials of C.C.A. who was interested in acquiring a piece of land.  The court’s opinion doesn’t say how C.C.A. knew about this land, or why he wanted it, or what he planned to do with it.  But it’s clear that C.C.A. wanted it.

The land was owned by a husband and wife with the last name of Bargas.  The court opinion doesn’t say how C.C.A. knew Bargas, and the opinion doesn’t say if they were friends.  The opinion doesn’t even say whether or not the property was for sale, and it doesn’t say whether C.C.A. ever tried to buy the property.

But the opinion does say what happened on June 3, 1895.  On that day, C.C.A. took with him a notary public, and went to visit the home of Mr. Bargas, who was one of the owners of the property. The court opinion notes that on the same day, Mr. Bargas was dying, and that he was unconscious, and was incapable, both physically and mentally, of performing any act.  Before C.C.A. went to visit the property owner, he wrote out a warranty deed which purported to transfer title to the property from Mr. Bargas to C.C.A.  When C.C.A. and the notary public arrived at Mr. Bargas’ home, they found Mr. Bargas unconcious, dying, unable to raise his hand, and completely unaware of anything.  After finding Mr. Bargas in this condition, C.C.A. (or the notary) raised Mr. Bargas “from his dying bed, took his helpless hand, touched it to a pen, and then with the said pen . . . made a cross mark . . . and above the cross wrote the words “his,” and below it the word “mark.”

There was no evidence that Mr. Bargas ever acknowledged the deed or knew it existed.  Instead, the evidence showed “beyond doubt” that Mr. Bargas was “wholly unconscious” after the deed was signed up until the time of his death, which occurred on the same day, a short time afterwards.

On these facts, the Texas court found the deed and the cross mark to be a “forgery. ” The court found that because Mr. Bargas knew nothing about the deed or its execution, the deed was never intended by Mr. Bargas to convey title, and the deed was never delivered by him to C.C.A.  The Texas court therefore found that the deed was completely ineffective to convey title to C.C.A.

There are other facts of the case not recited here.  The case is reported as Abee v. Bargas (1901) 65  S.W. 489.

The rules concerning conveyances of title to property can be complex, and results can vary.  Persons considering matters or issues involving deeds or other transfers of title to property should consult appropriate legal counsel.

Not Worth the Fight

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Sometimes Truth is stranger than Fiction.

Having said that, it’s worth noting that homeowner’s insurance can provide a broad range of coverage.  In one case homeowner’s insurance covered a man who fell out of a tree while trying to lop off some large tree branches.  In another case homeowner’s insurance covered someone who fell through a glass topped table while dancing on it. In yet another case homeowner’s insurance covered a claim that a strand of bamboo in a drainage canal caused serious erosion to the property across the canal. Homeowner’s insurance can cover all kinds of things.  But can homeowner’s insurance cover two ears and a nose?

Homeowners insurance is almost always a good idea.  Most policies carry two kinds of coverage: coverage for the home and its contents, and also general liability coverage for the homeowner.  This general liability coverage won’t usually provide coverage for accidents or losses involving motor vehicles.  That kind of coverage is usually provided by a separate policy of motor vehicle insurance.  But if a covered homeowner is out golfing, and if they unintentionally hit a stray ball over a high fence so that it blasts through a million dollar stained glass window on the front of a mile high cathedral – well, there just might be coverage for that.  The general liability coverage in a homeowner’s policy can often provide coverage for all kinds of general liability where a homeowner might unintentionally cause loss or injury to someone else.  Many homeowners might generally think that this type of general liability coverage might only extend to an injury that occurs on the property – such as somebody walking past the house who steps on a rake, and where the rake flips up and gives them a smack right on the forehead.  Or the population of homeowners at large might think that homeowner’s general liability coverage might only extend to something like the homeowner who digs a trench across their front walkway and front yard to install a pipe, only to have a neighbor step into that trench with disastrous results.  Yes, such accidents might be covered.  But there can also be events off the premises that can be covered.  Some of these might be very simple.  Or some can be more dramatic – like one involving a nose and two ears.

Apparently a lawsuit was filed in the Federal District Court in Colorado that resulted in a trial in 1986.  In that case, the plaintiff (or “claimant”) filed a suit against an insurance company who had written a policy of homeowner’s insurance for a defendant.  Apparently the plaintiff had lost his nose and both ears, and had tendered a claim for compensation to the insurance company who had insured the defendant.  The insurance company denied coverage, and the plaintiff sued.  The person who lost their nose and both ears was named Maestas.  The defendant who was insured was named Castro.  In the court’s own words, here is what happened:

“Maestas [the plaintiff] and Castro [the defendant] were occasional drinking buddies who were acquainted through work and softball team activities.  On the night of December 5, 1982, they were drinking and socializing in a bar.  The evening’s events did not remain subdued and tranquil, however.  Epithets were exchanged and fisticuffs ensued.  Maestas and Castro were asked to leave the bar premises.  Round two took place in the parking lot.  Though each claimed the other was the initial aggressor, Maestas lost; his nose and ears were bitten off.

“Before this brawl Castro had hopes of becoming a policeman, but he entered the court system through the other door, so to speak.  He was convicted of criminal assault in the second degree and sentenced to four years imprisonment.”

“On May 3, 1984, Maestas filed a civil complaint against Castro in the state district court.  The complaint sought damages from Castro due to negligence!  One is puzzled by the allegation since at least three bites were required to achieve the damage inflicted.  Arguably such activity could be described as gross negligence, but I think the third bite pretty clearly elevates the activity to an intentional tort, however mindless it might seem.”

Maestas apparently tended a claim to the insurance company for coverage, which was denied.  Maestas then filed suit against the insurance company.  The trial court judge noted that the policy excluded coverage for claims that were “expected or intended by the insured.”  The Court found that biting off the nose and ears of another person required an intentional act (which was expected or intended), and therefore no insurance coverage existed.

As a result, Maestas not only lost the fight; he lost the lawsuit as well.  The case is reported as W. Am. Ins. Co. v. Maesstas, 631 F. Supp. 1565 (D. Colo. 1986).

Homeowner insurance policy coverages can involve complex legal issues.  Persons with coverage questions or issues should consult competent legal counsel.