P R O B A T E   &   P R O P E R T Y
September/October 2004
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Keeping Current Property

Keeping Current—Property Editor: Daniel B. Bogart, Chapman University School of Law, One University Drive, Orange, CA 92866, bogart@chapman.edu. Contributing editors: Prof. James C. Smith and Prof. William G. Baker.

Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.

CASES

BANKRUPTCY: Lessee may not assign shopping center lease in violation of use restriction. Trak Auto Corporation, owner of a chain of auto parts stores, filed a bankruptcy petition to reorganize under Chapter 11. It obtained court approval to close a store located in West Town Center, a shopping center in Chicago, Illinois, and sought to assume and assign its West Town lease. The lease restricted use of the premises to the sale of automobile parts and accessories. The auto parts retailer engaged a real estate firm to advertise the availability of the lease and to obtain bids. No auto parts retailer submitted a bid. The bankruptcy court approved an assignment for $80,000 to the high bidder, who proposed to sell family apparel at discount prices. The district court affirmed, but the court of appeals reversed. Bankruptcy Code § 365(f)(1) allows a debtor to assign a lease notwithstanding assignment restrictions in the lease. But Section 365(b)(3)(C) requires an assignee of a shopping center lease to obey a clause restricting the use of the premises. The court concluded that the latter provision, being more specific, controls over the general invalidation of anti-assignment clauses. Congress intended to allow shopping center landlords to preserve the tenant mix that they bargained for in the process of leasing. The right tenat mix is a key to a shopping center’s financial success. A change in tenant mix can reduce overall patronage and revenues at stores in the center. This decision is especially significant because several other bankruptcy courts, like the bankruptcy court in this case, have allowed an assignee of a shopping center lease to violate a use restriction on the theory that the restriction constitutes a de facto anti-assignment clause. Trak Auto Corp. v. W. Town Center LLC (In re Trak Auto Corp.), 367 F.3d 237 (4th Cir. 2004).

BOUNDARIES: Prevailing party cannot recover attorney’s fees in boundary line litigation. Two neighbors, who had conflicting surveys, contested the ownership of a 30-foot strip of land. The plaintiff brought an action under the Texas Declaratory Judgments Act, Tex. Civ. Prac. & Rem. Code §§ 37.001 to 37.011, and the defendant counterclaimed under the Trespass-to-Try-Title Statute, Tex. Prop. Code §§ 22.001 to 22.045. Based on a jury verdict, the trial court granted judgment for the plaintiff, also awarding the plaintiff $35,000 for attorney’s fees under the Declaratory Judgments Act. The supreme court held that a declaratory judgment action is not an appropriate way to resolve a boundary dispute between neighbors. A trespass-to-try-title action is the exclusive means to resolve such a dispute. Thus, attorney’s fees are not recoverable. Martin v. Amerman, 133 S.W.3d 262 (Tex. 2004).

CONDEMNATION: Compensation for billboards is based on replacement value rather than lost income. The State of Indiana condemned over an acre of land to build an interstate highway interchange. The condemned tract contained four billboards, which the landowners relocated to their adjoining retained land. Court-appointed appraisers reported the fair market value of the land and improvements to be $23,565 and $167,945, respectively. After the state filed exceptions to the report of value of the improvements, the jury returned a verdict of $595,000. The verdict was based upon evidence of future rental income from the billboards on the condemned tract. The trial court prohibited the state from presenting evidence regarding the landowners’ relocation of the billboards to their adjoining property. The state supreme court reversed, holding that in condemnation billboards should be valued according to their replacement cost, less depreciation. Evidence of rental income is admissible only if the landowner is unable to relocate the billboards within the same market. State v. Bishop, 800 N.E.2d 918 (Ind. 2003) (rehearing denied Apr. 23, 2004).

FORECLOSURE: Expiration of statute of limitations on debt does not bar action to foreclose mortgage. In 1988, a corporation obtained a mortgage loan, guaranteed by the Small Business Administration, to acquire a bakery and convenience store on St. Thomas, Virgin Islands. Several of the principals guaranteed the loan, securing their guarantees by mortgaging three other parcels of real property. After the borrower defaulted, the SBA purchased the loan and resold it. In 2000, the present owner of the loan, a private entity, brought an action to foreclose the mortgages granted by the guarantors. A six-year statute of limitations applied to contract claims, and more than six years had passed since the borrower had defaulted. Defendant guarantors argued that because the plaintiff could not bring an in personam suit on the guarantees, it was also barred from foreclosing on the collateral. The court noted a split of authority as to whether a suit to recover security could be maintained after the statute has run on collection of the underlying debt. The court allowed the foreclosure to proceed, adopting the line of authority that treats an action to foreclose as separate and independent from an action on the debt. It reasoned that this rule adds stability to the mortgage markets, helping to protect offshore real estate investment in the Virgin Islands. The court also held that the plaintiff, as assignee of the United States, was not subject to any other statute of limitations for its foreclosure action. Following decisions of other courts of appeal, the court found no relevant statutory limitation and applied the maxim, “time does not run against the sovereign.” UMLIC VP LLC v. Matthias, 364 F.3d 125 (3d Cir. 2004).

MORTGAGES: Lender may require terrorism insurance under “other reasonable insurance” clause of loan agreement. In 1998, Omni Hotels borrowed $250 million, secured by five hotels located in New York City, Chicago, and Texas. Omni agreed to provide “comprehensive all risk insurance” on the hotels as well as “such other reasonable insurance” as the lender might request. The insurance industry changed after September 11, 2001. Before 9/11, “all risk” policies covered terrorism. After 9/11, insurance companies began excluding damage from terrorist attacks from their “all risk” policies. In 2002, when it renewed its “all risk” policy, Omni was unable to find a policy that covered terrorism. Insurance companies offered separate, stand-alone terrorism policies, but the quoted annual premium for Omni’s five hotels was over $1 million. Omni negotiated with Wells Fargo, the
servicing agent for the loan, over whether Omni would obtain terrorism coverage. Wells Fargo agreed to accept a $60 million policy at a time when the loan balance was $230 million, but negotiations broke down. Omni brought an action seeking a declaratory judgment that it was not required to obtain terrorism insurance. The court agreed with Omni’s position that its obligation to maintain “all risk” insurance did not require it to purchase terrorism insurance. In the loan agreement, the parties did not define “all risk.” In the insurance industry, “all risk” policies have evolved over time, with companies previously adding exclusions for mold problems and Y2K problems to their policies. Thus, Omni’s duty to provide “all risk” insurance was measured not by the policy as it existed in 1998, when the loan was made, but by an evolving standard. The court, however, held that Wells Fargo acted reasonably in requiring $60 million worth of terrorism coverage under the “other reasonable insurance” clause. Omni had a quote for such a policy for an annual premium of $316,000, and evidence indicated that many hotels presently carry terrorism insurance. Omni Berkshire Corp. v. Wells Fargo Bank, N.A., 307 F. Supp. 2d 534 (S.D.N.Y. 2004).

RECORDING ACTS: Deed with defective acknowledgment imparts constructive notice. After a creditor brought suit to collect a debt, the debtor/defendant conveyed his residence by quitclaim deed to his girlfriend. She promptly recorded the quitclaim deed. Five years later, the creditor brought an action against the girlfriend, seeking to set aside the transfer under the Uniform Fraudulent Transfer Act. The Act has a four-year statute of limitations, which runs from the time the transfer is perfected. The creditor claimed the quitclaim deed was not properly recorded because of a defective acknowledgment. The acknowledgment contained the grantor’s first name, but not his last name, and failed to state that the conveyance was the parties’ “free act and deed,” as required by the Rhode Island acknowledgment statute. R.I. Gen. Laws § 34–12–1. The court refused to invalidate the quitclaim deed, holding that the creditor had constructive notice of the contents of the deed. If a title searcher had found the deed, the searcher could have inquired further as to the legitimacy of the acknowledgment. Duffy v. Dwyer, 847 A.2d 266 (R.I. 2004).

RELIGIOUS LAND USE AND INSTITUTIONALIZED PERSONS ACT (RLUIPA): College must comply with generally applicable PUD regulations. San Jose Christian College purchased a property in the City of Morgan Hill, California, from a hospital, which had closed. The college sought to use the site for its college campus. The city rezoned the property as a planned unit development, which allows any use approved by the city council. The college submitted a development plan. The city responded by requesting additional information, including a landscape plan, a detailed site plan, the expected number of students, and information about evening events, sporting events, and other large events to be held on campus. Instead, the college submitted a “scaled back” application that provided less information, with a statement that the college could not yet predict its “future facility needs.” After the city denied this application, the college brought an action alleging violations of the First Amendment and RLUIPA. The court held that the city’s zoning process did not violate the Free Exercise Clause because the PUD regulation was not directed at religion; it was a neutral law of general application. RLUIPA, enacted by Congress in 2000, prohibits the government from imposing “substantial burdens” on “religious exercise” unless it has a compelling governmental interest and the burden is the least restrictive means of satisfying that interest. The court concluded that the college’s plan to develop a campus where religious education would take place constituted “religious exercise.” It concluded, however, that the city had not imposed a “substantial burden” because it merely required the college to submit a complete application, as is required from all PUD applicants. San Jose Christian College v. City of Morgan Hill, 360 F.3d 1024 (9th Cir. 2004).

SALES CONTRACTS: Seller not liable for misrepresentation when buyer chose not to perform inspection. Sellers of a house misrepresented the condition of the basement. They orally stated that the basement did not leak and completed a property disclosure statement, which disclosed one incident of prior leakage with an explanation, “repaired broken pipe.” In fact, the sellers had actual knowledge of several other leaks. Shortly after closing, the buyers encountered several basement leaks. They sued for fraudulent misrepresentation, prevailing at the trial court level. The supreme court reversed, holding that contract language insulated the sellers from liability. The contract gave the buyers’ the right to conduct professional inspections before the closing, which they chose not to do. The contract provided that the sale was “as is,” and the disclosure form prominently stated that its contents were not warranties “of any kind.” Moreover, the contract stated: “If inspections are not performed regarding all or part of the property, Buyer is bound by whatever information an inspection would have revealed, and waives any claim, right or cause of action relating to or arising from any condition of the property that would have been apparent had inspections been performed.” Based on these provisions, the court held that the buyers could not have reasonably relied upon the sellers’ representations that the basement did not leak. The sellers’ actual knowledge of the falsity of their statements was immaterial. The decision is contrary to a modern trend to ignore contract language in cases of alleged fraud and to set a low threshold for determining when a plaintiff has reasonably relied upon a representation. Many courts find that a buyer of property is entitled to rely on any representation that is not patently ridiculous. Alires v. McGehee, 85 P.3d 1191 (Kan. 2004).

TIMBER: Purchaser who obtains conveyance from less than all of the heirs is liable for treble damages. After the deaths of a married couple who owned 40 acres of timberland, their descendants—56 persons in all—succeeded to ownership as heirs. A purchaser contracted to buy the timber from two heirs, who lived on the property, obtaining a timber deed that purported to convey a 100% interest in the timber. The purchaser immediately resold the timber to a company, which cut and removed the timber. A Louisiana statute, enacted in 1974, provides for a timber owner to recover treble damages, plus reasonable attorney’s fees, from a person who “willfully and intentionally” cuts and removes the timber without the owner’s consent. La. Rev. Stat. Ann. § 3:4278.1. A related statute allows a purchaser to remove timber with the consent of at least 80% of the ownership interest of the land (the “80% rule”). La. Rev. Stat. Ann. § 3:4278.2. Twenty-five of the heirs, who had not agreed to the sale, brought a damage action against the purchaser and the timber company. The trial court refused to award treble damages, but the appellate court reversed, reasoning that the purchaser had actual knowledge that he had not acquired the necessary approval from 80% of the heirs. The court also concluded that the timber company was liable for treble damages and attorney’s fees because it had actual knowledge that Louisiana had the 80% rule and that some heirs had not signed the timber deed; its “reckless actions” amounted to a willful and intentional wrong. Another defendant—the timber company’s liability insurer—was not liable to the heirs because the company committed an intentional wrong. Cole-Gill v. Moore, 862 So. 2d 1197 (La. Ct. App. 2003) (writ denied Apr. 30, 2004).

ZONING: Tree ordinance is not a zoning regulation. In some states it matters whether a tree ordinance is considered to be part of the zoning code or a freestanding regulation. DeKalb County, Georgia, passed a tree ordinance to protect existing trees and require the planting of new trees on tracts undergoing development. In Georgia, zoning amendments must comply with minimum due process standards set forth in the state Zoning Procedures Law, Ga. Code Ann. §§ 36–66–1 to 36–66–6. Homebuilders challenged the tree ordinance because the county failed to follow the statutory standards. The court held for the county, reasoning that the tree ordinance was not a zoning regulation, because it applied to all unincorporated land in the county. The tree requirements, however, varied to some degree depending upon the zoning district where the tract was located. On this basis, two justices dissented, reasoning that the application of different tree standards to different zones subjected the ordinance to the Zoning Procedures Law. Greater Atlanta Homebuilders Ass’n v. DeKalb County, 588 S.E.2d 694 (Ga. 2003).

LITERATURE

Baseballs; Redux . In a prior column, the editor noted a law review article delving into the ownership of Barry Bonds’s 73d home run ball, which was hit in the last game of the 2001 regular season. For those readers who are also avid baseball fans, this personal property issue is again addressed, this time in Peter Adomeit’s article, The Barry Bonds Baseball Case—An Empirical Approach—Is Fleeting Possession Five Tenths of the Ball?, 48 St. Louis U. L.J. 475 (2004). One fan, Alex Popov, apparently caught the Bonds’s home run ball, then held the ball in his glove for all of six-tenths of a second. Popov, however, was very roughly jostled by a mob, which knocked the ball from his grip. A second fan, Patrick Hayashi, scooped up the ball and claimed ownership. The court asked to determine ownership ultimately decided that both fans had a 50% interest. Mr. Popov had a “legally protected pre-possessory interest.” Hayashi obtained only a 50% interest because, although he physically possessed the ball, his possession likely resulted from the actions of a mob. Having some fun with this subject, Professor Adomeit enlisted the aid of his elementary- school-aged son for two experiments to determine how likely it is that a person would drop a ball once caught after only six-tenths of a second in the web. The results of the experiments? The professor’s son can catch. At only eight years old, young Adomeit first held onto balls pitched directly at him at 50 miles an hour, and then to others dropped at him from a second story building. In most cases, Adomeit’s son held on to the ball for more than six-tenths of a second. Presumably, then, the court’s concern that Mr. Popov could not do the same is put to rest.

Conservation Easements. Adam E. Draper explores the development and usefulness of conservation easements, in Conservation Easements: Now More Than Ever—Overcoming Obstacles to Protect Private Lands, 34 Envtl. L. 247 (2004). Mr. Draper first provides a nice history of conservation easements. As he explains, “a conservation easement is a legal agreement in which a landowner agrees to permanently restrict the development and possible uses of the land in furtherance of conservation values.” Landowners often agree to provide these easements for essentially political reasons and in exchange for a relatively tranquil development process for property left unencumbered by the easement. As Draper explains, proponents of these devices believe that the easements are helpful in controlling urban sprawl and in the preservation of natural resources. And as he notes, conservation easements are one of the few “new” negative easements to be recognized by American common law. Draper describes changes to federal tax law that treat qualified conservation easements as tax deductions. State legislatures helped the process by adopting the Uniform Conservation Easement Act, created by the National Conference of Commissioners on Uniform State Laws. Draper fully supports the push for conservation easements and spends the remainder of his article addressing some of the more vexing policy and legal issues that arise from use of these agreements. These include the possibility that the easements, which are intended to run in perpetuity, may be terminated. This may result from abandonment of the easement, a government’s employment of eminent domain powers, or under the common law doctrine of “changed conditions.”

Easements; Relocation. Section 4.8(3) of the Restatement (Third) of Property: Servitudes would permit the owner of a servient estate encumbered by an easement to relocate the easement without the permission of the easement owner. This rule runs contrary to the common law rule enforced by a majority of American courts withholding such a right from the servient estate owners. Professor John V. Orth takes issue with the position of the Restatement and defends the existing rule, in Relocating Easements: A Response to Professor French, 38 Real Prop. Prob. & Tr. J. 643 (2004). In an article previously appearing in the Real Property, Probate and Trust Journal, Professor Susan French asked: “What’s not to like about a rule that makes the landowners better off and doesn’t hurt the use rights of the easement holders?” Professor Orth does not like the rule, asserting, among other things, that the location of the easement may factor into the consideration paid by owners of the easement right and that changing the location of the easement may defeat the intention of the parties. Furthermore, he argues that this new rule denies the owner of the easement an essential element of property rights: “the ability to refuse to suffer the loss of property to a private person even if that person offers other property of equal value in exchange.” Finally, Professor Orth argues that there is no rationale to support the asymmetry of the new rule—as written, it does not allow the owner of the easement to relocate the easement if such relocation does not unduly burden the servient estate.

Marital Property. Professor Julia Halloran McLaughlin looks at issues arising at the intersection of family law and property law in Should Marital Property Rights Be Inalienable? Preserving the Marriage Ante, 82 Neb. L. Rev. 460 (2004). Professor Halloran points out that many state legislatures eliminated inequity in the treatment of women in terms of property division at the time of divorce by moving away from a “title” approach to rights in property. Modern legislation now focuses on a new category of “marital property.” Thus, a spouse nominally holding title to all of a couple’s property at divorce would not be entitled to any more than that person’s marital share. Professor Halloran suggests that typical contract law analysis and enforcement of pre-marital agreements waiving a spouse’s rights to property brings the inequities of the older approach back into the law. She argues that, although it may interfere with individual autonomy, some marital rights should be inalienable.

Restatement of Property ; Impact . Rather than simply take aim at a single provision in the Second and Third Restatements of Property, Professor David A. Thomas argues that the entire Restatement endeavor is flawed, in Restatements Relating to Property: Why Lawyers Don’t Really Care, 38 Real Prop. Prob. & Tr. J. 655 (2004). Professor Thomas asserts that drafters of the Restatement have lost their way; rather than restate the law, they have too boldly attempted to reform it. He begins by suggesting that, given the expenditure of time and effort by an A-list of property law lawyers and professors who drafted the Restatement, the payoff has been much less than one would expect. Professor Thomas devotes a portion of his article to a history of the American Law Institute and the Restatement projects. He provides lists of the good and bad features of the Restatement (First) of Property. And he argues that “critical appraisals of the Restatement (Second) of Property have been remarkably sparse.” As to the Third Restatement, he states that it continues “the trend of putting forth fewer detailed rules and more statements of guiding principle.” He argues that the resulting documents have included too many caveats on some of the most difficult issues, thus rendering sections valueless to a lawyer’s process of advising clients. The article might be a bit disheartening to those who labor nobly in the creation of Restatements and model acts, and it may be a bit too pessimistic. But Professor Thomas’s objections should be read and discussed.

LEGISLATION

Alabama adopts the “Uniform Commercial Code—Documents of Title and General Provisions.” This act modifies and supercedes the federal Electronic Signatures in Global and National Commerce Act. 2004 Ala. Acts 315.

Arizona allows a tenant to summon a peace officer in response to domestic violence without cost or penalty. The landlord may impose no penalty upon the tenant for exercising his or her right to summon emergency assistance as a result of domestic violence. 2004 Ariz. Sess. Laws 222.

Arizona creates a procedure for the abandonment of cemetery property. A presumption of abandonment arises when an owner of unused cemetery property fails to provide the cemetery with a current address for fifty years. 2004 Ariz. Sess. Laws 100.

Colorado authorizes “beneficiary deeds” that are effective upon the death of the grantor. The deed is revocable until the death of the grantor. A beneficiary deed is a countable asset under Medicaid. 2004 Colo. Sess. Laws 217.

Connecticut requires deeds to a nonprofit land trust or organization to be accepted and signed by an authorized agent of the grantee. 2004 Conn. Acts 114.

Connecticut adopts the “Uniform Commercial Code—Documents of Title.” This act modifies and supercedes the federal Electronic Signatures in Global and National Commerce Act. 2004 Conn. Acts 64.

Connecticut validates mortgage releases executed by persons other than the record mortgage holder. In the seemingly never-ending battle to secure and record releases for mortgage loans, this act allows a valid mortgage release to be recorded without the signature of the record mortgage holder as long as the record owner affirms that the debt has been paid. The record mortgage holder has five years to contest the release. Although the act exempts releases obtained by fraud, it seems to open the door to that very problem. 2004 Conn. Acts 67.

Georgia clarifies its condominium act. Services provided by the association for a payment, such as pool key fees, may be charged equally among the units and do not have to be allocated in accordance with the common expense portion. 2004 Ga. Laws 535.

Maryland allows cooperative housing associations to withhold from public inspection personnel and individual financial records. 2004 Md. Laws 382.

Maryland guarantees the right of individuals to display the U.S. flag.  The right to display the flag may not be prohibited by owners’ associations, or by a covenant, condition, or restriction in a deed. Landlords may not ban the display of the flag. Reasonable restrictions may be imposed as long as they allow a display. 2004 Md. Laws 529.

Maryland authorizes homeowners’ associations to remove covenants or restrictions based on religious belief or national origin. An amended deed may be filed upon the approval of at least 85% of the lot owners. 2004 Md. Laws 478.

Maryland allows cooperative housing corporations and condominium and homeowners associations to vote by electronic transmission. Notice to members, unit owners, or association owners who consent may be given by electronic transmission. 2004 Md. Laws 286.

Minnesota imposes substantial regulation upon mortgage foreclosure consultants. Owners are given three days to cancel a foreclosure consultant contract. 2004 Minn. Laws 263.

Minnesota adopts the “Uniform Commercial Code—Documents of Title and General Provisions.” This act modifies and supercedes the federal Electronic Signatures in Global and National Commerce Act. 2004 Minn. Laws 162.

Minnesota prohibits unreasonable delay in mortgage loan closing. Lenders may be liable for the increased expenses of borrowers as a result of the expiration of an interest rate or a discount point agreement. 2004 Minn. Laws 203.

Nebraska creates statutory liability against a title insurer for defalcation or misappropriation by a title insurance agent. 2004 Neb. Laws 155.

 

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