P R O B A T E   &   P R O P E R T Y
January/February 2003
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Keeping Current Property

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

CONDEMNATION: Road lacked public purpose. The land taken for a proposed road would have solved traffic congestion resulting from two large industrial firms. Heightened scrutiny was used regarding public versus private use, because the taking benefited specific private interests. The city was denied deference on the public use issue as opposed to the deference required on the issue of the public necessity, a rather strained distinction. There seems no rational basis to hold that relieving traffic congestion created by two large industrial tracts is any less a public purpose than solving the traffic congestion created by a multitude of small residential tracts. Comparing a condemnation to relieve congestion created by a residential cooperative as opposed to a subdivision of single family homes reveals the illusory nature of the distinctions underlying this unfortunate holding. City of Novi v. Robert Adell Children’s Funded Trust, No. 223944, 2002 Mich. App. LEXIS 1379 (Mich. Ct. App. Oct. 4, 2002).

DEBTOR LIABILITY: Nonrecourse loan. The borrower clearly agreed to full personal liability in the event of any liens against a hotel, the equity in which was pledged to the lender to secure loan repayment. The existence of relatively small junior liens (relative to the loan) was held a material default, because the equity interest collateral would be adversely affected. The borrower’s argument, that the resulting personal liability was a void penalty, was rejected, because the lender sought only its actual damages consisting of the loan deficiency after realizing on the pledge. A query: was the actual damage to the lender really the diminution in value of its equity pledge based upon the relatively small liens as opposed to its full deficiency after accelerating the loan and foreclosing on the pledge? Heller Financial, Inc. v. Lee, Case No. 01-C-6798, 2002 U.S. Dist. LEXIS 15183 (N.D. Ill. Aug. 16, 2002).

DEED EXECUTION: Amanuensis. A daughter signed and recorded a deed for her disabled father granting her a joint tenancy interest in the father’s home. The Statute of Frauds requires written agency authority, but her written power of attorney did not authorize such a self-interested act. The amanuensis exception was held applicable, because the daughter functioned as the purely mechanical signing instrument of her father, even though done outside his presence. Because the act was self-interested, however, it would have been presumed invalid but for overwhelming evidence of the father’s intent. The decision seems appropriate in an age of push-button electronic contracting. Estate of Stephens v. Williams, 49 P.3d 1093 (Cal. 2002).

FORECLOSURE: Grossly inadequate price. Arizona adopts the position of the Restatement (Third) of Property: Mortgages § 8.3 that a foreclosure sale should be set aside based upon a grossly inadequate foreclosure sale price. The court’s attempt to address the need for certainty seems to the editor naïve and unpersuasive. With all due respect to the Restatement editors, this editor expects the Arizona legislature will overrule this decision to provide sufficient certainty or loans will become difficult to obtain on Arizona real estate. Krohn v. Sweetheart Prop. (In re Krohn), 52 P.3d 774 (Ariz. 2002).

GUARANTEE: Nonconforming renewal. Even though a guarantor is not required to honor its obligations to a lease that has not been extended or renewed in strict compliance with the terms of the original lease, the terms of the guarantee can waive this rule. T.C.T. Building Partnership v. Tandy Corp., 751 N.E. 2d 135 (Ill. App. Ct. 2001), appeal denied, 763 N.E.2d 326 (Ill. 2001).

IMPLIED WARRANTY: Disclaimer. The warranty of habitability creates strict liability that cannot be disclaimed or waived as opposed to the implied warranty of workmanship quality. Centex Homes v. Buecher, No. 00-0479, 2002 Tex. LEXIS 130 (Tex. Aug. 29, 2002). Compare this holding to Board of Managers v. Wilmette Partners, 760 N.E.2d 976 (Ill. 2001), in which a disclaimer of habitability was allowed, but a disclaimer of “warranties of fitness for particular purpose and merchantability” failed because it did not use the term “habitability.” This is some pretty fine hair splitting that should have been avoided by the nonwaivable Texas approach.

LEASES: Dependent convenants. Massachusetts joins a growing list of states holding a tenant may terminate a commercial lease for a condition not constituting constructive eviction. The landlord failed to adequately repair known roof leaks. The court failed to address the troubling predicament of a landlord whose tenant withholds both possession of the property and rent as opposed to this tenant’s election to terminate the lease and surrender possession to the landlord, thus allowing the landlord to seek a rent-paying substitute tenant. This predicament typically is avoided by expressly independent covenants in the lease, which are permitted under the court’s adoption of the position reflected in the Restatement (Second) of Property: Landlord and Tenant § 7.1 (1977). Wesson v. Leone Enters., Inc., 774 N.E.2d 611 (Mass. 2002).

LEASES: Piercing lessee’s corporate veil. Blimpie, of whom the court said the inference was ineluctable, created judgment-proof corporations for the sole purpose of insulating Blimpie from any liability on its restaurant leases in the event of the franchisee’s default, a purpose deliberately concealed by Blimpie by its conduct in creating the impression from the outset of the tenancy relationship and throughout its duration that it and tenant were one and the same. Blimpie was held liable for abusing the privilege of incorporation to perpetrate a fraud on its landlord. OTR Assocs. v. IBC Servs., Inc., 801 A.2d 407 (N.J. Super. Ct. App. Div. 2002).

MERGER: Collateral agreement. Parol evidence was properly admitted to establish that the seller agreed to grant water rights to the purchaser for no additional consideration in connection with the sale of a lot and did not intend the deed to be the final expression of their agreement. Water rights are not necessarily appurtenant to the land and therefore could be the subject of a collateral agreement. Payment of the purchase price was held sufficient part performance to avoid the statute of frauds because the evidence of the collateral agreement was overwhelming. This “relaxation” of the part performance rule seems more like an outright exception of questionable wisdom. Spears v. Warr, 44 P.3d 742 (Utah 2002). Compare Richman v. Gehring Ranch Corp., 37 P.3d 732 (Mont. 2001), in which hunting rights on land retained by the seller were held not a collateral agreement because they would have been appurtenant to the conveyed land, and Dubin v. Robert Newhall Chesebrough Trust, 116 Cal. Rptr. 2d 872 (Cal. Ct. App. 2002), in which the statute of frauds was held inapplicable to an implied leasehold access easement.

MORTGAGE PREPAYMENT: Rejection. Although the enactment of the Emergency Low Income Housing Preservation Act of 1987 (ELIHPA) repudiated prepayment rights on Farmers Home Loans, the actual prepayment rejection is the necessary breach of the loan agreement that triggers the running of the six-year statute of limitation. Franconia Assocs. v. United States, 122 S. Ct. 1993 (2002).

MORTGAGES: Determination of loan imbalance. In the absence of an express standard for determination of a loan imbalance, loan documents imply an objectively reasonable determination rather than the lower standard of subjective good faith. Storeck & Storeck, Inc. v. Citicorp Real Estate, Inc., 122 Cal. Rptr. 2d 267 (Cal. Ct. App. 2002).

REGULATORY TAKING: Public trust doctrine. A developer purchased tideland governed by state and city land-use laws that then permitted residential development subject to certain unsatisfied conditions. The developer’s regulatory taking claim was dismissed because the development conditions reflected background principles of state law, in this case the public trust doctrine regarding navigable waters as reflected in the Washington State Constitution. The developer pointed to the large amount of past tideland residential development, but the court pointed out the uniqueness of each tract of tideland and said past residential tideland development was no precedent for this particular tract of “first class tidelands” located only 700 feet from a large city park and a large marina justifying and requiring the disputed conditions. The holding raises the question whether some existing Washington tideland developments may be in the nature of nonconforming uses that could not be replaced if destroyed or abandoned. Esplanade Props., LLC v. City of Seattle, 307 F.3d 978 (9th Cir. 2002).

RESPA CLASS ACTION: Yield spread premium claims. In a victory for lenders and mortgage brokers, the Eleventh Circuit overruled Culpepper v. Irwin Mortgage Co., 253 F.3d 1324, 1326 (11th Cir. 2001), based upon the retroactive application of the 2001 “Statement of Policy” issued by HUD shortly after the Culpepper ruling. The deference given to HUD’s interpretation of RESPA in this decision may encourage HUD to push through its proposed revisions to Regulation X published for public comment at 67 Fed. Reg. 49,134 (July 29, 2002), regardless of questions about HUD’s authority. Heimmermann v. First Union Mortgage Corp., 305 F.3d 1257 (11th Cir. 2002).

SERVITUDE PROHIBITING BUSINESS: For-profit child care. In a split decision, the Michigan Supreme Court found a violation even though the day care was limited to seven children. The day care was a “business” because it was for profit. The court disclaimed any implication that home offices or similar uses would be prohibited business use. The court rejected any consideration of business compatibility with residential use, which may create difficulty if the court seeks to avoid the holding’s implications in future cases. The court also found no public policy basis to allow home day care centers in residences as exist in some other jurisdictions. Terrien v. Zwit, 648 N.W.2d 602 (Mich. 2002).

ZONING: Separation of powers. Courts cannot rezone property when zoning is held unconstitutional, but can sanction local authorities if they fail to rezone in a constitutional manner on remand. Town of Tyrone v. Tyrone, L.L.C., 565 S.E.2d 806 (Ga. 2002).

Article 9. Unless the reader has been in hiding for the last several years, he or she will know that Article 9 has been substantially revised, and New Article 9 is now effective in virtually every jurisdiction. It is crucial that real estate lawyers quickly learn the new definitions and concepts in this version of Article 9 and identify those portions of the original that have been modified, omitted, or replaced. Fortunately, Philip H. Ebling and Steven O. Weise provide a roadmap in What a Dirt Lawyer Needs to Know About New Article 9 of the UCC, 37 Real Prop. Prob. & Tr. L. J . 191 (2002). Mr. Weise was advisor to the revised Article 9 Drafting Committee and serves on the Permanent Editorial Board of the UCC. The article is straightforward and short, unlike much of recent Article 9 scholarship. The article assumes that the reader already understands basic Article 9 terminology and begins by pointing out changes and additions to primary definitions and concepts, including the definition of the “debtor” (which now may be distinguished from the “obligor”), and by explaining attachment, perfection, financing statements, choice of law rules, and priority. The remainder of the article addresses issues specific to real estate practice. These key issues include changes to perfection and priority of security interests in fixtures, Article 9’s treatment of deposit accounts and securities accounts, the manner in which Article 9 facilitates the sale of real estate secured loans, Article 9’s explicit recognition that lenders want perfected security interests in tenant letters of credit, and notice that certain sections of Article 9 may not be waived. As to this last issue, the authors make the nice point that attorneys drafting lender’s legal opinions “may want to add a general qualification to the opinion stating that the enforceability . . . is subject to the provisions of section 9-602 [the anti-waiver section].”

Commercial Leasing. Anton N. Natsis, Michael S. Greger, and Michael E. McFadden worry about the enforceability of lease credit enhancements when commercial tenants file for bankruptcy in Credit Enhancements in Commercial Leasing Transactions: Lessons Learned from the Lines of Dot.Com Bankruptcies and Proposed Legislative Resolutions, 35 Loy. L.A. L. Rev. 787 (2002). “Credit enhancements” are financial devices provided by tenants to landlords to assuage landlord concerns about the tenants’ financial soundness and include letters of credit, lease bonds, certificates of deposit, and cash. Dot coms and other high-tech tenants often fail basic tests of credit worthiness (availability of substantial assets and operating history). Although commercial landlords might be satisfied with the provision of credit enhancements, recent bankruptcy cases suggest that these devices may be subject to attack and invalidation following the filing of the tenant’s bankruptcy petition. The authors briefly explain the effect on tenant credit enhancements of the automatic stay, defaults occurring because of a bankruptcy filing ( ipso facto defaults), limitations on landlords’ damages, preferences, and the general equitable powers of bankruptcy courts. As to the latter, the authors correctly fret that bankruptcy courts occasionally employ Code § 105(a) (providing courts with the power to take actions “necessary or appropriate to carry out the provisions” of the Code) to enjoin draws against tenant letters of credit. The authors then propose a series of revisions to the Code to insulate these devices from invalidation or modification. The authors suggest that their recommended changes will be ultimately beneficial for tenants; they argue that commercial landlords will be increasingly unwilling to lease to these credit unworthy tenants in the absence of modifications to the Code. Whether tenants will view the authors’ suggested revision to the Bankruptcy Code in such a positive light remains to be seen.

Conservation Easements. In her article, Perpetual Restrictions on Land and the Problem of the Future, 88 V a. L. Rev. 739 (2002), Julia D. Mahoney treats a topic that has been the subject of several summaries in this column, namely conservation easements. As Mahoney explains, conservation easements (or conservation servitudes) preserve real property for ecological and other social purposes by permitting landowners to transfer nonpossessory and (often) perpetual rights to limit the use and development of real property to nonprofit and governmental organizations. She admits that this practice has gained currency among scholars and environmental lawyers and now covers more than 2.6 million acres. Mahoney compares this mechanism to traditional regulatory and transaction-based conservation mechanisms and finds the perpetual servitude wanting. According to Mahoney, a perpetual servitude saddles future generations to social expectations and scientific knowledge common when the servitude arises. Environmental servitudes ultimately come to represent a kind of dead hand control of the environment. Mahoney does a thorough job of explaining the historical development of these servitudes and then fires a shot across the bow of those pushing for wider adoption of conservation easements.

Single Asset Bankruptcy. In One Size Fits Some: Single Asset Real Estate Bankruptcy Cases, 87 Cornell L. R ev. 1285 (2002), Kenneth N. Klee takes aim at recent legislation repealing the $4 million cap contained in the definition of Single Asset Real Estate (SARE) in Bankruptcy Code § 101(51B). This legislation has passed both the House and Senate, but as of this writing has not been signed into law. As Klee explains, the Bankruptcy Code singles out SARE for expedited treatment, to the displeasure of SARE debtors. Eliminating the cap will “subject large real estate projects with complex capital structures and operating problems to the same reorganization process as a five unit apartment house.” In addition, a revision to the SARE definition strips “an important protection the Bankruptcy Code offers developers or owners with liquidity problems.” Klee’s article is important because it offers empirical support for his opposition to elimination of the cap. Klee examines confirmation rates of reorganization plans for the twenty years preceding the article, and discovers that larger debtors (with debts exceeding the cap) had higher confirmation rates. According to Klee, this finding justifies varying treatment of large and small SARE debtors. In fact, Klee finds something of a magic number. “Based on the raw data, it appears that somewhere between $7 million and $8.2 million in property value there is a flexion point above which the likelihood of confirmation increases substantially.”

Takings. Roderick E. Walston examines the intersection of the Takings Clause and the Due Process Clause in The Constitution and Property: Due Process, Regulatory Takings, and Judicial Takings, 2001 Utah L. Rev. 379. According to Walston, substantive due process requires courts to examine the merits of a governmental action. By contrast, the Takings Clause requires payment for property if it is taken for a public use, “regardless of the merits of the regulation.” Walston argues that regulatory takings theory that has developed in Supreme Court opinions has “effectively merged” these two clauses. This jurisprudence has emerged, at least in part, from the decline in substantive due process “as a vehicle to determine the validity of government economic regulation, particularly the regulation of property.” The most interesting feature of this article is not its history of substantive due process and regulatory takings. Instead, the most inventive part comes at the end of the article, when Walston asks the following question: “whether federal constitutional questions arise when state courts change their definitions of property by determining that ‘property,’ once recognized under state law, no longer exists”? Walston concludes that the Due Process Clause, but not the Takings Clause, should limit these state court determinations.

Takings. The University of Hawaii Law Review recently brought together an interesting array of lawyers and scholars for a symposium titled Symposium: Property Rights after Palazzolo , 24 U. Haw. L. Rev. 441 (2002). The symposium edition of the Law Review contains the following articles: David L. Callies, Takings: An Introduction and Overview, 24 U. Haw. L. Rev. 441 (2002); James Burling, The Latest Take on Background Principles and the States’ Law of Property After Lucas and Palazzolo, 24 U. Haw. L. Rev. 497 (2002); Steven J. Eagle, The Regulatory Takings Notice Rule, 24 U. Haw. L. Rev. 533 (2002); Robert H. Freilich, Time, Space, and Value in Inverse Condemnation: A Unified Theory for Partial Takings Analysis, 24 U. Haw. L. Rev. 589 (2002); and Thomas E. Roberts, Facial Takings Claims Under Agins-Nectow : A Procedural Loose End, 24 U. Haw. L. Rev. 623 (2002).

Books (Home Inspections). From the constitutional to the mundane: lawyers whose practices focus on residential transactions may be interested in a new book describing the business of home inspections. In The Home Inspection Book, The Real Estate Professional’s Guide to the Business of Home Inspection (2002), Marcia Darvin Spada describes, step by step, what an inspection must and should include, according to guidelines established by the American Society of Home Inspectors, Inc. A publication of Thomson/South-Western publishers, the book includes checklists, review questions, and the Standards of Practice and Code of Ethics for home inspectors.

Keeping Current—Property Editor: Eugene L. Grant, 1211 S.W. 5th Ave., Ste. 1600, Portland, OR 97204-3795, egrant@schwabe.com. Contributing editor: Daniel Bogart.