Monday, December 15, 2008

Waiver of Right to Arbitration in Texas

If you have an arbitration clause in an agreement, you may need to rethink using litigation as a discovery device or pressure tactic prior to seeking arbitration; because by doing so, you may unintentionally waive your right to arbitration. The Texas Supreme Court recently ruled that a party can waive its right to arbitration by pursuing litigation. (Perry Homes v. Cull, 258 S.W.3d 580 (Tex.2008). In Perry Homes v. Cull, there was an arbitration clause in the warranty agreement purchased by the Culls. However, when problems arose, the Culls filed suit rather than seeking arbitration. Perry Homes requested arbitration which the Culls vigorously opposed. After fourteen months of discovery and right before the case was set for trial, the Culls, who had opposed arbitration all along, requested the Court to compel arbitration. The Court granted the Culls’ motion, and over objection of Perry Homes, the case was sent to arbitration. The Culls obtained a large award against Perry Homes in arbitration. Perry Homes argued that the Culls had waived their right to arbitration by substantially invoking the judicial process. Through appeals, the case went all the way to the Supreme Court. The Court used a two part test to determine whether the Culls’ right to arbitration had been waived. In order for a party to have waived its right to arbitration, it must be found that the party substantially invoked the judicial process and that the opposing party was prejudiced. A party is prejudiced when there is an inherent unfairness in the terms of delay, expense, or damage to a party’s legal position because the opposing party forced an issue to litigation but then later seeks to arbitrate the same issue. In this case, the Court found that Perry Homes was prejudiced because the Culls had opposed arbitration and engaged in extensive discovery, even using the Court to compel discovery, but then switched to arbitration right before trial.

Monday, November 24, 2008

Contracts and Attorneys' Fees in Texas

In a breach of contract, the breaching party may be ordered by the court to pay reasonable and necessary attorneys' fees if it meets the requirements of Texas Civil Practice and Remedies (CPRC) Section 38.001. It should be noted that a party that does not have the ability to pay may also not have the ability to pay attorneys' fees, so it may be advised to not consider it an "absolute" that you, as the victorious party to a breach of contract case, will automatically be able to get the attorneys' fees back, even if it is authorized by the court. It should be noted that in other cases, unless authorized by statute, prevailing litigants are not entitled to attorneys' fees unless authorized by statute, so it is important to discuss these issues with your attorney when the decision is made to begin litigation proceedings if you are unsure.

Saturday, November 22, 2008

Real Property Division in Divorce in Texas

One of the more difficult assets to divide during a divorce is that of real property, such as the marital homestead. The reasons for the difficulties include: (1) the fact that both of the parties reside in the home, (2) it can accumulate a substantial amount of equity, and (3) there is usually secured debt upon the residence (mortgage, home improvement loans, or home equity financing). As a result, most personal property, stocks, bonds, and financial accounts are easier to split up. There are potentially many ways to deal with real estate.

However, in the situation where the divorcing spouses jointly own a single, marital residence, descriptions of the two most common ways to deal with the house:

(1) Sell The Home: The home can be listed for sale with a real estate broker and sold. The net proceeds of the sale (if any) would then be divided between the spouses as any other asset of the marriage. This is certainly the simplest way to go. It promotes certainty, it is easy to figure the equity, and it removes a significant liability and the entanglements that come with joint ownership and the joint liability. However, it will displace the family, including the children from the home. As a result, it will likely be the most disruptive. The other downside with selling the home is that there are usually significant closing costs with the sale and disposition of real estate. These expenses will be duplicated three times if each of the spouses are going to then buy their own home after the divorce.

(2) Conveyance to the Other Spouse: The second most common option regarding the marital homestead is a conveyance from one spouse to the other. Usually when children are involved the "primary" parent is the one that stays in the house. For example, in one of the the most common scenarios, the Wife stays in the home with the children and the Husband moves to an apartment. In this example, the Husband would sign a Deed (what is generally referred to as a Special Warranty Deed) and the Wife would then own the home outright. Most people understand that one spouse then owns the home, but many people do not understand what happens with the secured debt on the home.

WHAT ABOUT THE SECURED DEBT? Occasionally, the Judge will Order that the spouse who received the home refinance it (or the parties will agree to this), but oftentimes (due to high-interest rates, lack of credit, lack of income to justify the mortgage ratios, or, as we have now, the possibility of a lack of available lenders and funding) the acquiring spouse will not be able (or it will not be economically feasible) to refinance the home. What many people don't realize in this situation is that just because the home is conveyed from one spouse to the other, does not mean that the conveying spouse is no longer liable for the debt. The spouses and the Court cannot modify the contractual rights of the Mortgage Lender. Additionally, unless there is substantial equity in the home, and, in part, due to the fact that during a divorce the lender will be concerned regarding repayment, it is very rare that the lender would be willing to release the conveying party.

In this situation, the family law lawyer can assist by preparing the documents necessary to equalize the rights of the parties. In essense, the acquiring spouse will "asssume" the mortgage indebtedness. The conveying spouse will then receive a Deed of Trust to Secure Assumption (DOTTSA) - signed by the acquiring spouse. The Deed of Trust to Secure Assumption will allow the conveying spouse to foreclose his or her own lien, reacquire the property, and then either refinance, cure, or pay-off the note(s) owned by the Lenders (and potentially any other liens that have been placed upon the property).

A "Second lien" is what is held by the conveying spouse. This type of lien is generally "inferior" to that of the "superior" Purchase Money Security Interest that will be held by the Mortgage Lender. Because of the fact that the lien held by the conveying spouse is inferior, it is important for this spouse to notify the Mortgage Lender of this lien (preferably in writing) so that in the event of a foreclosure, the lender will notify the inferior lien holder of the impending foreclosure. This will allow the spouse holding the inferior lien to cure any defaults and then foreclose him or herself. The foreclosure will be "subject to" the lien held by the Mortgage Lender. In other words, the primary note will still have to be refinanced, paid-off, or sold with the new buyer then "assuming" the Note and making the payments. Because of the relative speed at which a Mortgage Lender can foreclose (potentially 45 days with a residence, and even less on non-residential property), it is important to keep up with the status of the loan.

WHAT ABOUT THE EQUITY? Because the spouses can build up a substantial amount of equity through: (1) payments on the mortgage, (2) an appreciation in value of the home, and/or (3) home improvements (sometime referred to as "sweat equity," many times the spouses are confronted with the difficult task of attempting to fairly dividing the marital assets when the marital residence has substantial value. This is generally accomplished inat least three ways.

(1) Refinance the Home and Pay Cash. The first way, as discussed above, is to do a refinance of the home and take the "cash out" option. If this can be done it is the easiest way, but, as addressed above, sometimes the acquiring spouse will not be able to make use of this option.

(2) Offsetting Assets. The next way to do this is with offsetting assets. For example, if there is a retirement account or another assets with substantial value the other spouse can receive this asset, rather than equity out of the home.

(3) Owelty Note. An "Owelty" Note -- think of it as "I Owe" -- is one of the ways to accomplish the equalization. In this option, the conveying spouse would, in essence, become a secured lending for his / her spouse. The Note can carry with it any number of terms as with any other Note, such as interest only payments, a balloon, equal month payments, or other financial options. You will want to discuss these potential options with your attorney to come up with a plan that works for everyone. Again, this type of Note would be a second lien and have the peculiar problems associated with this type of Note. This option also requires more involvement by the family law lawyer, but it is a relatively easy way to equalize the equity.

Thursday, November 6, 2008

Personal Property Lease Termination

When personal property is the subject of a Lease Agreement (“Lease”), the Lessor (or owner of the property) should initially look to the default provisions and consider terminating and/or accelerating the Lease payments at the initial stages of attempting a work out with a delinquent Lessee. This is true for two reasons: (1) after putting pressure on the Debtor, he may file a bankruptcy and the owner of the personal property will then be dealing with the “assumption or rejection” provisions of the Bankruptcy Code, and/or (2) when the Lessor attempts to repossess the property, prior to terminating the Lease, the Debtor may seek the intervention of a State Court judge by obtaining a Temporary Restraining Order or other injunctive relief. Either of these two scenarios can be expensive and will delay relief to the Lessor.

The Lessor should carefully consider its initial options and review the Lease documentation prior to the making of threats or the sending of threatening letters to a distressed Debtor that might trigger one of these two options to try to hang on to the property. This is especially true for highly valuable personal property (for example - construction equipment and/or modular buildings, etc) which may be integral to a Lessee’s business. The Creditor’s communications with the Debtor should not simply be viewed as an attempt to get them to pay, but rather a complex game of chess where the Creditor is setting up the next move.

Depending upon the documentation in the Lease, the Lessor may be able to utilize one (or all) of the following options (and perhaps others): (1) demanding payment, (2) giving notice of intention to accelerate the indebtedness, (3) accelerating the indebtedness, (4) demanding the return of the property, (5) demanding the right to inspect the property at a given time and place, and/or (6) terminating the Lease. Consideration should be given as to whether the Debtor is complying with the terms of the Lease or other documentation under the Lease, including requirements to maintain insurance, not damage the property, remain solvent, provide financial statements, or avoid actions which might result in the Lessor deeming itself insecure. The Lease documentation is important for determining what constitutes an “event of default” for these purposes. By doing so, the Lessor may be able to document a default that has occurred before an imminent Bankruptcy filing.

Before the sending of any of these types of notices or upon hearing that a bankruptcy is a possibility, the Lessor will want to consider all of these matters and, only then, communicate with the Debtor anticipating the Debtor’s next move. If the Creditor makes the wrong move, it may be stuck with the Lessee being able to keep the collateral for extended periods after an injunction, Automatic Stay, or potential acceptance under the Bankruptcy Code.

In the Bankruptcy context, the Debtor (or Debtor-in-Possession, or Trustee) has extensive powers, options, and, importantly, additional time to exercise the options. See 11 U.S.C. § 365. If the Lease (or Executory Contract) has not yet expired, been cancelled or terminated, then the Trustee (subject potentially to Court approval and some exceptions) may be able to assume or reject the contract on behalf of the Debtor. The Trustee may even be able to assume and assign the contract. Documenting the prior default becomes especially important in dealing with the Trustee, because when the Debtor is in default, the Trustee may be required to cure, compensate (or provide adequate assurances of such) prior to being able to exercise acceptance or assumption remedies. As a result, and significantly, if the Lessee is able to terminate and cancel the Lease, then the Lease may no longer be considered executory or unexpired, may not be “Property of the Bankruptcy Estate,” and, therefore, the Debtor (and Trustee) will have reduced rights with respect to the leased property. The Creditor may still have to file a Motion to Lift the Automatic Stay under Section 362 of the Bankruptcy Code, but obtaining this relief will likely be much easier with the defaults documents and/or the Lease terminated.

(Post by Erik Cary)