Texas Commercial Law Blog

Complying with Standards for Accessibility by Persons With Disabilities

2012-01-23T08:34:00.000-08:00

Texas’ statutory standards for accessibility by individuals with disabilities to privately owned buildings, including commercial establishments are contained in the Texas Accessibility Standards (TAS) of the Architectural Barriers Act. A copy of TAS is here. TAS substantially follows federal standards for accessibility established under the Americans With Disabilities Act (ADA). As one might expect, TAS is lengthy and complex, replete with exceptions, exemptions, minimum requirements and alternative guidelines.

Compliance is generally monitored and enforced by the Texas Department of Licensing and Regulation, which has established its own regulations and guidelines related to accessibility. However, persons with disabilities may also bring a private lawsuit to seek enforcement of TAS and/or damages for being denied access to a business establishment. Various civil rights organizations also pursue claims on behalf of individuals with disabilities to ensure that all public establishments remain open and accessible.

Many business owners are surprised to find themselves served with demands or even litigation seeking enforcement of TAS for access in buildings which they do not own. Merely leasing the premises does not excuse a business owner from compliance with TAS.

When a business owner receives a demand or is served with a lawsuit concerning accessibility, it should conduct an immediate investigation and formulate a plan of action. Early identification of the issues and evaluation of possible alternative methods to ensure accessibility (such as signage identifying assistance available to persons with disabilities) often leads to significantly reduced costs for compliance, as well as decreasing the potential for an award of damages and attorneys’ fees.

A business owner should also seek assistance from outside sources. For example, your lease agreement may contain terms related to remodeling and renovation, or allocate responsibility for ensuring compliance with building codes such as TAS. If it does not, you may wish to negotiate such terms in future leases. Additionally, certain types of commercial insurance policies may provide the policy-holder with coverage related to accessibility claims.

Article by Cynthia W. Veidt, Attorney

Waivers and Releases for Liens and Payment Bond Claims

2011-12-19T15:47:00.000-08:00

During the 82^nd Legislative Session, House Bill 1456 was passed which provides statutory forms for waiver and release of mechanic’s liens and payment bond claims. Four statutory forms were created: (a) Conditional Waiver and Release on Progress Payment; (b) Unconditional Waiver and Release on Progress Payment; (c) Conditional Waiver and Release on Final Payment; and (d) Unconditional Waiver and Release on Final Payment.

The new law is effective for contracts entered into on or after January 1, 2012. In order for a waiver and release to be effective, the form of lien waiver and release must be in substantial compliance with the statutory forms.

The new law is set out in Subchapter L added to Chapter 53 of the Texas Property Code entitled “Waiver and Release of Lien or Payment Bond Claim.” The text of the new law can be found here.

Article by Sarah F. Berry

Disaster Remediation Contracts

2011-11-22T15:12:00.000-08:00

The 82^nd Texas Legislature passed House Bill 1711 to regulate “Disaster Remediation Contracts” which became effective on September 1, 2011. House Bill 1711 is now Chapter 57 of the Texas Business & Commerce Code and regulates contracts for “the removal, cleaning, sanitizing, demolition, reconstruction, or other treatment of improvements to real property because of damage or destruction to that property caused by a natural disaster.”

A disaster declaration is made by the governor and a recent example would include the wildfires throughout Texas. Other examples would include hurricanes and tropical storms that devastated the Gulf Coast.

The new legislation requires a written contract that includes specific terms and disclosures. Failure to comply is a “Deceptive Trade Practice” under Chapter 17, Texas Business & Commerce Code and can result in a wide range of penalties.

There are a few exceptions to the applicability of the new legislation. Notably, the new statutory requirements do not apply to “local” contractors which are contractors that maintained a physical business address in the county in which the property is located or a county adjacent to the county in which the property is located for at least one year preceding the date of the contract.

If you are soliciting contracts in areas under a disaster declaration, you should review your contracts to ensure that the new required terms and disclosures are included.

Article by Sarah F. Berry, Attorney

How is a Promissory Note Different from a Forbearance Agreement?

2011-08-15T14:42:00.000-07:00

Under Texas law, a promissory note “is a written unconditional promise to pay another a certain sum of money at a certain time.” (Edlund v. Bounds, 842 S.W.2d 719, 724 (Tex.App. —Dallas 1992, no writ). The time need not be a specific date, but it must be a time that will certainly arrive. For instance, a note payable on demand or “on or before” a specified date may constitute a promissory note. A promissory note is also a contract subject to the rules applicable to interpreting contracts. DeClaire v. G & B Mcintosh Family Ltd. P’ship., 260 S.W.3d 34, 44 (Tex.App.—Houston [1 Dist.] 2008, no pet.).

The difference between a promissory note and a forbearance agreement is that a forbearance agreement is an agreement not to enforce rights you already have.

A forbearance agreement is an agreement typically between a creditor and a debtor whereby the creditor agrees to forgo some legal right in return for concessions from a debtor who is in default. Swilley v. City Inv. Co., 288 S.W. 485, 486 (Tex.Civ.App.—Galveston 1926, writ ref’d) (explaining that forbearance of a legal right is sufficient consideration for a promise of guaranty). A forbearance agreement is a powerful tool for creditors who face debtors in or near default on their obligations, and often should be used in lieu of entering into a promissory note.

In a typical forbearance agreement, a creditor will agree not to sue on a balance due in exchange for certain concessions by the debtor, such as an increased interest rate, as well as various admissions that can prove invaluable to a creditor should the debtor fail to fulfill the terms of the agreement.

It may also contain the remaining balance on the indebtedness, and an admission that the debtor is in default. A creditor might also receive an increased interest rate and a waiver of various notice requirements in the event of a future default. The agreement typically will also contain a provision that allows the creditor to reassert the rights that have been forgone under the agreement should the borrower fail to make a payment, or fail to fulfill any obligation of the agreement by a certain date. If this occurs, the debtor’s signed admissions concerning the original note could prove invaluable in a lawsuit.

Prepared by Chris Patterson. Reviewed and revised by Marc L. Lippincott.

Charging Interest in the Absence of a Contract Term for Interest

2011-07-05T15:49:00.000-07:00

The best practice for businesses supplying goods and services on credit is to include a contractual provision regarding interest. However, a creditor can charge interest if there is no contract provision regarding interest. Under Texas law, this is called legal interest. Legal interest does not begin to accrue until 30 days after the debt was originally due, and it accrues at a rate of six percent a year. The legal interest rate of six percent per year is simple interest. That is, the interest accrued each year is not compounded by adding it to the principal balance before computing the interest due in each subsequent year. This interest rate is actually “read into the agreement” and becomes the maximum rate that may be charged.

A lender must be careful not to charge in excess of six percent in the absence of a contract provision to do so. Charging a higher rate of interest may result in penalties for usury. Unilateral charging of interest by the lender, even with advance notice, is not enough to establish an agreement to pay interest at a rate greater than the legal rate of six percent.

If a lender charges more than twice the amount allowed by law, or 12 percent, he or she may be subject to penalties under Texas law. These penalties include forfeiture of the principal amount of the loan, reimbursement of any amounts paid by the debtor that was subject to the usurious interest rate, and three times the amount of usurious interest charged, even if the interest was never collected. The lender may also have to pay the debtor’s attorney fees.

Blog prepared by Chris Patterson.

Blog reviewed and posted by Sarah F. Berry.
http://www.carylippincott.com/Attorney_SarahBerry.php

What is a Texas PLLC?

2011-05-24T08:36:00.000-07:00

PLLC stands for “professional limited liability company.” In fact, PLLCs are nothing more than LLCs (limited liability companies) that perform a professional service. Of course, this explanation is meaningless without first understanding the form and function of an LLC in Texas.

Choosing a business form is one of the most critical decisions that a fledgling business must make. There is no shortage of options: the sole proprietorship, general partnership, limited liability partnership (LLP), limited liability company (LLC), and corporation are just a few of the many business forms available to choose from.

Yet among this myriad of choices, one business form has skyrocketed in popularity in the last decade: the LLC. Relatively speaking, the LLC is a recent business innovation. It was created by legislatures to combine three highly desirable characteristics of businesses: (1) limited liability to owners; (2) pass-through tax treatment; and (3) flexible management structure.

Limited liability to owners is a characteristic that LLCs share with limited liability partnerships (LLPs) and corporations. This means that one owner of the business cannot automatically be held liable for another owner’s wrongdoing. Depending on the nature of that wrongdoing, the suing party may be able to recover from the LLC’s assets, or personally from the business owner at fault, but he or she cannot automatically recover personally from a business owner who was not involved. This may seem intuitive, but sole proprietorships and general partnerships—even today—do not shield innocent business owners in this way.

Pass-through tax treatment is a characteristic shared by nearly all business forms except for the Subchapter C Corporation. This is only to say that LLCs are not “double-taxed.” LLC business owners only pay income tax on their own income—they do not need to pay an additional tax on the LLC’s overall income.

Flexible management structure is the hallmark of the LLC. Most other business forms in Texas are bound by numerous statutory requirements. And while many of these requirements are “subject to agreement otherwise,” some provisions cannot be contracted around. In contrast, LLCs experience virtually complete freedom of contract regarding which terms they can dictate for their business. They are even able to disclaim the fiduciary duty of loyalty that would otherwise exist between business partners.

So how is a PLLC any different from a regular LLC? The only essential difference is that PLLCs are founded by “professionals” to conduct business within their profession. Texas law considers the term “professional” to include areas in which a license is necessary to practice (such as physicians, architects, and attorneys). But why would professionals chose a PLLC instead of an LLC? Simply put: Texas law says they have to.

The distinction is perhaps because lawmakers thought it necessary to reign in the near-absolute freedom of contract possessed by LLCs. Professionals are generally held to a higher standard than other occupations, and so it would seem counterintuitive to allow them to disclaim fiduciary duties to other partners or to clients.

The formation of a PLLC is governed by a separate provision of the Texas Business and Commerce Code than that of an LLC. Aside from this fact, the precise difference between a PLLC and LLC in practice is not obvious. It bears reemphasizing that LLCs and PLLCs are relatively recent business innovations, and case law—as well as statutory provisions—will likely continue to develop over the next several years.

***This article was prepared by Matt Lloyd and edited by Chloe Love.

Individual State Tax Liabilty for Corporate Officers

2011-01-15T17:49:00.000-08:00

The reason that most corporations are formed are to provide limited liability to its shareholders, and to shield officers and directors of small businesses from many liabilities of those companies. However, there are some distinct areas where shareholders may have liability for the actions of the company.

One of the most common "veil piercing" comes up in situations where a company collects sales taxes as part of its operations. Many officers and directors of companies do not realize that they can be held individually liable for taxes collected and not paid to the state. An example of this, and a good discussion related thereto, can be found in the case State of Texas v. Crawford, a recent case out of the 3rd Court of Appeals in Texas.

The statute dealing with individual liability for tax collection is found in the Texas Tax Code Section 111.016 (emphasis added):

§ 111.016. PAYMENT TO THE STATE OF TAX COLLECTIONS.
(a) Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected.

(b) With respect to tax or other money subject to the provisions of
Subsection (a), an individual who controls or supervises the collection of tax or money from another person, or an individual who controls or supervises the accounting for and paying over of the tax or money, and who wilfully fails to pay or cause to be paid the tax or money is liable as a responsible individual for an amount equal to the tax or money not paid or caused to be paid. The liability imposed by this subsection is in addition to any other penalty provided by law. The dissolution of a corporation, association, limited liability company, or partnership does not affect a responsible individual's liability under this subsection.
(c) The district courts of Travis County have exclusive,
original jurisdiction of a suit arising under this section.

The Crawford facts are probably not that uncommon; that is, a party fails to property designate a contract as taxable in the accounting, but taxes are invoiced and collected. After a tax audit shows the error, the state seeks collection against a company that cannot pay the liability, and bank accounts get frozen. The twist here is that the State tried to claim that the officers wilfully failed to pay the tax, therefore they sought payment from the officers responsible for the taxes not getting paid. Although here the court found that the business owners did not wilfully withold payment, but they do state that knowledge of the failure to pay is not required to find wilfullness.

But if you are an officer of a company, be aware that you may be held liable by the state for failure to pay state taxes (which would include payroll and sales tax collections) should the company fail to remit.

Pre-Authorization of UCC 1 Financing Statement

2010-10-06T10:49:00.000-07:00

The typical loan/credit scenario unfolds that a creditor will run various credit checks on a potential debtor and, as part of that search, will run a search of all existing UCC financing statements on the debtor. After approval, the creditor will then prepare documents, set up the customer, and prepare whatever business preparations are necessary for that creditor's line of business. The credit department, having done its due diligence, then green lights the transactions knowing that they are holding a first lien position and away we go.

However, this particular scenario can cause some probems since many things can happen to the debtor after they apply for credit and before the actual purchase of the goods intended by the loan transaction. Even setting aside those nefarious characters out there, even honest business people, particularly when setting up a new business, are applying for credit at all sorts of institutions. So what is a prudent credit department to do?

Well, best practices would dictate that not only should a creditor "re-check" the UCC statements and credit reports prior to first shipment (depending on the length of time of the delay that is typical between that business approving credit and first delivery), there is one other way to ensure the best lien position possible. What is that?

Pre-filing the financing statement (UCC-1).

In Texas and under UCC 9-509(a)(1), a creditor can pre-file a UCC-1 financing statement with authorization from the debtor. What's more, the "first in time" rule, even if the transaction is later consummated, would allow the creditor to be ahead of any subsequent filed similar UCC-1 financing statements (unless they have special priorities, like purchase money security interests).

So how does one get authorized? Well, there must be some intent from the debtor to grant some future security interest, so getting the debtor to sign a "pre-authorization" letter (or you could include same conspicuously in your initial credit application) should do the trick. Basically, if the debtor authorizes the pre-filing in writing, you will meet the standards of 9-509(a)(1). A simple signed letter can also do the trick. Now it should be noted that you will still have to terminate the financing statements according to the rules as if the transaction occured should the transaction not occur.

So don't wait for the loan file to be complete before filing your UCC-1's...file the financing statement at the very beginning and establish / lock in your security interest priority.

Under What Circumstances are Texas Businesses Required to Pay Franchise Taxes?

2010-07-06T12:27:00.000-07:00

A business that is considered a taxable entity is required to pay a state franchise tax if it is a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity.

A business that is not considered a taxable entity does not have to pay a state franchise tax if it is a sole proprietorship, or a general partnership that is directly and solely owned by natural persons, unless it is a limited liability partnership. (A natural person is a human being as opposed to a legal entity, such as a corporation, limited liability company, partnership or trust.) Also, a business is not a taxable entity if it is an exempted or passive entity as defined by the Texas Tax Code. Exemptions from federal taxation may also be granted under Internal Revenue Code (IRC) Section 501(c) (2), (3), (4), (5), (6), (7), (8), (10), (16), (19) or (25). If your business has not received this federal exemption, it may still qualify for exemption from the franchise tax. For more information about whether your business is exempted, visit the Texas Comptroller of Public Accounts website. (http://www.window.state.tx.us/taxinfo/franchise/)

A business is a passive entity if it is a general or limited partnership, it does not receive more than 10 percent of its federal gross income from conducting an active trade or business, and at least 90% of the entity's federal gross income comes from specified passive sources such as dividends, interest, income from a limited liability company, distributive shares of partnership income, gains from the sale of property, commodities, and securities, and royalties, bonuses, or delay rental income from mineral properties and income from other non-operating mineral interests.

Trusts (except business trusts) and estates of natural persons are not considered taxable entities. More information, such as due dates, rates, discounts, forms, and other important details can be found at the Texas Comptroller of Public Accounts website listed above.

***This article was prepared by Sarah Raley,

and edited by Chloe Love.

Trademark & Domain Name Disputes

2010-04-14T09:27:00.000-07:00

Under Texas law, a domain name dispute could potentially lead to a trademark dispute. A trademark is, “a word, name, symbol, device, slogan, or any combination thereof that, whether registered or not, has been adopted and used by a person to identify his or her goods and distinguish them from the goods manufactured or sold by others.” A person commits trademark infringement if, without the registrant’s consent, he uses a reproduction, copy or imitation of a registered mark in selling or advertising goods when such use is likely to cause confusion with the likely source of the goods. A person may also bring suit against a party for actions likely to dilute the distinctive quality of a mark. Texas courts have determined that a domain name can violate the statute prohibiting trademark dilution.

Courts applying Texas law have determined that “dilution arises when a subsequent user uses the trademark of a prior user for a product so dissimilar from the product of the prior user that the subsequent user will lessen the uniqueness of the prior user's mark.” To recover, the owner of the tradmark must show that it owns a distinctive mark and dilution is likely. Distinctiveness can be proved by showing uniqueness of the mark or that it has acquired a secondary meaning. A secondary meaning means that the public has come to associate the trademark with a given entity.

For example, in a 2001 Texas case, the owner of the trademark “Ernest and Julio Gallo” sued a domain name owner who had registered ernestandjuliogallo.com. The court held that the name was distinct and it had a secondary meaning and further found that the value of the trademark was likely to be diluted because the defendant owning the domain name denied the plaintiff of the ability to use its mark to serve as a unique identifier for its goods. The defendant’s website used Gallo’s trademark in a way that diverted potential customers to a website containing disparitive remarks about Gallo, tarnishing its trademark. A domain name dispute can become an issue of trademark infringement if the holder of the name denies the holder of the trademark of the right to exclusive use over their trademark. Because the domain name denied Gallo the right to exclusive use over their trademark and confusingly directed customers to a website harmful to them, potentially weakening their trademark, the court applied Texas law and determined that a violation of the dilution statute had occurred.

So, under Texas law, a domain name dispute could lead to a trademark infringement suit if the trademark is distinct and has a secondary meaning, and the owner of the domain name denies the owner of the mark of exclusive right over their trademark and/or uses it in a way that will dilute or weaken the trademark.

** This article was prepared by Zachary Popovich and edited by Sarah Berry.

Should my company hire unpaid student interns?

2010-04-09T07:25:00.000-07:00

What criteria determine if an internship can be unpaid?

First, governmental agencies and non-profit entities can almost always hire student and professional interns or employees without the obligation to pay those employees a minimum wage. Second, once students have graduated from their school of choice with a degree in their field, they may elect to volunteer their time with any employer they so choose. This is true for lawyers, doctors, accountants, and even teachers. Third, if a student intern receives school credit for an internship, it is almost never in violation of the law.

In the case of student interns, they must be paid a fair wage under the Fair Labor Standards Act (FLSA) unless the position can be properly designated as that of “trainee”. In order to be considered a trainee under the FLSA, six criterion must be met:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school.
2. The training is for the benefit of the trainees.
3. The trainees do not displace regular employees, but work under close observation.
4. The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion his operations may actually be impeded.
5. The trainees are not necessarily entitled to a job at the completion of the training period.
6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

Thus the vast majority of student internships do not meet the standards for “trainees” under the FLSA.

What are the risks to the employer if they do not adhere to these criteria?

If an employer does not adhere to these criteria, they may find themselves faced with complaints filed with the Department of Labor (DOL) by their intern/employees. The DOL will then investigate and make a ruling, and if it determines that the employer owes the employee back wages, it may enforce the ruling by a variety of methods:
· conciliation - if the DOL can persuade an employer to cooperate, it may supervise a settlement of the claim between the employee and employer, in which case the employer may be able to escape with only liability for back pay (Section 216(c);
· civil action for back pay and damages - the DOL may sue on an employee's behalf to recover back wages and liquidated damages (Section 216(c);
· injunction - the DOL may apply for an injunction to restrain further violations by the employer or to restrain the sale or transfer of goods produced with labor that was compensated in a way that violated the FLSA (Section 217);
· criminal action - under 29 U.S.C. 216(a), the U.S. Department of Justice may bring a criminal action against an employer in the case of a willful violation of the FLSA; and
· civil actions by employees - employees have the right to file suit in a court of competent jurisdiction to protect their rights under the FLSA (29 U.S.C. 216(c)).
The employer may also face additional penalties under their relevant state’s laws.

Do you have examples of unpaid internships that clearly should be paid internships?

Any time an employer hires an unpaid student to do a job that would otherwise be performed by a paid employee they run a risk of violating the law. These types of illegal unpaid internships are widespread in certain industries such as fashion, publishing, and journalism. http://fashionista.com/2010/04/will-prohibiting-unpaid-internships-kill-the-fashion-industry/ If the purported “trainee” is doing nothing more than menial labor, it is very likely that there is a violation of the FLSA.

What recommendations do you have for employers that want to offer unpaid internships?

Adhere to the six criteria above! First, provide your interns with valuable training. In the legal industry this can mean critiques of interns’ work product and tips on how to be better writers. Second, don’t rely on unpaid interns to run your business. If a certain task is critical to your business, it should be performed by a paid employee or a licensed volunteer. Third, have your interns sign an internship agreement that explicitly states that they will not be paid for their time.

What recommendations do you have for those seeking them?

Come to your unpaid internship with an open mind, but also know what you want to get out of the position. Ask questions of your employer, and let them know if you feel like you’re not receiving valuable training. If you’re only taking the job to expand your contacts within your chosen field, you probably don’t want to rock the boat for fear of long term repercussions. If your employer has made it clear that they are not interested in paying you and will not provide you anything of value in exchange, quit that position and move on.

Why do Texas businesses incorporate in other states?

2010-03-16T08:58:00.000-07:00

Many businesses benefit from incorporation. Limited liability, an unlimited lifespan, and various tax breaks are advantages every corporation enjoys. All incorporation, however, is not created equal. Every state has its own laws governing the formation and operation of corporations.

A business may incorporate in any state it chooses, regardless of where it is physically located. It should come as no surprise, then, to learn that many businesses are incorporated out of state in order to take advantage of another state’s business laws. Of all such states, none has proven more alluring to corporations than Delaware. Nearly a million business entities have legal foundations in Delaware, and that includes over half of all the Fortune 500 corporations.

Why Delaware? There are three major reasons. First, its laws are among the least restrictive to corporate decision making. For example, while many states, including Texas, require a two-thirds shareholder vote to affect most extraordinary corporate transactions, Delaware requires only a simple majority. Second, its courts are viewed as efficient and sophisticated in the area of corporate law and finance. Perhaps Delaware’s most distinct advantage is its Court of Chancery, which can date its existence back to 1792. Over the years this court has compiled well-recorded case law in corporate matters. Combined with the fact that judges rather than juries sit as the decision makers, corporations have ample confidence in the courts of Delaware. Third, the public sentiment is generally pro-corporation. People and elected officials understand that a substantial amount of the state budget comes from fees and taxes associated with businesses incorporated there, so state laws are geared towards maintaining this reputation.

If you think this is why Texas businesses incorporate in other states, you are only partially right. In reality, many do not incorporate elsewhere. For smaller or purely local businesses, there are several reasons to incorporate right here in Texas. Perhaps the biggest reason is that businesses incorporated out of state must qualify as “foreign corporations” where they do business. Since there are fees and taxes associated with this process, it often becomes more of a financial burden than benefit for smaller businesses to incorporate out of state. Another reason is that businesses incorporated in Delaware can be subject to lawsuit there. As a result, business owners may be hauled into a courtroom hundreds of miles away from their place of business (and residence for that matter). Finding a lawyer locally licensed in Delaware, or familiar enough with Delaware corporations to advise on corporate structure changes (or the expense of hiring Delaware counsel in addition to Texas counsel), is also a reason to register locally and form under Texas laws.

It is also important to understand that Texas is arguably among the three most corporate friendly states in America (Delaware and Nevada being the other two). Texas and Nevada business laws are very similar to those of Delaware, if not preferable in many instances. Perhaps the only thing lacking in both Texas and Nevada is corporate confidence in the courts. Over time, however, it would not be surprising to hear one ask the question, “Why do so many businesses incorporate in Texas?”

**This article was prepared by Matt Lloyd, and edited by Chloe Love.

Adverse Possession under the Texas Five-Year Statute

2009-12-22T12:47:00.000-08:00

This blog entry is the third of a series related to adverse possession. Adverse possession is a legal principle under which someone can acquire ownership of real property that belongs to someone else. It is a form of “involuntary conveyance.”

The second shortest period for a claimant to assert adverse possession over real property under Texas law is five (5) years. In order to qualify for adverse possession under Section 16.025 of the Texas Civil Practice and Remedies Code, the claimant must:

* actually and visibly appropriate the property (in other words, take possession of the property in such a way that it is open and obvious);

* possess the property in a manner that consistently and unmistakably indicates the claimant asserts exclusive ownership to the property; and

* use or possess the property peacefully, but without the owner’s permission (in other words, scaring the owner off with a shotgun is not allowed), including:

(1) cultivating, using, or enjoying the property;

(2) paying applicable taxes on the property (before they become delinquent); and

(3) claim the property under a duly registered deed.

This statute does not apply in cases where a deed is forged or was executed under a forged power of attorney. It also does not apply to a “quitclaim” deed, a deed that is void on its face (because it fails to meet the legal requirements for a deed), or one obtained through fraudulent or dishonest practices. Interestingly, though, if the claimant obtained a deed that appears valid on its face and that was properly recorded, he could claim adverse possession even if the deed was executed by someone who had no actual title to or right to claim ownership to the property. For example, if you received a deed from Tom Jones which appeared to be valid, and you recorded that deed in the county’s real property records, you could assert adverse possession after five years (provided you met all of the other factors) even though Bob Smith was the real owner of the property.

There are several other statutes in the State of Texas which describe what factors must occur before a claimant can obtain title through adverse possession. As a result, adverse possession is a complex legal issue, and we strongly suggest that you seek the advice of an attorney (preferably someone versed in the litigation process, as well as real estate law) if you are confronted with either the need to assert or defend against a claim of adverse possession.

Adverse Possession under the Three-Year Statute

2009-08-21T13:29:00.000-07:00

This blog entry is the second of a series related to adverse possession. Adverse possession is a legal principle under which someone can acquire ownership of real property that belongs to someone else. It is a form of “involuntary conveyance.”

The shortest period for a claimant to assert adverse possession over real property under Texas law is three (3) years. In order to qualify for adverse possession under Section 16.024 of the Texas Civil Practice and Remedies Code, the claimant must:

* actually and visibly appropriate the property (in other words, take possession of the property in such a way that it is open and obvious);

* possess the property in a manner that consistently and unmistakably indicates the claimant asserts exclusive ownership to the property;

* use or possess the property peacefully, but without the owner’s permission (in other words, scaring the owner off with a shotgun is not allowed); and

* hold the property under title or “color of title.”

The key to the three year statute for adverse possession is the final factor listed above. In other words, the claimant must have received (1) a deed or other document reflecting title to the property, but his title is considered “irregular” because there is a document that is missing or has not been properly recorded, or (2) an unusual document, such as a certificate of headright, land warrant, or land scrip.

If all of these three things occur, the statute requires that the true owner to the property take action by bringing a lawsuit to recover the property within three years from the date that the claimant first enters the property, or else he will lose his ownership rights. In actuality, however, a title insurance company or buyer will likely request that the claimant sue the rightful owner or presumed owners and obtain a judgment reflecting title through adverse possession before they will agree to purchase the property from the adverse claimant.

There are several other statutes in the State of Texas which describe what factors must occur before a claimant can obtain title through adverse possession. As a result, adverse possession is a complex legal issue, and we strongly suggest that you seek the advice of an attorney (preferably someone versed in the litigation process, as well as real estate law) if you are confronted with either the need to assert or defend against a claim of adverse possession.

What is Adverse Possession and When Can It Help Me?

2009-07-22T07:27:00.000-07:00

This blog entry is the first of a series related to adverse possession. Adverse possession is a legal principle under which someone can acquire ownership of real property that belongs to someone else. It is a form of “involuntary conveyance.”

Adverse possession is defined by statute in Texas as “an actual and visible appropriation of real property, commenced and continued under a claim of right that is inconsistent with and is hostile to the claim of another person.” In other words, a person who does not hold title to real property can peaceably enter upon property owned by someone else and undertake actions (such as use of the property) that are inconsistent with and adverse to the rights of the property’s true owner. If the property’s rightful owner does not diligently attempt to stop the adverse claimant, he may find it difficult to transfer title to his property or even find that he has lost his ownership rights.

Adverse possession can be useful in a variety of situations which are more common than one might expect. For example, if land is occupied or operated by descendants even though title to the property was not transferred through probate from a deceased relative and probate is no longer an option, it may be possible to “clear title” through adverse possession. Adverse possession may be one way to obtain clear title in boundary disputes, such as when a surveyor has discovered that a fence or other structure has not been properly placed along the dividing line between two neighboring properties.

There are several statutes in the State of Texas which describe what factors must exist (and for how long) before a claimant can obtain title through adverse possession. As a result, adverse possession is a complex legal issue, and we strongly suggest that you seek the advice of an attorney (preferably someone versed in the litigation process, as well as real estate law) if you are confronted with either the need to assert or defend against a claim of adverse possession.

Austin Lawyer Tip: Five Problems with Form LLC Formation

2009-07-10T12:47:00.000-07:00

Many have asked the question, "why go to a lawyer when there is LegalZoom.com?" Well, for some sophisticated business persons with experience in corporate formation, it may be OK. But I have to say, having litigated a lot of disputes between co-owners of a business, LegalZoom.com is NOT a substitute for a lawyer (LegalZoom even admits this openly), and it is very often a pennywise and a pound foolish, emphasis on the foolish.

Now, I know many of you reading this may say, "of course, this is coming from a lawyer". True, I admit to some level of bias on this issue, but being biased doesn't mean I'm wrong.

Five Issues not typically dealt with in Form LLC Agreements

1. The problem of "OK, it's formed, I'm done"
There are many issues not usually dealt with in typical "form" LLC Agreements, but the worst thing is that most signers of LLC formation documents think that when the LLC is formed, everything is done. This is not true. There are so many other issues that need to be dealt with, including election of officers, delegation of duties, initial organization meeting, and many other discussions that need to take place. Now, the reality is that in single member LLC's, the member can do roughly whatever they please with the operation agreement at almost any time, but in two or multi-member LLC's, this is not the case. Think about how much easier it is to deal with issues such as one owner's death, divorce or bankruptcy than before said death, divorce or bankruptcy. Most form LLC agreements, particularly if only the certificate of formation is filed, do not adequately deal with these contingencies, or are not even reviewed by the members before signing the LLC agreement. Wouldn't you want to know whether you're going to be future business partners/co-owners with your business partner's husband or wife if they die? Wouldn't it be nice to know that a bankruptcy trustee will not hold the keys to whether your business can raise future capital? Yeah, I thought so.

2. The problem with the 50-50 ownership LLC
Split ownership sounds good..."hey we'll be partners!"...but in reality, what it means is that no one is really in control and it is management by committee. A properly drafted LLC agreement is a negotiation, and requires that the parties have dispute resolution built into their agreement, either through some sort of buy-sell agreement or arbitration/tie breakers. Nothing worse than a thriving business that is deadlocked on raising capital or operation directives. But Form LLC's are FILLED with them. And I don't get angry when I see them after disputes, I charge hourly to fight over them. But it is sad that this is almost always entirely avoidable with some element of design in the formation documents.

3. The problem with the money in the future
This is a constant problem in litigation with the "form LLC filers". At the beginning, everyone's happy. "Hey, Jimmie Joe, let's open a restaurant called JJSeras! It will be kicks!" "Sure thing, Sera Jean! Let's go halfsies!" All is fine and good. Until one of two things happens...(1)the restaurant does really well and there are disputes over speed of expansion and distribution (when one party stops working at the store), or (2) it totally does horribly and creditors are knocking on the LLC door. Well, if it goes bad, JJ and Sera are covered, right? Yeah, well, not if they had to personally guarantee the lease or credit facilities. And if JJ paid it all, but only owns 50% of the business still, how good does that make JJ feel? A properly done agreement deals with these issues before the dispute arises.

4. The problem with no exit strategy
Most people enter into LLC's with others without really thinking about how they will extricate themselves from it. How will one party buy out the other? How will it be valued? Very frequently form LLC agreements just don't deal with these issues, or are so basic that they really aren't designed for the parties involved and end up being useless. How about deciding on a person to do the valuation? How about agreeing to a system of valuators if there's no agreement? How about a buy-sell agreement?

5. The problem with majority rule
Many people who put investment money into an endeavor are not the ones running the show. Typically, those "money only" guys are doing this as an investment and gambling that JJ and Sera discussed above are going to give them a return on that investment, and are thus willing to be passive investors in the endeavor at a smaller percentage of interest. This makes the problem of the minority interest holder. I'm constantly amazed at people who put in thousands of dollars, get a minority stake, and when you look at the operating agreement, their interests are almost totally worthless because they can be practically eliminated by "majority rule". It sounds great on paper...but if you are a 10% holder, and the other guy owns 90%, and he can decide to dilute shares by "majority rule", well you're in for a heap of hurt.

It just makes sense to have attorneys review these documents. Typically it is not that expensive, and it just makes sense to have someone with experience reviewing those documents. Obviously, if you need assistance in a review, feel free to contact me at (512) 472-2300.

Marc Lippincott

Part 4: Public Works Contracts & Subcontractors: Prime Contracts Over $25,000.00 & Retainage

2009-06-02T15:31:00.001-07:00

Like in private construction projects, in public works projects, general contractors hold back part of the contract price until the subcontractor fulfills the contract as “retainage.” The amount withheld is a percentage of the total contract price, often around 10%. The retained money is supposed to be paid to the subcontractor after the public works contract (the contract between the governmental entity and the general contractor) is completed. If the general contractor does not pay the retained money, the subcontractor can file a lawsuit to collect on the payment bond; however, the subcontractor must first meet the notice requirements.

The subcontractor must give notice to the general contractor and surety on or before 90 days after final completion of the public works contract. The notice must include the amount of the contract, any amount paid, and the outstanding balance. Tex. Gov’t Code § 2253.046. The notices must be mailed by the proper method and to the proper addresses.

Once again, sending the notices timely, to the correct people, and with the correct content is crucial to perfect a claim retainage.

Texas law governing public projects can be found in Texas Government Code Chapter 2253 (formerly known as the McGregor Act) and Texas Property Code Chapter 53.

Please visit our blog again in a few days for Part 5: Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00 & Rights to Information.

Posted by Sarah F. Berry.

Part 3: Public Works Contracts & Subcontractors: Prime Contracts Over $25,000

2009-05-15T07:13:00.000-07:00

In reality, most public works projects are over $25,000.00 in value. When projects exceed $25,000.00 in value, the general contractor must post a payment bond in the amount of the prime contract for the protection of subcontractors and sub-subcontractors. Tex. Gov’t Code § 2253.021. If subcontractors are not paid by the general contractor, they can file a lawsuit to collect on the payment bond; however, before they can file suit, subcontractors must ensure that they have complied with strict notice requirements. If the notice requirements, including deadlines and content, are not properly met, the subcontractor will not be able to successfully sue to collect on the payment bond.

Subcontractors (those having a contract directly with the general contractor) must give written notice to the prime contractor and surety not later than the fifteenth day of the third month following each month in which the labor or material was provided for which the claimant has not been paid (often called the “Third Month Notice”). Tex. Gov’t Code § 2253.041(b). If this deadline is not properly met, the subcontractor will have lost its ability to prevail in a lawsuit. Furthermore, the notice must identify specific details such as: the labor or materials provided; who they were provided to; and when they were provided; in addition to other required information. Additionally, a sworn statement must be included verifying the amount due. Tex. Gov’t Code § 2253.041(c). The notices must be mailed by the proper method and to the proper addresses. Tex. Gov’t Code § 2253.044.

Sending the required notices on time is crucial for subcontractors but is often overlooked until it is too late or sent incorrectly due to a misunderstanding of the applicable laws. Subcontractors often wait too long believing that they will work something out with the general contractor. When they eventually do seek help from an attorney, the deadline has already passed. Subcontractors should pay careful attention to their past due invoices and ensure they seek an attorney’s advice far enough in advance so that all deadlines can be met and the subcontractor’s rights protected.

Texas law governing public projects can be found in Texas Government Code Chapter 2253 (formerly known as the McGregor Act) and Texas Property Code Chapter 53.

Please visit our blog again in a few days for Part 4: Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00 & Retainage.

Posted by Sarah F. Berry.

Part 2: Public Works Projects & Subcontractors ("First Tier Claimants"): Prime Contracts Less Than $25,000.00

2009-05-01T09:23:00.001-07:00

As noted in Part 1 of the series, in most cases, subcontractors ("First Tier Claimants") on public projects who have not been paid by the general contractor may make a claim on the payment bond posted by the general contractor. However, when the general contractor’s contract with the public entity is less than $25,000.00, the general contractor is not required to post a payment bond. Consequently, when the contract is less than $25,000.00, subcontractors have limited lien rights. The lien attaches to money due to the general contractor. (Tex. Prop. Code § 53.231).
To assert a lien, the subcontractor must give notice to both the general contractor and the appropriate public official. (Tex. Prop. Code § 53.232). Subcontractors must ensure that they strictly comply with notice deadlines and content requirements or they risk not perfecting their lien. The subcontractor must give the notice before any payment is made to the general contractor and not later than the 15th day of the 2nd month following the month in which the work was performed or the material furnished. (Tex. Prop. Code § 53.234). The notice must contain specific information relating to the labor performed or materials delivered. The notice must include (1) the amount claimed; (2) the name of the party to whom the materials were delivered or for whom the labor was performed; (3) the dates and place of delivery or performance; (4) a description reasonably sufficient to identify the materials delivered or labor performed and the amount due; (5) a description reasonably sufficient to identify the project for which the material was delivered or the labor performed; and (6) the claimant's business address. (Tex. Prop. Code § 53.233). The notice must also be accompanied by a sworn statement that the amount claimed is just and correct and that all payments, lawful offsets, and credits known to the affiant have been allowed. (Tex. Prop. Code § 53.233). Failure to comply with any of the notice requirements may result in loss of the lien.
When the public official receives notice, he should retain from the money due to the general contractor enough to pay the claim for which the notice was given. (Tex. Prop. Code § 53.233).
A general contractor may file a bond with the public entity to release the lien and obtain the money withheld. (Tex. Prop. Code § 53.236). The subcontractor must sue on the bond within 6 months after the bond is filed. (Tex. Prop. Code § 53.239).
Please visit our blog again in a few days for Part 3: Public Works Construction Projects & Subcontractors: Prime Contracts Over $25,000.00.

Texas law governing public projects can be found in Texas Government Code Chapter 2253 (formerly known as the McGregor Act) and Texas Property Code Chapter 53.

Posted by Sarah F. Berry.

Part 1: Public Works Projects & Subcontractors ("First Tier Claimants")

2009-04-20T13:41:00.000-07:00

For the next couple of weeks we will be posting a series of blogs relating to Public Works Construction Projects & Subcontractors ("First Tier Claimants"). Construction or improvements to public property are commonly referred to as public construction, public works contracts, or public projects. Some examples of public property are schools, courthouses, hospitals, highways, and bridges. On public projects, a subcontractor provides materials or labor to a general contractor whose contract is with a public entity. Unlike private property projects, a subcontractor cannot place a lien against public property due to nonpayment. Consequently, in order to protect their interests and increase their odds of receiving payment in full, subcontractors must be aware of the process and deadlines specific to public projects. In most cases, subcontractors on public projects who have not been paid by the general contractor may make a claim on the payment bond posted by the general contractor. A payment bond is a bond posted by the general contractor for the protection of subcontractors and sub-subcontractors. In more limited circumstances, subcontractors may have limited lien rights in money owed to the general contractor.

Please visit our blog again in a few days for Part 2: Public Works Construction Projects & Subcontractors: Prime Contracts Less Than $25,000.00.

Texas law governing public projects can be found in Texas Government Code Chapter 2253 (formerly known as the McGregor Act) and Texas Property Code Chapter 53.

Posted by Sarah F. Berry.

New Texas Court Dockets, CAD and Clerks Web sites

2009-03-04T18:23:00.000-08:00

We sponsor these sites developed by a developer friend of ours, but we thought other lawyers that may peruse our blog may also find these tools useful.

TexasDockets.com - When there are court dockets online, or searchable judicial records, this site links to those search pages.

TexasCAD.com - Now improved, and with many more counties added, this site allows people to search Texas County Appraisal Districts for information like property ownership, property values, etc. A great collection tool or real estate market tool.

TexasClerks.com - This is a brand new site, it basically provides links to hundreds of Texas County Clerks, District Clerks and Federal Clerks within the state of Texas.

TexasLocalRules.com - This is a site that links to the local rules of courts in Texas.

Pretty helpful stuff, and obviously many man hours went into the searching for these resources.

Texas Court: Deed of Trust Extinguished Upon Payment and Did Not Secure Additional Non Recourse Note

2009-02-16T14:10:00.001-08:00

Generally, a deed of trust is extinguished upon payment of the indebtedness which it was created to secure even without a written release. However, if the deed of trust contains a dragnet clause, in some circumstances, the deed of trust may be found secure future indebtedness created after the original indebtedness was paid. A Texas Court recently analyzed these issues in Craig v. Ponderosa Development, LP.

A debtor executed a promissory note (“Note”) in favor of creditor. The Note was secured by a Deed of Trust against property owned by the debtor. The Deed of Trust contained both a dragnet clause and a release provision. A “dragnet” clause is a future advance clause. In other words, the dragnet clause in the Deed of Trust provided that the property secured both the Note and the payment of future indebtedness. The release in the Deed of Trust stated that “upon payment of all sums accrued by this Instrument, Lender shall release this Instrument.”

The debtor paid the full amount of the Note to creditor; however, creditor never released the Note or Deed of Trust. After debtor paid the Note in full, debtor executed a Non-Recourse Promissory Note in favor of creditor. Debtor defaulted on the Non-Recourse Promissory Note and creditor attempted to foreclose on the Deed of Trust. The creditor argued that the dragnet clause of the Deed of Trust covered the Non-Recourse Promissory Note.

A deed of trust has no legal effect apart from the debt it is intended to secure. A deed of trust is usually extinguished upon payment of the indebtedness which it was created to secure. Extinguishment is complete even without a written release. However, there may be an exception to extinguishment when the deed of trust contains a dragnet clause.

Texas courts do not recognize the enforceability of dragnet clauses unless the subsequent debt to be secured was reasonably within the contemplation of the parties to the deed of trust at the time it was executed. If the requisite intent is found, however, courts have indicated that dragnet clauses will be given effect even as to indebtedness created after the debt originally underlying a deed of trust has been paid in full.

In this case, the Court found that when read in conjunction with other provisions in the Deed of Trust, it was clear that the dragnet clause was not intended to secure future indebtedness created after the Note was paid in full. Any other interpretation would render the release in the Deed of Trust meaningless. The court concluded that the application of the dragnet clause to the Non-Recourse Note was not within the parties' contemplation at the time they signed the Deed of Trust.

Austin Lawyer Tip: Texas Foreclosure Procedures in Real Estate

2009-02-10T07:04:00.000-08:00

In order to set up a non-judicial foreclosure, the lender must do several things in order to have the ability to foreclosure their security interest, or what we call a Deed of Trust. First, the loan papers (or "documentation") must include an obligation to pay (usually called a Note, Real Estate Lien Note, Promissory Note, or Note with Vendor's Lien) and should also include the security agreement (usually referred to as a Deed of Trust). The Deed of Trust gives the lender the right to "foreclose" its security interest if the Obligor fails to pay. The Deed of Trust should appoint a "trustee" and must contain a "power of sale." The Deed of Trust should also give the lender the right to designate "Substitute Trustee." In Texas, the foreclosure is usually by way of a "non-judicial" foreclosure, or by way of the posting of the property for sale on the first Tuesday of the month.

The following steps contain the basic procedures that the lender must go through in order to get to the point where they may foreclose the lien:

1) Demand for Payment - once the Obligor defaults in the making of one or more payments, the lender must give notice of the default and demand the overdue payment or payments.

2) Notice of Intention to Accelerate - prior to being able to foreclose its lien, the lender must give notice of intention to accelerate. The Notice of Intention to Accelerate is usually combined with a demand for payment. The notice should give at least ten (10) days within which the Obligor can cure the default. If the property is the Obligor's "residence," then the Notice of Intention to Accelerate should give the Obligor at least twenty (20) days notice. After the appropriate time period has expired, then the lender is free to "post" the property for a non-judicial foreclosure.

3) Notice of Foreclosure - assuming that the Lender has a valid Deed of Trust and that the lender has appropriately moved to foreclose through the designated trustee or its "substitute" trustee, then after the expiration of time on the Notice of Intention to Accelerate, the lender can "post" the property for foreclosure. This is done with the giving of Notice of Foreclosure. The Notice must be posted at the Courthouse and must be send via Certified Mail, Return Receipt Requested to the last known address of the debtor. Because only the sending of the certified mail is usually required, it does no good for the debtor to attempt to refuse delivery, as the debtor would only denying themselves the information contained in the Foreclosure Notice. The Notice must give the debtor at least 21 days notice of the foreclosure, and must inform the debtor of the time, date, and place of the foreclosure sale. Foreclosure sales take place at the location designated by the Commissioner's Court for each County in which the property (or any part of the property if the property is located in more than one County) is located.

4) Posting of the Property - the Notice of Foreclosure should then be "posted" at the designated location where notices are given at the County Courthouse (or other designated location). The Notice should be posted for the full twenty one (21) days prior to the sale and must be filed with the County Clerk's office.

5) Foreclosure Sale - The foreclosure sale should take place on the designated date between the hours of 10:00 a.m. and 4:00 p.m., that date being the first Tuesday of the month of the foreclosure sale. The sale must begin within three (3) hours of the time stated in the notice of foreclosure. At the foreclosure sale, the trustee or substitute trustee must "strike off" or sell the property to the highest bidder. The trustee is not required to sell the property for any particular price. For this reason, debtors are usually advised to attend the sale if they have some ability to redeem.

6) Substitute Trustees / Trustee's Deed - the final step in the process is for the Trustee (or Substitute Trustee if one was appointed) to prepare and file a Trustee's or Substitute Trustee's Deed to reflect that the property was sold. The Deed will then transfer title of the property to the purchaser or back to the lender, as the case may be. The lender should check the Deed to be sure that it accurately reflects what happened at the foreclosure sale.

Due to the complexity of these proceedings and the possibility of many pitfalls (or loopholes as many call them), if you have questions about the validity of any foreclosure sale, you should seek the advice of an attorney who is experienced in foreclosure litigation and foreclosure sales.

Austin Lawyer Tip: Texas Real Estate Foreclosure Litigation

2009-02-09T21:06:00.000-08:00

There has been a tremendous amount of litigation relating to foreclosures. On each side of the fence there are competing interests. On the one side there are real estate companies, banks, lenders, and mortgage servicers. On the other side, are homeowners, families, and even children. There are very important issues on each side of the fence.

If you are looking at having your property foreclosed upon, you should first attempt to work out an agreement with your lender after falling behind in payments. Many mortgage lenders have various programs to get you current. Sometimes they are willing to move a delinquent payment to the end of the mortgage, or they may simply add the accrued interest to the loan balance and give you a new amortization schedule. If you have fallen behind, you should pursue all of your remedies with the lender prior to proceeding with any legal options. If the lender is unwilling or unable to help you get current, and they are not willing to grant you an extension or renewal, then another option is to seek to have the loan refinanced.

If the foreclosure is imminent and you are sure that you do not want to keep the home, you should first attempt to give the lender a "Deed in Lieu of Foreclosure." By doing this, you may be able to negotiate a release by the lender and avoid a costly deficiency lawsuit, whereby the lender could go after you for any losses they incur in taking back the property (in other words you could be liable for any resulting "deficiency" between the sales price at the foreclosure and the total amount of the debt).

Anther option if you are sure that you do not want to keep the home is to sell it prior to the foreclosure. By doing this, you may also avoid the possibility of a deficiency lawsuit by the lender against you. In this marketplace, this might be easier said than done.

If none of these options are available, and it looks like the lender is going to foreclose, then you may want to seek the advice of a bankruptcy attorney. With the bankruptcy, your prior payments may be able to be treated as an "arrearage" so that you can make payments on the old debt while staying current on the new or "post-petition" indebtedness.

However, what do you do if bankruptcy is not available to you for some reason? What if you believe that your lender has taken advantage of you? Are their any other options? The answer to these questions are "maybe." A commercial litigation attorney may be able to help. However, oftentimes, these options are very expensive. If you had this kind of money, you probably should have simply paid down the mortgage. Nevertheless, litigation attorneys will review all of the documentation and the foreclosure documents to ensure that the lender has met all of the requirements for a valid non-judicial foreclosure. Strict compliance is usually required.

Waiver of Right to Arbitration in Texas

2008-12-15T08:36:00.000-08:00

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.

Contracts and Attorneys' Fees in Texas

2008-11-24T09:59:00.001-08:00

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.

Real Property Division in Divorce in Texas

2008-11-22T15:37:00.001-08:00

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.

Personal Property Lease Termination

2008-11-06T12:42:00.000-08:00

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)