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Beware Seller-Carried Financing

12 May 2015

My client finally gets a hearing in less than two hours. Shortly after filing an answer to the lawsuit, some additional legal research showed a huge defect in the breach of contract claim being brought by a now-formerly-licensed real estate broker: verbal modifications to listing agreements are NOT enforceable under an explicit Utah statute, now found at UCA § 25-5-4, commonly known as Utah’s enactment of the “Statute of Frauds”. The verbal agreement was prompted by the broker finding a buyer who was, using the language of real estate transactions, "ready willing and able" to make the purchase ONLY with half the price being due several years later rather than by getting third-party financing. In legal effect, half the price was a loan issued by my client, the seller. Few sellers of land are well-enough informed about loans, secured transactions, and real estate law to play in this field like banks do. When a seller agrees to what is called a seller-financed deal, that amounts to entering the banking business. It is filled with hazards. The protection of being able to foreclose on the unpaid-for land a few years later can still be expensive, time-consuming, and bothersome. Those are some reasons why I recommend that my clients let the banks do the lending. This particular case carries some frustrations because my efforts to, say, "educate" the opposing attorney have felt like paddling the canoe upstream with only one paddle. It took far more effort and time than I believe it should have to convince my opponent to drop the breach of contract claim for unpaid real estate commissions. A bit of background here--the first half of the payment made to my client was non-cash. It was a different piece of land deeded over as payment at an agreed-on price. This is often not a problem if the rest of the purchase price is also paid at closing. It is probably never a problem if the other portion is payment with real money. But in this instance, no cash changed hands and everyone was convinced that the balloon payment would be made less than three years later. So there was an agreement to pay the commissions "when" the buyer paid the other half due, in cash. The buyer didn't pay and everyone knew it. By the time "when" payment was made became a known certainty as being "never gonna be paid", the statutes of limitations had run on both the written contract claim, and any non-contract claims like "unjust enrichment". My client still had never received any cash in hand from the deal, and had sold the other land received in payment to clear out some long-term capital gains tax due on the transaction*. I had hoped to quickly dispense of the case, and noted that a warning period in Utah's Rules of Civil Procedure, Rule 11, might be useful to persuade the other attorney to drop the case under threat of sanctions for bringing a lawsuit on a very, very unenforceable written contract. This would be far, far faster and a little bit less expensive for my client than making a motion for summary judgment, then doing the legal dance of reviewing the other side's opposition, then writing a reply memorandum for the judge, then waiting for a hearing, and then arguing that motion in court. Well, the warning letter and proposed motion for sanctions didn't work. So I continued the minimalist approach and filed the motion for sanctions with the hope that making the demand that serious would work better than the earlier demand letter and strong citations to Utah law and court decisions. Well, that worked only as far as finally persuading the other side to drop the written contract claim. Something convinced them that I was right about verbal amendments to a written contract which are prohibited by Utah law cannot be enforced. But that was the only claim dropped that late in the dispute. The statute of limitations issue was still unresolved and the disagreement continued. In the meantime, that attorney filed a motion for sanctions against me, for making the first motion for sanctions. Something about "bad faith". So it went on and I prepared a motion for summary judgment on the rest of the claims. The short version is that no matter how you look at it, the broker knew he had not been paid, and everything he needed to know to sue without a written contract, he knew long before finally filing the lawsuit. There are time limits in the law to do these things, and there did not appear to be anything available to stretch those time limits (like him being out of the country for a year or more). The good judge spoke at an attorney's meeting a few weeks ago on a few subjects of how to keep your cases moving in the local court, and common problems to avoid not just in his courtroom but for the other judges in this county. He noted that unusual things like motions for sanctions are unlikely to be granted. He is not as willing to sanction other attorneys as attorneys want him to be. That's fine. He sounded incredulous when briefly describing this case and the counter-motion for sanctions that had been filed. But since I understand the ethics rules for attorneys and for judges regarding one-sided discussions without the other side present, I did not breathe a word about this case to him. But along with some of my colleagues there, I did ask a few questions about other things he had discussed. The motion for sanctions was filed on December 22. The motion for summary judgment was filed on January 20. The opposing attorney has threatened to revive the breach of written contract claim based on a court decision a few years before the case law supporting my client's position. That court decision also involves a very different part of Utah's statute of frauds. That is pretty frustrating in itself. I made a proper written request for a decision on the motion for sanctions on February 6. The request for a decision on the motion for summary judgment was filed February 13. The hearing is today, May 12, almost exactly three months later. There is also more drama on that between the attorneys, but I don't want to bore anyone with quibbling and sniping. Just know that someone asked for more time, I gave another week, and then when it was announced without asking for more time "It will be filed within the week", I relented but only until noon on a certain day. That deadline passed so I filed what became my client's first request for a decision on the motion for summary judgment. And all this is ultimately traceable to a broker finding a cash-poor buyer who was unable to perform without tendering full payment at closing, and my client was duped into carrying a note for the second half of the purchase price. So, beware seller-carried financing on real estate deals! BAB. * Perhaps for another article more suited to coming from a tax accountant, beware of selling land that has been in the family for decades, under circumstances that do not result in a step-up in cost basis per tax law and IRS rules!

Category: Real Estate--Selling | Leave A Comment

Maligned Indiana Law Uses Supreme Court Language

01 Apr 2015

What's up with the hue and cry over Indiana's new law attempting to protect the free exercise of religion? What no reporter or news agency I have seen will tell you is that the law echoes the words of the US Supreme Court setting the rules for "strict scrutiny" of laws that could restrict ANY "fundamental liberty", including First Amendment freedom of speech. Indiana's lawmakers copied language from the federal Religious Freedom Restoration Act of 1993 into their much-criticized state law. See 42 U.S.C. § 2000bb through 42 U.S.C. § 2000bb-4. The "compelling government interest", "least restrictive" and other catch-phrases of these two similar laws USED TO BE applied to the free exercise of religion with the "strict scrutiny" test for laws burdening religion. Called in its day the "Sherbert Test", these were controlling case law beginning in 1963 with Sherbert v. Verner, 374 U.S. 398, and also Wisconsin v. Yoder, 406 U.S. 205 (1972). At least that was the case until Employment Div., Dept. of Human Resources of Ore. v. Smith, 494 U. S. 872 (1990), which from my perspective tossed the free exercise clause of the First Amendment under the judicial bus just so a couple of workers who wanted to practice Peyote-fueled Native American religious ceremonies could be denied unemployment benefits because they were fired (From a drug rehab center, no less!) for using hallucinogenic drugs. Justice Scalia wrote the majority opinion, but I believe that Justice O'Connor's dissent was the more correct analysis. Although the Smith decision was supposed to be limited to being allowed to receive government benefits, and not about prosecution for drug crimes, we can still conclude that for about 25 years now, some 1st Amendment rights are more "equal" than others. No apologies to Mr. Orwell. *** If you don't know what I mean, PLEASE read George Orwell's "Animal Farm." It is quite a telling indictment of how Communism can deteriorate into garden-variety despotism. Even more impressive is that Orwell was quite the Socialist and consistently denounced all forms of totalitarianism.

Category: General Principles of Law | Read 1 Comment(s)

DOJ/Reporter Scandal Trashes Fourth Amendment More Than the First

22 May 2013

Tough questions posed this week to White House Press Secretary David Carney about freedom of the press concerns in the Department of Justice’s national security probe of news leaks are quite understandable: the news media properly cherishes that portion of our nation’s First Amendment rights. But the greater concerns for me as an attorney involve our Fourth Amendment rights “to be secure” in our “papers and effects” (which include electronic records of our telephone calls) and to be free from “unreasonable searches and seizures”. All quotes above are from the Fourth Amendment itself.

Law enforcement and prosecutors are the only players in the legal world who can issue subpoenas to people or businesses such as Verizon Wireless to start poking around in your personal business without first filing a lawsuit which would let you know that “the game is afoot”, as the fictional detective Sherlock Holmes was fond of saying. This is in general an acceptable government power because of the sensitive nature of criminal investigations and the need to gather information without prompting the target to start destroying evidence or tampering with witnesses. But in part because of the huge imbalance of power between government and any single citizen or business, this subpoena power is supposed to be cautiously exercised within relatively narrow boundaries. Subpoena power thus not give any government agency or worker the right to start conducting broad “fishing expeditions”. United States v. R. Enterprises, Inc., 498 U.S. 292, 111 S. Ct. 722, 112 L. Ed. 2d 795 (1991); FTC v.American Tobacco Co., 264 U.S. 298, 305-06 (1924). See also the DOJ’s own manual on grand jury subpoenas here: http://www.justice.gov/atr/public/guidelines/206696.pdf.

A criminal investigation subpoena can seek only historical records between specific dates and must be relevant to the inquiry. Secret Service investigations into counterfeiting operations cannot properly include a subpoena of a suspect’s pharmacy records, for example.

This page on FaceBook, for example, outlines that business’s interpretation of these rules for supoenas: https://www.facebook.com/safety/groups/law/guidelines/. Without a search warrant, the only information considered valid for a law enforcement investigative subpoena is described as:

. . . basic subscriber records (defined in 18 U.S.C. Section 2703(c)(2)), which may include: name, length of service, credit card information, email address(es), and a recent login/logout IP address(es), if available.

Note that the FaceBook equivalent of telephone call logs (date and time and sender or recipient of all private messages, for example), is not considered proper. That information, and the content of postings and messages, is not to be examined without a search warrant. The executive branch’s power must be checked by judicial branch oversight.

Subpoenas are issued from the executive branch of government without direct oversight of any other branch such as the judicial, and in non-criminal cases a person can object to them and ask a judge to order it to not be followed. Thus subpoenas should be more limited in scope and focus on specific types of information than a typical search warrant which must be requested from a judge. A judge is supposed to issue a search warrant only upon “probable cause”, and the warrant itself must be one “particularly describing the place to be searched, and the persons or things to be seized”. Similar specific rules govern the issuance of arrest warrants, and as a judicial law clerk years ago, I was not afraid to reject a requested arrest warrant in those portions were its supporting affidavits failed to establish probable cause.

But in a criminal investigation, no one outside of law enforcement and the third party holding the records knows about the subpoena. If it is improper, the suspect has no ability to ask a judge to quash such a subpoena. I believe that this tips the balance of power between government and citizens in such a way as to make protections from abuse necessary.

For most criminal investigations, the entire call log list is fair game–law enforcement needs to know every phone number calling into the suspect’s line, and every number the suspect called, to sort out which of them will lead to additional evidence regarding the suspected crimes. But for subpoenas involving security leaks from a known “universe” of potential offenders (the government agency itself) on the one hand, and news reporting on the other hand as the place that published or broadcast the leaked information, I believe that First Amendment freedom of the press concerns require a more restrictive approach for subpoenas.

Rather than limiting its subpoenas to require the telephone service providers to give information related to only the work and personal telephone numbers used by the leaking government agency’s offices and employees, Attorney General Eric Holders’ investigators and prosecutors now know whether reporters were calling dial-A-prayer, high school sweethearts, the suicide hotline, or their local liquor store – every single time.

This is simply wrong and should never be tolerated in any society. We have freedom of the press as a natural or God-given right regardless of whether the current government recognizes it (Acknowledging the source of our rights in religious or atheistic terms does not alter the supremacy of those rights.) One Supreme Court interpretation of our Fourth Amendment rights uses the idea of a “reasonable expectation of privacy” which must not be invaded without a very good reason, and those invasions must be only as deep as necessary to gather the relevant information. A search warrant for someone’s stolen Heisman Trophy does not authorize anyone to start looking in your jewelry box. A subpoena of news media phone records regarding a leak should include only the telephone numbers used by the governmental workers who could have been the source of the leak, and exclude all other numbers of the reporter’s other news sources.

In my opinion, there is a Constitutional-level “shield” to protect a news reporter’s other sources from investigations unrelated to them. Freedom of the press has not been interpreted to shield reporters from revealing their sources in criminal investigations (Branzburg v. Hayes, 408 U.S. 665 (1972)), which is why some states grant that protecting with state level “shield laws”. Both Utah and Nevada (and most other states) have these laws protecting reporters’ sources, and Utah courts recognize an additional “reporter’s privilege”, while Nevada courts do not. But even the Branzburg decision which the news media despises does not allow probing into a reporter’s entire address book of sources–it relates only to specific inquiries into specific crimes. No “fishing” is allowed even under that decision.

I share the news media’s outright alarm over the prospect that a person’s occupation can somehow make them more of a potential suspect or criminal than any other misbehaving citizen (or foreign national, because the term “the people” is not limited to U.S. citizens.). Yet that is exactly how the current Justice Department views reporters. Who is next?

But I wish that the news media would fret as much about other governmental actions which “chill” the exercise of other in alienable rights of the people which are protected by other Amendments to the Constitution. There are nine other Amendments in the Bill of Writes eight of them specifically applying to us as “” or otherwise protecting our personal, privacy, property, and liberty rights. They are all important and should be treated that way in our public discourse.


Category: General Principles of Law | Leave A Comment

The Long Arm of the Law

09 Jan 2012

Old bad jokes were not the only things that could be called “groaners”. This article tells about some of the uncommon, yet still all-too-frequent situations we attorneys hear which make us want to rather unprofessionally groan “Oh, no, don’t tell me....”

I chose the title “The Long Arm of the Law” because that is a familiar phrase from our childhood, intended to teach us that criminal law enforcement will chase an evildoer across the city, across the state, across the nation, and sometimes into other countries. The point here, however, is to add the element of TIME to the reader’s consciousness. The law is like an elephant. It never forgets.

Although it is true that a certain level of irrational optimism fuels some of these "groaner" stories, there are also situations where people just honestly do not realize that a legal problem still exists years after it started.

The very, very few times the law ever forgets, it takes "help". Fire, flood, perhaps a power outage or a computer failure these days can destroy court or law enforcement records. But this is very rare. Court records of minor infractions such as traffic citations can be routinely destroyed ten or twenty years after the case closes. These are notable exceptions to the general rule.

It should not come as a surprise that legal events create public records that WILL follow you for years. Being on the wrong end of one of these decisions does not mean that someone from local law enforcement will start tracking you down right away. But there is a record, waiting there for anyone in the legal system to look it up. Arrest warrants, for example, stay in law enforcement databases for years. Court records from a lawsuit are most likely to be kept for as long as you live. And even though a civil court judgment is described as enforceable for only six or eight years, that applies only to an automatic expiration. A determined opponent can “renew” that judgment any time in the last year before it expires, re-setting the clock.

You can become the subject of an arrest warrant even in a simple civil lawsuit that does not involve any criminal charges. It happens for just failing to show up in court ("failure to appear", it's called),  if the appearance at the courthouse was ordered by a subpoena. This can result in a "bench warrant" FOR ARREST being issued. I have heard people complain about being totally surprised by a bench warrant, only to later admit some time later that they got something by hand delivery or in the mail but never read it.

So, the next time you hear somebody say something about “oh yeah, I had a problem but they didn't do anything about it” or “somebody dropped off some court papers, but I just threw them away”, please warn them that the long arm of the law also includes being like an elephant which never forgets. A consultation with an attorney is almost always a very, very good idea if someone “hasn’t heard a thing”, even for years. It might be far, far less expensive than trying to make bail. And it can spare one of us attorneys from groaning in despair over a "groaner", a preventable mess.

The law never forgets. That is part of why its arm is so long.

BAB.


Category: General Principles of Law | Leave A Comment