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Beware Seller-Carried Financing

Posted by brent on Tuesday, May 12th, 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


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