Creative real estate investors have used various forms of seller-financing — with much success — for many years.  Two of the most favored forms of seller-financing, in turn, have been the Residential Lease-Option and the Land Contract (also known as a “Contract for Deed”).

By way of review, a residential lease-option is simply a “regular” residential lease coupled with an option to purchase the leased property at some future time.  Typically, a portion of the rental/lease payments are credited toward the Tenant/Buyer’s down payment at purchase.

A Land Contract (aka: Contract for Deed) operates in somewhat similar fashion, except that the Buyer/Tenant has an actual ownership interest in the subject property.  But, unlike the usual real estate transaction, where title is conveyed to the Buyer at or near the time of purchase and the Buyer then makes loan payments to a Lender, title is not transferred to the Buyer under a Land Contract until after all the payments have been made under the contract.  Hence the name: Contract for Deed.

In many (perhaps most) states, Residential Lease-Options and Land Contracts are alive and well; but not in Texas, the execution capital of the United States.

Please don’t misunderstand.  We fully support capital punishment in appropriate cases.  But here, in the case of State of Texas v. Residential Lease-Option, we believe the defendant was wrongfully convicted.  The following is a brief summary of the case for the defense:

A few years ago, before 2005, a few Texas real estate investors were, shall we say, not displaying the best judgment and good manners, and used the Residential Lease-Options and Land Contracts in a manner that was perhaps technically legal, but shall we say, somewhat less than honorable.

In response, the Texas legislature passed the functional equivalent of a capital punishment statute for Texas Residential Lease-Options by imposing draconian requirements and restrictions on so-called “executory contracts.”

In order to accomplish its desired result, the Texas Legislature had to redefine the term “executory contract” as: “An option to purchase real property that includes or is combined or executed concurrently with a residential lease agreement, together with the lease, [of more than 180 days] is considered an executory contract for the conveyance of real property.”  Texas Property Code § 5.062(a)(2).  For the sake of some semblance of brevity, we’ll forgo a discussion of the poor drafting of the statute and move right along to a discussion of the substance of the statute.

Perhaps hinting that it knew it was playing “fast-and-loose” with the term “executory contract,” the Texas legislature said only that Residential Lease-Options — but not non-residential lease options or commercial lease options — will henceforth be “considered” to be “executory contracts.”

In other words, what the Texas legislature said is that: (1) residential leases ARE executory contracts, but they’re okay; (2) purchase options that do not include a residential lease ARE NOT executory contracts, and thus are okay; and that (3) purchase options which are combined with a residential lease ARE, henceforth, to be “considered” executory contracts, and thus NOT okay.

To better understand what’s going on here, we need to define the term “executory contract.”  According to Black’s Law Dictionary, an “executory contract” is “[a] contract that has not as yet been fully performed or completed. . . .  In the context of the Bankruptcy Code [issues regarding executory contracts historically have arisen more frequently in bankruptcy cases than in general civil litigation] an executory contract is a contract under which obligation of both [the] bankrupt and [the] other party to the contract are so far unperformed that failure of either to complete performance would constitute material breach. . . .”

The important piece of our “executory contract” puzzle is that for a contract to be “executory,” both parties must still have contractual obligations which have not yet been performed.  For example, in the case of a contract for the sale of a widget, if the seller gives the widget to the buyer, but the buyer doesn’t pay, the seller sues for breach of contract.  In the widget case, the contract has been fully performed by one party and breached by the other; it is no longer a contract that requires both to perform, in other words, it is no longer executory.

Now let’s define an “option.”

Black’s Law Dictionary defines an “option” as a: “Right of election to exercise a privilege. . . .  An option is an agreement which gives the optionee the power to accept an offer for a limited time.”

Because an optionee has “only” a contractual right under an option contract — and does not have any obligation or duty to perform — it simply is not possible for an optionee to breach an option contract by failing to exercise the option.

Because each party to a contract must be capable of breaching the contract in order for the contract to be executory, and because it is not possible for an optionee to breach an option contract, it must logically follow that option contracts are not — indeed, by definition cannot be — executory contracts.

Except in Texas, where option contracts that are combined with residential leases are now somehow magically transformed into executory contracts, simply because the Texas legislature, by creating a legal fiction, "considers" them to be executory.

The 2005 Texas “executory” contracts law did not, however, make residential lease options illegal, but it did impose so many requirements on those real estate contracts that are considered under the law to be “executory” that no prudent or reasonably cautious investor is likely to use (or continue using) such contracts.

Thus, Texas did not “execute” the Residential Lease Option or other residential real estate contracts that it considers to be “executory.”  But it did wrongfully “convict” these types of contracts based solely on the misdeeds of a very small minority of users.  An analogy many Texans are likely to understand would be for the government to restrict a certain type or class of firearm so severely that the practical effect of the restrictions would be to ban the particular type or class of firearm altogether, based solely on the misuse of it by a small number of miscreants.

We submit that legally-competent adult Texans, whether they be real estate investors or home buyers, should be free to enter into the real estate contracts of their choice and that restrictions to prevent abuse or over-reaching should be narrowly tailored so as not to unreasonably dissuade honest adults from entering into legitimate real estate contracts.

The defense in the case of State of Texas v. The Residential Lease-Option rests.

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

Ask the Attorney a Question:
I am the owner of a small business and a real estate investor.  Although my businesses are profitable, I simply cannot risk a frivolous — and potentially ruinous — lawsuit.  What steps can my businesses take that will keep them from being dragged through the court system?


Attorney Answer:
As the saying goes, “anyone can sue anyone else, at anytime, for anything.”  It is often little comfort for the owners of a business to have their lawyer tell them that frivolous lawsuits can usually be resolved relatively quickly and with relatively little expense.  So here are the top 10 tips for keeping small (and not-so-small) businesses and real estate investors out of court:

1. Use the Proper Legal Entity for Your Business and Make Sure it is Set-up Properly.

Not all business entities are created equal.  Furthermore, the structures within each type of business entity are also not created equal.  So regardless of whether your business would be best-served through use of a corporation, limited liability company (LLC), or some form of partnership, be sure you obtain competent legal advice in selecting and setting-up the legal entity through which your business will operate.

2. Keep Proper Records

Everyone knows (or should know) that it is extremely important to keep records for business tax purposes.  It is also important to keep records in the ordinary course of business that are unrelated to taxes.  Although the type and nature of such records will depend on the type and nature of the business, suffice it to say that there are few (very few) businesses that cannot manage or reduce its exposure litigation risk by keeping proper records.

3. Implement and Maintain Appropriate Data Security Procedures

We live in a digital and data-driven world.  Digital evidence is an ever-present and ever-growing component of business-related litigation, both for plaintiff and defense.  Don’t lose the litigation battle over data by default.

4. Use Independent Contractors Appropriately

Savvy business owners have long understood that one way to increase profits is to decrease expenses, and that one very profitable way to decrease expenses is to use independent contractors instead of employees.  While there are many advantages to using independent contractors, there are many more disadvantages if it is not done correctly.  Make sure you use independent contractors properly.

5. Implement and Administer Appropriate Employee Policies and Procedures

If your business does require employees, make sure appropriate employee policies and procedures are in place to facilitate a good employer-employee experience for all involved.  Not only is it the right thing to do, it also makes good business sense to do so.

6. Adopt and Maintain Appropriate Customer/Client Controls

Just as a business should properly manage its independent contractors and employees, it should also properly maintain proper customer/client controls.  Proper customer/client controls include such matters as ensuring reasonable expectations, such as through the use of written contracts, policies and other business and industry-specific controls.

7. Adopt and Maintain Appropriate Vendor Controls

Vendors must also be managed.  Just as appropriate controls should be implemented to prevent or reduce the magnitude of legal disputes between workers and customers, so too should appropriate controls be used to reduce the likelihood and magnitude of disputes with vendors.  This, too, is a business/industry-specific analysis.

8. Use Business Experiences to Continually “Fine-Tune” Your Business Practices

Simply put: learn from your mistakes.  After your business experiences and works through a problem, make appropriate changes to your business controls so that the likelihood of that same problem being repeated is reduced, if not eliminated altogether.

9. Purchase and Maintain Appropriate Types and Amounts of Insurance

Insurance is cheap, compared to most risks.  Lawsuits can often be settled before trial for an amount equal to or less than the “policy limits” of the defendant’s insurance policy.  However, if the defendant is uninsured — or under insured — well, enough said about that.

10. Engage in Appropriate Asset Protection Planning Before a Lawsuit Is on the Horizon

Lastly, there are many legal strategies that can be implemented prior to the threat of a lawsuit that will either discourage the plaintiff from suing in the first place or, if the plaintiff does sue, provide the defendant with legal tools to terminate the lawsuit, before the lawsuit gets too out-of-control.  Many of these asset protection planning tools, however, are either unavailable after a claim arises, or will be of reduced effectiveness after a claim has arisen.

Learn how you can have a Lawyer Available Whenever to review your legal documents and answer your legal questions.  Learn more here about the LAW Plan

Learn more here about Asset Protection



For more information on this topic, click here to: Contact Lapin Law Offices

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

In Texas, a Real Estate Broker who is handling a real estate sales transaction may represent (1) the Seller only, (2) the Buyer only, (3) both Seller and Buyer, or (4) neither Seller nor Buyer.

In the discussion that follows, the term “Broker” means a real estate brokerage or “sponsoring” Broker, while the term “Sales Agent” or simply “Agent” refers to licensees who work for a brokerage or sponsoring Broker, even though such Sales Agents may, themselves, be licensed as “brokers.”

Sales Agents are subject to the control and supervision of their Broker; the acts of a Sales Agent are considered to be the acts of their Broker.

Additionally, in the eyes of the law, both Brokers and their Sales Agents are considered to be “agents” of the party whom they represent.  For example, both the Seller’s Broker, and the Sales Agents who work for that Broker, are considered to be “agents” of the Seller.  As such, they each owe the Seller certain legal duties.

The “default” rule in Texas is that a Broker represents the Seller, unless there is an express agreement to the contrary between Broker and Buyer.  This makes sense in that it is the Seller who decides whether to list a property for sale, it is the Seller who will pay the sales commission for brokering the transaction, and it is the Seller’s Broker (and/or that Broker’s Sales Agent) who will pay to advertise the property for sale.

Thus, when a Buyer calls a Seller’s Broker in response to an advertisement for a property, the Seller’s Broker is representing the Seller, not the Buyer.  In this situation, the Buyer is unrepresented.

A Buyer, in order to have independent Broker representation, would need to enter into an agreement with a Buyer’s Broker, that is, with a Broker other than the Seller’s Broker.  When this occurs, the Seller’s Broker and the Buyer’s Broker typically share the 6% sales commission (paid by the Seller), with each Broker receiving 3%.  Each Broker’s 50% share of the 6% sales commission (3%) is then divided between Broker and Sales Agent.

Texas, like many other states, allows a Seller’s Broker, with certain restrictions, to “represent” both Seller and Buyer.  When a Seller’s Broker “represents” both Seller and Buyer, the Seller’s Broker is not required to give 50% of the commission (that is, 3% of the 6% sales commission) to a Buyer’s Broker.

In Texas, this dual “representation” (sometimes also referred to as “dual agency”) can take one of two forms.

The first of these two forms of dual “representation” involves the Seller’s Broker acting as a mere “intermediary” (Texas Real EstateCommission’s term) between Seller and Buyer, without providing any real representation to either.  When this occurs, the Seller is not getting the Broker representation that is usually thought by sellers to be included in the 6% commission they are paying to sell their property, and the Buyer, as with the “default rule” described above, still gets no representation at all.

In the second of these two forms of Texas dual “representation” the Seller’s Broker appoints one of that Broker’s Sales Agents to “represent” the Seller and another of that Broker’s Sales Agents to “represent” the Buyer.  This arrangement, although on its face may appear to be legitimate, is rife with pitfalls.

As an initial matter, this second form of dual “representation” asks us to naively believe that the two Sales Agents, both of whom work for the same Broker, and who perhaps have offices or desks in close proximity to each other, who may attend Realtor training sessions together, and who might even socialize with each other outside of work, will not put their best interests of closing the deal — and getting paid — above the respective interests of the Seller and Buyer whom they supposedly represent.  This is not an indictment of Sales Agents; rather, it is simply an acknowledgment of human nature.

More importantly, however, each of these Sales Agents is, in the eyes of the law, merely an extension of the Broker.  Thus, although this arrangement may provide the appearance of separate or independent representation, such an appearance is a mere illusion.  One Broker is still representing both sides of the transaction.

Because a real estate purchase-sale transaction, like any other contract negotiation, is, at its core, a transaction with (at least) two mutually-exclusive interests — the Seller trying to sell on terms most favorable to the Seller and the Buyer trying to buy on terms most favorable to the Buyer — it simply is not possible for one Broker to represent the best interests of both Seller and Buyer.

Compare Broker dual “representation” to the representation a Seller or Buyer receives from an attorney or law firm.

Although it is technically possible for an attorney to act as an “intermediary” between Seller and Buyer, and not forming an attorney-client relationship or providing legal advice to either, most competent attorneys would never accept employment on these terms.  The major exception, of course, are attorneys who are employed by title companies.  The difference here, of course, is that these attorneys do provide representation to a client: the title company.

But back to our hypothetical Seller and Buyer.  When was the last time you heard about a law firm representing both sides in a transaction, with one of the firm’s attorneys representing the seller and another of the firm’s attorneys representing the buyer?  Probably never, because such arrangements are prohibited.

One last thought as we conclude this article and bring this subject “in for a landing.”  When litigation results from a real estate transaction, as it sometimes inevitably does, the Brokers and Sales Agents who were involved in the transaction are almost always subpoenaed to provide testimony about what happened.  Such testimony is likely to focus on statements made during conversations by and between Brokers/Sales Agents, on the one hand, and the party they “represented” in the transaction, on the other hand.

Attorney-Client communications, however, are protected from compelled disclosure by the Attorney-Client Privilege.  It is extremely rare for an attorney’s client to be compelled to testify about what the client said to the attorney, or for an attorney to be compelled to testify about what the attorney told the client.

Prudent Sellers and Buyers should seriously consider using a Real Estate Broker for the purpose of finding each other, that is, for what we refer to as the matchmaking function of “bring buyer and seller together.”

Once the match has been made, so to speak, Seller and Buyer should each retain their own attorney to provide legal advice and handle the purchase contract and other legal documents.

The article was excerpted from:
Real Estate Broker or Attorney: Who Should Represent You in Your next Real Estate Transaction?

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction and/or may not reflect current law.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

Texas entrepreneurs have two (2) options when choosing a form of Limited Liability Company (LLC).  The first option is a “traditional” LLC; the other option is a Series LLC.

A traditional LLC is composed of a single business entity, for example, Acme, LLC.  It would be possible for Acme, LLC to obtain, and do business under, various assumed names (e.g., “doing business as” or simply “dba”).  Thus, for example, Acme, LLC might do business under one or more assumed names, such as: The Acme Widget Company, LLC; or in the case of an LLC that is used to hold title to real property, The 1234 Main Street, LLC; and the like.

With the traditional LLC structure, Acme, LLC and each “sub-business” — Acme Widget Company, LLC, The 1234 Main Street, LLC, and so forth, would be treated for purposes of civil liability as a single unit.  In other words, Acme, LLC would be liable for the debts and other legal obligations of both The Acme Widget Company, LLC and The 1234 Main Street, LLC.  Furthermore, The Acme Widget Company, LLC and The 1234 Main Street, LLC would both be liable for the debts and other legal obligations of each other, as well as for the debts and other obligations of Acme, LLC.

A Texas Series LLC, on the other hand, although at first glance appears to be structured in much the same way as a traditional LLC, creates a legal separation between the “parent” LLC, Acme, LLC in our example, and each of the “sub-businesses,” The Acme Widget Company and The 1234 Main Street, LLC, in our example.

Thus, with a Texas Series LLC, neither the “parent” LLC, nor any of the “sub-businesses” are liable for the debts or other legal obligations of each other.

As with all legal matters, there is no “one-size-fits all.”  Thus, although a Texas Series LLC is not the appropriate choice for all situations, Texas “serial” entrepreneurs might at least want to consider the option prior to organizing their next new business entity.

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

The Miriam-Webster Dictionary defines “irreverent” as “having or showing a lack of respect for someone or something that is usually treated with respect [or] treating someone or something in a way that is not serious or respectful.”

We concede that the title of this article leans toward the irreverent.  However, the irreverence reflected in the title of this article merely reflects the apparent irreverence with which many divorce litigants handle the issue of Dividing the House When Divorcing the Spouse.

On a fairly regular basis, we are contacted by potential clients who relate the following scenario: Harry Husband and Wilma Wife divorced several years ago.  At the conclusion of the divorce proceedings, Wilma, who had been a stay-at-home mom, received title to the family residence.  Harry, as part of the divorce decree, received the right to receive a sum of money that reflected his marital property interest in the family residence.

The divorce decree also contains a provision that purports to require Wilma to refinance the debt which is secured by the family residence — “within a reasonable period of time” — or some such similarly vague language, so that Harry will no longer be contractually obligated to pay the loan.

When Harry or Wilma calls our law office some years after the divorce (our office didn’t represent either party in the underlying divorce proceeding), either Harry complains that Wilma never refinanced the residence as is “required” by the divorce decree, or Wilma complains that Harry is “harassing” her to refinance the house even though she lacks the financial ability to do so.

As with most problems, it is easier and less expensive to do something correctly the first time, rather than to try and remedy a problem at some future point in time.  Harry and Wilma, by the time their problem is resolved, will likely be acutely aware of this truism.

While it is understandable why Harry and Wilma (and their attorneys, if they were represented by counsel) took the “easy way out” at the time of their divorce — the easy way being “just get the divorce over with and we’ll worry about the refinance later — the reality is that taking “the easy way out” only makes the problem more difficult (and expensive) to resolve at some future point in time.

Regardless of whether you’re about to get married, already married, or facing divorce, don’t be a “Harry” or a “Wilma.”  Obtain the assistance of an attorney who is familiar with asset protection, real property, and marital property law, and implement appropriate legal strategies that, in the event of legal troubles “down the road,” will help negate, or at least minimize, the negative impact and expense of those legal troubles.

As the old saying goes, “Those who fail to plan, plan to fail.”

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction, or since this publication may have changed statutorily or have been affected by judicial decision.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

I own a residential property with two other individuals; however, I am the sole borrower on the loan which is secured by the property.  We – the three co-owners – want to begin renting the property to tenants.  What should we do before renting the property to protect ourselves from legal liability.

Before acquiring title to real property with any person than one’s spouse, it is always advisable to have in place some type of “co-ownership agreement.”  (Spouses should consider using a marital property agreement, which is a special-purpose form of co-ownership agreement.  Such agreements may be used as “stand-alone” agreements, or in conjunction with other asset-protection strategies.)  The appropriate type, or form, of such agreement will depend on the objectives of the co-owners and the intended use of the property.

Often (but certainly not always), a Limited Liability Company (LLC) will provide co-owners of real property with an appropriate legal framework to effectively manage their asset, while also providing an acceptable level of asset-protection.  Depending on your specific circumstances, a Series LLC might be a good choice.

A properly-drafted LLC Operating Agreement should address issues such how much capital each Member must contribute to the LLC, as well as each Member’s obligations and details concerning each Member’s ownership interest.  For example, if a mortgage loan is to be obtained in the name of one or more, but not all, of the Members of the LLC, the issues relating to that loan should be addressed in the Operating Agreement.  The Operating Agreement should also contain provisions for day-to-day operations and, in the event of disagreement or dispute, provisions for resolving conflict.

When an LLC or other form of business entity is set-up after an asset is acquired by one (or more) of the owners, title to the asset typically must be transferred to the entity.  Issues raised in such circumstances may include selection of the jurisdiction where the entity will be formed or organized; the avoidance (if possible) of transfer and related taxes (depending on the state in which the real property which will be owned by the entity is located); and often in the case of real estate loans, avoidance of due-on-sale clauses.

For purposes of asset-protection, an LLC is often a very good choice of entity, as the only remedy that is usually available to judgment creditors of a Member is a Charging Order against that Member’s interest in the LLC.  A Charging Order will allow a judgment creditor to “intercept” or receive any distributions from the LLC to the Debtor-Member, but will not allow a judgment creditor to obtain an ownership interest in the LLC itself (or in the assets of the LLC) or to otherwise interfere with the operation of an LLC.

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

The business of wholesaling real estate is often conducted by persons who are not licensed as a real estate broker or as a real estate sales agent.  Real estate wholesalers typically seek to find properties that are not suitable, in their present condition, for listing on a multiple listing service (MLS) and which are not suitable for sale at a retail price.

Once a real estate wholesaler locates a distressed property, the wholesaler, who deals directly with the property owner, attempts to negotiate the terms of a purchase contract or an option contract.

After entering into a real estate purchase contract or a real estate option contract with the property owner, the real estate wholesaler will then “sell” the contract to someone else.  The person who buys the wholesaler’s contract may be a “rehabber,” someone who fixes-up dilapidated properties and then resells them, either to consumers or to other investors.

Historically, Texans (as well as other Americans) could freely buy and sell rights in real estate purchase contracts and real estate option contracts.  That is, they could freely engage — without a real estate license — in the business of real estate wholesaling.

On September 1, 2017, however, the right to freely engage in the business of real estate wholesaling — in Texas — was diminished.  As explained below, the extent to which that right was diminished in Texas is yet to be determined.

Senate Bill 2212 (SB 2212) amended the Texas Occupations Code, by adding section 1101.0045, effective September 1, 2017, which, in relevant part, states:

Section 1101.0045 can reasonably be interpreted in at least two very different — and opposite — ways.

First, section 1101.0045 can be interpreted to mean that a real estate wholesaler’s failure to disclose the equitable nature of the rights being sold will, henceforth, be deemed to be the brokerage of real estate (for which a real estate license is required) and that disclosure alone is all that a real estate wholesaler must do to avoid violating this law.

In other words, according to this interpretation, a real estate wholesaler need only disclose and, after disclosure, may conduct “business as usual.”  This is the simple reading of the law and, indeed, is the explanation of the law which was given by the author of this legislation.  The courts, however, are free to disregard the author’s explanation.  

Alternatively, section 1101.0045 can be interpreted to mean that although a failure to disclose will certainly constitute the brokerage of real estate, and thereby bring an unlicensed real estate wholesaler within the reach of the statute, disclosure alone is not sufficient to protect the unlicensed wholesaler.

However, if disclosure alone is not enough to protect the unlicensed wholesaler, what else is required?  Answer: to “not use the option or contract to purchase to engage in real estate brokerage,” which is the first prong of the two-prong test of section 1101.0045(a)(1).

But that, you may say, just delays the question.  What does it mean to “engage in real estate brokerage”?

The statutory definition of what constitutes “real estate brokerage” is a bit lengthy, but the short answer is that brokering real estate means selling property: (a) that one does not own, (b) for a fee or other thing of value.

There is absolutely no dispute that real estate wholesalers expect to be paid for their efforts, which, of course, is a completely legitimate expectation.

Thus, the only question that remains is whether a real estate wholesaler “owns” the property being sold.  The short, but not necessarily easy, answer is that the wholesaler “owns” an “equitable” property right in the real estate contract that is being sold, but clearly does not own the legal rights associated with the property.  

Whether the Texas courts will decide that a real estate wholesaler sells “property” that the wholesaler “owns” or does not “own” is, currently, an open question.  As courts and judges have often said about various legal issues, this is “a question on which reasonable minds could differ.”  Translated, there are plenty of employment opportunities in this statute for Texas lawyers.

Perhaps one clue to answering the question of how the Texas courts, in a quest to reconcile the different parts of this statute, might answer the question of whether a real estate wholesaler “owns” what is being sold, is to look at the penalties for violation of section 1101.0045.

The most frequently seen penalty throughout this statutory scheme is monetary: no less than, but up to 3 times the profit realized by the wholesaler.

If we assume, for the sake of discussion, that the Texas courts will rule that disclosure alone is insufficient to bring a non-licensed real estate wholesaler into compliance with the statute, and that wholesalers do not own what they are selling, then it would not be surprising if the Texas courts were to hold that an unlicensed real estate wholesaler violates the statute only if the wholesaler is paid a fee.  In other words, “No Fee = No Brokerage.”  And, of course, 3 times $0.00 is $0.00.

Section 1101.0045 does not apply to licensed real estate brokers (sales agents may not lawfully work independently from their sponsoring broker), nor does it apply to attorneys (who are statutorily exempt from the real estate licensing statute).

In most states, attorneys are not required to hold a real estate license in order to represent a client in a real estate transaction.  Real estate brokers and sales agents in general, and Multiple Listing Services (MLS) in particular, are typically not too pleased with this fact, for obvious reasons.

Texas takes the general rule of allowing attorneys to act as real estate brokers for their clients a step further: In Texas, an attorney may lawfully broker a real estate transaction for a non-client.  See, Texas Occupations Code § 1101.005(1) (Texas Real Estate License Act (RELA) does not apply to licensed attorneys); Banowsky v. Schultz, 05-14-01624 (Tex. App., 2016) (licensed attorney, being statutorily exempt from RELA, may collect a commission for brokering real estate transaction, even in the absence of an attorney-client relationship with party for whom the transaction was brokered).

Given that a person who is seeking professional assistance when buying or selling Texas real estate can choose between a Broker and an Attorney, let us take a look at what each of these professionals does best.

The primary function of a Broker (including Sales Agents who work under a Broker) is to bring real estate buyers and sellers together.  One need look no further than a Broker’s listing agreement to see that it is this “matchmaking” function that earns the Broker a commission.

The single most powerful tool that Brokers have to assist them in bringing buyers and sellers together is the local MLS.  Every MLS spends large amounts of money to collect real estate market data and make it available to MLS members.  Generically speaking, “the MLS” is the benchmark for real estate market data; all other sources of such data are measured against the MLS.  

Furthermore, every MLS jealously restricts data access to its member Brokers and Sales Agents, and usually charges its members hefty fees for the privilege of MLS access.

In order to get paid, after a Broker(s) brings a buyer and seller together, the Broker(s) has to close the deal.  To do this, Brokers handling residential transactions typically fill out standard real estate contract forms, get the needed signatures, and coordinate matters with the closing agent, usually a title company.

For residential transactions in Texas, Brokers are required to use a standard form of contract that is furnished by the Texas Real Estate Commission (TREC).

According to the TREC website, the educational requirements to become licensed as a Texas real estate sales agent (and work under a Broker), and thus to authorize one to use the TREC form when brokering residential real estate transactions for others, includes instruction in:

1.  Principles of Real Estate I (30 classroom hours);

2.  Principles of Real Estate II (30 classroom hours);

3.  Law of Agency (30 classroom hours);

4.  Law of Contracts (30 classroom hours);

5.  Promulgated Contracts Forms (30 classroom hours); and

6.  Real Estate Finance (30 classroom hours).

That works out to be about four and one-half weeks of full-time instruction.

According to the TREC website, in order to become licensed as a Texas real estate broker, an applicant must complete the classes required for a sales agent license and take a 30 hour Real Estate Brokerage class.  Additionally, an applicant for a broker’s license must have “four years’ of active experience” as a real estate broker or sales agent.  Although no college degree is required, Broker applicants who do not possess a bachelor’s degree must complete an additional 630 hours of acceptable real estate-related course work.

Attorneys, by comparison, almost always have a bachelor’s degree in addition to a law school degree.

A portion of the typical three-year curriculum at an American Bar Association (ABA) law school (all good law schools in the United States, and even most mediocre ones, are ABA accredited) will almost always include:

1.  Property Law (two semesters);

2.  Law of Agency (one semester);

3.  Contract Law (two semesters);

4.  Business Organizations (one semester);

5.  Marital Property Law (one semester); and

6.  Wills and Trusts (one semester).

That’s eight semesters of law school course work, not counting the rest of the three-year law school curriculum.

Returning now to our discussion of whether to hire a Broker or Attorney to handle your next real estate transaction, recall that we mentioned earlier that a Broker’s commission is earned — as we see through a review of the typical listing agreement — by bringing buyer and seller together.

If you have ever asked a Broker a question about a real estate contract, there’s a good chance that the Broker responded by suggesting you consult with your attorney.  At least that’s what the answer probably should have been, as Brokers are not permitted to give legal advice.

Texas Brokers are required to use the TREC form for residential transactions; they don’t have a choice.  Ask a Texas Broker to do anything other than fill-in the blanks or check-the-boxes on a TREC form, and wait for the response.  For example, ask a Broker to cross out certain wording and add another line which states “such-and-such.”  You will likely be told that is not allowed.

It is true that Texas Brokers are not allowed to add, delete, or change language on the TREC residential contract.  However, since attorneys are not even required to use the TREC form, there is certainly no impediment to an attorney adding, deleting, or changing language on a TREC form.

A Broker also may not give you advice on whether you should, for example, take title to property in the name of your limited liability company or other business entity, advise you on marital property issues relating to the transaction, or draft a deed for you that will adequately address your estate planning needs.  An attorney may provide all of these services, and more.

In the discussion that follows, the term “Broker” means a real estate brokerage or “sponsoring” Broker, while the term “Sales Agent” or simply “Agent” refers to licensees who work for a brokerage or sponsoring Broker, even though such Sales Agents may, themselves, be licensed as “brokers.”

Sales Agents are subject to the control and supervision of their Broker; the acts of a Sales Agent are considered to be the acts of their Broker.

Additionally, in the eyes of the law, both Brokers and their Sales Agents are considered to be “agents” of the party whom they represent.  For example, both the Seller’s Broker, and the Sales Agents who work for that Broker, are considered to be “agents” of the Seller.  As such, they each owe the Seller certain legal duties.

The “default” rule in Texas is that a Broker represents the Seller, unless there is an express agreement to the contrary between Broker and Buyer.  This makes sense in that it is the Seller who decides whether to list a property for sale, it is the Seller who will pay the sales commission for brokering the transaction, and it is the Seller’s Broker (and/or that Broker’s Sales Agent) who will pay to advertise the property for sale.

Thus, when a Buyer calls a Seller’s Broker in response to an advertisement for a property, the Seller’s Broker is representing the Seller, not the Buyer.  In this situation, the Buyer is unrepresented.

A Buyer, in order to have independent Broker representation, would need to enter into an agreement with a Buyer’s Broker, that is, with a Broker other than the Seller’s Broker.  When this occurs, the Seller’s Broker and the Buyer’s Broker typically share the 6% sales commission (paid by the Seller), with each Broker receiving 3%.  Each Broker’s 50% share of the 6% sales commission (3%) is then divided between Broker and Sales Agent.

Texas, like many other states, allows a Seller’s Broker, with certain restrictions, to “represent” both Seller and Buyer.  When a Seller’s Broker “represents” both Seller and Buyer, the Seller’s Broker is not required to give 50% of the commission (that is, 3% of the 6% sales commission) to a Buyer’s Broker.

In Texas, this dual “representation” (sometimes also referred to as “dual agency”) can take one of two forms.

The first of these two forms of dual “representation” involves the Seller’s Broker acting as a mere “intermediary” (TREC’s term) between Seller and Buyer, without providing any real representation to either.  When this occurs, the Seller is not getting the Broker representation that is usually thought by sellers to be included in the 6% commission they are paying to sell their property, and the Buyer, as with the “default rule” described above, still gets no representation at all.

In the second of these two forms of Texas dual “representation” the Seller’s Broker appoints one of that Broker’s Sales Agents to “represent” the Seller and another of that Broker’s Sales Agents to “represent” the Buyer.  This arrangement, although on its face may appear to be legitimate, is rife with pitfalls.

As an initial matter, this second form of dual “representation” asks us to naively believe that the two Sales Agents, both of whom work for the same Broker, and who perhaps have offices or desks in close proximity to each other, who may attend Realtor training sessions together, and who might even socialize with each other outside of work, will not put their best interests of closing the deal — and getting paid — above the respective interests of the Seller and Buyer whom they supposedly represent.  This is not an indictment of Sales Agents; rather, it is simply an acknowledgment of human nature.

More importantly, however, each of these Sales Agents is, in the eyes of the law, merely an extension of the Broker.  Thus, although this arrangement may provide the appearance of separate or independent representation, such an appearance is a mere illusion.  One Broker is still representing both sides of the transaction.

Because a real estate purchase-sale transaction, like any other contract negotiation, is, at its core, a transaction with (at least) two mutually-exclusive interests — the Seller trying to sell on terms most favorable to the Seller and the Buyer trying to buy on terms most favorable to the Buyer — it simply is not possible for one Broker to represent the best interests of both Seller and Buyer.

Compare Broker dual “representation” to the representation a Seller or Buyer receives from an attorney or law firm.

Although it is technically possible for an attorney to act as an “intermediary” between Seller and Buyer, and not forming an attorney-client relationship or providing legal advice to either, most competent attorneys would never accept employment on these terms.  The major exception, of course, are attorneys who are employed by title companies.  The difference here, of course, is that these attorneys do provide representation to a client: the title company.

But back to our hypothetical Seller and Buyer.  When was the last time you heard about a law firm representing both sides in a transaction, with one of the firm’s attorneys representing the seller and another of the firm’s attorneys representing the buyer?  Probably never, because such arrangements are prohibited.

One last thought as we conclude this article and bring this subject “in for a landing.”  When litigation results from a real estate transaction, as it sometimes inevitably does, the Brokers and Sales Agents who were involved in the transaction are almost always subpoenaed to provide testimony about what happened.  Such testimony is likely to focus on statements made during conversations by and between Brokers/Sales Agents, on the one hand, and the party they “represented” in the transaction, on the other hand.

Attorney-Client communications, however, are protected from compelled disclosure by the Attorney-Client Privilege.  It is extremely rare for an attorney’s client to be compelled to testify about what the client said to the attorney, or for an attorney to be compelled to testify about what the attorney told the client.

It is always a good idea to use the right tool for the job.  Likewise, when professional assistance is needed, the best practice is to hire the right professional for the job.  In the case of buying and selling real estate, that means working with a Broker to “bring buyer and seller together.”  But it also means that a Seller and Buyer should each retain their own attorney to provide legal advice and handle the purchase contract and other legal documents.

As the old saying goes, “An ounce of prevention is worth a pound of cure.”

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

Ask the Attorney a Question:
Considering the high cost of litigation and the potential for a financially devastating outcome, I, like many others, have a generalized concerned about the possibility of being involved a lawsuit.  I do not, however, have any reason to believe that I will be involved in any particular lawsuit.  What are the greatest legal risks to my financial bottom line?  What can I do to protect against that risk?

Attorney Answer:
Clients often seek to manage and reduce legal risk, and rightly so.  The cost of litigation – whether in the form of adverse judgments or simply the expenses that must be incurred to litigate a case –  can bankrupt or severely impair the financial well-being of most individuals and businesses.

When discussing legal risk, clients often express concern about liability resulting from personal injuries others might sustain on the client’s real property, liability from automobile or other accidents, or liability from contractual or related business dealings that somehow went wrong.  These concerns are legitimate.  A large amount of money is lost to adverse judgments in these types of cases, as well as from litigating these types of cases.

The enormity of such losses might explain why many people seek to manage risk through use of various complicated and fancy (not to mention, expensive) asset protection strategies.  However, the truth of the matter is that the vast majority of people will never be involved in such high-stakes litigation and, therefore, do not need the (sometimes questionable) protection that might be provided by such strategies.

Simple (and usually less expensive) is often better than complex (and expensive).  Such is the case here.

Statistically, most Texans are more likely to find themselves in divorce court, fighting over the division of marital assets, than in a civil court fighting over personal injury or contract damages.  Thus, for most Texans it makes sense to focus, at least in the first instance, on the management of marital property.

A brief look at American marital property systems is necessary to better understand why Texas Divorce Courts pose such a great financial risk.

The marital property laws of all American states derive from two basic systems: the Common Law (aka: equitable distribution) system and the Community Property system.  Generally speaking, in Common Law states, married couples decide whether – and which – assets that are acquired during marriage will be considered “marital property” or part of the “marital estate.”  Upon divorce, courts in Common Law states divide the marital estate in a manner determined by the court to be “equitable.”  Most states can be classified as Common Law marital property states.

The Community Property system, on the other hand, presumes that all property acquired during marriage (with certain limited exceptions) is marital property.  Upon divorce, the marital estate – that is, all community property owned by the couple – is divided equally.  The community property form of marital property, having been derived from Spanish law, is found mostly in states located in the southwest and western areas of the country.

Texas statutes classify the Texas system of marital property as being of the community property variety.  Consistent with such a classification, all property acquired by Texans during marriage (again, with limited exceptions) is considered to be community property.

However, in sharp contrast to the “classic” or “textbook” definition of Community Property, Texas law provides that: “In a decree of divorce or annulment, the court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.”  Texas Family Code § 7.001.

Neither Texas statutes nor Texas judicial opinions articulate any objective or other meaningful standard by which to determine whether the division of marital property in any particular case is “just and right,” unjust and wrong, or somewhere in between.  Apparently, “just and right” is, as the statute itself states, whatever “the court [that is, the trial judge] deems” it to be.

Thus, the statutory mandate that Texas marital property be divided in “a manner that the court deems “just and right” is, for all intents and purposes, an almost unrestrained legislative invitation for the trial judge to do whatever he or she wants to do.  Indeed, what two or more judges consider “just and right” in a given situation might be vastly different.  There is absolutely no legislative (or judicial) attempt to ensure, or even promote, the uniformity of Texas divisions of marital property, whether from Texas county to Texas county, or even between different courtrooms within any given Texas county.

Furthermore, it is important to note that judicial discretion to divide Texas marital property in “a manner that the court deems just and right” is not limited to divorce cases that allege “fault.”  So-called “no-fault” cases are equally susceptible to the whims of the trial judge.  Thus, to the extent that a divorce litigant (or that litigant’s attorney) can cast the other party in a “bad light” before the trial judge, or where the other litigant brings judicial disfavor upon himself or herself for whatever reason, a divorce case that ostensibly is a “no-fault” case can, as a practical matter, yield a property division that is based on considerations of fault or other wrongdoing.

In all fairness to Texas judges, most probably hold a sincere belief that their “just and right” property divisions are, well, just and right.  The problem here is not most Texas judges; the problem is the Texas legislature.

The Texas legislature has failed to give Texas trial court judges any objective or otherwise meaningful guidance on how to properly divide marital property.  The result has been that each Texas trial judge that is tasked with making a “just and right” decision regarding the division of marital property has no choice but to apply his or her own values and ideas about how marital property should be divided in a given case.  The result is – literally – “Legislating from the Bench” – not because all or any particular judge has decided to be a “judicial activist,” but rather, because the Texas Legislature has failed to legislate.

Now for the good news.  The Texas Legislature has allowed you to do what it has failed to do.  Texas statutes affirmatively authorize and allow married couples to contract with each other on issues such as: specifying what property will (and will not) be considered marital property; whether and how marital property is to be divided; whether, in the event of divorce, one spouse may be made to pay the other spouse’s attorney fees (in whole or in part), whether one spouse may be made to pay alimony to the other spouse (and if so, how much), and other important issues.

More good news.  Marital property contracts are not just risk management tools that can be used in case of divorce.  Such contracts are also extremely valuable asset protection tools for couples where, for example, one spouse is self-employed or who engages in a profession or occupation that exposes that spouse to significant levels of litigation risk from dealings with third parties.

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction, or since this publication may have changed statutorily or have been affected by judicial decision.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

The entire staff at Lapin Law Offices, a Dallas, Texas law firm, offers its condolences to the Dallas Police Department and law enforcement community and, especially, to the families of the police officers who where assassinated and otherwise injured in the attacks that occurred in downtown Dallas on the evening of July 7, 2016.

As a law firm engaged in the private practice of law, we at Lapin Law Offices find that representing clients often requires that we challenge the actions of government in general, and sometimes of law enforcement in particular.

In the United States of America, opposition to the conduct of government is not only allowed, it is a highly cherished and protected right.

However, we firmly believe that, consistent with the principles embodied in the United States Constitution, opposition to the conduct of government must, if we are to live as a civilized society, be conducted within the parameters and confines of the Rule of Law.  To that end, civil disobedience must not be violent and challenges to government conduct must occur only in the courtroom.

Murderous attacks on law enforcement, such as the attacks which occurred in Dallas on July 7, 2016, are not acts of civil disobedience.

Given that law enforcement is the quintessential domestic manifestation of American government, politically-motivated attacks on law enforcement are nothing short of an attack on the sovereignty of government itself.  The United States, unlike other countries, does not have a widespread history of tolerating such conduct.  Hopefully, the clarity of history will show that the events of July 7, 2016 were an anomaly, and not a defining point in American culture.

To the families and loved ones of the law enforcement officers who were killed or injured in Dallas on July 7, 2016, please know that we appreciate the sacrifice made by each and every officer, and also the sacrifice made by each and every one of you, both in the present and going forward, as we all must do.

Asset protection clients are often sold elaborate – and expensive – trusts and other legal planning devices, often by slick lawyers or seminar presenters who promise, or who at least strongly imply, that their particular planning device (which no one else has managed to replicate) will provide all the asset protection the client could ever need.

Sometimes elaborate and expensive asset protection plans are warranted; more often, however, they are not.  But even when they are warranted, a lack of attention to basics can defeat the most sophisticated of asset protection plans.

Those who start or run their own businesses are usually at least somewhat familiar with the asset protection (e.g., pre-litigation risk management) strategy of using some type of statutory business entity (e.g., corporation, limited liability company, etc.) to protect their personal assets from their business creditors.  As we – and the Texas courts – all know, the ability to avoid personal liability “is an essential reason that entrepreneurs” shoulder the risks of starting and running their businesses.  Willis v. Donnelly, 199 S.W.2d 262, 271 (Tex. 2006).

Most asset protection clients have also heard of the tactic of “piercing the corporate veil,” which is used by plaintiff lawyers who would like to be able to satisfy a judgment against a business by going after the personal assets of the business owner(s).  Commonly recommended precautions to prevent a “corporate veil piercing” include such common-sense practices of keeping good corporate records, maintaining separate personal and corporate bank accounts, and not co-mingling business and personal funds and expenses.

However, many Texas business owners may not realize that the asset protection qualities provided by their business entity (e.g., corporation, LLC, etc.), can be forfeited – automatically and without any effort whatsoever by a plaintiff’s lawyer – simply by the business owner’s failure to timely file an Annual Franchise Tax Report and pay any tax that may be due.  See, Tex. Tax Code § 171.251.

When “the corporate privileges of a corporation are forfeited,” officers and directors are liable for the corporation’s debt.  Tex. Tax Code § 171.255.  When “corporate privileges of a corporation are forfeited . . . each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived.”  Id.  The period of liability thus begins “when the report, tax or penalty is due,” and not when the corporate charter is eventually forfeited.

Furthermore, “liability . . . is not affected by the revival of the charter or . . . corporate privileges.”  Id.  Thus, revival of the corporate charter will not protect the business owner from personal liability for a corporate debt that arose during the period between the tax or report being due and the revival of the corporate charter.

Although section 171 refers to “corporations,” these forfeiture provisions apply to all “taxable entities” in Texas.

Annual Texas Franchise Tax Reports are due May 16, 2016.

Contact Lapin Law Offices

Disclaimer

The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction, or since this publication may have changed statutorily or have been affected by judicial decision.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

Real estate investors need capital to fund deals.  Many, if not most, use only their own capital.  This strategy may be fine for the “weekend warrior,” that is, the real estate investor who has a “regular 9-5 job” and who invests in real estate just to supplement their “regular” income or to save for retirement.  This strategy, however, will not work for someone who is in the business of investing in real estate.  Those who are in the business of real estate investing must raise capital — that is, must use “other people’s money (‘OPM’)” if they are to be successful.  There simply is no other way.

The same is true for small businesses and other entrepreneurs.  Some require more startup or growth capital than others; but the fact remains that just about every business or entrepreneur will need to raise capital, through one means or another, at some point in time.

What do the professional real estate investor and other small businesses and entrepreneurs have in common?

First, neither will likely be able to borrow the capital they need from conventional sources such as banks.

Second, both will likely need to work with private investors to raise capital.

The Securities and Exchange Commission (SEC) regulates that which are known as “securities.”  The legal definition of a “security” for SEC regulatory purposes is a bit verbose, convoluted, and sometimes not terribly clear.  Thus, many different and diverse arrangements can constitute a “security.”

The most prevalent misconception of what constitutes a “security” that we encounter is the idea that as long as there is no “pooling of funds,” that is, no combining of funds from different investors, the securities laws don’t apply.

Although ordinary stocks and bonds constitute securities, the definition of a security is much broader and all-encompassing.  A lesser-known form of security is what is known as an “investment contract.”  A leading United States Supreme Court case has defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. . . .”  SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).  More recently, the Supreme Court stated that an investment contract is “an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”  United Housing Foundation v. Forman, 421 U.S. 837 (1975).  In United Housing, the word “solely” was conspicuously omitted from the definition of a security.

In an opinion that is recognized and cited nationwide, the United States Court of Appeals for the Fifth Circuit (which is composed of Louisiana, Mississippi and Texas) held that an interest in a Limited Liability Company (LLC) or an interest in a partnership is an investment contract (e.g., a security) if the investor was dependent on the promoter and could not exercise meaningful control.  Examples include where the: (i) managing partner cannot be replaced or is very difficult to replace, (ii) investors are inexperienced in business affairs and cannot exercise their abilities to participate in management, or (iii) promoter has unique managerial abilities which cause de facto reliance on the promoter.  Williamson v. Tucker, 645 F.2d 404 (5th Cir 1981).

The U.S. Supreme Court’s decision in Howey and United Housing, and the Fifth Circuit’s decision in Williamson, are and remain correct statements of the law.  Thus, we see that even if the pooling of funds is relevant to a determination of whether a financing arrangement constitutes a security, it is not a necessary element of a security. In other words, it is clear that a security can exist even if there is no pooling of funds.

Thus, we learn from Howy and Williamson that the real estate investor, as well as the small business or other entrepreneur, who uses “other people’s money” is engaging in activity that implicates the securities laws.  That’s the bad news.

The good news is that there are several exemptions to the securities law that often can be used to the benefit of a real estate investor, small business or other entrepreneur.  At Lapin Law Offices, we can often assist a client in taking advantage of an appropriate exemption.

Learn more here about Securities Law



For more information on this topic, click here to: Contact Lapin Law Offices


Lapin Law Offices, P.C.
5001 Spring Valley Road, Suite 400 East
Post Office Box 802234
Dallas, Texas 75380
972. 292.7425


Disclaimer: The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction and/or may not reflect current law.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

Lapin Law Offices mourns the loss of Antonin Scalia, and fully concurs with the Chief Justice of the United States, who said in a press release that Justice Scalia “was an extraordinary individual and jurist, admired and treasured by his colleagues.  His passing is a great loss to the Court and the country he so loyally served.  We extend our deepest condolences to his wife Maureen and his family”

We, at Lapin Law Offices, would add that not only was Justice Scalia “admired and treasured by his colleagues,” he was also admired and treasured by everyone at Lapin Law Offices, and especially by attorney Manasseh Lapin, who had the pleasure and privilege of attending a continuing legal education seminar that was taught by Justice Scalia during September 2007.  As a longtime admirer of Justice Scalia, we will miss his intellect, wit, and leadership on the Court.  Most of all, we will miss Antonin Scalia, the loyal American who strived to return the United States to a country that is governed by the Constitution that was actually ratified, rather than a “constitution” that changes with the wind to conform with the politically correct whims of a supposedly more “enlightened” society.  Justice Scalia truly was, in the words of Justice Clarence Thomas, a “legal giant.”

We at Lapin Law Offices also extend our deepest condolences to Justice Scalia’s wife Maureen and to his family.

Question:
In this Legal Update, we address the issue of handling small claims matters as they relate to real estate investors and general contractors.  Our question will illustrate both sides of a typical dispute:

A real estate investor hired a general contractor to make needed repairs on a single family residence that the investor had just purchased at a foreclosure sale.  After the agreed-upon repairs had been completed, it was discovered that some additional repair work was needed.  The general contractor offered to perform the additional work — for an additional fee.  The investor, believing that the additional work was needed solely as a result of the contractor’s negligence in performing the initial repairs, contends that the contractor should perform the additional work at no charge.

Answer:
Small claims matters in Texas are handled in the state Justice Courts.  A “claim” in Justice Court may be for “no more than $10,000, excluding statutory interest and court costs but including attorney fees, if any. . . .”  Texas Rule of Civil Procedure (TxRCP) 500.3(a).

Thus, assuming that an award of attorney fees is an available remedy in our hypothetical case, we see that a plaintiff’s decision to retain counsel may affect the Justice Court’s jurisdiction to decide the case.

As surprising as it is, we have actually seen suggestions by other attorneys that small claims litigants simply “take their chances” in small claims court by representing themselves and, if they lose, to then retain counsel and file an appeal in order to obtain a trial de novo in a County Court.

An “appeal” may be taken from a judgment issued by a Justice Court.  TxRCP 506.1(a).  In the context of our hypothetical case, a trial “de novo” means: “a new trial in which the entire case is presented as if there had been no previous trial.”  TxRCP 506.3.

Before we address the merits of the “take your chances” legal strategy, let us try to bring some precision to some imprecise word usage.  The term “appeal” is generally understood to be a review by a higher court of a lower decision.  However, appellate review is almost always limited to the issue of whether the lower court (e.g., the trial court) committed reversible error.  Examples of reversible error include erroneous decisions to admit or exclude evidence, whether sufficient admissible evidence was admitted at trial to support the verdict, whether the trial court applied the correct law, whether the trial court applied the correct law correctly, and so on.  Furthermore, not all error is considered “reversible.”  An appellate court will not reverse the decision of a lower court unless any actual error that was committed by the trial court materially affected the outcome of the case.

Thus we see that a trial de novo of a small claims case is not an “appeal” in the true sense of the word.  A trial de novo is merely a re-litigation of the case, that is, a “do-over.”

But what’s wrong with a “do-over?”  We “took our chances” and lost; now we get a second “bite at the apple.”

To answer this question, let us look at what the proceedings in Justice Court might have looked like.

1.  The Plaintiff filed and served a Petition.

2.  The Defendant filed an Answer, and perhaps (probably) filed a Counterclaim against the Plaintiff.

3.  In our hypothetical case, perhaps our “primary” Defendant contends that the only reason he is liable to the Plaintiff is because of the conduct of some third party, for example, a subcontractor.  Our Defendant might then bring the third party into the case by filing and serving a Third Party Claim against this person or entity.  TxRCP 502.6(c).  If the Plaintiff had already named this other person or entity as a party defendant, our “primary” Defendant would simply file a Cross-Claim.  TxTCP 502.6(b).

4.  All parties have the right to conduct pre-trial discovery; however, discovery requests must be pre-approved by the Court.  TxRCP 500.9.

5.  After discovery has been completed, one or more of our hypothetical Parties might move for summary judgment, that is, “[a] party may file a sworn motion for summary disposition of all or part of a claim or defense without a trial. . . .”  TxRCP 503.2.

6.  If a motion for summary judgment — or cross motions for summary judgment — do not completely resolve the case, the case can be set for trial.  TxRCP 503.3.

7.  Following the trial setting, the Court might then order a pretrial conference, in order to attempt a settlement.  TxRCP 503.4.

8.  If the pretrial conference does not bring about settlement, the Court “may order any case to mediation or another appropriate and generally accepted alternative dispute resolution process.”  TxRCP 503.5.

9.  If mediation fails, the parties then proceed to trial.

10.  If one or more of the parties had properly and timely requested a jury trial, then we begin the process of selecting a jury, that is, questioning potential jurors, challenging potential jurors, etc.  TxRCP 504.1; 504.2.

11.  Once a jury is empaneled, we try our case: call and examine our witnesses, introduce documentary and other physical evidence, cross-examine the other parties’ witnesses and challenge their physical evidence, etc.

12.  After the jury returns a verdict, an unhappy party may file a motion for a new trial.  TxRCP 505.3(c).

13.  After the motion for a new trial is denied, the unhappy party can now “perfect” an “appeal,” which means, in the case of a plaintiff, posting cash or bond in the amount of $500 and, in the case of a defendant, posting cash or a bond in an amount equal to twice the amount of the judgment.  TxRCP 506.1 (b); 506.1(c).

Now, our hypothetical real estate investor and general contractor litigants can take advantage of the trial de novo — the do-over — that was the focus of their “take your chances” litigation strategy.

The “take your chances” litigation strategy is, it seems to us, a very poor strategy; it is a litigation strategy we would not recommend.

There are many things an attorney can do to assist a client in resolving a small claims case while simultaneously not “breaking the bank.”  One tactic we have employed in small claims cases is to work “behind the scenes” with our client, advising the client on the merits and demerits of the case, drafting court documents for the client to file with the court, and educating the client on how to best present the case in court.

One very valuable tool that is available to our clients is the Lawyer Available Whenever (LAW) Plan.  Subscribers to the LAW Plan enjoy priority access to a Texas attorney who will consult with them, review their documents, and provide timely, insightful, and practical legal advice.  If the matter needs more than a short telephone consultation or document review, LAW Plan subscribers receive a 10% discount on all additional legal work that we perform for them.

The LAW Plan — unlike similar legal service plans from some of our competitors — gives you a direct relationship with a law firm, without any third party, non-attorney sales force intermediaries.

LAW Plan subscriptions are available for both individuals and small businesses.  For more information — and to subscribe — please visit: http://www.lapinlawtx.com/law-plan.html

Lapin Law Offices assists clients with asset protection, business law, family law, real estate law, trust and estate law, and other legal matters.

Prior to getting divorced, my now former spouse and I purchased a home.  We both signed the promissory note for the loan which is secured by the house.  During our divorce, my spouse was awarded the house.  I subsequently executed a deed which transferred my ownership interest in the property to my former spouse; however, my former spouse has never refinanced the loan which is secured by the property.  I do not want to be responsible for paying a loan which is secured by an asset that I neither own or have the legal right to control.  Nor do I want such a loan to impact my ability to purchase a replacement residence.  What can I do?

The situation you describe is, unfortunately, not uncommon in Texas.  We see it all the time.  The best solution, albeit one which is no longer available in most cases we encounter, is to not allow this problem to occur in the first place.  Where a litigant is represented by counsel during divorce proceedings, counsel should — at a minimum — advise the client to not agree to a settlement of the case on terms which would allow this situation to occur.

In cases where prevention is no longer an option, the best course of action can be determined only after a close and careful reading of the divorce decree.  The remedy (or remedies) which might (or might not) be available will depend in large part on the precise language and provisions in a divorce decree.

Litigants in this situation often (mistakenly) assume that all that is needed is to go back to court and either ask the court to enforce a provision in the divorce decree that purports to require a refinance of the property or to obtain a new, supplemental order which contains such a provision.  The problem with this strategy is that the spouse who was awarded the home will often claim (usually truthfully) that they do not have the financial ability to comply with such an order.

Thus, a more creative solution which takes into consideration all of the facts of a specific case is typically required.

Lapin Law Offices assists clients with asset protection, business law, family law, real estate law, trust and estate law, and other legal matters.

Effective September 1, 2015, a Trustee under a Deed of Trust which is secured by real property may, for a limited period of time, rescind a foreclosure sale of Texas residential property.  Relevant portions of the new statute, which was enacted as the result of Texas HB 2066, read as follows:

    Not later than the 15th calendar day after the date of a foreclosure sale, a mortgagee, trustee, or substitute trustee may rescind the sale under this section if:
    
    (1)  the statutory requirements for the sale were not satisfied;
    
    (2)  the default leading to the sale was cured before the sale;
    
    (3)  a receivership or dependent probate administration involving the property was pending at the time of sale;
    
    (4)  a condition specified in the conditions of sale prescribed by the trustee or substitute trustee before the sale and made available in writing to prospective bidders at the sale was not met;
    
    (5)  the mortgagee or mortgage servicer and the debtor agreed before the sale to cancel the sale based on an enforceable written agreement by the debtor to cure the default; or
    
    (6)  at the time of the sale, a court-ordered or automatic stay of the sale imposed in a bankruptcy case filed by a person with an interest in the property was in effect.  Texas Property Code § 51.016(a).

For real estate investors who purchase Texas residential foreclosure properties, this law has the effect of delaying — and making uncertain — the finality of purchased foreclosure properties for the duration of the 15 day rescission period.

For lenders, this law has the effect of providing a “safe harbor” for the correction of mistakes; for borrowers, the law creates one last opportunity to retain ownership of the foreclosed property.

Lapin Law Offices assists real estate investors and real estate professionals with a wide range of real estate and business law matters.

The Texas Real Property Transfer on Death Act, also known as SB 462, created the Texas “transfer on death (“TOD”) deed,” which provides for the automatic transfer of Texas real property upon the death of the transferor, without the need for probate.

SB 462, was enacted during the most recent session of the Texas legislature and has been codified in Chapter 114 of the Texas Estates Code.

The Texas TOD deed is merely an extension of the concept of allowing owners of real property to automatically transfer by deed, upon their death, their interest in a property to co-owners of the same property.  Most states refer to this concept as holding title to property as “Joint Tenants, with the Right of Survivorship,” or simply as “Joint Tenants.”

The Texas TOD deed extends an owner’s ability to automatically transfer upon the owner’s death an interest in real property to any person; no longer is an owner’s ability to automatically transfer property by deed and upon death limited to transfers to co-owners of the property (e.g., transfers to the surviving joint tenant(s)).

Unlike joint tenants, transferees who are designated to receive title to real property by way of a TOD deed do not have any legal or equitable interest in the subject property prior to the death of the transferor.

A TOD deed may be revoked at any time before the grantor’s death; however, the method for revocation must be one which is set forth in the statute.  A TOD deed may not be revoked by an ordinary Will.

For more information on Texas estate planning in general, or on Transfer on Death Deeds in particular, please contact Lapin Law Offices today.

During the most recent — 84th — session of the Texas Legislature, several important pieces of legislation which impact Texas businesses and real estate investors were introduced and ultimately passed into law.  One such important piece of legislation was Senate Bill 1077.

SB 1077 amended the Texas Business and Commerce Code to clarify that the term “person” includes a particular series of a for-profit Series Limited Liability Company (LLC).

This clarification, which at the time of this writing has already taken effect, reinforces and confirms that each series of a Texas LLC (or foreign Series LLC that has registered to do business in Texas) is to be treated as a separate, independent business entity.

For more information on Series LLCs, please visit: http://goo.gl/ZsuT9A

Question:
I am the owner of a single-member Limited Liability Company (LLC).  It is extremely likely that the LLC will be served with a lawsuit in the very near future.  Although I am confident the LLC would prevail at trial, the LLC cannot afford the costs of defending against the lawsuit.  Regardless, win or lose in court, the LLC does not have sufficient assets to pay any adverse legal judgment that might be rendered against it.  Would dissolving the LLC and reestablishing the business under a new name be an acceptable means of dealing with the anticipated lawsuit?

Answer:
As an initial matter, we must state unequivocally that attempting to put assets beyond the reach of identifiable and known potential judgment creditors (as well as actual judgment creditors) is illegal.  The umbrella term for such actions is “fraudulent transfer.”

If it is proven that a debtor engaged in a fraudulent transfer, the ultimate cost to the debtor could be many times more than the amount of the underlying debt.  Although debtors should consult with counsel prior to implementing any legal strategy, bankruptcy may be the best course of action for a company that is faced with a court judgment that it does not — and will not — have the ability to pay.

That said, your question illustrates the importance of pre-litigation planning — what is commonly referred to as “asset protection.”

Although the nature of your business or the claim against it is not ascertainable from your question, what can be said is that most businesses (as well as individuals who work as employees) can benefit from pre-litigation (asset protection) planning.

Depending on the nature of the most probable type(s) of claim(s), pre-litigation planning can help the assets of manufacturing businesses, service businesses, professional practices, real estate investors, and individuals.

Resolving legal disputes through litigation is expensive, with results being extremely unpredictable.  Pre-litigation (asset protection) planning, seeks to minimize the potential for litigation, as well as the adverse effects in the event litigation becomes unavoidable.



For more information on this topic, click here to: Contact Lapin Law Offices


Lapin Law Offices, P.C.
5001 Spring Valley Road, Suite 400 East
Post Office Box 802234
Dallas, Texas 75380
972. 292.7425


Disclaimer: The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction and/or may not reflect current law.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.

Question:
It looks like my spouse and I will soon be separating, and possibly divorcing.  As Texas residents, will the assets that each of us acquire after we separate, but before our divorce is final, be considered community property?

Answer:
Texas, as you correctly point out, refers to its form of marital property law as being of the “community property” variety.  Notwithstanding the “community property” label, the Texas system of marital property law is not a true form of community property law.  That, however, is a subject for a different time.

All community property jurisdictions agree that property acquired both prior to and after marriage are separate property.  The legal issue, as you astutely have observed, is at what point in time a marriage is deemed to have terminated for the purpose of acquisition of community property.

Some community property states, for example, California, consider “separation” to be the event that determines whether newly-acquired assets will be separate property.  Texas, on the other hand, considers entry of a decree of divorce to be the relevant event.

There are advantages and disadvantages to both methods.

In jurisdictions where separation is the triggering event, there often is significant (e.g., expensive) litigation on the issue of whether and when the parties “separated.”  Living apart may not always be legally sufficient.  Furthermore, in cases where the parties reside in the same residence during divorce – albeit in different areas thereof  – the date-of-separation can be much harder to establish.  However, assuming an undisputed date-of-separation, parties in this type of jurisdiction can live apart for years and never get divorced, all the time acquiring separate property.

In jurisdictions such as Texas, where entry of a decree of divorce is the triggering event, there is usually much less, if any, incentive for parties to litigate the date-of-separation issue.  However, if there is a significant disparity in the amount of actual post-separation earnings of the parties, that fact alone might be sufficient reason to promptly obtain a divorce.

Consider an example: Husband and wife separate.  Husband earns $150,000 per year, while wife earns only $50,000 per year.  The couple delays divorcing for five years.

In a date-of-separation jurisdiction, everything each of the parties earned post-separation is the separate property of the party who earned it.  Litigate the date of separation issue and this aspect of the property division issue pretty much resolves itself.  In our example, the only community property to divide would be that which was acquired prior to separation.  The post-separation earnings would be the separate property of the spouse who earned them.

In a divorce decree jurisdiction such as Texas, each party in our example would effectively have earned $100,000 per year during the separation ([$150,000 per year + $50,000 per year] / 2).  Assuming, for the sake of illustration, that husband saved every dollar of post-separation earnings, husband would owe wife $250,000 ($50,000 per year x 5 years) to equalize the division of community property.  Naturally, the husband in our example will likely have consumed some of his post-separation earnings on day-to-day living expenses, which would have the effect of reducing the amount of the equalizing payment.

However, to the extent that a portion of either spouse’s post-separation earnings were saved or invested – in either traditional investments or in retirement accounts – those savings or investments would be community property.  Likewise for any real property that either spouse may have purchased during separation (e.g., a replacement residence), but prior to entry of a decree of divorce.

As is readily apparent, it is important to properly and adequately address legal issues without delay, especially where, as in the situation of separation-divorce, the failure to take prompt and effective legal action could be very costly.



For more information on this topic, click here to: Contact Lapin Law Offices


Lapin Law Offices, P.C.
5001 Spring Valley Road, Suite 400 East
Post Office Box 802234
Dallas, Texas 75380
972. 292.7425


Disclaimer: The information contained in this publication is provided by Lapin Law Offices, P.C., for informational purposes only and, shall not constitute legal advice or create an attorney-client relationship.  The laws and interpretation of laws discussed herein may not accurately reflect the law in the reader’s jurisdiction and/or may not reflect current law.  Do not rely on the information contained in this publication for any purpose.  If you have a specific legal question, please consult with an attorney in your jurisdiction who is competent to assist you.