Real Estate Investors Wish They Were Partners After Developer Filed Chapter 7 Bankruptcy

Utnehmer v. Crull (In re Utnehmer)  12-1362  (Opinion released last week! 10/10/13) Developer may erase debt to investors during bankruptcy proceedings because their loan agreement for luxury home project did not make them business partners. In 2005, a real estate developer purchased a million dollar property in Venice California.  However, it was apparently a junk property.  The developer wanted to tear down the structure and build from scratch, resell it and make a healthy profit.  However, they did not have enough money. Enter Patrick and Mary Crull.  The Crulls loaned the developer $100,000.  The goal was to rebuild the property in one year.  However, the Great Recession caused a change in plans.  In 2008, the project was completed and sold for $3,725,000. The real estate developer sold the property for about 2.5 million more than what he bought the property.  Unfortunately, the sale proceeds were used the money to pay back other creditors, but did not pay back the Crulls. The Crulls were mad!  They filed a lawsuit.  The Developers never answered the complaint because they knew that they were going to be forced to file bankruptcy.  The Crulls were easily able to obtain a judgment of $213,645.17 for their $100,000 investment. The Developers countered the judgment by filing a chapter 7 bankruptcy petition. They named the Crulls as debtors and sought to discharge the debt.  The Crulls were forced to file a complaint inside the bankruptcy proceedings and asked the court to rule that the Developers could not discharge the debt to them via this bankruptcy. At the trial, the bankruptcy court found that the loan agreement for bankruptcy created a partnership between the Developer/debtor and the Crulls, and because of that partnership, Developers'/Debtors' debt to them could not be discharged. The Developers appealed the trial court and won!  The appellate court reversed the bankruptcy court. Bankruptcy Code Section 523(a)(4) provides that if a person filed for bankruptcy under a chapter 7, he cannot get rid of debts he owes, which occurred due to his fraud while acting in a fiduciary capacity. In California, business partners are fiduciaries within the meaning of Section 523(a)(4). Here, however, the loan agreement between the real estate developers and and the Crulls were not good enough to create a partnership relationship. What is interesting to note is that the loan agreement made reference that the Developers and the Crulls were going to form a partnership in the future.  But because it was a mere idea to form a partnership in the future, it was not enough to form a partnership.  Thus, the appellate court concluded there was nothing in the loan agreement that established any intent to create a partnership at any point. The court concluded that because there was no partnership agreement between the real estate developers the Crulls, they did not owe a fiduciary duty.  As a result, the debt is discharable. This opinion by the court was published last week.  The Crulls are probably still kicking themselves for electing to be lenders instead of partners on this Venice beach property.    Photo Credit: http://www.flickr.com/photos/huffstutterrobertl/

This article was written by California Attorney, Kenneth Jorgensen. To find out more, or to contact Ken, please visit his websites at www.fresnolawgroup.com and www.fresnobankruptcylawgroup.com

A Diamond in the Rough

For several years I have been driving by a simple little house near St. Peter, MN just across the Minnesota River. It always catches my attention and I have wondered how old it is, who built it, who lived there and how has it survived.  It is a small, simple building that looks to be a typical example of the first generation of houses built during the settlement era in the upper Midwest.  Although houses of this sort used to exist by the thousands in Minnesota, very few have survived unaltered.  This Fall I finally got my courage up and decided I would introduce myself to the owner.  Beside the house is Nelson Imports, an auto repair shop specializing in Mercedes, and I met the owner Josh Nelson who graciously showed me the building.

The mystery house near St. Peter, MN. 

As you can see there isn't much to the building. It is in good condition and hasn't been cut up or altered to the point that the original structure can't be easily identified. The earliest part of the house is the section on the right with the front-facing gable.  The addition on the left was added a few years later, most likely as the family grew and separate kitchen space was needed.  Josh knew that the house had been lived in up into the early 1960s and that it has been vacant ever since.  He also had heard that it had been used as the first railroad depot in St. Peter. Since I am fascinated by vernacular architecture like this humble little house and the stories of the people who lived in it, I couldn't help but offer to research the building's history.

Stay posted through the Fall as I start studying this little gem and learn all about its story!  

Plus, if your C Class needs brakes or the "check engine" light keeps coming on, stop by and see Josh at Nelson Imports in St. Peter and he will be sure to take good care of you and your Mercedes. 

New Bern Home Sales

Weekly Update-Home Sales for New Bern-Craven County Market

There are currently 1026 homes for sale in Craven County.

In the past two weeks, 51 homes closed in Craven County. (week ending 10/6)

$12,000.-$100,000=12 sales.   In this price range there are 164 homes for sale!

$100,001-$150,000=12 sales.   In this price range there are 229 homes for sale!

$150,001-$200,000=12 sales.   In this price range there are 257 homes for sale!

$200,001-$250,000=9 sales.     In this price range there are 136 homes for sale!

$250,000-$300,000=3 sales.     In this price range there are 56 homes for sale! 

$300,001-$1,000,000=3 Sales. In this price range there are 177 homes for sale!  

            

Of the sales in the two past weeks, 4 were Waterfront homes. 

Of the 23 sales this past week 5 were  Bank Owned properties. 

There was 0 waterfront lots sold in the past week. 

There were 4 interior lots sold in the past two weeks. Note-3 of these were in Carolina Colours

There were 1 commercial buildings sold in the past two weeks. It sold after being on the market 447 days.

Here is how the sales this week compare to sales for the same 2 weeks in prior years.

2013=51 sales

2012=45 sales

2011=41 sales

2010=48 sales

2009=36 sales

If you have any questions about the real estate market, or if you would like a custom report for your neighborhood, send me an email.

Partition of Property: What Happens When A Lawsuit is Filed

What happens if you are required to file a lawsuit seeking partition?  I recently read a case that went into details of how a typical partition case unfolds in litigation.  The facts are from Martin v. Martin, B198405 (Cal. Ct. App. Apr. 23, 2008).

In the Martin case, "Thomas" and "Ruth" were ex-spouses that co-owned a commercial property. Through the years, they split the rental income.  After a number of years, Thomas wanted to sell the property.  Ruth did not.  Thomas was forced to sue her.  Here's how the case was litigated at the trial level:

On May 4, 2005, Thomas filed a complaint for partition against Ruth. The complaint sought a sale of the property, and a division of the net proceeds of the sale. On June 13, 2005, Ruth answered the complaint and alleged various affirmative defenses, including claims for credits and offsets in connection with alleged fraudulent misrepresentations made by Thomas.  

The superior court set the matter for a mandatory settlement conference (MSC). At the March 29, 2006 MSC, the parties orally agreed to sell the property and equally divide the net proceeds.  

On June 2, 2006, counsel appeared in superior court and represented that the parties had agreed on a broker to list and sell the property. The court issued an order appointing the broker. The court also set a trial date of October 23, 2006.

On August 21, 2006, the parties accepted an offer for the sale of the property. The parties executed a purchase agreement and escrow instructions.

The escrow instructions memorialized the parties' earlier agreement in principle to equally distribute the net sale proceeds without offsets.

Ruth was fighting Thomas on selling the property.  She forced Thomas to spend attorney fees and costs before she agreed to list the property.  I am sure that her attorney advised her that she was going to lose her case.  Regardless, she decided it was worth paying a lawyer to fight a losing case.  Perhaps she was acting out of vindictiveness.  Perhaps she and her attorney were using the lawsuit to negotiate more favorable terms for her benefit.  Unfortunately, this legal opinion does not explore the personal motivations of the ex-spouses.  

Ultimately, Ruth agreed to list the property for sale.  The cost of the sale of the property was greatly inflated because of the court and attorney fees.  

Ken Jorgensen, California Attorney
www.fresnolawgroup.com

Photo credit: http://www.flickr.com/photos/victoriapeckham/

New Home Sales in the New Bern area.

New Construction Home Sales in the New Bern Market

So, how is new home construction faring in Craven County? If you listen to the national media things are looking rosy for new home sales, and I am sure they are in certain areas of the country. However, in Craven County new home sales are still lagging as demonstrated in the numbers below. Take a look, and then we will try to analyse why this might be the case. 

New Home Sales through 10-2.

2013=141

2012=184

2011=179

2010=232

2009=235

2008=269

2007=423

2006=526

2005=491

2004=160

Last week the news reported Fannie Mae officials were saying the recent increase in mortgage rates held new construction home sales back last month. In my opinion this is not the real underlying reason. It is the weak economy, lack of real jobs, and that new home prices have continued to rise while existing home prices have fallen. This has made existing homes more attractive to most buyers.

 Last month, my wife Jana, ran an ad on Craig's List for a Real Estate assistant to help us process paperwork. We had one MBA, and at least 8 recent college grads apply for a job that starts at $24,000. While we are delighted to get such quality applicants, I don't think an MBA will find this a rewarding career. My point, it is still a tough job market in this area and throughout most of the country.

Of the new homes sold this year only 4 have sold for over $250,000. What does this say? Many if not most of the new home sales were to young Marines that are in the $150,000-$200,000 price range. Marine officers that use to buy in the $250,000-$300,000 are opting to rent now instead of buying. The protracted weak economy has caused many folks that have good jobs to stay where they are for fear of losing their jobs.

Also, many of the retires relocating to this area are looking in the $200,000-$250,000 price range whereas they use to be looking in the $250,000-$350,000. They can find an existing newer home in the $200,000-$250,000 with the amenities they want. Because of the increase in regulation and in many instances material cost, builders simply cannot build a new custom home on a .3 acre lot and stay within that price.

When the economy turns there will be a pent up demand for home builders. Until then, my advice to home builders is to reinvent yourself and expand into other areas of construction such as remodeling, insurance restoration, and small commercial contracting.

Real Estate Agents: New Case Regarding Disclosures

A recent case was published regarding a real estate's agent duty to disclose dangerous conditions. While most agents know of the duty to disclose, real estate agents should read on to see how this court applied the rule . . .  

In Hall v. Aurora Loan Services, LLC (2013) 215 Cal.App 4th 1134, a buyer's agent was showing a home to a couple.  The home listed a "bonus room" in the attic.  The room was was accessed by a pull-down ladder from the ceiling.  As her clients went up the ladder, she warned them to be careful.  She then started to climb the access ladder.  As she climbed the ladder, a hinge holding the ladder together came undone.  She plummeted to the ground, breaking her leg pretty bad.  

The buyer's agent sued the owner of the property, Aurora Loans (REO) as well as the listing agents.  The listing agents said they did not know the stairway was in bad shape.  As such, they had no duty to disclose the dangerous condition.  They also said the dangers of an attic ladder are obvious and should have been known to the buyer's agent as well.  The listing agents' attorney filed a motion to get them out of the case.  The trial judge agreed with the listing agents and ordered the sale agents out of the case. 

The buyer's agent appealed the trial court's ruling to the appellate court and won!  The appellate court overturned the trial judge's ruling.  The appellate court held that the listing agent could have known the ladder might have fallen apart because of a property inspector's report delivered to the listing agents.    

Here is the scary part for listing agents: the property inspection report was pretty bland.  There was nothing special about the report.  Here is a quote from the court about this inspection report:    

It is true . . . that the recommendation to remove and replace the stairway ladder was buried in a long list of suggestions for mostly ordinary or cosmetic repairs. But the recommendation to replace the stairway ladder suggests at least the possibility that it was worn or broken. For all the listing agents knew at the time, [the property inspector] recommended the stairway ladder be replaced because he believed it would soon collapse. Yet there is no indication in the record that the listing agents did anything to follow up with [the property inspector] about the reasons for his recommendation or to inquire further into the stairway ladder's safety.

The sad part is that the property inspector later testified in his deposition that he did not believe that ladder was going to collapse.  He only recommended the ladder to be replaced because he thought the ladder system to gain access to the "bonus room"  was a "crappy product" and that it "looked bad."  

Thus, this case shows that listing agents should read those inspection reports and follow up with and make warnings about the recommendations.    

Ken Jorgensen, California Attorney

www.fresnolawgroup.com

Photo Credit: http://www.flickr.com/photos/richardharrod/

Home sales in Pamlico County

Good news. Pamlico County home sales are up. Below are home sales in Pamlico County for the past few years. As you can see they are heading in the right direction.

9-27-12 through 9-26-13=112 homes sold

9-27-11 through 9-26-12=93 homes sold

9-27-10 through 9-26-11=86 homes sold

9-27-09 through 9-26-10=74 homes sold

9-27-08 through 9-26-09=66 homes sold

Not really sure why sales are up. However I will speculate that because Pamlico was hit harder than Craven in the housing bubble, perhaps their rebound is a little more lively than ours. Whatever the reason, sales are rising.

www.newbern-nc.info