SBM Real Property Law Section eNewsletter

July 2010

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Financial Hardship Does Not Necessarily Render Contract Performance Impossible

By Christopher M. Williams, Couzens, Lansky, Fealk, Ellis, Roeder, & Lazar, PC

In Oakwood of Cambridge, L.L.C. v. Kaspa (Mich. App. May 20, 2010 (No. 289590) (unpublished)), the Michigan Court of Appeals held that defendants' financial hardship was legally insufficient to invoke the doctrine of supervening impossibility.

Defendants contracted to purchase a home, but failed to close the purchase after it was built. Defendants claimed that changed financial circumstances rendered their purchase impossible. These changes included paying their unemployed daughter's IRS liability, reduced income, losing health benefits, and the inability to sell a rental property. However, defendants' liquid assets were sufficient to complete the purchase.

The Court stated that " . . . while a supervening event's lack of forseeability may produce an impossibility sufficient to extinguish liability . . . , under Michigan law '[s]ubsequent events which in the nature of things do not render performance impossible, but only render it more difficult, burdensome, or expensive, [will not operate to relieve a party of its contractual obligations.]'" The Court found it lamentable that a near-retirement age couple had to tap into their savings or retirement account prematurely, but this was not sufficient to relieve them of liability.

Oakwood analyzes a common problem in uncertain economic times: the inadvisability of performing a contract due to unanticipated financial hardship. Adding contractual safeguards or contingencies (e.g. financing contingency or sale of home contingency), or limiting damages in the event of default (e.g. to a deposit) will avoid the liability. Contracts may also contain a force majeure clause identifying circumstances beyond the control of the parties which permit contract termination. Loss of income may be included in a force majeure clause, or other financial insecurities may be identified as conditions that permit contract termination.

The Empire Strikes Back, a Little

By Howard A. Lax, Lipson, Neilson, Cole, Seltzer & Garin, PC

On June 17, 2010, the U.S. Justice Department announced prosecutions of 1,215 individuals for significant mortgage fraud. On the day that Attorney General Holder announced Operation Stolen Dreams, the FBI launched coordinated arrests, obtained guilty pleas, and announced sentencing in mortgage fraud cases in Michigan and over a dozen other states and major cities across the United States.

The most common criminal count alleged by the Justice Department is wire fraud (18 USC §§ 1343 and 1349). Other potential criminal counts, such as taking fees for services not performed in a residential mortgage transaction (12 USC § 2607) and making a false statement to obtain a loan (18 USC § 1014) require more effort to prove authenticity of the documents or intent of the accused. Note that no prosecutions have been reported under parallel state laws, MCL 750.219 and MCL 750.219e. The FTC also took civil action against a string of foreclosure rescue operations, and FHLBB banks are suing lenders for selling securities backed by loans with inflated appraisals. These cases are but a tip of the tip of the criminal iceberg. According to the FBI's 2009 Mortgage Fraud Report, there were a total of 67,190 Mortgage Fraud Suspicious Activity Reports (SARs) filed with FinCEN in fiscal year 2009. Fraud reports in January and February this year were filed at triple the 2009 rate, even as the volume of loans declined.

The FBI arrested more than 400 in Operation Malicious Mortgage in 2008. Two years later, the arrest list is four times as long. The FBI will be arresting thousands of current fraudsters three years from now, with no end in sight.


Expect the Unexpected

By Larry Dudek, Miller Canfield Paddock & Stone PLC

In 1955, Mae Callow conveyed unimproved land to the predecessor of the Bloomfield Hills School District. The deed stated that the land was subject to "the restriction that these premises be used for School purposes only." The Oakland County Circuit Court in Mushovic v. Bloomfield Hills School Dist. (Mich. App. March 18, 2010 (No. 29341, 29342) (unpublished)) held the conveyance created a charitable trust which required use of the premises to benefit only students of the Bloomfield Hills School District, and the restrictive use provision created a covenant running with the land. The circuit court ordered the school district to terminate a lease allowing the Waterford School District to educate students at the school.

The Michigan Court of Appeals reversed, holding that the conveyance did not create a charitable trust or a covenant running with the land. Instead, the deed conveyed a fee simple determinable with a right of reverter to the heirs of the grantor, which would become operative if the school district ceased use of the premises for "School purposes." The Court of Appeals held that the lease was a proper "School purpose."

This decision is the first to find the existence of an implied right of reverter. Prior case law construed similar language as a non-binding statement of intended use. The decision is also contrary to the rule of construction that deed restrictions will be narrowly construed to promote the free use and alienability of property.

We often tell our clients that we cannot predict the outcome of a case. The Court of Appeals found a fee simple determinable even though none of the parties urged such a construction and, to the contrary, expressly asserted that the conveyance was not a determinable fee. The lesson to be learned is to expect the unexpected.

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July 14–17, 2010
2010 Summer Conference
The New Normal—Working With Today's Realities
Crystal Mountain Resort, Thompsonville