CHAPTER 1 - § 1.5 • THE COLORADO UNREPORTED CASES
| Jurisdiction | Colorado |
It is our thesis that those of us engaged in real estate practice (whether we call ourselves specialists or not) learn best from actual fact situations. It is not very helpful to tell yourself each morning on the way to the office that "today I'm going to be really careful."
But if you read about or listen to the case of the lawyer who did not see to the recording of the closing documents, or who did not commence the foreclosure until the treasurer's deed was issued, you may just remember to be diligent about recording a document or commencing a foreclosure.
With that emphasis — on remembering fact situations that spelled trouble for other Colorado practitioners — we report below actual cases that went to suit or threat thereof. The results, the decisions, the verdicts, the exonerations, the settlements, the insurance coverages or lack thereof—these are not important. Instead, we will concentrate on the events leading up to the accusation of fault.
In each case scenario, L = Lawyer, C = Client.
§ 1.5.1—Can You Prove What You Told the Clients?
The Case of Specific Performance Denied
C wanted to sell his business and its attendant real and personal property. Since C was a licensed real estate broker, he prepared a proposed purchase contract providing for specific performance upon the purchaser's default and took it to L to review.
After conferring with C, L redrafted the contract with a clause providing for liquidated damages upon the purchaser's default. C signed the contract and so did the purchaser.
Later, the purchaser defaulted and although C held the earnest money, C could not obtain specific performance of the contract. C claimed L was negligent for not explaining the difference between the specific performance and liquidated damages clauses. L insisted the difference had been discussed.
Moral: Keep a record of what you told the client and what the client told you. Detail to the client the potential exposure, as best you can. This can be done by email, notes, or description on the invoice.
The Case of Specific Performance Granted
C was a sophisticated stock broker and financial adviser, but without experience in real estate transactions. C retained L to prepare a purchase contract on a large tract of property that C hoped to acquire. L prepared a specific performance agreement, which included many typed pages and was not on the printed form. Hours were spent by L negotiating the contract, with C in attendance. Eventually the contract was signed by all parties.
Later, when C defaulted, the seller sued for specific performance. C claimed surprise, believing his only liability was loss of the earnest money deposit. Because of the declining real estate market, the seller sold the property to a third party at a sum that was more than $100,000 less than C had contracted to pay. Seller obtained judgment against C for the loss. C sued L for the same amount.
Moral: You can't win. But try to avoid losing. At the very least, explain to all clients, regardless of degree of sophistication, the difference between the remedies of specific performance and liquidated damages. Then, be able to prove what you explained and what the client instructed you to do.
The Case of the Unrecorded ILC
L and C were friends of long standing. L had done many favors for C over the years, including finding C employment. L had taken care of many minor legal matters for C and had never billed C for such services.
C decided to buy a commercial-residential property and asked L to assist. The property was in a somewhat distant county, but L undertook the job, making several trips to the county seat to take care of various matters connected with the transaction.
The owner of the property would only sell upon an installment land contract, so L prepared the agreement and provided that a warranty deed be placed in escrow for C's protection. At the closing, there was some discussion whether the contract itself should be recorded. The owner told C not to record the contract because to do so would be to reveal the purchase price to the tax assessor, thereby causing a substantial increase in C's taxes. There was a dispute as to what L told C, but no question that C followed the owner's advice and did not record the contract.
The county treasurer continued to mail tax notices to the vendor/record owner who had since moved. C never received the notices of tax delinquency. C did receive a tax notice for the personal property on the premises, which C paid, claiming later that he thought it was for taxes on both personalty and realty. Eventually, the real property was sold for taxes, a tax deed was issued, and C was ousted. C sued L for malpractice, claiming L should have protected C against the consequences of not recording the contract.
Moral: The case illustrates a less obvious pitfall arising from a failure to record. Can we say that you should always advise a client to record a purchase contract? Suppose C sues L following recordation of the contract for failure to warn C that C's taxes would increase as a result of the recording? Again, whatever you tell the client, be sure you are able to document it. A letter to the client following the closing, though an obvious attempt at exculpation, is certainly preferable to an adverse judgment for malpractice. And, by the way, do not rely on long-standing friendships to protect you from suit if you misfire.
The Case of the Missing Royalty
C owned property near a gas field. All the surrounding land had been leased except C's. C told L that although the landman said the lessee was paying a 12.5 percent royalty for oil, C felt entitled to a larger royalty on gas because this was the last unleased parcel and gas production was proven.
In response, L suggested that he prepare a lease on the usual "Producers 88" form, leaving paragraph 3 thereof as printed, providing for a one-eighth royalty for oil; but changing paragraph 4 from a one-eighth to a one-fourth royalty on gas. C agreed, so at the end of paragraph 4, L typed an asterisk. At the bottom of the page, he typed another asterisk, followed by: "All the royalties under paragraph 4 shall be 25 percent." L then attached a sight draft to the lease, C signed, and it was forwarded to the payor bank. The lessee executed the lease when it arrived at the bank, paid the sight draft, and returned a copy of the lease to C.
The lessee brought in an oil well on C's property, whereupon C claimed that he had instructed L to provide for a 25 percent royalty on both oil and gas, and sued L for the difference in royalties, amounting to $290,000. Although L claimed C had not given instructions to change the royalty pertaining to oil, L had no office notes or other evidence in the file to prove exactly what C had said. The lessee said it would not have signed the lease with a 25 percent royalty on oil. However, C was able to show that the lessee was paying 25 percent oil royalties in a situation involving the last leased parcel of a producing field.
Moral: Communicate. Write estoppel letters to clients explaining what you understand your instructions to be. Take notes — and save them.
The Case ofthe Three-Day "Be Back"
C, a rural land owner in a "hot" area, was being romanced by numerous speculators. C made inquiry as to who was the best real estate lawyer in the area and then retained L-1, everybody's "expert." Upon the advice of L-1, C rejected several offers from promoters because they did not involve adequate "windfall" profit to C.
Then appeared L-2, an out-of-state lawyer and speculator, who promised C a $600,000 profit in three years on a "wrap" around C's present encumbrance. L-2 asked for and received 30 days to go back to his home state to raise the down payment on a limited partnership syndication. Before he left town, L-2 put up $50,000 earnest money.
L-1 proceeded to draft the closing documents. As agreed with L-2, the contract provided that the limited partners, as well as the general partners, were to be individually liable to C for the purchase price. To carry out this intent, L-1 inserted a clause in the note and deed of trust to the effect that, although signed only by the general partner on behalf of the partnership, the limited partners were liable thereon to the same extent as the general partner, as provided in the limited partnership agreement (to be drafted).
L-2 returned with a list of limited partners that read like a "who's who" in high financial circles. However, L-2 did not have a signed agreement of limited partnership, as promised. The closing proceeded, but when the absence of the limited partnership documents became apparent, L-2 promised in writing that he would return home, crank out the partnership documents, and "be back" within three days.
L-1 took C aside in a separate room with no one else present and advised C not to close on this basis, telling C he would be better off to take the $50,000 earnest money and declare a forfeiture. But C, who now appeared to be relying more upon L-2 than L-1, insisted upon closing, stating that L-2 had never lied to him, that big bucks were involved, and that another $600,000 deal was very unlikely. L-1 said, "It's your closing, but if I were you, I wouldn't close." There were no witnesses to this advice.
C ignored L-1's advice and the closing was completed. L-2 went home. C discharged L-1, saying that he did not like the way L-1 handled the closing. L-1 asked C if C would follow through with L-2. C said he would, but he did not.
When the first year's payment of $200,000 came due, L-2 appeared with $127,000 but declared that was all he could raise with the money market the way it was. C said to L-2, "Give me the limited partnership agreement and I will go after the limited partners." L-2 then showed C the agreement, which said that the limited partners only had to pay when L-2 made a "call." L-2 refused to make a "call," and C never received the remainder of the windfall...
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