Federal Real Property Case Law Update

By Manuel Farach

Manuel Farach is a shareholder at Mrachek Fitzgerald Rose Konopka Thomas & Weiss, P.A., in West Palm Beach, Florida, and a member of the Section’s Marketing and Social Media Committee. Readers may obtain a weekly summary of federal case law by sending an email to mfarach@ mracheck-law.com and requesting to be placed on the distribution list.

Federal Real Property Case Law Update

This article provides a brief summary of the most significant opinions issued by federal appellate courts during the period from May through June 2022, which addressed, among other topics, contracts, governmental takings, COVID shutdown orders, arbitration, bankruptcy, and consumer law.

Contract Actions

This summary begins in the First Circuit where the court, applying Maine law, held that a seller under an “as is” contract has no duty to disclose the existence of fill on a property when there is evidence of the fill in the public records. The court went further and stated that the seller could not be sued for “active concealment” for “hiding” the fill when fill is—by its very nature—buried and not visible. The court explained the concept of “active concealment” and found summary judgment was proper for the seller due to the fill’s existence being recorded and there being two decades between the filling of the property and the sale contract. Pleasantdale Condo., LLC v. Wakefield, 37 F.4th 728 (1st Cir. 2022).

The Sixth Circuit explained how a “right of first refusal” under Low-Income Housing Tax Credit (LIHTC) program, 26 U.S.C. § 42, works in the SunAmerica Housing Fund 1050 v. Pathway of Pontiac, Inc., 33 F.4th 872 (6th Cir. 2022), decision. Briefly, a right of first refusal under the program requires there be a bona-fide, third party offer but then differs from the common law right by permitting a qualifying nonprofit organization to exercise its right of first refusal at the section-42-established right of first refusal ex ante price: the outstanding debt on the property plus any “exit taxes” that result from the sale (sometimes referred to as “debt plus taxes”).

The circuits were also busy with breach of contract cases. The Seventh Circuit ruled in an interesting case that a party who uses a false name to defraud under a contract cannot obtain benefits under the contract. The defendant was a competitor of the plaintiff and used a false name to pretend to be a customer in order to obtain the plaintiff’s software. The defrauding party was sued and demanded arbitration under the provision in the contract, but the court reasoned that a defrauding party cannot avail itself of benefits under the contract when it defrauded the other party when entering into the contract. CCC Intelligent Solutions Inc. v. Tractable Inc., 36 F.4th 721 (7th Cir. 2022). Also interesting is Franklin v. Regions Bank, 37 F.4th 986 (5th Cir. 2022), in which the Fifth Circuit held that a landman (an expert in oil, gas, and minerals who works for energy developers to obtain access or development rights from landowners) mistakenly entering into a lease for 1,800 acres at a price for 180 acres is not a “mistake in judgment,” i.e., a mistake involving the exercise of discretion. The end result here was that the owner could not terminate the lease under Louisiana law.

The circuit decisions regarding contracts also touched on settlement agreements as contracts. The Fifth Circuit held that a grace period in a mortgage reinstatement agreement must be given effect and overcomes any conflict with a monthly payment schedule or a “time is of the essence” clause. Burbridge v. CitiMortgage, Inc., 37 F.4th 1049 (5th Cir. 2022). And the Eighth Circuit held that a party cannot use equitable estoppel to enforce a settlement agreement against a non-signing party when the party who signed the agreement with plaintiff was not acting as the non-signer’s agent and when there was no joint venture between the signer and the non-signer. Cardiovascular Sys., Inc. v. Cardio Flow, Inc., 37 F.4th 1357 (8th Cir. 2022).

Takings

We also saw a takings case this cycle, but with a twist. The Seventh Circuit declined to endorse a “judicial takings” theory, holding that lakefront owners could not sue their state government in federal court under a “judicial taking” theory to overturn a state supreme court decision that arguably changed state law regarding private versus public ownership of lakefront land. Pavlock v. Holcomb, 35 F.4th 581 (7th Cir. 2022). The concept of judicial takings comes from the plurality decision in Stop the Beach Renourishment v. Florida Department of Environmental Protection, 560 U.S. 702 (2010), a U.S. Supreme Court case affirming a Florida Supreme Court decision upholding a beach renourishment program. A plurality of the Stop the Beach court believed, however, that the Florida Supreme Court decision effected a “judicial taking” because the program placed dry sand between beachfront owners and the water and disconnected beachfront owners from the water (thus creating a public beach between the beachfront owners and the water). Judicial takings theory has not gained traction, however, as the Pavlock decision to not allow a case to proceed under that theory demonstrates.

COVID-19 Insurers continue their winning streak on claims arising from COVID. The Seventh Circuit aligned with the Fourth and Sixth Circuits and held that there is no coverage under all-risk insurance policies for interruption as the result of closures due to COVID-19 if there was no physical damage caused by the virus. Paradigm Care & Enrichment Ctr., LLC v. West Bend Mut. Ins. Co., 33 F.4th 417 (7th Cir. 2022). The Eleventh Cir-cuit applied state law and followed the majority view to hold there is no coverage under all-risk insurance policies under Florida law for damages arising out of government-imposed closures arising as a result of COVID-19 because the virus did not cause a tangible, physical alteration of the insured properties. SA Palm Beach, LLC v. Certain Underwriters at Lloyd’s London, 32 F.4th 1347 (11th Cir. 2022). And apropos of our discussion above regarding takings, the Seventh Circuit held that claims against the state for closure orders under the First Amendment’s Free Exercise, Free Speech, and Freedom of Assembly Clauses and the Fourteenth Amendment’s Due Process and Equal Protection Clauses do not state causes of action, but upon sufficient proof, a claim under the Fifth Amendment’s Takings Clause may do so. Nowlin v. Pritzker, 34 F.4th 629 (7th Cir. 2022). Aggrieved parties may want to sue states instead of insurers.

Title

Circuit court decisions on title issues are not common, but the Tenth Circuit issued Mindock v. Bruff Dumars, 2022 WL 1410017 (10th Cir. May 4, 2022), and weighed in with a decision holding that the following language presents a restraint on alienation of a fee simple estate (not a use restriction) and is thus void under Colorado law: If either Joint Tenant, without the written consent of the other, attempts to: a) partition the property, or b) convert this joint tenancy into a tenancy in common with respect to any interest conveyed by this Warranty Deed or other interest in the Property currently owned or subsequently acquired by such Joint Tenant, then the Property shall, by operation of law, revert to the other Joint Tenant in fee simple immediately without requirement of judicial intervention or further legal conveyance.

Regulatory

There were three relevant decisions in the regulatory arena, Seila Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020) (for cause legislative restriction on President’s authority to remove director of Consumer Financial Protection Bureau who wielded executive powers was unconstitutional), continues to cast a long shadow over the landscape. Take, for example, the bank officer who was removed by the FDIC for failure to follow bank procedures when protecting a bank client from loan default. The officer claimed that the FDIC administrative law judge had no authority over him as a result of Lucia v. SEC, 138 S. Ct. 2044 (2018) (holding that appointments of SEC administrative law judges who are shielded from removal violates the Constitution). Unfortunately for him, the Sixth Circuit did not agree. Calcutt v. Fed. Deposit Ins. Corp., 37 F.4th 293 (6th Cir. 2022).

On a more prosaic level, there are two Fair Credit Reporting Act cases to note. The employer in Schumacher v. SC Data Center, Inc., 33 F.4th 504 (8th Cir. 2022), failed to obtain proper consent before running a credit report on a potential employee. The court held that although failure to obtain consent was a technical violation of the Act, the claim did not rise to the level of Article III standing. In Gross v. CitiMortgage, Inc., 33 F.4th 1246 (9th Cir. 2022), a lender violated the Fair Credit Reporting Act (FCRA), 15 U.S.C. §§ 1681 et seq., by reporting a borrower’s second mortgage as “past due” even though the borrower’s liability for deficiency under the second mortgage had been “abolished” under the state’s antideficiency statute. This party was not able to escape liability.

Arbitration

As is typical, there are several arbitration cases of note, including two from the US Supreme Court. The more significant of the cases is Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), where the Court held that federal courts interpreting the Federal Arbitration Act cannot add additional conditions to the Act and, accordingly, may not require a showing of prejudice to establish a party waived its right to arbitrate. And in ZF Automotive US, Inc. v. Luxshare, Ltd., 142 S. Ct. 2078 (2022), the Court held that only a governmental or intergovernmental adjudicative body (i.e., not an arbitral body) constitutes a “foreign or international tribunal” under 28 U.S.C. § 1782 such that a district court may order the production of evidence “for use in a proceeding in a foreign or international tribunal.”

On the procedural front, the Second Circuit held that an agreement between counsel to serve pleadings during the arbitration via email does not alter the Federal Arbitration Act’s requirement under 9 U.S.C. § 12 that motions to vacate be served in accordance with Federal Rule of Civil Procedure 5. DallaLonga v. Magnetar Cap. LLC, 33 F.4th 693 (2d Cir. 2022). Accordingly, a motion to vacate an arbitration award improperly served by email was untimely. And the Fourth Circuit held in Reddy v. Buttar, 38 F.4th 393 (4th Cir. 2022), that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, as implemented by 9 U.S.C. §§ 201–208 (the Convention), provides the method for determining the merits of arbitration awards but leaves the decision of the method for enforcement of awards to the laws of the Convention’s signatory states.

Bankruptcy

Although not expected to affect real estate practitioners a great deal, the US Supreme Court held in Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022), that the congressional enactment of different bankruptcy fee structures for different states violates the uniformity requirement of the Constitution. At the circuit level, the Ninth affirmed the widely held understanding that failure to make payments to a secured real estate lender as set forth in a confirmed Chapter 11 plan can result in conversion of the bankruptcy to a Chapter 7 even if substantial payments have been made under the Chapter 11 plan. The key, of course, is whether there was substantial consummation, so the Ninth Circuit’s decision should not be taken as a bright-line rule. Baroni v. Seror (In re Baroni), 36 F.4th 958 (9th Cir. 2022).

Two other concepts that bear mentioning are who “owns” the right of conversion and what constitutes a “conflict” under the Bankruptcy Code. The Tenth Circuit in Bear Creek Trail, LLC v. BOKF, N.A. (In re Bear Creek Trail, LLC), 35 F.4th 1277 (10th Cir. 2022), held that the management of a bankrupt company may appeal the conversion of their company’s Chapter 11 case to Chapter 7 in their own name (if they have standing), but the right of the company itself to appeal the conversion belongs to the Chapter 7 trustee. The Third Circuit held that a bankruptcy court determines conflicts to an estate under 11 U.S.C. § 327 and—in making its determination as to whether a conflict exists—may consider but is not controlled by the Model Rules of Professional Conduct. In re Boy Scouts of Am., 35 F.4th 149 (3d Cir. 2022).

Bankruptcy appeals are somewhat tricky due to the underlying structure of the cases, but the Sixth Circuit confirmed that bankruptcy appeals follow the general rule that appeal of a Rule 60(b) order does not automatically raise for appeal the merits of the underlying judgment. In re Murray Energy Holdings Co., Case No. 21-8014, 2022 Bankr. LEXIS 2056 (6th Cir. B.A.P. June 3, 2022). Along the same lines, the Eleventh Circuit held that under 11 U.S.C. § 1141(d)(1) and (1)(A), a plan of reorganization discharges a debtor from all claims “that arose before” the “order confirming the plan” unless the plan itself excludes those claims. Accordingly, obligations fixed before the bankruptcy court confirmed the plan of reorganization, e.g., to provide health care benefits, are discharged by the plan. U.S. Pipe & Foundry Co., LLC v. Holland (In re U.S. Pipe & Foundry Co.), 32 F.4th 1324 (11th Cir. 2022). And the Second Circuit held that a bankruptcy court’s traditional power to impose contempt sanctions carries with it the authority to award damages and attorney fees—including appellate attorney fees. Law Offices of Francis J. O’Reilly, Esq. v. Selene Fin., L.P. (In re DiBattista), 33 F.4th 698 (2d Cir. 2022).

Potpourri

Though not falling clearly into welldefined categories, some additional decisions are still of interest to real estate practitioners.

For example, the Fourth Circuit held in Martz v. Day Development Company, L.C., 35 F.4th 220 (4th Cir. 2022), that a court can determine the method of compensation for a land planner and consultant if the planner meets the requirement for compensation under his retention contract but the contract has no available method of determining compensation. The Eleventh Circuit held in Brucker v. City of Doraville, 38 F.4th 876 (11th Cir. 2022), that it is not unconstitutional for a municipality to base its annual budget on the collection of code enforcement and traffic fines. The Eighth Circuit held in Sanborn Savings Bank v. Freed, 38 F.4th 672 (8th Cir. 2022), that a mortgage is a “credit agreement” under Iowa statutory law, and accordingly, equitable defenses to a mortgage are waived to the extent a written mortgage differs. The Sixth Circuit held in Tarrify Properties, LLC v. Cuyahoga County, 37 F.4th 1101 (6th Cir. 2022), that a class of property owners who had their properties transferred to a land bank through a tax foreclosure process is not capable of class certification because there is no cognizable common theory for measuring the value in each property at the time of transfer. Finally, the Fifth Circuit ruled that a stipulation in state court that plaintiff seeks damages less than $75,000 may be binding on a defendant such that the defendant cannot remove the case to federal court. Durbois v. Deutsche Bank Nat’l Trust Co., 37 F.4th 1053 (5th Cir. 2022).

Published in Probate & Property, Volume 36, No 6 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Probate & Property, November/December 2022