Reversing the Dallas Court of Appeals

On June 20, 2014, the Supreme Court, in what will certainly be seen as a landmark decision, issued an opinion reversing the Dallas Court of Appeals in the case of Ritchie v. Rupe. The Dallas Court of Appeals had affirmed the trial court’s ruling that a minority shareholder was entitled to fair market value for her shares, including discounts for lack of marketability and for the stock’s minority position. On June 20th, the Supreme Court held that it was not “oppressive conduct” for the majority shareholders to refuse to meet with prospective purchasers of the company, that the Business Organizations Code does not authorize courts to order a corporation to buy out a minority shareholder’s stock, and that there is no common-law cause of action for minority shareholder oppression. The Texas Supreme Court’s opinion represents the single most important decision to-date on the rights, or lack thereof, of minority shareholders.

More on this topic in a blog post coming soon.

Prepetition Waivers of the Automatic Stay – Are They Enforceable?

In recent case law, bankruptcy courts are beginning to consider prepetition waivers of the automatic stay in bankruptcy as a consideration in determining whether “cause” exists to lift the automatic stay. In In Re 4848, LLC, 490 B.R. 343, 345 (Bankr. E.D. Wis. 2013), the court found the following language to constitute such “cause”:

“Relief from the Automatic Stay. As a material inducement to Lender to enter into this Agreement, Borrower hereby stipulates and agrees that Lender shall be entitled to relief from the automatic stay imposed by 11 U.S.C. § 362 or any similar stay or suspension of remedies under any other federal or state law in the event Borrower becomes subject to a bankruptcy or other insolvency proceeding, to allow Lender to exercise its rights and remedies with respect to the Collateral.”

The court determined that the public policies in favor of freedom of contract and encouraging out-of-court restructurings and workouts of a debtor’s relationships with its creditors outweighed the public policy behind the automatic stay.

Although prepetition waivers of the automatic stay are enforceable, they are not per se enforceable, nor are they self- executing.  Instead, the courts will consider the following factors:

  • The sophistication of the waiving party
  • The consideration for the waiver, including the creditor’s risk and length of time covered by the waiver
  • Whether other creditors’ rights are impacted
  • The feasibility of debtor’s plan
  • Whether there is evidence that the waiver was obtained through coercion, fraud, or mutual mistake of material factors
  • Whether enforcing the waiver will further the public policy in favor of out-of-court workouts
  • Whether there appears to be a likelihood of reorganization
  • To what extent the creditor will be harmed by not enforcing the waiver
  • The length of time between the date of the execution of the waiver and the date of the bankruptcy filing and whether a compelling change in circumstances has occurred during that time
  • Whether the debtor has any equity in the property

We suggest that all lenders should consider including the language cited above in all of their future loan documents, and in all forbearance agreements.

Traps for the Unwary: New Texas Property Owners Association Laws

In 2011, the Texas legislature completely overhauled the laws related to the actions of Property Owners Associations (“POAs”) in the state under the provisions of the Texas Residential Property Owners Protection Act.  Many POAs had used their assessment lien rights to force homeowners out of their homes for relatively minor infractions of POA rules and regulations. The goals of the overhaul were to create a more transparent relationship between the POAs and their members, to make foreclosure available only through judicial process, to create a six (6) month redemption period, and to require all “Dedicatory Instruments” (which means each governing instrument covering the establishment, maintenance, and operation of a residential subdivision [or the administration or operation of the POA of any such subdivision]) to be filed of record in the real property records of the county where the relevant subdivision is located and also made available  on the POAs website, if any.

RECORDING OF DEDICATORY INSTRUMENTS. Now, if the Dedicatory Instruments are not recorded, the POA cannot enforce their respective terms against the subdivision’s property owners (Texas Property Code Section 202.006). In the past, POAs have typically recorded the Declaration of Covenants, Conditions, and Restrictions for the subdivision and the Bylaws of the POA, but not necessarily the other documents that are included within the scope of the term “Dedicatory Instruments.”

The other documents that should be recorded to be clearly enforceable include:

  • The Open Records Production and Copying Policy of the POA (which must conform to mandatory ceiling prices)
  • The Document Retention Policy
  • Alternative Payment Plan Guidelines for delinquent property owners
  • The Architectural Control Committee’s Design Guidelines
  • The POAs Rules and Regulations for the subdivision

OVERRIDE OF CONFLICTING PROVISIONS IN EXISTING DEDICATORY INSTRUMENTS. Several changes to Texas POA law override previous provisions that were slanted heavily in favor of the subdivision developer:

  • Within 120 days after the date that 75% of the lots have been sold, at least 1/3 of the board must be elected by non-developer owners (versus typical provisions maintaining developer control until 90+% of lots have been sold)
  • Dedicatory Instruments can now be amended by 67% of the owners, not whatever higher percentage is actually in the Dedicatory Instruments
  • Board meetings must be open and at least 10 days prior notice must be provided to owners of the meetings
  • Owners have access to the POA’s records upon request
  • Assessment lien filings must now be prepared by an attorney not a POA employee
  • Architectural Control Committee Guidelines with respect to certain items is specified by law (flag displays, rain barrels, religious symbol displays, solar energy devices, and certain roofing materials)

Thus, a POA that relies on the wording of its Dedicatory Instruments may find that it has inadvertently broken the law, may not be able to enforce restrictions against owners, and may even have opened the door to liability for the POA.

All POAs should review their Dedicatory Instruments for compliance with the 2011 laws, record all required documents, and notate any provisions of their Dedicatory Instruments that have been overridden by such laws.