RANM CARAVAN LEGAL UPDATE SANTA FE, NM - JUNE 5, 2011 I. CASE LAW UPDATES: FREEMAN V. QUICKEN LOANS, INC. U.S. SUPREME COURT FACTS: Three married couples (collectively, Consumers ) received mortgage loans from Quicken Loans, Inc. ( Lender ). The Consumers filed three separate lawsuits against the Lender, alleging that the Lender had charged fees for which no services were provided and therefore the fees violated RESPA. One such charge was labeled a loan processing fee, while another charge was a loan discount fee, even though it was alleged the Lender had not provided a discount. The Consumers did not allege that the Lender had split any of these fees with a third party. CLAIMS: The Consumers asserted that a 2001 policy statement issued by the United States Department of Housing and Urban Development ( HUD ) prohibited the collection of unearned fees for real estate settlement services and therefore any of the Lender s charges where no services were provided violated 2607(b) of RESPA which states that [n]o person shall give and no person shall receive any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service [involving] a federally related mortgage loan. Real estate settlement services are defined as covering all services connected to a real estate settlement, including real estate brokerage services. PROCEDURAL HISTORY: The Court affirmed the rulings of the lower court, resolving a split among federal circuit courts of appeal. Previously, some circuits had required a fee split with a third party in order for there to be a 2607(b) violation, while others had followed the HUD policy statement and prohibited unearned fees, even when a settlement-service fee was not split with a third party. COURT S HOLDING: The Court rejected HUD s policy statement and ruled that a 2607(b) violation requires the payment of a portion of a settlement-service fee by the party collecting the fee to a third party who performed no services in exchange for the fee. COURT S RATIONAL: Looking at the plain language of 2607(b), the Court found that this section unambiguously covers a settlement-service provider s splitting a fee with one or more other persons; it cannot be understood to reach a single provider s retention of an unearned fee. Further, the Court stated that the language used by Congress in drafting 2607(b) describes two separate exchanges, where one party
receives a settlement fee and then pays a portion of the fee to a third party. Without such payment to a third party, the Court determined that there is no violation of 2607(b). The Court found the Consumer s arguments unpersuasive. First, the Court declined to defer to HUD s RESPA policy statement because HUD s interpretation was inconsistent with the plain language of the statute. The Court also rejected the argument that the consumers were the ones making the prohibited payments when they paid settlement service providers unearned fees, as Congress could not have intended to make consumers potentially criminally liable when it banned both the payment and acceptance of certain types of payments. Finally, the Court also stated that 2607(a) and 2607(b) contain separate prohibitions, rejecting the Consumers argument that the two sections must be read in conjunction with each other to ban unearned fees. Section 2607(a) broadly bans kickback arrangements in exchange for referrals of real estate settlement services, whereas 2607(b) covers arrangements dividing specific settlement service payments between two parties. Thus, the Court affirmed the rulings of the lower courts. WHAT THE FREEMAN DECISION MEANS FOR REAL ESTATE BROKERAGES Suits alleging a violation of Section 8(b) of RESPA have been brought against real estate brokerages that charge consumers a flat fee in addition to a percentage-based commission. The first such suit, decided in 2009 in the case of Busby v. JRHBW Realty, Inc. d/b/a Realty South, sent shock waves through the brokerage community. In that case the court found that a fully disclosed administrative brokerage commission paid by a buyer violated Section 8(b) of RESPA because it was not sufficiently related to any specific service performed for the buyer s benefit and could not be justified by the entire array of services provided to the buyer. In essence, the court found that a price increase violated RESPA merely because it was imposed as a flat fee added to a percentage-based commission as opposed to the brokerage simply charging a higher percentage-based commission. In spite of the fact that the ruling defied logic and was contrary to the language of the statute, other cases alleging the same violation soon followed, with equally troubling results. Today, in light of the unanimous Supreme Court ruling, such fees do not violate Section 8(b) of RESPA unless the broker who is paid the fee splits it and pays a portion of it to a third person outside of the brokerage firm who provides no services in exchange for the fee.
PINGUA ZHAO V. KAREN MONTOYA, BERNALILLO. COUNTY ASSESSOR FACTS: Homeowners bought and occupied new homes. In the year following purchase, Bernalillo County valued properties at significantly greater amounts for tax assessment purposes than it had for the previous owners of the properties. As a result, the property tax assessment for each home was significantly more than what the previous owner had paid in property taxes. CLAIMS: Statute under which their properties were assessed was unconstitutional because the statute creates a classification based on when residential property is acquired, not on the constitutionally permissible classifications of owner-occupied, age or income. PROCEDURAL HISTORY: Homeowners appealed to Bernalillo County Valuation Protests Board. Board rejected the appeals and upheld assessor s valuation. Homeowner s appealed to district court. District court took judicial notice of two previous cases from the district with disparate results and certified the cases to the NM Court of Appeals. COURT S HOLDING: Section 7-36-21-2 does NOT violate the NM Constitution as it limits re-evaluation for taxation purposes based upon owner-occupant status. COURT S RATIONAL: Section 7-36-21-2 provides that residential property shall be valued at its current and correct value provided that for the 2001 and subsequent tax years, the value of a property in any tax year shall not exceed the higher of 103% of the value in the tax year prior to the tax year in which the property is being valued or 106% of the value in the tax year two years prior to the tax year in which the property is being valued. This limitation on increases in value does not apply to valuation of property in any tax year in which a change of ownership of property has occurred in the year immediately prior to the tax year for which the value of the property for property taxation purposes is being determined. Statute is presumed constitutional. Article VIII, Section 1(B) of NM Constitution states that the Legislature shall provide by law for the valuation of residential property for property taxation purposes in a manner that limits annual increases in valuation of residential property. The limitation may be applied to classes of residential property taxpayers based on owner-occupancy, age or income. Homeowners believe that Section 7-36-21-2 classifies residential property owners based on when they acquired their property in violation of the NM Constitution. However, the class of owner-occupants contained in Article VIII, Section 1, does not include anyone until they own property which means that the classification is based on the acquisition of taxpayer status. The limitation ceases with the end of the owner-
occupant s tenancy after the sale of the property; s/he is no longer the tax payer for property tax purposes, nor the owner-occupant of the home who benefits from the limited valuation conferred by Section 7-36-21.2. The purchaser, not owning the property on the date it was last subject to valuation pursuant to the limitation, is not entitled to benefit from the lower taxable value. STROMEI V. RAYELLEN, NM COURT OF APPEALS - UNPUBLISHED OPTION FACTS: Broker had exclusive right to sell listing. Broker found a buyer (LLC). Seller and Buyer entered into a purchase agreement. Buyer/LLC wasn t incorporated at time of entering into purchase agreement and at time it provided letter of financial assurance. Seller didn t/wouldn t close. CLAIMS: Broker claimed entitlement to commission based on bringing a ready, willing and able buyer. Seller claimed because LLC wasn t formed when the parties entered into purchase agreement and at time the LLC provided financial assurance letter that the purchase agreement was void for impossibility (buyer was unable to comply with the conditions of the contract because it didn t exist). Because there was no binding contract, the Broker was not entitled to commission. PROCEDURAL HISTORY: Jury trial in favor of Broker. Seller appealed. COURT S HOLDING: In favor of Broker (accept for award of post-judgment interest). COURT S RATIONAL: Jury Instructions on ready, willing and able buyer. A real estate broker has earned his agreed commission when he produces a prospect who is ready, willing and able to purchase on terms agreeable to the seller. When seller accepts the prospect produced by the broker as a purchaser, the broker s right to a commission becomes fixed. The seller relieves the broker of any further duty when he accepts the purchaser as satisfactory and a binding contract is made. The question of the purchaser s readiness, willingness and ability to buy are factors no longer to be considered once the broker turns over his prospect to the owner, who accepts the prospect as purchaser by entering a binding contract. Jury Instructions on LLC issue: If you find that buyer was not legally formed as a LLC at the time the purchase agreement was signed, the buyer is nonetheless bound by the terms and conditions of the purchase agreement if it expressly or impliedly adopted or ratified the purchase and sale after it was formally organized as a LLC. An entity impliedly adopts or ratifies a
contract if it received benefits from such contract or takes any other action showing an intention to adopt and be bound by the contract. Sufficient evidence that buyer ratified contract after formation of LLC. Furthermore, evidence indicated Seller took no action to enforce the breach under the remedies provision after seller received organization documents from buyer. Buyer was validly existing company authorized to do business in NM as of the scheduled closing date, therefore contract was not impossible. As to whether breach was technical or material, reasonable minds could differ, so will not overturn jury s decision. As to financial assurance letter, seller could have objected, but did not; seller was satisfied with the letter. II. NM LIQUID WASTE (SEPTIC) REGULATIONS 20.7.3.7 DEFINITIONS: AMEND DEFINITION OF OWNER IN THE FOLLOWING MANNER: (6) owner means any person who owns an on-site liquid waste system or any component thereof, or any lot upon which any on-site liquid waste system or any component thereof is located. In the case of property sold/purchased on a real estate contract, the owner of the property is the buyer. INSERT DEFINITION OF REAL ESTATE CONTRACT AS FOLLOWS: R. Terms starting with the letter R are defined as follows: (1) "real estate contract" means a contractual document creating rights and obligations between a seller and buyer of real property under which the buyer acquires equitable title to the property at the time the parties enter into the real estate contract and the seller agrees to transfer legal title to the property to the buyer at some date in the future upon buyer s fulfillment of all terms and conditions of the real estate contract, including, but not limited to payment in full of the purchase price of the property; INSERT DEFINITION OF TRANSFER AS FOLLOWS T. Terms starting with the letter T are defined as follows: (7) transfer means the transfer of equitable or legal title to a property
20.7.3.902 OPERATION AND MAINTENANCE REQUIREMENTS AND INSPECTION REQUIREMENTS AT TIME OF TRANSFER: E. Prior to the transfer of a property with an established on-site liquid waste system, the transferor of the property current system owner shall have the system inspected. Permitted liquid waste systems shall be evaluated by an inspector qualified in accordance with Subsection C of 20.7.3.904 NMAC utilizing a department approved form. Unpermitted liquid waste systems shall be inspected by the department and registered pursuant to Subsections J or permitted subject to Subsection K of 20.7.3.401 NMAC. G. Inspections shall be recorded on forms approved by the department. Inspection reports shall be kept on file by the inspector of the on-site liquid waste system. Inspectors shall submit to the department copies of all inspection reports, whether completed or not, within 15 days of the inspection. A permit or variance application shall be submitted within 15 days of the inspection by the party who is or will be the owner of the property on the 15th day following the inspection to correct any deficiencies or permit violations identified by the inspection. In addition, all inspection reports shall include the global positioning system (GPS) coordinates of the tank. Once an inspection is requested, all results, whether complete or not, shall be submitted to the department. H. In the event of a failed system, that includes, but is not limited to disposal fields, the owner shall remedy the failed system with department approval. In the event property with an existing permitted on-site liquid waste system is transferred prior to the remediation of a failed system, upon transfer, the transferee becomes responsible under these regulations for remedying the failed system. II. SHORT SALE ISSUES: Contract or no contract? When do time frames run for inspections, earnest money etc.? What to do about subsequent offers that come in after first contract is with the lender? What does as is really mean?