Waiting for SB 2080

Both chambers of the Illinois legislature passed SB 2080 on May 31, 2008. Taking advantage of most of the 30 days the Illinois Constitution affords the legislature to present a passed bill to the governor, see Ill. Const. art. IV, § 9(a), SB 2080 was sent to Governor Rod Blagojevich on June 27, 2008. As of July 30, 2008, Governor Blagojevich has neither signed nor vetoed SB 2080. If this were legislation Congress forwarded to President Bush or that most state legislatures forwarded to their respective governors, SB 2080 would by now be deemed enacted by passage of time. However, the Illinois Constitution affords the governor 60 days to sign or veto a bill before it is deemed enacted without the governor's action. See Ill. Const. art. IV, § 9(b). So, while the bills enacting Revised Article 1 in Pennsylvania (also enacting Revised Article 7), South Dakota, Tennessee, and Vermont this year have all taken effect since the Illinois General Assembly passed SB 2080, Illinois's incipient enactment of Revised Articles 1 and 7 continues to idle. (Hopefully, unlike Godot, SB 2080 will eventually arrive.)

If enacted, SB 2080 will make Illinois the thirty-fourth state to have enacted Revised Article 1 and the thirty-first state to have enacted Revised Article 7.

Losing Limited Liability with the Stroke of a Pen: Serge Doré Selections Ltd. v. Universal Wines and Spirits LLC, 23509/2007.

My Payment Systems students sometimes struggle with the notion that a check constitutes its own, separate contract and can be an independent means of liability, wholly apart from the contract pursuant to which the check was written. A recent Westchester County, New York Supreme Court case provides a good example.

The case arose from Serge Doré Selections, Ltd.’s sale of about 900 cases of wine to Universal Wine and Spirits LLC for $112,372.92. There is no dispute that Universal received the wine, has resold at least some of the wine, and never paid for the wine. The interesting portion of the case, for the purposes of this posting, concerns the personal liability of two individuals, Jesse Kessler and Carla Lewin, for Universal’s debt to Serge Doré. The court’s opinion does not indicate who Kessler and Lewin are, but a public-records search reveals that Jesse Kessler is one of two manager-members of the LLC and Carla Lewin is apparently his wife.

Universal’s contract with Serge Doré was memorialized by an invoice and a purchase order, neither of which Kessler and Lewin signed. Instead, Leah B. Dedmon, whose name does not appear in any of the public records for Universal that I found, signed on behalf of Universal.

After the wine was delivered, Universal issued a check in the amount of the invoice, then instructed Serge Doré not to deposit the check. Serge Doré complied, and then a lengthy correspondence ensued between Kessler and Mr. Doré, the President of Serge Doré Selections Ltd. In the course of this correspondence, Kessler provided – and then withdrew – a personal check drawn on his joint account with Lewin for the full price of the wine. Universal also later supplied a second corporate check, which bounced twice and was never paid, precipitating the lawsuit.

Ultimately, the court found that Kessler’s correspondence with Serge Doré, coupled with his issuance of a personal check, showed that he had undertaken personal responsibility for Universal’s debt. (The court found that Lewin, however, had no liability to Serge Doré, since she had not signed the check and apparently knew nothing of its issuance.)

Universal was organized under the laws of Florida, which, like most states, has adopted its own version of the Uniform Limited Liability Company Act. Kessler would normally have been shielded from liability for Universal’s debt pursuant to Florida’s version of Uniform Limited Liability Company Act §303 (a) (1995), which states that generally “the debts, obligations, and liabilities of a limited liability company . . . arising in contract . . . are solely the debts, obligations, and liabilities of the company, [and] [a] member or manager is not personally responsible for a debt, obligation, or liability of the company solely by reason of being . . . a member or manager.” Thus, he was not personally liable to Serge Doré under the contract. The personal check he wrote, however, constituted a separate contract under which he undertook personal responsibility as a drawer.

The court’s analysis does contain an error with regard to UCC §3-402 (b) (1), in that it tends to suggest that Kessler could have avoided personal responsibility if the check had expressly indicated (1) the identity of the principal (Universal) and (2) the fact that Kessler was signing only in a representative capacity. While this would have been true in the case of a promissory note, for example, this would not have shielded Kessler from liability in this instance, since he wrote a personal check drawn on his own account and would therefore necessarily face liability as the drawer of that check under UCC §3-414.

The lesson of this case is an important one for businesspeople as well as lawyers and law students, in that it tends to suggest that limited liability can be quite literally wiped out with the stroke of a pen, at least if that pen is used to write a personal check.

Senator Feinstein Update on FHA Limits

Dear Mr. Thorngren:

Thank you for contacting me to express your support for permanently increasing the conforming loan limit. I appreciate the time you took to write and agree with you.

The Federal Housing Administration (FHA) plays an important role in insuring home mortgages for those in underserved communities. It is critical that FHA programs be modernized to provide more homebuyers and borrowers looking to refinance with the opportunity to obtain an FHA loan. This remains especially important in California where the cost of housing remains high. For homebuyers faced with so-called "jumbo loans" subject to higher interest rates, raising the government-sponsored enterprise (GSE) conforming loan limit will bring more liquidity to the market and lower interest rates.

On February 13, 2008, the President signed the Economic Stimulus Act of 2008 (H.R. 5140) into law. As the bill was being developed, I sent a letter to Senator Majority Leader Harry Reid (D-NV) expressing strong support for increasing the previous GSE conforming loan limit of $417,000 and the FHA loan limit of $362,790 to $729,750. While I am pleased that a temporary increase was included in the bill, the new loan limits will expire on December 31, 2008.

On July 11, 2008, the Senate passed the "Foreclosure Prevention Act of 2008," (H.R. 3221) introduced by Senators Christopher J. Dodd (D-CT) and Richard C. Shelby (R-AL). Prior to Senate consideration of the bill, I urged Senators Dodd and Shelby to keep the FHA loan limit and GSE conforming loan limits at the current level of $729,750. The Senate passed its version of H.R. 3221 on July 11, 2008. While the Senate-passed version of the bill would only raise the loan limits to $625,500, the House-passed version would keep them at their current level. On July 11, 2008, I joined 52 members of the California Congressional delegation in sending a letter to leaders of the Senate and House leadership urging them to retain the $729,750 limits in the final version of this important bill.

I fully support the higher limit and will continue to push to make it permanent.

Thanks for writing.
Sincerely yours,
Dianne Feinstein United States Senator
Further information about my position on issues of concern to California and the Nation are available at my website http://feinstein.senate.gov/public/. You can also receive electronic e-mail updates by subscribing to my e-mail list at http://feinstein.senate.gov/public/index.cfm?FuseAction=ENewsletterSignup.Signup.

Of Settlements and Sales: Hanson Staple Co. v. Ole Mexican Foods, Inc., A08A0658.

In one of the better-reasoned cases on this topic I have read, the Georgia Court of Appeals has explained why settlement agreements that arise from disputes regarding sales of goods should not normally be considered sales contracts, even when those settlements require one of the settling parties to purchase additional goods.

The parties’ dispute centered on Ole Mexican Foods’ decision to stop buying packaging materials from Hanson, and instead to purchase the necessary materials from one of Hanson’s former employees. In its suit for breach of contract, Hanson contended it was left holding more than $300,000 worth of packaging materials that it had customized for Ole Mexican Foods and could not resell. In its counterclaim, Ole Mexican Foods claimed it should be relieved from its contractual obligations due to the fact that Hanson had tendered defective materials. Hanson, of course, vigorously defended against this contention, claiming the goods were merchantable.

The parties negotiated a settlement whereby Ole Mexican Foods agreed (1) to purchase at least $130,000 worth of inventory from Hanson, (2) to test Hanson’s remaining inventory and, if it proved satisfactory, to purchase additional inventory, and (3) to begin to do business once again with Hanson.

Unfortunately, the settlement agreement did not end the parties’ dispute. Instead, Ole Mexican Foods refused to perform, and Hanson moved the trial court to enforce the settlement agreement. In response, Ole Mexican Foods claimed, among other things, that Hanson had violated the parties’ agreement by insisting that Ole Mexican Foods purchase inventory without regard to its merchantability. In support of its claim, Ole Mexican Foods contended that the Uniform Commercial Code’s implied warranty of merchantability found in 2-314 should apply to the settlement agreement.

The trial court accepted this argument, and Hanson appealed. In properly reversing, the Court of Appeals applied the predominant purpose test and held that the predominant purpose of the settlement agreement was to resolve the parties’ dispute regarding an earlier sales agreement, not to create an additional agreement of the kind to which implied warranties of quality would normally apply. Instead of turning on the merchantability of Hanson’s goods, Ole Mexican Foods’ duties under the settlement agreement would be governed by principles of good faith and “honest judgment.”

Although the court did not expressly say so, one reason why the court’s holding is so clearly correct is that a contrary holding would essentially eviscerate the purpose of this particular settlement: since one of the central disputes in the underlying litigation was whether Hanson’s goods were merchantable within the meaning of the Uniform Commercial Code, and since the case was settled rather than having this issue decided by the court, applying the implied warranty of merchantability to the settlement agreement would almost certainly require the parties to relitigate the question of merchantability.

Leaders and followers

An interesting discussion came up on the AALS Contracts List Serve today. Professor Chaim Saiman, University of Villanova, posted the following:

I have this general impression the contract law applicable to government contracts is somewhat hived off from what we call “general contract law” into a smaller category of “government contract law.” More specifically, I think that citations from the Ct. of Fed claims are not often cited by courts of general jurisdiction as “contract law”, and that contracts treatises casebooks., hornbooks etc. tend not to do rely on this body of case law in the formation of general principles (disclaimer: I’ve never actually paid attention to this, so I may be way off). So far as I can tell from some quick research into the Tucker Act, other than the fact that jurisdiction is conferred to the Ct. of Fed. Claims / Fed. Cir., there is nothing special about the substantive law principles of these contracts.

So my questions are:

Are my general impression/assumptions about the distinctness of gov contract law correct?
If so, why is this the case?

My position is that government contracts are just a subset of contracts, subject to the same general rules of contract (including UCC Article 2) unless specific federal law applies. In the case of wartime contracts, the Federal Acquisition Regulations and the Defense FARS are examples of these. The Armed Services Board of Contract Appeals tends to apply general contract principles, in addition to specific federal rules. I would argue that the federal courts handling contract disputes are “followers” of contract doctrine, rather than designers and developers in many cases. In the case of wartime contracts, I find that the lack of more substantive federal regulation has led to some special questions that require a close look at the operation of traditional contract doctrine. For instance, UCC Article 2-615’s provisions on impracticability don’t operate as neatly as I might like when it comes to delay or excuse claimed during wartime due to extreme risk of personal hazard to contractor personnel (for more on this see, Impracticability Under the U.C.C. for Wartime Contracts).

If we accept that the federal government is more of a “follower” when it comes to the default contract rules behind regulations, the really interesting part of Chaim’s question is the “why”. Sure, the contract formation aspect of government contracting is highly regulated by the bidding processes (even if not always followed by the government itself). This would certainly distinguish the “relational” aspect in some areas of government contracting where there is only one buyer. Yet, many of us have ample complaints about Article 2, so this would seem to be the perfect opportunity for the federal government to work an “end run” around it when it comes to performance of sale of goods contracts . Then, once the federal courts apply Article 2 in a different way at least as a leader, the opportunity for others in non-government contracts would be ripe for the same. Article 2 and the common law of contracts have been with us for some time and the mass privatization (particularly defense oriented) came later.

There does not seem to be enough incentive to rewrite the law of contracts, but there are so many specific privatization "patches" that need regulating as issues come up. So, the opportunity to be a leader would seem to arise primarily in the court setting, either between the government and a contractor or a contractor and a sub. There certainly are some cases that are "leaders" (ie. Transatlantic Financing on impracticability). Why there are not more case leaders, I am not sure that I can say, but I will give it some thought. There may be opportunity for leading in the wartime contracts area as we see these cases hit the courts.

Credit Card Fee Regulation: Could Disclosures Stimulate Competition?

Taking a break from blogging about merchant fees, this week’s post looks at the current debate with respect to credit card regulation. Although some in Congress have been thinking about merchant fee regulation, the hot action currently seems to be on the cardholder fee side.

For the last several months, Congress has been kicking around whether new regulation should prohibit certain practices or simply mandate more effective disclosure. Senator Ron Wyden is pushing the disclosure angle through an interesting star rating system, while Senator Carl Levine, among others, favors prohibitions. In May, the Federal Reserve proposed regulations aimed at some of the same concerns, and this weekend, a New York Times article indicated that the tide seems to be turning away from disclosure and in favor of direct regulation. Although a number of practices pop up in the various bills and regulations – mandatory arbitration provisions; charging interest on debit paid within the grace period; over-the-limit fees for approved transactions; fees for paying the bill by phone – every proposal takes aim at the practice of first allocating payments to lower interest rate debt.

I agree that this practice can be particularly egregious. A card company can lure a consumer into transferring a large balance with the promise of a low interest rate while charging “transaction fees” on the balance transfer that will be subject to interest. A consumer who spots the transaction fee may miss that the deal includes a relatively high interest rate on all new purchases. Even the wily consumer who catches both the transaction fee and the high rate on new purchases may mistakenly assume that she can simply pay off her new purchases within the grace period, avoiding interest. If the card company allocates payments first to the low interest balance transfer, however, the account will accrue interest at the high new purchases rate until the entire old transferred balance is completely paid off. Even if the cardholder paid more than the sum of the minimum payment on the balance transfer and the cost of all new purchases for that month, interest would begin accruing on the new purchases because the entire payment would be allocated to the low interest balance transfer. Yikes, by the time the old balance is paid off, the cardholder is likely to have a new one that is just as large and probably at a higher interest rate. Would you have caught all that? I admit, I’ve been caught a few times, and I’ve been studying credit card offers for over a decade.

One can debate how well the various proposals would actually protect consumers given the flexibility that card companies have in structuring their offers. Ironically, a disclosure requirement could be more effective in combating the payment allocation concern. Some may argue that card companies already disclose transaction fees and the allocation of payments among varying interest rate debt. Of course, the current methods of disjointed, fine print disclosure leave consumers who are not financially sophisticated unable to understand the terms of their agreement.

What’s needed is a disclosure along the lines of those provided by mutual fund companies. Those companies provide a return and fee breakdown based on a hypothetical investment. Credit card companies should be required to do the same. They should disclose all of the charges that they would assess on a hypothetical balance transfer and new purchase balance of, say, $1000 each. In addition to interest charges, the card company should be required to include all transaction fees and other fees that a cardholder might be expected to pay over the course of a year. For example, if the average cardholder pays one late or over-the-limit fee annually, that fee should be included. If the card company offers a reward or rebate, it could incorporate that into the disclosure as well. Most importantly, in type as large as the largest on the mailing or other offer, the card companies should be required to disclose the effective net interest rate – calculated pursuant to a formula developed by Congress or the Federal Reserve – that a typical cardholder would pay if the hypothetical balances were maintained for a year.

By mandating this sort of disclosure, even unsophisticated consumers would be able meaningfully to compare offers from various issuers. The comparison would be nearly as simple as comparing differing annual fees. The resulting competition might well protect consumers more effectively than prohibiting any particular practice.

Update on RiverPark Development in Oxnard

Here is a little update to a blog I wrote about the RiverPark development last year. This is inresponse to questions about the local High Schools, gangs, flood zone considerations and home buying expenses. There are also some very basic suggestions for people considering a home purchase in the next few months to make their experience more productive and less stressful.

Yes there are some real expenses with living in Riverpark that include Mello Roos, Oxnard City tax and HOA fees. The Mellos Roos and City tax can total close to 2% of the purchase price yearly, while HOA's average around $250/month. So, for a $450K home, your are talking about an extra $1,000 a month in home expenses.

Having said that, my experience has been that these are nicely built homes at very competitive prices even with the additional add-on expenses. In the last year, these same homes have had a number of price reductions and incentives thrown in to make them really good opportunities for folks who need a brand new home. So for the same $400K to $450K this year, you can often find yourself making an offer on a much nicer home for the same money.

My daughter attends High School at El Rio and we have found their programs for college bound students to be outstanding. There are some possible new developments for students as well which include El Rio High becoming one of only two High Schools in Ventura County (Newbury Park High is the other) to qualify for an international student accelerated learning class this year. It should be fully instituted by next year.

Gangs are a problem in Oxnard, but there have been some very effective law enforcement initiatives taken in the last few years to cripple their influence.

RiverPark has it's own school, fire department and is building some shopping areas as well.
In order to address the flooding issues, I would recommend you contact the City of Oxnard Public Works Department, FEMA for flood plain maps at www.FEMA.gov or http://www.floodalert.fema.gov for a list of insurance companies that offer flood insurance in your area. You can find additional commments on flooding issues in my latest blog on my personal website http://www.markthorngren.com.

Should you buy now or wait. Let's look at each possibility.
Buy later....or Buy now. Home prices will most likely continue to fall for months if not years yet. My personal bet is some areas will turn around before others. Unless you know your neighborhoods intimately, you may have difficulty recognizing when it begins to happen. According to local title information (Land America Lawyers Title - Tom Piszczek - (805) 302-8667) home prices in Oxnard have gone down over 34% from March'07 to March '08, and 16% in Camarillo over the same time frame. Those are some pretty big numbers.

I always do a Comparative Market Analysis of my own for my clients. This is a one year look at a very specific neighborhood for any property my clients are interested in making an offer on. I find price trends, comparative home sale prices and listing information to base the offer or sale price for sellers and buyers needs.

Let us say that home prices continue down for at least another year. During the year we may see the buyers continue to take advantage of this market. Some of these folks are investors who are very savvy to our local markets.

In January my clients purchased a home listed for $600K in a neighborhood with a $604K median price. The sellers were motivated and my buyers made an offer for $450K plus $8,000 in closing costs. It was accepted! That is a 25% price reduction - almost a full years price drop right now!

Those are the kinds of deals that can happen in today's market. Does it always happen like that? No, but such a thing was unheard of a year ago. Will that type market last another year? Impossible to say.Mortage programs are much more strict but progress has been made through FHA and CalHFA to make 100% financing still available to qualified first time home buyers. Very competitive rates are available through FHA for most other well-qualified individuals.

You should have yourself pre-approved with a lender you trust before you go looking for a home. If you don't know what you can afford, you are wasting your valuable time. Also,most realtors are not going to spend a lot of time driving people around at $4.65/gallon if they don't know what they are qualified to purchase or what program best fits their personal needs.

Get several Good Faith Estimates from different lenders and tell them what you are doing. Make them compete for your business! Watch you expenses and fees shrink as they try to lure you their way. Make sure the good faith estimates include pro-rated taxes, Title and Escrow fees. It is not uncommon to receive Good Faith Estimates that look very competitive until you realize they don't include all the normal expenses for your transaction.

Ask your competing lenders to explain any differences in competing Good Faith Estimates. Sometimes your realtor can give you and idea of what is really happening as well.

FHA comforming loan limits have been raised from $417,000 to roughly $729,000 until December 31 of this year. There is great pressure being put on Congress to extend this deadline and it may indeed be extended. Hasn't happened yet but might. If it doesn't, FHA limits will probably default back to $417,000 next year. There are not very many single family detached homes available in California for less than $417,000.

We have no idea what interest rates will do over the next 12 months. That is a very fundamental gamble if you are undecided about when to buy. A very small interest rate change can have an immense effect on the interest you pay over 30 Years. Right now the Fed is under increasing pressure to start raising interest rates again. Higher gas prices, food prices and shipping costs are having a huge inflationary impact on our economy. That should be a concern to more people than just home prices. I'm guessing that after the presidential election we could see higher home mortgage interest rates.

This is a buyers market. It will continue to be a buyers market for months to come. When it changes, it will change gradually and at different times in different towns and neighborhoods. You won't easily see the change until you are past it. That is my thought on today's market. What do they say about a bird in the hand?

Warmest Regards,

Mark Thorngren

http://RealtyTimes.com/REUv/MarkThorngren or
http://www.markthorngren.com
(805) 504-0228

Oxnard – Riverpark – 1,800 homes along the Santa Clara River
The largest new home development currently being built in Oxnard is Riverpark There are 15 different home plans by my count, located just North off the 101, along the banks of the Santa Clara River. HOA’s vary by neighborhood, by square footage and by builder. Standard Pacific Homes is currently marketing the Celadon tract. Their HOAs can run from less than $100.00 up to nearly $300.00. There is also a 30 year Mello Roos which is about 1.1% but it is combined with a city special tax assessment. Agents in the development have told me to just multiply the Sale Price x 1.9 to get a rough idea of the combined total. Add the HOA and you will come close to your monthly fees. The HOA in the homes built by Standard Pacific Homes includes outside maintenance, landscaping and lender insurance – typically fire. Add these to your mortgage payment for your monthly housing costs. This does not include all utilities or your personal property insurance. Even with all the added costs, the homes tend to be very competitively priced with more floor space than I would expect. In one case that I know of, a home was offered for 70K below market with a special 6% give back at close of escrow. It was the last home in the tract and had fallen out of escrow previously. This was a nicely upgraded home in a nice location. Good things can happen. Call them to find out what is currently available or I can check for you if you prefer.Shea Homes is offering the Market Street Tract of luxury townhomes. Plans 1 – 4 range in price from 486K for 2,362 sq ft to 545K for 2,631 sq ft. HOAs are up to $292 for Phase 2. This covers the Riverpark master association dues ($32) with the balance for Fire and Casualty Insurance of the building and exterior maintenance of the building. There is a property tax rate of 1.15% of the sale price, plus a Mello Roos Tax Assessment of $4,587 per year. Several other tracts are still under construction. They have a new school opening there this Fall. There are very nice websitesq at http://www.riverparklife.com/ or www.standardpacifichomes.com or www.SheaHomes.com.The tract names are:• Celadon• Destination• Luminaria• Market Street• Promenade• The Avenue• Tradewinds• Trellis• Westerly• Collage• Meridian • Morning View• Veranda• Waypoint • Daybreak
May 10, 2008 Mark J Thorngren
Mark has summed it up really well, about the declines yet to come, the variations in the markets in terms of turning down and up (coastal is last to fall, first to rise for example), and that lending is fairly loose if you look at higher limits and 100% financing for FHA. We had 140 FHA sales last month.
This is where I disagree on interest rates: since it's all about the monthly payment, any rise in interest rates NECESSITATES a lower home price.
If I were even thinking of selling, I would make sure I sold BEFORE1. Interest rates rise, thus shutting out more buyers and forcing me to lower my price 2. More foreclosures increase the supply of homes. As Chris Thornburg was quoted in the NC Times today, nothing is more pernicious to prices, than a high supply.