D.C. Holds TOPA Acceptance does not Require Deposit; Allows for Competing Offer from New Tenant

In Van Leeuwen v. Blodnikar, the D.C. Court of Appeals upheld the trial court’s determination that assignees of tenants’ rights under the D.C. Tenant Opportunity to Purchase Act of 1980 (“TOPA”), D.C. Code § 42-3404.01, et seq., could validly accept an Owner’s offer to sell certain real property, even though they failed to include the earnest money deposit, as referenced in the offer.  However, the Court held that new tenants may make a competing offer, even after the initial TOPA offer was accepted.  Thus, the Court remanded the case for further proceedings to determine whether the new tenants were bona-fide, the timeliness of the parties’ acceptance, and their resulting rights.

A copy of the opinion is available here.  

Background

Under TOPA, “[b]efore an owner of a housing accommodation may sell the housing accommodation or issue a notice to vacate for purposes of demolition or discontinuance of housing use, the owner shall give the tenant an opportunity to purchase the housing accommodation at a price and terms that represent a bona fide offer of sale.”  D.C. Code § 42-3404.02.  “Under TOPA, a tenant (or, as here, the assignee of a tenant) can create a binding contract by accepting the material terms of an owner’s offer of sale. . . .  After such an acceptance, the parties may negotiate over non-material terms, prepare a final contract, and proceed to settlement.”  Op. at 5 (citations omitted).

Here, Owner of a multi-unit residential property provided his tenants an offer to sell the property under TOPA, affording them an opportunity to buy the property for $480,000 (the “First TOPA Offer”).  The First TOPA Offer also provided for a five percent earnest money deposit, with the balance of the purchase price due at settlement.  

Two weeks later, Owner entered into a contract to sell the property to third-party purchasers (“Purchasers”) who were not tenants at that time, for $538,000.

Two tenants thereafter assigned their TOPA rights to Assignees, who proceeded to accept the original First TOPA Offer, but failed to include the earnest money deposit as provided for in the offer.   

Thereafter, Owner sent tenants a second offer of sale, with an increased sale price of $538,000.   Assignees responded by claiming that, because they had accepted the First TOPA Offer, Owner could not sell the property to Purchasers.  

Within weeks, one of the tenants was evicted, and Owner leased the vacant unit to the same persons who were the purchasers under the contract for sale, i.e., the Purchasers.  Owner then sent a third offer to sell the property to its tenants, and Purchasers submitted an intent to purchase the property.

Purchasers subsequently filed a lawsuit against Assignees in the Superior Court, seeking a declaration that their contract with Owner to purchase the property was valid.  Assignees filed a cross-complaint seeking a declaration that they had validly accepted the First TOPA Offer.  The trial court held that Assignees’ initial acceptance of the First TOPA Offer constituted a valid acceptance, even though it failed to provide for the earnest-money deposit, and refused to allow new tenants (i.e. the Purchasers) rights under TOPA.  Purchasers appealed.

Discussion

I. Acceptance of the First TOPA Offer

As an initial matter, the Court determined the Assignees validly accepted the First TOPA Offer’s material terms, even though their acceptance did not include the earnest money deposit.  According to the Court, under TOPA, after a tenant accepts the Owner’s offer of sale, the parties may negotiate over non-material terms, prepare a final contract, and proceed to settlement.  Op. at 5. 

Here, the Court found the earnest money deposit provision, which stated “5% earnest money deposit with a contract, and the balance at settlement” to be “unclear as to precisely when the deposit must be made.” Op. at 5.  Specifically, the Court explained:

[S]everal provisions of the first offer of sale state that tenants could respond by a ‘written statement accepting the owner’s offer to sell.’ The absence from these provisions of any reference to payment of earnest money tends to imply that contemporaneous deposit of earnest money was not a condition of acceptance. Similarly, the first offer of sale explicitly contemplates a process of post-acceptance negotiation to finalize a ratified contract. The subsequent reference to payment of a deposit 'with a contract' is thus more naturally read as referring to the ratified contract mentioned in the preceding paragraphs of the offer of sale.

Op. at 6-7.

Because the terms of the First TOPA Offer did not require that a contemporaneous deposit of earnest money was a condition of acceptance, the Court held, the reference to payment of a deposit when read as a whole, “is better understood to require payment of the deposit at the time a [full] contract is ratified, not at the time of the initial acceptance.”  Op. at 7.

II. Competing Offer of New Tenants (Purchasers)

The Court then considered whether Purchasers, who subsequently became tenants, were entitled to make a competing offer after the Assignees’ valid acceptance under TOPA.  The Court noted that in some circumstances, TOPA allows a subsequent competing offer by one tenant to pose an obstacle to the completion of a sale to another tenant who had previously accepted an offer of sale from the owner.  Op. at 8.  Specifically, the Court noted, under the TOPA provisions applicable to two-to-four-unit buildings (D.C. Code § 42-3404.10), even if an individual tenant accepts an offer of sale, thereby creating a potentially binding contract, the owner and that tenant “are not necessarily in a position to go forward immediately with a sale of the building.”  Op. at 8.  Rather, if another tenant timely submits an expression of interest, the owner must afford each tenant who did so a period of at least ninety days to negotiate over the sale of the building. Id.  At the end of that period, the owner is not required to honor an acceptance that was submitted first and instead may choose a competing bid that the owner prefers. Id.

Consequently, the Court vacated the trial court’s judgment in favor of Assignees, because it “appeared to imply that tenants whose tenancy begins after an offer of sale has been accepted have not rights under section 42-3404.10.”  Op. at 8.  The appellate court disagreed with such premise, explaining that if section 42-3404.10 applies in the present case, then the owner arguably was free to enter into a contract with the Purchasers – as tenants – for the purchase of the building notwithstanding the Assignees' acceptance of the offer of sale.  “Nothing in the text of section 42-3404.10 suggests that the new tenant … has no rights under TOPA.  Moreover, a general provision of TOPA points in the opposite direction.”  Op. at 9 (citing D.C. Code § 42-3404.06 (exercise of TOPA rights ‘may occur at any time in the process provided by the subchapter)).

However, the Court of Appeals determined that there were unresolved questions as to whether Purchasers were bona fide tenants under TOPA, whether the parties' acceptances and responses were timely, and their resultant rights.  Accordingly, the Court of Appeals remanded the case to the trial court for further proceedings to address such issues.  Op. at 9-10. 

D.C. Adopts Rule 702 Daubert Standard for Expert Testimony; Displaces Frye

In Motorola, Inc. v. Murray, in a rare en banc interlocutory appeal, the D.C. Court of Appeals expressly adopted the Daubert Standard for the admissibility of expert testimony, pursuant to Federal Rule of Evidence 702.  

The Court concluded that “Rule 702, with its expanded focus on whether reliable principles and methods have been reliably applied,” states a rule that is preferable to the prior “general acceptance” standard.  Op. at 15.   The Court indicated that such standard would apply to all criminal and civil matters, for which a trial has not yet begun.

A copy of the opinion is available here.

Discussion

In adopting Federal Rule of Evidence 702, which reflects the U.S. Supreme Court’s construction in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 587 (1993), and its progeny, the D.C. Court of Appeals undertook a review of its prior standard for the admission of expert testimony, and the evolution of the federal rule.

Previously, in matters tried before the D.C. Superior Court, the admission of expert testimony has been governed by the legal principles set forth in Frye v. United States, 293 F. 1013 (D.C. Cir. 1923), under which scientific testimony is admissible only if the theory or methodology on which it is based has gained general acceptance in the relevant scientific community.  Op. at 6.  The benefit of such standard is that, "[g]eneral acceptance means just that; the answer cannot vary from case to case . . . . If the technique has gained such general acceptance, we will accept it as presumptively reliable and thus generally admissible into evidence."  Op. at 6.

However, in the federal system, the ‘general acceptance’ test had been superseded by the Federal Rules of Evidence, which under Rule 702 provide:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:  (a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;  (b) the testimony is based on sufficient facts or data;  (c) the testimony is the product of reliable principles and methods; and(d) the expert has reliably applied the principles and methods to the facts of the case.

Fed. R. Evid. 702.

Thus, in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 587 (1993), the U.S. Supreme Court explained:  

‘General acceptance’ is not a necessary precondition to the admissibility of scientific evidence under the Federal Rules of Evidence, but the Rules of Evidence—especially Rule 702—do assign to the trial judge the task of ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand. Pertinent evidence based on scientifically valid principles will satisfy those demands.

Op. at 10 (citing Daubert, 509 U.S. at 597).

Under Rule 702, as interpreted by Daubert and its progeny, the trial judge performs an initial gatekeeper function:   “[W]hen a party proffers expert scientific testimony, the trial court must make ‘a preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue.’"  Op. at 7-8 (citing Daubert, 509 U.S. at 592-93).

Noting that the Supreme Court has eschewed a definitive checklist or test, the D.C. Court observed that several factors to be considered include:  “whether the theory or technique has been tested, whether it ‘has been subjected to peer review and publication,’ ‘the known or potential rate of error,’ and ‘the existence and maintenance of standards controlling the technique's operation.’ . . . ‘Finally, 'general acceptance' can yet have a bearing on the inquiry.”  Op. at 8.  (quoting Daubert, 509. U.S. at 594).  The inquiry is “a flexible one.”  Op. at 8.  "The focus . . . must be solely on principles and methodology, not on the conclusions that they generate."  Op. at 8 (quoting Daubert, 509. U.S. at 595). 

The Court shared the Supreme Court’s intent that the trial judge's more refined gatekeeping role would not displace the normal tools of the adversary system.  “‘Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence . . . [I]n practice,’ however, ‘a gatekeeping role for the judge, no matter how flexible, inevitably on occasion will prevent the jury from learning of authentic insights and innovations.’"  Op. at 8 (quoting Daubert at 596, 597).

The Court also agreed that Rule 702 does not operate in isolation, noting that other evidentiary rules operate in the application of the gatekeeping function, including those concerning the qualifications of the witness, the bases of the expert’s opinion (Rule 703), and whether the probative value of such evidence is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence (Rule 403).  Op. at 9.  The Court highlighted the Supreme Court’s concerns regarding unfair prejudice, noting that "Expert evidence can be both powerful and quite misleading because of the difficulty in evaluating it. Because of this risk, the judge in weighing possible prejudice against probative force under Rule 403 of the present rules exercises more control over experts than over lay witnesses." Op. at 9 (quoting Daubert, 509 U.S. at 595 (internal quotations omitted)).

The Court concluded that, in adopting the Rule 702 standard, there are substantial benefits to be gained from adopting a test that is widely used . . ., noting that “[w]e can learn from the decisions of other courts which apply Rule 702 or its state counterparts.”  Op. at 16.

D.C. Court of Appeals Holds Seller is Estopped From Unwinding Real Estate Transaction Due to Failure to Read Settlement Documents

In Moore v. Deutsche Bank Nat'l Trust Co., the District of Columbia Court of Appeals rejected a Seller’s title challenge to a post-foreclosure eviction, where she claimed that she had been defrauded into selling the property.  Although Seller claimed that the Purchaser misled her to believe that she was refinancing her prior mortgage loan, the Court of Appeals rejected her claim, determining that she failed to prove her fraud and forgery allegations by clear and convincing evidence.  Rather, the evidence suggested that her alleged misunderstanding was due to her own negligence in failing to read the documents before signing them.  Accordingly, the Court determined she has no interest in the property.

A copy of this opinion is available here.

Background

Seller claimed that she sought to refinance her mortgage to obtain $300,000 to make improvements to the property.  She contacted a loan officer, who informed her that she would need a co-signer, and introduced her to Purchaser who would be willing to co-sign the loan for a $100,000 fee.   During her first meeting with Purchaser, Seller signed several documents handed to her by a notary, including many that she did not read completely, and others without reading them at all.  Op. at 3.

Following the meeting, Seller received $78,435.45.  Because this was far less than the $300,000 she expected, she contacting the loan officer, who informed her that there was no record of her loan.  Seller contacted Purchaser, who told her that she had sold him the property and that he had a sales contract bearing her signature.  Appellant sued Purchaser for fraud, which was settled between the parties, whereby Seller agreed to assist Purchaser in paying the mortgage until 2008, when he would transfer the property back to Seller provided she pay-off the balance of the loan.

Despite such agreement, Purchaser defaulted on his own mortgage on the property.  At the foreclosure sale, Bank credit bid its debt, and purchased the property.  Bank thereafter filed a complaint for possession in the Superior Court, to which Seller filed a plea of title and counterclaim asserting that Purchaser and Bank had no interest in the property because she was defrauded into selling it.

Following a trial, the Superior Court ruled in favor of Bank, determining that Seller had not met her evidentiary burden to prove by clear and convincing evidence that the deed was forged or that the transaction was fraudulent.   Seller thereafter filed the present appeal.

Discussion

On appeal, Seller argued that the deed recorded in the land records was an altered forgery; that the transaction conveying the property to Purchaser was fraudulent and void ab initio; and that Bank’s interest in the property was therefore invalid.  Op. at 7.  She also claimed Bank was not a bona-fide lender for value without notice.

Rejecting her challenge, the Court of Appeals affirmed the trial court’s findings that “[t]he evidence indicating [that Seller] knew that the transaction was a sale of her property is overwhelming.”  Op. at 13.  The Court observed that the documents signed by the Seller included an a HUD-1 settlement statement, a “Correction Agreement, Limited Power of Attorney,” and two disbursement authorizations, all of which referred to sale of the property and which Seller signed over lines marked “seller.”  Op. at 4-5.  Seller also admitted that the signature on the recorded deed “looks like my signature,” but claimed that she didn’t remember signing it.  Op. at 6.

The Court also rejected Seller’s claim that the recorded deed was forged, explaining that “[t]here is a presumption that a deed is what it purports to be on its face, and one who seeks to establish the contrary has the burden of doing so by clear and convincing evidence.”  Op. at 8.  The Court held that Seller’s possession of an unsigned deed with different terms was insufficient because it could not compel an inference that she was given that version to sign.  Op. at 8.  Nor did a mistake in the notary block referencing the Purchaser instead of the Seller suggest that the deed was forged.  Op. at 8.  Rather, the trial court deemed such irregularity a “clerical error.”  Op. at 8.

Seller also claimed that she proved fraud in the factum, i.e., fraud which “procures a party’s signature to an instrument without knowledge of its true nature or contents.”  Op. at 9.   However, the Court noted that such a claim must be proved by clear and convincing evidence, and that the claimant would be estopped from making such claim if as a “literate and reasonably intelligent” person they fail to read the instrument.   Op. at 9.

Here, the Court agreed with the trial court that “the weight of the evidence did not support [Seller]’s claim that she signed the closing documents believing that they were refinancing documents.” Op. at 10. 

Moreover, the Court observed that Seller was a college graduate, had experience in property transactions, and had the opportunity to read the documents before signing.  Op. at 10.  Even assuming that Seller did not understand them, such a misunderstanding was due to her own negligence, negating any fraud-in-the-factum defense.   Op. at 10-11.

Finally, the Court rejected Seller’s fraudulent inducement claim, noting that “the evidence indicating that [Seller] knew that the transaction was a sale of her property is overwhelming.”  Op. at 12.  In addition to signing the documents, Seller could not give information she would be expected to know if she intended a mortgage refinancing, such as the amount of her new monthly payments.  Op. at 12.

The Court echoed the trial court’s suspicions as to whether the transaction as a whole was legitimate, but nevertheless agreed with the findings of the trial court, which was unable to accept as true Seller’s claim that she believed the transaction was a refinancing.  Accordingly, as Seller failed to meet her evidentiary burden, the Court affirmed the trial court’s judgment in favor of Bank.   Op. at 11-12.    In doing so, the Court determined that it need not address Seller’s challenge to the Bank’s status as a bona-fide purchaser for value.  Op. at 2, n.1.