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. 

Md. App. Allows Conversion Claim for Money Held in Escrow; Negligence Requires Expert Testimony for Settlement Company’s Standard of Care

In Roman v. Sage Title Group, LLC, the Court of Special Appeals of Maryland determined that a lender could bring a conversion claim against a settlement company for its employee’s misuse of funds held in the company’s escrow account.  The Court held that a conversion claim will not be barred “simply because funds were located in a single escrow account, without looking at the purpose of the account, the duties of the account holder, and whether the funds were sufficiently specific, separate, and identifiable.”  Op. at 16.

However, the Court affirmed judgment in favor of the settlement company on the lender’s negligence claim regarding the settlement company’s handling of such escrow funds, holding that expert testimony was necessary to establish the settlement company’s standard of care.

A copy of the opinion is available here.

Background

Lender, who provided interest-only “bridge loans” to real estate developers, deposited $2,420,000 into an escrow account of Settlement Company, to enable Developer to show liquidity for three projects (under a putative false escrow scheme).  Lender was led to believe that the money deposited into the escrow account would remain the property of Lender, and would not be at risk, because only Lender would have access to such funds.   Settlement Company’s branch manager thereafter disbursed the funds to Developer.  Branch Manager was later fired, pleaded guilty to wire fraud, and was disbarred.  Settlement Company never returned Lender’s money.

Lender sued Settlement Company for conversion and negligence.  Following a three-day jury trial, the trial court granted Settlement Company’s motion for judgment on the negligence claim, holding that expert testimony was required to establish the standard of care for a settlement company.  After the jury rendered a $2,420,000 verdict for Lender, the trial court granted Settlement Company’s motion for judgment notwithstanding the verdict, holding that because Lender’s funds were commingled with other funds in Settlement Company’s escrow account, the conversion claim was barred as a matter of law.  Lender filed the present appeal.

 Discussion

I. Conversion Claim: Money Held in Escrow Sufficiently Identifiable

As to the conversion claim, the Court reversed the judgment in favor of Settlement Company.  The Court noted that the tort of conversion covers “nearly any wrongful exercise of dominion by one person over the personal property of another.”  Op. at 6.  As to money, “[t]he general rule is that monies are intangible and, therefore, not subject to a claim for conversion.” Op. at 6-7.

“An exception exists, however, when a plaintiff can allege that the defendant converted specific segregated or identifiable funds. . . .  [C]onversion claims generally are recognized in connection with funds that have been or should have been segregated for a particular purpose or that have been wrongfully obtained or retained or diverted in an identifiable transaction.”  Op. at 7 (quoting Allied Investment Corp. v. Jansen, 354 Md. 547, 564-65 (1999).

Thus, the Court noted that in cases where Maryland courts have precluded claims for conversion of funds, “the plaintiff either never identified a specific dollar amount that was allegedly converted, or the defendant had no obligation to return those funds in the first place.”  Op. at 9.  Noting that the case of an escrow account presented a case of first impression, the Court observed that other jurisdictions had allowed a conversion claim to proceed against an escrow under certain circumstances.  See Op. at 10-12.

Finding those cases analogous, the Court determined that, although the Lender’s funds were placed with other funds in the Settlement Company’s escrow account, “the $2,420,000 deposited to that escrow account was sufficiently specific, segregated, and identifiable to support a claim for conversion.”  Op. at 14.  “[Lender] identified the specific funds at issue through the three checks and the corresponding notations on [Settlement Company]’s balance reports.  In other words, [Lender] was able to ‘describe the funds with such reasonable certainty that the jury may know what money is meant.’” Id. (quoting Jasen, 354 Md. at 565).  “The funds were segregated because, by agreement, the funds were to be placed in an escrow account, belong to [Lender], be accessible only by [Lender], and be returned to [Lender]. Finally, the funds were sufficiently identifiable, because all of [Lender’s] monies were not returned by [Branch Manager] to [Lender], nor were they disbursed with [Lender’s] permission.”  Op. at 14.

The Court rejected Settlement Company’s argument that conversion could not occur because the funds were commingled with other funds in the escrow account, noting that such view of commingling is too broad.  “Commingling of funds, in our view, does not occur when funds are placed in an escrow account to be disbursed only by agreement, even if those funds are physically located in the same account with other funds. In other words, if the funds, although physically mixed with other funds in an escrow account, are still under the control of the owner or restricted in use by agreement with the owner, commingling of such funds does not occur.”  Op. at 15.

II. Vicarious Liability for Employee’s Misuse of Funds

The Court also held that sufficient evidence existed to present to the jury the issue of whether Settlement Company was vicariously liable for Branch Manager’s misconduct.  The Court noted the general rule that “an employer cannot be held liable for the criminal acts of an employee, unless they were committed during the course of employment and to further a purpose or interest, however excessive or misguided, of the employer.”  Op. at 19-20.

Here, because Branch Manager was authorized to receive and disburse funds from the Settlement Company escrow account in order to conduct Settlement Company’s business, including the receipt and disbursement of Lender’s funds, and Settlement Company earned closing fees on the projects in question, the Court concluded that a reasonable jury could find that Branch Manager’s misconduct – disbursing Lender’s funds pursuant to Developer’s instructions, instead of returning the funds to Lender per their agreement – was in furtherance of the employer’s business and authorized by the employer.”  Op. at 21.

Moreover, the Court noted that such misconduct was foreseeable, because Branch Manager had previously violated Settlement Company’s policy in an incident where he accepted personal checks, and therefore, as articulated by the trial court, Settlement Company was “on notice that [Branch Manager] may be engaging in questionable conduct.”  Op. at 21.

III. Negligence: Expert Testimony Required

The Court affirmed the judgment in favor of Settlement Company on the negligence claim, because Lender failed to adduce or designate expert testimony as to the standard of care for a settlement company.  The Court noted that “[a]lthough ‘expert testimony is generally necessary to establish the requisite standard of care owed by the professional[,]’ such testimony is not needed when ‘the alleged negligence, if proven, would be so obviously shown that the trier of fact could recognize it without expert testimony.’” Op. at 27 (citing Schultz v. Bank of America, 413 Md. 15, 30-31 (2010)).

However, in this case, expert testimony was required to establish Settlement Company’s negligence, “because most lay people are not familiar with the operation of escrow accounts, nor with any standard of care a title company owes to individuals or entities who are not customers, but who deposit funds in escrow with the title company. . . . [Settlement Company’s] procedures and safeguards would ‘occur behind closed doors, out of the sight of the customer, and may involve numerous unknown procedures’ that are ‘beyond the ken of the average layperson.’” Op. at 29 (quoting Schultz, 413 Md. at 30).

Moreover, the Court noted that the “parties in this case also were sophisticated developers accustomed to working with title companies and multiple parties to move large sums of money in and out of escrow accounts; the standard of care for title companies in such circumstances is unknown to the average juror.”  Op. at 29.  Further, the Court rejected Lender’s claim that expert testimony was not required because Settlement Company had no policies, no procedures, no guidelines or no safeguards in place, observing that “the jury still did not know whether the standard of care required [Settlement Company] to have any policy at all.  Expert testimony was required to show the need for such policies in the first place, as well as what those policies should provide.” Op. at 30.

Accordingly, the Court reversed judgment in favor of Settlement Company on the conversion claim, remanded the case for further proceedings, and affirmed judgment in favor of Settlement Company on the negligence claim.

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.