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As a Texas attorney representing both builders and construction companies in Texas on one hand, and Texas consumers of construction services on the other, I have had occasion to litigate a number of cases in which construction defects were the central issue in the case. I learned long ago (because I had some great mentors when I was a new lawyer), that when I represented a Plaintiff in a suit to recover damages for a construction defect, the claim should be characterized as both a breach of contract as well as breach of warranty. It always seemed redundant to me, but a recent case illustrates that it may not be. Consider the case of Medical City Dallas Ltd. v. Carlisle Corporation, decided recently by the Dallas Court of Appeals and subsequently heard by the Texas Supreme Court.

Medical City purchased a membrane type roofing system from Carlisle Corporation. Within a short time, the roof began to leak. Initially, Carlisle performed repairs. When the repairs appeared not to cure the leaks, Medical City obtained the advice of a roofing expert, who examined the membrane and determined that it was failing. Medical City requested that the roof be replaced, and when Carlisle failed to respond, this litigation ensued.The opinion of the Dallas Court of Appeals held that a breach of warranty was different than a breach of contract, and in particular, a breach of warranty did not support an award of attorneys fees to the damaged party, even though the Texas Civil Practices and Remedies Code Section 38.001 clearly allows the injured party in a breach of contract case to recover attorneys fees. Since Medical City’s pleadings contained only a claim for breach a warranty, the Dallas Court of Appeals held that it could not recover attorneys fees, only its damages.

The Texas Supreme Court opinion reversed this decision, and concluded that since a written warranty is a type of written contract, Texas Civil Practices and Remedies Code Section 38.001(8) supports an award of attorneys fees for breach of a written warranty.

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In the course of representing rural water companies in Texas, I am always on the lookout for new resources and educational materials to help me expand my understanding of the challenges that water companies, and especially rural water companies in Texas, face each day. The American Water Works Association has just published a new book that looks like a fascinating addition to the library of any lawyer representing water companies. It’s called “The Business of Water”, and it’s edited by Steve Maxwell, Managing Director of TechKNOWLEDGEy Strategic Group in Boulder, Colorado.The advance press on this book indicates that it deals with some of the paradoxes that water companies face. For example, water is essential to life and thus incredibly valuable, yet drinking water costs us a fraction of a cent out of our tap. Another paradox is that many of us purchase bottled water that costs thousands of times as much as tap water, yet almost everyone screams if our monthly water bill goes up. Finally, the book notes that water companies must sell water in order to stay in business, yet are often in the position of asking their customers to conserve and use less water!

The book deals with water costs, strategic planning for water companies, government regulation and many other timely topics. I have ordered my copy and will report back to you after I have read it. It certainly appears to be a valuable addition to any water lawyer’s library. The price is $45.00 for AWWA members and $68.00 for nonmembers.

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Texas attorneys representing developers, homeowners and contractors, and in fact any attorney who is drafting a contract for a client, should make note of a recent case by the 4th Court of Appeals in San Antonio, Texas.

In the recent case of San Antonio Properties L.P. v. PSRA Investments, Inc., the Seller of an apartment complex was held liable for fraud for its representations as to the financial condition of the apartments, even though the contract of sale contained language that the Buyer agreed to “…accept the Property in its current condition, as is, after having inspected the Property to Buyer’s satisfaction.” The evidence showed that the Seller had provided the apartments’ operating statements to the Buyer, but had omitted from those financial documents the substantial amounts spent by the Seller in capital expenditures and repairs.The resulting operating statement (minus the capital expenditures) showed that the apartments made money. When the capital expenditures were added back in, the apartments lost money. The Court held that the “as-is” clause in this contract did not prevent the Seller from being liable to the Buyer for fraud due to the intentionally inaccurate financial documents provided to the Buyer. The Court notes that “…even sophisticated buyers have the right to rely on the veracity of the financial information provided to them by the sellers.”

I often see Texas real estate attorneys and their clients placing a great deal of reliance on the “as-is” clause in their contracts. This case suggests that this reliance may be misplaced, and will certainly not be a shield against actual deception.

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I have served as an attorney representing both rural water companies and real estate developers in Texas for quite a few years. Very often, my representation involves negotiating “nonstandard service” contracts. These are contracts governing the conditions, terms and costs under which a rural water company will extend water service to a new development. At best, there is a bit of built-in tension between the two groups: real estate developers are appropriately mindful of their bottom line and want to minimize the costs and restrictions of obtaining water service, while rural water companies have legitimate concerns that their capital costs will be paid and that some amount of warranty service is covered. I emphasize to all my clients, whether they are real estate developers or rural water companies, that their agreements must be reduced to writing, to insure there is no misunderstanding in what can very often be a complex negotiation.A recent case, BCY Water Supply Corp. v. Residential Investments, Inc., illustrates the pitfalls when one or the other of the parties involved takes action based on (often misunderstood) oral statements. This case, decided by the 12th Court of Appeals in Tyler, Texas, involved a small rural water company serving Anderson County, Texas. The Plaintiff was a real estate developer who was the considering the purchase of a small tract of land within the water company’s service area. The developer came by the water company’s office, and visited with the water company’s bookkeeper and maintenance man. The developer questioned the maintenance man about the availability of water for the property the developer was thinking of buying. According to the developer, the maintenance man said that there would be “no problem” getting water service to the property. The maintenance man, on the other hand, testified that the developer requested a single meter at the property, and that he told the developer that, while he did not see a problem serving a single meter, all requests for service had to be directed to and approved by the board of directors and that the board might require capital improvements before service could be approved. The developer bought the property, and when he applied for service, the board of directors of the water company told him that he would have to install a new line prior to water service being supplied. The developer claimed that the representations by the maintenance man were negligent and sued the water company for denial of service.

The Court of Appeals held for the water company, ultimately. However, this litigation probably cost this small rural water company and its members dearly. The decision represents something I emphasize often to my rural water company clients: educate all your staff, whether office staff, maintenance people or operators, that whenever someone asks about the availability of water, always, and I mean always, tell them that they will have to talk to the manager of the company or the President of the board of directors. Do not guess, do not speculate and do not surmise. The maintenance man for this company was probably just trying to be helpful to this developer, and a lawsuit was the result.

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As a real estate and development attorney in east Texas, I have represented Texas property or homeowners associations (HOAs) on quite a number of occasions. My legal services for my homeowner association clients have ranged from preparation of corporate documents and restrictive covenants, to mediating disputes, to overseeing annual meetings, to filing and collecting assessment liens, to litigation to enforce deed restrictions. As any lawyer who has represented HOAs knows, few things engender as much conflict and heated debate as interpretations of restrictive covenants among the members of the HOA. A recent case illustrates this situation.

In Jennings v. Bindseil, the Texas Court of Appeals in Austin considered just such a dispute. The neighborhood in question, in rural Comal County, Texas, had restrictive covenants in place. One of the restrictions prohibited mobile homes. The Defendant, Jennings, purchased a modular home, which was delivered in sections and assembled on Jennings property. The other members of the HOA cried foul, claiming that a modular home is the same thing as a mobile home, and sued Jennings for the removal of the structure.

The Court considers that modular and mobile housing (the term “mobile”, as the Court notes, has been replaced by the term “manufactured” housing) are governed by different codes, differ as to their foundation requirements (modular houses must be placed on a permanent foundation) and in titles (titles are issued for mobile homes but not for modular housing). Because the case had been decided in the trial court on a motion for summary judgment (in other words, there had been no evidentiary hearing as to the details of the Defendant’s house), the Court of Appeals reversed the summary judgment against the Defendant and sent the case back to the trial court for an evidentiary hearing.This case illustrates what happens when older deed restrictions (drafted and filed before modular housing became widely available) come up against more recent technology. The truth is, mobile or manufactured housing is different from modular housing in many ways. However, while there is high end modular housing that is quite tasteful, some modular houses look not much nicer than manufactured or mobile homes, and are sometimes made of the cheapest of materials. If the other owners in this subdivision had spent substantial amounts of money on site-built homes, and the Defendant’s home was of the cheap variety, it is understandable why they would be upset. The lesson for HOAs and their attorneys is clear: review your deed restrictions or restrictive covenants periodically, and update them to keep up with changing technologies.

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As a Texas real estate and development attorney who has represented lenders, commercial borrowers and developers for years, and as someone who has been critical of the “band-aid” solutions to the sub prime delinquency problem proposed by some politicians, I am heartened when I see solutions that appear to actually address the problem. Recently, an article by Karen Freifeld and Sharon L. Lynch in Bloomberg reported that Fannie Mae and Freddie Mac have reached an agreement with Andrew Cuomo, New York’s Attorney General, regarding appraisal standards. The agreement provides that Fannie Mae and Freddie Mac will buy mortgages only from lenders that adopt new standards that are meant to make sure that appraisals for home mortgages are independent and objective. Specifically, the new standards would prohibit mortgage brokers from selecting the appraiser for a loan, and would also prohibit lenders from using in-house staff or lender-owned appraisal companies to do appraisals for home loans.Fannie Mae and Freddie Mac are two federally chartered but privately operated organizations that buy real estate loans from banks. A large percentage of United States banks do not keep each home mortgage that they make for the full term of the loan. Instead, they sell their loans to Freddie Mac or Fannie Mae for a discounted amount of the full loan. Once the banks get paid by Freddie Mac or Fannie Mae, they can go out and make new loans with that money. Obviously, Fannie Mae and Freddie Mac are crucial to the liquidity of the United States mortgage industry. Banks will have to comply with standards set by Freddie Mac or Fannie Mae in order to sell loans to them.

From what I have read about the sub prime delinquency situation, inflated and even fraudulent appraisals appear to be at the heart of the current problem, just as they were for the Texas savings and loan debacle of the 1980’s. I suggest that the adoption on a national basis of the rules that are going into effect in New York will go a long way towards preventing the sub prime loan problems we see now.

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As a Texas real estate and development attorney who has represented lenders, borrowers and developers in Texas for years, I find the current debate over sub prime mortgages to be especially interesting. Sub prime loan foreclosures in Texas are not as extensive as they are in other states, however, they are still of concern in Texas and certainly nationally. Hillary Clinton has proposed a ninety day moratorium for foreclosures on sub-prime loans, according to her web site. Manny Fernandez in a recent article in the New York Times online describes how politicians in New York are pushing for a one year moratorium on sub-prime mortgage delinquencies in that state. One of these politicians, James Brennan, a Brooklyn Democrat, is quoted as saying: “There’s nothing wrong with giving people some time to see if better arrangements can be worked out.”Will someone please send these politicians to economics school? Their proposals may be designed to get votes, but they do not appear to deal in an educated way with the current sub-prime mortgage issues. For one thing, these proposals are based on the assumption that all sub-prime loans were made by evil, greedy lenders who imposed fraudulent terms on unsuspecting borrowers. I doubt that this is the situation for every sub prime loan out there. Secondly, a certain portion of these borrowers will not be able to pay any type of reasonable monthly payment, and should not have qualified for these loans in the first place. Giving them more time to “work things out” may be a fantasy. Thirdly, who is going to be responsible for deterioration in the condition of some of these homes while payments are not being made (since the threat of foreclosure often serves to dampen homeowner maintenance and repair)? Fourth, have these politicians calculated the cost to the economy of the mortgages to qualified borrowers that do not get made because of the chill this “solution” has on the mortgage lending market? And finally, do we really want government to step in and rescue people who have, in many cases, made an uninformed or inappropriate financial decision?

This kind of mass moratorium is calculated to wreck havoc with financial markets (can you say recession?). So in answer to James Brennan’s comment that there is nothing wrong with a moratorium, I would have to respond: think again! These proposals seem to illustrate what our form of government does best: create ill-considered quick-fixes to complicated problems in the hopes that voters will buy in to the illusion that something is being done.

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As the reader may be aware from one of my prior blogs concerning Texas rural water companies, not only have I served as an attorney for rural water and sewer companies in Texas for years, I have also spent the last year as President of the rural water company where I reside in east Texas. My term as a director and president will end next month, when our company holds its annual members meeting and elections. I have chosen not to run again because I believe it is important for the long term health of a water company for as many people as possible in the community to take a turn at being a director and an officer.

Alas, the problem is getting people interested. I have talked to many people in our community about running. Some say that they don’t know anything about treating water. My response is that they do not need to be an expert, they simply need integrity, common sense, and a willingness to base their decisions on what is best for the company and the community as a whole, rather than what may help a friend or neighbor.Some have told me that they are just too busy. I ask those people to consider that it is only a commitment for one board meeting a month. Is that too much of a price in terms of time for healthy drinking water for ourselves and for our children and parents, who are the people most vulnerable to pathogens in improperly treated water?

What often happens is that the people in the community who are best suited to serve on the board of directors don’t run for one reason or another. Instead, we often get candidates who are people who have been caught violating the rules, who have been forced to comply, and who are now mad. They want to be on the board so they can change those rules! This has got to be among the poorest of reasons to become a member of the board. In addition, in their ignorance and anger, these people are unaware that the local water company does not make the rules, the Texas Commission on Environmental Quality does that. However, we do have to enforce the rules. Not only can the board of directors not change the TCEQ’s rules, but in addition, the Texas Non-Profit Corporation Act prohibits a member of the board from voting on something that affects the member directly. Also important is the probability that if a rural water company director votes to violate the TCEQ rules, the water company may be fined and their officers and directors liability insurance will not pay for those fines. That means that those fines can come out of the pocket of the directors who voted to violate the rules.

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As a Texas real estate and development attorney, I am concerned that Texas real estate lending suffered some unwelcome notoriety recently when the Dallas Business Journal, quoting an announcement by the online publication, Mortgage Daily, announced that Texas had the fourth highest level of fraudulent real estate loans in the country.

Mortgage fraud in Texas has elicited a strong response from the Texas Attorney General. In July, 2007, the Attorney General announced a judgment against Ameriquest Mortgage Co. in which Ameriquest must return $21 million to Texas residents as restitution for deceptive practices by Ameriquest. The deceptive practices alleged to have been committed by Ameriquest include not adequately disclosing whether loans carried fixed or adjustable rates, charging excessive origination fees and prepayment penalties and using inflated appraisals that qualified borrowers for loans.The Texas Legislature has responded to the fraud crisis by enacting new rules governing loan officers and mortgage brokers and by requiring loan applicants to sign a notice that they are aware of the severe criminal penalties that apply if they are providing false information as to their identity, income, employment and/or intent to occupy the collateral. These rules are enforced by the The Texas Department of Savings and Mortgage Lending (formerly the Texas Savings and Loan Department).

The primarily vehicle for the fraud, from what I have read so far, is an inflated appraisal by a broker complicit in the fraud. Inflated appraisals were also one of the vehicles for the Texas savings and loan scandal of the 1980s. It seems we just don’t learn. Or maybe the problem is that we learn, but greed wins out anyway!

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In Part One of this blog regarding resources available for Texas rural water and sewer companies, I discussed the tremendous resource that Texas rural water companies and their lawyers have in the Texas Rural Water Association. In addition to the TRWA, there are two other associations that can be tremendously helpful to Texas rural water companies and attorneys who represent them.

The National Rural Water Association is also a great resource. An individual membership is only $25.00 per year, and includes a subscription to their great magazine, “Rural Water”. One of the things I appreciate most about the National Rural Water Association is that they keep an eye on, and report on, research by and proposed new regulations of the Environmental Protection Agency (the “EPA”). The EPA is the federal agency that is primarily responsible for enforcement of the federal Safe Drinking Water Act. Since the rules and regulations of the EPA are passed on directly to the state agencies that regulate water supply (in Texas, that agency is the Texas Commission on Environmental Quality or “TCEQ”), the information provided by the National Rural Water Association is often a crystal ball of changes ahead for Texas rural water companies.Another worthwhile organization that is a great resource for rural water companies is the American Water Works Association. This is a national organization with a more technical focus. AWWA publishes three excellent journals: “Opflow”, “Journal AWWA” and “Mainstream”. Their online library is excellent, and gives you access to a wealth of technical information. Membership for a water company with 5000 connections or less is $280.00 per year.

Each of these resources, the TRWA, the NRWA and the AWWA, are excellent resources for rural water companies and their attorneys. I highly recommend them.