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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.

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As an attorney for rural water and sewer companies in Texas, I have experienced first hand the increased regulatory and legal challenges faced by Texas rural water companies and their lawyers. While there is no substitute for having a knowledgeable attorney, there are several nonlegal resources available that are invaluable to Texas rural water companies.

The first of these resources is the Texas Rural Water Association. According to the TRWA website, its mission is:”To help water and wastewater systems supply Texans with safe and affordable water and wastewater services by providing:

* technical assistance,

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In a previous post, I discussed the implications for Texas contractors and insurance companies and their attorneys of the decision of the Texas Supreme Court in Lamar Homes, Inc. v. Mid-Continent Casualty Company. The Court’s decision had a second element that is notable, and will be helpful to attorneys who are trying to collect an insurance claim from a carrier.

Texas has what is commonly referred to as the “prompt payment” statute (Texas Insurance Code § 542.051 ) which provides for additional damages against an insurer who wrongfully refuses or delays payment of a claim. A “claim” is defined as a first party claim “made by an insured or policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract [that] must be paid by the insurer directly to the insured or beneficiary.” The problem has been that the Texas Insurance Code does not separately define “a first-party claim,” and Texas court decisions have been divided as to what it means. Some Texas Courts have defined a first party claim as a claim paid under a first party insurance policy, such a life insurance policy or an auto policy, where the insured is buying insurance to cover their own life or property. The reasoning here is that third party insurance, where the insured is purchasing insurance to cover a loss to others (such as the other guy in a car wreck) is not a first party claim and is therefore not covered by the prompt payment statute.

The Texas Supreme Court in the Lamar Homes case decided that the insurance company’s duty to defend Lamar Homes, even though the payment of attorney’s fees for defense would go to a third party (Lamar’s attorneys) was covered by the prompt payment statute. This part of the decision is, in my opinion, a good thing, because it requires insurance carriers to whom the statute applies to promptly review the claim, do their research and make a decision on the claim, rather than dragging their feet.

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A decision by the Texas Supreme Court either delighted or horrified Texas attorneys, depending on whether they represented consumers of construction services, construction companies or insurance companies. In Lamar Homes, Inc. v. Mid-Continent Casualty Company, an opinion delivered on August 31, 2007 and which became final in December 2007, the Texas Supreme Court held that unintended construction defects constitute property damage under a commercial general liability policy (“CGL” policy), triggering a duty by the insurer to defend the home builder and to pay damages on behalf of the builder when a home owner sued the builder for construction defects.This is a surprising decision in some ways because, in general, CGL policies in Texas cover claims for bodily injury, property damage, personal injury, and advertising injury (damage from slander or false advertising). A damage claim because something has been built defectively is usually not covered by a CGL policy. The CGL policy is intended to cover tort claims. A claim that something was built defectively is a breach of contract claim, As the dissent in this case so ably points out, this decision turns the construction industry and the CGL insurance industry on its head.

Attorneys representing home owners may smile at this decision, and think they have been handed another source from which to collect damages when a builder’s construction (or the work of the builder’s subcontractors) turns out to be defective. However, the real loser because of this decision may be the very person that this decision appeared to benefit: the consumer! If CGL insurers are now obligated to cover every real or imagined, major or minor, defect in new construction, then the premiums for those policies will most certainly rise. Those increased premiums paid by the contractor will be passed on to the consumer in both residential and commercial construction. Rents will ultimately increase. What this decision really does is spread the cost of construction defects among all of us. In addition, this decision really shields the bad builders in the short run: they can pass these costs on to their CGL carrier, rather than being liable themselves for shoddy work.

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As an attorney, I have represented rural water companies in Texas for years. I have prepared their corporate documents, assisted with government grant and loan applications, and negotiated non-standard and subdivision service contracts, among other things. I have also served as an officer and as a director on the board of a rural water company. Based on my experiences, I believe that many of Texas rural water utilities are struggling, and in some cases, may be headed for a crisis.

Rural water companies (also called community water systems) are, along with rural electric co-operatives, the backbone of American rural life. The U.S. Congressional Budget Office estimates that nationally, as of 1999, roughly 54,000 publicly or privately owned community drinking water systems provided drinking water to some 250 million people. Here in Texas, water companies are regulated by the Texas Commission on Environmental Quality (the “TCEQ”), and through the TCEQ, the Environmental Protection Agency, under the authority of the federal Safe Drinking Water Act. The problem begins with the fact that many of the rural water companies in Texas are so small. In many cases, the board of directors consists of a small group of farmers or ranchers or local residents, who are almost always great people, but who do not always have the tools or the background to deal with the increasingly complex technological and regulatory requirements imposed on all water companies, regardless of size.Here in Texas, rural water companies get tremendous technical and legal assistance from our state association, the nonprofit Texas Rural Water Association (“TRWA”). Notwithstanding this help, the diseconomies of scale and the increasing cost and complexity of complying with all the state and federal regulations are taking their toll on rural water companies.

The answer, I believe, is going to be in smaller companies banding together to create county-wide or even regional co-operatives. Initially, these co-operatives could use their buying power to save their members money on chemicals and other supplies. Ultimately, the co-operatives would jointly invest in treatment plants and other infrastructure needed to produce water.

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As I indicated in a previous post, a recent decision by the Texas Supreme Court contains an important lesson for Texas attorneys who represent Texas real estate owners, general contractors or subcontractors. Texas attorneys who practice construction law should be aware that, because of this decision, claims by a temporary labor service are covered by the Texas mechanic’s lien statutes, and that service can file a mechanic’s lien claim, just as an individual laborer can. As a result, when using a contractor who uses workers from a temporary labor service, an owner and/or general contractor must comply with the mechanic’s lien statutes, including the portions of those statutes regarding the timing of payment and the withholding of payment to a contractor who has been using temporary workers. The Texas mechanic’s lien statutes are complex, and not for the faint of heart. If you are a property owner or contractor, you would be well served by retaining an attorney who is experienced in construction law to review your contracts and explain the time limits in the statutes to you. This is one area where an ounce of preventive legal advice can save you a lot of money later!

It might seem obvious that workers from a temporary labor service should be considered as “labor” under the Texas mechanic’s lien statutes. However, this issue does not seem to have been decided until recently by the Texas Supreme Court. In Reliance National Indemnity Co., L&T Joint Venture and Lamar Construction Inc. v. Advance’d Temporaries, Inc. the Texas Supreme Court decided that a temporary staffing agency could, indeed, file a mechanic’s lien for unpaid labor services.

The case arose from the construction of an apartment building in Corpus Christi, Texas. L&T Joint Venture, the general contractor, hired Gonzalez, an individual, to do the framing, drywall and roofing at the project. Gonzalez supplemented his crew with additional workers from Advance’d. A written agreement between Gonzalez and Advance’d specified that the workers were employees of Advance’d, not Gonzalez. Reliance was the surety on the job.At some point, L&T terminated Gonzalez, and paid him through the date of termination. Unfortunately, Gonzalez did not pay Advance’d. Advance’d gave a statutory mechanic’s lien notice that it had not been paid to the owner, the general contractor and the surety .

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A recent decision by the Texas Supreme Court contains some very specific lessons for attorneys who represent temporary labor services who supply workers for Texas construction projects.

Temporary staffing agencies or temporary labor services have become a popular and often cost effective way for a property owner or contractor to supplement a work crew or even to staff an entire construction job. According to the U.S. Bureau of Labor Statistics, in 2005 there were 5.7 million temporary workers, or approximately 4% of the labor force in the United States, with the construction industry accounting for about 13% of that number. Such an arrangement has many advantages for the owner or contractor: the labor service recruits the workers, and is responsible for workers’ compensation and liability insurance, payroll and payroll taxes. The labor service simply presents an invoice for the use of the workers to the owner or contractor on a periodic (usually weekly) basis.It might seem obvious that workers from a temporary labor service should be considered as “labor” under the Texas mechanic’s lien statutes. Interestingly, however, this issue does not seem to have been decided by the Texas Supreme Court until recently. In Reliance National Indemnity Co., L&T Joint Venture and Lamar Construction Inc. v. Advance’d Temporaries, Inc., the Texas Supreme Court decided that a temporary staffing agency could indeed file a mechanic’s lien for unpaid labor invoices.

In this case, the general contractor and the surety on an apartment construction project in Corpus Christi, Texas, refused to pay the claim of a temporary labor agency (Advance’d) that had supplied labor to one of the subcontractors. The general contractor and surety argued that Advance’d did not actually furnish the labor to the apartment project because, in their view, the workers were really employees of the subcontractor, and not Advance’d. The Texas Supreme Court looked to the written contract signed by the subcontractor and Advance’d, noted that the parties had agreed in the contract that the workers were employees of Advance’d, even though the subcontractor directed their work, and decided that the Advance’d claim really was a claim for the furnishing of labor under the mechanic’s lien statutes.

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Texas real estate law generally provides that a property owner in Texas is not required to ensure that an independent contractor perform its work in a safe and non-negligent manner. In the recent case of Central Ready Mix Concrete Company, Inc. v. Luciano Islas, the Texas Supreme Court reaffirmed that principle, and refused to accept some apparently novel arguments in support of changing that law. The Plaintiff was clearly trying to find the “deep pocket” here, and was making some pretty tenuous arguments to try to get there. The Court’s decision in this case makes sense.

Central, the property owner, was a ready-mix concrete company who hired an individual, Taylor, to come to the property owner’s business premises to clean out concrete trucks. All parties agreed that Taylor was an independent contractor, and was not an employee of the property owner. Islas, the Plaintiff, was injured when another of Taylor’s employee’s turned on a concrete truck’s drum while Islas was inside, severely injuring him. The Texas Supreme Court refused to extend premises liability law to cover this situation.It was important to the Court’s decision that the property owner had neither contractual nor actual control over the independent contractor’s employees. In ruling in favor of the property owner, the Court disagreed with the following arguments:

1. Islas claimed that the concrete truck contained a “concealed hazard”, and that the property owner had a duty to warn him of this hazard. The Court said that while a property owner does have a duty to warn an independent contractor of concealed and hazardous conditions on its real property, a property owner does not have a duty to warn an independent contractor about the hazards of the contractor’s own work.

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The digital age has profoundly impacted the way real estate attorneys and real estate brokers do business. For example, in the case of my real estate law practice, I recently represented the seller in connection with the sale of a shopping center. The property, the title company and the seller’s attorney (i.e., me) were located in Texas, the seller was in Arizona, the buyer was in New York City and the buyer’s attorney was in Atlanta, Georgia. We used email or ftp sites to transmit and review title commitments and surveys and to send drafts of conveyance documents and closing statements back and forth until closing. The closing was done by the title company via Federal Express. Current federal legislation, the Digital Signatures in Global and National Commerce Act (E-Sign), will allow even the closing to take place electronically, and Texas title companies are beginning to move in this direction. However, despite the ease and swiftness of the Internet, nothing, in my opinion, can replace that personal connection between an attorney and their client, and the trust, professionalism and camaraderie that flows from that relationship.Real estate brokers have also realized great efficiencies in using the Internet as part of their service to their clients. First, of course, they use the Multiple Listing Service to list and identify properties for clients, and they use email to keep in touch with often far-flung clients. However, as in the case of real estate lawyers, there are limits. A recent news story illustrates these limits.

A Newsday story by James Bernstein chronicled the demise of Foxtons, a New Jersey based residential broker. Based on Mr. Bernstein’s story and other news reports, it appears that Foxtons entered the brokerage market in the New York City/New Jersey area in a big way in 1999, introducing themselves with an expensive advertising campaign. They used Internet listings and a paid staff to sell property, instead of commission-based brokers or agents. They paid commissions to buyers’ brokers (according to Bethany Marten with the Home Buyer’s Resource Center, quoted in Newsday) of only 1 to 2%, compared with the somewhat standard commission of 6%. Once a house was listed with Foxtons, while it was entered into the Foxtons database on the Internet, Foxtons clients complained that there was little or no personal contact with the staff, and that the house they were trying to sell was not even shown to prospective buyers. There were reports that buyers’ brokers did not like to show houses listed with Foxtons to their clients, because the commission was such a pittance.

I have worked with many real estate brokers over the years, and there are many good ones out there. A good real estate broker is invaluable in buying or selling either commercial or residential real estate. A good broker assists their client with proper pricing, with the best timing for the sale, with packaging the property so it will bring the best return, and with addressing buyers’ concerns. On the buyer’s side, a good broker helps a client not only find the property, but can assist with appraisers, inspectors, engineers and financing. I have bought and sold many properties of my own over the years, and even though Texas law allows me to act as a broker for myself or for a client, I do not. In fact, I have used a broker each time, not only because they are an invaluable partner in any transaction, but also because I can count on them to be objective.

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