ESSAY ONE
Peter owed a small house (the “House”) on Sick-a-more Street in Pineview. On January 15, 2008, Peter sold the house to John. The purchase price for the house was $100,000. John gave Peter $50,000 in cash and executed a promissory note (the “Peter Note”) in the amount of $50,000 payable to Peter. This note was secured by a deed of trust (the “Peter Deed of Trust”). The Peter Note provided that John would pay interest at the rate of 10% a year annually on the 15th of January of each year for ten years and that the principal balance would be due and payable in full on the tenth anniversary of the note, January 15, 2018. Peter did not record his Deed of Trust.
On December 15, 2008, John approached United Bank, the largest local bank in Pineview, which is the County Seat (place of government records) of Boone County, for a loan. He needed money to be able to make the $5000 interest payment on the Peter Note. John told Bill, the loan officer, about the Peter Note and that he wanted to be able to borrow money for a few years to make his interest payments. United Bank agreed to lend up to $30,000 to John (the “United Bank Loan”). The United Bank Loan was set up as a “revolving loan” which meant that John could borrow money from time to time as needed, up to the maximum amount of $30,000. The United Bank Loan was evidenced by a promissory note (the “United Bank Note”) and was secured by a Deed of Trust (the United Bank Deed of Trust) lien against the House The United Bank Loan was payable on demand by the Bank, but if no demand was made, interest only was payable annually. On December 15, 2008, United Bank recorded the United Bank Deed of Trust in the Real Property Records in Boone County. John immediately borrowed $5,000 under this United Bank Loan so he could make the January 2009 interest payment on the Peter Loan.
On December 15, 2009, one of John’s business partners, Larry, obtained a judgment (the “Larry Judgment”) against John for $25,000 in connection with a lawsuit between them. The law suit was originally filed in July of 2008. Larry promptly recorded the Larry Judgment.
On December 18, 2009 Henry, also obtained a judgment against John for $10,000 for lumber he had sold to John in 2008 for a deck on the House. Henry immediately filed the judgment in Bell County because he mistakenly believed that house was located in Bell County. Henry subsequently assigned his judgment to his father in law, Festus. Festus paid Henry $1,000 for the judgment.
Each of the following questions should be answered separately. Do not assume facts from one question apply to other questions. I am positing differing factual scenarios and asking you to respond based upon those scenarios.
Question One: Assume that John defaulted in the payment of the Peter note on January 15, 2017. Peter has sent several demand letters to John, but John has still not cured his default. Peter has come to you. He wants to foreclose on the Peter Deed of Trust. What additional information would you need to know in order to advise him about the proper actions he should take? What steps would you take to foreclose on the Peter Deed of Trust.
Question Two: Assume that Festus comes to you. He wants to get his $10,000 judgment paid. He wants you to get the sheriff of Bell County to sell the House to pay off his judgment. What advice would you give him?
Question Three: Assume that Larry has succeeded in having the House sold for $100,000 at a sheriff’s sale in his attempt to secure payment of his $25,000 judgment. What additional information do you need to determine how the sales proceeds should be distributed? Based upon this information how do you think the $100,000 should be distributed?
ESSAY QUESTION TWO
Bob, a commercial real estate broker and member of the City Council of the town of Salt Flats, approached his friend, Roy, a local personal injury lawyer, with the following business proposition. Bob has found out from a friend at Big Gas Company, that their geologists believe that there is a lot of natural gas under a part of Salt Flats. Bob knows that if the preliminary tests prove correct, Big Gas will start contacting property owners in about 6 months trying to lease the mineral rights. Most of this land is located in the poorer working class neighborhoods in Salt Flats.
Bob proposes to go door to door in these poor neighborhoods, offering to find a buyer to purchase these houses. Bob would be paid his 6% real estate commission on any sales. Roy and Bob would form a partnership to purchase the houses called Salt Lick Partnership.
This new partnership could then enter into the leases with Big Gas for the mineral rights and Bob and Roy could make a lot of money. Roy has just won a large personal injury case and his fee was over $1,000,000 so he is excited about having an investment opportunity like this.
Bob finds 50 homeowners who are willing to sign contracts to sell their homes to Salt Lick Partnership. Roy prepares the Salt Lick Partnership Agreement. He also prepares a standard form purchase contract for the houses. The purchase price for each home is 110% of the tax appraised value (based on the property tax records) and the sales are all in cash and close in 30 days. The average sales price per house is $20,000. The contracts also provide that each seller may lease the house back from the Salt Lick Partnership and most sellers enter into leases. Roy also prepares these standard form leases. Bob tells the sellers that these “standard form documents” were prepared by “Roy, one of the best lawyers in the city.” Roy’s name is well known to many of the sellers because of his aggressive radio and television advertising. None of the buyers hires their own lawyer to look at the purchase contracts or leases.
All of the closings of the house purchases take place at Peoples Title Company, which issues the title insurance policies in favor of Salt Lick Partnership in the amounts of the purchases prices. Lawyers representing Peoples Title Company prepare the general warranty deeds and other closing documents. Roy’s law firm sends a lot of business to Peoples Title Company. Prior to the first of the closings, Donna, the employee who is handling the closings and Roy’s personal friend asks Roy, “Why are you buying so many rent houses? Are you planning to become a slum lord?” Roy brags and tells Donna, that “Just between you and me, Donna, Bob and I are going to make a fortune off of these investments” He then explains to Donna about the potential Big Gas Company leases.
A few months later, Big Gas Company starts contacting homeowners offering to pay each a signing bonus of $15,000 if they lease their minerals to Big Gas. Under the terms of the mineral leases that Big Gas Company is offering, each home owner could make a lot more money from royalties. The Salt Lick Partnership signs mineral leases with Big Gas for all 50 houses that the partnership had purchased from homeowners.
Questions:
1) Several of the people who sold their homes to Salt Lick Partnership have heard about these large signing bonuses and lucrative mineral leases that their neighbors are receiving and signing. They come to you and ask you to represent them. What advice do you have? What rights, remedies and causes of action do they have?
2) Bob comes to you. He has just received a demand letter from an attorney representing several of the people who sold houses to the Salt Lick Partnership. The attorney is threatening to sue Bob. What advice would you give Bob about his potential liabilities, if any? What causes of action, if any, does Bob have and against whom for what?
3) Roy comes to you. He too has received a demand letter from the same attorney as the one who wrote Bob, also threatening to sue. What advice would you give Roy about his potential liabilities, if any? What causes of action, if any, does Roy have, and against whom?