Federal Real Property Case Law Update

By Manuel Farach Federal Real Property Case Law Update

Manuel Farach is a shareholder at Mrachek Fitzgerald Rose Konopka Thomas & Weiss, P.A., in West Palm Beach, Florida, and a member of the Section’s Marketing and Social Media Committee.

This article provides a brief summary of the most significant opinions rendered by federal courts during the period from March through April 2022. The opinions address, among other topics, issues involving arbitration, takings, rights of first refusal, and bankruptcy.

Supreme Court

The Supreme Court has finished oral argument for the October 2021 term and is now busy issuing opinions. The Court issued three opinions of interest to real estate practitioners: Badgerow v. Walters, 142 S. Ct. 1310 (2022); Boechler, P.C. v. Commissioner of Internal Revenue, 142 S. Ct. 1493 (2022); and City of Austin v. Reagan National Advertising of Austin, LLC, 142 S. Ct. 1464 (2022). City of Austin concerned an Austin, Texas, local ordinance and held that on-site/off-site premises distinctions for signs is facially contentneutral under the First Amendment. This is of interest because the Court declined to announce a bright-line rule for determining when commercial speech violates the First Amendment. Many were hoping for a bright-line pronouncement, but unfortunately, that statement was not forthcoming, and we are still left trying to decipher the series of court cases to determine what speech is protected. Badgerow (establishing the Look Through Doctrine for determining federal jurisdiction under the Federal Arbitration Act, i.e., courts are to “look through” the arbitration petition to examine the underlying claim to see if the claim is cognizable under the FAA) and Boechler (holding that Congress must clearly state in a statute that the statutory limitations period is jurisdictional; otherwise it is not) do not have as much impact but help clarify the fundamental legal principles we rely upon in drafting instruments.

Circuit Courts

The circuit courts have also issued a number of rulings recently that have a significant effect on real estate practice, and takings issues were at the forefront during this period. Foremost among these decisions was Heights Apartments, LLC v. Walz, 30 F.4th 720 (8th Cir. 2022), where the Eighth Circuit held that a property owner sufficiently pleaded claims under the Contract Clause and the Takings Clause as the result of the statewide residential eviction moratorium imposed by Minnesota. Admittedly, Heights Apartments is only at the pleadings stage, but it is a significant decision holding that the pandemic and resulting lockdowns created at least one cause of action for claims against the government.

The Sixth Circuit also issued precedential opinions in this area. It held that removal of a dam and the results arising therefrom can constitute a taking under 42 U.S.C. § 1983. Barber v. Charter Township of Springfield, 31 F.4th 382 (6th Cir. 2022). The Sixth Circuit also held that a party that does not own land in a municipality can claim a violation of its constitutional rights against the municipality for failing to approve a land use designation if a parallel application for annexation was rejected by the municipality. Rice v. Village of Johnstown, 30 F.4th 584 (6th Cir. 2022). Barber does not seem to be an expansion of property rights because “takings” from governmentally created water damage have often been held to constitute a taking, but Rice is remarkably interesting for its apparent willingness to grant a property owner relief against a municipality when the property was not within the municipality. This arguably appears an expansion of the class of persons who may claim against a municipality.

We were also treated to interesting opinions affecting transactional practice during this time period. The Seventh Circuit held in Archer-Daniels-Midland Co. v. Country Visions Cooperative, 29 F.4th 956 (7th Cir. 2022), that a purchaser who buys a property with knowledge of a right of first refusal, even if the property had been sold out of bankruptcy court without reference to the right of first refusal, is not a good faith purchaser under the Bankruptcy Code. The end effect of the ruling is that the purchaser is subject to the right of first refusal on the property. This is clearly a victory for the notice provisions of recording acts and serves as a warning to purchasers to further inquire regarding all aspects of instruments found in title records. Along these lines, the Eighth Circuit held in Erickson v. Nationstar Mortgage, LLC, 31 F.4th 1044 (8th Cir. 2022), that an innocent mistake (e.g., mistakenly releasing a deed of trust) is not slander of property as it lacks an element, i.e., malice, which is required to constitute a slander. The facts in Erickson were not kind to the borrower. The borrower knew he had not paid the mortgage but still wanted the mortgage satisfied under the mistaken release, so it was clear the court was not leaning in his favor. Still, the opinion provides an additional basis for backing out of a mistaken satisfaction. And the Eleventh Circuit re-clarified the role of witnesses by holding that an “attesting” witness witnesses the signature applied to the instrument and attests to having seen the act while an “acknowledging” witness is an officer before whom the grantor appeared and declared the paper to be the grantor’s instrument. In re Lindstrom, 30 F.4th 1086 (11th Cir. 2022).

The Sherman Antitrust Act also was discussed in the real estate context, with the Third Circuit holding that standing under the Sherman Antitrust Act is more restrictive than typical federal court standing. Under this more restrictive standard, a concessionaire at an airport is not a proper party under the Act and accordingly does not have standing to bring a claim for violation of the Act. Host International, Inc. v. Marketplace, PHL, LLC, 32 F.4th 242 (3d Cir. 2022). This opinion is counterintuitive but hews closely to and is consistent with the Act. This opinion will provide support to landlords but takes away a possible argument that tenants can use against landlords.

Arbitration issues were also prevalent at the circuit level. The Sixth Circuit explained that remanding an arbitration award back to the arbitration panel for clarification of the contractually required reasoning behind the award does not violate the Federal Arbitration Act and that the actions of the arbitration panel in explaining its reasoning satisfy the clarification completion exception to the functus officio rule. In re Romanzi, 31 F.4th 367 (6th Cir. 2022). Practitioners drafting and working with arbitration provisions should examine this opinion carefully and note that return of the arbitration award was pursuant to the contractual arbitration provision itself, a case in which careful drafting created the proper result.

Termination of arbitration has become problematic, and the Fifth Circuit explained that a contractual requirement to arbitrate disputes is fulfilled even though no award was issued. Noble Capital Fund Management, L.L.C. v. US Capital Global Investment Management, L.L.C., 31 F.4th 333 (5th Cir. 2022) (termination of arbitration proceedings without the issuance of an award, even if for nonpayment of arbitration fees, satisfies the contractual requirement that an arbitration be conducted, and the parties are now free to exercise nonarbitration remedies as a result). By way of background, arbitral organizations typically ask all parties to make advance deposits in order to conduct the arbitration and will ask one party to pay another party’s deposits if a party fails to make the deposit. Arbitrators are understandably reluctant to proceed if all deposits have not been made, and cases will often stall if the paying party fails to advance costs for the nonpaying party. This case clarifies the procedure employed in this situation in order to avoid a stalemate in the dispute resolution process.

Bankruptcy decisions were once again prevalent, including a Fourth Circuit case involving the In Pari Delicto doctrine, which keeps a wrongdoer (including a bankruptcy trustee) from collecting from or against another wrongdoer, In re Infinity Business Group, Incorporated, 31 F.4th 294 (4th Cir. 2022), and a Sixth Circuit holding that objections to discharge under 11 U.S.C. § 727(a)(5) have no lookback period, In re McDonald, 29 F.4th 817 (6th Cir. 2022). These decisions do not directly affect real estate practitioners but are helpful for purposes of understanding the rights of contracting parties.

Conclusion

As this article is written we are heading into the summer months, when the Supreme Court takes its recess and the circuit courts are a bit quieter than during the rest of the year. But the Court’s term is not over yet, and the changes in the market are sure to generate a good deal of disagreement, so stay tuned for future developments.

Published in Probate & Property, Volume 36, No 5 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Probate & Property September/October 2022