7 minute read
Keep it Legal
Answers to Members’ Questions by TRWA Assistant General Counsel Trent Hightower
:When new members of our WSC bring us their proof of ownership documents, most of them provide a warranty deed showing that they own the property being served. Recently, however, we have had an applicant provide us with a “deed of trust,” and another provide us with a “contract for deed.” What are these documents, and can we accept them as proof of ownership? A: A deed of trust is the document used to convey property in Texas, similar to a mortgage in other states, though they are commonly referred to as “mortgages” in casual conversation due to similarities between the two. Under a deed of trust, the lender has a secured interest against the real estate until the borrower pays off their debt in full, but legal ownership of the property is conveyed to the buyer. If the buyer defaults on their payments, the law specifies a comprehensive foreclosure process to enforce the lender’s rights. I consulted with an attorney who does a lot of real estate work as to whether he thought the deed of trust would suffice as proof of ownership. He said that document alone doesn’t really prove ownership because it simply lays out the rights and responsibilities of the parties to the transaction. In most transactions, the deed of trust should be accompanied by a deed showing a vendor’s lien on the property. While the similar terminology is confusing, WSCs should require applicants to show them this deed, not their deed of trust to establish ownership. A “contract for deed” is a completely different type of arrangement that is also sometimes referred to as a “rent to buy” transaction. These can be somewhat predatory in nature because they tend to be used when a potential purchaser of property is unable to secure traditional financing from a bank. Instead, the current owner and a potential buyer enter into a simple contract in which the owner agrees to convey the deed to the buyer once the full purchase price has been paid. Legal title does not pass to the purchaser until the final payment is made, and missing even a single installment can result in the seller canceling their contract and retaking possession of the property. Unfortunately, individuals who are unable to secure traditional financing also frequently fail to keep up their payments under these contracts. This can result in a revolving door of new residents at the property, and if the local WSC treats each one as if they legally own the property, it can find itself with repeated instances of unpaid balances at the same property. The Legal Department has fielded a few questions recently where a property owner has attempted to use a contract for deed to circumvent the obligations that come with being a traditional landlord in a lease situation. By claiming that the person listed as a buyer in the contract owns the property, they seek to avoid responsibility for paying the water bill at that location. Since legal title does not transfer upon the execution of a contract for deed, that is not the case. If someone claims to be a property owner and presents a contract for deed or other document that seems to be a rent-to-buy contract, WSCs should treat the arrangement the same as a landlord/tenant relationship, since that is essentially what is going on until all payments have been made. The attorney I spoke with recommended that systems require the so-called “seller” under the arrangement to apply for the membership in his or her name. This person should also sign the necessary easements, since they still have the legal authority to do so at the time service is requested. : We have heard through the grapevine that our utility might be getting sued soon. Who is the proper person to receive notice of that suit if it happens? Can the plaintiff sue any employee, or are there particular people they must serve? A: The answer here will depend on whether your system is a district or water supply corporation. For districts, Section 49.066 of the Water Code states that the president or the general manager of the district is the agent of the district on whom process, notice, or demand may be served. Therefore, as your president or general manager change over time, those individuals are always statutorily the people on whom lawsuits and other legal documents may be served. As nonprofits, however, water supply corporations are required to select a registered agent and file Form 401 with the Texas Secretary of State so the public is on notice of the individual who may be served with legal process. Often, the registered agent will be the president or another board officer, but Section 5.202 of the Business Organizations Code only requires that the person be a resident of Texas and that they consent in writing to serving as the corporation’s agent. Your agent can do this by filling out the Secretary of State’s Form 401-A. Both forms can be found on TRWA’s Legal Resource Page at www.trwa. org/Filings-WSCs. Because service of process is only valid against the individuals above, if an individual serves process on any other board member or employee, they have not properly initiated their lawsuit. Still, as a practical
matter, if someone other than the people discuss above accepts service of process, I recommend immediately contacting your attorney to determine your next steps. It is likely that the plaintiff will properly serve you later, and your attorney will appreciate the additional time to prepare a response.
:Our WSC has a policy that when people purchase a new meter, they can finance the equity buy-in fee and pay it over time. We had a customer who recently sold their property without paying the fee. Can we charge the new owner the balance of this fee? A: If you were to assess the new owner the remainder of the equity buy-in fee and they challenged it to the Public Utility Commission of Texas (PUCT), I’m not sure how the agency would rule and I am not aware of any cases where they have looked at this in the past. However, given their general consumer-focused stance on rate and fee issues and the way they look at other fees, I would urge you to err on the side of caution and absorb this as a loss and lesson learned. For most debts that water system customers leave behind, like a few months’ worth of unpaid water bills, the answer is clear: that debt belongs to the person who incurred it and the system is forbidden from charging it to a subsequent purchaser. Equity buy-in fees are somewhat unique in that they are assessed against a property, rather than a person. When a property is first served, the owner must pay this fee to bring it into “parity” with the rest of the system. In other words, the property will be receiving the benefit of many years of payments made by other members over the decades, and the owner must pay a calculated amount to bring the new property up to speed. That said, I have concerns that the PUCT would say that the utility had the obligation to collect the fee at the time service was extended to the property, and it is not the new owner’s fault that wasn’t done. Further, if you finance any up front fees as the TRWA Sample Tariff contemplates that a system may choose to do, you should have executed a deferred payment contract with the previous owner at the time you installed service. Such an agreement would likely make the remaining fee a personal debt of the previous owner, because they executed a contract agreeing to pay that amount. Thus, I think you will need to pursue this unpaid amount from the previous owner through the courts or collections as you would with any other bad debt. This is a risk that a system takes when it agrees to a deferred payment plan for up-front service fees. However, there is no requirement that systems agree to these terms. As with other things like obtaining easements, the utility is in its position of greatest strength when the applicant applies for service. They can predicate service on conditions that the PUCT would not allow a disconnection for after service has begun. I recommend using deferred payment plans for up-front fees sparingly, being mindful of cost of service appeals and an applicant’s likelihood of paying the full amount before they sell the property.
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