Commercial Litigation

The “Alternative” to the Courthouse

Over the past 20 years, the number of civil lawsuits filed in Texas district and county courts has increased by 31%, including an almost 4% average increase per year since 1999. While the number of lawsuits filed is steadily rising, the number of civil cases that go to trial is steadily decreasing. The United States Department of Justice found a 47% decrease in the number of civil trials in the nation’s 75 largest counties from 1992 to 2001.

So how can the number of lawsuits continue to increase while the number of trials continues to decrease? The main reason is settlement, as between 88 and 90% of all cases settle before going to trial. And cases most often settle through alternative dispute resolution (“ADR”). In fact, approximately threequarters of cases that go through ADR are resolved.

It is all but guaranteed that a party to litigation will have to participate in ADR. The State of Texas law strongly advocates the use of ADR, and the Texas Legislature passed the ADR Act in 1987 to carry out that policy. The ADR Act sets out procedures to facilitate non-adversarial negotiation, such as ensuring that the process is confidential, and encourages all Texas courts to refer matters to ADR. For example, the Travis County District Courts automatically refer all cases to pre-trial mediation. This is the predomipredominent policy in many Texas courts. For instance, Bexar County District Courts presume that all cases should be ordered to mediation and require that parties participate in an ADR hearing four months before trial.

Mediation is a confidential process during which a mediator facilitates settlement negotiations and discussions between the parties. The mediator is an impartial party that is typically an attorney who has completed required training for the mediation process. The mediation often starts with an opening caucus or joint session when the parties, their attorneys, and the mediator meet in the same room to discuss the case and their respective positions. The parties then split into separate rooms, and the mediator spends the rest of the time going back and forth to listen to the parties, clarify issues, and facilitate settlement negotiation. Mediations usually last a half day or a full day. If an agreement is reached at the end and reduced to writing signed by the parties, it is usually an enforceable contract. If an agreement is not reached, the parties may decide to continue settlement discussions, with or without the mediator, or the parties will proceed with litigating their cases at the courthouse.

The advantages of mediation are that it is flexible, voluntary, more economical, fast, and confidential. Allen Smith, the Chairman of our Commercial Litigation Section, describes mediation as an opportunity that allows his clients to “control their world” versus litigation where so many variables are left in the hands of opposing counsel and the court and out of the client’s control. Smith is an advocate of consideration of mediation prior to any lawsuit to address disputes efficiently and economically in a strategy that he calls as he calls “Litigation Mitigation”.

A soon to be published study in the Journal of Empirical Legal Studies concludes that settling can frequently be more beneficial than going to trial. “In just 15 percent of cases, both sides were right to go to trial – meaning that the defendant paid less than the plaintiff had wanted or that the plaintiff got more than the defendant had offered.” Given this finding and the very high likelihood that a court will order a case to mediation, it behooves all businesses to be familiar with the ADR process.

By J. Allen Smith and Daniel P. Tobin

Commercial Litigation

You Take It, You Buy It: Texas Courts Require Condemning Authorities to Compensate Billboard Property Owners for their Interests

After years of Texas condemning authorities and appraisers attempting to treat billboard owners and their interests differently from other property owners and their interests, Texas courts are saying, “Enough is enough.” Three recent Court of Appeals decisions are developing a body of law in Texas confirming that the protection of the rights of billboard property owners in condemnation is on par with that afforded to owners of other real property interests.

These opinions collectively hold that a billboard property owner is entitled to just compensation for the loss of income from advertising on a sign because such income is not “business income” but rather income generated from the land. Further, this line of cases establishes that a sign structure is a real estate fixture, and the taking of the structure is thus compensable.

Procedurally, these cases support the exclusion of valuation expert testimony where the expert fails to consider the billboard owner’s full interests in valuing the land. Significantly, these decisions have also firmly rejected the arguments repeatedly attempted by condemning authorities that sign structures are not fixtures as a matter of law because they are removable and/or considered personalty by the sign owner for tax purposes or under a ground lease.

In the case of Harris County Flood Control District v. Roberts, 2008 WL 878507 (Tex. App.—Houston [14th Dist.] 2008, pet. filed), the Court of Appeals upheld the trial court’s award of compensation to the billboard property owner for the taking of its sign structure and related property interests, finding that the billboard structure was a real estate fixture at the time of the taking, and the related lease and property interests should be compensated. The Court refused the condemnor’s argument that, as a matter of law, the sign structure was not a fixture and the billboard property owner was, therefore, entitled only to the bonus value of the lease, which had a nominal value.

Further, the Court in Harris County Flood Control District rejected the condemnor’s argument that the sign structure was not a real estate fixture because the billboard property owner considered it personal property for tax purposes and had the right under the lease to remove it. The Court instead found the evidence sufficient to establish the sign structure as a real estate fixture, making it a compensable interest in condemnation and requiring an award of just compensation to the billboard property owner for the taking of the sign, which the Court found to be properly valued at approximately 1,111 times greater than the value offered by the condemning authority.

In the case of Harris County v. Clear Channel Outdoor, Inc., 2008 WL 1892744 (Tex. App.—Houston [14th Dist.] 2008, no pet. h.), the Court upheld the award of compensation to the billboard property owner for both its leasehold interest and its sign structure. Finding that the Fifth Amendment to the U.S. Constitution requires the government to compensate the billboard property owner for the taking of the billboard structure, the Court rejected the government’s argument that the sign structure was not a compensable interest. Specifically, the Court denied the government’s arguments that the sign structure was personal property as determined by the billboard property owner’s intent as implied by the terms of the lease; that the sign structure was not sufficiently affixed to the real property to become a real estate fixture; and that the only compensation to which the billboard property owner was once again entitled was the bonus value of the lease, which was nominal.

Citing the U.S. Supreme Court’s decision in Almota Farmers Elevator & Warehouse Co. v. U.S., 409 U.S. 470 (1973), the Court in Harris County found that a condemning authority, such as the government, cannot take advantage of a lease agreement designating an improvement made by lessee as personal property. Further, the condemning compensate for taking business improvements, such as a billboard, by dismissing them as worthless simply because the condemnor does not intend to use them. The Court held that if a business improvement is attached to the real estate, as with a billboard, it must be treated as real estate in determining the total award. The Court thus awarded the billboard property owner the value it requested.

Finally, in the case of State v. Central Expressway Sign Associates, 238 S.W.3d 800 (Tex. App—Dallas 2007, pet. filed), the Court addressed the valuation of a billboard site in the context of a billboard easement. The Court found that in determining the value of the easement, income dederived from advertising on the sign was not “business income,” but rather income generated by the land which should be properly considered in valuing the sign site. The Court thus upheld the award of just compensation based on an income valuation approach using the advertising income from the billboard face rentals.

These precedents reinforce established property rights of billboard property owners and show that Texas courts will not allow condemning authorities to skirt their legal obligations to pay just compensation for taking billboard property interests in condemnation. Condemning authorities should take note of these appellate decisions in making statutorily mandated pre-condemnation settlement offers in compliance with the recently adopted Texas Landowner’s Bill of Rights as prescribed by the Texas Legislature in Texas Government Code § 402.031 and Chapter 21 of the Texas Property Code.

By J. Allen Smith and Michael R. Steinmark

Commercial Litigation

Specific Relief Concerning Fraud in Real Estate and Stock Transactions

Parties to real estate and stock transactions need to be aware of the specific relief for fraud in real estate and stock transactions. Typically, under common-law fraud, a plaintiff must prove that (1) the defendant knowingly or recklessly made a material misrepresentation with the intent that the plaintiff rely on the misrepresentation and (2) the plaintiff relied on the misrepresentation to his detriment.

For real estate and stock transactions, Chapter 27 of the Texas Business & Commerce Code provides a statutory fraud remedy that is essentially the same as commonlaw fraud with one key exception— under statutory fraud, the plaintiff need not prove that the defendant acted knowingly or recklessly. Thus, the standard of proof is not as great for this statutory fraud as opposed to common-law fraud.

Under statutory fraud, a defendant is liable if it is shown that (1) the defendant made a material misrepresentation or a false promise and (2) the plaintiff relied upon this misrepresentation to his detriment. Thus, in real estate and stock transactions a party may be liable for statutory fraud even though that party acted with care and was unaware of the falsity of the representation. Conceivably, a party could commit statutory fraud without having any intention to defraud merely by making representations that the party believed were true but later turned out to be false. Additionally, if the plaintiff can prove that the defendant acted knowingly, the plaintiff can recover exemplary damages.

A defendant may also be liable for statutory fraud under Chapter 27 for benefitting from a misrepresentation made by a third party that the defendant knew was false. When the misrepresentation is made by a third party and the defendant is aware of its falsity, the plaintiff may also recover exemplary damages because the defendant acted knowingly.

Accordingly, this relief is to be considered in the event a party has concerns as to the accurate nature of any representations in connection with a real estate transaction by another party to the transaction or a third party.

By J. Allen Smith