A Houston Real Estate Lawyer can help analyze your real estate case and can help you navigate the dense and sometimes contradictory case law that may apply to your real estate situation. Here Hector Chavana Jr. analyzes the case of Stumhoffer v. Perales, 459 S.W.3d 158, 159 (Tex. App.—Houston [1st Dist.] 2015, pet. denied), and argues that some of the case law established in this case should be changed. You can reach Hector Chavana Jr at 713-979-2941.
Attorney’s Fees And Duties To Defend When A Plaintiff is “Without More” Than General Warranty Language, and When a Plaintiff Does Not Use the DTPA to Bring a Title Warranty Claim, and How Court Mixed Up Liability For Breach of Warranty and a Duty To Defend
In 2007, Perales buys a piece of real estate from Stumhoffer (“Seller”) by warranty deed. Perales later had the property surveyed and found out that Perales’ neighbor (“Neighbor”) was encroaching on Perales’ property by having fenced in Perales’ property by seven feet.
Neighbor sued Perales to establish ownership of the seven feet. While the suit is pending, Perales “sought indemnification” from Seller for “all costs and expenses incurred in the litigation” and for the market value of the property. The case does not say how he sought indemnification, but it seems he did so by a demand letter. Seller does not provide the indemnification.
After Seller’s death and after resolution of the suit with Neighbor, Perales, sues Seller’s estate, alleging that Neighbor had breached his duty to defend. He alleged a breach of the general warranty in the deed. In this case, Perales sought attorney’s fees under a declaratory judgment theory and under a breach of contract theory. Significantly, the case does not mention anything about the DTPA, and I assume Perales did not plead the DTPA. Under the DTPA, attorney’s fees must be granted, and a plaintiff can bring a breach of warranty suit under the DTPA.
The trial court granted a victory to Perales in the form of a summary judgment, and Seller’s estate appealed. The principles that came out of the case are as follows:
Perales argued that the general warranty deed obligated Seller and his heirs to defend the title (which generally means to pay for attorneys to go to court to defend against a lawsuit). He argued that in the absence of a defense, that Seller must indemnify him for the attorney’s fees he incurred. Perales theorizes that this duty comes from the language of the general warranty with which real estate lawyers are familiar.
The Court says that based solely on the general warranty language, there is no authority to state that a seller must reimburse attorney’s fees. However, the court also states that a general warranty binds a seller to defend a lawsuit for title defects created by himself and all prior title holders. (“a general warranty deed expressly binds the grantor to defend against title defects created by himself and all prior titleholders in a suit by a person ‘lawfully claiming, or to claim the same, or any part thereof’…Thus, a seller has a duty to defend a title passed by a general warranty.”) Id at 165.
The purpose of a general warranty is to indemnify the purchaser against a loss or injury by a title defect. Fast forward: the Court reverses the trial decision and says that Perales cannot recover attorneys fees from Neighbor.
When the court says that there is a duty to defend, but that a seller need not reimburse attorneys fees expended by the buyer, the court is either saying that 1) the defect in the Perales v. Neighbors case was not a defect caused by the Seller or 2) that even if a seller breaches the duty to defend, there is no authority whereby a buyer can seek reimbursement for his legal costs under general warranty language. Either is problematic.
If the Court is saying that Seller did not cause a title defect, it is saying that a seller can sell a property with an encroachment and that a seller is not liable for that encroachment (presumably because he did not cause the encroachment). This upends the law as we know it because a Seller is warranting that the property is without encroachments, and because warranties do not consider the intent or mindset of the warrantor.
If the Court is saying that a buyer cannot seek reimbursement after the case has concluded, then the Court is saying that a seller can breach a duty to defend and a buyer has no remedy for that breach.
Another possibility is that the Court did not like the procedural vehicle used by Perales. The Court kind of hints at the fact that a suit after the Perales v Neighbor case was an improper method to bring a declaratory action. The Court also says that there must be an eviction of the buyer due to the superior title in order to bring an action under the general warranty. Therefore, if an evicion is REQUIRED, it seems apparent that the buyer should have the option of waiting out the first case to see if he is evicted before suing the seller, and seeking reimbursement later. So, on the one hand, the Court may not like a buyer to file a third-party action, bringing the seller into the title dispute (since he must be evicted first), but it also seems to say that an action after the initial action would be improper. This, again, means that a buyer would have no way to get reimbursement for attorney’s fees, either through a third party action or through a subsequent action.
Finally, the court also says that there is no breach of warranty if title does not fail. From that it seems that we are supposed to take away that if the buyer successfully defends title, on his own, without defense provided by the seller, then he cannot seek reimbursement from the seller. Again, this scenario allows the seller to breach its duty to defend with no consequence.
Under these sets of principles, it seems that a seller is never liable for breaching his duty to defend, a duty recognized by the Court. This cannot be the law.
But this does seem to be the law set down by this case. The Court says that even upon a showing of a breach of general warranty, “without more,” the purchaser’s damages do not include attorneys fees, and the damage is set at the return of the purchase money. The court specifies that if there is no title defect, there is no award for reimbursement of attorney’s fees. Again, the breach of the duty to defend goes uncompensated.
These principles sets up a perverse financial incentive for a buyer whose title is questioned to simply fail to defend the suit if the seller won’t contribute, and then sue the seller for the return of the purchase money after a default has been taken on him…even if he could clearly with the case. Why would a seller incur, let’s say 70k in attorney’s fees even if he could successfully defend title, for a property he purchased for 150k, when he 1) could not recuperate the 70k from the sellers; 2) could simply let the adverse party win, and 3) sue the sellers afterwards for the 150k he paid. Again, this can not be the law?
The Court distinguished other cases, and I think that the Court’s analysis of those distinctions was fair, even though the Court’s ultimate decision here was wrong.
The big issue here is that, in this case, the DTPA does not appear to be used as a vehicle to bring the warranty claims. The court says that general warranty language “without more” is insufficient for a buyer to demand attorney’s fees from a seller for breach of a general warranty. The DTPA mandates attorney’s fees for breach of a warranty, and that could be the difference. Even so, if a breach of warranty does not occur without the failure of title, as the court says, then a successful buyer might not be able to recuperate even under the DTPA. Such a buyer would be in the perverse financial position as described above.
This case law must be changed or sellers will be able to skirt their duty to defend, a duty recognized by this very court, with impunity.
Update
After review, it appears that the Court in Perales erred because it applied the standards for breach of a covenant to warrant title to the grantee’s duty to defend. This is not a correct standard, because A DUTY TO DEFEND generally arises around the time suit is filed against the grantee, and LIABILITY on the warranty should arise only when title fails. I think the Perales court confused the two concepts. I am more convinced of this since the Perales court recites in rote fashion the proper measure of damages for breach of a covenant. Those damages were not even at issue because the Perales case was a case on the DUTY TO DEFEND not LIABILITY. The Court concludes by saying, essentially, if there is no liability, then there is no duty to defend, which is illogical, and renders moot any damages for a breach of a duty to defend. Perversely, and illogically, on the one hand, the court says “Perales does not cite any agreement creating a separate duty to defend aside from the language of the general warranty of title,” (Id. at 166), and on the other hand says “a general warranty deed expressly binds the grantor to defend against title defects created by himself and all prior titleholders in a suit by a person ‘lawfully claiming, or to claim the same, or any part thereof’…Thus, a seller has a duty to defend a title passed by a general warranty.” Id at 165. WHAAATT?
Another case discusses a breach of covenant to warrant title:
A claim for breach of a grantor’s covenant to warrant title “does not arise until there has been an eviction,” which may include “constructive eviction.” Schneider v. Lipscomb County Nat’l Farm Loan Ass’n, 146 Tex. 66, 202 S.W.2d 832, 834 (1947). Constructive eviction has two elements, requiring the grantee-covenantee suing for breach of the covenant to prove that: (i) “paramount title has been positively asserted against the covenantee,” which “in fact is paramount” and (ii) the covenantee has “yielded to [the assertion] by surrendering possession or by purchasing the title.” Id. When constructively evicted, the grantee may surrender the land to the superior titleholder and resort to recovering on the warranty. Id. at 835. An extension of the above rule is that when the true owner is in possession at the time of the conveyance and the grantee is not, and at that time the grantee “finds the premises already in the possession of one claiming under a paramount title, the covenant of warranty is breached, and the [grantee] may maintain an action….” [meaning that the warranty of title was essentially breached when the grantee received the deed]. Morrison v. Howard, 261 S.W.2d 910, 912–13 (Tex.Civ.App.-Austin 1953, writ ref’d n.r.e.) (on reh’g per curiam) (citation omitted)