DAVID J. WILLIS ATTORNEY
Copyright © 2018. All rights reserved worldwide.
A Nuts and Bolts Tour for Investors
by David J. Willis, J.D., LL.M.
This article is designed to acquaint investors with basic rules and procedures involved in Texas litigation. For our purposes, "litigation" refers to the filing and prosecuting of a real estate-related lawsuit, or defense against one, in the Texas county civil courts at law or the civil district courts. We will not discuss divorce cases, criminal defense, or litigation in federal court.
The cost and complexity of litigation has doubled in the last 10 years, in no small measure due to the impact of computers and technology. What is capable of being done with all our electronic gadgets is now expected to be done. Ironically, the result is more, not less, paper. A prime culprit is the "docket control order" or DCO, also called a "scheduling order," generated by the clerk's computer shortly after the lawsuit is filed. In times past these orders contained only a few dates, including the discovery completion date, the date by which experts were to be designated, and a trial date. DCOs have now expanded to include many more dates and deadlines. Meeting dates and deadlines not only costs money but is the attorney's professional obligation, to the client and to the court. Attorneys must therefore be prudent when signing on as attorney of record. The attorney must not only be confident that the case has merit but that the client has the commitment and financial means to pursue litigation at today's level of complexity and expense.
In contemplating filing or defending against a lawsuit, one should keep in mind three cardinal rules, which shock clients when they learn them: (1) There is no such thing as a perfect case and yes, that includes yours; (2) no one ever gets exactly what they want in court and yes, that includes you; and (3) litigation always costs more than you think it will.
References to rules in this article are to the Texas Rules of Civil Procedure.
Why worry about legal fees? Arenít all lawsuits handled by contingency fee?
No. Contingency fee arrangements are usually unavailable in real estate and business cases (since there is generally no insurance pot of gold at the end of the rainbow) so the client will be required to post a substantial initial retainer. Many real estate and business attorneys require an initial retainer of around $10,000 (plus costs such as filing fees) with supplementary retainer installments to follow. Larger firms may require up to $25,000 up front. There is a reason for these retainers. For attorneys, there are few situations more frustrating than being in a lawsuit governed by a complicated DCO while stuck with a client who cannot or will not pay the bills for the work that order requires. Although most suits settle before trial, the client must be able to see the process through to its bitter end if necessary.
Evaluating the Case
A good case consists of (1) facts that clearly show liability, and (2) monetary damages in an amount that makes the process worthwhile. Both factors must be present. Good liability facts are not helpful if there is no real monetary loss; and large damages will not help a plaintiff who cannot show a clear path to holding the defendant legally liable. One or more established causes of action (fraud or breach of contract, for example) must apply. Note that legal liability is not the same as moral liability. The justice system, like every human institution, is imperfect. It is not only unable but unwilling to right every wrong.
As a rule of thumb, there should be at least $20,000 in actual damages to make it worthwhile to file a suit in county or district court. Plaintiffs with $5,000 and $10,000 cases should consider filing a small claims action in justice court where an attorney is not required. Otherwise, such cases are not cost-effective. The days when it was reasonable to hire an attorney for a low-damage claim are gone. A breach-of-contract claim in a real estate transaction of, say, $2,500 is not the basis for a lawsuit. It is more appropriately considered a collection item or a business write-off.
If an investor is contemplating litigation, the first step is to consult with a real estate litigator to go over the facts, review and analyze documents, and evaluate the potential for success. At the initial meeting, the client should be prepared with copies of allrelevant documents and correspondence as well as a written summary and a timeline of events. The prospective litigant should also be ready to demonstrate that he or she can afford the litigation. If the client arrives prepared, most attorneys can evaluate a case in an hour. As is the case with major medical decisions, obtaining a second opinion may be a good idea.
Representing Oneself as a Pro Se Litigant
Because of mushrooming complexity, representing oneself as a pro selitigant is no longer practical for non-attorneys except in small claims cases in justice courts, which hear controversies involving up to $10,000. Justice courts are also handy because they are located in various neighborhood precincts. For many, justice court may be the best option, but even there one sees more and more attorneys at the bench, and few things are more foolish than a pro selitigant attempting to match wits or knowledge of the rules with a trial lawyer. It goes without saying that representing oneself at higher court levels—county court or district court—is inviting trouble. The Rules of Civil Procedure, the Civil Practice & Remedies Code, and the Rules of Evidence govern trial work. These are complicated even for lawyers who appear in court frequently. They can appear illogical, incomprehensible, and Byzantine to others.
Note that corporations and limited liability companies are required to have an attorney in Texas. They are not permitted to represent themselves, either in filing or answering a lawsuit.
Obligations of the Client
A client cannot expect to meet with an attorney, pay a retainer, and then walk away and forget about a lawsuit. The client must be an active and essential participant, since a case in litigation will involve considerable time, effort, and expense. Patience and persistence are also required since it can take nine months or so to move a case to trial, and there are invariably bumps in the road.
The attorney-client relationship is based on trust, candor, participation, and communication. A client should tell the attorney everything pertinent to the case and provide all relevant documents.
A plaintiff who does not know the location of the person or entity to be sued should be prepared to incur the expense of a private investigator.
Clients should resist the temptation to micro-manage a lawsuit. Reach an agreement with the attorney on general goals and strategy and then let him or her do the job. Even so, no attorney can ever make a guarantee concerning the outcome of a case. Attorneys are merely the agents of their clients within the system.
The term "jurisdiction" has three aspects: first, whether a particular court is enabled by law to handle certain subjects ("subject-matter jurisdiction"); second, whether damages fall within certain monetary limits ("monetary jurisdiction"); and third, whether the court has jurisdiction over the parties and property involved ("personal jurisdiction" and "in rem jurisdiction," respectively). All of these requirements must be satisfied.
County courts and district courts have subject-matter jurisdiction over the full range of real estate and business matters. However, in certain counties other than Harris County, matters pertaining to title to real estate must be brought in district court. Justice courts have original jurisdiction over possession of real property, so evictions must brought there.
County courts have monetary jurisdiction up to $100,000. District courts can hear cases that exceed $500 in value, and there is no upper limit. Often, but not always, litigation in county court is cheaper and faster than in district courts.
Venue refers to the county in which a lawsuit is brought. Pursuant to Civ. Prac. & Rem. Code Sec. 15.002, one cannot file suit just anywhere. Venue is proper in a particular county if (1) all or a substantial part of the events or omissions giving rise to the claim occurred in that county; or (2) the defendant resides in that county or, if a corporation or other registered entity, does business there; or (3) the real property the subject of the suit lies in that county. If suit is filed in the wrong county, the opposing party will likely make a special appearance in order to ask for a change of venue. Failing to pay attention to proper venue results in wasted time and money.
Causes of Action
In order to be an effective lawsuit, a case must meet all the required elements of one or more causes of action. Causes of action derive from common law (legal history and tradition) and from specific statutes. Examples:
breach of contract and specific performance
breach of express or implied warranty
common law fraud
deceptive trade practices
slander of title
suit to quiet title
trespass to try title
suit for specific performance
suit for declaratory judgment
violation of real estate license act
These causes of action are common in real estate litigation. There are, of course, many more.
Specific Performance of Contracts
Specific performance of real estate contracts is an issue that arises in the investment business with sufficient frequency so as to merit special attention. What do you do when an opposite party fails to perform a valid contract? The answer may be a suit alleging breach of contract and seeking an order compelling the other party to do what that party agreed to do. "Specific performance is an equitable remedy that may be awarded, at the trial court's discretion, for a breach of contract . . . and is an alternative remedy to damages. When the recovery of monetary damages is inadequate to compensate the complainant, the transgressor is compelled to perform the promise of its contract . . . Specific performance is not a separate cause of action, but rather it is an equitable remedy used as a substitute for monetary damages when such damages would not be adequate." Marx v. FDP, LP, 474 S.W.3d 368 (Tex.App—San Antonio 2015, no pet.).
The remedy of specific performance, as a practical matter, is more effective against a breaching seller than a breaching buyer. One is essentially demanding the acknowledged signature of the seller on a deed and other documents, and that these documents be duly delivered to the buyer, which is not a major burden in practical terms. It is a different situation in the case of a buyer. In the real world, it is difficult to force a buyer to apply for a loan, sign a note and deed of trust, and so forth. Disappointed sellers are most often in the position of keeping the buyer's earnest money and moving on.
Injunctive relief (a temporary restraining order or temporary injunction) may also be requested after suit is filed. Injunctions are useful in preventing another party from taking certain action, such as foreclosure, that will cause irreparable harm to the applicant (Rule 680). A temporary restraining order ("TRO") is a form of emergency, equitable relief that is good up to 14 days. A TRO is granted, if at all, after notice to both sides and a hearing. A temporary injunction ("TI")—which is the next step in the process after the TRO expires—requires a more thorough hearing, usually a mini-trial, at which the applicant must show a likelihood of prevailing upon the merits at trial of the case. A TI usually remains in effect for the duration of the litigation. Finally, a permanent injunction may be granted as part of a judgment and is usually for an indefinite period.
Note that a bond is always required if a TRO or TI is granted. The amount can be nominal (say, $100) or it can be more significant. Bonds in the amount of $5,000, $10,000, or $20,000 are common, although the amount can be set much higher depending on the circumstances of the case and the inclinations of the judge. The amount of the bond is discretionary with the judge and is designed to protect the interests of the party against whom injunctive relief is awarded—in case, for instance, the plaintiff's case is ultimately shown to have no merit.
An applicant for a TRO or TI needs to be prepared to post the cash (which is refundable if the applicant prevails in the case) within 24 hours of the hearing or utilize the services of a bondsman to do so. Bondsmen will require 10-20% of the bond amount as a nonrefundable premium as well as collateral (e.g., a lien on real estate). Do not ask your attorney to seek a TRO or TI unless you have sufficient resources with which to post a bond.
Whether an injunction can be obtained depends on many factors including the attitude of the judge. The outcome of an application for an injunction is never automatic or guaranteed. An application for an injunction adds a significant layer of complexity and expense to a lawsuit and can therefore be expected to increase legal fees.
"Discovery" refers to mechanisms for obtaining information, documents, and tangible things about an opponent's case. See Tex. R. Civ. P. 190 et seq. Discovery can be divided generally into written discovery (requests for disclosure, interrogatories, requests for admission, and requests for production) and depositions of parties, witnesses, and experts. Discovery is necessary and it is expensive. No modern case can be effectively litigated without doing thorough discovery, which is at least partially responsible for soaring costs. The period for discovery can go on for quite a while (months), although the docket control order usually contains a date by which discovery must be completed.
Generally, lawyers prefer to do written discovery first and then, as needed, take depositions. It should be noted that this system is broken. Many lawyers who bill by the hour can be intentionally obstructionist and object to a broad swath of even routine interrogatories and production requests. This is at best contrary to the spirit of the rules, at worst unethical. The net effect of objecting to everything is to make oral depositions inevitable, since the inquiring party needs the information, one way or another, in order to prepare for trial. Depositions are time-consuming and expensive for the client, but for those lawyers who bill by the hour that is just fine. Chances are you will be doing at least two depositions in your case—yours and your opponent's. Average cost? Between the court reporter and legal fees, around $2,500 each.
Clients occasionally question the need to do discovery, hoping to avoid the expense, but attorneys know that it is always better to go to trial with thorough foreknowledge of the opponent's case. Their own clients will be the first to blame them if they do not. A lawyer will usually prefer to fire a client who insists on cutting discovery costs rather than risk harm to his or her reputation by going to trial unprepared on the facts. Motions for Summary Judgment
A motion for summary judgment is an attempt to dispose of all or part of the case without proceeding to a full trial on the merits. Tex. R. Civ. P. 166a. Such a motion may be partial, i.e., limited in scope to certain issues or certain parties, or it may affect the entire case. Disposition by summary judgment is proper only when the movant establishes there are no genuine issues of material fact such that the movant is entitled to judgment as a matter of law. That's a high standard. In evaluating a motion for summary judgment, the reviewing court must "indulge every reasonable inference in favor of the non-movant and resolve any in its favor." Nixon v. Mr. Prop. Mgmt., 690 S.W.2d 546, 548 (Tex. 1985). Therefore, all evidence favorable to the non-movant will be taken as true and all doubts must be resolved in the non-movant's favor—meaning the non-movant gets the benefit of the doubt across the board as to the merits of its case.The practical result is that summary judgments are difficult to obtain. Judges are reluctant to deprive a party of his or her day in court.
MSJs are useful, however, when one wants to address just part of the dispute—possession of real property, for instance, leaving issues of title for trial. Or an MSJ may be a way to remove a party from a suit if that party was sued improperly in an individual capacity. In any case, MSJ hearings are limited to lawyer argument supported by documentary evidence and affidavits. Live witness testimony is not allowed.
One of the most basic criteria by which an attorney evaluates a case is whether or not it will survive an MSJ by the other side.
Parties should expect to mediate, like it or not, since most judges order it automatically (it is usually one of the deadlines in the DCO). All judges will order mediation if either side requests it. It may be for a half day or a full day. It is voluntary in the sense that neither side is obligated to accept any particular outcome. All aspects of mediation are confidential and (like settlement discussions) cannot later be brought up in court.
The cost of the mediator's services is usually $500 to $600 per side for a half day. Clients must come to mediation prepared with a cashier's check or money order payable to the mediator. This is collected before mediation begins. Attorney fees are in addition to this amount. While some may consider this expensive, mediation is nonetheless far cheaper than going forward with trial of the case.
Clients should also come to mediation prepared to be reasonable, since it is seldom that anyone in the legal system gets exactly what he or she wants. No attorney wants a client who will not mediate or will not mediate in good faith. Incentives for settlement at mediation include (1) the cost and aggravation of continued litigation, and (2) having certainty and control over the outcome, rather than leaving it to a judge or jury who can return unpredictable and even whimsical results. Any experienced lawyer has stories about times when he or she was shocked and dumbfounded by an unexpected verdict.
Jury Trial versus Trial to the Judge
Jury trials are more suitable in cases where one desires to inflame the passions of jurors in order to get a bigger verdict. This is more likely in personal injury (tort) cases than in real estate or business cases, where issues of blood and malice are usually (but not always) less common. In the latter, technical questions of contract law and the like are often best left for a judge to decide (rather than sending these issues to a jury) since the judge has the training and expertise and hears similar cases often.
Phases of the Case
The litigation process can be broken down into predictable phases:
Initial Pleadings and Discovery
Original Petition or Original Answer
Continuing Discovery/Motions/Mediation Phase
Application for Temporary Restraining Order (TRO)
hearing to convert TRO to Temporary Injunction (TI)
ongoing attorney-client conferences
settlement negotiations with the opposition
requests for disclosure
requests for admission
requests for production
responding to written discovery
amending pleadings, including filing a counter-claim or cross action
hearings on various motions
continuing settlement negotiations
motion for summary judgment
locate experts and obtain expert reports
ongoing attorney-client conferences
ascertain compliance with Docket Control Order
final amendment of pleadings
additional motions, if appropriate
supplementation of discovery responses
designation of experts by the deadline
business records affidavit
pretrial order preparation
conferences with client to prepare testimony
conferences with witnesses to prepare testimony
pre-trial research and preparation
correspondence and conversations with the opposition
trial of the case by judge or jury
entry of judgment
motion for new trial/defense of motion for new trial
request for findings of fact and conclusions of law
abstraction, execution, and attempt to collect the judgment
The total time to trial is approximately nine to twelve months, varying from court to court and county to county. Cases are usually heard in the order of oldest first. They are set for a certain term of court (often one week in county courts and two weeks in district court). During this time, the attorney, the client, and the witnesses are all on call, which can be inconvenient and expensive (if, for instance, one must pay hourly experts to sit around and wait). There is a lot of sitting around and waiting involved in trial work. A judgment is final after thirty days.
Dismissal for Baseless Causes of Action - Rule 91a
The 82nd Legislature introduced a much needed reform by creating Rule 91a, which provides that causes of action with no basis in law or fact may be dismissed within 45 days of the filing of an appropriate motion. It provides a dismissal remedy early in the process rather than having to wait for discovery to be completed to file a motion for summary judgment.
Another welcome rule change pertains to "expedited actions" for monetary relief not exceeding $100,000. Rules 47 and 169 apply. Unfortunately—very unfortunately for real estate investors—this innovation does not apply to actions brought under the Property Code.
Collection on a Judgment
Collecting on a judgment against an individual is difficult in Texas because of homestead laws and the constitutional prohibition against garnishing wages. If the loser has no insurance coverage, collection can be a real problem. Similarly, satisfying a judgment against a corporation or LLC may be challenging if assets have been moved out of the company name or located in other jurisdictions. Attorneys are fond of saying that they could "paper the walls" of their offices with judgments obtained but never collected. That is the reality in Texas, especially when it comes to judgment debtors who are individuals.
Execution on a judgment is most likely to be successful when the defendant has cash in the bank, investment real estate, or a business with substantial inventory or receivables. If none of these is present, the plaintiff's best option may be to file an abstract of judgment in the real property records and hope that the defendant will sell property through a title company during the 10 years that the AJ remains on file.
Post-judgment discovery enables a creditor to determine whether or not he is dealing with a judgment-proof debtor or perhaps a debtor who negligently failed to make an asset protection plan and whose assets are widely exposed. Written discovery require responses within 30 days. An oral deposition is also possible. The format and procedure is the same as for any trial deposition, except the focus is now on assets, their location, and their value.
Post-judgment discovery can be lengthy and brutal. Attempting to represent oneself in this process is the equivalent of swimming through piranha-infested waters.
A lawsuit is a business enterprise, and a tough and demanding one at that. It should never be taken personally. One function of the attorney is to help the client keep a cool head and evaluate the case rationally.
Legal fees and costs expended to pursue a suit represent a form of business investment. Alternatively, for instance, one could put that same money into stocks, real estate, or a gambling trip to Las Vegas. The client needs to estimate the rate of return on the investment in exchange for time, effort, and money expended. Putting dollars to work in a lawsuit represents an opportunity cost in economic terms, meaning those funds are not available for other uses. Clients who say these sorts of businesslike calculations are beside the point, that their suit is all about principle, are the first to tire of the process and quit, leaving their attorneys with unpaid bills and egg on their faces. Attorneys do not like to quit and they do not like to lose. Clients need to have both the fortitude and the finances to support their attorney's efforts to thoroughly litigate and win the case.
Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.
Copyright © 2018 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com.