To Quality as a Future Advance Mortgage, Correct Language Must By Included in the Recorded Mortgage

A mortgage has priority over other liens on the property from the date it is recorded with the Register of Deeds. The mortgage can also have priority for amounts advanced by the lender after the date of recording if the mortgage contains certain specific language making it a “future advance mortgage”. In Citizens State Bank v. Nakash (2010), the Michigan Court of Appeals considered what happens when a recorded mortgage references a promissory note or agreement that contains the future advance language, but the recorded mortgage itself contains no future advance language. The Court of Appeals ruled that the mortgage creates no priority for future advances by the lender when the promissory note or agreement containing the future advance language is unrecorded. MCL 565.901(b) holds that the instrument creating a future advance mortgage must be recorded. This ruling makes sense, because the recorded mortgage should put other parties on notice that it is a future advance mortgage, and not merely refer to another document that is not part of the chain of title.

To download a PDF of the case click here.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm.

Effective Cross Default Provisions

Many contracts have default provisions.  These provisions set forth what actions or inaction must occur for a party to default under the Agreement and for the non-defaulting party to be entitled to recover damages and/or terminate that particular Agreement.

In some circumstances, and often in the context of a loan, parties may enter into multiple agreements with one another. When there are multiple agreements between the same parties, one party may want to negotiate the inclusion of  “cross default” provisions in those agreements.  A cross default provision provides that a party’s default under one agreement triggers an automatic default of all of the other agreements between the parties. Banks or Lenders often include a cross default provision in their loan documents to protect their financial interests.  Once the cross default provision is invoked, the defaulting party is not likely to have many options for recourse.

In order to be effective, the cross default provision must be included in each of the agreements subject to the cross default. Eagle Ridge LLC v Albert Homes LLC, 2009 Mich App, LEXIS 2382 (November 17, 2009).  In the recent case of Eagle Ridge LLC v Albert Homes LLC, the Michigan Court of Appeals refused to enforce a cross default provision that was found in only one of two simultaneously signed agreements.

The Michigan Court of Appeals used basic contract principals to support its decision.  Quoting Randolph v Reisig, 272 Mich App 331 (2006), the Court found that “an unambiguous contractual provision is reflective of the parties’ intent as a matter of law, and if the language of the contract is unambiguous, we construe and enforce the contract as written.”  Therefore, because one of the agreements at issue did not contain a cross default provision, the Court concluded that the parties must not have intended that the agreement be subject to a cross default provision.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm.

What You Need to Know About Severance Agreements

Contrary to popular belief, employers are not obligated to provide severance pay upon an employee’s termination of employment due to a layoff. If an employer does choose to provide severance pay, it should be accompanied by a severance agreement.

The most important provisions in a severance agreement are those regarding payment, non-competition, and the release of claims. In a severance agreement, the employee typically agrees to accept payment in exchange for agreeing to release employer from claims he or she may have against employer. It is also very typical for a severance agreement, like many employment agreements, to include a non-compete provision. An agreement not to compete should be reviewed for reasonableness, which will vary depending on the specifics of the situation.

It is recommended that employers offer the terminated employee a reasonable period of time to consider signing a severance agreement with a release. A release is unenforceable unless the employee voluntarily executes it, i.e., the execution is not the result of duress or coercion.

Employers should make sure to have legal counsel draft or review their severance agreement to ensure that the employer is adequately protected. Employees should consult legal counsel before signing a severance agreement to ensure that the agreement terms are fair and reasonable.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm.

Always Get it in Writing… Understanding the Statute of Frauds

Sometimes it’s easier to agree to something verbally, rather than put the agreement in writing.  This is not usually a good business practice, however, because many problems can arise from verbal agreements.  These problems include disputes over the terms of the contract, but also disputes over whether the contract itself is enforceable.

Some oral contracts are enforceable, but several types of contracts are enforceable only if they are in writing.  This stems from a legal concept called the “Statute of Frauds,” which was developed in the 17th Century and is still followed today.  The purpose of the Statute of Frauds is to prevent fraud in certain types of contracts

Under Michigan law, the following types of contracts (among others) generally must be in writing to be enforceable:

• real estate agreements, including purchase agreements, deeds, mortgages, and leases (unless the lease is for less than one year)
• contracts that cannot be performed within one year (e.g. a two-year employment contract)
• promises to pay the debt of another (e.g. a personal guarantee)
• marital contracts (e.g. prenuptial agreements)
• real estate commission agreements
• promises made by financial institutions (such as a promise to lend)
• misrepresentations regarding credit
• sales of goods worth more than $1000
• sales of personal property

How can you protect yourself or your business?  First, it’s generally a good idea to make sure that all contracts are in writing and are signed by all parties to the contract.  If the agreement is in writing, and signed by all parties, the parties usually cannot dispute later that something was left out of the agreement.  Second, if you have an existing agreement that’s not in writing, you should contact an attorney to find out whether that agreement should be put into writing in order to make it enforceable.

This article was written by Melissa L. Demorest, Associate at Demorest Law Firm.

A Contract Could Effect Damages in a Lawsuit

In a previous article we had examined the fact that the Michigan Court of Appeals affirmed the common law principle that contract provisions that shorten the statutory period for bringing a cause of action are allowable.   Recently, the Court applied similar reasoning in affirming the principle that a contract can even limit the amount of damages if the agreement is violated. The parties can agree in their contract to limit the damages to only those that occurred within a certain period of time before the date that the lawsuit was filed.

In the Michigan Court of Appeals case Bronco Oil v Citizens Bank (click here to download), the contract language, in essence, immunized the breaching party from having to pay the damages it allegedly caused because they occurred outside of a 12-month period before the lawsuit was filed. Even though the lawsuit was timely, the potential damages were lost because of when the lawsuit was filed.

This article was written by Michael R. Dorfman, Senior Associate at Demorest Law Firm.

Don’t Sign Away Unrelated Rights on Release Agreements

In all aspects of business and contracting, but especially after a lawsuit has been filed or threatened, one party may approach the other party with a comprehensive release agreement as part of a settlement of the dispute.     A release agreement is a form of contract wherein the party who has allegedly committed the wrong requests a written release of the claim from the aggrieved party in exchange for a settlement payment.    The release may be specific to the claims involved in the dispute, or it may be a “general release” of all claims of all types between the parties.  Once the claim is released, the agreement is binding on both parties, and the claim is rendered inactionable.   The terms of the release are negotiable.  Just because you didn’t author the document does it mean you do not have a say in what claims you are releasing.

Here is a scenario where a general release was used, which demonstrates the importance of reviewing the specific language used.   The example comes from the recent case of Levy v Ford Motor Company (Click here for a PDF of this decision).   Party A had a history of contracting with Party B for delivery of construction materials and services. In October 1998, an incident occurred involving a truck owned by Party A and a train owned by Party B. Each party maintained that the other was responsible. Party B issued a debit memorandum in 2001, and thereafter stopped paying invoices to offset its alleged losses from damage to its train.   In connection with other contracts, Party A sued Party B for payment for ready-mix concrete shipped after May 2004. The parties settled that case, and their agreement included a release that comprehensively waived any further claims Party A might have against Party B “from the beginning of time,” but “with the sole exception of any claim arising out of damage to the train equipment.

In 2007, Party A filed an action as a claim for payments due under invoices dating from “2001 and before” in connection with deliveries of materials to Party B.  Party A sought monetary contract damages plus an accounting.   However, the Court held that Party A had already released any and all claims it might have otherwise had against Party B arising from events prior to 2004, despite the fact that the claims were not related to the train accident. Because of the comprehensive language and nature of the release it had signed in the first settlement, Party A wound up releasing any and all claims it could have had against Party B, despite the fact the causes of action were completely different.

Always have an attorney review your settlement and release documents to ensure you are preserving valuable rights and not being taken advantage of in the settlement.

This article was written by Michael R. Dorfman, Senior Associate at Demorest Law Firm.

What Are A Dual Real Estate Agent’s Duties to the Buyer or Seller?

When purchasing or selling real property in Michigan, parties often rely on their real estate agent to guide them through the process with their best interests in mind.  However, this is only true of the buyer only agent or seller only agent.  A dual agent, who represents both the buyer and seller in a transaction, does not owe its clients the same fiduciary duties that a buyer only agent or seller only agent would be required to provide.  In fact, under Michigan law, dual agents have only the duty to provide services to complete a real estate transaction.  (MCL 339.2517).

This rule is clear in the recent Michigan Court of Appeals case, Vanhellemont v Gleason, et al (Click here for a PDF of the unpublished decision). The Court in this case looked to the terms of the parties’ Purchase Agreement and the Dual Agency Agreement and held that the dual agent not only complied with her duties under the Dual Agency Agreement by simply completing the transaction, but she would have been in violation of her duties under the Dual Agency Agreement had she drafted either a buyer-oriented or a seller-oriented agreement.

Therefore, a buyer or a seller that agrees to a dual agency relationship with their real estate agent is also agreeing, unless stated otherwise in writing, to be responsible for understanding and approving the terms of the purchase and sale agreement that they sign.  The dual agent will only ensure that the transaction in completed according to the terms of the purchase and sale agreement.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm.

Statute of Limitations Set by Contract

Unless the parties agree otherwise, the Statute of Limitations for a breach of contract claim in Michigan is six years.   However, the parties may agree by contract to a shorter limitations period.   A court would not enforce a one day or one week limitations period, but a contractual limitations period as short as one year has been regularly enforced by the Michigan courts.

The Michigan Court of Appeals continued this trend on September 29, 2009, when it issued its decision in Siuda v Tobin. The contract for purchase of a modular home stated that any claim had to be filed no more than one year from the date of sale of the home, rather than the normal six years.  The purchasers claimed that the home was damaged during construction, but failed to bring suit until three years after construction began.  The Court of Appeals rejected all of the purchasers’ arguments against the enforcement of the shortened Statute of Limitations.

You should review the forms and contracts that your company uses, and decide whether to shorten the time period that your customers or suppliers have to bring a lawsuit.  On the flip side, if you have a potential lawsuit, you need to review the contracts to make sure how long you have to bring a claim.   Don’t simply assume that the Statute of Limitations has not been modified.

Click to Download Case from Michigan Court of Appeals in PDF Format

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm

The Impact of Reicher v SET on The Michigan Sales Representatives Commission Act

The Michigan Sales Representatives Commission Act (“SRCA”), MCLA 600.2961, (Click here to view) provides protection for sales representatives from the company he is selling for (“principal”).  The statute provides that representatives are to be paid what they are owed in a timely manner, and that intentional non-payment of commission by the principal will result in “an amount equal to 2 times the amount of commissions due” up to $100,000.00.  According to the statute, a sales representative cannot waive his or her rights under the SCRA by signing a contract.

A recent Michigan Court of Appeals ruling in the case Reicher v SET Enters, Inc (click here to view) decided that a settlement agreement between the representative and principal after the representative was terminated and had filed a lawsuit against the principal can negate the non-waiver rule.  In other words, when Reicher decided to settle his claims against the principal he signed away his rights to protection under the SCRA.  When the principal breached the settlement agreement, the statutory penalties under the SCRA did not apply.  Reicher was limited to the damages for breach of contract.

The non-waiver provision will still apply to a contract or agreement establishing or modifying the business relationship between the principal and the sales representative, but does not apply to post-termination agreements.

Forum Selection Clauses

When entering into agreements with larger business entities, whether it be to lease a photocopier or host your website, for example, it is critical that you read the entire agreement, including one possibly costly paragraph – the choice of forum clause. A choice of forum clause binds the parties to litigate the matter in the state or county selected by the offering party. This clause is usually boilerplate language and typically glanced over by the accepting party. However, the inclusion of such a clause could cost you or your company thousands of extra dollars in legal fees should you be sued for failure to make payments or another issue related to a breach of the agreement.

An example would be a pre-printed, non-negotiated commercial lease for an office photocopier. There is typically no room for negotiation other than the price. These agreements also typically contain a choice of forum clause wherein as a party to the lease you have agreed that any disagreements related to the lease will be litigated in the state where the leasing company is located. Should you or your company begin missing payments or have some other dispute with the leasing company, the leasing company would be allowed by the terms of the agreement to sue you in their home state, as far away as New York, Florida or California. You would be required to locate an attorney in that jurisdiction to defend your interests. You might also be required to travel there for a deposition of trial. If you ignore the lawsuit filed in the selected forum, a default judgment could be entered against you, and the Judgment then recognized and enforced by Michigan Courts because of the language in the agreement.

Before entering into an agreement, it is imperative that you review all the language and the fine print, including the choice of forum clause and know that should you have a dispute with the other party, you could be hauled into court in a different state. You may be able to negotiate to remove the forum selection clause from the contract, or simply choose another vendor.

This article was written by Michael R. Dorfman, Senior Associate at Demorest Law Firm. Click here to view his professional resume.