Creditor's Threat to Have Broker’s License Revoked Coercion

Below are summaries of recent court cases affecting the real estate industry.

March 1, 2004

The U.S. Court of Appeals for the First Circuit has found that a creditor violated federal bankruptcy law when it threatened to file a complaint with the state real estate commission if the broker did not agree to settle the creditor’s debt during bankruptcy proceedings.

Broker John J. Diamond III had been a licensed real estate practitioner for 17 years. In 2000, he filed for personal bankruptcy. Prior to the bankruptcy court’s discharge of the bankruptcy case, at which the bankruptcy court determines which debts get paid, Premier Capital Inc., one of the creditors, requested that the court deny Diamond a discharge on the basis that he allegedly concealed assets and made false statements under oath.

The attorneys for Diamond and Premier attempted to negotiate a settlement of Premier’s challenge to the bankruptcy discharge. During these discussions, Premier’s attorney stated that if Diamond did not enter into a settlement agreement, Premier would file a complaint with the New Hampshire Real Estate Commission and attempt to have Diamond’s real estate license revoked. Diamond settled with Premier, but the bankruptcy court rejected the settlement agreement and denied Premier’s challenge to the discharge.

Diamond then initiated proceedings against Premier, alleging that the company’s threat to initiate license revocation proceedings violated the U.S. Bankruptcy Code’s “automatic stay” provision. This part of the code states that all attempts by creditors to collect debts incurred prior to the filing of a bankruptcy petition must stop immediately upon the commencement of a bankruptcy case.

The bankruptcy court rejected Diamond’s allegations, and a trial court affirmed the bankruptcy court. The lower courts ruled that the alleged threats by Premier’s attorney were merely a negotiating tactic get the best deal for Premier. Diamond appealed.

The U.S. Court of Appeals for the First Circuit reversed the lower courts and sent the case back to the trial court. The appellate court ruled that although the settlement negotiations between the two parties did not violate the automatic stay, it is not permissible for a creditor to engage in “coercive or harassing tactics” during the negotiation. The court further ruled that statements made by Premier’s attorney could be seen as a coercive attempt to collect a pre-bankruptcy debt, which violated the automatic stay. So the appellate court sent the case back to the lower court to resolve the factual issue of whether the statements were coercive.

Landlord Can’t Eliminate All Employee Parking

Maryland’s highest court has ruled that a lease between a commercial property landlord and a tenant that provided the landlord with the right to “limit” the number of reduced-cost parking spaces it would lease to the tenant did not give the landlord power to refuse to lease any reduced-cost parking spaces to the tenant.

In 1998, Sy-Lene entered into a 10-year lease with Somerset Properties Limited Partnership to lease space for its lingerie shop in a shopping mall. Later that same year, Starwood Urban Retail purchased the shopping mall, assuming Sy-Lene’s lease. The lease stated that Sy-Lene would pay $30 per month for each parking space needed by its employees. The lease also stated that the landlord “reserves the right to limit the number of employee parking spaces to be provided.” The retail price for a parking spot was approximately $80 per month.

For a few years starting in 1999, Sy-Lene requested parking spots for its employees, and Starwood responded that there were no parking spaces available. Sy-Lene sued Starwood, alleging that Starwood had violated the lease by failing to provide Sy-Lene with reduced-fee parking spaces. The lawsuit sought damages for the amounts spent by the company above the reduced-fee parking spot price.

The trial court dismissed the lawsuit, finding that the lease gave Starwood the right to “limit” the number of parking spots and that such a limit could be zero. A Maryland appellate court affirmed the trial court’s ruling, and Sy-Lene appealed.

The Court of Appeals of Maryland ruled that the “right to limit” was not the same as the “right to eliminate.” Since the parking space provision in the lease did not identify an appropriate limit for parking spaces and thus was ambiguous, the court reversed the lower courts and sent the case back to the trial court to allow the parties to submit evidence to clarify the ambiguous parking-space provision in the lease.

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