Texas Adopts Assignment of Rents Act

On June 17, 2011, Texas Governor Rick Perry signed into law the Texas Assignment of Rents Act (TARA).  Dubbed the "most significant finance-related bill" of the 82nd Texas Legislature's last session in the Texas Bar Journal's Legislative Update, the TARA clarifies some ambiguous case law regarding the status of assignment of rents. 

The TARA should benefit both creditors and borrowers in Texas by making assignments of rents in Texas much simpler and more straightforward.  Under the new law, every deed of trust, mortgage, or other instrument evidencing a lien against real property in Texas (with certain exceptions) includes a collateral assignment of rents to such real property unless otherwise stated in the instrument itself.  Such assignment of rents creates a presently effective security interest in all accrued and unaccrued rents arising from the real property, which security interest is separate and distinct from any security interest in the real property itself.  The security interest in the rents is perfected upon filing in the county in which the real property is located.

The TARA, codified as a new Chapter 64 of the Texas Property Code, was inspired by the Uniform Assignment of Rents Act (UARA), which was written by the National Conference of Commissioners of Uniform State Laws.  The TARA is much shorter than the UARA and more tailored to Texas property law concepts generally, however.

I won't get into the history of assignment of rent case law, which involves, among other things, a 1981 Texas Supreme Court case, absolute vs. collateral assignment of rents, bankruptcy law, and the pro tanto reduction concept.  A good capsule summary of these issues was provided in the TARA's Sponsor's Statement of Intent, which is available here: http://www.legis.state.tx.us/tlodocs/82R/analysis/pdf/SB00889F.pdf#navpanes=0
Luckily, thanks to the TARA, Texas lenders no longer need to worry about many of these issues that once complicated assignments of rents in Texas.
 

Texas Entrepreneurship Progams Rank Highly

The October issue of Entrepreneur magazine has some good news for the future of the Texas economy.  Texas based universities made an impressive showing in the Princeton Review's top 25 entrepreneurship programs in the country as reported by the magazine.  According to this blogger's count, 3 of the top 25 undergraduate programs (Houston (1), Baylor (3) and TCU (21)) and 3 of the top 25 graduate programs (Texas (8), Rice (9) and Acton (13)) are based in Texas.

Since entrepreneurship is the engine of economic growth, it is encouraging to know that some of the top young talent is graduating from programs right here in the Lone Star State.

More Caddy Shack Quotes

As noted in a prior blog post: (See http://www.northtexasseclawyer.com/2011/08/caddy-shack-m-article-publiched-in.html),
my article identifying M&A guidance from Caddy Shack's Judge Smails has been pretty popular, so I thought my readers might enjoy a few more quotes from everyone's favorite golfing judge.  These quotes were edited out of the article published in the Dallas Business Journal to meet its word count limits, but that doesn't make these quotes any less entertaining. Here they are:

“Well, we're waiting!”

Just as every golfer has felt the frustration of waiting for another golfer to swing their club, every veteran of merger and acquisition transactions has felt the frustration of waiting for the all of the parts of the transaction to come together for a closing.  Typically, many parties are involved in an M&A transaction, including buyers and sellers, lawyers, bankers, accountants, appraisers, title companies, and potentially many others.  The deal may need to be approved by boards of directors, shareholders, creditors, landlords, regulatory authorities, or others.  Thus, you may find yourself waiting on any number of deal participants.  An experienced M&A lawyer prepares a detailed closing checklist, anticipates and addresses potential bottlenecks that might delay closing, politely but persistently reminds other deal participants of their responsibilities, keeps the deal moving forward, and keeps the client informed on the status of the transaction.     

“Oh, Porterhouse, look at the wax build up on these shoes.  I want that wax stripped off there, then I want them creamed and buffed with a fine chamois, and I want them now.  Chop, chop.”

A seller in an M&A transaction should scrub up its business records with the same zeal that Judge Smails expects Porterhouse to apply to shining shoes.  A well represented buyer is going to conduct detailed due diligence review during which the seller’s problems are likely to come to light.  It is much better for the seller, and the seller’s reputation, if any bad news comes from the seller rather than as a result of an audit by the buyer’s accountants or other representatives of the buyer.  The seller will want to put the seller’s best foot forward.  That means business records should be as complete, accurate, and organized as possible.  And of course, the seller can make Judge Smails happy by assuring that its business records are free of wax build up.

“I've sentenced boys younger than you to the gas chamber.  Didn't want to do it.  I felt I owed it to them.”

When things go badly for the target of an acquisition after the closing, the buyer may share Judge Smails’s sense of moral obligation with respect to the seller.  For example, the buyer may refuse to pay the seller the earn-out portion of the purchase price if profits fall short of expectations.  As the buyer learns more about the target company and its operations after the closing, the buyer often becomes aware of breaches of the seller’s representations and warranties.  Like Judge Smails, the buyer may feel it owes it to the seller to sue and seek indemnification from the seller under the purchase agreement.

Judge Smails: “Do you mind, sir. I'm trying to tee off.”

Al Czervik: “I'll bet you a hundred bucks you slice it into the woods.”

Judge Smails: “Gambling is illegal at Bushwood sir, and I never slice.”

Too often, sellers take too little time reviewing the representations and warranties in an M&A purchase agreement because they think their company is “clean” or the target company has “never had a problem.”  Like Judge Smails, sellers think they will never slice.  But guess what?  There is a first time for everything.  And with new management of the target company after the sale, sometimes new problems emerge or old problems are uncovered.  When that happens, the seller will be glad if the seller carefully reviewed the representations and warranties and reasonably limited the representations and warranties with qualifications as to the seller’s knowledge and materiality.  Failure to carefully review the representations and warranties and related disclosure schedules in a purchase agreement can truly be a gamble for the buyer or the seller.    

Fraud Vitiates Everything It Touches

On July 29, the Fort Worth Business Press published an article I wrote titled "Texas Supreme Court Ruling May Surprise Landlords," which is available here.

The article discusses a very interesting recent Texas Supreme Court case in which a tenant sued a landlord for failure to disclose the existence of "ungodly" sewer gasses at the space the tenant had planned to use as a restaurant.  In fact, the landlord's representative said that the location was "perfect" for a restaurant.  The lease was silent as to the existence of smells at the property, and the lease provided that the landlord made no representation or warranties outside of the lease.  Nonetheless, the court ruled that the landlord's misrepresentations prior to the execution of the lease amounted to fraud and that "fraud vitiates everything it touches" - including contrary provisions in the lease itself.

This is an important cases for parties conducting business in Texas because it reminds us that Texas courts may not enforce contracts tainted by fraud or other misrepresentation even if the misrepresentation occurs outside of the contract itself.

Thanks to the Fort Worth Business Press for publishing the article.

DFW Venture Capital Investments

I just stumbled upon a statistic that will be discouraging to those of us in the Dallas-Fort Worth venture capital community.  The Dallas Business Journal recently reported that DFW companies raised only $714 million in 38 venture capital tranactions in 2010. That's down from $2.8 billion in 137 transactions in 2000.  Hopefully, that means the venture arrow can only point up from here!