County’s Hands Tied on Excessive Forest Clearing

July 9, 2008

RCW 82.02.020 is an example of the ways in which the stong hand of special interest lobbies in Olympia affect folks in Washington. This law says in pertinent part that

no county, city, town, or other municipal corporation shall impose any tax, fee, or charge, either direct or indirect, on the construction or reconstruction of residential buildings, commercial buildings, industrial buildings, or on any other building or building space or appurtenance thereto, or on the development, subdivision, classification, or reclassification of land.

Meanwhile King County adopted its Clearing and Grading Critical Areas Ordinance in 2004 pursuant to the Growth Management Act (RCW 36.70A.060(2)) which required it to adopt regulations to protect its critical assets. Generally speaking the ordinance prohibited clearing more than 50% of rural lots with a number of qualifications and exceptions.

Before adopting this regulation the County undertook a number of studies and consulted with experts to verify that excessive clearing had negative impacts on stream health, wildlife, and critical aquifer recharge areas in the County.

The ordinance was challenged by a property rights groups that contended that the blanket prohibition against clearing was an improper indirect charge under RCW 82.02.020.

The County said that this was not a tax but a justified regulation, presenting 24 journal articles and several experts who identified the harm sought to be avoided and vouched for the efficacy of the regulation in terms of avoiding the harm.

The trial court sided with the County but the Court of Appeals did not. In Citizens Alliance for Property Rights v. Ron Sims

the court held that the bar against excessive clearing was prohibited by statute. The decision seems quite sound to me, relying on well established pro-development case law. Without disregarding precedent, the court could do little else. (Personally I would like to see the court start whittling away at the existing law.)

What is important here, I believe is that local decision regarding the environment, urban sprawl, habitat, and water issues are fairly commonly thwarted by the state legislature which in turn is rather shockingly influenced by special interests, particularly the building industry which pushed through the legislation giving developers a preferred tax status.


Traps for Unwary Real Estate Buyers

July 7, 2008

I was asked to briefly summarize some of the legal considerations that a buyer might keep in mind while venturing into the real estate market in Washington. I think something like this might prove to be helpful so long as you keep in mind that this is not a comprehensive list of all possible difficulties. Here is a short list of legalities that might be helpful to buyers of real estate to keep in mind.

New Construction. Washington has an extremely harsh “statute of repose.” Six years after the final permit is issued all recourse against anyone working on the project is barred, exect as to damage that has already arisen.

If for example you buyer a building, or bridge that collapses six and one half years after the last permit, you have no recourse against anyone in the construction industry.

The Washington statute of creates false expectations in the minds of consumers.

If you buy a building with a useful life of forty years you expect it to last that long. In Washington you can only count on six, assuming that you are buying a new building. If you are buying a used building, it is very likely that the six years have passed and you have no recourse whatsoever against anyone involved with the construction of it.

People who spend money to retrofit buildings , to make them earth-quake proof, must remember that they have no recourse against the engineers or builders if the work is faulty, assuming that the earth-quake occurs more than six years later.

This puts a premium on investigation and study before buying. It also puts a premium on the purchase agreement and the ability to look to the seller if there are latent defects. With respect to construction, owners should consider taking these things into account in negotiating contracts.

Building Codes. Many residential buyers put stock in representations that the building complies with code or they just rely on the fact that the building had to be inspected and approved by local government before it could be occupied. This does reduce the chances of defective construction but it is a long way from assuring the purchaser that the construction is not defective and there is no assurance that the building in fact complies with code. There is no recourse in the usual case against the city or county if the building was approved in spite of noncompliance — and this happens.

Form 17. The Seller’s Disclosure Statement required in residential sales has recently been interpreted (see my last entry) as unenforceable by one of our three courts of appeals. This can be cured by modifying the standard forms, but it certainly opens the door to using the form as a tool of deception.

Bad Materials and Workmanship. There are a number of cases in Washington in which purchasers have been held to be without recourse when the property they purchased was defective. The “economic loss rule” is invoked to hold the buyer without recourse. This result can be avoided contractually.

Verbal agreements. The form purchase and sale agreement in common use says that there are no other enforceable agreements. That means that agreements — even written agreements — outside the purchase and sale agreement are at least of questionable enforceability.

“Merger into the Deed.” When the transaction closes many of the terms and conditions of the agreement are terminated. Discovery after closing of a false representation may be too late if the representation or assurance is deemed to have been merged into the deed. This can be avoided by care in writing the contract.

There are of course other issues that arise but this at least gives you a sense of the care that must be taken in protecting an important investment such as buying real estate.

Please note that in the last legislative session a very modest bill was introduced to confer limited rights on home buyers. The bill was killed by the Democrats, particularly Frank Chopp.


Washington’s Political Attack Machine

June 19, 2008

The Building Industry Association of Washington has said that it will not focus attention on the judicial race this fall, preferring to funnel its money into the governor’s race. The B.I.A.W.’s participation in the last judicial election caused it to be the most undignified and misleading judicial campaign in memory.

The B.I.A.W.’s support of Republican Rossi in the gubernatorial race promises to make this campaign the sleaziest governor’s race we’ve seen. (More than a trade organization, the B.I.A.W. is the Republican Party’s “hatchet man.”)This approach was announced in the B.I.A.W.’s newsletter which called Gregoire “a heartless, power-hungry she-wolf who would eat her own young to get ahead.” Rarely does a person have a chance to read such hysterical hate mongering as the article that appeared in the newsletter.

A good account of the B.I.A.W.’s contribution to the campaign appeared in Joel Connelly’s column on June 10.

The State Democratic Party has asked Rossi to denounce the B.I.A.W, as an attack machine. With the Times, P.I. and News Tribune all having called attention to the unwelcome tactics of the B.I.A.W., Rossi’s partnership with this organization could backfire.

It is hard to believe that such a vicious political machine can thrive here is Washington. Not only is it a dominant force in elections but it seems to have the state legislature and Democratic Speaker of the House, Frank Chopp, under its control.


Equity Skimming in Washington: A Brief History

June 7, 2008

There are three main reasons that real estate has attracted so many unscrupulous people in recent years.

First it is an asset that can be highly leveraged. Homes can be purchased for a relatively small amount down and the balance financed. When property goes up in value this confers wild profit on the owner. For example, say you buy a home for $100,000 and pay 10% down. When the transaction closes you have purchased a $100,000 asset for an expenditure of one tenth its value. Putting aside transactional costs, if the property increases in value 25%, you have gained $25,000 in value on an original investment of $10,000. You more than doubled your money on a 25% increase in value of the asset.

The second aspect that attracts the criminally inclined, is that these very valuable assets are often owned by people who are not sophisticated in real estate financing. This is an area where people typically just given themselves to the grinding wheels of commerce without knowing a lot about what is going on in a real estate transaction. Thus there is great opportunity for duplicity behind a mask of convention.

This area is also relatively unpoliced. In the early 1900’s the scam of choice was securities fraud. So many people were falling victim to fraudulent securities schemes that the federal government created the Securities Exchange Commission and in the 1930’s passed legislation imposing severe penalties for securities fraud and implementing broad disclosure requirements.

Many equity skimmers would probably have been selling bunko stock one hundred years ago. The equity skimming schemes of today occupy a relatively unpoliced area without much in the way of legislation (although states such a Washington are passing legislation to thwart this form of fleecing). In short home sales is an area where a lot of money passes hands, there is potential for fast profit and there is not a great deal in the way of scrutiny — similar to stock sales before the Security Exchange Commission.

There have always been lots of real estate scams but for our purposes the story starts in the 1970’s. There was a recession in the early 70’s (or something that looked remarkably like one). An average house in Seattle could be purchased for $15,000, due in large part to local economic problems. This was followed by a period of inflation and breathtakingly high interest rates.

The inflation encouraged people to sell their real estate profitably, but the high interest rates prevented many people from getting loans to buy real estate. These pressures created an era of seller financing. The buyer would give the down payment to the seller and make monthly payments to the seller with an agreement to pay the purchase price off in full in three to five years, when financing could be obtained. This sort of arrangement was commonplace.

The buyer got the house and with it the obligation to pay payments to the seller and the obligation to continue to pay the seller’s mortgage. The buyer could assume FHA loans but usually the buyer just agreed to make the payments for the seller after the sale. The malevolent instincts that had been somewhat suppressed by federal laws in the area of securities sales were revived in this situation.

All sorts of bad things happened. Crooks would buy homes with faulty seller financing documents so sellers could not foreclose if they were not paid by the buyer, while at the same time they remained obligated on the mortgage which the buyer might choose not to pay. Companies were formed that bought real estate on seller financing, then just stripped the property of everything of value and left the barren property for the sellers to foreclose upon.

Seller financing deals could be structured to protect the seller, but there is always a portion of the population that does not consult a lawyer before entering into a transaction of this sort. It is this group around which financial vultures circle.

There was nothing of the magnitude of the massive systematic fraud of recent years, so the legislature was relatively slow to address the problem of equity skimming. In 1988 Washington passed a law that criminalized equity skimming and declared it to be a violation of the Consumer Protection Act. The forward to the bill states in part:

The legislature finds that persons are engaging in patterns of conduct which defraud innocent homeowners of their equity interest or other value in residential dwellings under the guise of a purchase of the owner’s residence but which is in fact a device to convert the owner’s equity interest or other value in the residence to an equity skimmer, who fails to make payments, diverts the equity or other value to the skimmer’s benefit, and leaves the innocent homeowner with a resulting financial loss or debt.

Financial institutions had their hands full in the 1980’s. Seafirst Bank, the biggest bank in the Northwest was going bankrupt until it was purchased by Bank of America. Other big banks swallowed smaller ones into the nineties. Two of the biggest Seattle banks, Peoples Bank and Old National Bank, were bought by U.S. Bank of Oregon and merged into U.S. Bank of Washington. This activity seemed to occupy attention much more than occasional fraud on homeowners.

The opportunity for homeowner fraud errupted like never before during the Bush Administration. The administration’s laizes faire, anti-regulation bias allowed this situation to reach international economic crisis proportions, despite obvious abuses all along the way. (The policies that created the situation were constant between Clinton and Bush, but Bush’s response to the financial crisis made Katrina relief look adequate and timely.)

The subprime era was awash in home loan money; lenders could hardly give it away fast enough. Home loans were obtained without a great deal of review for as much as the full purchase price of a home. This was like a petri dish for raising a culture of financial fraud.

People were so eager to get at the money there were numerous seminars given on equity skimming. Small fortunes were made on the price of admission alone. These week-long seminars were packed with local real estate people, real estate agents, brokers and miscellaneous others. People from Seattle, Everett, from all over the Western part of the state attended.

Recently indicted Charles Head (California based) advertised on the internet, sent faxes to mortgage brokers and people in the real estate industry and nurtured relationships with lenders and escrow companies. He had dozens of companies that were nothing more than names to confuse the public. Sometimes the companies described themselves as facilitators, sometimes as lenders, sometimes as lenders’ agents, sometimes buyer’s agents, sometimes both lender and buyer’s agents and often not at all.


Washington State Economic News

May 14, 2008

The week already there have been a few startling reports about the economy. The Associated Press reported that in the construction industry there was an unprecedented decline in starts. The biggest drop ever! It also reported that the salmon industry is being designated a disaster qualifying it for federal help. The Washington Center for Real Estate Research also reported that in Pierce, King and Snohomish Counties home sales (excluding new homes) were down by about one third over last year, a little above the national average. This suggests that the local insulation from the national trend that we have enjoyed may be ending. Finally, Realty-Trac reported that in April foreclosures are up 65%. Now one in 519 homes in the country is in foreclosure. Washington, which initially was not severely affected by this phenomenon, is now in the middle of the pack among the states.

That’s not all the sobering economic news but all I could stomach mentioning. It is not clear to me how Bush’s policies influenced the number of salmon swimming around (a joke), but these trouble spots are directly linked to the mortgage crisis and generally attributed to the financial community’s exploitation of the absence of regulation, particularly in the investment banking area. Some people more informed than me say that the country’s rampant deficit spending also plays a role, but precisely how I do not understand.

The rising local concern about the economy will play an important role in the November elections.


The B.I.A.W. and the Coming Judicial Election

April 2, 2008
For the last several years the Building Industry Association of Washington has probably been the most powerful lobby in Washington. This was reported in November 2003 by this newspaper and it remains true today. The Seattle P.I. which seems to be keeping tabs on this group, noted Monday that B.I.A.W.’s March newsletter contains a venomous, hate-filled diatribe against ecology minded people, apparently linking them all together with eco-terrorists and a viscous attack against the governor. There is a link to newsletter in the P.I. editorial.I will write quite a bit about this later but for now I want to call attention to a couple of things that I will later describe more fully. The B.I.A.W is extremely political and closely, but not directly, aligned with the Republican Party. For example the number one agenda item for B.I.A.W. this year is the election of Dino Rossi. The second most important item is the judicial election of three State Supreme Court members. The B.I.A.W. is looking particularly closely at the seat occupied by Justice Mary Fairhurst. It said that the two issues that it is considering in connection with this election are property rights and public disclosure.Public disclosure? I had been unaware of any interest by B.I.A.W. in public disclosure law. The B.I.A.W was hugely involved with the legislature and public disclosure law was nowhere on its list of topics. It did not publicly advocate for to the legislature for changes in the public disclosure law, where ordinarily these changes would be made. After thinking about this a while, I have a theory: to some degree this “issue” might be staged.In late December last year the Court published an opinion called Soter v. Cowles Publishing Company. The case received publicity, particularly on the East side of the state. It involved the routine matter of interpreting the Public Disclosure Act and the scope of a well recognized legal privilege. The case was brought by the Spokane-Review to try to force a school district to divulge privileged papers relating to a wrongful death lawsuit that had been settled. The Court’s holding said in essence that if newspapers wanted this right they would have to go to the legislature to get the law changed, an apparently conservative holding.

Charles Johnson is a highly respected jurist, generally regarded as one of the conservative justices on the Court and he is running for re-election as well. He wrote a strident sounding dissent in Soter and according to the Olympian actually issued a press release about his dissent at the time that he announced that he was running for reelection. (Justice Fairhurst voted with the majority in the opinion and appears not to have issued a press release.)

Justice Charles Johnson is likely to be supported by the B.I.A.W. because of his conservatism. Justice Fairhurst is likely to be targeted. She wrote the dissent in Anderson v. King County, arguing that it was unconstitutional to withhold the right to marriage from gays. As you recall this was a 5 to 4 decision with Justice Johnson voting with the narrow majority.

I do not see how the interpretation of the public disclosure law is a legitimate judicial campaign issue, as the law was made by the legislature, but if the B.I.A.W. pursues this, it does serve a number of interests. Putting aside the oddity of conservatives arguing that the courts ought to be expanding the scope of legislation, this would put them on the side of the media, a highly desired ally. While I am not aware of any doctrinal chasm between Justices Fairhurst and Johnson on this matter of legislative interpretation, the Soter case could be spun to make them appear to be on opposite sides of an important issue, so the B.I.A.W. could at once bolster Justice Johnson’s candidacy while attacking Justice Fairhurst. This sounds like it might be a politically adept move, but I still need to find out how this issue is anything but a red herring, mere manipulation to try to get a political result. If the B.I.A.W pursues this, I guess I will find out.


Washington State: Haven for Special Interests

March 30, 2008
It is my impression that Washington, more than perhaps any other state, is led by special interests. My impression is based in part at least on my law practice which focuses on real estate and business, so my awareness of this influence is pretty much confined to those areas.Let me give you a few examples of what has given me the impression that special interests are more influential here than most other places.
Perhaps my most shocking moment practicing law occurred when, during oral argument before the State Supreme Court, a representative of the insurance industry pointed to the justices and told them that his people were closely looking at how each one of them voted on this case and the insurance industry would be heard from come election time. (I am paraphrasing here but this message was loud and clear.) I thought that this was a truly shocking insult to the integrity of the court, but the justices said nothing.
In the area of construction law Washington is I believe the most repressive with respect to consumer rights. Did you know that if a building or bridge collapses six years after it is permitted, there is absolutely no recourse against anyone in the construction industry, including builders, suppliers, architects, engineers, even surveyors and anyone one else claiming to be in the industry? Condominium owners have no recourse if their building collapses four years after it was permitted (although this is a little murky). In Washington, at least with respect to being able to enforce warranties and representations, all the talk about the useful life of structures is bogus. After six years (four for condos) no one is responsible.This is the result of Washington’s statute of repose, which is jokingly said to have received that name named because people had to be asleep for the legislature to get the law through.
Other states have statutes of repose. These were pushed through state legislatures by an unprecedented lobbying effort on the part of the insurance and building industries in the 1960’s. Washington’s four year statute for condos and six years for absolutely everything else is extremely rare among the states and may be the shortest of any state. If you buy a new condo you should know that you are stuck if anything (however disastrous) goes wrong four years after the permit was granted, which is ofter about two or so years after it is filled.
To give you a sense of the influence of the building lobby, in Washington say a school building collapses six years after completion and kills a child whose watch stops for no good reason. There would be no recourse against anyone in the construction industry but the parents could sue the watch manufacturer for the cost of the watch. Personal property here has a twelve year (or the useful life of the product) statute of repose.
Perhaps the best indicator of the exalted state of special interests here is that when three sitting justices of our State Supreme Court announced last week that they were seeking reelection, the newspaper interviewed not a law professor or someone who practices before the court, but a representative of B.I.A.W., the building industry lobby.