Daily Development for Thursday, Dec. 4, 2003 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu CLOSINGS; TAX PRORATION: Where statute provides "default" method of prorating taxes unless parties agree otherwise, a stipulation as to the amount of taxes prorated will be viewed as a an agreement to the method used and an exception to the statute. Chicago Title Ins. Co. v. East Arm, LLC. No. 242372 (Mich. App. 11/25/03) (unpublished) Various counties in Michigan apparently prorate property tax obligations in different ways. Some collect taxes once a year, others two or more times each year. Some make each tax payment the payment covering the prior period, others view the payment as covering the next succeeding period. Others make the taxes, however billed or collected, applicable to the calendar year in which billed. To address the confusion for purposes of closings, the Michigan legislature adopted a statute that provides a "default" method of proration for purposes of computing taxes in closings between private parties. Under the statutory method, the seller is responsible for that portion of the annual taxes levied during the twelve months immediately preceding, but not including the day title passes, from the levy date or dates to, but not including, the day title passes and the buyer is responsible for the remainder of the annual taxes. In the instant transaction, involving the sale of a hotel, the parties initially did not provide for method of prorating taxes. The closing agent contacted the parties representatives. One said to use the method used by the local county, and the other agreed. This method was different from the statutory method, and, as compared to the statutory method, required the seller to pay over $40,000 great share of the taxes. At closing, the closing agent provided the parties with "tax proration sheets" for the various involved parcels. On each sheet, there appears the statement: "We, the undersinged buyers and sellers of the above-captioned property, hereby agree that the prorated taxes charged to the seller/buyer and credited to the seller/buyer at closing are $______." Later, seller discovered the discrepancy between the prorations as computed by the statutory method and the prorations seller was charged, and made a claim on the escrow company. The company, by now acquired by Chicago Title Insurance, agreed with the seller and paid seller a refund of over $41,000, and then attempted to collect that amount from the buyer. Buyer argued that the parties had agreed on a separate proration method, as permitted by statute. But the plaintiff argued that the selected method must be set forth in a written agreement under the Statute of Frauds.. Buyer then pointed to the proration sheets and the language quoted above. The trial court found that the proration sheets did not establish such an agreement, because there was a mutual mistake of fact as to the correct amount of taxes (that being the amount determined by the statutory method) and thus the court entered summary judgment for Chicago Title against the buyer. On appeal: Held: Reversed. The Michigan Court of Appeals concluded that the execution of the statement on the proration sheets was an agreement electing out of the statute. The court stated that, absent the proration sheets, there was no other understanding that the parties had reached concerning taxes, so it is impossible to say that they were under the mutual mistaken belief that the stipulated taxes were computed by the wrong method. Although the plaintiff argued that even the local county's computation would have produced a different figure, it did not adduce any evidence supporting that contention. Hence, by agreeing to the figure, the parties implicitly evidenced their agreement to the method by which that figure was obtained. Comment 1: It's a nice question whether the same result would have obtained if the number had in fact been different from that determined by the local taxing authority. Then, arguably, although there may have been agreement as to the method of computation, there was mistake as to the resulting amount. Problem is that if we take away the written agreement to the number, there is no written agreement to the method of computation, so we'd get a significantly different result. Good thing the court didn't have to deal with that. Some other court will. Comment 2: The editor has included the case primarily to note the bizarre situation that various counties in the same state prorate tax obligations differently. If this is true in other states, the editor hasn't encountered it. But obviously it's one more thing the editor has to worry about - Iraq, the Middle East, and now tax prorations. Oh, my!!! Readers are encouraged to respond to or criticize this posting. Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data provided and opinions expressed by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues. ABOUT DIRT: DIRT is an internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 - 15 messages per work day. 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