Making Contracts Work for You – Part 2: Warranties, Indemnity and Insurance Provisions

  • May 27, 2015

In a previous Clarity post, Making Contracts Work for You – Part 1: Top 5 Boilerplate Items You Don’t Read, I wrote about how you can make your contracts useful (to your side of the case) if you are in a dispute.  I also wanted to provide you some pointers on the use of warranties, indemnity and insurance provisions.

Warranties

A warranty is an agreement that the item sold, or some other subject matter related to your contract, conforms to a certain description.  The effect of a warranty is a contractual allocation of financial risk if the item sold (or other subject matter of your agreement) does not conform to the specified warranty.  A warranty is violated when the thing sold doesn’t satisfy the warranted condition.  When this happens, the party who made the warranty is liable to the other party for the cost to repair or correct the issue — without regard to fault.  Thus, warranties produce liability without fault, sometimes called “strict liability.”  When a warranty is breached, it may also provide a basis for rescission and restitution — this means unwinding the contract.

Including warranties in contracts is an effective way to make sure your assumptions about what you are buying are included in the paperwork.  Requesting warranties during negotiation and drafting of documents is a good way to find out whether each party has the same understanding of what is being bought and sold.  Signing an agreement that contains warranties that you did not agree to make can produce bad results; likewise, failing to include warranties in an agreement to reflect what has been promised to you is also a bad idea.

Often, a seller will attempt to disclaim liability for any breach of warranties by requesting an “AS-IS” provision. The words “AS IS” and similar terms generally trigger a legally enforceable disclaimer of all express and implied warranties, except for warranties set forth elsewhere in the agreement.

Parties relying on warranties will often want a “survival clause” in the agreement to be sure that any important warranties continue in effect after close of escrow, for example.

 

Indemnity Provisions

Indemnity or “hold harmless” clauses are another way of allocating financial risk to a particular party in a transaction.  Indemnity clauses require one party to bear the cost of certain risks defined in the contract, which can range from particular losses, lawsuits, or even non-conformance with prescribed warranties.  Most commercial agreements should have some form of indemnity clause, in which one party agrees to defend (i.e., hire a lawyer) and indemnify (reimburse) the other party for the risks described.

definition-indemnity-6427471We find that indemnity clauses are often one-sided, and sometimes taken from unrelated contracts, so that the risks which ought to be negotiated and indemnified are overlooked, while the indemnity clause as written produces results which the parties never contemplated.  For example, Party A would not expect to find a clause that lays the costs of Party B’s fault back upon Party A.  Yet that kind of result can happen when indemnity clauses are not carefully negotiated and drafted.

Indemnity clauses can be quite complex, including provisions regarding the selection and control of the attorneys who will defend the claim.  A well-drafted indemnity clause will include a provision that the benefited party will be entitled to their reasonable expenses incurred to pay the indemnified loss, and any settlement, judgment and defense costs.

Losses are not always caused by one person or one discrete act or omission.  Events like construction site accidents and other industrial accidents are often the result of a combination of factors.  Environmental contamination can have multiple causes spread over decades.  In such cases, the wording of an indemnity clause can make a big difference.

The legal effect of an indemnity clause is usually a question of state law.  Different states have varying rules for interpreting and enforcing indemnity clauses.  Therefore, the state law selected in the agreement can have a major effect on the results produced by the indemnity clause.  Some states require particular wording in an indemnity clause before a court will shift the risk of a loss from one party to another.  If  the contracting parties intend to shift the risk of one party’s “active” negligence to the other, such an intent will often need to be specifically spelled out or the indemnity clause will not be given that effect.

Most or all states have limitations on the kinds of liabilities that may be indemnified, and some even have special statutes that change the rules in particular settings, such as construction contracts, for example.  Indeed, California courts have at times distinguished between “Type I,”  “Type II” and Type III” indemnity clauses. (I will spare you those details.)

Ultimately, the effect of an indemnity clause will turn on the state law chosen in the contract, the subject matter of the contract, the words used in the indemnification provision, the circumstances of the loss to be indemnified, and the different parties’ roles in producing the loss.

Insurance

I can already hear it — you know what insurance is.  However, did you know that a promise to procure insurance for another party can sometimes equal an obligation to cover the loss the insurance would have provided if you don’t procure it?  In other words, if you promise to insure another party in conjunction with a commercial agreement, you become the insurer if the agreed-to coverage is not purchased.  For this reason, insurance provisions in commercial agreements can have enormous financial consequences, particularly when a loss occurs which would have been covered by insurance required by the agreement.  As is often the case with indemnity provisions, insurance clauses are sometimes drawn from old, unrelated agreements, and your contract might wind up with unfair or insufficient insurance provisions.  Make sure the insurance clause fits the deal.

Next time you negotiate an agreement, make sure that you are best protecting yourself and avoiding unintended financial risks by including appropriate warranty, indemnity and insurance provisions that reflect your intentions and are enforceable under the state law selected in the agreement.

Happy contracting.

 

Nevada Supreme Court Puts Another Nail in AB273’s Coffin: Anti-Deficiency Protections

  • May 20, 2015

In my ILG Currents newsletter articles in January 2014 and April 2014, I discussed some important court decisions impacting Nevada’s 2011 Assembly Bill 273 (AB273), which expanded anti-deficiency protections available to borrowers and guarantors whose loans are secured to Nevada real estate. AB273 essentially limits a deficiency judgment after foreclosure to the amount paid for the assigned loan.  In the Sandpointe case decided in late 2013, the Nevada Supreme Court determined that AB273 was not applicable to the particular case before it, because both the loan assignment and the foreclosure sale in issue had occurred before the enactment of AB273. In Sandpointe, the Nevada Supreme Court was not required to address any difficult questions regarding the federal Constitution or federal “preemption.”

In March, 2014, Judge Robert Jones of the U.S. District Court of Nevada confronted some of the constitutional problems of AB273, head-on, in a case called Eagle SPE NV I. In short, Judge Jones determined that AB273 would be unconstitutional if it is applied retroactively to assignments of loans, which had been made before the effective date of AB273.  In other words, AB273 is unconstitutional if it is applied to prohibit a deficiency judgment on a loan assigned to the foreclosing lender before the enactment of AB273, even if the foreclosure sale is held after the effective date of AB273 in June 2011.

In a new case this past month, the Nevada Supreme Court has just ruled that AB273 cannot be applied to loans that have been assigned through the FDIC via operation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).  FIRREA is a United States federal law through which the FDIC takes custody of a failed bank and transfers its assets to other banks. Relying on the Supremacy Clause of the United States Constitution, the Nevada Supreme Court ruled that the federal FIRREA law trumps the Nevada state anti-deficiency law. Accordingly, whenever an assignment of a failed bank’s assets is made through the FDIC, AB273 will not be applied to limit the rights of the loan’s new owner, as doing so would directly interfere with the federal statutory scheme for taking custody and liquidating failed bank assets under FIRREA.  Here is a key bit of the text from Munoz v. Branch Banking and Trust Company, Inc., Nevada Supreme Court (131 Nev. Adv. Opinion No. 23, April 30, 2015):

At issue here is whether NRS 40.459(1)(c)’s limitation on the amount  of  a  deficiency judgment  that  a  successor  creditor  can  recover conflicts with FIRREA’s purpose of facilitating the transfer of the assets of failed banks to  other  institutions.  Because  NRS  40.459(1)(c)  limits  the value that  a successor  creditor  can recover  on a deficiency judgment,  its application to assets transferred by   the Federal Deposit Insurance Corporation (FDIC) frustrates the purpose of FIRREA.  Therefore, we hold that NRS  40.459(1)(c) is preempted by FIRREA to the extent that NRS 40.459(1)(c) limits deficiency judgments that may be obtained from loans transferred by the FDIC.

So what does this mean for our clients? What clarity does this provide?

In the immediate aftermath of AB273’s enactment, from 2011 through 2013, we were successful in arguing the potential impact of this law for the benefit of clients who had been threatened with the prospect of a deficiency judgment arising from a foreclosure sale during the Great Recession. Those arguments had legs for two or three years while courts grappled with the meaning and effect of AB273.  As a result of the cases described above, including most recently Munoz, AB273 will have very limited application to loans that predated its enactment, or which were assigned before its enactment, but moving forward, AB273 will become a force to be reckoned with as new loans are made and assigned with AB273 as the underlying law of Nevada.

Federal District Court Limits Nevada Anti-Deficiency Protections (AB273)

  • May 13, 2015

This article was originally published in the April 2014 edition of Incline Law Group’s printed newsletter, Currents. 

In my last Currents column, I discussed the Nevada Supreme Court’s November, 2013, decision in Sandpointe.

Sandpointe concerned the application of Nevada’s 2011 AB273, which expanded anti-deficiency protections afforded to borrowers and guarantors whose loans are secured to Nevada real estate.

AB273 essentially limits a deficiency judgment after foreclosure to the amount paid for the assigned loan. Sandpointe determined that AB273 was not applicable in the case before it because both the loan assignment and the foreclosure sale occurred before enactment of AB273.  Sandpointe thus left the weightier constitutional issue of possible impairment of contract rights to future cases.

Within the past  month, one such case decision arrived on the scene –  Eagle SPE NV I, Inc. v. Kiley Ranch Communities, United States District Court, D. Nevada, March 24, 2014, 2014 WL 1199595 (“Eagle SPE”).  Eagle SPE  involved the assignment prior to enactment of AB 273 of four defaulted loans totaling $45 Million, with loan foreclosure sales occurring after the enactment.  Chief Judge Robert Jones of the U.S. District Court of Nevada delved headlong into the constitutional questions avoided by the Nevada Supreme Court and concluded that AB273 cannot be constitutionally applied to loans where the assignment to the foreclosing creditor occurred prior to the statute’s effective date in June, 2011. This decision is not currently binding on other Nevada courts, but it may portend the future legal landscape in Nevada. An appeal to the U.S. Ninth Circuit Court of Appeals and thereafter to the Supreme Court of the United States (“SCOTUS”) is certain to follow.

While the popular view is that laws simply cannot impair any vested contract rights, the decisions of the SCOTUS and federal appeals courts have established a much more subtle balancing test that allows some significant interference with contracts.

Judge Jones’ decision stated: “The amended statute, if retroactively applied to assignments made before the effective date, provides a windfall to a particular class (mortgagors) that could not have been reasonably expected under the mortgage and assignment when made, to the detriment of another distinct class (mortgage assignees). …”

Judge Jones concluded that parts 1 and 2 of the above test were satisfied – i.e., that AB273 indeed impairs contract rights when it is applied to a loan assignment made prior to AB273 enactment, and that there was a legitimate public purpose for the Nevada state legislature enacting the law to address a state-wide real estate crisis.

Judge Jones also concluded that any impairment of the assignee’s expectancy interest – its benefit of the bargain – cannot be limited.  He found that AB273 essentially destroys an assignee’s upside or benefit of its bargain, but completely protects the assignee’s out-of pocket losses from the contract impairment.  Judge Jones concluded this is a windfall to the borrower, and does so without discussing the particular borrower’s circumstances (rather he discusses all borrowers collectively and abstractly).  Nor does Judge Jones consider the probability that in essentially all deficiency judgment actions after foreclosure, the borrower has not enjoyed any windfall at all – it is not walking away with a pile of money in its pocket, it has no remaining interest in the property, and has probably lost its entire equity capital investment and perhaps years of sweat equity.

In this light, Judge Jones’ conclusion that every foreclosed borrower has enjoyed a windfall and is impermissibly receiving special protection is neither supported by the facts of the case nor economic reality.  Moreover, the decision fails to address the fact that a potential windfall is accruing to the party who acquired the loan at a discount, in a voluntary transaction between the foreclosing holder of the loan and the prior holder or loan originator.  The foregoing aspects of Judge Jones’ analysis may prove to be crucial in appellate litigation that is certain to follow – after all, the case concerns a deficiency of $35.7 Million.

My prediction is that the case will proceed to the U.S. Ninth Circuit Court of Appeals and eventually to the SCOTUS, and the argumentation will focus on whether AB273 in fact accords a windfall to borrowers, whether all Nevada borrowers with assigned mortgages are an improperly defined special interest group, and whether AB273’s protection of the loan assignee’s out-of-pocket losses, while entirely destroying its benefit of bargain (the right to enforce the assigned loans at face value when acquired at less than face value, when the devaluation of the collateral is already known or obvious) is permissible under the Contracts Clause.  The Ninth Circuit will make an interesting appellate forum for these issues.  If Judge Jones’ decision is upheld, it will have the effect of gutting the consideration-paid limitations imposed by AB273, in regard to all loan assignments made before AB273 took effect in June, 2011.

NV Supreme Court Addresses AB273 – Anti-deficiency Protections

  • May 13, 2015

This article was originally published in the January 2014 edition of Incline Law Group’s printed newsletter, Currents. 

In 2011 the Nevada legislature enacted Assembly Bill 273, and in doing so expanded the anti-deficiency protections available to borrowers and guarantors in Nevada.  An anti-deficiency law is one that limits the amount of money which a lender or its assignee may obtain from a borrower or guarantor in excess of the value of the real property or other collateral given to secure the loan.  Of particular importance, AB273 limits the amount that an assignee may recover through a deficiency judgment to the amount of consideration it paid for the assignment of the note and deed of trust, minus  (1) the amount paid for the property at the foreclosure sale, or (2) the fair value of the property on the date of foreclosure, whichever is greater.

Within a few months after AB 273 was enacted, trial courts in Nevada began to issue conflicting rulings regarding application of the new law.  In particular, on one day in late 2011, two different judges from the Eighth Judicial District Court in Clark County issued rulings with opposite conclusions about the effect of the law.  The two cases, Sandpointe and Nielsen, were then appealed to the Nevada Supreme Court.  Since then, attorneys and judges handling collection cases and the banking industry in general have been waiting for rulings on these cases.

In November, 2013, after a two-year wait, the Nevada Supreme Court issued its rulings in Sandpointe and Nielsen.  Depending on who you ask, there are differing opinions regarding what was decided and not decided by SandpointeThe following is this attorney’s view of the primary issues decided and not decided by Sandpointe:

First and foremost, Sandpointe determined that the AB273 anti-deficiency protections apply to any loan where the foreclosure sale (private trustee’s sale or judicial foreclosure) occurs after the effective date of the statute, which was June 10, 2011.  The court noted that a creditor’s right to a deficiency judgment vests when the foreclosure sale happens.

Some have suggested that AB273 only applies to an assignment of a right to obtain a deficiency judgment after foreclosure (i.e., a cause of action), but not to an assignment of a note and deed of trust.  In fact, Sandpointe expressly and impliedly determined that the AB273 anti-deficiency protections apply to any transfer of the right to obtain a deficiency judgment, regardless of when or how the right was transferred.

The Supreme Court also explained the practical economic effect of AB273 when it applies.  In this regard, the court stated:

Following the enactment of NRS 40.459(1)(c), a successor holder is now limited in its recovery, in a deficiency action or suit against the guarantor, to the sum by which the amount paid for the “right to obtain the judgment” exceeds the greater of the fair market value or the actual sale price. Under NRS 40.459(1)(c), no award may be made for other amounts that the successor in interest may have incurred following the acquisition of the right to obtain the judgment, such as accrued interest, costs and fees, and any advances, as provided in NRS 40.451 and NRS 40.465.

No doubt the statement that no award may be made for accrued interest, costs and fees will produce additional controversy.

The Court did not rule on the applicability of AB273 to loans transferred to a FDIC takeover.  AB273 refers to “persons” — in particular, a “person” assigning and a “person” receiving assignment.   Successor banks that hold assets received through the FDIC argue that the FDIC is not a “person” within the definition of statute and, therefore, that successor banks acquiring loans from FDIC are not limited in what they can recover.  This issue will undoubtedly be addressed in a future appellate court decision.

Sandpointe and Nielsen have answered some important questions following the enactment of the AB273.  Several crucial issues regarding this important law still remain to be decided, and will undoubtedly be the subject of future appellate decisions and/or legislative changes.

 

Making Contracts Work for You – Part 1: Top 5 Boilerplate Items You Don’t Read

  • May 11, 2015

In this two-part series, Making Contracts Work for You, I will discuss various ways that you can strengthen your contracts, so that in the case of a dispute, your contract works on your behalf.

Many people and businesses use self-written business forms as contracts and rely on handshakes to seal a deal. When a dispute arises from said deal, many of these people or business later turn to attorneys for a review of said contract.  Having an attorney review the contract will often reveal shortcomings, and then the second-guessing of the agreement then begins.

Contract

A few simple, but well-defined boilerplate terms can make your standardized agreement an advantage for you in the case of a dispute, or at least keep the playing field level.  In many cases, a court cannot rescue you unless you give it the ammunition to do so.  It makes great sense to improve your leverage and chances of collection, and perhaps even ward off disputes, by improving your standard contract forms with the simple tools mentioned below.

Here are 5 provisions that can make or break your success in a lawsuit that arises from your contract:

1. Attorney’s Fees Clause — language that says the winner also gets his attorney’s fees recovered.

Why? Under the “American Rule” you generally cannot recover attorney’s fees in most states, unless you have a right to attorney’s fees in your contract or under a special statutory remedy.  You want an attorney’s fee clause that is properly drafted.

2. Clear Payment Deadlines and Interest Provisions — terms that state when payment or performance is due and the consequences for delay.

Why? Disputes can take a long time to resolve.  The accrual of interest can become a powerful bargaining chip, and a significant item of recovery.  Interest compensates you for the loss of use of your money, and, to some degree, the loss of your own time devoted to the case.  Allowable interest rates vary according to the applicable state law.  If you want to charge “compound interest” — in other words, interest on interest — this must be explicitly stated in the agreement.  Otherwise, only simple interest will accrue on the principal sum due.  Typically, we see contracts with no interest rate stated; the interest rate only appears in invoices.  The interest rate(s) should be agreed upon, up-front, in the contract.

3. Choice of Law, Consent to Jurisdiction, and Venue — where a lawsuit must be filed and what law will apply.

Why? Cases can be won or lost based purely on the financial burden caused by the location of the lawsuit or arbitration hearing.  You want to be in your own home “court,” spending nights at home with your family, trying the case with your favorite lawyer.

4. Correct Naming of the Parties and Authorized Signatures — are you actually signing a contract with the party you think you are dealing with?

Why? Some level of due diligence is always appropriate.  If you are doing business with a corporation or other entity, you want your contract signed by a properly authorized representative with the corporate name properly stated.  You would be surprised how often this is overlooked.  Are you dealing with the true property owner, or his uncle who just got out of jail?  There is a wealth of publicly available data available on the Internet to verify the correct names of corporations and the true owners of property, businesses, etc., so you can ensure you have the correct, authorized signatures.

5. Personal Guaranties — an additional source of payment if the contracting party defaults; usually a person with money, property or both.

Why? It doesn’t take much for an unscrupulous person to form a corporation or an LLC.  If you do not have a solid track record of doing business with a business entity or trust, it may be appropriate to ask for a personal guaranty. Guaranties must be in writing to be enforceable; they can vary from a single sentence to multi-page guaranty agreements.

We are always happy to review our clients’ standard contracts and provide advice that will make your agreements stronger.

Stacey F. Herhusky Named Top 10 Family Law Attorney in Nevada

  • May 6, 2015

Stacey F. Herhusky Named Top 10 Family Law Attorney in Nevada

Incline Law Group, LLP is pleased to announce that partner Stacey F. Herhusky has named by the National Academy of Family Law Attorneys (NAFLA) as one of Nevada’s Top Ten Family Law Attorneys.

Stacey F Herhusky Top 10 Family Law Lawyer Each year, NAFLA recognizes the top 10 Family Law Attorneys in each state.    Their peers nominate these attorneys because they have demonstrated an  extraordinary amount of knowledge, skill, experience, expertise and success in  their practice of Family Law.

Stacey has been practicing Family Law for over 22 years (9 with Incline Law Group) in the Tahoe-Truckee region. She is licensed to practice in all courts of California and Nevada and is a member of the State Bar of Nevada, the State Bar of California, the Washoe County Bar Association and the Truckee Tahoe Bar Association. Stacey is also a Director of Far West Nordic Ski Education Association and sits on the Sugar Bowl Ski Team and Academy Board of Trustees.