Category Archives: State Cases

September 15, 2015

Nevada Supreme Court Allows Pursuit of Deficiency Judgments Following Out-of-State Non-Judicial Foreclosure Sales

In its opinion in Branch Bank and Trust Company v. Windhaven & Tollway, LLC et al, 347 P.3d 1038 (Nev. 2015), the Nevada Supreme Court reversed the lower court and held that a creditor who non-judicially forecloses on real property in another state may sue in Nevada to recover a deficiency judgment, even though the foreclosure sale was conducted pursuant to the laws of the state where the property is located instead of pursuant to NRS 107.080.  In the case before the court, Branch Banking and Trust foreclosed on real property in the State of Texas pursuant to that state’s nonjudicial foreclosure statutes.  The sale yielded a lesser amount than owed on the note secured by the property, and the bank brought an action in Nevada for a deficiency judgment.  The district court granted summary judgment in favor of the defendants, ruling that NRS 40.455(1) requires as a condition precedent that the sale be conducted pursuant to NFS 107.080.  The bank appealed and the Nevada Supreme Court reversed.

The court’s decision was based on a close reading of the statutory language at issue.  NRS 40.455(1) provides in pertinent part:

[U]pon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.  (emphasis added).

The court began its analysis with the observation that “statutory interpretation is a question of law, which this court reviews de novo. (citatiosn omitted).  In interpreting a statute, this court looks to the plain language of the statute and, if that language is clear, this court does not go beyond it. (citations omitted). Each section of a statute should be construed to be in harmony with the statute as a whole.”  Further, the court noted that a statute does not modify common law unless an intent to do so is explicitly stated.

In addressing the question of whether NRS 40.455 precludes or allows deficiency judgments where foreclosure was through a nonjudicial foreclosure in another state, the court specifically analyzed the use of the word “respectively” in the statute.  The court relied on accepted use of the word “respectively” to “pair words or phrases in the correct order.”  Doing so, the court concluded that the use of the word “respectively” in NRS 40.455(1) paired “foreclosure sale” with “judgment creditor” and “trustee’s sale held pursuant to NRS 107.080” with “beneficiary of the deed of trust.”  Using this construction, the court agreed with the bank that the term “foreclosure sale” in the statute refers only to judicial foreclosure. 

In addition, the court concluded that, because NRS 40.455(1) contains no language limiting the right to a deficiency judgment following an out-of-state nonjudicial foreclosure sale held in another state.  Looking to NRS 40.430, the court determined that the statutory scheme contemplates that a party may foreclose on out of state property nonjudically and still bring an action in Nevada for a deficiency judgment.  Further, the court noted that NRS 40.455(1) is a statute that derogates from the common law and thus must be construed narrowly in favor of allowing creditors to pursue deficiency judgments.  Because the statute is designed to achieve fairness to all parties to a transaction secured by real property, the court held that interpreting NRS 40.455(1) to preclude deficiency judgments to creditors who nonjudically foreclose on out-of-state property pursuant to another state’s law would undermine the purpose of the statute.

April 28, 2015

Minnesota Supreme Court Rejects the “Ponzi Scheme Presumption” in Connection with the Uniform Fraudulent Transfer Act

Rejecting the reasoning of a number of opinions by federal courts, the Minnesota Supreme Court has held that the “Ponzi Scheme Presumption” does not apply to claims brought under the Minnesota Uniform Fraudulent Transfer Act (“MUFTA”).  Patrick Finn and Lighthouse Management Group, Inc. v. Alliance Bank et al, 2015 WL 672406 (Minn. 2015).  The case involved the fraudulent lending operations of First United Funding, which was placed into receivership.   First United operated a Ponzi scheme, but also ran other legitimate business operations.  The receiver brought actions against Alliance Bank and others seeking to recover funds under the MUFTA.  The receiver argued that the “Ponzi Scheme Presumption” entitled him to a judgment on the following key elements of his claims:  (1) the transfers in question were made with actual intent to hinder, delay or defraud any creditor of First United, (2) First United was insolvent on the dates of the transfers in question and (3) the recipients of the transfers did not provide reasonably equivalent value in exchange for the transfers.  The Minnesota Supreme Court rejected the presumption in all three instances.

The court began its analysis by noting that the “Ponzi-scheme presumption, by operation of its three components, allows a creditor to bypass the proof requirements of a fraudulent-transfer claim by showing that the debtor operated a Ponzi scheme and transferred assets ‘in furtherance of the scheme.’”  However, the court then stated that the statute “neither mentions nor defines a ‘Ponzi scheme.’”  In reviewing the statute, the court noted that it contains no provision allowing a court to make any presumptions based on the existence of a Ponzi scheme.  The court interpreted the statute as one which deals with transfers on a transfer-by-transfer basis and not the structure of the entity making the transfer in question.  Next, the court noted the statute contains a list of “badges of fraud” which a court may rely on to determine if the debtor transferred assets with the intent to hinder, delay or defraud any creditor, and that the operation of Ponzi scheme is not one of those badges.  The court stated: “[T]he Legislature’s enumeration of a specific list of badges of fraud, none of which are conclusive, precludes an interpretation that it intended a non-enumerated badge of fraud to be conclusive.”  (emphasis in original).  As a result, the court concluded that, while the existence of a Ponzi scheme may allow the court to draw a rational inference that a transfer was made with fraudulent intent, the existence of such a scheme does not relieve the creditor from his burden of proof under the statute. 

The court also rejected the notion that a Ponzi scheme presumption conclusively establishes that a debtor was insolvent on the date the transfer was made.  Again, the court noted that the statute does not define insolvency with a view to whether the debtor was operating a Ponzi scheme.  Instead, the court noted the statute provides that “a debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets, at a fair valuation.”  In addition, the court noted that the statue does contain a presumption on insolvency if the debtor is not generally paying debts as they become due.  Adding a presumption of insolvency based on the existence of a Ponzi scheme would, in the court’s words, require it to “add language to MUFTA, something we cannot do.”  Further, since some perpetrators of Ponzi schemes also run legitimate businesses, and since some Ponzi schemes start out as legitimate businesses and only degenerate into a Ponzi scheme at a later point in time, the court concluded that a conclusive presumption of insolvency when a debtor operates a Ponzi scheme “may be incorrect, both as a matter of law and as a matter of fact.” 

The court finally rejected the third component of the Ponzi scheme presumption – that the recipient can never give reasonably equivalent value in exchange for the transfer.  The court noted that the lack of reasonably equivalent value is an element of proof in a claim for constructive fraudulent transfers, and the existence of reasonably equivalent value is an element of proof in a defense to a claim for actual fraudulent transfers.  Again, the court noted the statute delineated several specific types of reasonably equivalent value – non-collusive foreclosure sales, the execution of a power of sale for the disposition of property on default under a mortgage, deed of trust or security agreement and the satisfaction or securing of an antecedent debt – and that the existence of a Ponzi scheme was not included by the legislature in the statute.  The court also rejected some of the “fairness” and “policy” arguments advanced by the receiver to justify the presumption.  First, the court rejected the policy argument that all contracts between a Ponzi scheme perpetrator and his victims are unenforceable as a matter of public policy.  The court rejected this argument because not every Ponzi scheme – First United’s included – lacks a legitimate source of earnings.  In this instance, while no one argued that First United did not operate a Ponzi scheme, it was also clear that it had legitimate business operations and that the defendants had purchased non-oversold participation interest in actual loans to real borrowers, which provided First United with a legitimate source of earnings from which it could pay the banks which purchased these interests.  Second, the court rejected the policy argument that the Ponzi scheme presumption operates to the beneficial purpose of treating all creditors equally.  The court noted the absence of language in the statute setting out equality of treatment as a goal, and held that the statute does not prevent a debtor from making a preferential transfer in favor of one bona fide creditor over another so long as the transfer is not fraudulent.

March 4, 2014

Bankers Beware—Ambiguous Language in Participation Agreements Can Lead to Costly Litigation

The need for careful drafting of participation agreements between banks was brought home by the Utah Supreme Court’s ruling in Holladay Bank & Trust v. Gunnison Valley Bank, 2014 UT App 17, 2014 WL 266289 (Utah App. 2014).  In Holladay Bank, Gunnison Valley Bank and Holladay Bank entered into a participation agreement relating to a substantial loan extended by Gunnison for the construction of a luxury home.  The participation agreement provided that Gunnison fund its portion of the loan first, and Holladay fund its portion last.  Gunnison foreclosed following the borrower’s default, and a dispute arose between the banks over the allocation of the sales proceeds which were insufficient to cover the loan.  Litigation between the banks ensued.  The participation agreement provided in one section that, “as the Borrower repays the loan,” Holladay would receive all principal payments pursuant to the “last in, first out” provisions of the agreement, until its principal was paid in full, with Gunnison to receive principal payments thereafter.  Another section of the agreement provided that, after payment of collection costs to Gunnison, all amounts received were to be divided between the banks in accordance with their respective percentages of ownership interest in the loan.

Both banks argued in connection with Gunnison’s motion for summary judgment that the language of the participation agreement was unambiguous and they were entitled to judgment. Gunnison asserted an alternative argument that the language was, in fact, ambiguous and provided the trial court with two affidavits from Gunnison’s vice president and Holladay’s former president and CEO, both of whom were involved in the transaction.  Both affidavits supported Gunnison’s position that the proceeds from a foreclosure sale were to be divided pro rata based on the amounts owed to the banks and not pursuant to the last in, first out method asserted by Holladay.  The trial court held the participation agreement was unambiguous, refused to consider the two affidavits, and ruled in Holladay Bank’s favor.

The Utah Court of Appeals reversed and remanded.  In explaining its analysis, the court started with the ruling that a contract is ambiguous if its pertinent terms are “capable of more than one reasonable interpretation.”  Of course, the court noted that an appellate court looks to the writing itself to ascertain the parties’ intentions.  A party’s attempts to endow a contract’s language with an interpretation according to his or her own interests will not render the language ambiguous; rather, the court said a contract is ambiguous when “competing interpretations are reasonably based on the natural and ordinary meaning of the terms of the contract and generally consistent with interpretive canons.”  In other words, “to be ambiguous, both interpretations must be plausible in the context of the contract as a whole.”

In the present case, the appellate court determined that the participation agreement could, using the natural and ordinary meaning of the language in light of interpretive canons as entitling Holladay to be paid first or requiring the sale proceeds to be divided pro rata.  Therefore, the court ruled the contract was ambiguous and remanded the matter to the trial court.

March 3, 2014

Perfected Secured Creditors Square Off Against Statutory Lienholders In Idaho Supreme Court

The Idaho Supreme Court recently has been called upon to decide two cases that could have important implications for agricultural lenders.  The first is already decided; the second has been briefed and will likely be decided this summer.

Cows Gobble Up Commodity Lien

In Farmer’s National Bank v. Green River Dairy, LLC, 2014 WL 268643 (Jan. 24, 2014), the Court held that an agricultural commodity lien on diary feed did not extend to the livestock that eventually consumed the feed. 

In Green River, Farmer’s National Bank (“Bank”) held a properly attached and perfected security interest in the dairy cows of Green River Dairy (“Dairy”).  Certain commodity sellers (“Feed Providers”) sold hay and wheat products to Dairy for use as feed.  Dairy defaulted on its payments to Bank.  Bank foreclosed on the cows and sold them at auction.  Bank and the Feed Providers each claimed a priority interest in the proceeds of the sale. 

Bank claimed priority pursuant to general U.C.C. Article 9 principles.  See Idaho Code § 28-9-101, et. seq.  According to such principles, conflicting security interests and liens generally rank “according to priority in time of filing or perfection,” and a prior perfected security interest has priority over a conflicting unperfected interest.  See Idaho Code § 28-9-322.

The Feed Providers, on the other hand, relied on a special statutory lien enacted to protect “agricultural product” producers and dealers.  See Idaho Code § 45-1802.  Pursuant to that section, one who sells or delivers agricultural product holds a first priority lien in the agricultural product and the proceeds of its sale.  The statute provides that “the lien created in this chapter may attach regardless of whether the purchaser uses the agricultural product purchased to increase the value of his livestock or whether he uses the agricultural product purchased to maintain the value, health or status of his livestock without actually increasing the value of his agricultural product.”  Id.  The district court construed this sentence to mean that the commodity lien continued in the agricultural product after it was consumed, and attached to the livestock that consumed the product.

The Supreme Court disagreed.  It noted that, pursuant to the statute, the lien only applies to “agricultural products” or the proceeds of the sale of such products.  Dairy cows are not included within the statutory definition of agricultural products, and are not proceeds of such products.  Thus, the Supreme Court held that the Feed Providers’ lien could not attach to the livestock.  Their lien was extinguished when the feed was consumed.  Accordingly, Bank had priority in the proceeds of the sale of the cows.

Agisters Lien Takes Priority Over Prior Perfected Security Interest 

In a related case arising from the same troubled Dairy, the Idaho Supreme Court is considering whether a statutory “agisters’ lien” takes priority over a prior perfected security interest.  See J&M Cattle Co., LLC v. Farmers Nat’l Bank, Case No. CV-2012-3020 (Idaho).  As described above, Bank claims first priority in the proceeds of the sale of the dairy cows, pursuant to Idaho Code § 28-9-322, which generally grants first priority to a perfected security interest, subject to exceptions. 

Bank faces a competing claim from J&M Cattle Company, LLC (“J&M”), a third party dairy servicer that cared for, boarded and fed Dairy’s cattle.  Companies that provide such services are often referred to as “agisters”.  J&M asserts a possessory agister’s lien that, it claims, trumps Bank’s prior perfected security interest.  J&M and Dairy agreed that the proceeds from the cow sale would be held in escrow while they sought a determination from the Supreme Court concerning their relative priority. 

Idaho law provides a first priority lien for agisters.  That lien is derived from two sections of the Idaho Code.  First, Idaho Code § 28-9-333 provides that “a possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.”  Thus, an agister’s lien may take priority over a prior security interest if it is (1) a possessory lien in goods, and (2) the statute creating the agister’s lien does not expressly provide otherwise. 

The parties in J&M Cattle appear to concede that J&M’s lien is a possessory interest in goods, satisfying the first prong.  They dispute, however, whether the agister’s lien statute “expressly provides” that an agister’s lien does not have priority over a competing security interest.  That is, unless the agister’s lien statute expressly provides otherwise, the agister’s lien takes priority over Bank’s perfected secured security interest. 

The Court’s decision will therefore turn on its construction of the agisters’ lien statute, Idaho Code § 45-805.  It consists of three subjections.  Generally speaking, subsection (a) describes how one who services personal property of another, may provide prior notice to security interest holders, and if the service provider is not paid, he may sell the property and take first priority in the proceeds.  Subsection (b) grants a similar right specifically to agisters – those who feed, board, or care for livestock.  Unlike subsection (a), however, subsection (b) is silent regarding the priority of such a lien.  Finally, subsection (c) provides, in relevant part, as follows:

The proceeds of the sale must be applied to the discharge of any prior perfected security interest, the lien created by this section and costs; the remainder, if any, must be paid over to the owner.

Subsection (c) is the key disputed provision.  In short, Bank will likely prevail – and perfected security interests will trump agister’s liens under Idaho law – if the Supreme Court concludes that this clause “expressly provides” that agister’s liens do not have priority over prior security interests. 

The parties, of course, disagree about the meaning of subsection (c).  Bank claims it is an express subordination of agister’s liens to prior security interests, because the drafters of subsection (c) must have intended to list liens in order of priority, and prior perfected security interests are listed first.  J&M argues that subsection (c) does not “expressly provide” for subordination of the agister’s lien.  Instead, Bank’s interpretation relies on an inference that the liens are listed in order of priority.  Thus, according to J&M, an agister’s possessory lien takes priority by default pursuant to § 28-9-333.

Conclusion

Secured lenders can take some comfort, based on the Green River decision, that a prior perfected security interest in dairy cows will not be impaired by another party’s provision of feed or other agricultural products to the dairy.  That same security interest, however, may come under attack from an agister who cares for the dairy’s cows, depending on the outcome of the J&M Cattle case.  Accordingly, secured lenders should be aware of a borrower’s practices with respect to the use of agisters, and may wish to contractually limit or prohibit such use until the law is settled.

April 25, 2013

Utah Court of Appeals Holds that a Judgment Creditor may Execute on a Chose in Action Under Utah Rules of Civil Procedure

In its decision in Lamoreaux v. Black Diamond Holdings, LLC, 296 P.3d 780 (Utah App. 2013), the Utah
Court of Appeals addressed a judgment debtor’s argument that, through its repeal of Rule 69 of the Utah Rules of Civil Procedure, the Utah Legislature had intended to abolish the right of judgment creditors to execute against their judgment debtors choses in action. The court held that the Utah Legislature did not intend to abolish this right, and upheld the conduct by the Black Diamond Holdings in purchasing a chose in action at an execution sale for the purpose of dismissing the litigation brought against it by David Lamoreaux.

Lamoreaux brought suit against Black Diamond Holdings alleging a debt owed and seeking a judgment to collect it.  Following a bench trial on the dispute, the court took the matter under advisement.

In the meantime, in a separate action, Lamoreaux suffered a judgment against him in litigation brought by Cheryl Fisher.  Seeking to satisfy her judgment against Lemoreaux, Fisher obtained a writ of execution against Lamoreaux’ claim against Black Diamond and noticed a public sale. 
Lamoreaux received notice of and attended the sale, but took no legal action to stop it.  Black Diamond also attended the sale, and purchased Lamoreaux’s claim against.  Thereafter, Black Diamond moved to substitute itself as the plaintiff in the action brought against it by Lamoreaux, which the court granted.  Black Diamond, now as plaintiff,  moved to dismiss the action
against itself as defendant, which the court also granted.

Lamoreaux appealed, contending that the repeal of Rule 69 by the Utah Legislature in 2004 constituted an expression of its intent to abolish the right of a judgment creditor to execute against a chose in action owned by its judgment debtor.  Therefore, Lamoreaux argued, Fisher’s execution against his claim against Black Diamond was a nullity, and Black Diamond purchased nothing when it bought the claim at the execution sale.  The court rejected Lamoreaux’s argument.

The court began its analysis by stating that Rule 69 governed procedures relating to writs of execution and provided that such writs were “available to a judgment creditor to satisfy a judgment or other order requiring the delivery of property or the payment of money by a judgment debtor.”  The rule contained an internal definition of property subject to execution:  “A writ of execution may be used to levy upon all of the judgment debtor’s personal property and real property which is not exempt from execution under state or federal law.”  Subsection 69(f) expressly referred to choses in action, and expressly authorized the officer charged with the writ to collect and sell choses in action.

In 2004, the Utah Legislature repealed Rule 69 and replaced it with multiple rules, including Rules 64 and 64E.  Rule 64E provides “A writ of execution is available to seize property in the possession or under the control of the defendant following entry of a final judgment or order requiring the delivery of property or the payment of money.”  The term “Property” for purposes of the rule, is defined to include “the defendant’s property of any type not limited to real and personal property, tangible and intangible property, the right to property whether due or to become due, and an obligation of a third
person to perform for the defendant.” 

The court acknowledged that at times removal of a term from a definition is an indication of the legislature’s intent to remove the item from the definition; however, the court concluded, based on the plain language of the statute, that its terms were very broad and that a chose in action fell within
its definition.

February 4, 2013

Nevada Supreme Court Issues Opinion Denying Equitable Subrogation of a Subsequent Mortgage Over Pre-Existing Mechanics Liens

In its decision of first impression in In re Fontainebleau Las Vegas Holdings, LLC, 289 P.3d 1199 (Nev.
2012), the Nevada Supreme Court, in response to questions certified to it by the United States Bankruptcy Court for the Southern District of Florida, issued an important decision on the relative rights of mortgagees and mechanics lien holders.  The opinion reveals the strong policies in Nevada favorable to holders of mechanics liens.

The facts involved in the case are straightforward.  Fontainebleau Las Vegas Holdings, LLC ("Fontainebleau”) sought to construct a hotel and casino in Las Vegas, Nevada.  It obtained a loan from Bank of America in the amount of $150 million, securing the loan with a deed of trust
against its real property.  The credit agreement required the general contractor and subcontractors to subordinate their mechanics liens to the deed of trust. Construction commenced on the project. 
Subsequent to commencement of construction, Bank of America agreed to loan an additional $1.85 billion, a portion of which went to pay off the original $150 million secured loan.  

After construction halted, Fontainebleau filed a chapter 11 petition in the United States Bankruptcy Court for the Southern District of Florida.  Wilmington Trust succeeded Bank of America as administrative agent for the lenders. 

When disputes arose between Wilmington and the mechanics lienholders, Wilmington Trust filed an adversary proceeding in the bankruptcy court seeking a determination of the relative priorities of the deed of trust and mechanics liens. 

The bankruptcy court certified three questions to the Nevada Supreme Court, the following two of which the court addressed in its opinion:

(1)   Whether Nevada Revised Statute (Chapter 108) prohibits the use of equitable subrogation to allow a mortgage to step into the shoes of a pre-existing lien when such pre-existing lien was recorded prior to the commencement of any work or improvement giving rise to a statutory lien
under NRS (Chapter 108)?

(2)   Whether subordination agreements executed by mechanics and materialman lien claimants, purporting to subordinate their liens to a new mortgage, are enforceable under Nevada law?

The Nevada Supreme Court answered both questions in the favor of holders of mechanics and materialman liens.

The court began its discussion by stating that, while it has adopted mortgage subrogation principles, it had never addressed whether equitable subrogation applies in the mechanics lien context.  The court stated that NRS 108.225 is the controlling authority in Nevada regarding the priority of mechanics liens.  That statute states in relevant part:

  1.  [Mechanics’] liens . . . are preferred to:  

(a)   Any lien, mortgage or other encumbrance which may have attached to the property after the commencement of construction of a work of improvement.

(b)  Any lien, mortgage or other encumbrance of which the lien claimant had no notice and which was unrecorded against the property at the commencement of construction of a work of improvement.

  1.  Every mortgage or encumbrance imposed upon, or conveyance made of, property affected
    by [mechanics’] liens . . . after the commencement of construction of a work of improvement are subordinate and subject to the [mechanics’] liens. . .regardless of the date of recording of the notices of liens.

The court found the language to be plain and unambiguous, and that equitable principles did not justify a disregard of the clear provisions of the statute.  The statute gives mechanics’ lien claimants priority over all other liens, mortgages and encumbrances that attach after the commencement of a work of improvement.  The court noted that its decision did not align with the trend in other states, but determined that the clear language expressed the intent of the Nevada legislature to give priority to mechanics’ lien claimants in this circumstance, and that the lender could have protected its position by obtaining contractual subordinations at the time it extended its loan.

In response to the second question, the Nevada Supreme Court held that subordination agreements that purport to subordinate liens prospectively are unenforceable, but that non-prospective subordination agreements obtained in compliance with NRS 108.2457 are enforceable.  The court noted that NRS 108.2453(1) specifically provides that a waiver or modification of a right under the state’s mechanics’ lien statute is unenforceable unless it complies with the provisions of NRS 108.221 to 108.246 inclusive.  However, the court further noted that NRS 108.2457 specifically provides for circumstances under which a waiver is allowed.  The parties took divergent views on their interpretation of NRS 108.2453 and 108.2457, and the court held the statutes to be ambiguous because they could be interpreted as argued by both parties.  The court, therefore looked to the legislative history of the statute, which itself stated that “the purpose of this bill is to prohibit the prospective waiver of a lien claimant’s rights, and to confirm, clarify, and standardize the procedures and forms required for a waiver and release upon payment.”  Based on this legislative history, the Nevada Supreme Court held that non-prospective waivers of mechanics’ liens are enforceable provided they comply with the statutory requirements, but that prospective waivers are unenforceable.

January 28, 2013

Utah Supreme Court Holds that the Utah Consumer Credit Code does not Create a Bankruptcy Exemption on Earnings

In connection with an appeal in the bankruptcy proceedings of Dr. Douglas Reinhart, the United States Court of Appeals for the Tenth Circuit certified the following question to the Utah Supreme Court:  “Does Utah Code Ann. sec. 70C-7-103 create an exemption in bankruptcy, or does it only limit a judgment creditor’s garnishment remedy outside bankruptcy?”

In its opinion in Gladwell v. Reinhart, 723 Utah Adv. Rep. 66 (Utah 2012), the Utah Supreme Court
concluded that section 103 does not create an exemption in bankruptcy, and is expressly limited to a judgment creditor’s garnishment remedy outside of bankruptcy.

At the time he filed bankruptcy, Dr. Reinhart was owed unpaid salary by his professional corporation. 
He asserted an exemption to those monies under both the federal Consumer Credit Protection Act, 15 U.S.C. sec. 1673, and section 103 of the Utah Consumer Credit Code.  The trustee objected to the claim of exemption, contending that the asserted federal exemption was precluded by the United States Supreme Court’s decision in Kokoszka v. Belford, 417 U.S.C 642 (1974) and that the provisions
of section 103 of the Utah Consumer Credit Code apply only outside the bankruptcy context.  The bankruptcy court denied the trustee’s objection and allowed the exemption.  The United States District Court for the District of Utah summarily affirmed.  The United States Court of Appeals for the Tenth Circuit reversed as to the exemption claimed under federal law, agreeing that the Supreme Court’s decision in Kokoszka precluded the federal exemption. Gladwell v. Reinhart, 416 F. App’x, 761, 763 (10th Cir. 2011). The Tenth Circuit certified the question as to the state exemption to
the Utah Supreme Court.

The Utah Supreme Court began its analysis by noting that Utah has opted out of the federal exemption scheme for purposes of determining what exemptions Utah residents may claim in bankruptcy cases.  The court then noted that exemptions for Utah debtors are generally located in the state’s Exemptions Act, but that additional exemptions are located outside the Exemptions Act.  As an example, the court that Utah Code sec. 35A-3-112 provides for an exemption allowable generally and in bankruptcy for public assistance monies. 

In determining whether section 103 of the Utah Consumer Credit Code provides a general exemption allowable in a bankruptcy case the court began with the plain language of the statute:

                “(2) the maximum part of the aggregate disposable earnings of an individual for any
pay period which is subjected to garnishment to enforce payment of a judgment arising from a consumer credit agreement may not exceed the lesser of: (a) 25% of his disposable earnings for that pay period; or (b) the amount by which his disposable earnings for that pay period exceed 30 hours per week multiplied by the federal minimum hourly wage prescribed by Section 6(a)(1) of the Fair Labor Standards Act of 1938, 29 U.S.C. Section 206(a)(1), in effect at the time the
earnings are payable.”

The court viewed the plain language of the statute as restricting its application to those instances where a judgment creditor seeks to garnish wages to enforce a judgment arising from a consumer credit agreement.  The court concluded that this plain language did not provide a general exemption for purposes of bankruptcy proceedings.  The plain language indicated it was not intended to apply outside of the context of a garnishment to enforce a judgment arising from a consumer credit agreement.

The court buttressed its conclusion by noting that, at the time the Utah Consumer Credit Code was enacted in 1969, the Utah Exemptions Act already contained a general exemption of “half a debtor’s earnings rendered at any time within thirty days next preceding the levy of execution or attachment
by garnishment or otherwise.” The two statutes co-existed for a number of years, leading the court to conclude that the protections in section 103 of the Utah Consumer Credit Code applied in circumstances relating to enforcement of judgments arising from consumer credit agreements, whereas the Utah Exemptions Act had a broader protection for wages from judgment creditor actions.  This co-existence indicated a legislative intent for a more limited application of section 103 of the Consumer Credit Code.  In 1981, the Utah legislature repealed the earnings exemption in the Exemptions Act, but did not amend the Consumer Credit Code to expand its application. 

The totality of these circumstances lead the court to conclude that the legislature did not intend section 103 to provide a general exemption for unpaid earnings under Utah law in a bankruptcy case.

October 12, 2012

Utah Court of Appeals Addresses Factors Required to Set Aside a Sheriff’s Judgment Execution Sale

If a sheriff’s sale is otherwise conducted properly, may a judgment debtor nevertheless obtain relief if the sales price of the property sold at execution is grossly inadequate?  That is the question which was recently answered by the Utah Court of Appeals in Meguerditchian v. Smith, 2012 WL 2428535, 2012 UT App 176 (Utah App. 2012).  In Meguerditchian, the judgment creditor obtained a judgment in the amount of $55,000.  The judgment creditor sought to execute the judgment against various items of personal property owned by the debtor.  However, after the debtor asserted an exemption in the personal property, the judgment creditor then sought to enforce the judgment against the debtor’s real property and related water rights.  At the sheriff’s sale, the judgment credit bid $33,000 of its judgment against the real property.  In conjunction with the debtor’s request to have the sale set aside, the trial court found that the real property had an actual value of over $500,000, and that the sales price was grossly inadequate.  However, the trial court refused to set aside the sheriff’s sale because it determined there had been no irregularities in the sale.

On appeal, the Court of Appeals began its analysis by stating that a request to set aside a sheriff’s sale, or to extend the deadline for the judgment debtor’s right to redeem the sold property, involves the interplay of two factors:  (1) gross inadequacy of the purchase price and (2) irregularity in the sale so as to indicate at least “slight circumstances of unfairness.”  The court stated that these factors work together on a sliding scale, so that the greater the disproportionality in price, the less unfairness or fewer irregularities a party must demonstrate before a court may justifiably extend a redemption period or set aside a sheriff’s sale.

Because the trial court had found that there were no irregularities in the sale, the Court of Appeals addressed the question of whether gross inadequacy of price alone could constitute a sufficient ground to set aside a sale.  The Court of Appeals noted that both it and the Utah Supreme Court had previously theorized that there may be circumstances where inadequacy of price alone could be so
great as to “shock the conscience of all fair and impartial minds” such that a court would be justified in setting aside a sale even in the absence of any irregularities in the conduct of the sale.  See Pyper v. Bond (Pyper I), 2009 UT App., 331 (Utah App. 2009); see also Young v. Schroeder, 37 P. 252 (Utah 1894). 

However, the Court of Appeals affirmed the trial court’s order denying the request to set aside the sale.  First, the court noted that a judgment debtor’s redemption rights are generally a sufficient remedy to a grossly inadequate purchase price.  After all, in the present case, the debtor had the right to redeem the $500,000 property by paying the $30,000 paid for it at the sale within the six months following the sale.  Second, noting that a trial court’s decision on whether to set aside a sale is granted a “high degree of discretion,” the Court of Appeals concluded that sales price in question did not shock the court’s conscience when compared to other instances where judgment debtors had sought similar relief.  In the present case, the sales price was 1/15 of the real property’s
market value.  The Court of Appeals noted previous cases where the sales price was even less, including the sale in Pyper I, where the property sold for 1/228 of its market value.  Consequently,
the court concluded that this case did not present that special set of shock that would allow for a properly conducted sale to be set aside on the basis of price alone.

July 3, 2012

Utah Supreme Court Clarifies Contractual and Statutory Right to Recover Attorneys Fees in Two New Opinions

Utah’s reciprocal attorney fees statute, 78B-5-826 provides in relevant part that “a court may award . . . attorney fees to either party that prevails in a civil action based upon any . . . written contract. . . when the provisions of the . . . contract allow at least one party to recover attorney fees.”  In its 2007 opinion in Bilzanich v. Lonetti, 160 P. 3d 1041 (Utah 2007), the court held the prevailing party in an action in which a guaranty of a loan was held to be unenforceable could recover attorney fees.  In that action, the guaranty contained a provision entitling the lender to its attorney fees in enforcing the guaranty.  The lender sued the guarantor under a guaranty which allowed the lender to recover attorney fees but contained no similar provision for the guarantor, and judgment was entered on the guarantor’s theory that the guaranty was unenforceable.  The lender asserted that, there being no enforceable contract, the guarantor could not recover attorney fees.  The Utah Supreme Court disagreed, holding that had the contract been found to be enforceable the lender would have been entitled to an award of attorney fees.  Therefore, the guarantor was entitled to his attorney fees in defending the action.

In two recent opinions, the Utah Supreme Court has clarified and expanded its ruling in Bilzanich.  The first opinion is Bushnell v. Barker, 705 Utah Adv. Rep. 24 (Utah March 27, 2012), in which the Utah Supreme Court affirmed the opinion of the Utah Court of Appeals in Barker v. Bushnell, 222 P.3d 1188 (Utah App. 2009).  In Bushnell, John Bushnell retained the accounting firm of Dale K. Barker Company to prepare tax returns for himself and his company.  The contract had an attorney fee clause which provided that in the event of a breach, the “nondefaulting party shall be entitled to all costs and attorneys’ fees incurred in enforcing this Agreement.”  Bushnell became dissatisfied with Barker Company’s work and terminated the relationship.  At the time, Bushnell owed money to Barker Company for services, and Barker Company sued to collect.  Bushnell counterclaimed against Barker Company asserting claims for breach of contract and negligence.  Bushnell also filed a third party complaint against Dale Barker individually, asserting that Barker Company was his alter ego, and that he should be held liable to pay all amounts determined to be owed to Bushnell by Barker Company.  The trial court granted Barker’s motion to dismiss the third party complaint, but denied his request for an award of attorney fees on the finding that Barker was not a party to the Bushnell/Barker Company contract and could not recover under the reciprocal attorney fee statute.  The Court of Appeals affirmed, as did the Utah Supreme Court.  The Utah Supreme Court agreed with the Court of Appeals that, had Bushnell succeeded on his alter ego claim against Barker, he would not have been entitled to an award of attorney fees.  In that event, Barker would not have been a “defaulting party” under the contract, and the contract would not have entitled at least one party to recover attorney fees.  Bushnell’s entitlement to attorney fees on his breach of contract claim against Barker Company would not have entitled him to recover attorney fees on his alter ego claim against Barker.  In short, a party who recovers on a breach of contract claim against one defendant may not recover payment of those attorney fees from a second defendant whose liability is based solely on a theory that the first defendant is the alter ego of the second defendant.

The second opinion is Hooban v. Unicity International, Inc., 705 Utah Adv. Rep. 36 (Utah March 27, 2012).  Hooban purchased all stock from the bankruptcy estate of the owners of H&H Network Services.  H&H was a distributor for Unicity pursuant to a distributor agreement which contained a clause providing that “[i]n the event of a dispute, the prevailing party shall be reimbursed attorney’s fees. . . by the other party.”  Hooban sued Unicity to enforce the distributor agreement after Unicity took the position that Hooban had no right to operate under the agreement as a Unicity distributor.  The trial court granted Unicity’s motion for summary judgment finding that Hooban was not a party to the distributor agreement and lacked standing to enforce it.  Unicity filed a motion for attorney fees under 78B-5-826.  The Utah Supreme Court affirmed the decision of the Utah Court of Appeals that Unicity was entitled to recover its attorney fees from Hooban.  The Court of Appeals held that a prevailing party may recover attorney fees under the statute if two requirements are satisfied:  (1) the underlying litigation must be based upon a contract and (2) the contract must allow at least one party to recover its attorney fees.”  The court concluded that Hooban’s action was based upon a contract, and the contract allowed at least one party to recover its attorney fees.

Hooban argued before the Utah Supreme Court that the statute should be restricted in its application to those instances where its application is necessary to “level the playing field” between parties who have disproportionate bargaining power.  Because the contract in question had a bilateral attorney fee provision and because he was found not to be a party to the contract, Hooban argued that the statute could not provide a basis for an award of attorney fees in favor of Unicity.  Unicity argued that the statute should be interpreted more broadly to apply if the following two conditions are met:  (1) the provisions of the contract at issue must allow at least one party to recover fees if that party prevails in litigation and (2) the underlying litigation must be “based upon a contract” in the sense that a party to the litigation must “assert the writing’s enforceability as basis for recovery.”  The Utah Supreme Court agreed with Unicity:

“We agree with Unicity and affirm.  In so doing. . . we clarify some latent ambiguities in section 826. . . . First, we hold that the statute applies even in the face of a bilateral fee clause. . . Second. . . we clarify the meaning of the term ‘party’ as it is used in the statute, concluding that Unicity is entitled to fees because it was the prevailing party and because Hooban would have been a party to the contract if he had prevailed in this suit.”

These two opinions of the Utah Supreme Court should give creditors enforcing breach of contract claims additional insights into their rights under Utah law to an award of attorney fees in enforcing those rights in the litigation process.

February 28, 2012

Utah Court of Appeals Rules that the Duty of Good Faith and Fair Dealing Cannot be Used to Vary the Clear Terms of a Contract

In its decision in Keybank National Association v. Systems West Computer Resources, Inc., 2011 UT 324 (2011) reiterated and strengthened prior rulings from Utah’s appellate courts that evidence supporting a claim of breach of the duty of good faith and fair dealing is not admissible to vary the clear terms of a contract.

In Keybank, the bank and its borrower entered into a revolving loan agreement which contained a specific maturity date.  Over the course of several years following the execution of the loan documents, the bank and the borrower entered into a series of agreements modifying the terms of the original loan agreement, with each extension also extending the maturity date of the loan by setting a new, specific maturity date. As is customary in this type of loan transaction, the loan documents required the borrower to pay the loan at maturity, and further provided that its failure to do so would constitute a default. The last such extension resulted in a maturity date of July 15, 2008.  Although Keybank had agreed to numerous extensions of the maturity date, nothing in the loan documents required it to extend the maturity date if the borrower was not otherwise in default under the loan documents.

The loan matured on July 15, 2008, and Keybank demanded payment.  When Systems West failed to pay, Keybank sued.  Systems West filed a counterclaim alleging the bank breached its duty of good faith and fair dealing by refusing to further extend the maturity date of the loan and, in opposing Keybank’s motion for summary judgment, sought to introduce into evidence the testimony of its president and CEO to the effect that her understanding, based on her communications with Keybank representatives was that Keybank agreed that it would further extend the maturity date of the loan until both parties agreed in writing to terminate the loan. 

The Utah Court of Appeals affirmed the district court’s grant of Keybank’s motion for summary judgment on Systems West’s counterclaim.  The declaration of Systems West’s president to the effect that Keybank agreed to further extend the maturity date, while relevant to its claim that Keybank breached a duty of good faith and fair dealing, was inadmissible because it was at variance with the clear terms of the loan documents.  The court ruled that “while a covenant of good faith and fair dealing inheres in almost every contract, . . . this covenant cannot be read to establish new, independent rights or duties to which the parties did not agree ex ante.”  The court stated that the concepts and policies behind the duty of good faith and fair dealing are to be used to “protect the express covenants and promises of the contract,” and not to modify express terms of the contract.