January 21, 2010

Flossing The Craw

Every profession has its toolbox of near essentials. For a lawyer, I think a good craw is just about indispensable. Even though humans don’t actually have “craws” (with the possible exception of Don Rickles), a figurative craw is most useful for the practice of law. You need a place to jam the stuff that just rubs you the wrong way. You’ve got to store the things you just can’t quite digest so that you can pull them out, poke at them a bit, and turn them over as over as you look to make sense of them.

Something that has been stuck in my craw for awhile now has been the Alaska Supreme Court’s decision in Roeland v. Trucano. This came down in late August, and yes, it’s been wedged tightly in my craw ever since.

floss.jpgThe facts of the whole dispute are a bit convoluted. Two folks from Belgium held a right of first refusal on a piece of real property located in Juneau. (Belgians in Juneau? Who knew?) The Trucano guys who gave that right of first refusal made a deal to sell a 25% interest in the property to a fellow named Coates. In exchange, Coates was going to give Trucano a 25% interest in the souvenir shop he was going to put on the property, as well as interests in other businesses that he might someday open in the future in Juneau. (I kid you not, the deal was that vague and open-ended.)

Trucano duly sent this off to the Belgians to match if they wanted to under their right of first refusal. The Belgians were confused by the thing, as well they might be, since they didn’t have any plans to put souvenir shops on the property or anywhere else in Juneau. To cloud the matter more, the offer was presented to the Belgians as being the equivalent of $7 million in cash, although it’s not clear at all how one would work the math out on that. The Belgians told Trucano the proposal was not a real deal they had to match.

Trucano went ahead with the transaction and transferred the property to a new LLC to complete the development. Trucano held onto 75% of the new LLC. But instead of giving 25% to Coates -- as he told the Belgians was going to happen -- he gave only 12.5% to Coates. The other 12.5% went to a Ketchikan couple named Jethani. How and when the Jethanis came into the picture is unclear; all the opinion says about these folks is that “Jethani is a business partner with Coates in Ketchikan.”

The Belgians challenged the deal and lost. On appeal to the Supreme Court, they lost again. The Supremies said the offer passed to the Belgians was sufficiently definite and detailed and that the transfer into the new LLC did not change things. Trucano still kept control with his 75% interest, just as he said he would, he just did so in the LLC context. But when it came to the Jethanis – whom the Belgians had apparently never heard anything about -- the Supremes just glided right over it. Even though it was clear the Belgians were never offered the 12.5% interest in the property that ended up with the Jethanis for whatever amounts the Jethanis paid, the court just let that inconvenient fact float away in a bubble. The fact that Trucano kept 75% as originally proposed, and that Coates somehow stayed in there as well, seemed to be close enough. In essence what the Courtus Maximus decided was that the 25% interest Coates was supposedly getting could be divvied up any which way and it did not matter. (Yet, both the trial court and the appellate court characterized the LLC creation as an integral part of the original offer itself, which one would have thought was supposed to have been given to the Belgians.)

The Biggie Court went on to point out that the Belgians still retained their right of first refusal as to Trucano 75% interest. So that when and if Trucano wants to sell out to someone else, the Belgians will have the privilege of getting into a business partnership with a bunch of folks they’ve never met, either Coates and the Jethanis and whoever picks up their interest in the future.

I find this outcome a mite hard to square with the way rights of first refusal are usually understood to work, which is why I’ve got a irritated craw at the moment. Regardless of the oddball nature of the offer transmitted to the Belgians at the start, I can’t see how you can change the participants to add the Jethanis to the deal without allowing the Belgians the chance to buy that same interest for the same amount. Also, one of the functions of rights of first refusal is to keep a lid on who you get into business with, and the Bigs pushed that completely off the rails in this deal.

Anyway, the lesson I take away from the case is that you don’t want the Alaska Supreme Court writing your business deal for you. They just might work it over in a way that you don’t like. It is far better to put more of an effort into writing your deal at the front end. Spell out in the agreement what sort offer you have to match on the property. Set out in unmistakeable English that you can ignore stuff in any offer that an accountant applying usual accounting methods cannot translate into actual dollars and cents. Be explicit that any change in the proposal, including even a change in a minority interest, requires a re-tender to the holder of the right of first refusal. Maybe if you do all that, you will stand a fighting chance of having the deal play out the way you expect.

Now, where did I put that craw floss I had around here?

November 4, 2008

A Novation Is Not A Car

“You need a novation,” I say.

I can hear the client literally scratching his head on the other end of the line.

“You mean I need an crappy old Chevy?” He asks, clearly puzzled.

“No, no, no,” I say. “You're thinking of a Nova, or maybe a Citation. I’m talking about a novation. It’s an agreement in which a new party is substituted in for another.”

Because we are discussing a real estate lease in this case, I go on to explain the nuances of the law about privity of contract and privity of estate. I tell the guy that an assignment of the lease to another party gets his business out of “privity of estate” but it does not get him out of “privity of contract.”

“Since your business made a contract with the landlord, you are in privity of contract with the guy," I tell him.

"You promised the landlord you would do certain things, like pay the rent every month and keep the premises insured. You can’t get out those obligations just by assigning the lease to someone else, even if the landlord approves of the assignment. The transfer of possession breaks the privity of estate you have but not the privity of contract. You have to get the landlord to let you out of privity of contract through a novation.”

He asks: “What if I skip that part and just let the new company move in? As long as the landlord gets his rent he will be happy, I think.”

“Well, the landlord could claim a breach of the assignment provision in your lease and evict the new guys.” I caution him. “More importantly, you could face liability down the line. How many more years does your lease have to run?”

“Another seven years,” he says. “But we need a bigger space, which is why I had my real estate gal find this new company to take over.”

“Well, you are on the hook for the next seven years, whether you want to be or not, unless you do a novation,” I say. “If the new company defaults on the lease anytime in the next seven years, the landlord can come after you. So down the road, this lease that you thought you were all done with could come back to haunt you.”

“OK, OK,” he concedes. “You talked me into it. Write up your crappy old Chevy agreement.”

275redchevy.jpg“I’ll be glad to.” I say. “But you’ve got to talk your landlord into accepting it along with the new company.”

“Besides,” I add. “A mid-sixties Chevy Nova SS with a small block V8 shoehorned under the hood and four on the floor was a legitimate muscle car. It was a thing of beauty, as long as you were going in a straight line.”

“Spare me the history lesson,” he tells me. “Just get me out of this lease!”

July 10, 2008

The Shocking Loss Of A Gritty Banana Peel

Chris Slottee, my esteemed colleague here at Atkinson, Conway & Gagnon, has already reported on the Alaska Supreme Court’s recent decision in Edenshaw v. Safeway, Inc. Chris’ blog post calmly notes that the decision may impose greater liability on property owners than was previously the case. I think that Chris has vastly understated the significance of the decision. This new decision totally knocks out one of the bulwarks of established tort law. I mean, what the heck happened to the Gritty Banana Peel Doctrine?

When I was in law school (back in the far, far recesses of the last century), they taught us fledgling lawyers that negligence was not the equivalent of strict liability. To be negligent and liable for someone’s injuries, you had to do something wrong. More specifically, you had fail to act in the manner that a reasonable person would have acted. Negligence law, good old Professor Dente said, accounted for the fact that BAD STUFF HAPPENS. Sometimes, its nobody’s fault and the plaintiff just has to take it in the shorts. (I'm paraphrasing the professor's comments here.)

falling_man.jpgThis principle of negligence law meant that just because a guy injures himself by falling down in a grocery store does not mean the store owner is liable. If the guy slipped on a banana peel, the store owner is not responsible unless the owner should have cleaned the thing up. So if the banana peel is a fresh one that was not previously tromped upon, it indicates the damn thing just fell on the floor and the store owner can’t be expected to have known about it or to have picked it up. But if the banana peel is all nasty from being on the floor for awhile this demonstrates a reasonable property owner had time to discover the peel and pick it up. This is the Gritty Banana Peel Doctrine.

You probably think I’m making this up. I'm not. In my first-year casebook on Torts from 1977, there were two cases on banana peels. In Anjou v. Boston Elevated Ry. Co., 94 N.E. 386 (Mass. 1911) the plaintiff won because she provided proof of negligence. The banana peel she slipped on “felt dry, gritty, as if there were dirt upon it,” and it was “black, flattened out and gritty.” But in Joye v. Great Atlantic and Pacific Tea Co., 405 F.2d 464 (4th Cir. 1968) the plaintiff lost because there was no proof of negligence. “Plaintiff offered no direct evidence below as to how long the banana had been on the floor before the accident . . . the jury could not tell whether the banana had been on defendant’s floor for 30 seconds or 3 days.” (My Torts book also had a case about pizza on the floor, but to avoid confusing myself or anyone else I want to stick to one kind of food.)

The Alaska Supreme Court in Edenshaw threw the Gritty Banana Peel Doctrine into the dumpster. The Court said a plaintiff can maintain a negligence action without specific evidence showing that the property owner knew or should have known of the dangerous condition. The Court also did not pin the property owner's liability to him doing anything else in particular wrong (like stacking up the bananas in a faulty manner in the first place). In essence, the Court decided to entirely punt the question of sufficient proof of negligence to the jury. The plaintiff does not have to show the property owner did anything specifically wrong in order to roll the dice with the jury.

Under Edenshaw, it presumably will be enough for the plaintiff to show that he went into the defendant’s store, encountered a patch of gravity there, fell down and hurt himself. The poor trial court judge can only shrug her shoulders, hand the thing off to the jurors, and let them retreat to the back room to make sausage with it.

Many years ago the Alaska Supreme Court eliminated the old common law rules that had been developed in so-called premises liability cases. Those old rules had different standards depending on whether the plaintiff was classified as a trespasser, or a licensee, or an invitee. Since it was often hard to tell who was exactly what type of person, and since feudal law designed to protect landowners at all costs had fallen out of fashion, the Court chucked out these rules in favor of a plain reasonable care standard that applied to everyone. This change in the old rules was brilliant, visionary, super keen. It made life easier for everyone. But junking the Gritty Banana Peel Doctrine and cutting these cases free from any sort of objective proof standard? That’s just goofy.

I predict that Edenshaw will be distinguished into near oblivion as future cases are decided.

The Court's Edenshaw decision only makes sense if you assume they really meant to say advance notice of a dangerous condition is not the only way to prove negligence; a myriad of other ways are permitted. Nevertheless, some sort of minimally adequate proof of negligence still has to be provided to get to the jury (reasonable minds differing and all that). The trial judge can be asked to verify this through a summary judgment or directed verdict motion. I have to admit, though, that the Edenshaw opinion does not come close to expressly stating this. But in my view this is what the opinion should have said.

July 7, 2008

Weekly Summary of Alaska Supreme Court Opinions

Well, after a few months of having other things to occupy my time, namely these darling three month olds (Isaac & Aaden), IMG_0527.jpg it is time for me to renew Atkinson Conway & Gagnon’s attempt to, ahem, timely summarize the Alaska Supreme Court decisions of the week.

First up is Pebble Limited Partnership v. Parnell, S-13059/S-13060, in which the Alaska Supreme Court rejected an attempt to remove an initiative from the November ballot that will impose new requirements on mining in Alaska. The opinion has no real reasoning, as it’s actually an order with an opinion to follow, issued so that the State has time to print ballots for the election this fall. I won’t go into the arguments regarding the merits of the underlying mining initiative, but if you listen to the radio or watch TV for five minutes, you are almost sure to see ads from both sides of the issue.

The only other opinion of real interest is Edenshaw v. Safeway, Inc., S-12583, in which the Alaska Supreme Court held that to prevail on a premises liability claim in Alaska, a plaintiff does not need to show that the business owner had actual or constructive knowledge of the dangerous condition. Instead, the Court held there was only a basic reasonableness test, in which the business owner’s notice of a dangerous condition was a factor to consider, but not a dispositive or required one. This case is a departure from prior cases in which the Alaska Supreme Court held that the State of Alaska had to have actual or constructive knowledge of a defect in a highway to be liable if that defect caused an injury. In Edenshaw, the Court distinguished these prior cases by noting that a grocery store (which was where the injury occurred in Edenshaw) is a much more tightly controlled area, and thus it was more reasonable to impose a general duty of care on the business owner regardless of whether the business owner had actual or constructive knowledge of a dangerous condition on the property.

This opinion will have a significant effect in future litigation, as business owner now can be exposed to liability for injuries caused by dangerous conditions of which they were both not aware and had no reason to be aware. It is also certain to make premises liability cases more expensive and difficult to defend, as the question of the reasonableness of an owner’s actions will almost always be a fact question. Consequently, now that a business owner cannot rely on a lack of notice, constructive or actual, to avoid liability as a matter of law, it will be very difficult to obtain summary judgment or resolution of a premises liability case short of actual trial.

June 12, 2008

Confessions Of A Hipster Doofus

Look, I’m willing to admit it. It’s nothing to be ashamed of, not really. Just because most everyone else does not feel this way is no reason that I should deny my true nature. You see, the thing is, I have to confess something: Arbitration clauses in contracts make me nervous.

Yes, I know, I know. Arbitration is trendy, arbitration is hip. It’s as cool as wearing sunglasses on a rainy night in Belltown. It’s as fashionable as those ugly plastic clogs with the holes in them. It’s as scenester as post-post-emo rock. Arbitration is so cutting edge that all those boutique lawyers who are putting the clauses into their copyrighted, intellectual property have paper cuts all over their hands. I mean, Dawg, what sort of hipster doofus doesn’t think that arbitration is just da wicked phat bomb?

Well, actually, that hipster doofus would be me. I paw through a lot of contracts. And every time I get to one where there is an arbitration clause (it's happening with greater frequency), I wince. Usually I reach in my desk drawer and pull out the faithful red pen, a/k/a d’Artagnan. A swift stroke of d’Artagnan’s blade and the clause is excised from the contract, tossed back into the ever flowing river of the law like so much salmon guts.

HalfLoaf.jpg I don’t like arbitration clauses because arbitration can be a half-a-loaf deal. No matter how right your client may be in whatever the dispute is, arbitration carries with it a built-in pressure to compromise. People don’t like absolutes and usually look for a way to reach what they consider to be a happy medium. And arbitrators are people just like everyone else (or at least most of them are). So arbitration cases often result in a half-assed compromise decision that pleases neither side.

Plus, arbitration is outlaw territory. The rules the rest of us have to live by don’t apply in the land of arbitration. For example, the law is well-established in Alaska that a landlord of a commercial property can distrain for rent due, at least when the lease provides for it. (To “distrain” means to hold the tenant’s personal property until he pays up.) But an arbitrator is not obligated to follow the law. Some of them seem to know this. An arbitrator can decide that distraint is a barbaric custom that should have gone out with maiden rents. So the arbitrator can rule the landlord was wrong to distrain the tenant’s property and must pay the tenant damages for doing so.

And once the arbitrator rules this way there is almost nothing you can do about it. The courts won’t overturn an arbitrator’s decision absent showing out-and-out bribery occurred, or something close to it. The fact that the arbitrator was a stubborn pinhead who ignored the governing law on the subject gets you precisely nowhere in court. The arbitrator has ruled and the client is just plain stuck with that decision.

Sure, there can be instances where arbitration makes sense for some clients. When the client wants efficiency above all else, or when the client is a big corporation that is concerned about what a jury might do, arbitration would be logical. But in too many instances, arbitration is just a way to double-down on the regrettable uncertainty that is already built into the legal system.

So I have to confess that I’m way out of step with enlightened society on this. But what else would you expect from a hipster doofus lawyer who gives names to his pens?

By the way, did you know that the real person who inspired the character of d’Artagnan in Dumas’s books was killed in 1673 at the siege of Maastricht? The Musketeer caught a musketball in the throat. You can almost see him standing at the gate to the city, leading the charge with his rapier pointed forward. "One for all, and all for [bang!] . . . . gurgle . . . gurgle . . . gurgle." It would have been ironic that a gun was used to kill the greatest swordsman in all of France, if they actually had irony back in those days. (I think of this every time I get red ink on my fingers.)

June 5, 2008

The Supreme Court Catches A "Waive"

The Alaska Supreme Court does not often delve into the world of commercial lease clauses. When it does so, we commercial real estate lawyers have to sit up and take notice. The rest of you out there can safely ignore these court decisions because they are B-O-R-I-N-G. But those of us toiling in the field have to read them whether we want to or not.

A few weeks ago the Court decided Carr-Gottstein Foods Co. v. Wasilla, LLC. The case turned on the application of a . . .wait for it now . . . WAIVER clause in a commercial lease. And I mean, really, is it possible to get any S-E-X-I-E-R than that? (OK, maybe a waiver clause tied into an insurance subrogation claim would be just a bit more dazzling, but we can’t always get everything we want.)

It seems that in 1996 Safeway's predecessor (Carr’s) moved out of the stand-alone liquor store it had been leasing in Wasilla from some formerly affiliated company, which I’ll just call Landlord LLC for simplicity. Safeway moved its liquor store into part of its main grocery store space that it was also renting from Landlord LLC. Landlord LLC knew about the move and even helped with it. Landlord LLC later affirmed for lenders that Safeway was not in default on its lease. The head man at Landlord LLC (a lawyer no less) said he thought the move was a technical default under the lease but he decided that he would “keep his options open” and not declare the tenant in default until the “economic ramifications” shook out. (The technical legal term for this is "lying in the weeds.")

Some six years later, after letting the situation ride without complaint, Landlord LLC sued Safeway for breaching the lease. Landlord LLC based its case on the use restrictions in the lease (supermarket only) and the prohibition against subleasing (the liquor store was technically owned by a separate entity). Landlord LLC offered up a creative damage theory to go with its claim. Since Safeway had fully paid its rent to Landlord LLC all along for the main store, Landlord LLC said its damages were the loss of rentals on the stand-alone store that had been vacated years earlier. Sure, the lease for that stand-alone store had expired six years ago, but Landlord LLC claimed that if Safeway had not moved its liquor store to the main building then it would have continued to rent the stand-alone store to sell liquor and it would have paid rent on it all those years.

So the reality was that Landlord LLC was suing to recover rent under a lease that did not actually exist for premises that the supposed tenant did not actually occupy. Can you spell C-H-U-T-Z-P-A-H?

cover.jpgIt was not hard for the Supreme Court to decide that this was not a situation crying out for the terrible swift sword of justice. (Or even the terrible slow sword of justice, which would be a more accurate characterization.) But the Court did two interesting things in leaving Landlord LLC hanging out there with its chutzpah flapping in the breeze: (1) the Court decided Landlord LLC had waived its default claims as a matter of law; and (2) the Court sidestepped the anti-waiver clause in the lease by saying it only applied to future breaches.

In finding waiver as a matter of law, the Court’s decision deviated from the conventional wisdom that waiver is a fact issue, one that has to be decided by the jury. The Court in effect held that some instances of waiver are just soooooo obvious that even a lowly Superior Court judge can make that call. (As opposed to letting unsophisticated jurors flip a coin in the back room.) Unfortunately, though, the Court gave no practical guidance for distinguishing waivers as a matter of law that the judge should decide from the more garden variety waivers that are fact issues to be punted to the jury.

In characterizing the waiver clause as being applicable only to future breaches, the Court ducked the more difficult question of on-going obligations under the lease. Sure, the past breaches of the “use” and “sublease” covenants of the lease were waived. But those covenants impose on-going obligations on the tenant that are theoretically violated anew with each day the liquor store remains in operation on the main premises. Isn’t the anti-waiver clause meant to apply in exactly that sort of situation? The Court did not really come to grips with this.

But don’t get me wrong. I am not criticizing the Supreme Court’s decision. I have no doubt the outcome of the case was entirely correct. Even if the anti-waiver clause should not have been sidestepped, the clause itself can be treated as being waived. It’s the same thing as orally amending a contract that says it can only be amended in writing, because the writing requirement itself can be orally modified. It sounds wacky, I know, but there is a lot of 24-carat legal authority vouching for it as the real deal.

And, you know, if the circumstances are so egregious that a mere trial court judge should be able to figure it out, then there’s got to be a waiver of the anti-waiver clause as a matter of law. Because the fundamental truth is, at bottom, the law just does not let you get away with this C-R-A-P.

(Hey, I warned you upfront that it was B-O-R-I-N-G.)

April 16, 2008

Wooing Contract Conditions

You see it again and again in lawsuits over contracts. Almost everyone gets confused when its comes to conditions. The courts frequently mess up on the rules that apply to conditions. The lawyers often don’t realize the problems they are dealing with involve conditions. And the clients don’t even know what conditions are. The result is that some poor schmuck who has charged off suing the other side thinking he was given the shaft gets smacked down in court. The poor schmuck finds out that, because of the failure of a condition, the shaft was part of his deal all along.

A condition in a contract is simply something that has to happen before something else happens. Easy to say, but not so easy to apply. Conditions are imposed on one party’s obligation to perform under the contract. The contract might say, for example, that Andy Hardy does not have to buy Aunt Milly’s house until Andy Hardy first sells his existing home. If Andy Hardy cannot sell his existing home then the condition has failed and he is never obligated to actually fork over the money for Aunt Milly’s house.

Andy%2520Hardy-Lana%2520and%2520Mickey%2520Kissing.jpg But what if Andy Hardy does not really try very hard to sell his existing home because he’s too busy “pitching some woo” with Polly Benedict? Can Aunt Milly take Andy to court and complain that Andy’s out-of-control hormones kept him from making a decent effort to fulfill the condition? This gets us into conditions creating "implied promises" and the ever popular "excuse of conditions." Aunt Milly might have a good case here, if you can ignore the fact that Andy’s dad is Judge Hardy.

Conditions can be tricky because the contract may not make it clear exactly what is a condition. Time deadlines are often put in contracts but the deadlines are not always stated as being a condition to performance. The courts are no help in straightening the situation out because judges don’t really like conditions very much. The failure of a condition means the jackass on one side of the deal does not have to deliver on his promise. For some odd reason, this raises a judge’s hackles. So a judge can go to some lengths to say that the time deadline in the contract that every normal person would think is pretty darn important does not really mean much at all.

The sale contract says: “The closing deadline shall be April 1, 2008.” When Andy Hardy fails to show up at the title company on that date with his dough, Aunt Milly calls the deal off and makes a separate deal to sell her house to Beezy Anderson for more money. So Andy takes Aunt Milly to court to force her to sell the house to him. Not surprisingly, Judge Hardy sides with his boy Andy on the matter. The old judge (who might well have sat in contracts class with a young Charles Kingsfield) rules the closing deadline wasn’t a condition after all. It was more like an aspirational guideline. So it was okey-dokey for Andy to take a couple of extra weeks to get his cash together and wander into the title company with it. (Besides, Andy had to go to the doctor to get treatment for the social disease he caught along with Polly’s “woo.”)

Poor Aunt Milly’s lawyer is left outside the courthouse scratching his head as to what part of the word “deadline” the judge did not understand. But what the guy really needed in his appearance before the Honorable Old Fogey was a contract provision that said: “The closing deadline shall be April 1, 2008, time being of the essence. The parties’ obligations to close are expressly conditioned on the deadline being met.” (That last sentence is actually redundant, since "time being of the essence" is a phrase of art that means performance on time is an express condition. But you can't count on judges actually knowing this, since its not explained on red wine labels or anything else a judge is likely to actually read. So it does not hurt to use the lawyer's trick of saying the same thing over again in a different way. In fact, if I was writing the contract, I would be tempted to drive the point home by adding the line: “And judge, we really, really mean it.")

The law on contract conditions can get trickier still when you delve into the necromancy of “constructive conditions” and the accompanying two-headed beast of "substantial performance/material breach." The law here is filled with vague lists of "factors" that have to be considered, along with brain-numbing concepts. Its enough to make strong men and women of the Bar promise the Lord-High-Chancellor-of-Us-All that they will swear off “woo” forever if they can just get a clue about what the heck this legal mumbo-jumbo means. If you have the ill-fortune to stumble into this area, you might be able to figure out the nuances of the law after a good bit of study. But you are going to have a damned hard time getting old Judge Hardy to follow along, especially after he's had a glass or two of red wine.

March 2, 2008

Tell 'Em Large Marge Sent Ya!

The Alaska Supreme Court’s decision last week in Mullins v. Oates is a cautionary tale for those selling real estate in Alaska. The case shows that you have to be careful about how your deal gets put together. For just this reason, its always helpful to have a pessimistic, worrywart real estate lawyer in your corner who can point out the pitfalls up ahead.

In the Mullins case, Alice Oates, the owner of some land and a building in the burgeoning metroplex of Tok, Alaska, sold the property to Margret Mullins. Mullins apparently lacked the ability to get a bank loan so Oates engaged in a form of owner financing for the deal. Oates sold the property to Mullins under a contract of sale. (The phrase “contract of sale” should mean that red lights are flashing for all the cynical real estate lawyers out there. The red lights are also probably flashing even for the optimistic, sunny-side-of-the-street real estate lawyers out there, if there actually are any such creatures.)

You see, a sale on a contract means that the seller hangs on to the title to the real estate until the seller is paid in full. The buyer gets the immediate right to occupy the property and can even make improvements to it while its being paid off. But if the buyer fails to make the required payments, the contract says that the seller can take the property back and throw the buyer out into the street. At least, the contract gives the seller that right in theory.

The problem with this arrangement is that the law does not know what to do when a default occurs. Equity abhors a forfeiture and so do most judges. The courts don’t like to see the poor buyer get stiffed on the property after perhaps making years of payments and even erecting a building or two. To complicate matters further, there is no easy remedy available to the seller to enforce the requirement that the buyer get lost after failing to make the payments. The non-judicial foreclosure procedure that is available for deeds of trust does not apply to contract deals. The contract seller ordinarily has to go to court for a judicial foreclosure to actually terminate the buyer’s rights.

(As an aside, I will point out that on occasion one comes across a lower court judge who has no problem enforcing a contract as written, even if it means a forfeiture occurs. These rare and enlightened beings -- who are like a fresh summer breeze blowing through the mausoleum that is the courthouse -- are almost certain to have the highest reversal rates in the appellate courts.)

So poor Alice Oates had to go to court to throw out Margret Mullins when the required payments were not made. It turned out that the sweet, hard-working Maggie Mullins who Oates originally made her deal with later changed into the buyer from hell. The transformation was one worthy of Large Marge in the movie Pee-Wee’s Big Adventure.

Large Marge Mullins represented herself in the lawsuit and battled over nearly everything. The parties eventually struck a settlement, but Mullins disavowed it and went as far as accusing the Magistrate who brokered the deal of coercion. Large Marge also wrapped herself in the Constitution, desperately claiming that she was being deprived of equal protection of the law and due process by being held to the deal she had made.

The Alaska Supreme Court rejected Large Marge’s arguments and upheld the lower court’s judgment in favor of Alice Oates. The end result was a judgment confirming the property belonged to Oates. The only problem was that the confirmation finally came more than six full years after Mullins stopped making payments on the property. This is in contrast to the four or five months that a non-judicial foreclosure would have taken if the original deal had been structured correctly.

But have we heard the last of Margret Mullins? Perhaps not. Its unclear whether the judgment in Alice Oates' favor is really an order for judicial foreclosure or not. The argument can be made that it has to viewed that way. In a judicial foreclosure setting, Mullins would have a one-year right of redemption through which she could regain the property. We can only hope that Large Marge Mullins does not tumble to this issue.

By the way, the best line from Pee-Wee's Big Adventure comes when Pee-Wee is talking with the cafe waitress, Simone, about her dream to live in Paris one day. Pee-Wee encourages Simone to just go for it, at which point the following dialogue occurs:

Simone: I know you're right, Pee-Wee. But, . . .

Pee-Wee: Everyone I know has a big "But." (Sigh.) C'mon, Simone, let's talk about your big "But."

February 20, 2008

Doing Deals Can Be An Ordeal

February 2008 has been the month for closing commercial real estate deals here at Atkinson, Conway and Gagnon. In the first two weeks of this month alone, I have personally closed a half dozen transactions in which something like $20 million has changed hands. I say “something like $20 million" because they do not actually let me handle the money itself in these deals. I just make it possible for the money to get passed around amongst the other kids on the playground.

The deals this month have ranged from helping a client sell a couple of office buildings to assisting a client in buying a Midtown trailer park. (Earl Hickey, Come On Down!) Its always gratifying to see a deal come together and successfully close.

Some deals are harder to get closed than others. The deals over the office buildings were particularly troublesome. While my client was in Anchorage, the buyers were a couple of Delaware limited partnerships run by a guy in New York with a lender in Seattle and a lawyer and title company in Washington D.C. The money also had to go through a bond broker and bond trustee before any of it could find its way into my client’s pockets. All the e-mails scurrying back and forth amongst this crowd trying to pull these deals together could have crashed and melted the entire computer infrastructure of any number of Central Asian countries. Like the Republic of Uzbekistan for instance, where the President-For-Life has his very own Apple IIe sitting on his desk.

(I made that last part up. The Uzbeks can actually boast that a whole 15% of their universities in the capitol city of Tashkent have access to e-mail and the Internet: Uzbek Internet )

Uzbekistan-20C-1992.jpg And speaking of Uzbekistan -- truthfully, how often does that country come up in the course of a day? -- I just had to mention that the Uzbeks issued a terrific postage stamp a few years back. The 20 kopeck stamp shows just how highly regarded the Unibrow is in the rest of the world and how backwards we Americans are when it comes to the appreciation of female body hair. (Note that this gal -- Princess Nodira, the wife of Omar Khan -- bears a strong resemblance to Princess Jasmine of the Disney movie Aladdin, except that the lame Disney animators gave Jasmine a wax job on the eyebrows in order to be more politically correct for Western audiences. It just goes to show that the PC police can take the fun out of everything, including facial hair and trailer parks.)

Anyway, the deals for the office buildings turned into ordeals. I had my client twice sign the impressive pile of the closing documents just to have the buyers fail to come through with the money to pay for the buildings. Arghh! We sat on our hands for a few days until – REJOICE! -- the money appeared. After a third round of document signing, the deals were completed.

And so my friends the lesson to be learned is that the Art of the Deal takes many forms, one of which may include chewing your fingernails whilst doing nothing else in particular. Other than perhaps working on your stamp collection, or maybe keeping an eye out for a clean, low mileage double-wide to fit in that open trailer park space you just happen to know is available.

February 5, 2008

Make Sure Your Commerical Lease Is A Real Space Ranger

The business lawyers at Atkinson, Conway & Gagnon know that, when leasing out an office, industrial or warehouse property, there are some simple things you can do to protect against problems down the road. One thing you should be sure to do is resist the temptation to just pick up a commercial lease form you happen to have lying around and use it for your deal. You need to go through that lease form in detail to make sure it’s a suitable document. Better yet, you should have your lawyer go through that lease form to make sure it's put together correctly.

To illustrate my point, I give you the case of Buzz Lightyear, Space Ranger of the Gamma Quadrant, from the Pixar movie Toy Story. (Stay with me here because I promise it all ties together in the end.) As you will recall, the flashy Mr. Lightyear burst upon the scene in Andy’s room operating under the notion that he actually was a real Space Ranger. No matter how hard Woody tried to convince Buzz otherwise, Buzz just did not accept that he was merely a toy, a child’s plaything.

darjeeling.jpg That is, until Buzz fell into the hands of the neighboring family. The evil Sid wanted to blast Buzz to bits, and Sid’s little sister Hannah dressed Buzz up in doll clothes to participate in a pretend tea party. Buzz’s whole world was turned inside out when he found himself as “Mrs. Nesbitt” and seated at a little toy table next to a couple of headless dolls that Sid must have mutilated. As his delusion dissolved around him, Buzz moaned: “One minute you’re defending the whole galaxy, and, suddenly, you find yourself sucking down Darjeeling with Marie Antoinette . . . and her little sister.”

That lease form you happen to have kicking around is like Buzz Lightyear. While it might have the appearance of something of substance with the blinking lights and all, it may not actually be of any real use out there in the galaxy. For example, if the default clause in your lease is not written correctly, you could find yourself unable to collect lost future rentals from a defaulting tenant. Unless you have the right language in the lease, the termination of the tenant’s right to occupy the premises will terminate the tenant’s obligation to pay you rent. The Space Ranger default clause that you thought was protecting your interests may turn out to be nothing more than a meek Mrs. Nesbitt.

So tread carefully in using lease forms or other standard contracts. When crunch time comes and you want to collect what is owed, you don’t want to find yourself dressed in doll clothes and “sucking down Darjeeling” instead. (Hey, I promised it would tie together, but I didn’t say it would tie together real well.)

By the way, Disney has announced it is going to re-release both Toy Story and Toy Story 2 in 3-D within the next couple of years. Information on Disney's announcement can be found here: Variety Article. (I imagine the comely Bo Peep will be quite fetching in 3-D.)

January 31, 2008

New Office/Retail Building Nearing Completion

One of Atkinson, Conway & Gagnon's favorite clients, Ruby Investments, Inc., is getting close to finishing up the construction of a new 15 story mixed use office/retail building in Midtown Anchorage. The project is a known as 188 West Northern Lights, which not coincidentally is the building's address. (Clever thing, that!) It's a terrific project that will have some unique architectural features to dress up Midtown. The building's location, at the intersection of Northern Lights Boulevard and C Street, will make it a real landmark right at the main crossroads in the heart of town. We put together the architect's contract and the construction contract for Ruby Investments and we helped them negotiate those deals.

As with most large real estate developments, this one was not without its little hiccups. But it was all worked out through the art of negotiation and the application of a bit of brain prowess in crafting the necessary documents. Now the building is nearing completion and Ruby Investments is lining up tenants to move in and enjoy the great location and swanky new building. Check out the live web cam of the project: 188WNL Cam

We're proud of the small role we played in helping the Ruby Investments team bring this project together. It's just another example of how a lawyer can have a positive influence on a client's business. (Excellent thing, that!)

January 29, 2008

Indemnity Clauses Mean Money

The topic of the day rattling around this end of Atkinson, Conway & Gagnon is indemnity clauses in contracts for business transactions. Just about every contract has an indemnity clause and hardly anyone other than the lawyers really cares. But I'm here to tell you that indemnity = money. Write that down, folks. When you think of indemnity clauses that way, it's worth paying attention to them.

Hey, I understand there are many, many more interesting things out there on the World Wide Web than reading what a nerdy business lawyer has to say about the nuances of indemnity clauses. I mean, you could be on eBay right now bidding on a vintage Roy Rogers metal lunch box with the matching thermos! (The dome lunch boxes are especially cool; search for one here: eBay) But if you happen to be in the middle of a business deal, taking a few moments to ponder indemnity clauses is probably more productive.

What the heck is indemnity anyway? Indemnity means that you (the indemnitor/sucker) has to pay for some sort of a loss that is visited on the other guy in your business deal (the indemnitee/smart guy). Typically, the loss involves a third person who sues the indemnitee/smart guy for something bad that happened. Or something bad that the third party thinks happened because, as we all know, you have to start hemorrhaging money to defend any lawsuit even when the claim asserted does not actually amount to a hill of beans.

But is indemnity limited to third party claims? Not necessarily. In some states, the word "indemnity" has been interpreted to mean that the indemnitee/smart guy can pass off on you some direct monetary loss he suffers that does not involve a third party claim. In other states, indemnity is usually interpreted to refer only to third party claims. In Alaska, the answer is unclear since the Alaska Supreme Court has never directly spoken to the issue. This means the indemnity clause in your Alaska contract needs to be carefully written to spell out whether it just applies to third party claims or also extends to direct losses. If your indemnity clause is not carefully written, then when a dispute over the indemnity obligation arises, you will find yourself sucked down the swirling bowl of the common law, waiting for some judge to pronounce what the clause in your contract actually means. That common law process is going to spit you out many years later, probably with an answer you did not expect, and certainly with a thinner wallet from paying your lawyer to argue the point in court.

But what about the situation where the indemnitee/smart guy is totally at fault for whatever loss he suffers? The law can't require you to indemnify that jerk for his own fault, can it? That must be covered in the U.S. Constitution somewhere, like maybe in some penumbra to the Bill of Rights? Well, unfortunately, penumbras to the Constitution have fallen out of favor these days. Alaska law actually will allow that jerk to make you pay for his mistake. That is, if the indemnity clause in your contract requires it (and if you are not dealing with a contruction contract). The cure to this problem is, again, carefully writing the indemnity clause so that the jerk on the other side of your deal has to twist in the wind on his own if it's all his fault.

So don't skip over that boring old indemnity clause in your business deal. If you don't make sure it's written correctly, whether you are the indemnitor/sucker or the indemnitee/smart guy, it is likely to end up costing you money. That's less money you'll have to spend on cool stuff like vintage metal lunch boxes. (Let me know if you run across a good deal on a Jonny Quest box).

January 28, 2008

Commercial Real Estate Market

The commercial real estate market in Anchorage is headed upwards, or maybe it is actually going sideways. The economic forecast that Neil Fried presented at the BOMA Anchorage luncheon earlier this month called for continued economic growth, just at a slower pace than earlier years. Vacancies in the office and warehouse market continue to be tight. A handful of new commercial buildings are nearing completion that may loosen things up a bit. Once the new buildings come on line, however, there is not a whole lot on the drawing boards yet for new commercial projects, aside from a large office tower in Downtown Anchorage that is in the works. Check out the recent BOMA Anchorage presentations here: BOMA Anchorage

We always have an eye on the local commercial market to keep up with our clients. In helping a client buy, sell or lease property, its helpful to know which way the market is headed. Timing can be everything in getting a deal put together and closed. This is why we make a conscious effort to get the legal work done promptly.