Daily Development for Tuesday, April 1, 2008
by: Patrick=20 A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of=20 Law
Of Counsel: Husch Blackwell Sanders
Kansas City,=20 Missouri

MORTGAGES; FORECLOSURE;ACT OF GOD: Courts=20 may not construeact of God clause because to do so may be an unconstitutional=20 establishment of religion.  Consequently, borrower=E2=80=99s excuse based upon=20 event arguably constituting an act of God must conclusively be viewed as a valid=20 excuse and mortgagee is barred from declaring default.

Wise Realty=20 Lending Trust v. Diversified Retail Ventures, LLC. , ___ U.S. ____, 2008 LEXIS=20 5798666 (3/28/08)

In 1993, Lender agreed to make a mortgage loan on a=20 regional mall to a leading shopping center operator.   The interest=20 rate was set at a LIBOR based floating rate but contained elaborate language=20 modifying the rate in the event of dramatic changes in money markets.  The=20 notion was tosmooth out the rate to conform to historic numbers when the=20 index fluctuated wildly. 

During the negotiation of the loan documents, the Borrower requested that a force majeure provision be added to the=20 mortgage.  The lender=E2=80=99s standard mortgage form did not include such a=20 clause, and the Borrower provided a provision essentially identical to one which=20 was contained in the construction loan on the same property. The clause=20 read:

If Borrower cannot not perform its obligations under the Loan=20 Documents as a consequence of events beyond the control of Borrower then such=20 nonperformance shall not constitute an Event of Default as defined in Section=20 2.4.612(e) of this Mortgage.

 Events beyond the control of=20 Borrower shall include hurricanes, strikes, fire, flood, or other acts of God,=20 civil insurrection, government regulation (except for such regulation for which=20 Borrower or one or more of its controlling parties or counsel played a material=20 role in its adoption or drafting, or both) or bad faith acts or failure to=20 act  by the Lender.  The terms and provisions of this paragraph shall=20 not apply to the financial inability of the Borrower.

Borrower missed=20 several payments.  Lender declared an event of Default, accelerated and=20 filed a foreclosure action in federal court.  Borrower answered only that=20 there had been  no Event of Default because its nonpayment was excused by=20 anact of God as defined in the above clause.  The district court,=20 however, granted summary judgment for the Lender,  ruling that the failure=20 to make a timely payment was outside the ambit of the force majeure provision by=20 virtue of thefinancial inability exclusion.

On appeal, the Sixth=20 Circuit Court of Appeals held that the mere failure to make a mortgage loan=20 payment is not conclusive evidence that the Borrower was in financial=20 difficulty, and thus the financial exclusion might not be applicable, depending=20 on the facts of the case.  This raised the question of the viability of=20 Borrower=E2=80=99s reliance on theAct of God defense, and the Court of Appeals=20 instructed the District Court to make a determination of whether the default was=20 caused by such an Act of God.

On remand, Borrower strongly argued that an=20 act of God - dramatic changes in weather patterns worldwide in the Winter of=20 2007-08, created conditions in the international money markets that made it a=20 prudent business and legal decision to withhold payment for a period of time=20 notwithstanding its strong cash position. Borrower further argued that making=20 such payment would have cost Borrower an important lost opportunity and exposed=20 its management to material liability to its shareholders.  The District=20 Court, considering Borrower=E2=80=99s presentation on this point, agreed with Borrower=20 dismissed the case.

Lender appealed again to the Sixth Circuit Court of=20 Appeals claiming that the clause acts of God should be stricken from the=20 Mortgage.  It argued that a court could not enforce such a clause because=20 such enforcement would be inimical to the First Amendment of the Constitution of=20 the United States of America.  The Court of Appeals agreed, reversed the=20 lower court=E2=80=99s decision and remanded the case to the district=20 court.

Borrower then filed an appeal to the Supreme Court claiming that=20 the Court of Appeals failed to properly apply the First Amendment.

The=20 Lender contended that if a court enforced contract rights based upon an =20 act of God, federal action would be supporting such clause and thus supporting=20 a specific religious system of belief.  Lender quoted the First=20 Amendment:

. . .  Congress shall make no law respecting an=20 establishment of religion, or prohibiting the free exercise thereof . . .=20 .
Since the Senate, a branch of Congress, must consent to the appointment of=20 Supreme Court justices, Lender reasoned that acts of such justices are acts of=20 Congress and that the first amendment does not make any distinction between=20 direct and indirect acts of Congress.  Lender pointed out that in the=20 transcripts of the Senate hearings for confirmation of several of the justices,=20 the Senate clearly probed into the nominees=E2=80=99 positions on the establishment=20 clause of the first amendment.  Lender also claimed that the Supreme Court=20 often acts as a legislature by creating new law rather than limiting its decisions to the mere interpretation of laws adopted by Congress and state=20 legislatures.  Lender further argued that if it ruled in favor of enforcing=20 theact of God clause, the Court would be making new law that such a clause is=20 enforceable and since Congress, as the law making branch of the federal=20 government, is prohibited by the first amendment from creating such law, then no=20 other
branch of the federal government has the power to create such=20 law.

Borrower countered that the use of theact of God clause has=20 become tradition in the legal profession and is part of the very fabric of our=20 commercial free enterprise culture for as long as anyone can recall (similar to=20 the use ofin God we trust on legal tender and one Nation under God in the=20 pledge of allegiance) and that a great deal of law has evolved from the use of=20 such clause.  All members of society of all religious and non religious=20 backgrounds have utilized such standard language, and all lawyers and their=20 clients have come to rely on the law of theact of God clause.  By=20 agreeing with Lender=E2=80=99s position, the Court will create a situation which will=20 interfere with thousand upon thousands of contracts.

Borrower then argued=20 that if Lender=E2=80=99s assertion that the subject clause not be enforceable is upheld,=20 then the Court ought then to hold that the loan agreement was totally=20 unenforceable, because enforcing an agreement in which such clause exists will=20 be creating law that such contracts may be enforced even if they contain a=20 constitutionally defective provision.

The Supreme Court, in a 5-4 opinion=20 written by Justice Scalia,  concluded that the Borrower=E2=80=99s suggested=20 voidness principle might be correct, and remanded for consideration by the=20 Sixth Circuit of the impact of its decision on the validity of commercial=20 agreements generally and whether the parties to this mortgage intended that the=20 act of God clause be severable.

Thus, although there is no final=20 opinion in the case, the notions pressed by both the Lender and the Borrower in=20 this case have profound implications for the transactions bar.

Reporter=E2=80=99s=20 Comment:  There are three reasons the Lender altered its approach and=20 agreed with the Borrower=E2=80=99s position that the entire mortgage be=20 unenforceable.  During the recess, the Lender had its entire multi billion=20 dollar mortgage loan portfolio full text searched and found that only 3 of its=20 mortgages contained act of God clauses, and those mortgages secured obligations=20 with an aggregate outstanding debt of $2,765, 890.15.  At about the same=20 time, the Lender received the results of a phase two environmental study that=20 identified 3 separate areas of contamination on the mortgaged property with=20 estimated remediation costs of  $4,183,4 54.19.  Lender also ran a=20 credit check on the Borrower and determined that Borrower had sufficient credit=20 to obtain additional unsecured credit of at least $60,000,000.32. =20 Moreover, Lender took a calculated risk in changing its position.  It=20 gambled that by agreeing with Borrower, there would no longer be a case and=20 controversy and the Supreme C
ourt would not issue an=20 opinion.

Editor=E2=80=99s Comment: It is likely that the lower courts will find=20 that the provision is severable by the consent of the parties, and the severance=20 of the clause would not implicate Constitutional restrictions upon the authority=20 of the courts.  But the notion that a judicial construction of what is and=20 what is not anAct of God, obviously raises profound difficulties for the=20 construction of millions of commercial agreements containing such a=20 clause.

The Reporter for this item was Dirter Gerald J. Hoenig, who=20 submitted it as an April Fool=E2=80=99s spoof.  The Editor has heavily adapted=20 Gerald=E2=80=99s original manuscript, but thinks that we might hook a few readers. =20 What about you? 

Items reported here and in the ABA=20 publications
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