Daily Development for Wednesday, July 21, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu
MORTGAGES; MORTGAGEE’S REMEDIES; ATTORNEY’S FEES: Attorney fees relating to
torious waste claim are not available where non-recourse carve out excepts
liability for waste, but does not specifically mention attorney’s fees for tort
claims based upon waste.
Aozora Bank, Ltd. v. 1333 North California Boulevard, 2004 Cal. App. LEXIS 1033
(June 29, 2004),
This case is an interesting postscript to Nippon Credit Bank, Ltd. v. 1333 North
California Boulevard, 86 Cal. App. 4th 486 (2001), (the DIRT DD for 1/29/01). In
the Nippon case the court affirmed a jury verdict that the borrower partnership
and its general and managing partners were guilty of the tort of bad-faith waste
for failure to pay real estate taxes while the nonrecourse mortgage was
delinquent. See John C. Murray, Nonpayment of Taxes as Tortious Waste in
Nonrecourse Mortgage Loans, 19 Cal. Real Prop. J. 22 (Spring 2001) (reviewing
case law, including Nippon, supra, finding that mortgagor's nonpayment of real
estate taxes constitutes actionable waste under contractual or tort theory).
The California appellate court here ruled, however, that the bank lender (now
known as Aozora Bank Ltd.,, which was the beneficiary of the court's ruling, was
not entitled to attorneys' fees under the contractual language in the loan
documents.
The jury at the trial court level had found the defendants liable for
approximately $395,000 in compensatory damages and $8,333,333 in punitive
damages. But the trial court remitted the amount of punitive damages to $1.6
million. The appellate court (in an unpublished portion of the opinion) upheld
the remittur of punitive damages and the order for new trial on the amount of
punitive damages only. At the second trial, in which the jury awarded no
punitive damages to the bank, the bank moved for an award for the attorney's
fees it incurred in the case, in the amount of approximately $1, 434,000. The
trial court approved this request by the bank, which included a 1.5 multiplier
for "the complex and cutting edge nature of the issues litigated." The borrower
then appealed this ruling to the appellate court.
The appellate court reversed the trial court's determination that the bank was
entitled to attorney's fees under the contractual language in the loan
documents. The court first noted that attorney's fees are not generally
available to prevailing parties in tort actions, citing applicable California
statutes and case law. According to the court, "Since there is no statutory or
other legal authority for an attorney fee award in this instance, Bank's
entitlement to fees hinges entirely on the terms of the parties' contract."
Turning to the contractual language, the court rejected the bank's argument that
the borrower was liable under the general attorney's fee provisions contained in
the note and mortgage. According to the court, "even if those provisions
extended to the fees in question, the Partnership would not be liable for them
unless such liability was excepted from the nonrecourse feature of the note and
deed of trust," i.e., if the carveouts did not expressly include liability for
attorneys' fees, they would only be recoverable from the real estate collateral.
The applicable nonrecourse carveout in the note and deed of trust stated that,
"nor shall such limitation of liability apply if and to the extent that
[Borrower/Trustor] . . . commits fraud, material representation or waste." The
court seized on this language to find the following reasons to reject the trial
court's determination that it was broad enough to make the borrower partnership
liable for attorney's fees as well as waste damages: (1) the carveout did not
specifically refer to attorney's fees, and would not be implied because
attorney's fees generally are not awarded in tort actions; (2) given the
importance of this issue, which the court noted is one of the key concerns of
lenders when negotiating nonrecourse carveouts, "it is unlikely that the
carve-out would be silent on attorney's fees if they were intended to be
included" (the court noted the uncontradicted testimony of an expert who
testified that carveouts were "always expressed, and never implied"), and (3)
because the carveout only applied "if and to the extent" that waste was
committed, this undercut the bank's argument that the carveout entirely negated
the nonrecourse aspect of the agreement when waste is committed. The court
summarized by stating that, "the most reasonable reading of the agreement is
that the waste carve-out does not implicitly include attorney's fees for
prosecuting a waste action. As a consequence, recovery of these fees from the
Partnership is barred by the nonrecourse provisions of the note and deed of
trust." .
The appellate court also dismissed the bank's argument that if it were precluded
from obtaining attorney's fees, it would "void the general purpose" of the
general attorneys' fees provisions in the note and mortgage but the borrower
would be able to invoke the attorney's fees clause against the lender, thus
violating the California statutory provision (Cal. Civ. Code Sec. 1717) that
makes attorney's fees clauses reciprocal. The court responded that because the
partnership borrower was not the prevailing party in the case, it need not
decide the issue of reciprocity, and that the bank still could benefit from the
attorney's fees provisions of the note and deed of trust even though the loan
was nonrecourse, because it could recover such fees from the mortgage security
and add them to the amount required to reinstate the loan or add them to the
amount of a credit bid at a foreclosure sale. The court stated that, "If bank
wanted additional recourse against the Partnership personally i t should have
negotiated for an attorney fee carve-out in the loan documents."
Finally, the appellate court rejected the bank's argument that it was entitled
to attorney's fees as well as waste damages under the reasoning of the court's
prior ruling in this case. The appellate court noted that the bank had sued in
tort, not under the contract, and had never mentioned the waste carveout. The
court stated that, "our analysis was focused on whether the evidence in the
first trial supported a bad faith finding," and "[w]e had no occasion in the
prior appeal to consider the nonrecourse provisions of the note here - they
plainly include a carve-out for waste damages, and no issue was made of them."
Reporter’s Comment 1: This decision unveils yet another trap for the unwary, and
is a cautionary tale and "wake-up" call for lenders not to be careless when
drafting attorney's fees provisions in commercial loan documents that contain
nonrecourse provisions with specific carveouts. The lender easily could have
prevailed in this case -- and picked up another $1,434,000 -- if it had merely
inserted the "magic words" in the carveout language of the nonrecourse
provision. The appellate court even set forth the "roadmap" to follow in a
footnote, where it referred to the "waste carve-out exemplar" in a 1999 PLI
publication entitled What Borrowers and Lenders Need to Know Now. The court
cited the following language from this publication, which provides that the
waste carveout provision should cover "all loss, cost (including [reasonable]
attorneys' fees and expenses), expense, claim, liability or damage incurred by
Mortgagee as a result of waste of the Mortgaged Premises, which [materia lly]
reduces the value of the Premises.".
Attorneys' fees provisions in loan documents generally are not favored by courts
(as demonstrated by the Aozora case), and such clauses must be specific,
conspicuous, and comprehensive or they will not be enforced. Lenders should also
be cautioned to provide, in a modification agreement, that all rights under the
original mortgage are preserved, and specifically provide in the modification
agreement for the right to collect attorneys' fees even if the original loan
documents contain an attorney's fees provision. Otherwise, if the lender sues
based on provisions in the modification agreement, and it doesn't contain a
specific right to attorneys' fees, the lender may not get them.
Reporter’s Comment 2: See Wheeling Trust & Savings v. Citizens National Bank,
142 Ill.App.3d 333, 491 N.E.2d 866 (1986), in which the borrower brought an
action against the bank lender for a declaratory judgment that language in the
Extension Agreement executed by the parties, which provided an interest rate of
6% over prime, but 5% over prime if no default in note and payments timely made,
was an unenforceable penalty. The court held that the interest rate provision
was not a penalty before maturity, but also held that the bank was not entitled
to attorney's fees (which the bank had petitioned for). The mortgage contained a
covenant that the borrower would pay for any expenses and attorney's fees
incurred by the bank in "any action or proceeding to protect its security or in
which it was made a defendant by reason of its mortgage". The bank argued that
the language referred to "any proceeding," not just proceedings enforcing its
security. The Extension Agreement specifically ref erenced the original mortgage
and provided that it secured the Extension Agreement. The court nevertheless
reasoned that the action was brought in connection with the interest rate
provided for in the Extension Agreement, which was a document separate from the
mortgage. (The Extension Agreement itself made no provision for payment of
attorneys' fees, nor did the bank contend that the note so provided.) The court
ruled that contractual agreements for payment of attorneys' fees must be
strictly construed, and must be provided for by "specific terms of the
mortgage". The court acknowledged that the intention of the parties should
control, but stated that in declaratory actions, the underlying action is to
declare rights, not to enforce mortgage obligations, and thus attorneys' fees
for actions "relating to enforcement of mortgage" are uncollectible. The moral
of this decision: The intention of the parties is controlling, so make certain
(in an abundance of caution) to insert a specif ic clause for attorneys' fees in
modification agreements, and don't limit collection to impairment of the
security or enforcement of the obligations of the borrower under the mortgage.
(It may be wise to refer specifically, without limitation, to declaratory
actions and suits to quiet title, or "actions to determine rights of parties or
any other actions or proceedings whatsoever arising out of or in connection with
the mortgage, as hereby modified".)
Editor’s Comment: Another interesting attorney’s fee case, going for the fee
claimant, is Honey Baked Hams, Inc.v. Dickens, 43 Cal. Rptr. 2d 596 (Cal. App.
1995), the DIRT DD for 10/16/95. (Contract provision permitting recovery of
attorney's fees to "the successful party . . . whether or not such action is
prosecuted to judgment" requires landlord to pay tenant's attorney's fees when
landlord dismisses unlawful detainer action.) The result seems obvious, but the
case was necessary because another California case had held that contractual
provisions for award of attorney's fees may not be enforced when the action is
dismissed, as the dismissal may not necessarily reflect that the action is
without merit and to penalize a party for dismissing when appropriate could
result in clogged courts and interfere with the efficient administration of
justice.
The Reporter for this item was Jack Murray of First American Title Insurance,
Chicago Office.
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