The ruling was issued in a case where the City of Phoenix agreed to rebate half of its future sales tax revenues from the “CityNorth” retail project, up to $97.4 million, in exchange for the developer building parking spaces and dedicating part of those parking spaces exclusively to drivers participating in commuting programs. The decision hinged on the presumption that the value of the dedicated parking spaces did not come close in value to the $97.4 million in tax benefits. (Note that, had a present value calculation been performed for the $97.4 million in payments over 45 years, it is not clear that the trade off in value would have been unequal, especially given the uncertainty of the timing and amounts of those payments.)

The ruling arguably prohibits any Arizona governmental entity from giving tax breaks to a private enterprise in exchange for locating a new business enterprise, or expanding an existing facility, in Arizona, unless the government entity receives direct consideration of roughly equal or greater value. New tax revenues expected to be generated from the expanded economic activity do not qualify as direct consideration to the government under the court’s ruling.

Arizona is struggling to attract new businesses and jobs to the state. We will have to be all the more creative and thoughtful if we are to be successful without the ability to offer the incentives being liberally offered by other states.

While Arizona does have an anti-deficiency statute which prohibits lenders from pursuing some borrowers personally for the balance due on a note after a foreclosure sale, its protection is generally limited to purchase money mortgages on residential property of two and one-half acres or less. Purchase money mortgages are those given to secure the payment of the balance of the purchase price or to secure a loan to pay all or part of the purchase price.

Although the anti-deficiency statute may at first appear fairly mundane, for many homeowners, investors or trusts, its application is anything but. Common issues that require careful consideration and analysis include: (1) the impact of equity lines of credit; (2) personal guarantees; (3) the potential for cross-defaults under other loans; (4) whether the property is a “dwelling” under the statute; (5) whether the lender has waived any right to a deficiency; and (6) the amount of the deficiency. The analysis of whether a borrower has potential liability for a deficiency (and to what extent) often requires careful review of the loan and security documents, as well as the borrower’s actions following the execution of the note and security instrument. Although there are many sources that purport to provide this information, a comprehensive analysis should be conducted by an attorney experienced with these matters.

Most attorneys and clients intuitively understand the importance of good communication from the attorney to the client in keeping the client apprised of developments in the matter in which the attorney is providing legal services, even if some attorneys sometimes fail to live up to this requirement in practice.   There is no denying that such communications are a critical part of the attorney-client relationship, and are an area of focus in our firm.  Indeed, probably ninety percent of potential clients that come in looking for new counsel because they are dissatisfied with their current or prior counsel indicate that poor communication and/or a lack of up-to-date information from their attorney is the reason that they are looking for a change.

With that said, however, candid, open communications from the client regarding all aspects of a legal engagement are of equally critical importance in developing and maintaining the attorney-client relationship and achieving the results that the client seeks to achieve.   We value our client relationships and will aggressively move to achieve our clients’ desired results, but without candid and open communications from the client as to the desired objective, counsel’s actions may fail to achieve the desired results.  Below are some suggestions for clients that will help ensure that you and your attorneys are on the same page, thereby maximizing the likelihood of the desired outcome. 

Setting the Goal 

Before your attorney can take action to achieve your desired objective, you must first determine what that desired objective is.  Spend some time thinking on your own about what you actually want to accomplish in the legal engagement, and then discuss that goal with your counsel.  This is not to say that the ultimate goal for the engagement should be set without the advice of counsel.  To the contrary, the only reasonable way to set a realistic, achievable goal for a legal engagement is to engage in a candid, open discussion with your attorney regarding your desired outcome, other possible outcomes and scenarios, legal issues, and financial considerations.  Listen to your attorney, and be realistic in setting your goals and expectations.

Be Candid About Financial Considerations

It is a simple fact of life, particularly in these difficult economic times, that legal services are expensive and that financial considerations will play a significant, if not decisive, role in setting the goal for the engagement and determining an effective strategy for achieving that goal.  For example, litigators by nature have an inherent desire to “win” the case.  But if “winning” a lawsuit costs the client more than it can afford or, worse, more than is obtained in a “victory,” then the result for the client is not a “win” at all.  Attorneys must be candid with clients regarding the costs of an engagement, and clients must be candid with their attorneys regarding their financial circumstances and ability to pay.  While many clients enter into litigation in “battle mode” believing that they want to move forward as aggressively as they can to “win” the case, that approach will result in large legal bills early in the case.  Arizona litigation clients should also be cognizant of the fact that Arizona’s up-front disclosure requirements are such that discovery expenses are substantially front-loaded in the early part of a litigation matter.

Don’t be Afraid to Ask Questions

The old adage that the only stupid question is the one that goes unasked is particularly true in the context of the attorney-client relationship.  While we attempt to anticipate as many of our clients’ questions as possible, it is still important for our clients to feel comfortable enough to ask any questions they may have.  While your attorneys have the advantage of understanding the legal issues, you (the client) will always have a far better understanding of your personal or business circumstances and those circumstances may be critical in determining the appropriate strategy for your engagement.  We are here to answer your questions and client questions often have a way of leading to critical information that may lead to a better strategy or a change in the ultimate goal.

The Attorney-Client Privilege Exists for a Reason

Remember that essentially anything that you tell your attorneys (with the possible exception of a present intention to commit a felony in the near future) is privileged and confidential, and will not be disclosed under any circumstance.  The reason that the attorney-client privilege exists and is enforced by our courts is that the legal system recognizes that candid, open, and forthright communication between attorney and client is absolutely critical.  In the litigation context, when “bad” facts are disclosed to your attorneys, we can plan around those facts and create a strategy for minimizing any damage to your case that may result from those facts.  On the other hand, withholding “bad” facts from your attorneys is a recipe for disaster as the likely result is that the opposing party will find out about those facts and use them at the most inopportune moment, catching your attorneys off guard. 

On those occasions over the years when I have learned about “bad” facts that were not disclosed to me by my clients, the clients often were “afraid” or “embarrassed” to disclose bad facts because they were afraid that the “bad” facts would be unnecessarily disclosed and hurt their case, or that I would think less of them as a result of my knowledge of the “bad” facts.  As to the first reason, parties in litigation are all required to play by the same set of rules.  We play by those rules and will disclose information that is required to be disclosed.  It is universally true, however, that the failure to disclose required information always turns out worse than making the required disclosure and implementing a strategy to minimize any damage resulting from that disclosure.  With respect to the second concern that I may think less of my client as a result of the disclosure of “bad” facts, my job is to solve my clients’ problems, not to “judge” their actions under difficult circumstances.  Clients should always disclose all pertinent information to their attorneys.

After bottoming out at 4.4% in early-2007, the unemployment rate recently hit 6% and is likely headed higher.

Everywhere in Arizona, the recession is starting to take its toll. By an “Arizona recession,” I mean we are experiencing negative employment growth in our state. Employment in the Phoenix-Mesa MSA is expected to be down about 1% in 2008.

But of course the negative 1% overall employment dip in Arizona severely understates the far more severe drop in employment in the real estate industries, which are the most severely affected sectors of our local economy. Real estate brokers, real estate lenders, title companies, mortgage brokers, architects, engineers, real estate and lending lawyers, contractors and their suppliers, local governments, furniture companies and even homeowners’ associations are all experiencing severe pain. And yes, it is possible that it will get a lot worse for them and others.

Arizona is not alone, of course. One of the nation’s largest law firms, Sonnenschein Nath & Rosenthal, has laid off 124 employees so far this year including 37 lawyers. Cadwalader, Wickersham and Taft, the country’s 64th largest law firm, has axed upwards of 130 attorneys, quickly making it known as “America’s firingest law firm.”

But where is our local economy headed? Will things get much worse? How long will it take before we enter a recovery? A year? Two years? Longer? What does that recovery look like?

Perhaps we can get a feel for the potential depth and breadth of the current recession by comparing it to our last major recession – the one of 1990. While people are beginning to compare the current recession to the depression of 1929, there are so many differences in our economic and political system today versus then, and no one really expects things to get that bad, so a comparison to 1990 is far more interesting and instructive.

Things are bad in Arizona now. But, if you were toiling in business back in 1990, you know that things can still get much worse. Really. Let’s roll back time and think about what Arizona was like in 1990:

Looking at the financial sector, the 1990 recession saw every savings and loan association close in the Valley, and every locally grown bank of any significance sold to out-of-state institutions. Not only did the high-flying Lincoln Savings controlled by Charley Keating go under, but Merabank, Arizona’s largest S&L then controlled by APS, went into receivership. And while Western Savings had grown during the 80’s to the 37th largest S&L in the country with more than $6 billion in assets, Western Savings moved into second place in 1989 for the most losses of any S&L in the country with a $1 billion loss. Pima Savings was at one time a $2.7 billion institution, but it was dissolved by the taxpayers in 1989.

The “Mortgages Ltd.” of its day, the Baptist Foundation, filed bankruptcy in 1991 after losing several hundred million dollars from thousands of retirees’ IRA funds.

Virtually every real estate developer in the Valley went out of business around 1990 with a few notable exceptions such as the Najafi brothers’ Pivotal Group, DMB, Robert Sarver, and Starwood, all of whom used their access to scarce capital to take advantage of the plethora of opportunities created by the recession.

The nimblest of the troubled developers were able to negotiate releases of liability on their personal guaranties of their real estate debt in exchange for giving their lenders deeds-in-lieu-of-foreclosure to their real estate empires. A good number of real estate developers and syndicators sucked all the cash they could out of their projects and then fled to Florida or Texas where those state’s unlimited homestead exemption laws allowed them to reinvest their cash in homes in order to shelter a significant amount of net worth from creditors.

The recession of 1990 was largely a result of excesses in the commercial property and land development sectors. A dramatic example from the 1990 recession was Sun Valley, about 45 miles west of downtown Phoenix. It was planned as a 28,000-acre master-planned community. Fifty of the 95 Sun Valley land owners filed Chapter 11 bankruptcy reorganization petitions in 1990 to protect their land from reverting to Heron International of London. Heron had guaranteed $82 million in bonds that the landowners used to finance the Sun Valley Parkway, a four-lane, 30-mile road that connects with Interstate 10 on the south and sweeps around the White Tank Mountains through what was to be the heart of the planned community. Today, few but cycling enthusiasts use the parkway.

One of the most severely brutalized industries in Arizona in 1990 was the legal community.

In 1989, the Arizona Republic quoted Shirley Murray of the Arizona State Bar’s membership department as saying that, “It’s been an unreal year. Usually we have 10 new firms. This year there are about 100 new law firms due to the dizzying pace of lawyers switching, closing and starting new firms.”

In Nov. 1990, the Phoenix Gazette reported that of the 290 attorneys being admitted to the bar, only 50 had jobs awaiting them as they were being sworn in by the Arizona Supreme Court.

Streich Lang shrank by a third in terms of the number of attorneys. Evans Kitchel & Jenckes, one of the state’s largest firms at the time, and which claimed the accolade of being the state’s oldest firm, closed its doors in 1989 on its 40 attorneys. Winston & Strawn, with 950 attorneys internationally today, closed its Phoenix office in 1989.

The firms that survived then did so largely by representing lenders in bankruptcies and workouts. While many firms were precluded by conflicts, having previously represented troubled borrowers, among the lucky firms that represented the FDIC and RTC were Ridenour Swenson Cleere & Evans, McCabe & Pietsch and Robbins & Green.

So, how does today’s recession differ from 1990?

In one respect, today’s recession is largely driven by the residential mortgage debacle, whereas the recession of 1990 was driven by commercial overbuilding and excess. While there is significant stress in today’s commercial markets due to the retraction of real estate-related firms, we do not enter this recession with the severe commercial vacancy rates of 1990.

As bad as it now is, the current housing crisis can still get worse. At a minimum, we will see a more gradual recovery than in the past. Tightened residential credit standards will forever reduce the pool of potential homebuyers. Some have predicted that the “Alt A” mortgage default “bulge in the python” has yet to flood the market with additional foreclosures, and that this arrival can be expected soon. The glut of homes on the market will continue to put a lid on construction and remain a drag on the economy.

The Valley’s population is still increasing, so we will grow out of this recession as we always do, but it will take some time.

Unemployment can, and likely will, go higher. There will be more commercial and land loans going into default, bankruptcy and foreclosure, as loans come due and cannot be renewed or refinanced due to owners’ inadequate cash flow to service the debt and lower appraised values for the collateral. On the other hand, we will not see the massive wave of foreclosures in the commercial sector that occurred in 1990.

We will see additional bank closures and sales, but most banks will survive this recession, unlike 1990 when most banks disappeared. When the RTC took over all the S&L’s and most banks’ assets in 1990, they foreclosed on all their real estate assets, and then flooded the market with these 3,000 properties for sale at a time when there was little liquidity in the marketplace to absorb the glut of product, resulting in properties selling for 25 cents on the dollar. In 2009/2010, most banks will survive and, if property owners can service the debt on their properties, lenders will have no choice but to work with the borrowers until the market rebounds.

Most of the disruption in the legal community has already occurred, but there will be more. As with the early 90’s, many real estate transactional attorneys will retool into workout artists and bankruptcy experts.

In summary, commercial real estate defaults are still working their way through the foreclosure pipeline and will increase. Commercial bankruptcies will increase before peaking. Law firms will need to keep an eye on their receivables since litigation is on the increase, yet clients are increasingly unable to pay the cost of court battles. Banks will struggle, and some will close or merge, but unlike the 1990 recession, most banks will survive. Most likely, things will not get as bad as 1990, but for those who lived through 1990 and survived, they know that the potential exists for things to still get much worse.

Mark Dioguardi is a partner with the law firm of Dioguardi Flynn LLP. His firm practices in the areas of general business transactions and litigation, including the areas of finance, banking and real estate transactions, as well as commercial real estate workouts, bankruptcies, and litigation. He a founding principal shareholder of West Valley National Bank and its former Chairman of the Board, and currently serves on the board of directors of Friends of Public Radio Arizona. He is a graduate of Stanford University and ASU’s School of Law. Mark can be reached at MDioguardi@DioguardiFlynn.com or 480-970-2430.