The Arizona Supreme Court’s opinion in Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474 (2002), and its progeny have substantially impacted commercial litigation by expanding the implied covenant of good faith and fair dealing (“implied covenant”). In contrast to a written, agreed upon term, Arizona law implies this covenant in every contract.

However, rather than eviscerating parties’ right to negotiate and enter into contracts on express terms, as some naysayers originally prophesied, its largest impact may be more economic than substantive.

Implied covenant claims are exceedingly prevalent in commercial litigation. Indeed, they are present more often than not. Due to the expansion of the implied covenant in Wells Fargo and its progeny, these claims are less likely to be resolved by early motions—resulting in longer, and often more expensive litigation. Without question, this result has only fanned the popularity of these claims.

Wells Fargo arose from a Tri-party Agreement between the Mercado Developers (a partnership headed by Arizona’s former Governor, J. Fife Symington, III) (“Symington”), First Interstate Bank (Wells Fargo’s predecessor) (the “Bank”), and various union pension funds (the “Funds”). The Bank agreed to provide temporary construction financing if Symington was able to secure permanent financing from another lender. The Funds agreed to be that lender.

The Funds took out the Bank’s construction loan and Symington eventually defaulted on the permanent loan. The Funds ultimately claimed, among other things, that the Bank breached the implied covenant by failing to disclose Symington’s deteriorating financial condition to the Funds.

Although the Bank was not expressly required to make such disclosures to the Funds, the Supreme Court found that a jury might reasonably conclude that the Bank’s actions were inconsistent with the Funds’ “justified expectations” under the Tri-party Agreement.

As a result of Wells Fargo and its progeny, a party may breach the implied covenant without actually breaching an express term of the contract. Courts must make a factual determination whether a party acted in a manner inconsistent with the other party’s reasonable or justified expectations. However, these factual questions typically require the parties to undertake costly and time consuming discovery, and make it very challenging for either party to prevail on an implied covenant claim in the early stages of litigation. Therefore, the unintended consequence of the Wells Fargo decision is often longer, more costly litigation.

Landmark Litigation Article Arizona Business Magazine September-October 2011

http://dioguardiflynn.com/wp-content/uploads/2011/09/Moolenaar_2011906.pdf

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.

Binding arbitration is typically the result of a contractual agreement between the parties providing that any disputes between the parties will be resolved in binding arbitration. Under the Federal Arbitration Act (“FAA”) and its state law counterparts, such agreements are presumptively valid and enforceable. Generally speaking, if you sign a contract that contains an arbitration provision, you will be bound by that agreement and forced to resolve any disputes through arbitration. In other words, by entering into an agreement containing an arbitration provision, you are waiving your right to address any disputes through traditional litigation in a court of law.

The most commonly cited benefits of binding arbitration mirror the most commonly cited negatives associated with litigation: faster resolution and reduced expense. There is no denying that traditional litigation takes too long and is very expensive. Arbitration is substantially faster than litigation in the overwhelming majority of cases (often less than 6 months with no mechanism for appeal compared to 1.5 to 2 years through trial in traditional litigation, with the possibility of several additional years if the case goes to appeal). Arbitration can also be substantially less expensive than traditional litigation, although not in every case. Depending on the arbitration agreement and the rules of the organization conducting the arbitration, discovery is likely to be substantially limited, which significantly reduces both the cost and invasiveness of traditional litigation.

Despite the benefits of arbitration, there are still many cases in which it is not the best option. First, arbitration of claims involving larger amounts often requires payment of substantial upfront fees. While court fees are typically a flat fee of a few hundred dollars, a large dollar case in front of AAA, for example, can require the payment of $15,000 – $20,000 in administrative fees to AAA prior to any award by the arbitrator. Moreover, the benefits associated with limited discovery are only beneficial in cases in which the parties are able to obtain the necessary evidence to prove their case. Discovery is often considered critical in litigation, and the significant limitations on discovery in arbitration may prevent a party from obtaining critical evidence. Finally, in our experience, there are fewer opportunities for dispositive motions, and dispositive motions are less likely to be granted, in the arbitration context. In those circumstances in which a client is likely to have strong legal defenses and a reasonable probability of success on a dispositive motion, the client may well be better off in traditional litigation with an opportunity for appeal if the decision at the trial court level goes the other way.

The attorneys at Dioguardi Flynn have extensive experience in both arbitration and litigation, and can assist clients in determining which approach is in their best interests in their specific situation.

The attorneys at Dioguardi Flynn LLP have extensive experience in litigating a wide array of civil/commercial litigation matters in the State and Federal Courts of Arizona and throughout the country. They have gained substantial experience over the years addressing the needs of their Internet-based clients as well, including claims involving the Digital Millennium Copyright Act (“DMCA”). Please contact John at 480-951-8803 (jflynn@dioguardiflynn.com) or Peter at 480-951-8806 (pmoolenaar@dioguardiflynn.com) if you would like to discuss obtaining legal advice and representation.

[Download a copy of the Court's Decision]

MERS was created in 1997 to obviate the need to record changes to mortgages stemming from the subsequent transfers of their corresponding Notes. Although MERS does not own or service the mortgages it registers, it is typically listed in the mortgage as a nominee for the actual owner.

Although the majority of the challenges to MERS (which have been largely unsuccessful) involve the proprietary of its role vis-a-vis the borrower or homeowner, there may be some question as to the legitimacy of its registration vis-a-vis a subsequent bona fide purchaser or encumbrance holder for value.

All states have recording acts governing the recordation of documents concerning the title to real estate. These acts are designed to protect subsequent bona fide purchases of an interest in land from unrecorded claims. They generally have no application to the validity of a deed between the grantor and grantee.

There are three types of recording acts: Race, Notice and Race-Notice. In a Race statute, whoever wins the race to record first prevails over anyone who has not recorded or subsequently records. In a Notice statute, a subsequent purchaser wins if he or she has no notice of a prior claim when he or she acquires the interest in the property. Race-Notice statutes protect subsequent purchasers who take their interest without notice of the prior claim and win the race to record.

Given that the vast majority of states have either a Notice or Race-Notice statute, the question is whether security instruments listing MERS as a nominee provide sufficient “notice” to subsequent purchasers. The recorded mortgage typically will not identify the current owner of the mortgage, nor will there be subsequent recorded documents identifying the owner. Therefore, it is not possible for a subsequent purchaser to discern from the records whom is asserting a prior claim to the property. Further, should the subsequent purchaser contact MERS, he or she will typically only be informed of the entity that is servicing the mortgage. This may not necessarily be the same entity that owns the mortgage.

Should subsequent purchasers or encumbrance holders for value begin to challenge MERS, Courts will likely be asked to determine the level of “notice” required. Is notice of an asserted interest in property, without notice of the person or entity asserting the claim, sufficient?