Avoid Pitfalls in Business Communications

Written By: Eric D. Dean

On July 22, 2015, Eric D. Dean (Vice Chair of the Commercial & Real Estate Practice Group) served as the speaker for a luncheon meeting of the Commercial Real Estate Professionals of Orange County group (CREPOC). His presentation addressed communications in a legal setting. The information presented to the group was based on the below two articles.

 

Communications As A Key Component to Litigation Preparation

The history of communications leading up to a litigation/arbitration is crucial to both the settlement value and outcome of a dispute. Put simply, as a general rule, the more control exercised over communications pre‐litigation, the less risk that will be presented in the litigation.

With the growth of the computer age, “communications” consists not only of letters, faxes and verbal exchanges but websites, blogs, the internet, social media, emails and text messages. As a result, the battleground is broader than ever for those in a dispute to find communications pitfalls in their opponent’s published statements and to highlight portions of same in in both cross examination of an adverse witness and causing a subjective reaction in the media and with a judge and jury.

To understand the importance of this topic one needs to understand the typical nature of litigation/arbitration in the majority of disputes.

The Objective View of a dispute is akin to how a computer works. This view sees a dispute as a search for the truth where the trier of facts impartially listens to the facts brought forth from the parties then applies germane precedent and applicable statutes to the analysis and the outcome is “Truth” and “Justice”. This view may apply in part to many disputes and be the way many legal disputes are ultimately decided.

However, in most disputed matters, key facts are vigorously contested or given variant spins, the application of the law to these facts is twisted by counsel to obtain an advantage and the arbitrator, judge or jury who will decide the matter bring their subjective views and likes and dislikes into their deciding the dispute.

In the vast majority of cases, the underlying tactic employed by all parties is a battle to establish themselves as good, credible, sympathetic and well‐liked by the trier of facts while the opposing party and its witnesses are painted as untrustworthy, biased, lying, evil, oppressive and in the wrong. The key to this subjective battle is most often based on a small portion of the many streams of communications that are often available sometimes taken completely out of context from which a favorable view of one party and an adverse view of the other party creates the themes upon which each party attempts to sway the trier of facts who will ultimately rule one party a winner and the other a loser.

There are actually two broad types of communications that may play a role in a litigation/arbitration: (1) Verbal or written statement or internet postings by a witness or opposing party and (2) “tacit admissions”, which are factual statements by one potential party to a dispute that are not contested within a reasonable time of receipt by the adverse party. Tacit admissions can be as powerful a tool in the hands of a skilled attorney as are express statements.

As discussed in the following articles, when a dispute appears possible, it is imperative that communications, whether posted on the internet, verbal, in an email or internally, be controlled and that potential tacit admissions be rebutted even by something as simple as “your communications has been received and is not agreed to in multiple respects”. The following articles address some of these concerns in a practical manner.

 

THE IMPORTANCE OF COMMUNICATIONS AND PERCEPTION IN LITIGATION

Written By: Eric D. Dean

For lenders and servicers, communications is perception. If the last few years have established anything, it is that the perception of borrowers, regulators and, in litigation, judges and juries, have and will dramatically influence not only the outcome of a dispute but, risk assessments, profitability and business practices.

This article is meant as a brief look into how every day communications, whether by content or tone, can have a dramatic and wide range influence, especially in a litigation setting.

In the last approximately seven (7) years, lenders and servicers have increasingly been in the public eye. In the view of both the public and both state and federal public officials, the view of lenders and servicers has shifted in some instances towards a perception of ruthless actions, sharp practices and overreaching. This change in perception has had an increasing effect on how lenders are treated in litigation both, in some cases, by judges, and certainly by juries. With this shift, lenders and services have experienced higher litigation risk and greater litigation costs. To summarize the author’s view of pertinent factors leading to this more hostile environment for lenders and servicers and its impact, the author has focused on the following::

1. The Information Age:  Our lives are governed by an increasing demand for higher speed and greater volume. From a communications standpoint, in the business world, the solution for these demands has largely been the replacement of letters and phone calls with emails and similar types of quick communications. While letters were generally drafted, edited and many times redrafted and phone calls were typically undocumented, emails are generally quick, first drafts, and in many instances part of a flurry of back and forth communications prepared on an extemporaneous basis.

2. Evidence in a Lawsuit:  Often, there are hundreds, if not thousands, of emails exchanged between various individuals both inside and outside the institution long before recognition of a potential dispute is noted. As the matter moves towards trial, out of this mass of emails, there will customarily be only 5 to 10 that a party will focus on and present at trial to hammer home a theme.

Generally, as harsh as it sounds, an attorney in litigation is not conducting a search for the truth, but is instead endeavoring to present the strongest case for his or her client. The attorney will, in reviewing emails, look for every statement by the other side that may provoke a judge or jury to look negatively on the opposition and every ambiguity that can be skewed to strengthen his or her client’s position and weaken the position of the opposing party. Since the judge or jury hearing the matter may already have a predisposition against the lender or servicer, this negative view can in many instances be exacerbated by the lender or servicer’s own emails.

Trial results are often driven more by perceptions and likes and dislikes rather than legal theories or who is “right”. The impreciseness of communications may, as a result, become a critical factor in the outcome of a trial or whether a party can even risk going to trial as opposed to being forced into an otherwise unacceptable settlement position.

3. The Economic Environment:  With the unexpected downturn in the economic environment, the number of uncured loan defaults rose throughout the industry and lenders and servicers were required to handle these defaults with a staff not adept at handling the volume of communications that resulted and systems and remedies that were not designed or equipped to manage the conditions presented. The result was to a certain degree a chaotic environment where lenders and servicers were viewed as they had not been viewed since the Great Depression. While the number of foreclosures is now significantly declined, the regulatory environment and government oversight is more draconian than ever.

a) The Shift In Precedent: As the view of lenders and servicers became more polarized, well-recognized protections and defenses lenders and servicers had relied on for many years to prevent or end litigation claims by borrowers and guarantors were minimized or destroyed by new legislation and court decisions as both judges and legislatures became more sensitive to the protection of borrowers and guarantors. Specifically, a long established series of cases to the effect that the court would not look beyond the four corners of the loan documents was cast to the wayside if the Borrower or Guarantor made the contention that the loan documents did not accurately reflect what was represented by the lender and relied on by the Guarantor or Borrower; or

b) Through a stream of communications between the borrower and the lender or servicer, an agreement was formed under which the lender must forbear, modify or waive rights. This may be argued based on nothing but a series of emails exchanged between the borrower and lender; or

c) Even if no contract was formally entered into, the Lender is liable based on a verbal commitment or loan modification that was never documented but is nevertheless binding based on representations that were justifiably relied on.

d) The Borrower’s Attorney Bar: With the downturn in the economic environment and a growing number of attorneys who wished to maintain a viable practice, a broader group of lawyers emerged who specialized solely in the representation of borrowers. This resulted in borrowers having significantly greater access to representation by lawyers who had superior expertise in this particular area of law and who regularly challenged lenders and servicers often on an extremely aggressive basis.

Each of these four (4) factors has resulted in the need for lenders and servicers to be significantly more cognizant of the implications of their communications, to standardize communications where possible and to consider a change in who is communicating on behalf of the lender or servicer if it appears that a material dispute may be on the horizon.

Maxims of Communications

In view of the concerns expressed above, the following precepts are helpful considerations in limiting risk of a communication going array:

1. Fast paced communications have created enhanced risk of an ambiguity or poorly based phrase becoming the center point of the Borrower or Guarantor’s entire case.
2. Desperate borrowers with creative attorneys will look to distort the meaning of communications to gain an advantage.
3. Poor communications can lead to a wide range of claims based on theories of written contract or promissory estoppel that are harder and more costly to defend.
4. Use of Confidential Communications should be considered in internal communications.
5. Claims of fraudulent inducement in the making of a loan are now a greater risk.
6. Every written communication is a potential exhibit at trial.
7. Focused and short is better than long and complex.
8. The less editorial the better.
9. Ambiguity creates risk.
10. Maintain a theme and focus based on the purpose of the communication and the desired outcome.
11. Recognize risk of a potential lawsuit – stay vigilant.

Types of Communication To Avoid

Based on these postulates certain communications need to be avoided:

• Unintended promises or assurances.(may result in a binding obligation that was not intended).
• Ambiguous statements (allows for distorted interpretation).
• Conveying internal discord (this will often broaden the scope of a lawsuit).
• Poor follow-up (inflammatory at all levels).
• Breaching the attorney/client privilege (opens up enormous problems and risk of disclosure).
• Heavy handed statements (can be deadly even if fully accurate).
• Untrue statements.(very difficult to overcome at trial).
• Oversell (avoid promising more than certain can deliver).

Use of A Pre-Negotiation or Confidentiality Letter

One widely used method to avoid risk of an errant email or other communication being used by an adversary is a “Pre-Negotiation” or “Confidentiality” Agreement pursuant to which all communications with the borrower and its affiliates are acknowledged to be confidential in scope. Such a letter would typically be signed before discussions of a possible change in the loan documentation or loan terms. Reference should also be made that these communications are initiated at the borrower’s request and that the communications are to be used solely for purposes of facilitating discussions between the parties, and not otherwise, and are to remain strictly confidential in all respects. This type of agreement can also be used to document a variety of facts that cannot otherwise be disputed and the admission of which might be helpful at a later date such as the loan amount, the operative loan documents, that there are no offset or set-off claims and existing defaults and maturity date.

Use of Attorney Communications and Internal Communications

Communications in confidence between an attorney and his or her client are privileged and not subject to discovery by a third party or forced disclosure. This applies whether the attorney is in-house, retained or just consulted. Involvement of an attorney in communications within an organization or within departments can be an effective tool to maintain sensitive communications in confidence as long as only personnel and consultants of the organization are made privy to the communications with the attorney. Such communications are rarely challenged as discoverable and discovery of such communications is even less often ordered by a court as long as the conditional nature of the communications is strictly maintained.

Conclusion

The purpose of this article is solely to raise awareness and not to render advice nor for purposes of reliance. Competent counsel should be contacted as to any specific areas of concern. Awareness of risk combined with prudent policies and training are the best weapons available to minimize these risks and prevent costly mistakes arising from poor or careless communications or internal documents.

 

RECENT EXPANSION OF LENDER AND SERVICER RISK OF MISREPRESENTATION CLAIMS AND LAWSUITS

Written By: Eric D. Dean and Christine E. Howson

As a matter of case law, statute and contract interpretation, it had long been the established and accepted law in California that a party to a written agreement, including a borrower or guarantor, could not successfully introduce a prior agreement or contemporaneous oral agreement or promise that contradicted the express written terms of an unambiguous provision in an integrated loan agreement or security instrument. (An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement). This long standing rule of law which existed for nearly 75 years had been found applicable to promissory fraud claims despite the fraud exception to California’s Parol Evidence Rule. However, the California Supreme Court in the case of Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association (“Riverisland”) 2013 Cal. LEXIS 253 determined that reasoning and logic behind the long standing prohibition were faulty and unsupportable.

In Riverisland, the Fresno-Madera Production Credit Association (“the Credit Association”) entered into a written loan restructuring agreement with the Borrowers. The Borrowers contended that they did not read the agreement and simply signed it where it was tabbed for their signatures based on their understanding of the document derived from purported verbal representations of the lending officer. After the loan modification was signed, the Borrowers failed to make the required payments, and the Credit Association filed a Notice of Default and commenced foreclosure proceedings with respect to the collateral. Ultimately, the loan was repaid; however, the Borrowers and the guarantors of the loan sued the Credit Association alleging fraud, negligent misrepresentation, rescission and reformation of contract.

In their lawsuit, the Borrowers contended that prior to entering into the loan restructuring agreement, the Credit Association’s vice president met with them and told them that the Credit Association would extend the loan for two (2) years in exchange for Borrower’s pledging additional collateral approved by the Credit Association. However, the actual restructuring agreement signed by the Borrowers provided for only three (3) month forbearance while identifying more new collateral than the Borrowers contended to understand was required. The Borrowers further alleged as part of their damages, that to avoid a loss of the pledged assets, the Borrowers sold part of the newly pledged collateral in what they contended was a “soft market” to pay off the Credit Association loan.

The Credit Association contended that the Borrowers’ suit was barred in its entirety since the claims asserted by the Borrowers directly contradict the express terms of the signed Loan Restructuring Agreement. Prior to the California Supreme Court’s holding in the Riverisland case, unless certain special circumstances existed (e.g. the nature of the document being signed was misrepresented or the Borrowers were under duress or incapacitated when they signed the agreement), in most instances, the Credit Association would have been successful in ending a lawsuit such as brought by the Borrowers before trial.

However, in Riverisland, the California Supreme Court found that the reasoning behind the long established rule excluding a defense based on an allegation of fraud sought to be established by extraneous communications to the loan documents had been poorly analyzed and demonstrated a lack of reliance on properly reasoned precedent holding to the contrary. Based on its analysis, the Supreme Court held that parol or extrinsic evidence, whether written or verbal, can be introduced by a party to a lawsuit seeking to establish fraud in the inducement even if these assertions directly conflict with the terms of a signed integrated written agreement.

In Riverisland, the Supreme Court emphasized that the party asserting the purported fraud still must establish justifiable reliance on the purported fraudulent misrepresentation or promise to prevail. Despite this limitation, it cannot only be anticipated that more of these fraud claims will be asserted by Borrowers and Guarantors against Lenders but that it will be far more difficult to terminate such claims at the pleading stage of a Lawsuit or even by a summary judgment motion. As a result, where Lenders would generally refuse to consider settlement of such claims, the Borrower may be able to force some form of a settlement so that the Lender is not faced with protracted litigation and the costs and risks attendant to such proceedings.

It should also be noted that the ruling in the Riverisland case has been expanded to such areas as employment law and buy-sell agreements.

Two immediate responses to the Riverisland case that the authors recommend are:

(1) In appropriate cases, require the Borrower to have independent counsel sign an acknowledgement that the loan documents are fully reflective of all agreed terms, that there are no terms or representations made by or on behalf of the lender not included in the loan documents and that he or she has fully reviewed all loan documents and loan terms with his or her client. Similar kinds of legal acknowledgements are commonly obtained in attorney opinion letters. In light of the Riverisland case, expansion of the use of these kinds of letters appears prudent and warranted in connection with commercial loan agreements.

(2) Require the Borrower and Guarantor to sign a letter of acknowledgment before a notary including such things as that he or she has fully reviewed and read all of the loan documents before signing, that the Borrower had an opportunity to consult with independent counsel of the Borrower’s choice, that there have been no representations made by the lender or any agent of the lender or any terms or conditions agreed to that are not expressly set forth in the loan documents, and that any question the Borrower may have had as to the loan documents was fully and accurately responded to by the lender in all respects.

While the suggestions in the preceding paragraphs may not end the expansion of the risk of promissory fraud lawsuits produced by the Riverisland Case, these suggestions would appear to negate the ability of the Borrower to establish justifiable reliance and set up the framework to successfully challenge a claim or defense under Riverisland.

NOTATION.  This article is simply for purposes of providing a general overview and is not to be relied on for purposes of determining policy or how to approach a specific fact situation. Counsel should be consulted for all purposes related to a more concrete understanding of the implications of the Riverisland case and its actual or potential application to a specific fact pattern.