Three Gems (Or So We Think)

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We’ve been doing Ruminations since 2011 and yet this is the first time we’ve deliberately done a multi-topic blog posting. Generally, when we choose a topic (400+ thus far) we dig in and treat(?) our readers to several pages of our ramblings. That approach has precluded our covering simple or easily contained topics, ones undeserving of deep drilling down. So, today, for the first time (but, perhaps not the last), we present a little of this and a little of that.

Overnight Delivery. In New York, service of lawsuit papers upon an attorney in a pending matter may be accomplished in a number of ways, including:

by dispatching the paper to the attorney by overnight delivery service …. Service by overnight delivery service shall be complete upon deposit of the paper enclosed in a properly addressed wrapper into the custody of the overnight delivery service for overnight delivery, prior to the latest time designated by the overnight delivery service for overnight delivery. Where a period of time prescribed by law is measured from the service of a paper and service is by overnight delivery, one business day shall be added to the prescribed period. “Overnight delivery service” means any delivery service which regularly accepts items for overnight delivery to any address [New York].

So, one would think that giving the papers to FedEx or UPS on the last day possible would extend the service period by one business day. That would mean giving the papers to FedEx on a Friday would be proper service even if Friday was the last day for serving the papers. After all, one additional business day makes a Monday delivery perfectly fine. WRONG (according to a New York Appellate Division Court)! According to an August 1, 2018 decision, depositing papers with Federal Express on Friday for weekday delivery on Monday does not qualify as using an “overnight delivery service.”

So, let’s all look at our notice provisions to see how they are worded. While we might think the New York court (in affirming a lower court decision) got it wrong, how would anyone of us feel if that same court ruled on a lease or loan dispute especially where the time for notice is “of the essence.”

Insurance Advice. Often, we think that if an insurance broker negligently fails to advise a customer about the wisdom of carrying certain forms of insurance and the customer suffers what would have been a covered loss, the customer can look to the broker’s errors and omissions (malpractice) carrier for the post-loss coverage. A December 21, 2018 decision from the Alabama Supreme Court says, “Not so fast.”

After a mattress factory burned to the ground in 2006, it was rebuilt. So, in 2009 (as the factory’s owner told the court), the company’s insurance broker was asked about Business Income and Extra Expense coverage (in the vernacular, “business interruption insurance”). According to the owner, its broker responded: “It’s pretty expensive, and it’s hard to get because you’ve got to come up with a lot of records to verify whatever you’re claiming; and so I don’t think you need it.” The broker didn’t dispute the owner’s memory but pointed out that, in 2009 and each year thereafter, it provided a pair of quotations – one with the Business Income and Extra Expense coverage, and one without that coverage. The owner agreed that he received the paired quotes but always chose an insurance policy without the extra coverage.

So, when the factory burned to the ground again in 2013, there was no “business interruption” coverage in force. That’s when the owner sued its broker. It seems that except for the 2009 discussion, the broker never directly advised its customer about the advisability of buying that extra coverage even though it always provided a quote for it. According to the customer, its broker’s failure to advise such coverage for the 2013 policy constituted negligence. As to why the owner ignored the annual quotation for a policy with “business interruption” coverage, his response was because in 2009, “I was told that it was expensive and it required a lot of record — to produce a lot of records and it was hard to get,” and the broker never changed or updated that advice. The owner claimed that had the broker advised him to obtain the cover for 2013, he would have done so.

The Alabama court rejected the claim, relying on the following from a well-regard insurance treatise:

Absent a specific agreement to do so, an insured’s agent does not have a continuing duty to advise, guide, or direct the insured’s coverage after the agent has complied with his or her obligation to obtain coverage on behalf of the insured. Insurance agents do not have an independent duty to identify their clients’ needs and to advise them regarding whether they may be underinsured because it is the client’s responsibility or duty, not the insurance agent’s, to determine the amount of coverage needed and advise the agent of those needs. In addition, upon receiving the policy of insurance, the client has a duty to review the policy to ascertain that his or her needs are met. In addition, insurance agents generally are not liable for actions other than obtaining insurance coverage for their insureds unless a special relationship has been established between the parties.

Obviously, the facts in the case before the Alabama court were critical in that court reaching its decision, but owners (and tenants) beware. Not all courts will reach the same result, but (as can be seen) some will. It makes sense to obtain a full insurance coverage review every year – no assumptions. If you get quotes for different levels of coverage, realize there is a reason and ask why.

Profit Sharing Lease Provisions. What happens to a profit-sharing upon assignment lease provision? Well, the goal of bankruptcy judges (and that of the attorneys for unsecured creditors) is to make the pool of money available to pay those unsecured creditors as big as possible. So, you can guess the result. Provisions in the Bankruptcy Code are designed to set aside lease provisions that would serve to reduce the value of the lease should it wind up in the hands of a bankruptcy trustee. Broadly speaking, the Bankruptcy Code invalidates what is referred to as “anti-assignment provisions.”

The trick here is that “anti-assignment” means far more than provisions that say the tenant can’t assign its leasehold interest. The concept covers all manner of clauses that would restrict or condition an assignment. On July 17, 2018, the United States Court of Appeals for the Third Circuit, in upholding a District Court ruling, invalidated a lease’s 50-50 profit sharing provision. In doing so, it rejected the landlord’s claim that: “the Profit Sharing Provision was the product of a bargained-for exchange, i.e., the landlord agreed to a term extension, fixed rent, and the elimination of various use restrictions in exchange for half of the tenant’s leasehold interest in any profits derived from an assignment of the Lease.”

As the court saw it, the sole function of the profit sharing provision would be “to extract value that would otherwise accrue to a debtor’s estate, for the sole benefit of an individual landlord.” According, the policy of bankruptcy law overrode any claim that the 50% bargained for was “owned” by the landlord.

The takeaway here is that bankruptcy law is not intuitive and if a landlord senses that a tenant will be filing for protection, it behooves that owner to get good advice before, and not just after, such a filing. Deals voluntarily made are often better than those imposed by a judge.

This was fun, doing a few tidbits at a time. We may try this again without waiting another 7-plus years.

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