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Supreme Court Completely Endorses Critical Vendor Theory! Well, Not Completely. But Almost!

We at the Bankruptcy Cave are not very surprised by the ruling yesterday in Czyzewski v. Jevic Holding Corp.  The Supreme Court in Jevic reviewed a Bankruptcy Court’s decision to approve a settlement (with a distribution of proceeds that contravened the Bankruptcy Code’s priority scheme) in conjunction with dismissing the bankruptcy case of the Chapter 11 debtor Jevic Holding Corp. According to the Bankruptcy Court, because the distributions would occur pursuant to a “structured dismissal” rather than a confirmed plan, the failure to follow the creditor priority scheme did not bar approval.  In short, the Bankruptcy Court did not confirm a plan of reorganization for the Chapter 11 debtor, in which sufficient creditor support can re-order some of the Bankruptcy Code’s priority scheme.  Nor did the Bankruptcy Court convert Jevic’s Chapter 11 case to Chapter 7, in which the Code’s creditor priority scheme can never be changed. Instead, the Bankruptcy Court allowed a “structured dismissal,” a hybrid unrecognized by the Code (but oh so popular among the Delaware set).  In a “structured dismissal,” a case is dismissed and, through opaque deal making, cash proceeds of the estate are shifted to some creditors that Congress afforded lower priority (like general unsecured claims in Jevic’s bankruptcy case) despite nothing being paid to higher priority creditors (like unpaid wage claims of truck drivers in Jevic’s bankruptcy case).

Nothing in the Bankruptcy Code allows such re-ordering of creditor priorities as part of a dismissal.  Thus, in Jevic, the Supreme Court rejected the proposed “structured dismissal” and sent the case back to the Bankruptcy Court to distribute the money as the Code requires.  In summary, Orwell’s adage that “all animals are equal, but some animals are more equal than others” George Orwell, Animal Farm 112 (Signet 1962 edition) (1946) has no place in the Bankruptcy Code, according to the Supreme Court in Jevic.

But a truly astounding part of the Supreme Court’s opinion in Jevic provided (in dicta, we grudgingly admit) strong support for the oft-criticized “critical vendor” theory used in many large Chapter 11 cases to immediately pay seemingly important (i.e., “more equal”) unsecured creditors while other creditors sit and wait.

Specifically, the Supreme Court’s opinion in Jevic went to great lengths to mention the many valid circumstances in which a bankruptcy court “has approved interim distributions that violate ordinary priority rules.”  The Court specifically noted “‘first-day’ wage orders that allow payment of employees’ prepetition wages, ‘critical vendor’ orders that allow payment of essential suppliers’ prepetition invoices, and ‘roll-ups’ that allow lenders who continue financing the debtor to be paid first on their prepetition claims.”

The Court noted that such orders are based on findings that these priority-skipping payments “would ‘enable a successful reorganization and make even the disfavored creditors better off.’” (Jevic, citing, inter alia, In re Kmart Corp., 359 F.3d 866, 872 (7th Cir. 2004)).  Thus, such payments would (or could? or always? — it is hard to say how strong this dicta is) be allowed due to a “significant offsetting bankruptcy-related justification.”

This was a shocker.  Not because we think it is wrong – the Supreme Court is dead right that the exigencies of the initial days in Chapter 11 can permit certain limited payments to pre-petition, unsecured creditors – but because the Court did not have to delve into these theories to decide Jevic.  The Supreme Court could simply have stated that nothing in the Code’s “dismissal” provisions allow for priority skipping, and that would be that.  But instead, the Court’s expansive reasoning buttresses “critical vendor theory” and similar theories that allow for some creditors to be paid immediately upon a Chapter 11 – if there is a “significant offsetting bankruptcy-related justification.”

In conclusion, Jevic did not surprise us with its ruling, but surprised (and impressed) us with how far it went to provide added support for critical vendor theory.  Jevic is, as one may say, a critical case for those in the bankruptcy world.

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Fifth Circuit Rules for PACA Claimants, and Weakens PACA, All in One Curious Ruling

February 15, 2017

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Most restructuring practitioners are aware, either vaguely or through punishing experience, of the power of PACA creditors.  PACA (or the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. for those who hate brevity) requires that buyers of produce hold such produce – and their proceeds – in trust for the benefit of produce sellers.  General creditors of the produce buyer receive nothing, even if they hold a lien on the buyer’s assets, until produce sellers are paid in full on any valid PACA claims (including their interest and attorneys’ fees in most instances).

But sometimes, or many times, the PACA trust assets needed to pay produce sellers are not present.  Accounts must be collected, by use of employees, lawyers, collection agents, or other parties.  Inventory must be preserved and then sold, incurring further costs.  In short, assets to pay PACA claims don’t magically appear, and if no one is paid to pound the pavement to sell that inventory and collect those funds, nothing will be collected, and nobody gets paid.

The Bankruptcy Code deals with the problem very simply.  If assets are being collected for the benefit of unsecured or priority creditors, the post-petition costs and expenses incurred to liquidate such assets are granted first priority of payment.  11 U.S.C. § 503(b)(1)(A).  Alternatively, if assets are being collected (or costs incurred) for the benefit of a secured creditor, the secured creditor’s collateral can (and should) be surcharged.  11 U.S.C. § 506(c).  If the secured creditor complains or balks, the trustee or DIP can (and should) abandon the collateral and force the secured creditor to pay its own costs to liquidate the collateral.

However, a recent Fifth Circuit opinion rejects this common sense approach when PACA is involved.  In Kingdom Fresh Produce, Inc. v. Stokes Law Office (In re Delta Produce), the Fifth Circuit held that the trust structure of PACA mandates that produce sellers be paid in full even prior to the costs of counsel which collected every single dollar needed to pay those very produce sellers’ claims.

The case has limited reasoning.  It borrows from cases holding that PACA creditors are ahead of secured creditors or other creditors, and expands that principal to cover everything.  A utility keeps the power on at the food warehouse so the inventory can be preserved and sold?  That is a foolish utility, unless it knows to a certainty the proceeds can pay PACA sellers in full, leaving funds left over to pay the utility bills.  Employees show up to make collection calls, or process payments?  Good luck getting paid for such efforts, if despite their work funds are insufficient to pay PACA claims in full.  In short, Kingdom Fresh turns a food business in wind-down into a charity for the benefit of PACA claimants, with everyone providing pro bono service to enhance the PACA trust.

Kingdom Fresh recognizes this “free rider problem“: why would anyone work even one iota for an insolvent produce buyer, if payment for their efforts comes behind all the PACA claimants?  But while the Kingdom Fresh Court notes this problem, its proposed solutions are, frankly, illusory.  The Court notes (remarkably, in the view of The Bankruptcy Cave) many professionals will be willing to work to collect assets for PACA creditors, and bear the risk of their fees being behind millions of dollars of such PACA creditors.[1]  Wow.  Second, the Fifth Circuit states that a court-appointed Special Master could do the collections work.  Yet this is not at all what Special Masters do under Federal Rule 53.  Third, the Kingdom Fresh Court notes that PACA allows recovery of attorneys’ fees – and so presumably attorneys working for the estate to collect A/R can get paid from the account debtors?  We guess so, but this is also speculative.  And who is to say the unpaid produce sellers cannot glom onto an attorneys’ fee award the same way they have a senior interest in an underlying claim or judgment owed by a third party to a debtor?  The opinion is silent.

Kingdom Fresh can be viewed as a victory for produce sellers and other beneficiaries of PACA – once again, such creditors are declared to be first among all other creditors.  But its slavish devotion to PACA renders every insolvency case involving the sale of produce much harder – things will grind to a halt until professionals employed to collect and liquidate assets negotiate with PACA creditors to be paid.  By depriving courts of the power to surcharge PACA trust assets, collection of those assets will be delayed or just won’t happen at all.  No one benefits, not even those which PACA is supposed to help.  Kingdom Fresh is, in fact, one of the most anti-PACA cases we at The Bankruptcy Cave have seen, despite its protestations to the contrary.

[1] This is an astounding and unsupported assumption. People taking on greater risk need greater compensation.  No one will take on risk of non-payment for free.

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The A++, Guaranteed to Go Smoothly and Make You Look Like You Do This All the Time, Timeline and Checklist to Prepare to Take a Deposition

June 16, 2016

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Editor’s Note:  If you would like a copy of this document in MS Word (we know the font on this blog is hard on the eyes, we are working on it I swear, but in the meantime we are happy to send you our forms or checklists in Word), then please feel free to contact either of the authors, mark.duedall@bryancave.com or leah.fiorenza@bryancave.com.  And if you find this helpful, please check out the other “A++ Forms and Resources” we have posted to the blog, using the “Categories” drop down menu at the main page or clicking here and here.  Coming up next week:  another comprehensive checklist for preparing and filing a complaint.

The Master Deposition Timeline and Checklist

Two Weeks before Issuing the Subpoena (if you are issuing a subpoena to a non-party)

  • Please remember to run conflicts on every witness before you issue a subpoena to them. Failure to do so can be a very serious problem for you, and your Firm; it is a real problem to subpoena a client.

One Week before Issuing the Subpoena / Notice of Deposition

  • Request the check for the subpoena in advance of the date you intend to serve the subpoena. The check should include both mileage (round trip) and the witness fee.
  • Note recent changes to Federal Rule 45:
  • A subpoena must be issued from the district where the deposition will be held or where the production of documents will be made.
  • Make your court reporter arrangements now, especially if it is an out-of-town deposition. Do not call another law firm or whomever you know in that town the day before issuing the subpoena asking for a room – do this well in advance of finalizing the subpoena.
    • N.B.  If anyone ever calls you asking if they can use a conference room for a deposition in a case they are working on, your Firm likely has very strict policies on this. At an absolute minimum, you must run and clear conflicts on every party to your colleague’s case, and on the witness and his / her affiliation. (It would not do at all to host a deposition for someone that is suing a client of your Firm.) Then, call your office manager or office managing partner and obtain his or her express permission.
  • We have had great nationwide success using Will Ward of Courtroom Sciences Inc., 877-784-0004 (work), 706?581-6293 (cell), wward@courtroomsciences.com. He can arrange a court reporter anywhere in the country, conference rooms out of town, interpreters, etc.
  • However, determine whether your client requires a certain court reporting company and, if so, use that company!

Things to do on the Saturday or Sunday before the deposition (this really needs to be done on a weekend – you need several hours, uninterrupted, to complete this): 

  • Prepare (and put in order) all exhibits for the deposition. 
    • Your exhibits should include, at a minimum:
      • The subpoena or notice of deposition (almost always, this is exhibit 1, and starts the deposition).
      • Copies of any discovery responses certified or signed by the deponent. It is very important that you ask the deponent if s/he reviewed, approved, and then signed off on the answers. Many times, s/he did not, just signing at the direction of an attorney, or s/he only reviewed the responses in a cursory fashion. This is very important to cover in the deposition.
  • Labeling Exhibits
    • Avoid duplicative or confusing labels.
    • Think about using them at trial; try not to have labels change, (although numbers may, as that is somewhat unavoidable).
    • Check local rules or any applicable scheduling or discovery order; otherwise, do it the way it makes sense to you.
    • Think about future depositions, clarity, and simplicity.
  • Is there anything else that you need as a resource for the deposition (we suggest you bring a separate notebook containing each of these):

Things to do two days before the deposition:

  • Finalize your exhibit folders or binders!
  • Finalize your exhibit folders or binders!!
  • Please, we are begging you, at least two days before the deposition, finalize your exhibit folders or binders!!! 
    • In other words, you really cannot wait until the day before the deposition to finalize your exhibits. You will need multiple sets (see below), and the day before should be final prep, not hunting down documents and integrating them into your deposition plan and questioning.
    • This is especially true is the deposition is out of town. It is impossible to guarantee that your full exhibit sets will arrive by 8 am the morning of the deposition. The only other options, carrying multiple sets of your exhibits (you need at least four – see below) on the plane, is not advisable.
  • If the deposition is out of town, send all copies off by overnight mail to a trusted soul at the location of the deposition, except your master set that you carry with you. Note – you are sending these out two (2) days in advance of the deposition.
    • Number of copies: at least four.
      • Deponent;
      • Court reporter (optional, but highly recommended);
      • Your master set; and
      • A complete set for the attorney defending the deposition.
  • Keep exhibits orderly and accessible.  Methods vary by preference (e.g., binders, folders), but choose a method that works for you and that you have tried in advance in other depositions or with a colleague.
  • Binders truly are preferable; pulling documents out of folders, and circulating them to all parties, will really interrupt your flow and slow you down.
    • The only problem with binders is that you may not use some of the items in the binders, and the deponent or the other side will wonder why. Let them wonder. We still think flipping documents in a binder is far easier than taking out a folder, getting copies, and the attendant delay of circulating its contents to everyone. 

Things to do the day before the deposition:

  • Have your secretary re-verify that:
    • the court reporter is coming.
    • all conference room arrangements are complete, including drinks (including a break out room if you want one for yourself and client, and/or for the other side).
    • the names of all parties attending (including the court reporter) are entered into building security.
    • N.B. It is not customary to order lunch for anyone, people usually go out on their own.

Matters of Form During the Deposition

  • Beware of letting documents control the deposition so much that they impede quality testimony and/or constrain your ability to interrogate the witness.
  • Beware of letting documents become a distraction or a waste of time.
  • The court reporter is referred to as “Mr. Court Reporter” or “Ms. Court Reporter.”
  • Provide the court reporter with a list of names and/or words that are hard to spell, that you expect will come up during a deposition.
  • Take a break every single hour, no matter what.
  • Be careful with the use of pronouns. Using pronouns can often make a statement unclear and it can make quoting from the transcript more difficult and less clear. If you can, don’t ever use pronouns at all, always “Ms. Smith” or “Steve” or other proper names.
  • Go off the record absolutely as much as you need to, to clarify things, head off conflict or inappropriate behavior, re-instruct the witness (if s/he keeps talking over you or not waiting for you to finish, a constant problem), or deal with other matters.
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The A++ Forms and Resources: Handling the No-Show Deposition

March 25, 2016

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Editor’s Note:  Here at The Bankruptcy Cave, we love insolvency stuff; we eat it for breakfast and dream about it at night.  (We are not kidding.)  Sometimes that includes credit-related litigation, and so we keep our pre-trial, trial, and appellate skills honed.  To that end, here is a very helpful cheat sheet we prepared and which we bring with us to every deposition, just in case.  (Your author Leah even got to enjoy a no-show deposition in Chicago last year; she created a perfect record using the below.)  Feel free to use it, and if it is handier to have a Word version, email one of the authors.  We will update the post later to make it download-able, but the rudimentary blogging skills of your new editor prevent that now, alas.

Editor’s Note 2:  If you like practice tips and cheat sheets like this, see also Mark and Leah’s “The A++, Super Comprehensive, Don’t Ever Start Anywhere Else Set of Opening Questions, Introductory Matters, and Document Inquiries for Taking a Deposition,” posted Aug 2015 here on the Bankruptcy Cave.  And coming soon, “The A++, Super Comprehensive, Way to Ensure ‘The Client Just Called and Said He or She Was Completely Prepared and the Deposition Went Great,’ Checklist and Key Items to Prepare Your Witness, Defend a Deposition, and Not Lose the Case.”

Without further ado, today’s post . . .

The Nonappearance (i.e., “No-Show”) Deposition Script

Instructions:

  1. Always bring a copy of this to every deposition – you sometimes do not know that you are going to have a “no-show” deposition.
  2. If you think you may have a no-show, bring with you exhibit copies of all email and letter correspondence with the other side from the previous days, most importantly including any email or letter to the other side telling them that the deposition is going forward, and you expect them to be in attendance. As set forth below, those should be entered into the record with the reporter.

Begin Script:

My name is [_______] and I am joined by [name of anyone else attending deposition with you], and I/we represent the [___________]. This is to be the Rule 30 / 30(b)(6) / 45 deposition of ___________ taken pursuant to Rule 30 / 30(b)(6) / 45 of the Federal Rules of Civil Procedure in Civil Case Number __________ pending in _____________________. [Alternatively, for Georgia cases, or conform to your applicable state laws or rules, “This is to be the deposition of ______ taken pursuant to Sections 9-11-26 and 9-11-30 [or 9-11-45] of the Official Code of Georgia in Civil Action Number ______ pending in the _______ Court of _______ County, Georgia.”]

It is now [time] on [date] and the representative for ________________ [or name person], has not appeared. In addition, counsel for the deponent is not here. We will go off the record for 20 minutes to give the deponent and his/hers/its counsel a bit more time [or so you can call the other side].

It is now [time] and the deponent and his/her/its counsel have not appeared.  [If you sent them an email or called them during the break, which is not required but maybe you do it anyway if you think the other side will try to come up with some excuse later, then put on the record what you did, and the response, if any.] Before marking _________ exhibits, I will provide a concise summary of what has happened in the days leading up to this deposition.

[Provide Concise Summary, noting precisely (i) when you served your notice, and (ii) how you served it. If you had communication with deponent’s counsel (or just the deponent, if the deponent is not represented), you should state the nature of the communications and the purported reasons, if any, for the nonappearance.]

And now, I would like to enter a few exhibits into the record.

Index of Deposition Exhibits

Tab Exhibit Description
1. (Is a true and correct copy of the ) Notice of Deposition
2. (Is a true and correct copy of a) Proof of Service
3. [Email or letters from you re: you better not no-show]
4.  [Other written stuff to get into the record to show the harm of the no-show, if you want and had a sense the no-show was likely.]
5.

 

It is now approximately [time] and the deponent and counsel for the deponent still not appearing, this deposition is suspended due to nonappearance. [Mark and Leah prefer “suspended,” as then the original notice or subpoena is still valid, if discovery periods are expiring you may not need to extend (although check your local rules on this, folks), and you will have the argument that this is a “break” in a deposition that makes the intervening communications between opposing counsel and client fully discoverable and not subject to the privilege.][1] This will conclude today’s transcript.

 

[1] See David S. Wachen and George Hovanec, Can We Talk? Nationwide Survey Reveals Wide Range Of Practices Governing Communication With Witnesses While Defending Their Deposition, published by the Section of Litigation of the American Bar Association (Undated), available on file with the authors.

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The Guarantor Chronicles – Can a guarantor waive its right to a foreclosure confirmation proceeding?

Editor’s Note #1: This post first appeared last week on Bank Bryan Cave, a top blog on regulatory, M&A, and litigation issues for those in the banking world, located at http://www.bankbryancave.com/. Given the close relationship of this post’s topic to the world of distress, we are cross-posting it here.

Editor’s Note #2: For prior posts of interest to those involved in guarantor litigation, see Ninth Circuit Decides Issue of First Impression, Protects Insider Guarantor from Preference Liability, located at http://bankruptcycave.com/ninth-circuit-decides-issue-of-first-impression-protects-insider-guarantor-from-preference-liability/.

Can a guarantor waive his right to a confirmation proceeding under Georgia law, after a non-judicial foreclosure results in a deficiency still owing? Yes.  Last week, in case closely watched by Georgia commercial real estate lenders, borrowers, and guarantors, the Supreme Court of Georgia issued its opinion in PNC Bank, N.A.  v. Smith, 2016 Ga. LEXIS 169 (Ga. Sup. Court Feb. 22, 2016). The case was before the Georgia Supreme Court on two certified questions from the United States District Court for the Northern District of Georgia.  The two Certified Questions were: (1) Is a lender’s compliance with the requirements contained in O.C.G.A. § 44-14-161 a condition precedent to the lender’s ability to pursue a borrower and/or guarantor for a deficiency after a foreclosure has been conducted?; and (2) If so, can borrowers or guarantors waive the condition precedent requirements of such statute by virtue of waiver clauses in the loan documents?

In answering the first question in the affirmative, the Georgia Supreme Court upheld its reasoning in First Nat. Bank & Trust Co. v. Kunes, 230 Ga. 888, 890-91 (1973).  The Georgia Supreme Court echoed the reasoning in Kunes by stating “that notice to both sureties and guarantors is necessary to satisfy the purpose of the confirmation statute— ‘to limit and abate deficiency judgments in suits and foreclosure proceedings on debts’ and to enable sureties and guarantors ‘an opportunity to contest the approval of the [foreclosure] sales.”

The Court’s analysis of the critical second question focused on the Georgia Court of Appeals’ ruling in HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877 (2013), holding that a lender is entitled to pursue a guarantor for any deficiency remaining on a debt after a foreclosure, regardless of whether the lender has confirmed the foreclosure sale, if the guaranty included language waiving all defenses to collection of the debt.  As set forth in Bryan Cave’s amicus curiae brief filed on behalf of the Georgia Bankers Association,[1] a ruling by the Georgia Supreme Court upholding HWA and its progeny, Cmty. & S. Bank v. DCB Investments, LLC, 328 Ga. App. 605 (2014), will do much to correct the current abuse of Georgia’s foreclosure confirmation statute, O.C.G.A. § 44-14-16, which some commercial borrowers and guarantors have used to draw out foreclosure proceedings and prevent collection of any deficiency.  In support of this argument, Bryan Cave’s amicus brief focused on Georgia’s long standing recognition of the freedom to contract, and more specifically, the ability of a party to waive certain defenses.

Justice Melton, writing for the majority in the PNC Bank case, agreed with the reasoning in HWA and DCB Investments reiterating that “a guarantor retains the contractual ability to waive the condition precedent requirement.”  In fact, the PNC Bank opinion explicitly states “[t]his result creates an appropriate balance between the statutory protections of the confirmation statute and the freedom of a guarantor to enter contracts deemed beneficial.”  Accordingly, the Georgia Supreme Court’s opinion upholds HWA and DCB Investments by affirming that guarantors may waive compliance with the confirmation statute.

In a concurrence, Chief Justice Nahmias expressed concerns with the consequences of the decision and suggested that the legislature may wish to examine the issue. We will continue to watch both legislative and judicial activity on this issue and keep readers apprised of any further developments.

[1] Those of you who regularly visit The Bankruptcy Cave will recall the prior post noting that Bryan Cave, on behalf of the Georgia Bankers Association, filed an amicus curiae brief in support of a common sense approach to this matter, allowing parties to freely negotiate as to what notices are warranted, and the waiver of defenses by parties who chose to guaranty debt. http://bankruptcycave.com/bryan-caves-atlanta-office-files-amicus-brief-for-georgia-bankers-association-regarding-guarantor-deficiency-claims/

 

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The A++, Super Comprehensive, Don’t Ever Start Anywhere Else Set of Opening Questions, Introductory Matters, and Document Inquiries for Taking a Deposition

August 31, 2015

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The A++, Super Comprehensive, Don’t Ever Start Anywhere Else Set of Opening Questions, Introductory Matters, and Document Inquiries for Taking a Deposition [1]

Have you ever had to press garlic for a recipe? Or put together a Swedish bookshelf, purchased from a Swedish superstore? Yes, you have – and you may have succeeded, so long as you had a garlic press, or the bag of special Swedish tools respectively. But what if you don’t? Yikes. An easy part of the job becomes hard; your likelihood of failure increases, substantially.[2]

Practicing law is often the same. Certain tasks are very complicated. Reasoning, analysis, complex drafting, making hard things simpler for busy clients to understand – not easy stuff. But with the correct tools, forms, checklists, and honed skills, you can render some of the harder tasks easier, allowing you to focus your time, smarts, and passion on the really tough part of the assignment.

Now, this is not to say the right tool makes for a perfect end result. Preparing Mom’s classic lasagna is no slam dunk, even if you purchased your garlic press from the high?end kitchen store. And the Swedish bookshelf, even with the complete set of tools, well . . . next subject.

So in the first of a long series, we are circulating our best checklists, scripts, do’s and don’ts, and the like. Our first: the introductory matters, opening scripts, and initial questions (word?for?word) to use in any deposition. Why try to remember all the usual opening stuff? (BTW, you never will – there are twelve pages of opening questions and tips, each of them serving a unique purpose, as set forth below). Why scramble the night before the deposition, writing out introductory things (for the nth time), taking you away from preparing for the substance of the deposition, such as key dates, words, thoughts, and documents? We hope that after you read this article, such exercise will be a thing of the past.

Below you will find the following:

  • In case you need more convincing, a preamble of classic deposition errors, made in the first minutes of the deposition, due to the lack of a comprehensive, word?for?word script of introductory matters and questions.
  • The script: a comprehensive, word?for?word list of every opening question and introductory matter for your deposition.[3]

But wait, there’s more!

  • Virtually every deposition deals with documents. But before asking about the substance of a document, ask about its history and minutia – who drafted it? Were there prior versions? Did other people work on it? For how long? Did the deponent ever make notes on it? Or on a prior draft? And where are those notes today?
  • So as your added bonus, we include “The Forty-One Questions to Ask About Every Single Document in a Deposition.”

We hope this is helpful to you.

 

Part I: Classic Deposition Errors –

Often Made in the First Minutes of the Deposition

These have happened to all of us (or a colleague we know) when taking a deposition:

  • You ask the deponent if she has ever been deposed before, but forget to ask if she has ever testified at trial. Thus, you fail to obtain some good information on the deponent. Worse, you don’t know to obtain a trial transcript from some old case to reveal how the deponent holds up (or breaks down) under cross-examination.
  • You ask the deponent how he is feeling that day. He says, “fine.” But you forget to also ask if he is taking any medication. Halfway through the deposition (or afterward, such as when the “read and sign” comes back), you learn the deponent was medicated that day. Or as high as a kite. The deposition is more or less worthless. You probably have to take it again. And you have to explain to the client why it has to pay your billable rate to prepare again, and also take the deposition again (and pay for the new transcription expense) – because you didn’t have a script of opening questions covering this point.
  • You ask the deponent about a document. But you forget to ask if the deponent knows of any prior versions. Or, you actually remember to ask about prior versions, and the deponent states “I don’t know of any.” Yet then, you forget to ask the follow up: “Is there anyone that would know of any prior versions?” And so, you never get the real answer you need: “Well, Ted and Sally ran with the document for a while before I got involved.” This is information you need – it might be critical – but by failing to have written down every single follow up question you should ask about every single document (see Part III, infra), you miss out.
  • You ask the deponent if she has ever been convicted of a crime. But you forget to ask if she has ever filed for bankruptcy or been denied a discharge in bankruptcy. You fail to obtain important information about the deponent and her past fraud or wrongdoing.
  • The attorney defending the deposition asks at the outset if “the usual stipulations apply.” Not wanting to appear uncooperative, or inexperienced, you say “of course.” But why would you agree to ground rules that are not clearly stated? At best, the other lawyer is being lazy and co?opting you into equal laziness. At worst, the other lawyer is creating a record that you agreed to whatever rule, waiver, or system that he later creates to attempt to limit the use of your outstanding deposition.[4]
  • For instance, “the usual stipulations” typically includes waiving the deponent’s right to read and sign. But in some jurisdictions, if the deponent is a non?party, waiving the read and sign process precludes you from using the deposition at trial, unless the other party to the lawsuit also agrees to waive the read and sign. If the other party to the lawsuit simply sat there during your opening of the deposition, saying nothing and smiling as you agreed to “the usual stipulations” mentioned by the non-party deponent’s counsel, then you have likely waived your ability to use the deposition at trial.[5] You have made an error – a very serious one – by agreeing to unstated “usual stipulations.”

The examples are myriad. But it doesn’t have to be this way. None of these are strategic mistakes – they are simply a failure to have, and use, a tried and true list of opening questions and descriptions of the rules of deposition. But fear no longer! Review the attached, and file it away. (Or email your authors for a word version, to cut and paste in to your next deposition outline.) Put the opening stuff on autopilot with the following script, and spend your time and energy on the real deposition preparation.

To continue reading, please download:

Part II: The Word for Word Script of Every Opening Question and Introductory Matter for your Deposition

Part III: The Forty-One Questions to Ask About Every Single Document in a Deposition


 

[1] The Authors wish to thank Wendy Godfrey and Melissa Kotun of Bryan Cave, and Juan Martinez (Emory University School of Law Class of 2015), for their suggestions, additions, and thoughtful revisions, in making this as comprehensive as possible for our fellow litigators.

[2] For some comic relief in the middle of your hard day, enter “What can I use if I don’t have a garlic press?” into the website https://answers.yahoo.com/. YAHOO! ANSWERS, https://answers,yahoo.com (last visited July 28, 2015). Some great responses: “a Chinese knife would be best,” “I used a hammer,” and of course, the classic, “run out and buy a garlic press.”

[3] We don’t pretend to be perfect! If you have others, or better formulations, please contact your authors, we would love to hear from you and include them in a future iteration of this document, with full credit to you.

[4] See Stephen D. Archer, The Dangers of the “Usual Stipulation” in Deposition Practice, Los Angeles Bar Association Survival Guide for New Attorneys, Fall 2006, at 46 http://www.lacba.org/Files/LAL/Vol28No7/SGNA21.pdf.

[5] See Fla. R. Civ. P. 1.310(e) (requiring all parties to agree to allow a deponent to waive signature, if the deposition transcript is to be used at trial).

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Being Sued by the Client You Never Knew You Had

September 22, 2014

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Attorneys with secured lenders for clients may one day find themselves in the following hypothetical scenario: An attorney represents a secured lender in the workout of a loan that is owed by a small distressed borrower. The borrower finds a buyer for its assets (either in a § 363 sale or out-of-court short sale), and the borrower and buyer agree upon the basic terms of the sale transaction. However, the borrower’s counsel does not have the experience, time or resources to draft the sale transaction documents, so the responsibility to “just get it done” falls on the secured lender’s attorney, whose client has the biggest economic stake because it will likely receive most of the sale proceeds.

After the deal closes, it turns out that the borrower is subject to tax claims that could have been avoided if the sale had been done another way, or the borrower is stuck with some pre-closing liabilities that it (mistakenly) thought the buyer was taking, or some other liability that counsel for the borrower should have addressed prior to or at the closing, but that the attorney did not care about or missed. The borrower sues — and the target of the suit is the attorney for the secured lender.
Many of us have been in this situation. The client, the secured lender, is very interested in finding a way to get the deal done. But the borrower’s counsel is slow, perhaps is not being paid, and likely does not have the resources of a larger firm to quickly move the matter along. This article will explore the liability issues raised in the aforementioned hypothetical scenario and provide practical advice for attorneys who find themselves in this or a similar situation.

Over the years, courts have held that a nonclient party may have standing to sue an attorney for malpractice, even though there is no privity of contract. Even absent fraud or collusion, courts have found that a mistake by an attorney, to the detriment of the nonclient party, could result in a viable claim — or at least a claim that will survive a motion to dismiss and likely a motion for summary judgment. Depending on the context, those courts have found that a nonclient party has the standing through the following theories of law: multi-criteria balancing test,1 third-party beneficiary theory,2 secondary implied privity theory, and voluntary or gratuitous agency theory.

All of these claims sound in tort, and as with all torts, in order to establish a claim, the plaintiff must show that the defendant owed a duty of care to the plaintiff.3 Of these theories, the “secondary implied privity” theory and the “voluntary or gratuitous agency” theory are most likely to be used by a borrower to establish a duty of care in the hypothetical scenario. The borrower is likely to raise the “secondary implied privity” theory because the attorney drafted the sale transaction documents for the borrower’s signature, which is something an attorney typically does for his/her own clients. Thus, or so the argument goes, it would be reasonable for the borrower to believe that the attorney represented the borrower’s interests too, creating an implied attorney/client relationship. In addition, the borrower is likely to raise the “voluntary or gratuitous agency” theory because the attorney offered to draft documents for the borrower, and in doing so, the attorney owed a duty of care to protect the borrower’s interest.

We are practitioners who occasionally deal with small, distressed borrowers, and we sometimes have to pick up the drafting pen more than is typical to move a transaction along with dispatch. As such, we think these theories are rubbish. Nonetheless, they exist.

Secondary Implied Privity Theory

Although lawyers are generally comforted by the principle that an attorney/client relationship arises only when there is privity of a contract between a lawyer and client, courts routinely find, as with other contracts, that the contractual relationship between a lawyer and client can be either expressed or implied.4 Such a relationship generally cannot be established absent evidence that the lawyer knew that the nonclient party assumed that the lawyer was representing him/her in a matter.5 In short, an attorney/client relationship may be implied from the conduct of the parties.6 In this situation, the question for the fact-finder is whether the attorney was aware, or should have been aware, that his/her conduct would have led a reasonable person to believe that the attorney was representing that person.7

In Kotzur, a purchaser in a real estate transaction claimed that the lawyer for the seller misled him into thinking that the title was being conveyed clear of all liens.8 The purchaser brought a legal malpractice claim against the lawyer, and the trial court granted summary judgment in favor of the lawyer, holding that the absence of an attorney/client relationship precluded a cause of action. The appellate court reversed, concluding that when (1) the lawyer admitted that he prepared all documents relating to the sale and that the transaction was done on a “family-type basis,” (2) a nonclient party testified that it was his impression that the lawyer was handling the documents for the transaction, and (3) the lawyer never told the nonclient party that he was not representing the nonclient party or to hire a separate lawyer, an issue of fact existed as to the nature of the relationship.

Similarly, in Burnap, lawyers were hired to represent a partnership in connection with the withdrawal of several partners.9 The matter included a mutual release and indemnity in favor of the withdrawing partners by Willard Burnap (who was one of the remaining partners). The lawyers had no direct contact with Burnap, but they did prepare numerous documents for Burnap’s signature. After the withdrawal was completed, Burnap’s indemnity was triggered, and he sued the lawyers for, among other things, professional malpractice. The trial court granted summary judgment for the lawyers, but, as in Kotzur, the appellate court reversed. The appellate court found that a question of fact existed as to whether an implied attorney/client relationship existed because the lawyers prepared numerous documents for Burnap’s signature, Burnap received no notice that the lawyers did not represent Burnap’s personal interests, and Burnap was never informed that his interests might be adverse to the interests of others involved.

In the hypothetical scenario, there is likely a question of fact as to whether the borrower reasonably believed that the attorney represented his interests, since the attorney drafted documents for the borrower’s signature for a sale transaction in which the attorney’s client was only indirectly involved (i.e., involved only to provide a lien release and to receive a check). The attorney also failed to notify the borrower that the attorney did not represent the borrower’s interests, even though he was acting on the borrower’s behalf.

Voluntary or Gratuitous Agency Theory

The doctrine of voluntary agency holds that when a professional (e.g., an attorney) gratuitously offers to perform a task, he/she owes a duty of care in completing that task.10 In brief, even when there is insufficient consideration for a promise to permit an action in contract, a promissor has a duty to fulfill the promise if he/she knows that his/her gratuitous promise has induced reasonable reliance.11 Reasonable reliance is required for this exception to the common law requirements of privity.

For example, in Wright v. Swint,12 the plaintiff purchased a parcel of real estate based on a defective title search performed by the lawyer for the lender. The plaintiff discovered this defect when he attempted to refinance, and when the plaintiff told this to the lawyer who originally closed the transaction, the lawyer gave “assurances” to the plaintiff that the defect was being cured. The trial court granted summary judgment for the attorney, concluding that the lawyer was never the plaintiff’s lawyer. The court of appeals reversed, however, holding that a jury could find that the lawyer owed the plaintiff a duty based on the lawyer’s assurances and purported attempt to fix the defective title.

Similarly, in Simmerson, the court determined that a lawyer who undertakes a task, even without payment, might be responsible for misfeasance, even though the lawyer would not have been liable had the lawyer never undertaken the task.13 Specifically, in Simmerson, after the closing, the lawyer for the seller told the purchaser that he would file all necessary papers evidencing the deal. The lawyer did so — but in the wrong county. Upon discovering the error, the purchaser sued the lawyer. The court of appeals reversed the trial court’s grant of summary judgment for the lawyer, finding that the lawyer was a voluntary agent and, as such, must “use a reasonable degree of care and skill, and … possess to a reasonable extent the knowledge requisite to a proper performance of the duties of his profession.”14

The particular relevance of Simmerson to even larger deals is when counsel for the secured lender undertakes to file UCC-3 termination statements upon confirmation of the receipt of funds from the buyer or new lender paying off the secured lender’s liens. In that instance, Simmerson is on all fours, and if the buyer or new lender is harmed by an untimely or incorrect UCC-3 filing by a secured lender’s lawyer, or the lawyer forgets to file it altogether, then watch out.

Applied to the hypothetical scenario, the borrower’s relationship with the attorney is foreseeable, as the attorney offered to draft, and indeed drafted, the sale transaction documents for the borrower’s benefit. Like the attorney in Wright who voluntarily offered to cure his prior defective title search, the attorney assured the borrower, albeit implicitly, that he would draft all of the necessary documents and would do so in a competent manner. Even though the attorney had no explicit duty to the borrower, having undertaken the task, the attorney was bound to draft the documents with the ordinary and reasonable skill of his profession. If the attorney misses something, then a claim for negligence is likely to follow, and the matter will likely go to trial in light of the cases above in which summary judgment for the defendant/attorney was denied.

How to Avoid Such Nonclient Liability

Because we now know that a court may find an attorney liable to a borrower for negligence under at least two theories, the next question is this: What steps should the attorney have taken to avoid such liability? The ABA Model Rules of Professional Conduct do not specifically address the hypothetical scenario presented in this article. A careful review of the ABA Rules, however, provides guidance to the hypothetical attorney. Comment [4] to ABA Rule 1.3 states that “[d] oubt about whether a client/lawyer relationship still exists should be clarified by the lawyer, preferably in writing, so that the client will not mistakenly suppose [that] the lawyer is looking after the client’s affairs when the lawyer has ceased to do so.” Rule 1.13 (f) (“Organization as Client”) affirmatively requires a lawyer to “explain the identity of the client” when the interests of a client organization are adverse to those of its constituents. Comment 10 to Rule 1.13 (f) (“Clarifying the Lawyer’s Role”) further directs the organization’s lawyer in such a situation to ensure that the constituent understands that “the lawyer for the organization cannot provide legal representation for that constituent individual.”

When in doubt, refer to the ABA Rules. Even though the ABA Rules do not address the exact hypothetical mentioned at the beginning of this article, they do provide guidance for similar situations, and the guidance consistently requires the attorney to clarify who he/she represents, preferably in writing.

This advice is consistent with the warnings from case law. For instance, in Fox, a legal malpractice case brought by an unrepresented party in a real estate transaction, the court noted that “neither appellants nor respondent specifically recall [the] respondent advising them to seek independent counsel, and there is no written notice or advice to such effect.”15 Thereafter, the Court made the following statement:

Attorneys in these circumstances are well advised to place a disclaimer in writing. A simple clause in the agreement stating that it was prepared by the attorney for the opposite party acting solely on behalf of that party’s interest, and advising the other parties to seek independent legal counsel to protect their own interest, might have prevented this action from being filed.

As another example, a North Carolina State Bar Ethics Opinion provides that in real estate transactions, an attorney may, with proper notice to the borrower, represent only the lender, and the lender may prepare the closing documents.16 The Ethics Opinion further explains that as long as the attorney clearly explains to the borrower that he/she represents only the lender and makes that disclosure far enough in advance of the closing so that the borrower can procure his/her own counsel, the attorney has no duty to notify the borrower of potential defects in the title. The Ethics Opinion also strongly suggests that the notice be in writing.

Practical and Easy Steps

If there is any potential ambiguity about whether the lawyer represents specific nonclient parties, the lawyer should send a “non-representation” letter to each of them. Consider using the following language:

This firm is representing [name your client] in [describe nature of the matter]. While you have not requested that we represent you, we want to make it clear that we do not represent you in this matter, and you should not look to us for protection of your interests in the matter. Given [describe client’s role in matter], however, the firm drafted [describe documents]. The [describe documents] were prepared solely in the interest of [name your client]. Our initial draft nor any future input shall create any implication that the firm represents anyone other than [name your client]. We recommend that you obtain other counsel

Such a letter should be sent certified mail with proof of mailing retained; it is the simplest way to avoid potential liability to nonclient parties while still pushing the deal forward for your secured lender client.


  1. See, e.g., Lucas v. Hamm, 364 P.2d 685, 688 (Cal. 1961) (factors include extent to which transaction was intended to affect plaintiff, foreseeability of harm to plaintiff, degree of certainty that plaintiff suffered injury, closeness of connection between defendant’s conduct and injury, policy of preventing future harm and extent to which profession would be unduly burdened by finding of liability).
  2. See, e.g., Flaherty v. Weinberg, 492 A.2d 618, 622 (Md. 1985) (nonclient party must allege and prove that intent of client to benefit nonclient party was direct purpose of transaction or relationship).
  3. See, e.g., Palsgraf v. Long Island R. Co., 162 N.E. 99 (N.Y. 1928) (absent duty owed by defendant to plaintiff, there can be no tort claim) (Cardozo, C.J.); Tarasoff v. Regents of Univ. of Cal., 551 P.2d 334, 343 (Cal. 1976) (“[A] duty of care may arise from ‘… a special relation … between the actor and the other, which gives to the other a right of protection.’”).
  4. See Fox v. Pollack, 226 Cal. Rptr. 532, 534 (Cal. Dist. Ct. App. 1986).
  5. See Burnap v. Linnartz, 914 S.W.2d 142, 148-49 (Tex. Ct. App. 1995).
  6. See Kotzur v. Kelly, 791 S.W.2d 254, 257 (Tex. Ct. App. 1990).
  7. See Burnap, 914 S.W.2d at 148-49.
  8. Kotzur, 791 S.W.2d at 257.
  9. Burnap, 914 S.W.2d at 145-46.
  10. See Simmerson v. Blanks, 254 S.E.2d 716, 718 (Ga. Ct. App. 1979).
  11. Id.
  12. 480 S.E.2d 878 (Ga. Ct. App. 1997).
  13. Simmerson, 254 S.E.2d at 719.
  14. Id. at 718.
  15. Fox v. Pollack, 226 Cal. Rptr. 532, 534 (Cal. Dist. Ct. App. 1986).
  16. N.C. Revised Rules of Prof’l Conduct RPC 40 (1989).
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