Legal Disclaimer

  • This blog is made available by the law firm of Dickinson, Mackaman, Tyler & Hagen, P.C. for educational purposes only. It is intended to provide general information and a general understanding of the law, but not specific legal advice. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Use of this blog does not create an attorney-client relationship between you and Dickinson, Mackaman, Tyler & Hagen, P.C. or any of its attorneys. The content of this blog is not an advertisement for legal services, nor is it an invitation to form an attorney-client relationship. Statements made in this blog are the viewpoints of the individual authors, and do not necessarily reflect the views of Dickinson, Mackaman, Tyler & Hagen, P.C. or any of its clients. Although this blog may address certain tax issues, it is not intended to constitute a reliance opinion as described in IRS Circular 230 and, therefore, cannot be relied upon by itself to avoid any tax penalties.

Economy/Interest Rates

Tuesday, June 09, 2009

The Credit Crisis and Commercial Impracticability

The bankruptcy of Lehman Brothers Holdings Inc. in September of 2008 resulted in a global credit crisis.   It seems clear that this credit crisis has greatly exacerbated the current global recession and has been extremely damaging to developers of commercial real estate.   An unresolved issue is the extent to which problems associated with the credit crisis may excuse performance of contractual obligations on grounds of commercial impracticability. 

 

A high profile example is the litigation involving the Trump International Hotel and Tower project in Chicago.  In November, Donald Trump’s development company commenced litigation against Deutsche Bank AG and other lenders asserting the right to an extension of the maturity date of the first mortgage construction loan for the project until the abatement of the credit crisis.  In this litigation Trump asserted that the credit crisis constitutes a force majeure under the terms of their agreement.  On March 3, 2009, the parties announced that they have suspended this litigation, which should permit construction to be completed.  It is not clear whether the court will ever rule on the merits of Donald Trump’s assertion that the maturity date of the loan must be extended because of commercial impracticability resulting from the credit crisis. 

 

Courts normally will enforce a force majeure clause in accordance with its terms.  Commercial impracticability will not excuse performance when a court concludes that a party has assumed the risk of the event by the terms of the contract.  Therefore, the result in any particular situation may depend on the exact wording of the contract between the parties.    

 

Generally, courts in modern cases tend to require only a showing of impracticability rather than a showing of strict impossibility.  Courts often look to Restatement (Second) of Contracts § 261 which states:

 

Where, after a contract is made, a party’s performance is made impracticable without his fault by occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

 

The expansion of the legal defense of impossibility to include commercial impracticability has also been influenced by the provisions of Section 2-615 of the Uniform Commercial Code which deals only with the sale of goods and which provides in part as follows:

 

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:  (a)  Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.  [emphasis added]

 

In general, a claim of commercial impracticability requires the absence of fault by the party seeking to be excused and an event that could not reasonably have been foreseen. Temporary impracticability merely suspends the duty of performance.  Temporary impracticability resulting from the credit crisis would raise additional difficult questions:  Has the credit crisis ended?  When did the credit crisis end?  What events marked the end of the credit crisis?

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Friday, April 25, 2008

Is LIBOR Accurate?

The Banking Law Prof Blog has a brief discussion and link to a Wall Street Journal article suggesting that LIBOR (the London inter-bank offered rate) may be artificially low.  Banks in trouble may have been reporting lower rates for inter bank borrowing because they don't want to own up to their actual financial condition.  See Banking Law Prof Blog Article.  So, consumers had been puffing their credit to get home loans, if they are even asked.  Unregulated mortgage brokers puffed, or neglected to fully explain, the financial terms of mortgages they were handing out left and right.  These loans were then securitized and sent down the line.  Now, after those loans went south, partially causing our current economic "slow down," institutions are puffing the interest rate they are getting?  Is the state of the economy being puffed to us?  Let's hope all the huffing and puffing doesn't blow this house down.   

Monday, October 22, 2007

Survey Reports Midwestern Rural Economy Slowing

According to a survey of bank presidents and CEO's in non-urban, agriculturally dependent areas of ten states, rural economy growth has declined for the seventh time this years.  The survey, dubbed the Rural Mainstreet Index, was originated at Creighton University.  A score of 50 indicates growth.  Iowa has the second lowest index score, at 43.9.  The overall index is at 52.1.  In the survey, 60% of CEO's were of the opinion that the benefits of corn-based ethanol have been oversold.  For further information on the RMI see this article from the Omaha World Herald and this release from Creighton University.

Tuesday, August 21, 2007

Subprime Lineage

          The reports of a recent depositor run at the Countrywide Bank in California may reveal an emerging shortcoming in comfort with the industry's FDIC insurance.  See article in Atlantic Journal-Constitution.  This new phenomena of undifferentiated fear may be the result of the increasingly complex and intertwined system of financial products confronting and confusing investors.  An insightful analysis of this growing customer anxiety and the potential inability or unwillingness of bank customers to differentiate the "insured" financial product from the uninsured financial instrument can be found in the Op-Ed column by Paul Krugman of the New York Times available here (subscription required). 

          Whether more regulation, or simply more common sense, is needed to deal with the recent credit events, Barney Frank, Chair of the U.S. House Financial Service Committee believes in and is urging more federal intervention.  See Financial Times article.  Mr. Frank calls for regulation of mortgage brokers, guidelines for securitization of mortgages, and a total reevaluation of the regulation of financial markets. 

Firm Website

Enter your email address:

Delivered by FeedBurner

Iowa LLC Blog