Old Contracts, New Problems: When a 2004 Agreement Becomes a 2024 Courtroom Drama
This belated review of the first quarter case law is still more timely than the contract at issue in the first case we are going to review. Proving that things often move at a glacial pace in the legal arena.
A lot of the time it feels like lawyers spend too much time arguing about indemnities in agreements. The business principals sometimes ignore the bickering and forge ahead with onerous indemnities. Presumably they believe, in the words of the Canadian politician Charlotte Whitton, that “action makes more fortune than caution.” Mostly, I suspect, they are right. However, in the first quarter of 2024, in FDIC v. Freedom Mortg. Corp., No. 8:23-cv-01359-FWS-KES, 2024 U.S. Dist. LEXIS 49912 (C.D. Cal. 2024), the anxieties of every lawyer on this subject were justified when the court dissected an indemnity provision from an agreement dated March 3, 2004. At the time of the agreement in question, Barack Obama had yet to enter the United States Senate and Taylor Swift was only 14 years old. The agreement in question was between a mortgage broker and the now defunct Washington Mutual (“WaMu”). It contained an indemnity provision: [Defendant] will indemnify, defend and hold [WaMu] . . . harmless from any and all costs, claims, charges, actions, causes of action, losses or liability arising either directly or indirectly, regardless of any indemnitee's negligence, by reason of [Defendant]'s negligence, a breach of the terms or conditions of this Agreement, or in any way as a result of an inaccurate or incomplete application or other documentation prepared by or at the direction of [Defendant]. [Defendant's] duty to defend and indemnify [WaMu] under this paragraph shall arise immediately upon notice by [WaMu], without the requirement that [WaMu] have previously become liable to others or have been required to pay any amounts whatsoever. In plain language (skipping over some subtleties): if the loan broker was negligent or there was an inaccurate or incomplete application prepared by or at the direction of the broker, and that caused a loss to the bank, then the broker would indemnify the bank. In this case though, WaMu failed. Its operations were seized and placed in receivership with the FDIC. It was, at that time, the largest bank failure in American history. Prior to the FDIC receivership, WaMu had sold a portfolio of residential loans, including twenty-five loans brokered by the defendant, into residential mortgage-backed securitized trusts (“RMBS Trusts”). In a turn of events that will surprise no one who lived during that era, the RMBS allegedly suffered losses due to allegedly defective loans. The RMBS would have sued WaMu, but instead, on August 26, 2009, it sued the FDIC in its capacity as the receiver of WaMu. The FDIC fought the lawsuit but eventually settled with the RMBS Trusts for three billion dollars in a written settlement agreement with an effective date “no earlier than September 5, 2017." In the next twist, approximately five years and ten months after the settlement, the FDIC sued the broker of the twenty-five loans brokered under the agreement containing the indemnity language cited near the beginning of this blog article. The parties both agreed, that in this case, it would be a six-year statute of limitations because 12 U.S.C. § 1821(d)(14)(A) provides the statute of limitations applicable when the FDIC brings an action as the longer of six years after the date on which the claims accrues or the period applicable under state law. In this instance California only has a four-year statute of limitations for written agreements, so the longer six-year statute of limitations applied because the suit was brought by the FDIC. The parties disagreed, however, on when that six-year period started to accrue. Not wishing to defend a lawsuit nearly two decades after the brokering of the loans, the Defendant brought a motion to dismiss arguing that the lawsuit was untimely because the statute of limitations should have started to accrue either when the Plaintiff received notice of the claim in 2009 or on June 30, 2017 when the settlement agreement was approved by the California Superior Court. The court recited the rule, which is that a claim for breach of contractual indemnity under California law accrues when the indemnitor sustains the loss (my emphasis added) by paying the amount of money for which the indemnitee seeks indemnification. It then addressed two points of the Defendant –
First on matter of contract interpretation, the Defendant argued that this clause -- “[Defendant's] duty to defend and indemnify [WaMu] under this paragraph shall arise immediately upon notice by [WaMu], without the requirement that [WaMu] have previously become liable to others or have been required to pay any amounts whatsoever” – meant essentially that the six-year period began when the FDIC became aware of the lawsuit. However, the court noted that two other courts had found the most natural reading of the provision altered when the right to seek indemnification arose for WaMu (i.e., not when the right to seek indemnification ended).
The second argument from the Defendant was the court approved the settlement agreement on June 30, 2017, and that is when the six-year statute of limitations should have started to accrue. As noted above, however, the settlement agreement had an effective date of September 5, 2017, and the purpose of that delayed effective date was to put the effective date of the settlement past the time in which it could be reviewed by the court.
The court concluded that the FDIC timely filed within the six-year statutory period.
While I think the court got the decision right, the outcome here is nearly impossible to believe in some respects. The Blackberries, which were likely in use, and/or the HP or Dell desktops from the time are long gone. Witnesses will have switched jobs, or moved, or died. And the ones who can be found will likely have a foggy memory at best. Few of us can recall the particulars of a document we saw in the third week of April in 2004.
From a practice point, I wrote about indemnities last quarter and much of the musings remain applicable here. Since the broker in this case seems to have been making a one-sided indemnity, a clause limiting indemnification rights to a certain time period may have worked to prevent this outcome. And in the normal course, that would seem fair as well. If someone fails to make payments in the second year of their mortgage, it might be the fault of the broker; but if someone fails in the twentieth year of their mortgage, that would not seem to be connected to the underwriting process. As previously discussed though, a lot of indemnity provisions tend to be mutual and inserting the concept of a time limit would likely end up applying to both parties. Ergo, it’s apparent that we want the time limited when we can be a defendant, but it’s not so obvious that we would want the time limited when we can be a plaintiff. FDIC v. Freedom Mortg. Corp., No. 8:23-cv-01359-FWS-KES, 2024 U.S. Dist. LEXIS 49912, at *7 (C.D. Cal. 2024).
How One Landlord’s Secret About His Greenhouse Caused Serious Loss
In the second case of our first quarter review, a landlord renting a greenhouse in Encinitas, California failed to disclose asbestos in the greenhouse. The landlord acquired the real property in 2012 with knowledge that several of the greenhouses on the property contained asbestos, including one which had “friable asbestos” which had to be remediated. The landlord did so, immediately, during the escrow phase of the acquisition of the property. The remaining greenhouses were believed to contain so-called “inert” asbestos that would generally not pose a human health risk unless disturbed. In 2014, the landlord rented one of the other greenhouses to the tenant. The landlord did not disclose any information related to the presence of the asbestos to the tenant. The lease contained a limitation of liability provision which stated, in part: Landlord shall in no event be liable for any consequential damages or loss of business or profits and Tenant hereby waives any and all claims for any such damages.” Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC, 99 Cal. App. 5th 44, 52 (2024). The tenant made renovations to the greenhouse. At no time did the landlord express any concern to the tenant that the renovations could expose asbestos to the elements. But it wasn’t the renovations that caused the discovery. Around March or April of 2016, a storm in the area damaged the greenhouse and opened a steam pipe. The tenant informed the landlord.
To the landlord’s credit (but, in my opinion further demonstrating their culpability) the landlord engaged a company specializing in asbestos remediation to repair the broken steam pipe. The landlord did so despite a provision in the lease that made the tenant responsible for repairs to the property. After the pipe was fixed, the tenant noticed some debris remained. The tenant sent samples of the debris to a laboratory for testing. The testing revealed asbestos and lead paint. In March of 2017, the County of San Diego quarantined the greenhouse because of friable asbestos in the air and on the ground. But, according to the record in the case, as part of an abatement plan the landlord had the soils and orchid plants HEPA vacuumed and notified the tenants in May of 2017 to retrieve the orchids. The tenant abandoned the inventory.
In June of 2018, the tenants filed a lawsuit against the landlord for seven causes of action. The jury's special verdict found the landlord liable for premises liability and negligence. The jury also found the landlord intentionally failed to disclose facts the tenant did not know, and could not reasonably have discovered, but the jury found no intent to deceive and therefore no liability for concealment. The jury awarded tenant $144,300 in “lost profits” and $77,700 in “other past economic loss.” Id. at 53.
After the trial, the landlord filed a motion for judgment notwithstanding the verdict (a JNOV) on the basis that the lease contained the limitation of liability clause that would bar recovery of “consequential damages or loss of business or profits.” The trial court agreed that the limitation of liability clause applied and granted JNOV for the landlord.
An appeal ensued. Several issues were raised on appeal, but this blog is exploring whether the limitation of liability clause barred the recovery of the tenant. The court explored several laws. First: “Any owner of nonresidential real property who knows or has reasonable cause to believe, that any release of hazardous substance has come to be located on or beneath that real property” must before leasing the property, give the lessee written notice of the condition. (Former § 25359.7, subd. (a), italics added.). Id. at 57.
Next, the court reviewed the asbestos notification law: When construction, maintenance, or remodeling is to be conducted in an area of the leased premises where there is the potential for employees to encounter asbestos or asbestos-containing materials, the owner responsible for the construction, maintenance, or remodeling must post a written warning. (§§ 25915.5, subd. (a), 25916.) The posted warning sign must state either: “CAUTION. ASBESTOS. CANCER AND LUNG DISEASE HAZARD. DO NOT DISTURB WITHOUT PROPER TRAINING AND EQUIPMENT.” Or “DANGER. ASBESTOS. CANCER AND LUNG DISEASE HAZARD. AUTHORIZED PERSONNEL ONLY. RESPIRATORS AND PROTECTIVE CLOTHING ARE REQUIRED IN THIS AREA.” (§ 25916, subds. (a) & (b).). Id. at 58 The appellate court found that the jury had concluded that the landlord had violated the above laws. Recall in a prior blog, the nexus of limitation of liability clauses and Section 1668 of the California Civil Code was discussed and essentially that is also what came to be in play here:
“[A]ll contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his [or her] own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” Id. at 60.
The appellate court in this case found that the landlord's failure to comply with disclosure requirements contained in the Health and Safety Code prevented the tenants from knowing about latent hazardous materials at the premises which tenant had no way of discovering on its own. The appellate court found that landlord’s statutory violations led directly to tenant's financial losses. Accordingly, it found that the limitation of liability clause could not be upheld under Section 1668 of the California Civil Code and that the trial court had improperly granted JNOV to the landlord. 62.
Here, the court came to the right conclusion. In my opinion, the landlord was a bad actor. But, as long as none of the officers or employees of the tenant contract mesothelioma, the tenant had a stroke of luck as well. The record of the case stated that the tenant did not hire a lawyer and that the tenant had only read the portions of the lease related to the price and the term. One wonders if a disclosure document had properly been inserted in packet of lease documents whether it would have been reviewed. Nevertheless, paraphrasing the appellate court, these disclosures often run counter to a party’s business interests but the Legislature determined that the information should be made available in order to promote informed choice.
The practice point here is rather obvious: keep your business in compliance with the law. Otherwise, among other possible ramifications, the limitation of liability clauses in your agreements may not be enforced by the courts.
Why California’s Decades-Old Invasion of Privacy Act is Back in the Spotlight
Hollywood is not the only center of creativity in California. From time to time, the plaintiff’s bar imagines and creates entirely new genres of lawsuits. The lawsuit spectacle du jour for the last year or so centers around privacy claims and websites. A person might (somewhat reasonably) jump to the conclusion that these claims come from the much newer California Consumer Privacy Act. But, in fact, most of the lawsuits seem to allege violation of the decades older California Invasion of Privacy Act, Cal Penal Code § 631. Broadly speaking, the core claim is typically that so-called “Session Replay” providers, which create a video replay of a consumer’s visit to a website and provide it to the site owner, are violating prohibitions against wiretapping. The courts seem to be meeting these claims with healthy skepticism. But, as each case is factually slightly different, it may be a while longer before there’s clear guidance as to how the courts treat these claims. In one such case decided in the first quarter, Mikulsky v. Bloomingdale's, LLC, No. 3:23-cv-00425-L-VET, 2024 U.S. Dist. LEXIS 17411 (S.D. Cal. 2024), the court granted the Defendant’s motion to dismiss for failure to state a claim. Plaintiff had made claims based on the wiretapping portion of the California Invasion of Privacy Act (“CIPA”) and on common law claims of intrusion upon seclusion. Bloomingdales had argued, essentially, that what was being recorded was not the “contents” of a communication “in transit” as required by California Penal Code § 631(a)(2). The court more or less agreed and narrowly construed the statue. With respect to the CIPA claims, the court likened the recording of the Plaintiff’s "button clicks, mouse movements, scrolling, resizing, touches (for mobile browsers), key presses, page navigation, changes to visual elements in the browsers, network requests, and more" to information about a telephone call's "origination, length, and time" which have previously been deemed not to be contents pertaining to the substance of the telephone call. Next, the court stated that to state an intrusion upon seclusion claim under California common law, a plaintiff must plead that (1) a defendant intentionally intruded into a place, conversation, or matter as to which the plaintiff has a reasonable expectation of privacy and (2) the intrusion occurred in a manner highly offensive to a reasonable person.
Without much analysis, it stated that courts have been unwilling to find a cognizable privacy interest in browsing data from users on Defendant's own website. Mikulsky v. Bloomingdale's, LLC, No. 3:23-cv-00425-L-VET, 2024 U.S. Dist. LEXIS 17411, at *21 (S.D. Cal. 2024). Therefore, the court also dismissed the claims for intrusion upon seclusion. Here, I think the court got it right on both points. From a broader policy standpoint, the wiretapping statute was not enacted to prohibit the conduct that is occurring here. So, it is only appropriate that the court reviewed the statute narrowly. Next, though it somewhat summarily dismissed the intrusion upon seclusion common law claim by citing prior case law, can it be said that any plaintiff has a reasonable expectation of going to a website and having the interaction be private? In one respect, visiting the Bloomingdales website is like visiting their store. Yes, it would be offensive to have someone peeking into the dressing room, but we certainly have the expectation that staff at the store will be casually monitoring our movements. The buttons, clicks and browsing seem to be more like the case of walking around the Bloomingdales store and less like the case of someone peeking into the dressing room. Still, getting common law claims which often rely on fuzzy standards dismissed at an early stage of a lawsuit can be difficult.
In this particular case, the plaintiff amended the complaint again but was denied again. At the time of writing this blog, the plaintiff is appealing the matter to the 9th Circuit.
By contrast, in a separate case also decided in the first quarter, Carnival, the cruise line operator, had also been using session replay technology to record users on its site. Plaintiffs’ claims were very similar to the Bloomingdales case above, but Carnival was denied on the motion to dismiss. The legal arguments being made were similar, but I think the fact the user’s passport information had been transferred to the third-party providers of the session replay technology made the court uncomfortable. It found that users had not consented to the third-party recording because of the sensitive nature of the information. Price v. Carnival Corp., No. 23-cv-236-GPC-MSB, 2024 U.S. Dist. LEXIS 10175, *11 (S.D. Cal. 2024). And thus, allowed plaintiffs’ claims to survive the motion to dismiss state.
It's premature to conclude anything in this arena. The litigation is especially unpredictable and hopefully, the 9th Circuit provides sensible guidance. Businesses of all types have long shared information about their customers with partner vendors, of course, even before the internet era. Further, this kind of activity is more appropriately regulated under the purview of modern data privacy acts. Accordingly, my view is the courts will eventually reign in the frivolous suits. However, as a practice point, you may want to review the indemnities with any third-party technology providers.
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