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Litigation in 2009: Creative Strategies Creating Opportunity Anything Other Than Business as Usual

Article

Corporate & Finance Alert

April 7, 2009

The reality of a new financial landscape is becoming increasingly clear and the outlook for many businesses is dim. With scarce resources to litigate, scores of businesses are finding themselves stuck in deals that were once profitable but no longer make economic sense. Real estate redevelopment projects across the nation are in turmoil and multi-million dollar deposits stand to be forfeited with inability to obtain financing. In these trying economic times, businesses across all industries are being forced to look outside the box to find creative solutions to their problems. It is no surprise, then, that in the litigation arena we are seeing a new wave of creative tactics as lawyers seize unique opportunities for their clients.

In the current economic climate, financing for deals has all but dried up. Increasingly, many businesses find themselves in the position of being forced to seek cost effective and legal solutions to compel performance of existing contracts. Conversely, for business that find themselves locked in contracts that no longer make economic sense, the goal is entirely different: to find innovative ways to escape the terms of otherwise binding contracts through the courts. One creative legal solution which is being employed with increasing frequency is the filing of a lawsuit for material breach of contract as a means to be released from a deal which is no longer economically viable.1 For business on either side of the equation, it is important to be aware of these creative strategies.

Other sharp-minded attorneys have chosen not to go on the offensive and file lawsuits for material breach of contract, but instead have chosen to rely on seemingly exotic defenses to contract enforcement. For example, defenses such as the doctrine of unclean hands or reliance on force majeure provisions are suddenly gaining traction. In the $40 million lawsuit Deutsche Bank instituted against Donald Trump for repayment of a loan obtained in connection with the construction of the Trump International Hotel and Tower in Chicago, Trump’s lawyers have seized on the force majeure clause in the lending agreement in an attempt to avoid payment.2 The clause allows the borrower to delay completion of the building if construction is disrupted by riots, floods or strikes, but also contains a catch-all section covering “any other event or circumstance not within the reasonable control of the borrower.”3 Trump’s lawyers contend that the current financial crisis and plummeting real estate market falls within this catch-all section.4 If Trump’s defense ultimately prevails, real estate litigators are sure to encounter its use in other projects that have been affected by the recession.

It is not just the borrowers in default who are employing new ways to litigate. In a recent decision out of the Superior Court of New Jersey, Chancery Division, entitled Hageman v. 28 Glen Park Associates, LLC, Judge Harriet F. Klein dismissed a Complaint based on predatory lending and foreclosure rescue scam allegations due to plaintiff’s “unclean hands.”5 The Hageman case gives us insight in these trying times, so much so that the infrequently invoked equitable maxim of “unclean hands” is suddenly holding water in unique and compelling circumstances.

While certainly no one could have predicted the dramatic economic events of late 2008, practitioners must remains nimble to the challenges ahead. In effect, these events have created newfound opportunities for our clients. Now, more than ever, we are not forced to sit idly by watching transactions unfold and more money slip away. We no longer have to feel like sitting ducks, trapped in deals that no longer make sense. These times have implored the court system to revisit and reevaluate legal theories in order to alleviate some of the situations we are faced with today. In fact, there are more solutions available now than before. It is time to stand up and take action. We must not “give up” and let these difficult times take further advantage of our clients livelihoods. Cost-effective solutions, creativity and a premium on results stand to be the hallmark for 2009 and beyond.



1 See Magnet Resources Inc. v. Summit MRI Inc.,  318 N.J. Super (App. Div 1998) (material breach may excuse performance by the non-breaching party).
2 David S. White, Trump’s Force Majeure Problem, Fox & Hounds Daily, December 22, 2008; Floyd Norris, Trump Sees Act of God in Recession, December 5, 2008, http://www.nytimes.com/2008/12/05/business/05norris.html
3 Ibid.
4 Ibid.
5 Hageman v. 28 Glen Park Associates, LLC, 402 N.J. Super. 43 (Ch. Div. 2008).