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When securing your fee is not a priority

When securing your fee is not a priority

A recent case before the Utah Court of Appeals saw a law firm challenge a trial court’s ruling that a judgment creditor’s right to a set off takes priority over the firm’s right to rents under an assignment.  The court of appeals ultimately disagreed with the law firm’s argument that, as an assignee, the firm had priority over a judgment creditor.  The appellate court concluded that the law firm merely “stood in the shoes of its assignor,” and, because the assignor had no right to receive the rents in question, neither did the law firm as an assignee.  As a result, the law firm lost out on the remainder of its fee, which included a portion of an annual rent payment of more than $3 million owed to its client pursuant to a lease agreement.

ASC Utah Agrees to Pay Annual Rents Under Lease Agreement

In 1997, ASC Utah entered into an agreement (“Ground Lease”) with Wolf Mountain to lease property in Summit County, Utah for the purposes of operating a ski resort.  Pursuant to the Ground Lease, ASC Utah was obligated to make “a substantial annual rental payment each September” to Wolf Mountain.

Wolf Mountain Assigns Right to Receive Rents to Law Firm

ASC Utah eventually sued Wolf Mountain, “alleging various breaches of the Ground Lease.”  Wolf Mountain subsequently retained the aforementioned law firm to defend it against the claims alleged by ASC Utah.  During the litigation, Wolf Mountain began to fall further and further behind in its obligations to pay the law firm.  As a result, in March 2011, shortly before trial, Wolf Mountain and its lawyers agreed to enter into an amended engagement agreement in order to secure the remainder of its legal fees.  The amended engagement agreement “required Wolf Mountain to make specified monthly payments to [the law firm] until its legal fees were paid in full.”  The amendment also set forth that:

In order to secure its obligations to [the law firm] hereunder, [Wolf Mountain] hereby grants to [the law firm] a security interest in, and hereby assigns to [the law firm] all of [Wolf Mountain’s] right, title and interest in and to, both (a) Rent . . . and (b) Option Payments . . . in [the] Ground Lease Agreement dated July 3, 1997 . . . , by and between [Wolf Mountain] and ASC Utah, Inc.

Wolf Mountain Hit With $60M Judgment

Following a seven-week trial, a jury awarded ASC Utah $54.5 million in damages.  The trial court’s judgment entered against Wolf Mountain totaled approximately $60.6 million, which amount included interest and attorney fees.

ASC Utah Motions Court for a Set Off

In light of the judgment against Wolf Mountain, ASC Utah filed a motion with the trial court seeking to assert its “right to set off the annual rent payments due under the Ground Lease against the Judgment.”  The district court, just one week before ASC Utah’s $3 million rent payment was due to Wolf Mountain, granted ASC Utah’s motion, even though Wolf Mountain had challenged that ASC Utah was not entitled to any “set off” under the terms of the lease agreement.

The district court concluded that, “although ASC Utah had waive[d] the right [to a] setoff under section 3.02 of the Ground Lease, the Judgment for Wolf Mountain’s breach triggered section 17.02,” which the district court said “provided that [t]his Lease is a valid and binding obligation of Landlord enforceable in accordance with its terms, subject to equitable principles ….”  Accordingly, ASC Utah was allowed to deduct its annual rental payment to Wolf Mountain from the $60 million judgment.

Wolf Mountain’s Lawyers Sue Over Assignment of Rents

In November 2011, Wolf Mountain’s law firm sued both Wolf Mountain and ASC Utah “alleging various claims for relief, including breach of contract against Wolf Mountain and unjust enrichment against ASC Utah.”  The law firm’s claims “were aimed at recovering the attorney fees that [the law firm] alleged it was due under the terms of the assignment.”  In March 2012, the law firm moved for summary judgment as it related to rent payments, claiming that its right to rents had priority over any set offs pursuant to the judgment.

On summary judgment, the law firm argued that Wolf Mountain’s assignment secured its claim for attorney fees against any claim that ASC Utah had as a result of the judgment: “[A]t the time [ASC Utah] recorded its judgment lien against the Property, the judgment lien, as a matter of law, did not extend to the Rent, up to the amount of [the law firm’s] legal fees, because Wolf Mountain had already conveyed and assigned the Rent to [the law firm] months earlier.”

ASC Utah’s Right to a Set Off Takes Priority Over Law Firm’s Assignment

In August 2012, the district court denied the law firm’s motion for summary judgment, concluding that, as a matter of law:

Wolf Mountain’s purported assignment to [the law firm] of an interest under the Ground Lease—the right to receive rents and other payments—at best gave [the law firm], as purported assignee, the same rights as Wolf Mountain, the assignor, and nothing more. The Court also concludes as a matter of law that any assignment of rents under the Ground Lease that [the law firm] may have acquired from Wolf Mountain would be wholly subject to [ASC Utah’s] right of setoff or recoupment arising under the Ground Lease. The Court further concludes as a matter of law that Wolf Mountain’s right to receive rent payments from [ASC Utah] under the Ground Lease was extinguished by [the Setoff Order] before any such rent monies were due and owing. The Court adheres to, and the parties are bound by, [the Setoff Order]. The Court therefore concludes as a matter of law that because Wolf Mountain has no right to receive those monies, neither does [the law firm] as Wolf Mountain’s purported assignee.

Based upon the district court’s ruling, ASC Utah filed its own motion for summary judgment, which was granted by the district court.  The law firm thereafter appealed.

Law Firm’s Interest in Rents Subject to ASC Utah’s Right to a Set Off

In its opinion, the court of appeals framed the issue for appellate review as “whether [the law firm’s] right to Ground Lease rents under the assignment is superior to and takes priority over ASC Utah’s right to set off those rents against the Judgment.”  On appeal, the law firm argued:

Wolf Mountain conveyed all of its interest in the Rent to [the law firm] before [ASC Utah] obtained its judgment lien against Wolf Mountain.  [The law firm’s] interest in the Rent is not simply that of a secured creditor….  Rather, [the law firm] owns—free and clear of all encumbrances—the right to receive the Rent.  That was the position Wolf Mountain was in when it conveyed its right to receive the Rent to [the law firm].  Because [ASC Utah’s] right to setoff and resultant judicial lien came several months after [the law firm’s] acquisition, [ASC Utah’s] execution on the Rent is subject to [the law firm’s] rights therein.

ASC Utah argued in opposition that the issue must be resolved according to the law of assignments, which ASC Utah said bestowed no greater rights upon the law firm as an assignee than those held by the assignor, Wolf Mountain.  Accordingly, ASC Utah told the court of appeals that “because Wolf Mountain’s interest is subject to ASC Utah’s right to set off, so is [the law firm’s].”

Law Firm Argues ASC Utah Should Pay its Fees from Rents Not Otherwise Owed

The court appeals noted that the law firm’s argument was premised on the underlying idea that “the right to receive future rent payments is severable from all other rights and responsibilities contained in the Ground Lease.”  According to the law firm, once the right to receive rent from ASC Utah was assigned to the law firm, Wolf Mountain no longer owned any right to ASC Utah’s rent payments, the law firm did.  Therefore, the law firm argued that ASC Utah could not set off the annual rent payment against the judgment because the law firm “received the assignment of Rent before [ASC Utah] obtained any set off rights,” and as a result the law firm’s right to the rental payments took priority over any set off.

The court of appeals disagreed, explaining that the law firm’s “argument misses the mark by ignoring the context in which the setoff right arose—specifically, the ongoing contractual relationship between Wolf Mountain and ASC Utah.”  According to the court of appeals, “Wolf Mountain [could] not by assignment simply sever the benefit of receiving rents from ASC Utah from Wolf Mountain’s own obligations as lessor.”  By way of its assignment, Wolf Mountain could only transfer whatever rights it had to the rents pursuant to the lease agreement with ASC Utah.

An Assignee Can Only Stand in the Shoes of the Assignor

In discussing the rights of an assignee, the court of appeals aptly pointed out that under Utah law “an assignee is often described as standing in the shoes of the assignor.”  The court of appeals explained that:

The assignee is subject to any defenses that would have been good against the [assignor]; the assignee cannot recover more than the assignor could recover; and the assignee never stands in a better position than the assignor.  [A]n assignee gains nothing more, and acquires no greater interest than had his assignor. In other words, the common law puts the assignee in the assignor’s shoes, whatever the shoe size.

Turning to the specific rent payments at issue in the case, the court of appeals set forth that the law firm’s argument that Wolf Mountain no longer had any interest in the rents following the assignment was “in effect an argument that the assignment would have allowed Wolf Mountain to elevate its obligation to pay [the law firm] over its responsibilities to compensate ASC Utah for serious breaches of the Ground Lease,” which would have required ASC Utah “to pay Wolf Mountain’s attorney fees with rent money it would not have owed to Wolf Mountain directly.”  The court of appeals said that such a result stood in direct contrast with the “fundamental principle that the assignee never stands in a better position than the assignor.”

Court of Appeals Rejects Law Firm’s Priority Arguments

In an attempt to avoid the unfavorable law of assignments, the law firm argued that ASC Utah, as a “judgment creditor with a lien in competition with [the law firm’s] superseding prior interest as a creditor in the rent,” could not trump the law firm’s priority to the rents.  Simply put, the law firm argued that because it already owned the right to the rents at the time ASC Utah obtained its judgment, ASC Utah’s “judicial lien could not attach to it.”  However, unfortunately for the law firm, the court of appeals saw through the law firm’s priority argument as well:

ASC Utah’s right to set off its rent obligation against the Judgment for Wolf Mountain’s breach derives from the mutual obligations and rights of ASC Utah and Wolf Mountain under the Ground Lease itself, not from the legal status of the Judgment as a lien on Wolf Mountain’s interests.  [The law firm’s] assignment, while perhaps superior to the lien of a random third-party with a judgment against Wolf Mountain, does not take priority over ASC Utah’s right, as lessee under the Ground Lease, to set off rents against Wolf Mountain, the lessor.  To the contrary, as assignee of Wolf Mountain’s right to the rents, [the law firm] stands in the lessor’s shoes and therefore has the same rights as Wolf Mountain and “nothing more.”

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