If You Give Retroactive Effect to a Contract That’s Part of a Series of Transactions, It Can End in Tears

Brian Rogers, aka @theContractsGuy, let me know of the recent Missouri Court of Appeals case FH Partners, LLC v. Complete Home Concepts, Inc. (The official copy is here; a copy from Westlaw is here). It provides a useful reminder of the limits to giving retroactive effect to a contract if that contract is part of a series of transactions.

Here’s a very simplified timeline of the events underlying the dispute:

  1. In 2007, Columbian Bank lends CHC money.
  2. In February 2008, Columbian Bank transfers 94.5% of the CHC loan to Bank of Weatherford.
  3. In August 2008, Columbian Bank fails and the Federal Deposit Insurance Corporation (FDIC) steps into Columbian Bank’s shoes.
  4. In September 2008, the FDIC transfers the rest of the CHC loan to Bank of Weatherford.
  5. In December 2008, the FDIC sells the CHC loan to FH Partners. The documents don’t address that in September 2008 the FDIC had transferred the CHC loan to Bank of Weatherford.
  6. In June 2009, Bank of Weatherford transfers the CHC loan to the FDIC effective November 2008.
  7. In November 2009, FH Partners demand that CHC and its guarantors pay the CHC loan. CHC and its guarantors claim that they don’t owe FH Partners anything on the loan because FH Partners never acquired an interest in the CHC loan.

So FH Partners sued. The CHC parties filed a motion for summary judgment, and the trial court granted it. The Court of Appeals affirmed the portion that’s relevant for our purposes. Here’s the relevant part of the opinion:

FH Partners does not cite a single authority for the proposition that a retroactive effective date in one contract can be construed to have an automatic retroactive effect on a separate contract. … Though FH Partners cites to several cases for the general proposition that the parties to a contract can agree to give a contract retroactive effect, none of those cases address or support the proposition that a retroactive effective date in one contract will be applied to retroactively modify or reform a separate contract involving at least one unrelated party.

Moreover, FH Partners’ argument ignores that summarily applying the retroactive effective date from the FDIC/ Weatherford Agreement to the FDIC/FH Loan Sale Documents would be inconsistent with the express terms of the FDIC/FH Loan Sale Documents. The Loan Sale Agreement between the FDIC and FH Partners expressly provides that “[n]o provision of this Agreement may be amended or waived except in writing executed by all of the parties to this Agreement.” See paragraph 10.6. In addition, the FDIC/FH Loan Sale Documents did not anticipate that the FDIC could modify what it was conveying to FH Partners after closing. To the contrary, the Loan Sale Agreement expressed the intent to convey “all of the right, title and interest of [the FDIC]” in Loan A and Loan B “as of the Loan Sale Closing Date.” See paragraph 2.4 (emphasis added). The trial court thus correctly found in its Judgment that the Loan Sale Agreement between the FDIC and FH Partners “expressly limited the rights and interests transferred by the FDIC to those possessed by the FDIC as of December 16, 2008.”

In addition, the Loan Sale Agreement provided that the FDIC was selling Loan A and Loan B to FH Partners “as is” and “without any representation, warranty or recourse whatsoever.” See paragraph 6.1. The Loan Sale Agreement provided that the FDIC would “have no obligation to secure or obtain any missing intervening assignment or any assignment to [the FDIC] that is not contained in the Loan File.” See paragraph 6.7. Critically, the Loan Sale Agreement set forth a detailed process by which FH Partners could require the FDIC to repurchase a Loan if it was determined after closing that “prior to the Loan Sale Closing Date” … Seller [was] not the owner of the Loan.” See paragraph 7.1 (emphasis added). Finally, the Loan Sale Agreement required the execution and delivery at closing of a Bill of Sale and an Assignment and Assumption of Interests and Obligations, both of which expressed the transfer of rights held by the FDIC at the time of closing, and both of which indicated that all transfers were without warranty or recourse.

We necessarily conclude that the FDIC/FH Loan Sale Documents unambiguously anticipated that the FDIC might very well be conveying to FH Partners less than perfect, and even non-existent, title to Loan A and Loan B. In light of that fact, there is no evidence that the FDIC was authorized to unilaterally cure title defects months after closing. We cannot conclude that the retroactive effective date in the FDIC/Weatherford Agreement had the automatic effect of retroactively modifying the rights and interests on the FDIC and FH Partners under the FDIC/FH Loan Sale Documents. The FDIC/Weatherford Agreement, even if effective to afford the FDIC ownership of Loan A as of November 7, 2008, was not effective to retroactively bestow ownership of Loan A upon FH Partners as of December 16, 2008.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.