Note 15 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Commitments Disclosure [Text Block]

15.         Commitments and Contingencies

The Company and its subsidiaries are parties to claims and lawsuits related to the normal course of business operations. When the Company determines that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure is recorded. Actual losses may materially differ from the Company’s estimates. With respect to our title insurance operations, this customary litigation includes but is not limited to a wide variety of cases arising out of or related to title and escrow claims, for which we make provisions through our loss reserves. See Note 7, Reserve for Title Claims, for further information. None of these claims and lawsuits, in management’s opinion, will have a material adverse effect on our Consolidated Financial Statements.

In conducting our title insurance operations, our title insurance subsidiaries routinely hold customers’ assets in escrow, pending completion of real estate transactions, and are responsible for the proper disposition of these balances for our customers. Certain of these amounts are maintained in segregated bank accounts. These balances amounted to $7.5 million at  December 31, 2023 and $5.5 million at  December 31, 2022.

We currently have letters of credit to cover estimated exposures, most notably with workman’s compensation claims. This agreement requires us to maintain a compensating balance with the issuer for the amounts outstanding. We currently have letters of credit outstanding in the amount of $230,000. The compensating balance amount is reflected as restricted cash on the consolidated balance sheets.

Litigation

The Company’s subsidiaries are parties to legal actions incidental to their business. As of December 31, 2023, management believed that the resolution of these matters would not materially affect our financial condition or results of operations.

Anchor Title Litigation

During the second quarter of 2023, one of the Company’s subsidiaries, Omega, became involved in litigation in the United States District Court of the Northern District of Florida. The case, instituted by Anchor Title & Escrow, LLC (“Anchor”), raises issues arising from Omega hiring former employees of Anchor. Anchor’s first two complaints were dismissed by the Court. Anchor’s second amended complaint asserted that Omega misappropriated trade secrets and violated the Florida Uniform Trade Secret Act amongst other counts. 

On October 10, 2023, all parties entered into a compromised Settlement Agreement (“Anchor Settlement Agreement”) in which Anchor agreed to dismiss the lawsuit with prejudice, Omega admitted no fault or liability and received a full release from Anchor. Ultimately, the matter was dismissed with prejudice on November 15, 2023. The monetary amount conveyed to Anchor as part of the Anchor Settlement Agreement did not result in a material adverse effect on the Company’s financial statements.

Fednat Underwriters, Inc. Bankruptcy & Related Proof of Claim

As disclosed in a Current Report on Form 8-K filed by FedNat Holding Company (“FedNat”) with the SEC on December 12, 2022, on December 11, 2022, FedNat and certain of its wholly-owned subsidiaries, including FedNat Underwriters, Inc. (“FNU”), filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida in order to maximize value for all stakeholders. As part of the Chapter 11 process, FedNat will evaluate all strategic alternatives to maximize value for stakeholders, whether that be a reorganization of its business or a sale of its assets.

On January 26, 2023, the United States Bankruptcy Court for the Southern District of Florida, Ft. Lauderdale Division, entered an order (the “Order”) granting a motion from the debtors (including FNU) pursuant to Section 365(a) of the Bankruptcy Code authorizing such debtors to reject that certain Management Advisory Services Agreement dated and effective as of July 1, 2022 (the “Advisory Services Agreement”) between HGMA and FNU. Based on the Order, the Advisory Services Agreement was deemed rejected as of December 12, 2022.

Effective with the rejection of the Advisory Services Agreement, the Company will no longer earn compensation for the remaining duration of the agreement. On February 21, 2023, the Company filed a proof of claim for $609,771 of unsecured claims for compensation earned pre-petition pursuant to the Advisory Services Agreement. The Company also filed a claim for post-petition damages arising from the rejection of the agreement prior to its contractual end date.

On July 27, 2023, FNU and HGMA, amongst other parties, entered into a settlement agreement (the “Settlement Agreement”) addressing both claims identified herein. In the Settlement Agreement, FNU and HGMA agreed that the cumulative amount allowed for both proofs of claims was $1,109,771. This recoverable has not yet been recorded on the Company's financial statements as of December 31, 2023 in accordance with ASC Topic 450, Contingencies. On August 11, 2023, the United States Bankruptcy Court for the Southern District of Florida, Ft. Lauderdale Division, entered an order approving the Settlement Agreement. The total amount recovered for the proofs of claim is subject to successful execution of the Chapter 11 plan by FedNat and its affiliates, including FNU.

Hollie Drive Litigation   

In November 2019, we received notice that the Company and the Buyer, the purchaser of substantially all of the Company’s assets during the first quarter of 2018, pursuant to the Asset Sale, were defendants in a pending case in the Circuit Court for Henry County, Virginia. The case, which had been instituted on September 18, 2019 by Hollie Drive Associates, LLC (“Hollie”), raises issues arising from the purported breach of a lease for warehouse space in Henry County, Virginia, which is owned by Hollie and was previously rented by the Company. The relevant lease was assigned to the Buyer in connection with the Asset Sale. The complaint asserted that the Buyer breached various provisions of the lease including failure to make certain rental payments and failure to pay for certain clean-up and reconstruction after the Buyer vacated the property. The complaint sought damages in the amount of approximately $555,000 and attorney’s fees. Hollie named the Company as a party because the Company was the original tenant under the lease. Under the asset purchase agreement entered into in connection with the Asset Sale, the Buyer agreed to assume and indemnify the Company against post-closing liabilities arising under the lease including those asserted in the complaint. The Buyer’s filings in the case do not dispute the obligation to indemnify the Company for any damages awarded in the case. Through both discussions with the Buyer and documents produced by Hollie, it appeared Hollie had asserted damages greatly exceeding the likely recovery in the case. 

On January 12, 2024, Hollie and the Company entered into a compromised Settlement Agreement (“Hollie Settlement Agreement”) in which Hollie agreed to dismiss the lawsuit with prejudice, the Company admitted no fault or liability and received a full release from Hollie. The monetary amount conveyed to Hollie as part of the Hollie Settlement Agreement did not result in a material adverse effect on the Company’s financial statements and was recorded as a liability on the Company's Consolidated Balance Sheets as of December 31, 2023. Ultimately, the matter was dismissed with prejudice on January 24, 2024.

Leases

Right-of-use assets and lease liabilities related to operating leases under ASC Topic 842, Leases (“ASC 842”), are recorded when the Company and its subsidiaries are party to a contract, which conveys the right for it to control an asset for a specified period of time. Substantially all of our operating lease arrangements relate to rented office space and real estate for our title operations.  The Company is not a party to any material contracts considered finance leases. Right-of-use assets and lease liabilities under ASC 842 are recorded as Lease assets and Lease liabilities, respectively, on the Consolidated Balance Sheets.

Our operating leases range in term from one to five years. As of December 31, 2023, the weighted-average remaining lease term of our operating leases was 2.2 years.

The Company’s lease agreements do not contain material variable lease payments, buyout options, residual value guarantees or restrictive covenants.

Most of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term by varying amounts. The exercise of lease renewal options is at our sole discretion. We do not include options to renew in our measurement of lease assets and lease liabilities as they are not considered reasonably assured of exercise as of December 31, 2023.

The lease liability is determined by discounting future lease payments using a discount rate based on the Company’s incremental borrowing rate for similar collateralized borrowing.  The discount rate is calculated using estimates of capitalization rates and borrowing rates. As of December 31, 2023 and 2022, the weighted-average discount rate used to determine our operating lease liability was 6.0%.

Lease expense, including property taxes and routine maintenance, as well as rental expenses related to short term leases, was $978,000 and $700,000 for the years ended December 31, 2023 and 2022, respectively, and is reflected in general and administrative expense on the Consolidated Statements of Operations.

Future payments under operating lease arrangements accounted for under ASC 842 as of December 31, 2023 are as follows (in thousands):

2024	$	361
2025		155
2026		65
2027		48
Total lease payments, undiscounted	$	629
Less: present value discount		39
Lease liabilities, at present value	$	590