January 29, 2015
One of the duties of a litigator is to prepare the client to testify at a deposition, mediation, hearing or trial. Clear, credible and cogent testimony puts the party in the best position to prevail. While judges, arbitrators and juries want to see the contracts and key documents, they also want to hear directly from the parties whose dispute is before the court.
Experienced trial attorneys know what to expect of themselves and their witnesses from the facts of the case. When it comes to public speaking, witness preparation typically includes discussion of the disputed facts and legal arguments in the case. While an attorney may not tell the client or witness what to say, he may ask practice examination questions. Witnesses quickly learn that courtroom or deposition testimony differs from ordinary conversation or interviews. A witness may have little or no public speaking training or experience. There may not be time for a witness to gain valuable experience in Toastmasters International or other activities to practice speaking skills. So how can a witness prepare herself to give effective testimony in her own case?
This month, Brian K. Johnson and Marsha Hunter published a new book, “The Articulate Witness: An Illustrated Guide to Testifying Confidently Under Oath.” This edition is available in print or e-book format. Johnson & Hunter are consultants who train attorneys for a variety of public speaking settings. I have read one of their other books and attended one of their seminars. “The Articulate Witness” is useful to parties and witnesses seeking an overview of the legal testimonial process. It is a valuable resource for attorneys and law students seeking insights in how to better prepare their clients to testify. Professional experts evaluating their own habits and skills would benefit as well. The book is a breezy 50 pages with copious illustrations. I finished it riding on the D.C. Metro between the Judiciary Square & West Falls Church stations. The book focuses on the mechanics of speaking confidently in litigation situations, including cross-examination. The book would be useful to a witness when they first know that a deposition, hearing, trial, etc. will occur. It is not a good book to read the evening before the big day. The reader may desire to practice some of the exercises or discuss them with the attorney beforehand. The book is not a proper substitute for trial preparation with one’s attorney.
A common mistaken belief is that public speaking involves only expressing one’s thoughts using one’s voice. Johnson & Hunter do a great job of showing how it is also a “physical” activity, involving posture, gestures, handling exhibit documents, facial expression and eye contact.
“The Articulate Witness” is an excellent reference for witnesses,attorneys, experts or any other person whose profession or circumstances require him to speak in a legal proceeding. Mastery of the facts and laws is not sufficient. One must be prepared to cogently communicate one’s position to others.
January 21, 2015
A few days ago, Virginia state senator Chap Peterson introduced new Homeowner Bill of Rights legislation in the 2015 General Assembly. The proposal sets out certain rights of property owners in HOA and condominium communities. For example, SB1008 recites a owner’s right to due process in the association’s rule violation decision-making. I anticipate political debate on whether SB1008 simply restates existing legal protections or contributes to them. Regardless, the introduction of this bill illustrates that rule violations are a hot item in association matters. Who collects on association rule violations? Boards in most associations are comprised of unpaid volunteers. Most of an association’s day-to-day work is done by property managers hired by the board.
Federal Debt Collection Laws.
Generally, the Fair Debt Collection Practices Act (“FDCPA”) protects consumers from abusive debt-collection practices. This Act does more than provide defenses in collection lawsuits or authorize a federal agency to take regulatory action. If debt collection businesses, including law firms, violate the FDCPA, they may be liable in an independent lawsuit. Under the FDCPA, it is easier for debtors to sue collectors for false or misleading statements in correspondence. The Act also requires certain notices in correspondence, such as notifying the consumer of their right to seek verification of the debt. In my previous blog post, I provided some examples of this in the foreclosure context. Where the facts and circumstances allow, class action lawsuits may be brought for FDCPA violations. Broad application of the FDCPA against association property managers would force them to change many of their practices. For example, the Act examines whether a notice would be materially confusing to the least sophisticated consumer. Are association property managers debt collectors for purposes of the FDCPA?
Welnowska v. Westward Management, Inc.
A 2014 court case illustrates the current limitations in applying the FDCPA to association property managers. Anna Welnowska & Jerzy Sendorek owned a residential condominium unit in the Madison Manor 2 Condominium Association in Chicago, Illinois. In July 2012, Madison Manor hired Westward Management, Inc., as its “full service” property manager. Part of Westward’s duties was collection of assessments and fines. Westward mailed collections letters to Welnowska & Sendorek in the name of Madison Manor. The owners disputed the charges. Madison Manor filed a lawsuit seeking a judgment for the unpaid sums and eviction of the owners.
In August 2013, Welnowska’s & Sendorek’s attorneys filed a FDCPA lawsuit against Westward in federal court. The manager filed a motion to dismiss, arguing that it is not a “debt collector.” The FDCPA has an exception for collections activity that is “incidental to a bona fide fiduciary obligation.” 15 U.S.C. Sect. 1692a(6)(F). A fiduciary is someone, such as a trustee or corporate director, who owes a high standard of care in managing someone else’s money or property.
Westward argued that its debt collection activity was only one of many duties it had to the association. The owners argued that this exception did not apply because the debt collection was central to the fiduciary obligation, not incidental. In his July 24, 2014 decision, Judge Edmond Chang rejected the owners’ argument on the grounds that Westward had numerous non-financial, managerial obligations to the association.
Alternatively, the owners argued that the debt collection activity was entirely outside the scope of Westward’s Management Agreement with the association and thus was not “incidental to” the fiduciary obligation. This written agreement specifically excluded collection on delinquent assessments and charges except for FDCPA notices. Westward separately billed the association for the collections activity at issue in the case.
The Court found that if Westward indeed acted outside the scope of the Management Agreement, the incidental-to-a-fiduciary-obligation exception would not apply. This case illustrates why an association’s property manager does not enjoy “automatic” exception from the FDCPA. In each case where the manager asserts this defense, courts will review the Management Agreement and related facts and determine: (a) whether the FDCPA would apply absent the exception; (b) if the manager has a fiduciary obligation to the association; (c) the nature and scope of that fiduciary obligation; and (d) the relationship between the debt collection activity in the case and that fiduciary obligation. The Westward case demonstrates the challenges to homeowners in bringing a successful FDCPA claim against a property manager.
Westward sought refuge from the FDCPA under the “fiduciary” exception. Most service providers try to avoid designation as a fiduciary. Fiduciaries owe strict duties to their beneficiaries. If the court deems that there is more than one beneficiary, the court may apply a duty to the fiduciary to act impartially between them. A fiduciary may be liable to a beneficiary for a claim for Breach of Fiduciary Duty. Over the years, the General Assembly has enacted legislation imposing special duties on other types of fiduciaries, such as trustees in foreclosures and estates.
Foreclosure Trustee as Debt Collectors.
Just because a debt collector is a fiduciary doesn’t mean that he is excepted from FDCPA compliance. For example, the FDCPA applies when lawyer debt collectors act as trustees in residential foreclosures where the communications include a demand for payment. Courts have found that a debt collection attorney’s activity as a foreclosure trustee isn’t incidental to the fiduciary obligation; it is central to it. The foreclosure trustee debt collector must refrain from continuing foreclosure proceedings or litigation activity until the debt verification requirements are met. In a foreclosure sale, the debt collection attorney obtains cash applied in satisfaction of the debt. A foreclosure trustee has fiduciary obligations that go beyond merely collecting the purchase price. A foreclosure trustee has a broad set of duties under the loan documents to prepare for the sale, conduct it, and disburse the proceeds properly. While association property managers and foreclosure trustees are different types of fiduciaries, in both examples the professional has a broad set of obligations impacting more than one party.
Whether debt collection activity conducted by an association’s manager is non-abusive or “incidental to a fiduciary obligation” requires independent analysis in each case. Boards, homeowners and property managers must familiarize themselves with debt collection laws and the management agreement to determine whether the manager must comply with the strict standards of the FDCPA. If an association’s property manager is engaging in improper collections activity against you, contact a qualified attorney to discuss your rights.
Photo credit (does not depict property discussed):
January 16, 2015
Foreclosure of residential real estate is traditionally based on state law and agreements between the borrower and lender in the loan documents themselves. Each state has its own rules governing whether foreclosure should occur in or out of a court proceeding. In Virginia, the vast majority of foreclosures occur in bank-appointed trustee’s sales. State and federal courts review and supervise this activity through lawsuits brought by one or more of the parties, usually borrowers seeking to set aside trustee’s sales. However, they resist efforts to transform the foreclosure process into a judicial one, ruling on various motions brought early in cases.
The mortgage crisis is a national concern involving federal policies promoting home ownership. Is there a federal regulation of nonjudicial residential foreclosure? Through supervision of the mortgage giants Fannie Mae, Freddie Mac, and other administrative programs, the federal government is invested in the mortgage origination process. In some cases, a federal agency takes direct title to distressed home loans or the foreclosed real estate itself. I have written about some of those cases in the past few months. For example, Fannie Mae and Freddie Mac enjoy property recording tax exemptions. Also, in states like Nevada that allow homeowners associations to foreclose, government agencies find themselves in title litigation when properties are assigned to them pursuant to the terms of federal mortgage programs. In the event of default of a loan tied to a federal program, the government may find its interests aligned more on the creditor’s side.
Foreclosure is one of many remedies available to lenders to collect on defaulted home loan debt. For over 30 years, Congress has come to the aid of consumers in debt collection matters. In 1977, Congress enacted the Fair Debt Collections Practices Act to curb abusive practices by the debt collection industry against consumers. The FDCPA also has the effect of benefiting non-abusive debt collectors harmed by violating competitors. Since its enactment, Congress and the federal courts have clarified the FDCPA’s role in regulating debt collection law firms’ activity obtaining foreclosure sales and deficiency money judgments. Since an attorney’s sale of distressed Virginia real estate in a trustee’s auction is an activity outside of the traditional perception of debt collection, the role of the FDCPA in foreclosure practice has been relatively unclear until the past few years, when a slew of foreclosure contest lawsuits have tested the utility of the statute.
The FDCPA applies to lawyers collecting on home loan debts, not just non-attorney debt collection agencies. Federal courts in Virginia have recognized that the Act also applies when lawyer debt collectors act as trustees in residential foreclosures where the notices include a demand for payment. These consumer protection laws regulate, among other things, the communications between the debt collector and the consumer. In order to conduct a foreclosure practice, the attorney must send notices to the borrower. The FDCPA may provide independent causes of action against the attorney found to have engaged in abusive practices. FDCPA issues thus pervade residential foreclosure matters. Consumers, lenders, and their attorneys must be aware of how this Act affects a contested foreclosure matter. There are many ways the FDCPA may be violated in a foreclosure matter, including the following:
False Representations. Under ordinary circumstances, it is difficult for a party to prove that they are entitled to relief because their opponent is allegedly lying, cheating or stealing. These are weighty accusations; the standard for proof is high, and the defenses are many. In 15 U.S.C. § 1692e, the FDCPA changes the rules of the game in the consumer debt collection context. The consumer doesn’t need to prove that he was actually deceived by the misleading communication. Instead, the consumer must show that false representations in a debt collection communication materially affects a consumer’ ability to make intelligent decisions with respect to the alleged debt. The courts apply a “least sophisticated consumer” standard to alleged false representations. This tends to prevent application of 20/20 hindsight in the interpretation of correspondence. The court will consider whether the correspondence is susceptible to more than one interpretation, one of which is misleading. Between the FDCPA, the Deed of Trust and state law, the debt collection law firm and attorney foreclosure trustee have multiple compliance obligations in preparing correspondence to the borrower.
Validation Notices. The FDCPA goes beyond prohibiting false representations. In 15 U.S.C. § 1692g, Congress mandates that disclosures be put into debt collection correspondence. In nonjudicial foreclosure, notices to the borrower are an essential element of the process. The initial communication must contain several messages, including, but not limited to:
[A] statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector[.]
If the debtor asks for verification of the debt, the collector must cease all collections activity until the verification is made. This not only means ceasing telephone calls, letters and collections lawsuits; it also includes the nonjudicial foreclosure activity.
Since foreclosures are typically conducted by law firms that exclusively pursue debt collection activity, these provisions of the FDCPA have served as the basis for class action lawsuits. Through the FDCPA, the federal government is heavily involved in regulation of nonjudicial, residential foreclosures. Borrowers, banks and their attorneys must be cognizant of the government’s role as regulator of collection of home loans and sometimes as assignee of mortgage debt or foreclosed real estate. Ironically, consumer protection attorneys are litigating FDCPA claims in federal courts against attorneys for their debt collection work on behalf of federally subsidized mortgage giants.
January 8, 2015
In Virginia, borrowers have several options of where to bring a legal challenge to a foreclosure trustee’s sale. The shortest commute is usually the Virginia circuit court for the city or county where the property is located. Alternatively, the facts may allow suit to be brought in a federal district courthouses. Another common venue is federal bankruptcy court.
On June 18, 2014, I posted an article about a borrower, Rachel Ulrey, who managed to keep her foreclosed real estate because the lender, SunTrust Bank, failed to object to the plan in time. Ulrey’s case is a cautionary tale to lenders. Other cases show why borrowers cannot rely on lender inattention as a legal strategy. On November 12, 2014, U.S. Bankruptcy Judge Kevin Huennenkens issued an opinion illustrating why parties and their attorneys may not bring the same claim in bankruptcy court after they fail to achieve their desired result in a Virginia state court. The borrower and his attorney found their attempt to relitigate foreclosure in bankruptcy sanctioned by the judge.
Michael Pintz owned property in Sussex County, Virginia, in the name of Michael’s Enterprises of Virginia, Inc. In June 2008, he took out a $200,000 mortgage from Branch Banking & Trust. After he defaulted on payment, BB&T obtained a money judgment in Hanover Circuit Court. When BB&T sent Michael’s Enterprises a Notice of Foreclosure, he filed a request in Sussex Circuit Court to block the threatened sale. That court denied the motion. BB&T later purchased the property at a November 2013 Trustee’s Sale. In February 2014, Michael’s Enterprises filed for Chapter 11 reorganization in the U.S. Bankruptcy Court. The petition claimed the Sussex property as an asset of the corporation.
You may be wondering whether bankruptcy petitions can be used this way. When a court finds that someone filed something for an improper purpose, it may award litigation sanctions. State and federal courts in Virginia have similar rules prohibiting parties and their attorneys from advancing legal claims and defenses for improper purposes and not to vindicate the rights described in the court filing. Improper purposes include but are not limited to harassment, unnecessary delay or needless increase in the cost of litigation.
BB&T brought a Motion for Sanctions for Violation of Bankruptcy Rule 9011. The Bankruptcy Court initially deferred BB&T’s request for sanctions. Judge Huennenkens gave Michael’s Enterprises an opportunity to submit a proper bankruptcy reorganization plan before ruling on the sanctions request. The conditions imposed were not met. In October 2014, the bankruptcy court dismissed Michael’s Enterprises’ petition.
The court granted the lender’s renewed motion for sanctions. Judge Huennenkens observed that Michael’s Enterprises had had an opportunity in Virginia state court to litigate the same objectives sought in the bankruptcy petition. The court saw the new lawsuit as an attempt to attack the Virginia court’s decision and the nonjudicial foreclosure. The bankruptcy opinion doesn’t mention this, but if a party believes that a trial court made an erroneous decision, their recourse is to file a motion to reconsider and/or appeal it to the Supreme Court of Virginia. A bankruptcy court may be able to discharge or reorganize debts reduced to court judgments. However, they usually do not allow parties a do-over of unfavorable results of a state court case. Michael’s failure to present a proper reorganization plan in the face of a sanctions request made a poor impression. Judge Huennenkens found the case to be for an improper purpose and awarded BB&T $10,000 in sanctions against Michael’s Enterprises, Michael Pintz, individually, and his attorney. As of the date of this blog post, this result is currently on appeal before the U.S. District Court for the Eastern District of Virginia.
A common mistaken belief about litigation sanctions is that they are proper whenever a party or attorney loses in court. However, it is common for borrowers in foreclosure contest lawsuits have their cases dismissed on the merits or procedural grounds. Usually, the cases are brought as good faith attempts to obtain relief on the facts and circumstances of the foreclosure proceedings. In Michael’s Enterprises, however, the record of the state court actions together with the absence of a reorganization plan added up to an award of attorney’s fees, not only against the property owner but also its sole shareholder and the attorney. The facts of each case are different and require investigation and research before employing a legal strategy.
Case Citation: Branch Banking & Trust Co. v. Michael’s Enterprises of Virginia, Inc., et al, No. 14-30611-KRH (Bankr. E.D. Va. Nov. 12, 2014).