February 28, 2017
Little Love Lost in Sedimental Affair
A lawsuit for damage to property must be timely filed to prevail in court. In Virginia, the statute of limitations for property damage is five years from accrual of the claim. When an owner suffers damage caused by a neighboring owner, when does this five year time-period start running towards its expiration date? Does the clock start ticking at the time the trespass or nuisance began or some other moment? On February 16, 2017, the Supreme Court of Virginia issued a new decision finding that when the effect of the offending structure is continuous, the claim accrues when damage began. The distinction between “temporary” and “continuous” is potentially confusing and the stakes are high in real property damage cases. Understanding how Virginia courts apply these rules is essential whenever owners and their attorneys discover what is happening.
Forest Lakes Community Ass’n v. United Land Corp. of America involved property that I have driven by numerous times. I grew up in Orange and Culpeper Counties in Virginia. My family would drive down Route 29 to shop or attend sporting events in Charlottesville. The Charlottesville area prides itself as the home of President Thomas Jefferson and the University of Virginia. Along Route 29 is Hollymead, an artificial lake built from a sediment basin. A sediment basin removes silt or other particles from muddied waterways. Two HOAs, Forest Lake Community Association, Inc. and Hollymead Citizens Association, Inc. jointly own Lake Hollymead.
The defendants included United Land Corp. and other owners and builders of the Hollymead Town Center (“HTC”) upstream from the Plaintiff HOAs’ lake. In 2003-2004, defendant developers constructed three new settlement basins along Powell Creek, the tributary to Lake Hollymead. Owners in the HOAs complained about excessive influx of sediment from the HTC construction into Lake Hollymead. If I bought a home with lake views, I wouldn’t like looking at muddied waters either. The HOAs complained that the defendants caused excessive sedimentation by improperly removing vegetation within the Powell Creek watershed.
If this was a serious problem, how did it get through the county’s permitting process? According to the case opinion, the development complied with state and local regulations regarding retainage of sediment within the three new basins. The county rejected suggestions from downstream owners that upgraded sediment filtration systems be required of HTC. The case doesn’t discuss whether the county’s standards did, or should set a benchmark for the reasonableness of the defendants’ control of sediment. Owners may have a right to sue even when the city or county refuses to intervene in a property damage dispute.
Discussions continued within these HOAs for years. In 2011 they finally filed suit, alleging nuisance and trespass. The HOAs asked for the court to award them money damages and an injunction requiring the defendants to stop the excessive drain of sediment. The HOAs enjoyed standing because they jointly owned Lake Hollymead as a common area. Incursion of sediment into Lake Hollymead began during HTC’s construction. The HOAs argued that intermittent storms caused subsequent separate and distinct sediment incursions, each triggering new causes of action that restarted the five year statute of limitation. This was contradicted by the HOAs’ expert who acknowledged that at least a little sediment incurred continuously. The HOAs also argued that the defendants’ sediment currently sits in Lake Hollymead and will continue to trespass until someone digs it out.
When a case comes to a lawyer for the first time, her initial assessment considers statutes of limitation. Legal claims have a corresponding statute of limitation setting a deadline by which the claim must be brought. Even if the claim is one day late it can be dismissed as time-barred. The HTC defendants sought to have the HOAs’ claims dismissed because they waited over five years after the sediment problem began in the 2003-2004 timeframe. After a day of testimony, Judge Paul M. Peatross found that the statute of limitations barred the claims because they accrued in 2003 and sediment incurred continuously thereafter.
The HOAs sought review by the Supreme Court of Virginia. Their appeal focused on Judge Peatross’ ruling that the claim was barred by the five-year statute of limitation because the continuous damage accrued at construction.
Justice D. Arthur Kelsey explained in the opinion that under Virginia law, a claim for an injury to property accrues when the first measurable damage occurs. Subsequent, compounding or aggravating damage attributable to the original problem does not restart a new limitations period. The court acknowledged that plaintiffs might need to seek a claim for an award for past, present and future damages. This accrual principle applies where the permanent structure causing the injury could be expected to continue indefinitely. I find this confusing, because drainage systems and sediment basins have lifespans. After a number of years, they fail or require repairs. Anything that comes into contact with water is under tremendous pressure. Perhaps what the court means is that the structure causing the injury is “permanent” if it would continue to cause the damage if maintained to continue to function as it did originally. This concept of “permanent structure” implies that its owner will maintain the nuisancing or trespassing feature as it presently exists.
Alternatively, in the facts of a case, a later cause of action might accrue that looks and acts like the earlier one but is a “stand alone” claim that starts a new five year limitations period. This can happen where the structure causes separate, temporary property damage. For example, some dams can be opened or closed. This exception can apply even when the physical structure causing the damage is a permanent fixture.
Justice Kelsey acknowledged the challenges applying these principles to particular cases:
Though easy to restate, these concepts defy any attempts at formulatic applications. Because the underlying issue – determining the boundaries of a cause of action – depends to heaving on the factual context of each case, our jurisprudence has tailored these principles to analogous fact patterns and rights of action.
To resolve these issues, the Supreme Court relied upon the factual finding of the Circuit Court that the three HTC sediment basins discharged into Lake Hollymead on a continuous basis and that the five year statute was not revived by a later, discrete discharge episode.
Ordinarily, on these motions to dismiss a lawsuit, the courts tend to give plaintiffs a benefit of the doubt. Often judges will look to see if the facts are contested so as to warrant a trial. Here, Judge Peatross took a day’s worth of testimony in a pretrial hearing. The HOAs may have appealed on the hope that the Circuit Court short-circuited the case too early and the Supreme Court would rule that they deserved another chance to have their case heard on its merits. This case may embolden more defendants to put on expert testimony in support of a plea of a statute of limitations in the hopes that their cases could be brought to a quick end.
The easiest way to avoid these kinds of statute of limitation problems is to file suit early enough so that either way the court looks at it, it would be deemed timely. Plaintiffs and their lawyers should file early to avoid the necessity of having to litigate such issues in day long evidentiary hearings and on appeal.
Case Citation:
February 6, 2017
The Surface Water Diversion Blame Game
According to the Bible, water is both the fountain of life and a destroyer by flood. Water naturally plots its own course, creating wetlands to store excess storm water. Human development, for better or worse, seeks to maximize the value of property and minimize land set aside for natural wetlands or artificial drainage purposes. The proximity of water can enhance or damage the value of real estate. For example, waterfront properties tend to fetch higher sale values. Sometimes neighbors will improperly channel water off their own land onto that of another in an effort to fend off unwanted surface water diversion. Lawyers and judges describe unwanted surface water as a “common enemy” because both neighbors seek to avoid it. The common law tradition developed a system of rules whereby judges can resolve disputes between neighbors over the reasonableness of surface water diversion.
Sometimes it is not a family or business that owns the uphill parcel that is diverting surface water. A property owner might find herself contending with a governmental or community association neighbor in a surface water diversion dispute. In a recent Southwest Virginia lawsuit, owner Consortium Systems, LLC sued two contractors, Lane Engineering, Inc. & W-L Construction & Paving, Inc. who constructed a sediment pond on a neighboring technology park owned by Scott County Economic Development Authority (“County EDA”). Rural counties like to build technology parks to attract out of town businesses to relocate there. Consortium alleged that the EDA’s contractors built the sediment pond without a proper outlet or outfall.
Owning property beside a public or private common area can be an advantage or a risk. Businesses want to locate themselves near parking, amenities and potential sources of customers or vendors. However, if a dispute arises between an owner and a governmental neighbor, the private party may find themselves facing additional legal obstacles. Sometimes governmental entities enjoy sovereign immunity, shortened lawsuit filing deadlines or additional notice procedures. Consortium tried to sue the contractors for negligence, trespass and negligent surface water diversion. The owner argued that the contractors should be liable to damage to neighboring properties because they faultily constructed the drainage facilities on the County EDA property. In his January 9, 2017 ruling on the contractors’ pretrial motions, Judge John C. Kilgore made findings illustrating an owner’s challenges to sue its neighbor’s contractors:
- Common Enemy Doctrine. Because surface water must go somewhere in developed areas, the common law tradition allows neighboring owners to “fight off” the “common enemy” onto neighboring parcels. Virginia, like many states, has an exception requiring surface water diversion to be done, “reasonably and in good faith and not wantonly, unnecessarily or carelessly.” Virginia courts find improper surface water diversion where the neighbor collects water into an artificial channel and redirects it onto someone else’s land.
- Sovereign Immunity. Virginia counties enjoy the sovereign immunity of the commonwealth. Municipal corporations are also entitled to sovereign immunity when exercising governmental functions. This immunity extends to contractors working for a governmental body. However, sovereign immunity does not protect the negligent performance of the government’s contractor. Judge Kilgore found the Economic Development Authority’s construction of the technology park to enjoy sovereign immunity without discussion in his opinion letter. Consortium’s negligence claims had been previously dismissed.
- Who is Responsible, the Neighbor or their Contractor? Judge Kilgore observed that the two defendants, Lane & W-K were working on behalf of the EDA. Generally speaking, the owner of a neighboring parcel is responsible for the acts of its representatives and contractors. The Court did not find authority for holding the neighbor’s contractor liable for the surface water diversion, in this situation.
The court previously dismissed Consortium’s claims for negligence as not being timely brought. In its January 2017 ruling, Judge Kilgore dismissed Consortium’s other claims, which were for trespass and diversion of surface water as barred by sovereign immunity.
The Consortium Systems, LLC v. Lane Engineering, Inc. case contains several surface water diversion takeaways in addition to the judge’s legal rulings. First, when flooding occurs, the suffering owner should investigate the causes and potential remedies for the drainage problem. Sometimes the answer is not obvious. In serious cases, this may require the assistance of an engineer or other expert. Second, all flooding problems should be addressed promptly before additional damage occurs. If a neighbor is to blame, they should be notified promptly. Third, the law may apply a standard of care that is different from what may appear as ground water diversion best-practices. The flooded owner or her attorney may need to consult HOA documents, covenants, deed restrictions, easements, county storm water management guidelines, state case law and other authorities to determine the parties’ relative rights and responsibilities.
Case Citation:
Consortium Systems, LLC v. Lane Engineering, Inc., 2017 Va. Cir. Lexis 2 (Lee Co., Jan. 9, 2017).
Photo Credit:
KevinsImages New 2016 drainage Juniper rd. via photopin (license)(does not depict any facts discussed in blog post)
December 12, 2016
Construction Defect Warranty Claims
Construction defect warranty claims are a frequent source of conflict between contractors and new home buyers. Builders feel pressure to get the purchasers through closing so they can pay their employees, subcontractors and suppliers. For the past few years there has been a severe shortage of experienced tradespeople and supervisors. This makes the contractor’s quality control efforts more challenging. Inexperienced buyers can get frustrated with delays. They may wonder what would happen if they try to back out of the deal. When consumer complaints about construction defects are not resolved amicably, the parties often find themselves pursuing or defending lawsuits or arbitration proceedings.
New home buyers feel pressure from the contractor and the circumstances of their lives to go to closing. Later, they may discover decreased responsiveness to their customer service inquiries to the builder. What should parties do to prevent construction defect litigation from becoming necessary? How are these cases won and lost? I took up these issues in an October 14, 2015 blog post entitled, “Common Misconceptions about Home Builder Warranties” On November 21, 2016, the Circuit Court of Norfolk, Virginia decided a case that provides some valuable insights for contractors and purchasers.
In April, 2007, Benjamin Bessant and Dorothy Horne contracted with Dey Street Properties, LLC for the construction of a new home in Norfolk, Virginia. The buyers got the standard new home warranty pursuant to Va. Code § 55-70.1. Dey Street impliedly warranted that the home was constructed in a workmanlike manner and free from structural defects for one year from settlement or possession. The implied new home warranty includes a strict requirement that the buyer give the seller written notice of the alleged defects. This notice must be properly submitted to the seller within the one-year warranty period.
During construction of the home, Mr. Bessant purchased $650 in floor tile out of his own pocket and delivered it to the jobsite for an upgrade. Unfortunately, someone stole this tile while Dey Street maintained control over the premises. Because Dey Street failed to complete the project by the agreed upon delivery date, Bessant and Horne had to stay in a hotel for three weeks. On August 15, 2007, the purchasers moved in.
Shortly after move-in, the purchasers discovered several construction defects. Bessant mailed Keith Freeman (principal of Dey Street) a notice letter on September 5, 2007. Not getting much of a response, on December 20, 2007, the purchaser’s attorney sent another letter, this one addressed to “Freeman Homes, Inc.” Enclosed with the attorney letter was the purchaser’s September 5, 2007 letter with the list of defects. Dey Street proceeded to do some warranty repairs.
Note the confusion regarding who the purchasers were dealing with. In the facts of the case, the purchasers signed a contract with Dey Street. However, many contractors provide consumers with different pieces of correspondence that have different business names. Judge David Lannetti found that the buyers only had privity of contract with Dey Street Properties, LLC. However, because Mr. Freeman also sent correspondence to Bessant on Freeman Homes, Inc. letterhead, the court found that notices actually received by Mr. Freeman put the Dey Street company on actual notice of the warranty claim.
These parties were not able to amicably resolve these construction defect damages issues. Bessant and Horne sued Dey Street. This family experienced some struggles preparing for trial. The homeowners had certain damages excluded from the jury because they failed to submit a timely expert witness designation. Also, the owners failed to disclose the details of certain defects in response to the builder’s pretrial discovery requests.
Judge Lannetti’s opinion only talks about certain items at issue post-trial: $1,500 for flooring defects, $200 for subfloor repairs, $2,000 for the drainage and concrete problems on the porch and $200 for a porch column. The owners also wanted reimbursement for the stolen tile and the hotel stays. I suspect that there were additional defects claimed in the lawsuit but because pretrial disclosure deadlines weren’t met, the owners were prejudiced to assert them at trial. For purchasers, properly documenting the defects and the estimates to repair is not always easy. In most cases this requires finding another contractor to assess and estimate it.
After a two-day trial, the jury returned a verdict of $15,000.00 in favor of the owners. After the jury returned its verdict, the contractor moved to invalidate or set it aside the jury verdict. First, Dey Street argued that the owners waived their implied warranty claim because the first notice letter was never received and the second one was sent to Freeman Homes, Inc. and not Dey Street Properties, LLC. Virginia law requires the purchaser to send the written notice letter to the seller by hand delivery with retention of a receipt or by certified mail. The court found the certified letter to Freeman Homes, Inc. to be sufficient. The court observed that the owner of Dey Street used Freeman Homes, Inc.’s name and address in correspondence to the buyer. At trial Mr. Freeman admitted on the witness stand that he actually received the second notice letter and its enclosures. The owners are lucky that Mr. Freeman did not simply deny receiving anything. Because they have the burden of proof, the owners should take care to follow all formalities required in the contract or statute so that they don’t have to rely upon their opponent’s moment of candor in court.
Dey Street also argued that the evidence was insufficient to support a verdict of $15,000.00. Judge Lannetti found this argument more persuasive. Since the implied new home warranty statute doesn’t say anything about negligent security for the tile or consequential damages like hotel room bills, those items were thrown out. The court could not figure out how the jury could possibly have added the remaining evidence of defect damages could total $15,000.00. The judge recognized in his opinion that he was not permitted to substitute his own independent assessment of damages for the jury award, and could only look to what the maximum verdict that the evidence would support. Judge Lannetti reduced the $15,000 verdict and entered a judgment against Dey Street for $3,900. A tough result for owners when their jury was convinced that they were owed much more. If larger dollar amounts were at stake I would not be surprised if the owners petitioned to appeal the case.
Lessons from Bessant v. Dey Street include the following:
- Who Are the Parties? Purchasers should be clear about what party they are in contract with so that they can correspond with and sue the proper entity. Contractors must take care to ensure that everything is done in the name of the contractor identified in the written agreement to avoid personal liability.
- Formalities of Notice. When lots of money are at stake, parties shouldn’t rely upon their opponents to follow through on oral demands or representations. Notice requirements in statutes should be carefully followed. Assume that at trial the judge will expect proof of notice and one’s opponent will deny receipt of the written notice.
- Use Professionals. Engage with a construction litigator and independent expert witnesses early so that legal formalities can be observed and deadlines met to maximize results.
- Be Prepared to Deal with Delays & Headaches. Purchasing a home that hasn’t been built yet can be an exciting, and even cost-saving means of acquiring one’s dream home. It also carries with it significant risks of delays, defects and added expenses which may be difficult to get reimbursed for.
When legal disputes appear on the horizon, contractors and purchasers should seek the assistance of qualified counsel to preserve and protect their rights.
Legal Authorities:
Va. Code § 55-70.1 (Implied warranties on new homes)
Bessant v. Dey Street Properties, LLC (Norfolk Cir. Ct. Nov. 21 2016)(link available to VLW subscribers only)
Photo Credit:
Jason OX4 B-R Corridor at Sunset via photopin (license)(disclaimer: does not depict anything discussed in blog article)
November 15, 2016
Attorneys Fees Awards Against HOAs
In this blog and in my law practice, I focus on practical solutions to clear & present legal dangers to property rights of owners of properties in HOAs, condominiums or cooperatives. Many raise questions about getting attorneys fees awards against HOAs. This is an interesting topic in community associations law, where the outcomes of many disputes have a direct or precedential impact on other owners in the community. In my last blog post, I discussed a couple of 1990’s Virginia court opinions where owners’ counsel used an old English common law doctrine to solve modern HOA litigation problems. The doctrine of “virtual representation” allows individual owners to bring to complaints of general concern without naming every owner in the community as a plaintiff or defendant. Where the actual, named parties to the lawsuit fairly represent the interests of other members who are too numerous to add to the court case, the judge can nonetheless render a decision that binds all impacted parties. For example, a “representative” owner may bring a court case challenging an election or the validity of board resolution and the final order binds all members impacted by the election or board action. The doctrine of “virtual representation” solves a couple obstacles to owners gaining effective access to the legal system.
Today’s post discusses the problem of “free-riders” who may reap a benefit from other owners virtually representing them and footing the bills. In litigation, HOA boards draw upon the benefit of insurance policies, loans or assessment income to finance their legal expenses. The board may protract the dispute in a desire for a precedential effect or to simply wear down the owner. There is a case presently before the Supreme Court of Virginia where an owner accuses her association of the latter. Martha Lambert had a claim for $500.00 for reimbursement for certain repairs she made herself that were the responsibility of Sea Oats Condominium Association, Inc. The board’s lawyers defended the claim with time consuming motions and discovery normally used in cases where the amount in controversy is much larger than $500.00. Ms. Lambert “won” in the Circuit Court of Virginia Beach on what the judge described as a “close call.” The judge told the owner’s lawyer he did a “magnificent job” and reasonably pursued the case. However, the court only awarded $375 in attorney’s fees out of the full $9,568.50 amount Ms. Lambert incurred in the case. The only reason Ms. Lambert didn’t get the full amount was because the trial judge wanted to make an attorney’s fees award smaller than the $500 principal judgment. The Supreme Court accepted the appeal to determine whether the statute allowing for “reasonable” attorney’s fees required the Circuit Court to reduce the award to an amount in a nexus to the principal judgment awarded. Lambert accuses Sea Oats of engaging in “stubborn & obstructionist tactics.” Kevin Martingayle, Counsel for Ms. Lambert describes the trial judge as punishing the homeowner for vindicating her rights and discouraging others from doing the same when necessary. At stake is whether one party can get away with not performing their covenanted obligations because a lawsuit would add insult to injury. Lawyers practicing in the community associations arena around the state will watch to see what the Supreme Court does with this case.
The outcome of Lambert vs. Sea Oats only appears to directly impact the association and Ms. Lambert. In other HOA lawsuits, the rights of other owners are directly impacted by the outcome. What if, hypothetically speaking, a condo association caused injury to an entire floor of condominium units. One owner decides to sue. A plaintiff may find herself shouldering the burdens of similarly situated owners (“free riders”) not joining the suit or otherwise helping to pay for the legal expenses incurred by the plaintiff. Under many HOA governing documents and state statutes, the prevailing party at trial is entitled to an award of reasonable attorney’s fees against their opponent. What about the portion of a prevailing owner’s legal expenses which is attributable to representing the interests of similarly situated fellow members who are not official parties to the lawsuit? Would this provide a separate basis for an award of attorney’s fees reflecting the realities of “virtual representation?”
Since the 19th century, Virginia’s common law tradition of judicial precedents protects representative plaintiffs from the burden of the “free rider” problem. In “virtual representation” cases, the prevailing party may recover in their attorney fee award for legal expenses incurred in achieving the common benefit:
It is a general practice to require, when one creditor, suing for himself and others, who may come in and contribute to the expenses of suit, institutes proceedings for their common benefit, that those who derive a benefit shall bear their proportion of the expense and not throw the whole burden on one. This is equitable and just. But it only applies to those creditors who derive a benefit from the services of counsel in a cause in which they are not specially represented by counsel. If a creditor has his own counsel in a cause, he cannot be required to contribute to the compensation of another. Stovall v. Hardy, 1 Va. Dec. 342 (1879), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
Virginia courts apply this “common fund” doctrine in awarding attorney fee awards in creditor suits, securities lawsuits, civil rights cases, trust & estate litigation and other representative litigation. In 1999, the Circuit Court of Winchester applied it in the context of a dispute among members of a defunct nonstock corporation over the proceeds of liquidated assets. Most community associations in Virginia are incorporated under the Virginia Nonstock Corporation Act.
The Supreme Court of Virginia recognized that the common fund doctrine serves to eliminate “free rides” that would unfairly burden litigants in cases that directly impact a class of represented parties not retaining counsel in the lawsuit:
The essence of the common fund doctrine is that it would be unfair to permit one party to retain counsel, to file suit, to secure a benefit that all will share, yet to leave the full cost of the effort upon the one party who initiated the suit while others who will share the proceeds make no contribution. If others are to sit idly by and reap the benefits of one litigant’s labors, the idle parties should share in the cost of those labors. In short, the common fund doctrine is aimed at preventing “free rides.” See J. P. Dawson, Lawyers and Involuntary Clients: Attorneys’ Fees From Funds, 87 Harv. L. Rev. 1597, 1647 (1974), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
The common fund doctrine extends beyond cases where there is an actual “fund” of money to included cases where there may be some sort of injunctive, declaratory or equitable remedy that does not have a specific dollar amount associated with it.
I am not aware of any published judicial opinions where a judge has considered the “common fund” doctrine in representative plaintiff litigation specifically involving HOAs or condominiums. However, the Property Owners Association Act and the Virginia Condominium Act provide for “prevailing party” attorney’s fees. Is there any reason why the common fund doctrine should not be applied to avoid free riding of representative plaintiff litigation against community associations? I see no obstacle to use of this doctrine for such in a proper case.
Update July 20, 2022:
I have a new 2022 blog post about Attorney fee awards in HOA and condominium law cases. “Awards of Attorney’s Fees in Community Association Litigation.” This blog post addresses the issue of attorneys fees in these cases more generally, with greater focus on the procedural aspects of such claims.
In 2017 I posted an article more particularly about the Lambert v. Sea Oats Condo. Ass’n, Inc. case, “Condo Owner Prevails on Her Request for Attorney’s Fees.”
Case Citations:
Du Pont v. Shackelford, 235 Va. 588 (1988).
Turner v. Yeatras, 49 Va. Cir. 395 (Winchester 1999).
Photo Credit:
Jason OX4 Il Radicchio at the Border via photopin (license)(for illustrative purposes – does not depict anything from any case discussed)
November 3, 2016
Lawsuits Against HOAs Potentially Benefit Other Owners
In many HOA disputes, only one (or a small handful of) owners desire to challenge board actions that negatively impact a larger class of owners in the community. If the court finds that the board action was invalid, then the court decision would materially impact everyone, not just the plaintiff owners and the HOA. Today’s post is about how plaintiffs lawsuits against HOAs potentially benefit other owners. Usually, a plaintiff must name everyone materially impacted by a potential outcome as parties to the lawsuit. Must a homeowner join all owners as plaintiffs or defendants in a lawsuit against a HOA seeking judicial review of a board decision? What flexibility does the law allow for one or more owners to bring a representative claim against the association to benefit themselves and other similarly situated owners? How should attorney fees be handled in cases with “free riders”? The answers to these questions show tools for owners to enjoy greater access to justice in community association disputes.
Mass claims by owners may be brought against community associations in several ways. A group of interested owners can split the cost for one law firm to sue on their behalf. Alternatively, owners may bring separate suits and have the claims consolidated in court. Filing a class action may be a feasible option in many states. Is there any other way that claims can be brought to benefit both the named plaintiffs and other similarly situated owners? Can this somehow make lawsuits against HOAs more affordable?
There are good examples of such representative actions in Virginia. Ellen & Stephen LeBlanc owned a house in Reston, a huge development in Fairfax County, Virginia. Reston is a locally prominent example of where the community association model largely replaces the town or city local government. Most Restonians live under a Master Association and a smaller HOA or condo association. Such owners must pay dues and follow the covenants for both the master and sub association.
The LeBlancs owned non-waterfront property near Reston’s Lake Thoreau. In 1994, the Master Association decided that henceforth, only waterfront owners would be permitted to moor their watercraft directly behind their properties. This would substantially inconvenience the LeBlancs’ boating activities. The LeBlancs’ lawyer Brian Hirsch filed a lawsuit in the Circuit Court of Fairfax County challenging the validity of the master HOA’s decision on both constitutional and state law grounds. The association retained Stephen L. Altman to lead their legal defense.
Roger Novak, Judy Novak, Rex Brown and Dalia Brown all owned waterfront properties on this lake. These families did not want the LeBlancs or other non-waterfront Reston owners mooring their boats behind their houses. I can’t blame them for wanting a tranquil aquatic backyard all to themselves. The Novaks and Browns hired lawyer Raymond Diaz to bring a motion to intervene. The Browns and Novaks became parties to the suit. These intervenors asked the judge to force the LeBlancs to name all the owners in Reston as parties or dismiss the case for lack of necessary parties.
In general, a lawsuit must be dismissed if the plaintiffs fail to name all parties that are necessary for the case to be properly litigated. A suit on a contract or land record usually must include all parties named in the contract or instrument. The Novaks and Browns wanted to block people like the LeBlancs from enjoying mooring privileges on the lake. They wanted the LeBlancs to name all the parties subject to the covenants recorded in the registry of deeds for the Reston Association. If the LeBlancs had to litigate against the hundreds of owners, then the case could quickly become uneconomical, even if most were friendly. The Court denied the intervening parties’ motion, upholding an exception from well-established legal precedents in non-HOA Supreme Court of Virginia opinions:
Necessary parties include all persons, natural or artificial, however numerous, materially interested either legally or beneficially in the subject matter or event of the suit and who must be made parties to it and without whose presence in court no proper decree can be rendered in the cause. This rule is inflexible, yielding only when the allegations of the bill disclose a state of case so extraordinary and exceptional in character that it is practically impossible to make all parties in interest parties to the bill, and, further that others are made parties who have the same interest as have those not brought in and are equally certain to bring forward the entire merits of the controversy as would the absent persons.
The Circuit Court found this exception to apply:
In the case at bar, it is impracticable to join the estimated 400 to 500 homeowners surrounding Reston’s five lakes in this action. Likewise, the interests of these persons are the same as those of the parties to this action, and said parties are certain to bring forward all of the merits of the case as would the absent persons.
Hundreds of other owners are materially impacted by the case’s outcome. But this exception allows the case to proceed without adding them as necessary. Other individual owners are not barred from suing or become party to the LeBlancs’ case. The other owners weren’t necessary for the practical consideration of the sheer number of the affected class. The court found the LeBlancs sufficient to represent the case against the exclusive moorings rule, and the Novaks, Browns and the HOA competent to defend the board’s action favorable to the waterfront owners. The LeBlanc’s case was permitted to proceed without adding hundreds of affected owners. This “virtual representation” procedure is significant because the court’s ruling on the validity of the board’s resolution would affect all owners, not just the parties.
At trial, the Court upheld the Board’s decision to regulate boating activity on Lake Thoreau as a valid exercise of powers granted in the covenants. The LeBlanc’s case was dismissed. The Supreme Court of Virginia declined to reverse the decision. However, the principle that one or more owners can virtually represent the interests of a large class of homeowners in a contest over the validity of HOA rulemaking has not been overturned.
In 1996, the Circuit Court for the City of Alexandria applied the same principles in a homeowner challenge to a condominium election of directors. The Colecroft Station Condo Unit Owners Association Board asked the court to dismiss the judicial review of the election because not all owners were listed as plaintiffs. The judge rebuffed demands that all owners be added as parties, citing the same exception as used in LeBlancs’ case.
This exception that all materially affected parties need not be named as a plaintiff or defendant in the lawsuit is important to homeowners’ rights for several reasons. It gives an individual or small group of owners the ability to proceed with a lawsuit even when their neighbors might be friendly but uninterested in litigating. It gives owners another option when their rights are threatened and are not effectively redressed by board of directors’ elections or initiatives to amend the governing documents. Certain types of claims may be brought where class actions are not permitted or unfeasible. One brave owner could get a court to overturn an invalid board decision infringing upon the rights of many. This “virtual representation” doctrine advances the cause of homeowner access to justice in HOA and condo cases.
One challenge in these “virtual representation” cases is the notion of “free-riders.” The HOA’s attorney’s fees are paid for by the board’s accounts receivable: assessments, fees, loans and/or fines. Representative plaintiffs leading the challenge might find themselves “carrying water” for similarly situated owners who would stand to potentially benefit from the outcome of the case but aren’t paying lawyers. Is it fair for the challenging owners to pay for the legal work undertaken to achieve a benefit to both the plaintiff and the larger class? Are they entitled to an award of attorney’s fees reflecting the benefit conferred on behalf of other interested parties not named as plaintiffs? I will address this question in a future blog post focusing on the doctrine of “common fund” or “common benefit” in attorney fee awards and how this might apply in community association cases.
Case Citations:
LeBlanc v. Reston Homeowners’ Ass’n, 38 Va. Cir. 83 (Fairfax Co. 1995)
Cobble v. Colecroft Station Condo. Unit Owners’ Ass’n, 40 Va. Cir. 105 (Alexandria Cty. 1996)
Photo Credits:
pnyren35 20160131_Reston Trail Walk-187.jpg via photopin (license)
andrewfgriffith Flight Over the Town Center via photopin (license)
Bill Schreiner Dec15707 via photopin (license)
October 25, 2016
Virginia Consumer Protection Claims Against Contractors
There is a lot of litigation and arbitration in the construction contracting industry. Most of these cases are disputes over whether the contractor did the work and if so, whether it has been appropriately compensated under the terms of the agreement. Some construction disputes include allegations of deceptive practices. Virginia law approaches unprofessional practices in the construction contracting industry in two ways: First, construction contractors must obtain licenses to do business here. A builder is subject to professional sanction if the Board for Contractors finds that the conduct violated regulations. There is a fund managed by the board, from which unsatisfied claims may be paid if certain criteria are met. Second, owners, general contractors, subcontractors and other parties can bring lawsuits (or where agreed, arbitration claims). Can residential owners bring Virginia consumer protection claims against contractors? Parties unfamiliar with these rules often need help navigating the legal system to protect their rights.
VCPA & License Regulation:
In the 1970’s, the General Assembly adopted the Virginia Consumer Protection Act (“VCPA”). The main purpose of the VCPA is to make it easier for consumers (including homeowners) to bring legal claims against suppliers for deceptive practices. Before the VCPA, consumers had to prove fraud. Suing for fraud is attractive because a court may award attorney’s fees or punitive damages for fraud. However, fraud carries a higher standard of proof and many defenses that the consumer must overcome. In a proper case, the VCPA allows for tripled damages and attorney’s fees. The legislature has exempted certain types of real estate related business activity from the VCPA, including regulated lenders, many landlords and licensed real estate agents. What about contractors? Are contractors subject to professional regulation and exempt from the VCPA? Last month, the Circuit Court of Loudoun County considered this question in a lawsuit arising out of a residential custom contracting dispute.
Closing the Sales Process for the Custom Residential Construction Project:
On May 20, 2015, licensed contractor Interbuild, Inc. made a written agreement with Leslie & John Sayres for the construction of a large recreational facility on their property. The Sayres agreed to pay $399.624.00 for what would include a batting cage, swimming pool, exercise area and bathroom. According to the Sayres, they relied upon certain false representations by Interbuild in their decision to move forward with the contract. They allege that Interbuild told them the following:
- Interbuild had been established since 1981.
- The project did not require a building permit.
- The contractor already priced things out with subcontractors.
- Interbuild would supervise construction full-time.
- The project would be completed in 16 weeks.
- 4000 PSI concrete would be used.
- The building would be constructed upon an agreed upon area.
On October 20, 2016, attorney Chris Hill discusses this Sayres opinion in his Construction Law Musings blog. He observes that many of the alleged misrepresentations sound like things that would be specifications or terms of the contract. Hill raises concerns expressed by Interbuild’s lawyers that the Sayres complaint attempts to transform a breach of contract case into a fraud claim. I agree that this fraud in the inducement claim will be a challenge to pursue. However, I think that some of the fraud claims described in the Sayres counterclaim sound more like promissory fraud than anything else. Under Virginia law, promissory fraud occurs when one party makes a promise to the other that they have no intention of keeping, and the listener relies upon this empty promise to their detriment. In July, I blogged about this in the foreclosure context. If a false promise remains fraud even after reduced to a contract, then the Sayres fraud in the inducement claims make more sense.
Some of these alleged misrepresentations appear potentially more serious than others. While contract management experience is important, the Sayres contracted with Interbuild for a certain result. The experience was not an end unto itself. A missing permit could become a problem if the county later decided that the construction was not code-compliant and wanted substantial, costly corrections. The subcontractor pricing could become an issue if it could be proven that Interbuild was effectively unable to complete the job from the get-go. A contractor is required to provide adequate supervision regardless of what is represented. Rarely will you see a written agreement that absolves a contractor of this. In a proper case, courts will award damages for delay. However, the Sayres would have to prove that they relied upon the agreed delivery date. I suspect that this lawsuit is not about the Sayres inconvenience of continuing to exercise in a different place. The strength of the concrete raises serious structural questions, but would require proof by expert testimony. Building the project on the spot where the customer wants is indeed a fundamental issue. However, it might be shown that the location under the contract is unfeasible due to site conditions or that the difference is only slight. In general, the damages must flow from the misrepresentations. Courts are reticent to award a windfall to purchasers if the lies are of minimal consequence.
After paying most of the purchase price but before completion, the Sayres terminated the contract. Interbuild sued for work that was allegedly performed but not paid for. The Sayres filed counterclaims for fraud in the Inducement, VCPA and breach of contract.
Fraud in the Inducement:
Interbuild sought a court ruling on whether the Sayres could move forward with their fraud in the inducement and VCPA claims. The Contractor argued that the fraud claim should be thrown out. Interbuild maintained that the fraud claim was not proper because the customer only alleges that their expectations under the contract were disappointed. In its September 8, 2016 opinion letter, the Court dispensed with this argument, distinguishing between fraud inducing formation of the contract and fraud in the performance of the contract. The court found that the counterclaim clearly alleged that the misrepresentations were made to convince the Sayres to sign the contract. Because the alleged fraud occurred before the contract came into being, the claim is not alleging disappointed contractual expectations.
When legal disputes arise, owners and contractors frequently focus their attention on things that were most recently said or done. A contractor may be unhappy about an owner’s hands-on attitude about a project. Customers may take offense at the contractor’s customer service. However, the case might be about fraud in the inducement issues that come from the sales process. In the Sayres case, the judge allowed the fraud in the inducement claim to move forward.
The VCPA:
Interbuild adopted a different approach in its attempt to get the Sayres’ VCPA claim dismissed. The contractor argued that since it is subject to regulation as a licensee of the state contracting board, it is exempt from the consumer protection statute. While the VCPA does not specifically name contractors as exempt, it does exclude “any aspect of a consumer transaction which aspect is authorized under laws or regulations of this commonwealth. Va. Code § 59.1-199. Contractors are subject to state regulation by Va. Code § 54.1-1000, et seq. In his opinion, Judge Douglas L. Fleming, Jr. followed judicial precedents distinguishing between consumer transactions that are specifically sanctioned by law vs. those that are merely regulated. The absence of a prohibition of a particular practice does not constitute authorization of that practice. Since the professional regulations do not specifically cover the particular types of business practices at issue, this statutory exemption does not protect the contractor from suit. The court found that the alleged misrepresentations are the kind of practices that are actionable under the VCPA. This is consistent with other rulings made by Virginia courts in cases between consumers and construction contractors.
The VCPA also provides that a consumer may sue a contractor for not having a license. Interbuild argued that because it had an active contracting license it was exempt from the VCPA. Since Interbuild is subject to license revocation for conduct that violates professional regulations, that should be the sole remedy under the state statutes. Judge Fleming rejected this argument, observing that the state’s licensure regulations do not, “inferentially cloak licensed contractors with VCPA immunity if they are shown to have committed deceptive practices.” In short, a professional license does not include with it a privilege to engage in fraudulent behavior.
News reports frequently raise public policy questions about professional regulation. Each year, more occupations become subject to licensure requirements. Usually this means that the leaders in that industry regulate its participants by means of a state board. Too often, self-regulating industries use these boards to protect prominent members against competition. Consumers look to the boards for relief from predatory practices, but are often frustrated by the results. Interbuild’s arguments seem to appeal to this notion that as a licensee, its customers should have to go through the board if they want a special remedy. Bear in mind that there is a public demand for housing prices to go down. Builders have a more organized lobby than consumers regarding professional regulation and limiting liability for extra damages in lawsuits. Given market demands, I wonder how close the General Assembly is to exempting contractors from the VCPA. The construction industry provides many jobs to Virginia. However, I think that the public’s interests would not be served if quality and service were sacrificed for job creation and affordability concerns. A defect-riddled house is the most unaffordable of investments to its owner and doesn’t help the “property values” of others.
All the September 8, 2016 opinion decided was that Interbuild’s counterclaims may move forward in litigation. Even under the lower standards and enhanced remedies of the VCPA, claims based on deception are difficult to prove and obtain an award of damages.
When disputes arise over custom construction contract projects, the parties cannot rely upon the board of contractors or the county’s permitting office to advocate or mediate for them. When payment issues, construction defects or other disputes arise, the services of an experienced construction litigator are necessary to protect one’s best interests.
For Further Reading:
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Phil’s 1stPix Too Many Tonka Toys? via photopin (license)
July 15, 2016
Dealing with Memorandum for Mechanics Lien
A disgruntled contractor or supplier may attempt to collect a payment from owners by filing a Memorandum for Mechanics Lien against the real estate. Under Virginia law, claimants (contractors or material suppliers) can interfere with owners’ ability to sell or refinance property by filing a lien in land records without first filing a lawsuit and obtaining a judgment.
A March 2016 opinion by federal Judge Leonie Brinkema shows why purchasers at Virginia foreclosure sales must give care to mechanics liens. In April 2013 and October 2015 Jan-Michael Weinberg filed a Memorandum of Mechanics Lien against a Fairfax County property, then owned by Ann & James High. J.P. Morgan Chase Bank later foreclosed on the High property. In early 2016, Mr. Weinberg brought a lawsuit to enforce the mechanics lien against J.P. Morgan Chase and the property.
If a claimant pursues a Memorandum for Mechanics Lien correctly, the property may be sold to satisfy the secured debt. A Memorandum for Mechanics Lien is a two-page form that anyone can download online for general contractors or subcontractors. The filing fee is a few dollars. By contrast, removal of the lien may require significant time and attention by the owner. Overall, it is best for owners to work with their advisory team to avoid having contractors file mechanics liens in the first place. Sometimes, disputes cannot be easily avoided and owners must deal with recorded liens. A Memorandum for Mechanics Lien differs from a mortgage or a money judgment. Fortunately for the owner, Virginia courts apply strict requirements on contractors pursuing mechanic’s liens. Just because a contractor fills out all the blanks in the form that doesn’t meant it necessarily is valid. This blog post is a brief overview of key owner considerations. The Weinberg case provides a good example because the court found so many problems with that lien.
- Who? The land records system in Virginia index by party names. For this reason, the claimant must correctly list its own name and the name of the true owner of record. The owner’s team will need a title report and the construction contract. Whether the claimant is a general contractor, subcontractor or supplier will determine which form must be used. Mr. Weinberg’s Memorandum for Mechanics Lien claimed a lien of $195,000. Virginia law requires a contractor to have a “Class A” license for projects of $120,000 or more. Judge Brinkema found this Memorandum defective because Weinberg’s claim was not supported by a reference to a Class A license number. In some residential construction jobs, the Virginia Code requires appointment of a “Mechanic’s Lien Agent” to receive certain advance notices of performance of work from claimants that might later become the object of a mechanics lien. This creates an additional hurdle for the contractor, suppliers and subcontractors. In many construction projects, the builder works with the owner’s bank to obtain draws on construction loans. If mechanics lien disputes arise, owners can work with the bank to obtain documents.
- What? The Memorandum for Mechanics Lien must describe the dollar amount claimed and the type of materials or services furnished. The written agreement determines the scope of work, payment obligations and other terms. Generally speaking, only construction, removal, repair or improvement of a permanent structure will support a mechanics lien. Mr. Weinberg claimed that he conducted “grass, shrub, flower care,” “week killer,” “tree removal/cutting,” general property cleanup,” “infrastructure work,” “planting grass,” “site work,” “general household work” and “handy man jobs.” The Court found that this description of work was invalid. The work described was either landscaping or too vaguely connected to actual structures. Where the agreement was for work that could actually be the basis of a mechanics lien, the owner should consider how much of the work the contractor actually performed? Is the work free of defects? Does the Memorandum state the date the claim is due or the date from which interest is claimed?
- When? The contractor or supplier must meet strict timing deadlines for the mechanics lien. Generally speaking, the Memorandum for Mechanics Lien must be filed within 90 days from the last day of the month in which the claimant performed work. Judge Brinkema observed that Mr. Weinberg failed to indicate on the Memoranda the dates he allegedly performed the work. Also, no Memorandum may include sums for labor or materials furnished more than 150 days prior to the last day of work or delivery. Furthermore, the claimant must bring suit to enforce the lien no more than 6 months after recording the Memorandum or 60 days after the project was completed or otherwise terminated. Weinberg’s 2013 Memorandum was untimely because he did not sue to enforce it until 2016. Because Weinberg’s 2015 Memorandum was the same as the 2013 version, they both probably describe the same work on the property.
- Where? The Memorandum for Mechanics Lien must correctly describe the location of the real estate that it seeks to encumber. If it lists the wrong property, the lien may be invalid. Property description problems frequently arise in condominium construction cases because the same builder is doing work in the same building for multiple housing units. The Memorandum must be filed in the land records for the circuit court for the city or county in Virginia where the property is located.
- Why? There is usually a reason why a contractor decides to file a Memorandum for Mechanics Lien instead of pursuing some other means of payment collection. The Highs allegedly didn’t pay Weinberg for his landscaping and handyman services. The Highs’ weren’t able to pay their mortgage either. Weinberg filed for bankruptcy. In order to resolve a mechanics lien dispute with a contractor, an owner should consider how the dispute arose in the first place. Is someone acting out of desperation, confusion, or is the lien a predatory tactic? Could investigation need some other explanation?
- How? The owner must understand how the mechanics lien dispute with the contractor relates to the overall plan for the property. Mr. Weinberg tried to use mechanics liens to collect on debts. At the same time, he went through bankruptcy and the property went through foreclosure. Context cannot be ignored. Few owners can afford to remain completely passive in the face of a dispute with a contractor. The owner may have a construction loan or other debt financing to consider. An unfinished project is difficult to sell at a favorable price. Potential tenants won’t lease unfinished property.
On March 15, 2016, Judge Brinkema denied Mr. Weinberg’s motion to amend his lawsuit and dismissed the case. When a contractor or supplier files a Memorandum of Mechanics Lien against property, the owner must carefully consider whether to pay the contractor directly, deposit a bond into the court in order to release the lien and resolve the dispute with the contractor later, bring suit to invalidate the lien on legal grounds or simply wait 6 months to see if any suit is brought in a timely fashion to enforce the lien. Fortunately for owners, there are strict requirements on contractors for them to take advantage of mechanics lien procedures. A Virginia property owner should consult with qualified legal counsel immediately upon receipt of a Memorandum of Mechanics Lien to protect her legal rights.
Case Citation: Weinberg v. JP Morgan Chase & Co. (E.D. Va. Mar. 15, 2015)
Photo Credit: Views from a parking garage via photopin (license)
July 1, 2016
False Promises of Loan Modifications in Fraudulent Foreclosure Cases
In the classic comedy, Ferris Bueller’s Day Off, Ferris’s mother meets with the assistant principal to discuss his absenteeism. She had no idea he took 9 sick days. The school official bluntly explains: “That’s probably because he wasn’t sick. He was skipping school. Wake up and smell the coffee, Mrs. Bueller. It’s a fool’s paradise. He is just leading you down the primrose path.” Mothers of truant teenage sons aren’t the only ones succumbing to the temptation of wanting to believe that everything is fine when it isn’t. Owners busy with their jobs and families would like for their home to be worry-free. Unfortunately, the Ferris Bueller’s of the world sometimes grow up to service mortgages, manage HOA’s and handle customer service for home builders. The real estate and construction industry has some predators who lead consumers on the “primrose path.” We are not talking here about mere “sales talk” and “puffery” (for example, someone merely says that they will “treat you like family”). Promissory Fraud is when someone makes promises with no intent to follow-through but with every desire for the listener to rely upon it. In the past few years, borrowers have sued mortgage servicers for false promises of loan modifications in fraudulent foreclosure cases. Loan servicers stand in the shoes of the original mortgage lender as far as the borrower is concerned. Servicers send out the loan account statements, collect the payments and make disbursements. These cases allege that the servicers used “primrose path” tactics to conduct foreclosure fraud.
Leading along the primrose path is a powerful ploy because of the psychological roller-coaster the consumer experiences. Financial struggles, default notices and foreclosure letters causes stress and troubles that impact owners’ resources, time and relationships. Promises of time extensions, foreclosure avoidance and loan modifications are spellbinding. They invite the consumer to the much-missed happy place of living their life without threat of catastrophic financial loss. If the servicer says just the right thing, the borrower will very naturally want to let down their guard and forego more arduous tasks of forging a legal and financial solution to the problems. The false sense of security is intoxicating. When the borrower later experiences foreclosure instead of the promised modification, they are left trying to pick up the pieces.
Randolph Morrison vs. Wells Fargo Bank:
Mortgage servicers often get away with this because borrowers don’t always pay close attention to what they are actually being told. When borrower listen and take notes, they protect themselves. In 2014, a federal judge in Norfolk considered a claim for fraud based on telephone misrepresentations that Wells Fargo Bank allegedly made in the foreclosure context. When Virginia Breach homeowner Veola Morrison died in 2009. Her family received a notice that the property would be foreclosed on January 19, 2011. Veola’s son Randolph offered to assume the mortgage and requested an interest rate reduction. On January 12, 2011, a Wells Fargo employee told Randolph that he was approved for a loan modification and that the January 19, 2011 foreclosure would not take place. Wells Fargo sent Randolph a letter dated January 14, 2011 offering him a special forbearance agreement, requiring him to make his first payment on February 1, 2011. A “forbearance” is when the lender agrees to hold off on foreclosure and collection activities for a period of time in anticipation that the borrower will resolve short-term cash flow difficulties. They said that the foreclosure would be suspended so long as Randolph kept to the terms of the agreement. In spite of these representations, Wells Fargo Bank’s substitute trustee conducted the foreclosure sale anyway on January 19, 2011. In his suit, Randolph alleged that he reasonably relied upon a telephone statement by Wells Fargo that the January 19, 2011 foreclosure would not occur. He relied upon the subsequent letter saying when he had to make his next monthly payment. Relying on these representations, Randolph did not take other actions to prevent foreclosure such as hiring an attorney. After he discovered what happened, Randolph sued Wells Fargo. The Court denied Wells Fargo’s initial motion to dismiss the case and allowed Randolph’s claim for promissory fraud to proceed in Court. The case settled before trial.
Alan & Jackie Cook vs. CitiFinancial, Inc.:
Just because a false reassurance is not in writing doesn’t mean that the borrower can’t sue for fraud. Virginia Federal Judge Glen Conrad considered this question in 2014. Jackie & Alan Cook owned a property in Lovington, Virginia. In September 2011, Mr. Cook explained to his lender CitiFinancial, Inc. that he was current on his loan but struggling to make payments. The branch manager suggested that he pursue a loan modification through the Home Affordable Modification Program (“HAMP”). The manager told Mr. Cook that if he stopped paying, the lender would “have to modify the loan” and it would probably be able to cut the interest rate and principal owed. Mr. Cook became leery and asked questions. The manager reiterated that he should just stop making payments and ignore the bank’s letters until he received a notice with a date for the foreclosure sale. The customer services rep told Mr. Cook that once he got the foreclosure notice he could call the number on it and get started. Per the manager’s instructions, Mr. Cook stopped making payments and ignored the servicer’s default letters.
On June 17, 2013, Cook received a notice that on July 17, 2013, foreclosure trustee Atlantic Law Group would sell his Nelson County property in foreclosure. Remembering what CitiFinancial originally said, Cook tried to call the loan servicer 20 times, receiving no answer or he was hung up on. Finally, on July 11, 2013, Mr. Cook got ahold of CitiFinancial who told him what information they needed for a loan modification. When Mr. Cook talked to another employee of the servicer, he was told that his case would remain on “pending/hold status” for 30 days in order for him to obtain the necessary documents, and that the scheduled foreclosure would be postponed during that time. On July 17, 2013, the noticed day of foreclosure, one employee of the servicer told him on the telephone the “great news” that he was awarded a loan modification. Later that day, he talked to another employee of the servicer who told him that the foreclosure would indeed proceed as originally scheduled, because he failed to provide them with necessary documents. When Mr. Cook asked her about the 30-day hold period that he was previously given, she replied that “she had never heard of such a thing” and that there was nothing to be done to stop the foreclosure sale. Notice how the servicer used a new misrepresentation about the 30-day period to keep Mr. Cook on the “primrose path” even after he struggled to communicate with him after defaulting per their instruction. Mr. Cook rushed to an attorney’s office but by the time the trustee received the attorney’s letter the sale had already occurred. Use of the primrose path strategy is particularly damaging because the new buyer can use the foreclosure trustee’s deed to initiate eviction proceedings. Citi bought this property at the trustee’s sale and brought eviction proceedings against Mr. Cook. Cook filed suit, basing fraud claims on the servicer’s false promises. CitiFinancial initially moved for the court to dismiss the lawsuit, arguing that Cook could not have reasonably relied upon the false oral representations because the promissory note and deed of trust provided unambiguous terms for foreclosure in the event of default. Citi seemed to be saying that only things that are in writing are official in the mortgage context. Judge Glen Conrad rejected this argument because the question of whether Cook was justified to rely upon Citi’s oral statements was an evaluation of the credibility of witnesses at trial.
Jackie & Alan Cook’s case settled before trial. An agreed order reversed the foreclosure sale. While a servicer misrepresentation doesn’t have to be in writing to constitute fraud, the dispute may come down to a “he-said she-said” at trial. Few borrowers will take careful notes at the time these discussions take place. While defendants may be required to make document disclosures, homeowners can’t count on getting copies of servicer notes and internal messages during the litigation. Search warrants are not available in civil cases.
The experiences of the Morrisons and Cooks are common amongst different lenders all across the country. It’s best for homeowners struggling with their mortgages avoid the “primrose path” promises made by some servicers, foreclosure trustees and foreclosure rescue scams. If it sounds too good to be true, then it deserves thorough review and consideration. However, there are many situations where relying upon the representations of a lender or trustee is the only reasonable option. Once the foreclosure trustee’s deed is recorded, the borrower may face eviction proceedings. If a trustee or servicer breaches the mortgage documents or makes misrepresentations in conducting a foreclosure, the borrower should contact qualified legal counsel immediately.
Case Citations:
Morrison v. Wells Fargo Bank, 30 F. Supp. 3d 449 (E.D. Va. 2014)
Cook v. CitiFinancial, Inc., 2014 U.S. Dist. Lexis 67816 (W.D. Va. May 16, 2014)
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June 21, 2016
The Day the Universe Changed
My parents are retired schoolteachers. Growing up, we watched our share of public television. I remember watching a British documentary by James Burke called, “The Day the Universe Changed.” This program focused on the history of science in western civilization. Scientific developments affect public perceptions of man’s place in the world. Each episode dramatically built up to a momentous change in scientific perception. For example, when scientists determined that the earth circles the sun (and not the opposite), it felt as though the “universe changed.” The title of the final episode was, “Worlds Without End: Changing Knowledge, Changing Reality.” Provocative stuff for 1985. I went on to study the history of science for four years in liberal arts college.
Property: Ownership & Possession:
In the law there is a difference between the reality of how people think and act in real life, on the one hand, and the reality of courthouse activities on the other. For example, people frequently lie when under the stress of questioning. Courts developed a comprehensive set of evidence rules to determine what documents and testimony are acceptable. The rules of evidence are not a formalization of the way people ordinarily evaluate truth-claims. As another example, outside of Court, non-lawyers understand the difference between the right of ownership and the right to possess or occupy any property. The right of ownership is superior to, and often includes the right to possess. These rights are distinct but unseverably connected. Attorneys and nonlawyers understand the difference between being an owner, a tenant, or an invited guest. By contrast, since before the Civil War, Courts in Virginia enforced the conceptual separation between the right to claim ownership and the right to evict an occupant and gain exclusive possession. The courts did this by not allowing an occupant to raise a competing claim of ownership as a defense in an eviction suit. In many cases, attorneys would have to “lawsplain” why a borrower could not effectively assert the invalidity of the foreclosure in the eviction case brought by the new buyer. Practically speaking, the borrower had to defend the eviction case while also filing another, separate lawsuit of her own to raise her claims to rightful title to protect her property rights. The rules required a financially struggling borrower to litigate overlapping issues in two separate cases at the same time against overlapping parties. If you are reading about this and think that it makes no sense, you are right, it doesn’t. But this was the way that the Virginia eviction world worked for a very long time.
Instant Legal Reform:
And then June 16, 2016 was the day the entrenched worldview of foreclosure contests and evictions in Virginia changed forever, or at least until the General Assembly holds its next session. The Supreme Court of Virginia published a new opinion overturning 150-200 years of precedent in this area. This opinion is important to anyone who lives or works in any real estate with a mortgage on it. Virginia appellate law blogger Steve Emmert observed that this decision represents a “nuclear explosion” and that “. . . dirt lawyers are going to erupt when they read . . .” This case is a game-changer that unsettles much of real estate litigation in Virginia.
My Professional Interest:
Since the foreclosure crisis exploded in 2008, I have litigated foreclosure cases in Virginia on behalf of borrowers, lenders and purchasers. Before June 16, 2016, few expected the rules of the road to change dramatically. The Supreme Court of Virginia has hundreds of years of precedent underlying the existing state of affairs. The banking industry maintains an effective lobbying presence with the General Assembly. Victims of foreclosure abuses play the game of survival; few become activists. Yet, common-sense would dictate that having two separate lawsuits (the eviction case and ownership dispute) proceeding through the court system at the same time wastes resources for everyone. This impacts borrowers the most because they are in the least favorable position to pursue multiple lawsuits at the same time.
Parrish Foreclosure Case:
Teresa and Brian Parrish took out a $206,100 deed of trust (mortgage) on a parcel of real estate in Hanover County, Virginia. This deed of trust’s provisions incorporated certain federal regulations into its terms. These regulations prohibited foreclosure if the borrower submitted a complete loss mitigation application (a.k.a., loan modification application packet) more than 37 days before the trustee’s sale. Federal National Mortgage Association (“Fannie Mae”) had an interest in the home loan. The Parrishes timely submitted their application packet. Regardless, in May 2014, ALG Trustee, LLC sold the Parris property to Fannie Mae at the foreclosure sale. Fannie Mae then filed an unlawful detainer (eviction) lawsuit against the Parrishes in the General District Court (“GDC”). The GDC is the level of the court system that most Virginians are familiar with. People go to the GDC for traffic tickets, collection cases $25,000.00 or less, evictions and “small claims” cases. In the GDC, the Parrishes did not formally seek to invalidate the foreclosure sale. Instead, they argued that they were entitled to continue to possess the property because ALG conducted the foreclosure sale while the loan modification application was pending. The GDC judge took a look at the Trustee’s Deed that ALG made to Fannie Mae and ordered the sheriff to evict the Parrish family. The Parrishes appealed the case to the Circuit Court. The Circuit Court granted a motion affirming the lower decision in Fannie Mae’s favor. The Parrishes sought review of the case by the Supreme Court. The Supreme Court of Virginia’s June 16th opinion is a mini-treatise for the new landscape of foreclosure legal challenges.
Questions of Ownership and Occupancy Are Inextricably Intertwined:
The Justices directly addressed the question of the GDC’s jurisdiction. Unlike the Circuit Court, the GDC does not have the statutory legal authority to decide competing claims to title to real estate. That said, in each post-foreclosure unlawful detainer case the GDC must base its decision on whether the presentation of the Trustee’s Deed of Foreclosure is sufficient evidence of title to grant the eviction. Under longstanding legal precedent, the Parrishes’ contention about their loan modification application would not be heard in the unlawful detainer case because the borrowers can’t invalidate the foreclosure deed in the GDC. But on June 16, 2016 that all changed. The majority found that the validity of the foreclosure purchaser’s claimed right to possess the premises cannot be severed from the validity of that buyer’s claimed title because that title is the only thing from which any right to occupy flows. “The question of which of the two parties is entitled to possession is inextricably intertwined with the validity of the foreclosure purchaser’s title.”
From this insight, one must call to question the practical requirement for the borrower to bring his own separate lawsuit against the buyer, trustee and lender to reverse the foreclosure, confirm the right to possess and other relief. Why not have a procedure where all of the related claims can be combined?
What Are Lawyers to Do Now?
Okay, now the “universe has changed.” How do borrowers raise this issue in defense of post-foreclosure evictions? Is there anything that the foreclosure buyer can do about this? The Supreme Court recognizes many reasons why a borrower might have a legitimate claim that the foreclosure sale was legally defective, including but not limited to:
- Fraud (by the lender and/or foreclosure trustee)
- Collusion (between the trustee and the purchaser)
- Gross Inadequacy of Sale Price (so low as to shock the conscience of the judge)
- Breach of the Deed of Trust (for example the regulations about the loan modification application)
The Supreme Court’s new opinion states that the homeowner could allege facts to put the validity of the foreclosure deed in doubt. By the court’s new standard, if the borrower sufficiently alleged such a claim, the GDC becomes “divested” of jurisdiction. When the judge determines that he has no jurisdiction because there is a bona-fide title dispute, he must dismiss the entire case. From there, the new buyer would have to re-file the case in the Circuit Court where the parties would then litigate everything.
I expect that the General Assembly will enact new legislation in its next session that will clarify the jurisdiction of the GDC and the procedures for post-foreclosure unlawful detainers. At least until then, purchasers and lenders will not have the same ability to use the unlawful detainer suit as a weapon in their struggles with borrowers in foreclosure contests. Homeowners’ abilities to fight foreclosures will be streamlined. Justice McClanahan wrote a dissent where she explained the meaning of this in remarking that the majority of justices,
practically eliminated the availability of the summary [i.e. expedited] proceeding of unlawful detainer to purchasers of property at foreclosure sales. The majority’s new procedure for obtaining possession operates to deprive record owners of possession until disputes over “title” are adjudicated after the record owner has sought the “appropriate” remedy in circuit court.
The Supreme Court of Virginia reversed the decision of the Circuit Court and dismissed the unlawful detainer proceeding brought against the Parrishes.
Conclusion:
I welcome the Court’s recognition that the rights of title and possession are “inextricably intertwined”. In post-foreclosure disputes between the borrower, purchaser, lender and trustee, bona fide ownership claims should certainly be decided in court before the sheriff kicks anyone out of their house. Eviction procedures should not be used as a weapon to railroad homeowners out of their houses. It makes no sense for there to be more than one legal case about the same thing. Hopefully the General Assembly will adopt new legislation accepting these revelatory developments while clarifying and streamlining court jurisdiction and procedures so that the parties need not litigate any more than is necessary to properly decide who has the right to own and possess the foreclosure property. The universe has changed, and we are closer to a future where the court procedures do not unfairly burden one side over the other and it is easier for each case to be decided on its merits and not who runs out of money first.
UPDATE: I was interviewed by Shu Bartholomew on her radio show/podcast, “On the Commons” about this Parrish v. Fannie Mae case. The podcast is now available.
Case Citation: Parrish v. Federal National Mortgage Association (Supr. Ct. Va. Jun. 16, 2016)
Photo Credit: 2012/11/12 OOFDG Defending Jodie’s Home via photopin (license)(does not depict the property discussed in this article)
May 31, 2016
Liberty University Suing Neighbors Over Unwanted Lake
Lynchburg got in the news lately on account of Liberty University suing neighbors over unwanted lake. People know about Liberty University (“LU”) from the political-incorrectness of its leaders, especially Jerry Falwell, Sr. Long before Donald Trump captured the headlines with controversial statements, Mr. Falwell had a comparable relationship with the news media. Liberty brands itself as a conservative Christian University. Until recently, I had no idea how intermeshed Liberty is in Lynchburg, Virginia. For example, in March 2016, Liberty purchased a 75% interest in the River Ridge Mall for $33.5 million dollars. This mall is across the street from LU. According to ABC13 WSET, Liberty will allow the property managers to operate the mall without much regard for the political or religious viewpoints of the University. R-rated movies will be shown. Victoria’s Secret will remain open. President Falwell, Jr. explained that the University purchased the controlling interest in the mall to diversify its investment portfolio.
River Ridge Mall is not the only local off-campus real estate owned by LU. Many years ago, a Real Estate Investment Trust donated Ivy Lake to Liberty University. Ivy Lake is the centerpiece of a residential development 10 miles from the LU campus. Ivy Hill Recreation, LLC (“IHR”), a LU subsidiary holding company and the homeowners around the lake are in an intractable dispute over maintenance of the lake’s dam and the road that runs over it. In April, 2016, IHR brought a lawsuit against more than 400 landowners, seeking contribution towards necessary repairs to the dam and the roadway. This case tests the institutional values of LU regarding respect for property rights and neighborly obligations. The case also illustrates risks to landowners when the duties to maintain and repair roads and bridges in a community are not very well-defined. Most suburban properties without direct access to public right of ways have recorded HOA covenants that refer to roads as commons areas. When considering purchase of properties in a HOA, potential buyers certainly should carefully review and consider the HOA disclosure documents. As this lawsuit shows, sometimes home buyers should be equally skeptical about the absence of restrictive covenants when there are “common areas” that require maintenance.
This case captured my attention because I grew up a mile from a man-made lake in rural Virginia. While the lake and adjoining park are owned by the local government, some of our neighbors had lakefront properties. My brothers and I used to walk to the lake during the winter and sled down the side of the dam. One winter, someone built a sledding ramp near the bottom of the dam for cheap, risky thrills. In the summer, I would run up the side of the dam for an intense workout. Perhaps IHR could offer rights to use a beach area on the lake as an incentive to maintain the dam?
According to the lawsuit, the developer constructed a dam across ivy creek in order to create Lake Ivy. The lake adds scenic and recreational value to adjoining owners. The developer built a road across the dam. Some of the homes around the lake are only accessible by the road across the dam. The lakefront owners have easements to use the lake for recreational purposes. What is unusual here is that the lake, dam and road are not owned by the county or by an HOA. The developer donated the Lake to Liberty University, subject to the easements of the homeowners. Liberty faculty, students and staff rarely use the lake. A few years ago the Commonwealth of Virginia determined that per statute, the dam required extensive repairs, particularly the spillway and the road over the dam. If the spillway and road are not repaired, they must be closed to mitigate risks of failure. The repairs will cost approximately $1 million dollars. The state ordered IHR to comply with the safety requirements. Because of all of this, Liberty is no longer interested in owning the lake property. If they can’t get the owners to assume ownership of the property, they at least want them to contribute to the repairs.
This dispute is complicated by the fact that some defendant owners have lakefront acreage and don’t use the dam road, some rely upon the road over the dam (with no lakefront), and some are on the water and rely upon the dam road for access.
The neighborhoods surrounding the lake are not without any restrictive covenants. While they don’t all appear to be an HOA, most of them are subject to a declaration of agreements that restricts development to residential use, sets up an architectural committee, prohibits commercial uses, limits unsightly outbuildings, and other restrictions.
The gravamen of LU’s demands to the homeowners is not unreasonable. If the owners want to continue to enjoy access to their properties, someone needs to maintain the dam road. If the waterfront owners want to continue to enjoy the lake, someone needs to support the repairs to the spillway. Many landowners willingly signed documentation that would require them to make pro-rata contributions to the repairs. LU would prefer to have the owners form a HOA with the lake property as a common area. The lawsuit doesn’t request that the owners be forced into a formal HOA. Judges have discretion to craft solutions to easement disputes. However, they cannot decree creation of an HOA. HOAs must be set up by the developer beforehand, because rarely will owners unanimously consent to one. Enough oppose the efforts to require filing of the lawsuit. LU’s decision to file the lawsuit is more reasonable than unilaterally draining the lake and eliminating the dam without an effort to resolve the dispute. Without the lake, the owners will lose a perk. Without the roadway, their properties become useless because of lack of access.
The lawsuit suggests that the legal and practical aspects of all of this has been apparent for many years. Any potential buyer could research land records and determine that if the dam road required repairs, someone would have to pay for it. Also, the developer who built the lake apparently did it on the cheap. The lawsuit alleges that, “The work necessary to armor or harden the spillway was contemplated when the dam was originally conducted, however it apparently was not completed, and it must be done now as a condition of maintaining the dam.”
What is LU asking the Court to do for them? The lawsuit contains five claims:
Count 1: Duty to Maintain Easement (both the lake and the required repairs)
Count 2: Contribution (to IHR towards Required Repairs and other related issues)
Count 3: Right to Assess a Fee (for use of the lake, consistent with the right to makes rules & regulations)
Count 4: Negative Reciprocal Easement (lake development parcels have similar restrictions, most have express easements for recreational use of lake subject to rules and regulations, because they have easements for use, they should be bound by the rules and regulations, and also should be bound to contribute to the required repairs)
Count 5: Otherwise, owners must (1) personally make the repairs or (2) suffer the consequences of an abandoned easement.
In my opinion, IHR is overreaching somewhat in this lawsuit. I doubt that the judge would enter an order that would create a quasi-HOA relationship between the parties absent a unanimous agreement. The lawsuit burdens the owners with having to defend the case. It forces them to take a position, either participate in the maintenance and repairs or abandone their interest in the road, dam and lake. I would be very surprised if the judge would do more than deciding that the LU subsidiary is entitled to financial contribution for the minimum amount of repairs to maintain the easements.
Regardless of its outcome, this case has lessons learned for prospective property owners. Buyers should not assume that the developer will record covenants that will adequately address common area maintenance. If a developer wants to give away a property like a man-made lake that is unfinished and requires maintenance, then an institution like a University should consider the implications before accepting the gift. Hopefully these parties can resolve this dispute and avoid endless litigation and/or removal of the dam. Ivy Lake could remain a blessing, and not become a curse.
photo credit: The James River from the Old N & W Railroad Bridge via photopin (license)(does not depict creek or lake in article)
May 17, 2016
Can a HOA Represent Individual Landowners in Court without Their Permission?
Can a HOA Represent Individual Landowners in Court without Their Permission? What gives an HOA or Condo Association standing to sue to address threats coming from outside the community, or to appeal administrative decisions by the government that affect the neighborhood? On April 22, 2016, the Circuit Court of Loudoun County issued an opinion that explains how an HOA’s power to represent its owners in the outside world is actually quite narrow. This case is important to anyone interested in the overreach of HOA powers. In matters involving real estate, the HOA only owns the common areas and easements granted in the covenants recorded in the land records. For an HOA to represent the interests of an individual owner’s property in court, specific authorization is required.
The Grenata Homeowners Association and the Evergreen SportsPlex are neighbors. Grenata is a 61 lot community in Leesburg, Virginia. Like many sports complexes, Evergreen SportsPlex uses powerful lighting to make its ballfields usable at night. In many places, sports complex lights are intense enough that passengers taking off or landing can see games in play from airplanes from a high altitude at night. Many people in Grenata find the glare from the Evergreen SportsPlex a nuisance. Personally, I dislike having streetlight glare come into my bedroom or hotel room at night. Loudoun County has a light ordinance that does not require residents to do this where the light problem reaches a certain point. I can understand why those owners brought complaints before Loudoun County, alleging that Evergreen SportsPlex violated the local light ordinance. (Pop star Cory Hart’s 1984 hit song, “Sun Glasses at Night” is the musical inspiration for this blog post) The zoning administrator issued a notice of violation. Evergreen SportsPlex appealed and the Board of Zoning Appeals reversed the decision, finding that the Evergreen SportsPlex lighting was compliant. The HOA and some of the individual owners appealed this adverse decision to the Circuit Court. The April 22, 2016 opinion of Judge Douglas Fleming rules on the County’s efforts to get the appeal dismissed without further litigation.
Much of Judge Fleming’s opinion addresses technical questions about whether the HOA or individual owners were effectively notified of the Board of Zoning Appeal’s decision and thus waived any right to appeal. The case also presents questions about Grenata HOA’s standing to appeal the Board of Zoning Appeal’s adverse decision on behalf of itself and its individual owners. Has Grenata rightfully interjected itself in this case if it is the individual owners who are impacted by the intense glare? There may be owners in the HOA who are not damaged by the SportsPlex lighting and would not stand to benefit from this litigation. The Court addressed Grenata’s claims of standing both as a property owner and as an owner representative:
HOA as a Representative Agent of Individual Homeowners:
Grenata HOA claimed to be an authorized representative agent of individual homeowners affected by this Board of Zoning Appeals decision. There are provisions in the covenants that authorized the HOA to bring lawsuits that the board deemed necessary. The Board of Directors made a written resolution specifically authorizing the appeal to be filed. The opinion does not discuss any provisions in the covenants that would specifically authorize the HOA to litigate on behalf of individual owners’ interests.
If Grenata succeeds on appeal, the owners living closer to the SportsPlex would benefit more than the ones living further away. All owners would be paying for this out of their assessments.
There is no provision of the Property Owners Association Act that specifically authorizes HOAs to appeal adverse land use decisions on behalf of individual “constituent” owners.
The Court found that there was no record in the Board of Zoning Appeal case that individual affected homeowners ever expressly authorized the HOA to pursue this appellate litigation on their behalf. However, since Grenata alleged in their appeal that there was, the Court viewed this as a factual dispute that would have to be resolved later on in the case.
The Court is making a subtle point about the limits of HOA powers. Just because a HOA Board of Directors decides that they want to pursue an appeal of a land use decision on behalf of several of their constituent owners doesn’t mean that they have the authority to do so. Only those individual landowners have standing to pursue the litigation unless they expressly authorized their HOA to do this. The language in the covenants is critical to assessing these authorization issues. The covenants could prohibit such actions by the board, with or without owner’s authorization, or they could provide specific circumstances where the HOA could do something like this without individual owner authorization. The analysis applied by the court appears to be in a situation where the covenants are silent on the issue.
In these types of cases it is usually best for the affected owners to retain their own counsel (either separate or joint representation, as appropriate) and explore these matters without involving the HOA. If an individual owner signs an authorization for the HOA to proceed, and the HOA Board is motivated to proceed, then the owner runs the risk that the HOA Board will pursue things in a manner in the interests of certain officers, the majority of HOA directors or owners. This could result in an outcome that might not be in the best interest of the affected owner. Also, many owners may be suspicious if the Board pursues legal action that is paid for by all owners but disproportionately benefits certain owners, who may be connected with board members. The case opinion does not delve into these internal HOA governance issues, so I don’t know if they come into play here.
HOA as an Impacted Property Owner:
Grenata HOA owned a few parcels of land approximately 480 feet from the SportsPlex, including a water supply and undevelopable “out-lots.” Grenata argued it had standing because it owned these nearby properties. The Supreme Court of Virginia has a test as to whether a neighbor has standing to challenge a land use decision:
- The neighbor must own or occupy property within close proximity to the property at issue (here the SportsPlex), thus establishing a direct, immediate, pecuniary and substantial interest in the decision.
- And they must demonstrate a particularized harm to some personal or property right, or a burden different from that suffered by the general public.
The County unsuccessfully argued that these common areas did not adjoin the SportsPlex and thus were not in close proximity. The court found that 480 feet was close enough to allow the appeal process to proceed. On argument the County pointed out that these common areas were undevelopable and thus of little or no market value. The Court determined that such value was not relevant to this determination. The court determined that the HOA had standing to pursue the appeal on the grounds because it sufficiently alleged that it was a proximate owner alleging a particularized harm not suffered by the general public.
A cheeky argument that lawyers for Evergreen Sportsplex or the County could make, but isn’t discussed in the opinion is that the SportsPlex lights actually confer a benefit on the HOA in its administration of the common areas. HOA’s have an obligation to their residents and guests to keep common areas well-lit if necessary to promote safety. If there is an area where storm runoff accumulates, or parking lots or perhaps some roads, it may benefit the community to have electric bills for lighting paid by Evergreen.
The Grenata case is far from over. The Circuit Court may ultimately dismiss the appeals of the HOA, individual owners or both. In Virginia, the factual determinations of the Board of Zoning Appeals are presumed to be correct by the Court unless a party successfully rebuts the presumption. The burden rests on the HOA and owners to show that the Board of Zoning Appeals made an incorrect determination.
Case Citation: Grenata Homeowners Association, et al. v. Bd. of Superv. of Loudoun Co. & EVG Land, LLC (Loudoun Co. Cir. Ct. April 22, 2016)(behind subscription paywall)
Photo Credit: Flood lights via photopin (license)
December 1, 2015
Plaintiff Sanctioned for Intimidating Lawsuit
Experienced trial lawyers know that judges disfavor parties using litigation as a means of inflicting extra punishment on their opponent beyond the outcome of the case. Lawyers and their clients are supposed to use claims, defenses, motions and other procedures for their intended purposes of working justice. Real estate and construction litigation is an emotional process. In real estate and construction cases, the property at issue represents the owner’s home, business or retirement. In the courthouse, there is a fine line between seeking justice or revenge. In a November 12, 2015 opinion, the Supreme Court of Virginia found that a real estate investor crossed the line into impermissible vindictiveness. The plaintiff sanctioned for intimidating lawsuit. The Supreme Court upheld an award of sanctions rendered by the Circuit Court of Albemarle County in the investor’s dispute with his ex-girlfriend. When a party is trying everything they can to resolve a dispute quickly and decisively, knowing where one might find the boundary into sanctionable territory is crucial. Even savvy people can find themselves in intractable litigation. This case opinion contains valuable insights for self-protection.
Mitchell Kambis was a real estate broker, home designer and developer who passed away at the age of 71 in October 2015. According to an informative article by Peter Veith in Virginia Lawyer’s Weekly, Kambis restored the historic Empire Theater in Richmond. His obituary states that he attended law school but does not indicate whether he graduated. Kambis was in a romantic relationship with April Considine for over 11 years. Kambis and Considine formed Villa Deste, LLC for developing 130 acres in Albemarle County. To finance the investment, the couple borrowed over $2 million from Considine’s mother. At some point, Kambis transferred all of his ownership interests in Villa Deste to Considine, making her the sole owner. After the couple broke up, Kambis brought a 19 claim Complaint against Considine and her mother over the real estate.
The parties engaged in substantial motions practice over whether the lawsuit brought by Kambis alleged facts sufficient to support the multitude of requests for damages and other remedies. Considine filed a motion for litigation sanctions arguing that the suit was not warranted by existing law and was simply to harass. The Albemarle County Circuit Court threw out some but not all of the claims in Kambis’ lawsuit. Kambis and his attorney overcame the initial obstacles and got their case scheduled for trial.
As frequently happens in intractable cases, the parties filed a multitude of pretrial motions. Brevity prohibits me from describing them all and how the Court ruled at each stage. The court opinion described a pattern whereby Kambis brought claims or motions, would drop them, and later bring them up again. 12 days before trial, Kambis’ lawyer succeeded in getting the court to allow him to withdraw from the case. A few days later, the now lawyer-less Kambis voluntarily dropped claims for battery and intentional infliction of emotional distress. The Court refused to allow Kambis to voluntarily dismiss his claim for fraud because of Considine’s counterclaim. At some point, Kambis asked for the trial to be postponed because his case was too complicated for him to handle without a lawyer.
Eventually, the Court awarded Considine sanctions in the amount of $64,319.38 against Kambis’s original lawyer. The Court also awarded $84,541.61 against Kambis personally, finding, “a certain level of intent to intimidate Ms. Considine in this particular case.” Kambis ran up the costs of the litigation, including attorney’s fees. The Court further held Kambis responsible for the “costs of the trial and going forward.”
The difference between litigation sanctions from an ordinary award of attorney’s fees is a frequent source of confusion. Generally speaking, parties are responsible for bearing their own costs of litigation, including attorney’s fees. The most common exception is where a contract between the parties provides for an award of attorney’s fees to a prevailing party. There are other exceptions that may arise out of statutes such as the Virginia Consumer Protection Act.
Virginia law distinguishes an award of attorney’s fees as a litigation sanction under Va. Code § 8.01-271.1 from prevailing party awards. This statute can provide for attorney’s fees regardless of the type of claim or defense brought and what the parties may have agreed to in writing. Courts in Virginia have strictly construed this statute, only applying it in extraordinary circumstances where its key provisions are met:
The signature of an attorney or party constitutes a certificate by him that (i) he has read the pleading, motion, or other paper, (ii) to the best of his knowledge, information and belief, formed after reasonable inquiry, it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and (iii) it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
In expensive, unsettled disputes eventually one party has their legal arguments and factual presentation rejected. The question may arise whether their pursuit or defense of the case was sanctionable. Usually, no. Just because a party completely prevails over their adversary on a motion or at trial does not necessarily mean that there is grounds for sanctions. This exception does not swallow whole the general rule that parties bear their own costs in litigation.
Mitchell Kambis appealed the judge’s award of sanctions. He argued that his fraud claim was well-grounded in law and fact because it survived extensive pretrial motions. The Supreme Court of Virginia found that the trial court did not need to find Kambis’ claims legally inviable to conclude that they were for an “improper purpose.” This conceptual separation between the viability of claims or defenses and the propriety of a litigant’s purposes in bringing them is what may raise the blood pressure of many trial lawyers trying to walk the line between zealous advocacy and impermissible vindictiveness. Just because a party wins a motion on the sufficiency of a pleading doesn’t mean that claim is “immune” from a sanctions motion later on.
Kambis also argued on appeal that while his court action was intimidating, it was not for an improper purpose that would support an award of sanctions. The court observed that Kambis’ conduct, “demonstrated he was less interested in vindicating his legal rights and more interested in intimidating and injuring Considine.” Kambis forced Considine to expend a significant amount of time and money in motions practice and in trial preparation before Kambis dropped many of them right before trial.
The court’s award of sanctions was supported by emails and oral courtroom admissions that the lawsuit was designed to intimidate and that if the suit failed, the motion for sanctions had a reasonable likelihood of being granted.
Confusingly, an award of sanctions is not warranted just because a party finds the litigation process intimidating. To start, the act of filing of public documents alleging wrongdoing is intimidating. What’s more, at the center of any trial, the credibility of a party’s testimony is tested by right of cross-examination. Cross-examination is so intimidating that a law of evidence developed to protect the integrity of this process. Justice Cleo Powell recognized this issue in the Kambis case:
We recognize that almost any legal action is, in some way, intimidating. Such intimidation is inherent in our adversarial legal system and is generally not sanctionable, so long as the intimidation is a collateral effect of a party’s legitimate attempt to vindicate a legal right. The spectre of sanctions arises when intimidation is no longer a collateral effect. Thus, where a party brings an action or makes a filing primarily to intimidate the opposing party, such an action or filing is improper and runs afoul of Code § 8.01-271.1.
Kambis v. Considine clarifies that just because a lawsuit survives initial attempts to dislodge it on motions, it may not necessarily later survive a motions for sanctions. A casual reading of the Kambis opinion might lead some trial lawyers to argue that where a vindictive or intimidating motive can be ascribed to an opponent’s actions, then an award of attorney’s fees are proper. If this was a correct interpretation of this opinion and the statute, then it would increase unnecessary litigation rather than cut it out. Parties’ decisions to bring or defend legal proceedings never occur in a vacuum. Parties and their lawyers would seek sanctions every time their opponent filed anything because an ulterior motive could be intimated from the context of the case. Such an argument would ignore the extraordinary facts in the Kambis case, together with the admissions made regarding Kambis and his lawyer in email and in open court.
It is difficult to end cases like Kambis v. Considine before trial because the credibility of witnesses in a fraud case is not proper for determination on a motion for summary judgment in the Virginia court system. The Supreme Court seems to be saying that while a litigant may have a right to prove their version of the facts at trial, the sanctions statute prohibits them from abusing their right to a trial.
Resentment can fool otherwise sensible people into thinking that they are seeking justice when really they want payback. This is why it is important for a party to retain a lawyer who will exercise independent professional judgment. This protects both the lawyer and the client from making shortsighted litigation decisions that are antithetical to their long term best interests. This is especially important in real estate and construction cases where so much is at stake.
photo credit: Albemarle Courthouse via photopin (license)
