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)
Photo Credit:
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)
November 12, 2015
Confidentiality Terms in Litigation Settlement
When parties to lawsuits finally agree in principle to resolve dispute, sometimes one side will request insertion of confidentiality terms in litigation settlement. These “gag orders” typically forbid the parties from disclosing the terms of the settlements. These requests can come as a surprise because requests for confidentiality may have not come up yet in the case. Litigation is mostly a public activity. Usually anyone can read the court file or observe motions or trials.
Some defendants fear that the dollar amount of settlement in one case may create a “benchmark” or market value for settlements in a similar, future cases brought against them. The facts and dollar amount may be embarrassing. Even if the settlement agreement denies admission of any wrongdoing, the act of payment may be interpreted by some as a sign of the merit of the claim. A plaintiff may have a short period of time to consider a proposal of a confidentiality clause. What do these confidentiality clauses mean to parties bound by them? Most confidential settlements are “successful”. The cases never end up back in court, the news or social media because the parties “move on” with their lives and business. However, in a 2008 North Carolina case, a HOA and its former property manager failed to achieve a clean resolution. Selwyn Village Homeowners Association vs. Cline & Company illustrates potential pitfalls surrounding confidential settlements. This case has many lessons on “closing the deal” in litigation settlement.
Selwyn Village is a condominium association near Myers Park in Charlotte. Surrounding Myers Park is an affluent, “southern charm” neighborhood with 100-year-old oak trees. Cline & Company 
was Selwyn Village’s property manager. In 2003, Selwyn Village suffered flood damage. When the board of directors made a claim on their insurance policy, they discovered that Cline had cut costs by drastically underinsuring the property. Selwyn Village sued Cline and the insurance broker. The owners must have been outraged by the devastation unrepaired by inadequate insurance. The board and its law firm may have struggled to hold Cline responsible. The manager may have had access to more information about their conduct than their client. Perhaps the manager pointed fingers back at the board as the responsible party? In between the lines of the court opinions one can imagine messy litigation.
During the middle of the 2006 trial, Cline agreed to pay the association $26,000 in settlement. The parties also agreed to “work out” confidentiality and non-disparagement provisions in a consent order to be entered later. The court opinion does not discuss any estimates for the full amount of repairs. Even if insurance covered part of the costs, $26,000 seems like a low number to repair condominium flood damage in Myers Park.
While going back and forth with Cline about the terms of the confidentiality order, the HOA board requested that its own lawyers explain the settlement at an owners meeting. Little did they know that Kelly Ann Cline, daughter-in-law of the owner of Cline & Co., owned a unit in Selwyn Village. Ms. Cline attended the attorney’s presentation at the owner’s meeting. Kelly secretly tape recorded the disclosure of the terms of the settlement and provided it to Cline & Co.’s lawyers. Cline then used this “disclosure” as an excuse not to pay. The lawyers for the condo association moved the court to enforce the $26,000.00 settlement. The judge agreed with Selwyn Village. Cline appealed. The Court of Appeals and Supreme Court of North Carolina affirmed the trial court’s enforcement of the settlement against the property manager. This case illustrates several pitfalls to watch out for in a settlement.
- Settling on the Courthouse Steps. While it is often best to settle cases as soon as possible, many settle right before or during trial because one side wants to see if their opponent is really serious. Other parties want to check out how the judge and jury receive some of the evidence before agreeing to settle. Parties must be prepared to continue to engage in settlement negotiations before, during and even after trial.
- Piecemeal Settlements. Selwyn Village and Cline agreed to a settlement “in principle” to end the pending trial, with a plan to hash out the confidentiality terms later. The parties had to live in the short-term with undefined confidentiality provisions. This may have contributed to the blow-up over the owners meeting. In legal proceedings it’s just as important to understand what hasn’t been resolved as what has.
- Scope of Confidentiality Obligations. In any representation, a lawyer needs to know who his client is so that he can counsel them regarding any settlement proposal so that they can make informed decisions. The Selwyn Village case had the issue of whether it was proper to talk about the terms of the settlement in the owners’ meeting. The courts did not appear to have a problem with what the lawyers did. The court’s decision does not outline what details the lawyers shared at the owners’ meeting. In other states or organizations the attorney client privilege may be waived by sharing something with the shareholders or members. In other cases, lawyers may not be able to discuss all the details of a settlement negotiation at a members meeting. Consult with qualified legal counsel to determine whether communicating something to someone.
- “Loose Lips Sink Ships.” The “espionage” adds a juicy element. An owner does not lose their rights to participate in owners meetings because the HOA sued her in-laws. The opinion does not say whether the board was aware that the daughter-in-law attended the meeting. It is common for industry people to have ownership connections in HOA’s they work for. This is what sign-in sheets can be used for. Each state has different laws about whether someone can tape record people without their knowledge.
- Sharp Litigation Practices. The N.C. courts did not seem pleased with Mrs. Cline’s secret tape recording of the owner’s meeting and then using it as a pretext for paying nothing. Parties in litigation should be prepared to deal with an opponent who may succumb to the stress and burden of litigation and try just about anything to get what they want.
Streisand Effect. According to Wikipedia.org, the “Streisand Effect” is,
[T]he phenomenon whereby an attempt to hide, remove, or censor a piece of information has the unintended consequence of publicizing the information more widely, usually facilitated by the
Internet.
It is named after American entertainer Barbra Streisand [who] unsuccessfully sued photographer Kenneth Adelman and Pictopia.com for violation of privacy. The US$50 million lawsuit endeavored to remove an aerial photograph of Streisand’s mansion from the publicly available collection of 12,000 California coastline photographs. Adelman photographed the beachfront property to document coastal erosion as part of the California Coastal Records Project, which was intended to influence government policymakers. Before Streisand filed her lawsuit, “Image 3850” had been downloaded from Adelman’s website only six times; two of those downloads were by Streisand’s attorneys. As a result of the case, public knowledge of the picture increased substantially; more than 420,000 people visited the site over the following month.
Cline & Co. wanted the confidentiality provisions to avoid negative publicity about the settlement. What happened after the trial in this case is an example of the “Streisand Effect.” Ironically, many details ended up in publically available appeals court opinions.
The Selwyn Village HOA exchanged the risk of an unpredictable trial verdict for a settlement sum that may have been lower than what some may have wanted. After getting the threat of a jury verdict to go away, Cline Co. attempted to derail the settlement by refusing to pay and continuing the case through multiple appeals. The case illustrates the value and challenges of “closing the deal” in settling a case. Lawyers have varying professional acumen for settling cases depending upon their personality, experience and knowledge. When litigation seems inevitable, most parties are best served by lawyers who can fight for their clients or make peace in settlement depending on the facts and circumstances of the case and client’s needs. The “Streisand Effect” can be avoided by being selective about which things to fight over. In some situations, “Who cares?” may be the best response.
Case Citation:
Selwyn Vill. Homeowners Ass’n v. Cline & Co., No COA07-116-2 (Ct. App. N.C. Nov. 4, 2008)
Photo Credits:
Charlotte, NC at night via photopin (license)
June 9, 2015
Can a Buyer Sue a Sellers Real Estate Agent?
This past month, I experienced wonderful changes in my life which drew me temporarily away from my passion for blogging about property rights. On May 1st, I started my own solo law practice, Cowherd PLC. The new law firm continues my professional focus on the types of legal matters discussed in “Words of Conveyance.” On May 27th, my lovely wife and I welcomed our beautiful newborn daughter into the world. I would like to thank my friends and family for their love and support, including those who follow this blog. As a parent, I want the best home environment for my child to grow up in. As a trial attorney, I want to advocate for rights that are precious to clients.
When smart prospective buyers search the market for a home, they need to investigate the property. Typically, buyers use home inspectors to help them. Unfortunately, some defects cannot be easily discovered during the home inspection. For example, a structural defect may be concealed by drywall or other obstructions. With other houses, flooding problems may only be apparent after heavy rains.
Often, buyers will ask the seller’s agent whether there is a history of flooding or other problems. Agents know that if potential buyers learn negative information about the property they may move on to another listing. After a buyer completes a sale, the property may turn out to have defects that were concealed or contrary to representations made in the sales process. Who is legally responsible in those situations? Can a buyer sue a sellers real estate agent? Virginia courts considering this question draw varying conclusions.
“Great Party Room:”
The Circuit Court of the City of Norfolk recently considered whether a buyer can sue a sellers real estate agent under the Virginia Real Estate Broker’s Act. Megan Winesett is an active duty servicemember who bought her first home in 2010. The property listing described the basement as a “great party room.” During the walk-through, Ms. Winesett asked her own agent about basement flooding. The buyer’s agent told her that the seller’s agent explained that flooding was not a problem. A few years later, Winesett renovated the property and discovered rotting and termite damage in vertical support beams in the basement under her kitchen. She also found cracks in her foundation.
Buyer’s Relationship with the Seller’s Agent:
Winesett sued the seller, seller’s agent, her own agent and the real estate brokerages for $75,000 for repairs plus $350,000 in punitive damages. She sued the seller for fraud and the realtors for violation of the Real Estate Broker’s Act (“REBA”). The seller’s agents sought to dismiss the lawsuit on the grounds that the statute does not create a private cause of action against the agents. They argued that the REBA only allows for professional discipline by the Real Estate Board and not lawsuits by individuals. In a 1989 decision, Allen v. Lindstrom, the Supreme Court of Virginia observed that:
The [seller’s agents]’ primary and paramount duty, as broker and broker’s agent, was to the sellers, with whom they had an exclusive contract. While there may be some type of general duty to the public owed by every realtor, it is not the type of duty that converts into a liability against a seller’s agent for improper conduct to one in the adversary position of prospective purchaser, where there is no foreseeable reliance by the prospect on the agent’s actions.
In that case, the Court rejected the buyer’s attempt to sue the listing agent for violation of a duty arising out real estate agent regulations.
Ms. Winesett brought her case against the agents on the Virginia Real Estate Broker’s Act, which also governs the practices of real estate agents. That statute creates duties for agents (licensees) to their own clients and also the opposite parties in the transaction:
Licensees shall treat all prospective buyers honestly and shall not knowingly give them false information. A licensee engaged by a seller shall disclose to prospective buyers all material adverse facts pertaining to the physical condition of the property which are actually known by the licensee. Va. Code Sect. 54.1-2131(B).
The Act requires such disclosures to be in writing. The realtor doesn’t need to be an expert in every issue. An agent is entitled to pass on information provided by the seller, the government, or a licensed professional. However, the agent may not rely upon information provided by others if he has actual knowledge of falsity or act in reckless disregard for the truth. Va. Code Sect. 54.1-2142.1.
On May 21, 2015, Judge Mary Jane Hall denied the seller’s agent’s motion, finding that the REBA does create a private cause of action for buyers against seller’s agents for violations. Judge Hall focused her analysis on language in the statute providing that, “This includes any regulatory action brought under this chapter and any civil action filed.” This case is currently set for trial in August. While the Court allowed this claim to move forward, Ms. Winesett bears the burden of proving it at trial.
Judge Hall’s legal conclusion is not consistently reached by all courts in Virginia. Unlike other consumer protection statutes, the REBA does not contain specific provisions about how a civil action may be brought and what remedies are allowed.
In 2004, the Circuit Court of Loudoun County entertained the same issue and concluded that a buyer is not entitled to a private cause of action against a seller’s agent for violation of the REBA. In Monica v. Hottel, Judge Thomas Horne decided instead that a buyer may allege a negligence per se claim against the seller’s agent for violation of the duty of ordinary care set forth in REBA.
I have a few observations about what these recent decisions mean to current and prospective real estate owners in Virginia:
- Discipline vs. Liability: In these cases, the sellers argued that the General Assembly contemplated that the statute would only be enforced by professional discipline, not private lawsuits. To a professional, the prospect of having one’s license suspended or revoked is a different type of threat than a jury award of a large money judgment. To the buyer saddled with a house requiring more repairs than they can afford, money is much more of a consolation than the knowledge that an agent is no longer selling real estate.
- Virginia Consumer Protection Act: Unlike auto dealers, construction contractors and many other types of businesses, licensed real estate agents are excepted from liability under the Consumer Protection Act. To the extent seller’s agents have responsibilities to buyers, liability would have to arise out of some other legal theory, such as the REBA, negligence or fraud.
- Challenges and Advantages of Suing for Fraud: Trial attorneys know that it is much easier to prove negligence or breach of contract than claims based on misrepresentation. In fraud, the standard tends to be higher and there are many recognized defenses. For example, expressions of opinion may not normally serve as the basis for a fraud suit. It is unclear what the standard of proof is for a civil action under the REBA and whether the usual defenses permitted in fraud cases apply. Buyers aren’t normally privy to the private conversations of the seller and his agent. Proof of “actual knowledge” may be hard to come by in many cases. However, there are advantages for suing for fraud. The plaintiff may be entitled to attorney’s fees and punitive damages. Fraud is a flexible legal theory which may provide a remedy in situations that statutes don’t cover.
- REBA Standard for Agents: Normally, a buyer must follow the traditional principle of Caveat Emptor (“Buyer Beware”). The REBA imposes a higher standard of professionalism on seller’s agents by requiring them to affirmatively disclose material adverse facts under many situations. Broad legal enforcement of REBA may change the way that real estate is sold in Virginia.
Although they construe the REBA in different ways, these recent court decisions demonstrate a trend towards greater consumer protection against predatory conduct in the real estate industry. In my experience litigating cases under common law fraud, consumer protection statutes, breach of contract and warranty law, I have learned that there is usually a legal theory that provides a consumer with a remedy. However, claims have a defined time period in which they may be brought. If you fell victim to dishonest conduct in your real estate purchase, discovered that a defect was concealed during your property inspection or your requests for relief under a warranty are being stonewalled, contact a qualified real estate litigation attorney before the passage of time may prejudice your rights. As an owner, you make a tremendous commitment and personal sacrifice to acquire and keep real estate. You are entitled to the legal protections owed by others.
Authorities:
Virginia Real Estate Broker’s Act, Va. Code Sect. 54.1-2100, et seq.
P. Fletcher, “Homeowner Can Sue Agents Under Brokers’ Act,” Va. Lawyers Weekly, (Jun. 5, 2015)
Winesett v. Edwards-Soblotne, No. CL14-6964 (Norfolk Cir. Ct. May 21, 2015)(Hall, J.)
Monica v. Hottel, 64 Va. Cir. 439 (Loudoun Co. May 24, 2004)(Horne, J.)
Allen v. Lindstrom, 237 Va. 489 (Va. 1989)
Photo Credit: Fixer upper via photopin (license)(Used to illustrate themes of post. Does not depict any properties described herein. To my knowledge, this property does not suffer any defects)
February 20, 2015
The Basics of Civil Litigation Discovery
At some point after the filing of a lawsuit in Virginia Circuit Court, initial disputes over the sufficiency of the complaint are resolved. The parties are now on notice of their opponents’ claims and defenses. The process of getting to this point was the focus of my previous blog post. Contrary to what one sees on T.V. or movies, parties do not immediately proceed to going to trial. Instead, lawyers and their clients begin to prepare for trial in a period called “discovery.” Discovery involves finding out more facts about the case. This post provides an overview of the basics of civil litigation discovery, with a focus on its purposes and tools in real estate cases. Why is there such a lengthy process for this? Consider three purposes of discovery:
- Hoarding. Preventing one side or another from “hoarding” documents and information about the case to the unfair detriment of others. For example, in a case between different homeowners’ association factions over control of the board of directors, whoever happens to have access to the minutes, resolutions, notices, amendments, etc., kept by the association must provide them to the other.
- Surprises. Lawyers, as a lot, are attracted to springing surprises on their opponents at trial. However, it may be contrary to the principles of justice for one side to hand the other a large stack of documents they have never seen before during the trial and expect the witness questioning to be meaningful. Discovery can mitigate unfair surprise.
- Effectiveness of Trial. The public places greater confidence in trial results that are based on documents and facts rather than the decisions made in the absence of existing evidence.
The methods of discovery are more formal than the fact gathering conducted outside of litigation. Informal investigation includes researching the documents and information within one’s control, talking to friendly witnesses, checking what is publicly available or that one’s bank can provide. Usually this doesn’t answer all questions. So what are the available forms of civil discovery? There are quite a few. The most useful in real estate and construction cases in Virginia circuit court are:
- Document Requests. The rules allow a party to request in writing an opponent’s documents. A party seeking production of documents must send a written request. The responding party then has 21 days in which to respond as to documents within their possession, custody or control. In large cases it usually takes significantly longer than 21 days to resolve a document request. Reviewing the relevant documents of one’s opponent is a central element of trial preparation. Contracts and other documents created before the dispute cannot, absent forgery, be changed to adapt to someone’s current story. When the judge or jury goes to make determinations of facts, the credibility of the parties and the key documents carry great weight. If a party fails to produce a document requested in discovery, they are not normally allowed to use it as an exhibit at trial. The documents of a third-party can be requested by serving them with a subpoena duces tecum.
- Interrogatories. Information sought may not necessarily be reflected in a document. In discovery, a party may submit written interrogatories to another party, seeking answers to specific questions. For example, a party may inquire into the factual support for their opponent’s claims or defenses. Parties usually ask for disclosure of all persons having knowledge about the facts of the case. Interrogatories are also a good tool for finding out about expert testimony that one’s opponent may present at trial. The answering party must respond within 21 days. The answers must be signed by a party under oath or affirmation.
- Requests for Admissions. Last August, I posted an article about the role of a party’s admissions in a federal trial in Maryland. In that case, a lawyer made an oral admission in a closing argument. His opponent did not make a motion to have the admission deemed binding before the jury went to deliberate. The jury made a decision contrary to the admission. The jury verdict ignoring the admission survived post-trial motions and appeal. Party admissions can be requested in discovery before they come out at trial. Parties are entitled to submit to the opponent formal, written requests for admission. The 21 day deadline applies here as well. Admitted responses are binding. These can be useful for resolving uncontested matters so that the trial can focus on what’s disputed.
- Depositions. How will a party or witness react to a line of questions at trial? Does a party or witness know something that can be useful to preparing one’s own case? In discovery, a party may take oral depositions of parties, experts or other witnesses. The deposition usually occurs at a law office. The parties, the lawyers and the witness meet in a conference room with a court reporter. The court reporter places the witness under oath, and then records all of the lawyers’ questions, objections and witness answers. Depositions of parties and experts are an important part of pretrial discovery in large cases.
- View of Real Estate. In many real estate or construction cases, the most significant piece of evidence is the building or land itself. If ordered, the jury travels to the property to view it as evidence. More commonly, the appearance of property is put into evidence by photographs or video. A party not in possession or control of the real estate is entitled to view it. This can be an effective way of expanding one’s knowledge about the case.
Not all of these tools will need to be employed in every case. In addition to these forms of discovery, there are common areas where parties dispute over whether the discovery has been properly sought or provided. These are usually the subject of objections and motions:
- Relevance. Discovery cannot be used to explore any and every topic. The requests must explore relevant, admissible evidence or information that is reasonably calculated to lead to admissible evidence. Although not unlimited, the scope of discovery is broad.
- Confidentiality. A party may have confidentiality concerns about turning over documents or information. These concerns can be addressed by a protective order regulating the use and disposition of confidential documents or other information.
- Privileges to Withhold. Frequently attorneys will interpose objections to discovery requests. One justification for withholding documents is the attorney-client privilege. Communications between an attorney and his client are not subject to discovery. Despite the apparent simplicity of this concept, disputes over assertion of the attorney-client privilege are a frequent source of discovery disputes. There are other privilege and objections that are applicable in certain situations.
- Spoliation. In the age of computers, e-mails, text messages, computer files and other electronic data are easily created and easily deleted. Once litigation is threatened or pending, parties and witnesses should take action to preserve evidence, including electronically stored information for potential use in the lawsuit.
- Motions to Compel. Lawyers must make reasonable efforts to resolve disputes over the legitimacy of objections, the sufficiency of responses and other discovery disputes without putting it before a judge. When disputes cannot be resolved, typically one party will bring a motion to compel discovery against the other.
- Sanctions. The failure to obey discovery orders can subject a party to a variety of sanctions, including awards of attorney’s fees, dismissal of claims or defenses, exclusion of witnesses and other punishments.
By better understanding the basics of civil litigation discovery, one can adopt strategies that make better use of time, energy and resources pre-trial. Implementing discovery strategies proper to the needs and circumstances of the case pave the way towards a favorable result.
February 12, 2015
The Beginning of a Virginia Circuit Court Case
Many people will never be party to a lawsuit that goes to trial. For those that do, the first time may be the only time. Being a party to a Virginia circuit court civil case requires significant time, focus and resources for what may be several months or longer. What should a party expect from the beginning of a Virginia circuit court case? Because of the commitment required, parties to a lawsuit should familiarize themselves with the basics. This article is the first installment in a series providing a basic overview of Virginia circuit court civil cases. While the circumstances and details of each case are unique, the rules of court provide a basic outline of what to expect.
Pre-Lawsuit Negotiations: Before a lawsuit is filed, the parties and their attorneys usually communicate in efforts to achieve desired results without the necessity of a lawsuit. They exchange emails, demand letters, settlement offers and other correspondence articulating their interests, position and requirements. Why engage in this process if there already are grounds for a lawsuit? In the facts of many cases, there is a reasonable likelihood that the case can be settled without the necessity of filing suit. Not every case that ought to settle in fact resolves without filing suit. However, once suit is filed, the parties will be required to conduct the case in addition to engaging in any desired settlement negotiations. Often it is worthwhile to first see if things can be negotiated.
Filing the Complaint: If settlement negotiations don’t work, a party’s first step towards obtaining a judgment may be to file a complaint at the circuit court clerk’s office. In real estate and construction cases, this is usually done at the courthouse for the city or county where the property is located. Most real estate or construction cases are brought in Circuit Court. However, if the amount in controversy is $25,000.00 or less, the case will probably be brought in General District Court. Alternatively, some cases are brought in federal court.
To begin the case properly, the plaintiff’s best interests are served by investigating and analyzing the case with the lawyer. The complaint should include the proper parties with their correct names. The claims (e.g., breach of contract, breach of warranty, fraud, etc.) should be carefully considered and supported by sufficient factual allegations. The remedies (e.g., money judgment, declaration of rights, etc.) requested to the Court should be clear and supported by the claims. The parties defending the lawsuit can be expected to attack the complaint in whatever way they can. Making the complaint as strong as reasonably possible positions the plaintiff to have a greater likelihood of obtaining a favorable result in court or settlement. The plaintiff normally bears the burden of proof for the claims in the complaint. Parties should avoid simply putting some allegations together that merely forces the other side to respond. Time and focus spent on the complaint may prevent more time unnecessarily being spent strengthening or disputing over a claim later.
Service of Process: A lawsuit cannot proceed unless the defendants are formally put on notice. Normally this consists of having a sheriff’s deputy or private process server going out to each defendant’s house to serve them. There are several alternatives to direct hand delivery of the complaint on the defendant that may apply. Usually it takes a few days for the court personnel to process the paperwork. If the lawyers for the parties are already introduced, often the attorney will provide the defendants with a courtesy copy of the complaint before it is served.
Defendant’s Initial Response: Once the defendant is served, he normally has 21 days in which to respond. Failure to respond in a timely manner or obtain an extension can result in that party falling into default. Falling into default can result in significant waiver of rights to defend the lawsuit and possible entry of default judgment. Usually, defendants respond initially to complaints by filing a “demurrer” or some other motion designed to have the lawsuit dismissed. In the Virginia circuit courts, defendants often make substantial efforts in these early demurrers and motions. Unlike some other states, the defendant’s ability to get a case dismissed on a later pre-trial motion is limited in Virginia state courts. Since the plaintiff bears the burden of proving the allegations and generally upholding the legitimacy of the lawsuit, there are many possible grounds for a defendant to seek dismissal. What is a demurrer? At this stage the defendant usually cannot successfully challenge the truth of the facts asserted in the complaint. Instead, the demurrers typically argue that, for whatever reason, the complaint is not legally sufficient and must be revised or abandoned. For example, a plaintiff may allege various forms of wrongdoing and damages suffered. However, if a claim fails to properly articulate a causal connection between the wrongful conduct and the damages suffered, the defendant will probably argue that it is not legally sufficient. The demurrer or motion to dismiss may require a court hearing where the attorneys will argue before a judge over the sufficiency of the lawsuit. The parties themselves are usually not required to attend these hearings but may do so if they wish.
Defendant’s Answer and Affirmative Defenses: At the end of this initial motions practice phase, the defendants are usually left with claims that have survived and must be responded to directly. This is done by filing an answer containing numbered paragraphs responding directly to those in the complaint as admitted, denied or whatever other response is appropriate. In the same document, the defendants will also identify their affirmative defenses. For example, the defendant may assert fraud, that the plaintiff waived her rights by taking too long to file suit, or other defenses. Some affirmative defenses must be put with the answer to avoid being waived.
Additional Claims: A defendant may have a claim against the plaintiff, another defendant or a third party that may be related to the facts of the case. This initial response phase is the normal time for such claims to be asserted. A counter-claim, cross-claim or claim against a third party is in many respects treated like a separate lawsuit that will go to trial with the initial lawsuit because of the common factual issues.
Scheduling Orders and Trial Dates: Around this time the court will set the trial date. A party should provide her attorney with dates to avoid (vacation, travel, etc.) for trial. Additionally the attorney and client will discuss whether a trial by or without a jury should be requested. When the attorneys set the case for trial, the court may enter a scheduling order setting certain deadlines for the progress of the case. Once the trial date is set, the attorneys, parties and witnesses should reserve the trial dates on their calendars.
There is a lot of activity that goes on in a Virginia circuit court case before the parties give their own personal testimony. In the next installment in this series, I will provide an overview for the discovery process, where each side requests testimony, property viewings, documents and information from their opponents and third parties. The facts and circumstances of each case are different and may require additional procedures or other variations from the outline provided above. If you have a real estate or construction claim against another party, discuss the matter with a qualified attorney to avoid unnecessary waiver of any rights. If you have been made a defendant to a lawsuit, consult with an attorney admitted to practice before the court where the suit is filed to avoid falling into default or other waiver of rights.
January 29, 2015
New Book Review: The Articulate Witness
One of the duties of a litigator is to prepare the client to testify at a deposition, mediation, hearing or trial. Clear, credible and cogent testimony puts the party in the best position to prevail. While judges, arbitrators and juries want to see the contracts and key documents, they also want to hear directly from the parties whose dispute is before the court.
Experienced trial attorneys know what to expect of themselves and their witnesses from the facts of the case. When it comes to public speaking, witness preparation typically includes discussion of the disputed facts and legal arguments in the case. While an attorney may not tell the client or witness what to say, he may ask practice examination questions. Witnesses quickly learn that courtroom or deposition testimony differs from ordinary conversation or interviews. A witness may have little or no public speaking training or experience. There may not be time for a witness to gain valuable experience in Toastmasters International or other activities to practice speaking skills. So how can a witness prepare herself to give effective testimony in her own case?
This month, Brian K. Johnson and Marsha Hunter published a new book, “The Articulate Witness: An Illustrated Guide to Testifying Confidently Under Oath.” This edition is available in print or e-book format. Johnson & Hunter are consultants who train attorneys for a variety of public speaking settings. I have read one of their other books and attended one of their seminars. “The Articulate Witness” is useful to parties and witnesses seeking an overview of the legal testimonial process. It is a valuable resource for attorneys and law students seeking insights in how to better prepare their clients to testify. Professional experts evaluating their own habits and skills would benefit as well. The book is a breezy 50 pages with copious illustrations. I finished it riding on the D.C. Metro between the Judiciary Square & West Falls Church stations. The book focuses on the mechanics of speaking confidently in litigation situations, including cross-examination. The book would be useful to a witness when they first know that a deposition, hearing, trial, etc. will occur. It is not a good book to read the evening before the big day. The reader may desire to practice some of the exercises or discuss them with the attorney beforehand. The book is not a proper substitute for trial preparation with one’s attorney.
A common mistaken belief is that public speaking involves only expressing one’s thoughts using one’s voice. Johnson & Hunter do a great job of showing how it is also a “physical” activity, involving posture, gestures, handling exhibit documents, facial expression and eye contact.
“The Articulate Witness” is an excellent reference for witnesses,attorneys, experts or any other person whose profession or circumstances require him to speak in a legal proceeding. Mastery of the facts and laws is not sufficient. One must be prepared to cogently communicate one’s position to others.
photo credit: Extraordinary Chambers in the Courts of Cambodia via photopin cc
January 8, 2015
Attempt to Relitigate Foreclosure in Bankruptcy Sanctioned by Judge
In Virginia, borrowers have several options of where to bring a legal challenge to a foreclosure trustee’s sale. The shortest commute is usually the Virginia circuit court for the city or county where the property is located. Alternatively, the facts may allow suit to be brought in a federal district courthouses. Another common venue is federal bankruptcy court.
On June 18, 2014, I posted an article about a borrower, Rachel Ulrey, who managed to keep her foreclosed real estate because the lender, SunTrust Bank, failed to object to the plan in time. Ulrey’s case is a cautionary tale to lenders. Other cases show why borrowers cannot rely on lender inattention as a legal strategy. On November 12, 2014, U.S. Bankruptcy Judge Kevin Huennenkens issued an opinion illustrating why parties and their attorneys may not bring the same claim in bankruptcy court after they fail to achieve their desired result in a Virginia state court. The borrower and his attorney found their attempt to relitigate foreclosure in bankruptcy sanctioned by the judge.
Michael Pintz owned property in Sussex County, Virginia, in the name of Michael’s Enterprises of Virginia, Inc. In June 2008, he took out a $200,000 mortgage from Branch Banking & Trust. After he defaulted on payment, BB&T obtained a money judgment in Hanover Circuit Court. When BB&T sent Michael’s Enterprises a Notice of Foreclosure, he filed a request in Sussex Circuit Court to block the threatened sale. That court denied the motion. BB&T later purchased the property at a November 2013 Trustee’s Sale. In February 2014, Michael’s Enterprises filed for Chapter 11 reorganization in the U.S. Bankruptcy Court. The petition claimed the Sussex property as an asset of the corporation.
You may be wondering whether bankruptcy petitions can be used this way. When a court finds that someone filed something for an improper purpose, it may award litigation sanctions. State and federal courts in Virginia have similar rules prohibiting parties and their attorneys from advancing legal claims and defenses for improper purposes and not to vindicate the rights described in the court filing. Improper purposes include but are not limited to harassment, unnecessary delay or needless increase in the cost of litigation.
BB&T brought a Motion for Sanctions for Violation of Bankruptcy Rule 9011. The Bankruptcy Court initially deferred BB&T’s request for sanctions. Judge Huennenkens gave Michael’s Enterprises an opportunity to submit a proper bankruptcy reorganization plan before ruling on the sanctions request. The conditions imposed were not met. In October 2014, the bankruptcy court dismissed Michael’s Enterprises’ petition.
The court granted the lender’s renewed motion for sanctions. Judge Huennenkens observed that Michael’s Enterprises had had an opportunity in Virginia state court to litigate the same objectives sought in the bankruptcy petition. The court saw the new lawsuit as an attempt to attack the Virginia court’s decision and the nonjudicial foreclosure. The bankruptcy opinion doesn’t mention this, but if a party believes that a trial court made an erroneous decision, their recourse is to file a motion to reconsider and/or appeal it to the Supreme Court of Virginia. A bankruptcy court may be able to discharge or reorganize debts reduced to court judgments. However, they usually do not allow parties a do-over of unfavorable results of a state court case. Michael’s failure to present a proper reorganization plan in the face of a sanctions request made a poor impression. Judge Huennenkens found the case to be for an improper purpose and awarded BB&T $10,000 in sanctions against Michael’s Enterprises, Michael Pintz, individually, and his attorney. As of the date of this blog post, this result is currently on appeal before the U.S. District Court for the Eastern District of Virginia.
A common mistaken belief about litigation sanctions is that they are proper whenever a party or attorney loses in court. However, it is common for borrowers in foreclosure contest lawsuits have their cases dismissed on the merits or procedural grounds. Usually, the cases are brought as good faith attempts to obtain relief on the facts and circumstances of the foreclosure proceedings. In Michael’s Enterprises, however, the record of the state court actions together with the absence of a reorganization plan added up to an award of attorney’s fees, not only against the property owner but also its sole shareholder and the attorney. The facts of each case are different and require investigation and research before employing a legal strategy.
Case Citation: Branch Banking & Trust Co. v. Michael’s Enterprises of Virginia, Inc., et al, No. 14-30611-KRH (Bankr. E.D. Va. Nov. 12, 2014).
Photo Credit: taberandrew via photopin cc
December 4, 2014
Litigation over Property After the Foreclosure Law Firm Goes Out of Business
On January 31, 2012, F&M Services, L.C., conducted a foreclosure sale in Hampton, Virginia. F&M was the foreclosure trustee affiliate of the Richmond law firm Friedman & MacFadyen. Freedom Mortgage Corporation appointed F&M as successor trustee for the foreclosure of Hampton property owned by Ms. Gloria J. Harris. At the sale, Freedom Mortgage purchased the property. Subsequently, Freedom assigned the property to the U.S. Department of Veterans Affairs. Ms. Harris had a VA loan on the property.
In October 2012, Friedman & MacFadyen shut down their operations. That law firm was the target of class action litigation arising out of their debt collection and foreclosure practices, including “robo-signing” and violations of federal debt collection law. This law firm was the subject of an October 25, 2012 article on RichmondBizSense.com. In 2008, Diversified Lending Group, a company owned by Bruce Friedman made an undocumented $6 Million loan to his brother Mark Friedman’s law firm. In 2010, the appointed receiver for DLG entered into an agreement with the Friedman law firm for repayment of the $6 Million. A few months later, Bruce was arrested on investment scam charges. This same foreclosure operation was conducting sales and filing foreclosure accountings for many distressed properties in Virginia.
This did not stop litigation over property after the foreclosure law firm went out of business. Ms. Harris decided to bring a lawsuit in federal court to reverse F&M’s foreclosure sale. Rather than sue the law firm or the successor trustee, she decided to bring suit against the federal government and Freedom Mortgage. Ms. Harris’s suit does not focus on the debt collection rules or “robo-signing.” She alleged that a 30-day notice sent to her by LoanCare Servicing Center, Inc. failed to include information specifically required by the loan documents. For example, the amount demanded in the notice was over-stated by one-third. She also pleads that she made an October 2010 payment that was not credited in the notice amount.
Both the government and the mortgage company brought motions to dismiss the lawsuit. District Court Judge Henry Coke Morgan, Jr. denied their motions. The Court showed appreciation of the fact that the 30-day cure notice did not comply with the specific requirements of the loan documents. Of course, on an initial motion to dismiss, the court does not entertain proof of disputed facts. Later in the litigation the Court would consider the exact amount owed at the time of the notice and Ms. Harris ability to cure the payment default if she had received an accurate and compliant cure notice.
In the continuing fallout from the mortgage crisis beginning in late 2008, the federal government frequently finds itself as a party to complex foreclosure litigation. Previously, I discussed the tax advantages Fannie Mae and Freddie Mac enjoy in recording deeds in land records. In other states, such as Nevada, the federal government finds itself as a party to lien priority disputes between banks and community associations. The collapse of foreclosure operations such as Friedman & MacFadyen may prevent them from continuing their scrutinized practices. However, the homeowners, mortgage investors and even the government may find themselves in title litigation over the sale anyway.
Many lawsuits brought by borrowers after foreclosure sales never survive the initial motions filed by the defendant lenders. Although the October 17, 2014 opinion does not mention the law firm, I wonder if F&M’s role in Ms. Harris’ foreclosure afforded her case closer attention.
If you have interest in real property that has in the title report a trustee’s deed from an now out-of-business debt collection law firm, contact a qualified attorney in order to protect your rights.
Case Citation: Gloria J. Harris v. U.S. & Freedom Mortgage Corp., No. 4:14cv56 (E.D.Va. Oct. 17, 2014)(Morgan, J.)
photo credit (does not depict any properties discussed): Mike Licht, NotionsCapital.com via photopin cc
