April 28, 2017
One problem that owners in HOAs and condominiums face is access to justice. Boards enjoy various out-of-court remedies, such as fines, liens and foreclosures. To obtain remedies for the board’s breach of the governing documents, owners must bring a lawsuit. This requires legal counsel familiar with how governing documents, statutes and judicial precedent fit together. When cases go to trial, owners face uncertainty in the amount of attorney’s fees that may be awarded to the prevailing party. What determines whether a condo owner prevails on her request for attorneys fees? Many judges seem reluctant to award a full amount of attorney’s fees. Is seeking the assistance of a state agency a viable alternative to the courts?
I’m happy when I can report news to my readers when owners win and courts set precedents that will help them in the future. On April 13, 2017, condo owner Martha Lambert won a significant victory in the Supreme Court of Virginia against Sea Oats Condominium Association. Her board forced her to hire an attorney go to trial to obtain reimbursement for a $500.00 repair. The governing documents contractually obligated this Virginia Beach association to repair an exterior door jamb to her condo unit. The board failed to make the repair despite her persistent requests. They insisted that the damage was to a limited common element that was her responsibility. Initially, she sought petitioned the Virginia Common Interest Community Ombudsman’s Office to redress the board’s adverse decision. The Ombudsman issued a couple decisions letters indicating that she was unable to help Ms. Lambert. The owner made the repair herself and sued the association in the General District Court of Virginia Beach. When Sea Oats prevailed in G.D.C., Lambert appealed to the Circuit Court. There Sea Oats continued to defend the case, filing a motion and discovery requests. Lambert prevailed in the subsequent trial. The judge awarded a $500 judgment in her favor and against the condominium association. Ms. Lambert’s attorney submitted an affidavit indicating she incurred $8,232.00 in attorney’s fees. Under the Virginia Condominium Act, a prevailing party is entitled to reasonable attorney’s fees. The parties submitted briefs and argued a post-trial motion on the issue of attorney’s fees.
The lawyers for the condominium board opposed the attorney’s fees award. They argued that the owner’s request for attorney’s fees was 16 times the amount of the judgment. Without waiting to read Ms. Lambert’s response, the Judge James C. Lewis awarded her only $375.00 in attorney’s fees. Ms. Lambert’s attorney nonetheless filed a brief, and provided notice that she incurred an additional $2,650 in fees for the post-trial motions activity.
Was court litigation Ms. Lambert’s only means of redress against the condo board’s adverse decision regarding the broken door? Is there some state agency or official who can aid resolution of these disputes? Ms. Lambert tried to take this dispute to the Office of the Common Interest Community Ombudsman. Ombudsman Heather S. Gillespie issued a decision letter on April 17, 2013. Ms. Gillespie observed that her office lacked the legal authority to decide the dispute because the answer lay in the interpretation of the condominium instruments (bylaws, covenants, etc.) as to whose obligation it was to repair the limited common element. In a separate letter dated May 13, 2013, Ms. Gillespie declined to decide against Sea Oats on Ms. Lambert’s claim to inspect the association books and records pursuant to the Condominium Act. Ms. Gillespie observed that the Act was not clear and that sorting out statutory ambiguity was the province of the courts. As you can see from this case study, the Ombudsman’s Office lacks the authority to decide cases where parties present conflicting interpretation of legal documents. Of course, if the parties agreed as to what they meant, there would not be a dispute. Consumers and property owners are better off in court anyway because of the independence of the judiciary from lobbying and the political winds of change.
Ms. Lambert’s only effective means of redress was through the courts so that’s where she went. There are two ways of looking at Ms. Lambert’s case. There is a view that if someone files a civil lawsuit, they must have done something wrong to incur the damage that they suffered or they are otherwise petty or vindictive. In my years of practice both bringing and defending civil suits, I have come to see that there is often an unfair prejudice against plaintiffs.
The other perspective is that Sea Oats drove unnecessary litigation by failing to perform their maintenance obligations and then aggressively defending the suit to exhaust Ms. Lambert’s resources. If the defendant can simply outspend and exhaust their opponent, they don’t need to be in the right. If obstructionist tactics are rewarded in how attorney’s fee awards are determined, then the specific obligations of the HOA or condominium covenants can be made of no effect.
Judge Lewis explained why he only awarded $375 in attorney’s fees. He found that Ms. Lambert’s lawyer did a “magnificent job,” but “I thought $6,000 in attorney’s fees on a case involving a dispute of $500 was not fair to the Defendant [Sea Oats].” Ms. Lambert appealed her case to the Supreme Court of Virginia.
Was it proper for Judge Lewis to find that a prevailing party could be denied almost all the attorney’s fees she incurred because the amount was not “proportional” to the judgment? Lawyers know from experience that, especially in many state courts, judges are reluctant to award a prevailing party $6,000-$9,000 in attorney’s fees on a $500.00 judgment. The practical effect is that owners and their lawyers are reluctant to bring lawsuits where the amount of attorney’s fees is expected to exceed the value of what could be expected in the judgment. Sometimes these circumstances embolden boards to strategically breach the covenants.
On appeal, Ms. Lambert analogized the attorney’s fees provision in the Condominium Act to similar provisions in the Virginia Consumer Protection Act. The Supreme Court previously held that the purpose of the VCPA’s attorney’s fees provisions is to encourage private citizens to enforce the statute through civil litigation. Otherwise, the VCPA’s policies could be made of no effect if the consumer must bear the costs of vindicating the statutory rights. If you listen to the audio recording on the Court’s website, you can hear Lambert’s appellate attorney Kevin Martingayle doing an excellent job arguing the case to the justices.
On appeal, a judge’s determination of an award of attorney’s fees is evaluated on an “abuse of discretion” standard. However, the scope of the judge’s discretion is not absolute. The statutes and contract provisions create a boundary of exercise of discretion. The Supreme Court viewed the trial judge’s “proportionality” requirement as an incorrect legal conclusion misinforming his decision.
The Condominium Act states that the prevailing party in an action to enforce compliance with the condominium covenants and bylaws shall be entitled to recover reasonable attorney’s fees. There is an analogous section in the Property Owners Association Act that applies to most HOA’s in Virginia. These statutes are exceptions to the general rule that each party to a lawsuit must pay their own attorney’s fees. Unless you are in Alaska, courts won’t consider attorneys fee requests unless there is a statute or contract provision that allows for attorney’s fees. The Condominium Act makes an award of reasonable attorney’s fees mandatory when one side prevails, instead of merely an option for the judge.
What factors determine the reasonableness of an award of attorney’s fees? According to the Supreme Court of Virginia, those factors include:
- The time and effort expended by the attorney.
- The nature of the services rendered.
- The complexity of the services.
- The value of the services to the client.
- The results obtained.
- Whether the fees incurred were consistent with those generally charged for similar services
- Whether the services were necessary and appropriate.
Judges are also permitted to consider other factors. In Lambert v. Sea Oats, the Supreme Court found that the amount of damages awarded was a permissible consideration under the “results obtained” factor. However, “merely applying a ratio between the damages actually awarded and damages originally sought will not satisfy the reasonableness inquiry.” This is common sense. In some cases, the non-prevailing party will engage in vigorous litigation tactics that will leave their opponent with the choice of taking necessary action to obtain a result in the case or abandon the claim. Conversely, plaintiffs can also be found to “over-litigate” cases, resulting in defendants incurring attorney fees that may be unnecessary in the case was properly brought. A formulaic ratio may be simply inadequate to do justice. The Supreme Court observed that a trial court may consider any disparity between the amount sought in the lawsuit versus the verdict. If a plaintiff sues for $500,000.00 but only receives $50,000.00 at trial, then this may factor in the attorney’s fee award. The Supreme Court found that Judge Lewis should have compared the $500 sought to the $500 awarded instead of the ratio of the fee request to the award:
[T]he “results obtained” factor does not permit courts to do what the circuit court did here—i.e., to use the amount of damages sought as a limit beyond which no attorney’s fees will be awarded. To do so tells parties that they may not recover the reasonable attorney’s fees they incur simply by sending an attorney through the courthouse door if they prosecute, or defend against, claims in which such fees exceed the amount in controversy. Circuit court litigation comes at a price, sometimes a heavy price. There is an initial pleading, or an answer to one, to research, write, and file. Discovery may be propounded and must be answered. There will be witnesses to prepare for trial. There may be pre-trial motions to research, write, and argue. And then there is the trial itself, if the case makes it that far. If either party invokes its right to a jury, trial could encompass everything from voir dire to jury instructions.
Each of these tasks requires an attorney’s time and, provided the time is reasonable in light of his or her experience and the nature of the case, he or she may expect compensation for that time at a reasonable rate. Undoubtedly, the number of tasks and the time required for them will vary depending on whether the ad damnum is $500 or $5 million, regardless of whether the attorney represents the plaintiff or the defendant. They will likewise vary based on the vigor with which the opposing party responds. But it is the court’s duty to assess the necessity of those tasks, the time spent on them, and the rate charged “under the facts and circumstances of the particular case.” Mullins, 241 Va. at 449, 403 S.E.2d at 335. This does not require the court to pore over pages and pages of billing records to evaluate the reasonableness of each line-item. But the court may neither shirk its duty to assess what amount of attorney’s fees is reasonable in the specific case before it, nor award an amount so low that it fails to reimburse the prevailing party for the costs necessary to effectively litigate the claim that—after all—it prevailed on.
Plaintiffs who come to court believe they have legitimate claims that are being illegitimately denied by the defendant. Defendants who come to court believe their defenses are legitimate. Neither’s position need be frivolous; they may simply disagree. But when each of them comes to court seeking a neutral adjudication of their disagreement, each is there because the opposing side forced him or her to be. When the case is covered by a fee-shifting provision and the court weighs the reasonable amount of attorney’s fees to award, it cannot dismiss out of hand the costs of litigation inflicted on the prevailing party by the losing party’s insistence on its losing argument, based solely on the dollar value of the claim. To do so deprives the parties of the benefit of their bargain if the fee-shifting provision is contractual and contravenes the intent of the General Assembly if the provision is statutory.
We stress that this holding does not mean that courts may not consider the value of the claim, along with other factors, to assess the complexity of the case (and therefore the legal services necessary to represent the client’s interests), or whether those services were necessary and appropriate in light of the claims prosecuted or defended against. It means only that courts may not do what this court did and say that “$6,000 in attorney’s fees on a case involving a dispute of $500” is unreasonable per se, without regard to the necessary costs of effectively litigating a claim.
The Supreme Court’s decision requires the case to go back to the Circuit Court of Virginia Beach to reconsider the award of attorney’s fees in light of the opinion.
Lambert v. Sea Oats is a big victory for owners in condominiums and HOAs. First, it sends a message that the particular circumstances of a case cannot be ignored and replaced by some percentage of the judgment. Second, this discourages HOA and condo boards from stonewalling owners’ rightful claims for what they are entitled under the governing documents. Third, it puts the obligation on the parties to make sound, rational litigation decisions. Fourth, it will help owners in cases that will never actually go to court. Why? Because the association lawyers will counsel their clients regarding this case and it will deter the kind of conduct that gave rise to cases like Ms. Lambert’s.
What I dislike about the trial judge’s approach in awarding only $375 is that it places parties like Ms. Lambert in an impossible position. Without reversals like this appellate decision, in the next case an owner would have to either (a) fix the common area herself and not seek reimbursement, thus making the covenants to no benefit to her, (b) limit the attorney’s activity to one or two hours of work, which could result in the owner losing the case for failure on a procedural technicality, or (c) effectively pay eight or nine thousand dollars to get the door fixed when the board is required to do it for $500.00.
Not all community association lawsuits are about money damages. Sometimes the plaintiff seeks an order that their opponent stop doing something, to take affirmative action required under a contract, or to declare the results of a board election invalid. In a footnote, the Supreme Court states that in those cases there may not be a dollar amount in controversy: “These cases tend to be binary, and the ‘result obtained’ is clear based on whether the relief sought was granted or denied.”
Does this new decision mean that homeowners will always get a disproportional award of attorney’s fees in small dollar cases where they prevail? No. But it does help to level the playing field of litigation. I hope that this case encourages more owners to pursue legal action when they suffer damage and infringement of rights in association matters. This case should also discourage owners and boards alike from bringing cases that should not be brought in the first place.
Update July 20, 2022:
I have a new blog post about Attorney fee awards in HOA and condominium law cases. “Awards of Attorney’s Fees in Community Association Litigation.” This blog post addresses the issue of attorneys fees in these cases more generally, with greater focus on the procedural aspects of such claims.
For Further Reading or Listening:
The photograph for this blog post doesn’t depict anything discussed in the article. It’s a row-house in Alexandria, Virginia.
November 15, 2016
In this blog and in my law practice, I focus on practical solutions to clear & present legal dangers to property rights of owners of properties in HOAs, condominiums or cooperatives. Many raise questions about getting attorneys fees awards against HOAs. This is an interesting topic in community associations law, where the outcomes of many disputes have a direct or precedential impact on other owners in the community. In my last blog post, I discussed a couple of 1990’s Virginia court opinions where owners’ counsel used an old English common law doctrine to solve modern HOA litigation problems. The doctrine of “virtual representation” allows individual owners to bring to complaints of general concern without naming every owner in the community as a plaintiff or defendant. Where the actual, named parties to the lawsuit fairly represent the interests of other members who are too numerous to add to the court case, the judge can nonetheless render a decision that binds all impacted parties. For example, a “representative” owner may bring a court case challenging an election or the validity of board resolution and the final order binds all members impacted by the election or board action. The doctrine of “virtual representation” solves a couple obstacles to owners gaining effective access to the legal system.
Today’s post discusses the problem of “free-riders” who may reap a benefit from other owners virtually representing them and footing the bills. In litigation, HOA boards draw upon the benefit of insurance policies, loans or assessment income to finance their legal expenses. The board may protract the dispute in a desire for a precedential effect or to simply wear down the owner. There is a case presently before the Supreme Court of Virginia where an owner accuses her association of the latter. Martha Lambert had a claim for $500.00 for reimbursement for certain repairs she made herself that were the responsibility of Sea Oats Condominium Association, Inc. The board’s lawyers defended the claim with time consuming motions and discovery normally used in cases where the amount in controversy is much larger than $500.00. Ms. Lambert “won” in the Circuit Court of Virginia Beach on what the judge described as a “close call.” The judge told the owner’s lawyer he did a “magnificent job” and reasonably pursued the case. However, the court only awarded $375 in attorney’s fees out of the full $9,568.50 amount Ms. Lambert incurred in the case. The only reason Ms. Lambert didn’t get the full amount was because the trial judge wanted to make an attorney’s fees award smaller than the $500 principal judgment. The Supreme Court accepted the appeal to determine whether the statute allowing for “reasonable” attorney’s fees required the Circuit Court to reduce the award to an amount in a nexus to the principal judgment awarded. Lambert accuses Sea Oats of engaging in “stubborn & obstructionist tactics.” Kevin Martingayle, Counsel for Ms. Lambert describes the trial judge as punishing the homeowner for vindicating her rights and discouraging others from doing the same when necessary. At stake is whether one party can get away with not performing their covenanted obligations because a lawsuit would add insult to injury. Lawyers practicing in the community associations arena around the state will watch to see what the Supreme Court does with this case.
The outcome of Lambert vs. Sea Oats only appears to directly impact the association and Ms. Lambert. In other HOA lawsuits, the rights of other owners are directly impacted by the outcome. What if, hypothetically speaking, a condo association caused injury to an entire floor of condominium units. One owner decides to sue. A plaintiff may find herself shouldering the burdens of similarly situated owners (“free riders”) not joining the suit or otherwise helping to pay for the legal expenses incurred by the plaintiff. Under many HOA governing documents and state statutes, the prevailing party at trial is entitled to an award of reasonable attorney’s fees against their opponent. What about the portion of a prevailing owner’s legal expenses which is attributable to representing the interests of similarly situated fellow members who are not official parties to the lawsuit? Would this provide a separate basis for an award of attorney’s fees reflecting the realities of “virtual representation?”
Since the 19th century, Virginia’s common law tradition of judicial precedents protects representative plaintiffs from the burden of the “free rider” problem. In “virtual representation” cases, the prevailing party may recover in their attorney fee award for legal expenses incurred in achieving the common benefit:
It is a general practice to require, when one creditor, suing for himself and others, who may come in and contribute to the expenses of suit, institutes proceedings for their common benefit, that those who derive a benefit shall bear their proportion of the expense and not throw the whole burden on one. This is equitable and just. But it only applies to those creditors who derive a benefit from the services of counsel in a cause in which they are not specially represented by counsel. If a creditor has his own counsel in a cause, he cannot be required to contribute to the compensation of another. Stovall v. Hardy, 1 Va. Dec. 342 (1879), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
Virginia courts apply this “common fund” doctrine in awarding attorney fee awards in creditor suits, securities lawsuits, civil rights cases, trust & estate litigation and other representative litigation. In 1999, the Circuit Court of Winchester applied it in the context of a dispute among members of a defunct nonstock corporation over the proceeds of liquidated assets. Most community associations in Virginia are incorporated under the Virginia Nonstock Corporation Act.
The Supreme Court of Virginia recognized that the common fund doctrine serves to eliminate “free rides” that would unfairly burden litigants in cases that directly impact a class of represented parties not retaining counsel in the lawsuit:
The essence of the common fund doctrine is that it would be unfair to permit one party to retain counsel, to file suit, to secure a benefit that all will share, yet to leave the full cost of the effort upon the one party who initiated the suit while others who will share the proceeds make no contribution. If others are to sit idly by and reap the benefits of one litigant’s labors, the idle parties should share in the cost of those labors. In short, the common fund doctrine is aimed at preventing “free rides.” See J. P. Dawson, Lawyers and Involuntary Clients: Attorneys’ Fees From Funds, 87 Harv. L. Rev. 1597, 1647 (1974), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
The common fund doctrine extends beyond cases where there is an actual “fund” of money to included cases where there may be some sort of injunctive, declaratory or equitable remedy that does not have a specific dollar amount associated with it.
I am not aware of any published judicial opinions where a judge has considered the “common fund” doctrine in representative plaintiff litigation specifically involving HOAs or condominiums. However, the Property Owners Association Act and the Virginia Condominium Act provide for “prevailing party” attorney’s fees. Is there any reason why the common fund doctrine should not be applied to avoid free riding of representative plaintiff litigation against community associations? I see no obstacle to use of this doctrine for such in a proper case.
Update July 20, 2022:
I have a new 2022 blog post about Attorney fee awards in HOA and condominium law cases. “Awards of Attorney’s Fees in Community Association Litigation.” This blog post addresses the issue of attorneys fees in these cases more generally, with greater focus on the procedural aspects of such claims.
In 2017 I posted an article more particularly about the Lambert v. Sea Oats Condo. Ass’n, Inc. case, “Condo Owner Prevails on Her Request for Attorney’s Fees.”
Du Pont v. Shackelford, 235 Va. 588 (1988).
Turner v. Yeatras, 49 Va. Cir. 395 (Winchester 1999).
December 1, 2015
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.
January 8, 2015
In Virginia, borrowers have several options of where to bring a legal challenge to a foreclosure trustee’s sale. The shortest commute is usually the Virginia circuit court for the city or county where the property is located. Alternatively, the facts may allow suit to be brought in a federal district courthouses. Another common venue is federal bankruptcy court.
On June 18, 2014, I posted an article about a borrower, Rachel Ulrey, who managed to keep her foreclosed real estate because the lender, SunTrust Bank, failed to object to the plan in time. Ulrey’s case is a cautionary tale to lenders. Other cases show why borrowers cannot rely on lender inattention as a legal strategy. On November 12, 2014, U.S. Bankruptcy Judge Kevin Huennenkens issued an opinion illustrating why parties and their attorneys may not bring the same claim in bankruptcy court after they fail to achieve their desired result in a Virginia state court. The borrower and his attorney found their attempt to relitigate foreclosure in bankruptcy sanctioned by the judge.
Michael Pintz owned property in Sussex County, Virginia, in the name of Michael’s Enterprises of Virginia, Inc. In June 2008, he took out a $200,000 mortgage from Branch Banking & Trust. After he defaulted on payment, BB&T obtained a money judgment in Hanover Circuit Court. When BB&T sent Michael’s Enterprises a Notice of Foreclosure, he filed a request in Sussex Circuit Court to block the threatened sale. That court denied the motion. BB&T later purchased the property at a November 2013 Trustee’s Sale. In February 2014, Michael’s Enterprises filed for Chapter 11 reorganization in the U.S. Bankruptcy Court. The petition claimed the Sussex property as an asset of the corporation.
You may be wondering whether bankruptcy petitions can be used this way. When a court finds that someone filed something for an improper purpose, it may award litigation sanctions. State and federal courts in Virginia have similar rules prohibiting parties and their attorneys from advancing legal claims and defenses for improper purposes and not to vindicate the rights described in the court filing. Improper purposes include but are not limited to harassment, unnecessary delay or needless increase in the cost of litigation.
BB&T brought a Motion for Sanctions for Violation of Bankruptcy Rule 9011. The Bankruptcy Court initially deferred BB&T’s request for sanctions. Judge Huennenkens gave Michael’s Enterprises an opportunity to submit a proper bankruptcy reorganization plan before ruling on the sanctions request. The conditions imposed were not met. In October 2014, the bankruptcy court dismissed Michael’s Enterprises’ petition.
The court granted the lender’s renewed motion for sanctions. Judge Huennenkens observed that Michael’s Enterprises had had an opportunity in Virginia state court to litigate the same objectives sought in the bankruptcy petition. The court saw the new lawsuit as an attempt to attack the Virginia court’s decision and the nonjudicial foreclosure. The bankruptcy opinion doesn’t mention this, but if a party believes that a trial court made an erroneous decision, their recourse is to file a motion to reconsider and/or appeal it to the Supreme Court of Virginia. A bankruptcy court may be able to discharge or reorganize debts reduced to court judgments. However, they usually do not allow parties a do-over of unfavorable results of a state court case. Michael’s failure to present a proper reorganization plan in the face of a sanctions request made a poor impression. Judge Huennenkens found the case to be for an improper purpose and awarded BB&T $10,000 in sanctions against Michael’s Enterprises, Michael Pintz, individually, and his attorney. As of the date of this blog post, this result is currently on appeal before the U.S. District Court for the Eastern District of Virginia.
A common mistaken belief about litigation sanctions is that they are proper whenever a party or attorney loses in court. However, it is common for borrowers in foreclosure contest lawsuits have their cases dismissed on the merits or procedural grounds. Usually, the cases are brought as good faith attempts to obtain relief on the facts and circumstances of the foreclosure proceedings. In Michael’s Enterprises, however, the record of the state court actions together with the absence of a reorganization plan added up to an award of attorney’s fees, not only against the property owner but also its sole shareholder and the attorney. The facts of each case are different and require investigation and research before employing a legal strategy.
Case Citation: Branch Banking & Trust Co. v. Michael’s Enterprises of Virginia, Inc., et al, No. 14-30611-KRH (Bankr. E.D. Va. Nov. 12, 2014).
July 2, 2014
In lawsuits over real estate, attorney’s fees awards are a frequent topic of conversation. In Virginia, unless there is a statute or contract to the contrary, a court may not award attorney’s fees to the prevailing party. This general rule provides an incentive to the public to make reasonable efforts to conduct their own affairs to avoid unnecessary legal disputes. An exception to the general rule provides a judge with the discretion to award attorney’s fees in favor of a victim of fraud who prevails in court. Effective July 1, 2014, a new act of the General Assembly allows courts greater discretion to award attorneys fees for rescission of contracts obtained by fraud and undue influence. The text reads as follows:
In any civil action to rescind a deed, contract, or other instrument, the court may award to the plaintiff reasonable attorney fees and costs associated with bringing such action where the court finds, by clear and convincing evidence, that the deed, contract, or other instrument was obtained by fraud or undue influence on the part of the defendant.
This new statute narrowly applies to fraud in the inducement and undue influence claims requesting as a remedy rescission of a written instrument. I expect this new attorney’s fees statute to become a powerful tool in litigation over many real estate matters.
- Obtaining Approval of Written Instruments by Misconduct. This new statute does not focus on the manner or sufficiency of how obligations under a contract or deed are performed. Instead, it concerns remedies where one party obtains the other’s consent on a written instrument by material, knowing misrepresentations made to induce the party to sign (fraud) or abusive behavior serving to overpower the will of a mentally impaired person (undue influence). Fraud and undue influence are usually hard to prove. There are strong presumptions that individuals are (a) in possession of their faculties, (b) are reasonably circumspect about the deals and transfers they make and (c) read documents before signing them. This new statute does not allow for fees absent clear & convincing proof of the underlying wrong. Tough row to hoe.
- Undoing Deals Predicated on Fraud or Undue Influence: This new statute doesn’t help plaintiffs who only want damages or some other relief. The lawsuit must be to rescind the deed or contract that was procured by the fraud or undue influence. Rescission is a traditional remedy for fraud and undue influence, and it seeks to “undo the deal” and put the parties back in the positions they were in prior to the consummation of the transaction. This statute should give defendants added incentive to settle disputes by rescission where a fraud in the inducement or undue influence case is likely to prevail.
- Reasonableness of the Attorney’s Fees Award: When these circumstances are met, the Court has discretion to award reasonable attorney’s fees. Note that the statute does not require that fees be awarded in every rescission case. Under these provisions, on appeal the judge’s attorney’s fees award or lack thereof will be reviewed according to the Virginia legal standard for reasonableness of attorney’s fees.
Prior to enactment of Va Code Sect. 8.01-221.2, defrauded parties had to meet a heightened standard in order to get attorney’s fees. In 1999, the Supreme Court of Virginia held in the Bershader case that even if there is no statute or contract provision, a judge may award attorney’s fees to the victim of fraud. However, in Bershader the Court found that the defendants engaged in “callous, deliberate, deceitful acts . . . described as a pattern of misconduct. . .” The Court also found that the award was justified because otherwise the victims’ victory would have been “hollow” because of the great expense of taking the case through trial. The circumstances cited by the Court in justifying the attorney’s fees award in Bershader show that the remedy was closer to a form of litigation sanction than a mere award of fees. Bershader addressed an extraordinary set of circumstances. Trial courts have been reluctant to award attorney’s fees under Berschader because it did not define a clear standard.
The new statutory enactment removes the added burden to the plaintiff of showing extraordinary contentiousness and callousness or other circumstances appropriate on a litigation sanctions motion. It is hard enough to prove fraud or undue influence by clear and convincing evidence, and then show reasonableness of attorney’s fees. Why should the plaintiff be forced to prove callousness and a threat of a “hollow victory” if fraud has already been proven and the court is bound by a reasonableness standard in awarding fees? The old rule placed a standard for awarding attorney’s fees in fraud cases to a heightened standard comparable to the one available for imposition of litigation sanctions. Va. Code 8.01-221.2 permits attorney’s fees in a rescission case without transforming every dispute in which deception is alleged into a sanctions case.