November 12, 2015
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,
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.
February 20, 2015
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.