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)
May 29, 2014
What is a Revocable Transfer on Death Deed?
On May 20th I attended the 32nd Annual Real Estate Practice Seminar sponsored by the Virginia Law Foundation. Attorney Jim Cox gave a presentation entitled, Affecting Real Estate at Death: the Virginia Real Property Transfer on Death Act. Jim Cox presented an overview of this new estate planning tool that went into effect July 1, 2013.
Use of Transfer on Death (“TOD”) beneficiary designations for depository and retirement accounts is widespread. This 2013 Act allows owners of real estate to make TOD designations by recording a Revocable Transfer on Death Deed in the public land records.
The introduction of TOD Deeds is of interest to anyone involved in estate planning or real estate settlements. The following are 8 key aspects of this development in Virginia law:
- Not Really a “Deed.” A normal deed conveys an interest in real property to the grantee. A TOD Deed is a will substitute that becomes effective only if properly recorded and not revoked prior to death. The Act’s description of this instrument as a “deed” will likely be a source of confusion.
- Formal Requirements. A TOD Deed must meet the formal requirements of the statute in order to effect the intent of the owner. It must contain granting language (a.k.a. words of conveyance) appropriate for a TOD Deed. It is not effective unless recorded in land records prior to the death of the transferor. The statute contains an optional TOD Deed form. Due to the formal requirements, I cannot image advising someone to do one of these without a qualified attorney.
- Beneficiary Does Not Need to be Notified. Although a TOD Deed becomes public when filed, the transferor does not need to notify the recipient. The beneficiary may not learn about the designation until after the transferor’s death. At some point, the local government will change the addressee on the property tax bills.
- Freely Revocable. The transferor can revoke the TOD designation at any time prior to death. In fact, a TOD Deed cannot be made irrevocable. A revocation instrument must be recorded in land records.
- Unintended Title Problems. The Act takes pains to avoid creating title defects on the transferor’s title prior to death.
- Can be Disclaimed. The beneficiary can disclaim the transfer after the death of the transferor.
- Subject to Liens. Recording a TOD Deed does not trigger a due-on-sale clause in a mortgage. At the date of death, the beneficiary’s interest is subject to any enforceable liens on the property.
- Creditor Claims & Administration Costs. The beneficiary’s interest in the property is subject to any general claims of the transferor’s creditors or the expenses of the estate administration. Such claims may attach up to one year after the date of the transferor’s death. For this reason, the TOD beneficiary’s interest in the property or the proceeds of its sale will be uncertain until that 12 month period expires. However, taxing authorities, insurance companies, HOA’s and banks will expect payment prior to the end of those 12 months.
Each family has unique estate planning needs. The Va. Real Property TOD Act is a new gadget in the toolbox for crafting a plan that addresses individual desires and circumstances. Combining TOD Deeds with other estate planning tools such as wills and trusts requires careful integration to avoid unintended consequences. Estate planning and real estate practitioners will overcome any initial reluctance to use of TOD Deeds as they become subject to the test of time.
If you learn that you are the beneficiary of a TOD deed and are uncertain as to your rights and responsibilities with respect to the property, contact an experienced real estate attorney.
January 31, 2014
Cold Temperatures in a Slow Economy: Insurance Claims from Frozen Pipes in Unoccupied Buildings
NBC News reported Wednesday that home insurance claims for damage resulting from frozen pipes are so high that insurers are hiring temporary adjusters to handle increased claims:
“We anticipate a large spike in frozen pipe claims,” said Peter Foley, the [American Insurance Association’s] vice president for claims. “In Washington, D.C., some of my colleagues have already had them in their own homes.”
What State Farm describes as a “catastrophe” comes while many families & communities struggle to make ends meet under the current economic conditions. These insurance claims can run as high as $15,000 in residential dwellings. A commercial property or multi-family housing can sustain even greater damages.
In many communities in Virginia, homes and commercial buildings remain vacant this winter because the local real estate market has not yet come back or the properties are only used seasonally. Frozen pipe damage is compounded in vacant buildings because:
- Few occupants take precautions to protect pipes from bursting before they move out of a building.
- Usually no one checks up on an unoccupied building when it is extremely cold. If there is a landlord, property manager, bank or other institutional investor, they aren’t likely to give a vacant building individual attention.
- No one is there to observe the damage as it develops, so greater drywall, carpet, mold, and other damage can occur.
These types of problems tend to result in litigation between the owners, banks, neighbors and insurance companies. This blog post explores three recent cases:
Hiring a Property Manager: Panda East Restaurant, Massachusetts
From 1987-2006, Issac Chow owned and operated the Panda East restaurant in Northampton, MA. Mr. Chow also purchased a house in Hadley, MA, for his employees to live in. While the restaurant was in business, Richard Lau managed both the restaurant and the house. When Panda East went out of business, all of its employees moved out of the house. Chow instructed Lau to keep the heat on in the Hadley house during the winter of 2006-07. Unfortunately, that winter the house suffered damage from burst frozen pipes. An inspector determined that the heat had been turned off. The flooding ruined carpets, furniture and drywall throughout the house.
Mr. Chow brought suit against Merrimack Mutual Fire Insurance Company in Massachusetts. On appeal, the Court could not determine what Chow did, if anything, to engage Lau as property manager for the house after the restaurant closed down. Since the employment relationship between Chow and Lau was unclear, the Court could not determine who was negligent. Chow v. Merrimack Mut. Fire Ins. Co., 83 Mass. App. Ct. 622 (2013). The Panda East case shows that:
- Cold winters are a time bomb to an unoccupied house (or other building) not winterized to prevent frozen pipes.
- Owners must consider retaining a manager or house-sitter for properties that “go dark.”
- Written property management agreements work better than verbal directions. A contract document can clearly define the scope of the manager’s responsibility.
Homeowner’s Negligence: Potomac, Maryland
In addition to suing the insurance company, some lawyers try to sue public utilities for damages arising from frozen pipes in an abandoned home. Izatullo Khosmukhamedov and Zoulfia Issaeva brought a lawsuit against Potomac Electric Power Co. (PEPCO) for leaving the electricity on in their unoccupied house, which later suffered damage from burst frozen pipes.
These Plaintiffs primarily lived in Moscow, Russia. This couple owned a second home in Potomac, Maryland. Apparently, they grew tired of paying the heating and electric bills. After a stay in October 2008, they sought to turn all of these services off. In the following winter, the pipes in the house froze, burst and caused extensive damage. They made no effort to winterize, heat the property, turn off the water main or drain the pipes. In their lawsuit, they argued that PEPCO failed to completely turn-off the electricity, thus allowing the well water pump to push water into the house, intensifying the damage.
The Federal judge in Maryland dismissed their claims on summary judgment before trial, observing that:
It is well-settled, both in Maryland and other jurisdictions, that a property owner can reasonably foresee the danger that water pipes may freeze in the winter and breaches the duty of ordinary care by failing to adequately heat and/or drain them.
Koshmukhamedov v. PEPCO, No. 8:11-cv-00449-AW (D. Md. Feb. 19, 2013)
Judge Williams dismissed Plaintiffs’ claim against PEPCO. This case illustrates skepticism shown to Plaintiffs in frozen pipe cases where they failed to take reasonable precautions.
Most residential property insurance policies specifically exclude coverage if the property goes unoccupied. In a related case, this couple also sued their property insurer, State Farm. The same judge decided that the home was “unoccupied” and thus excluded from coverage by the terms of the policy. Koshmukhamedov v. State Farm Fire & Cas. Co., 946 F. Supp. 2d 443 (D. Md. May 28. 2013)
Insurance Claims in Foreclosure: Holiday Inn Express, Burnet, Texas
On our road trip, dear reader, we first warmed ourselves up with an a la carte dim sum brunch in Massachusetts. For lunch, we had a backfin crabcake in Maryland. The last stop on our trip takes us to a beef brisket dinner in central Texas. Our final case study shows how cashflow and property damage can compound problems for a business owner facing foreclosure. This double whammy presents special challenges to the bank and property insurer as well.
In late 2009, a Holiday Inn Express franchisee stopped making its mortgage payments to the bank that had lent the money for the purchase of the hotel building in Burnet, Texas. On January 9, 2010, the hotel suffered extensive damage from frozen pipes. On January 28, 2010, the bank sent the owner a foreclosure notice. A few days later, the property insurer sent the owner and bank a payment check. This was not cashed due to the disputes between the bank and owner. The owner and the insurance company could not agree on a proper estimate for the damage from the frozen pipes.
On March 2, 2010, the bank foreclosed on the property and purchased it at the sale. The hotelier then sued the bank, insurance company and the subsequent purchaser. The former owner sued the insurance company for not fully compensating for the damage he alleged to be $133,681.62. The Court of Appeals of Texas focused on relevant language in the insurance company’s contract with the owner and the Bank’s loan documents for the hotel. Lenders typically require borrowers to maintain adequate insurance on the property. That way, the loan is adequately secured in the event that damage and default occur around the same time. Usually, a lender’s rights to the security under the loan documents are limited to the principal, interest and other indebtedness owed. A claim for insurance proceeds comes into play to the extent the foreclosure sale price does not satisfy the sums of money owed to the bank.
In Virginia, the foreclosure trustee must file an accounting with the commissioner of accounts that reconciles the indebtedness, sale price and other credits and debits that the bank is entitled to under the loan documents and law. Each state has its own foreclosure procedures.
The Texas Court of Appeals explained that the Bank was only entitled to any portion of the insurance claim proceeds necessary to satisfy any deficiency after the foreclosure. It appears that the Court sought to avoid a windfall to any party seeking to muscle the proceeds during the chaotic foreclosure period. Peacock Hospitality, Inc. d/b/a Holiday Inn Express-Burnet, 419 S.W.3d 649 (Ct. App. Tex. Nov. 27, 2013)
Neither foreclosures nor frozen pipe damage occur in a vacuum. An exceptionally focused owner might take measures to prevent catastrophic damage to a distressed property in an attempt to fetch the highest possible foreclosure sale price. When a property is in financial distress, its owners and lenders must also attend to any signficant insurance claims that may become an element of the foreclosure accounting.
Conclusion:
These three cases illustrate why, as attorney Jim Autry says, “An abandoned building is more of a liability than an asset.” Frozen pipes present a serious threat to the value and habitability of unoccupied homes and commercial buildings. Except for a few “hot” areas, much of Virginia (and the country at large) has a significant inventory of uninhabited homes and commercial properties. This winter’s cold spells present unique challenges to property managers, water utilities, banks, owners and insurance companies. When a family or business must negotiate with more than one of these parties to resolve legal issues surrounding a distressed property, an experienced attorney can provide critical counseling and representation.
photo credit:
Ryan D Riley via photopin cc (for demonstrative purposes only and does not depict any of the actual properties described in this article)
