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)
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.
February 5, 2014
They Might Be Mortgage Giants: Fannie & Freddie’s Tax Breaks
On January 3, 2014, the U.S. Consumer Financial Protection Bureau published a request for input from the public about the home mortgage closing process. 79 F.R. 386, Docket CFPB-2013-0036. The CRPB requested information about consumers’ “pain points” associated with the real estate settlement process and possible remedies. The agency asked about what aspects of closings are confusing or overwhelming and how the process could be improved.
The settlement statement is an explanatory document received by the parties at closing. The statement lists taxes along with other charges. The settlement agent sets aside funds for payment of both (a) the county or city’s property ownership taxes and (b) transfer taxes assessed at the land recording office. The property taxes are a part of a homeowner’s “carrying costs.” The recording taxes are part of the “transaction costs.” Typically, neither the buyer nor the seller qualify for a recording tax exemption.
The federal government advances policies designed to increase consumers’ access to affordable home loans. The Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) provide a government-supported secondary market. They purchase some home mortgages from the lenders that originate them. The Federal Housing Finance Agency regulates these chartered corporations. In 2008, FHFA imposed a conservatorship over Fannie Mae & Freddie Mac.
In the years leading up to the crisis of 2008, Fannie and Freddie used their government sponsorship to purchase some of the higher-rated mortgage-backed securities. See Fannie, Freddie and the Financial Crisis: Phil Angelides, Bloomberg.com. As the secondary-market purchaser of these home loans, Fannie and Freddie have foreclosure rights against defaulting borrowers and distressed properties. These corporations participate in the home mortgage process from origination, through purchase post-closing, and, in many cases, subsequent foreclosure-related sales.
Congress exempts Fannie Mae and Freddie Mac from state and local taxes, “except that any real property of [either Fannie Mae or Freddie Mac] shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed.” 12 U.S.C. sections 1723a(c)(2) & 1452(e). Which local real estate taxes does this exception apply to? The ownership tax, transfer tax, or both? The statute does not specifically distinguish between the two. Fannie and Freddie concede that they are not exempt from the tax on property. However, they decline to pay the transfer taxes assessed for recording deeds and mortgage instruments in land records. This is one advantage they have over non-subsidized mortgage investors. Local governmental entities and officials from all over the U.S. challenge Fannie & Freddie’s interpretation of the exemption statute since it represents a substantial loss of tax revenue. This blog post focuses on two recent opinions of appellate courts having jurisdiction over trial courts sitting within the Commonwealth of Virginia.
Virginia:
Jeffrey Small, Clerk of Fredericksburg Circuit Court, attempted to file a class action against Fannie & Freddie in federal court on behalf of all Virginia Clerks of Court. Small v. Federal Nat. Mortg. Ass’n, 286 Va. 119 (2013). Mr. Small challenged their failure to pay the real estate transfer taxes. The Defendants argued that the Clerk lacked standing to bring the suit for collection of the tax. A Virginia Clerk of Court’s authority is limited by the state constitution as defined by statute. In the ordinary course of recording land instruments, the Clerk’s office collects the transfer tax at the time the document is filed. One half of the transfer taxes go to the state, and the other half goes to the local government.
To resolve the issue, the Supreme Court of Virginia found that if the taxes are not collected at the time of recordation, then the state government has the authority to bring suit for its half, and the local government to pursue the other half. The Virginia clerks do not have the statutory authority to bring a collection suit for unpaid transfer tax liability. Because they lack standing, the court dismissed the clerk’s attempted class action against Fannie and Freddie for the transfer taxes.
Maryland & South Carolina:
Montgomery County, Maryland and Registers of Deeds in South Carolina brought similar federal lawsuits challenging Fannie and Freddie’s non-payment of recording taxes. See Montgomery Co., Md. v. Federal Nat. Mortg. Ass’n, Nos. 13-1691 & 13-1752 (4th Cir. Jan. 27, 2014). The Fourth Circuit also hears appeals from federal Courts in Virginia. This case proceeded further than Mr. Small’s. The Appeals Court found that:
- Property taxes levy against the real estate itself. Recording taxes are imposed on the sale activity. The federal statute allows states to tax Fannie and Freddie’s ownership of real property. The statute exempts Fannie and Freddie from the transfer taxes.
- Congress acted within its constitutional powers when it exempted Fannie and Freddie from the transfer taxes, because this may help these mortgage giants to stabilize the interstate secondary mortgage market.
- The exemption does not “commandeer” state officials to record deeds “free of charge,” because the states are free to abandon their title recording systems. By this analysis, the exemption is not a federal unfunded mandate on state governments because the decision to include a land recording system as a feature of property law is not federally mandated.
Some federal courts in other parts of the country have reached analogous conclusions. e.g., Dekalb Co., IL v. FHFA (7th Cir. Dec. 23, 2013)(Posner, J.). This legal battle wages on in the federal court system, but the results so far favor Fannie and Freddie.
Discussion:
Is abandoning the land recording system a realistic option? In Greece and other countries lacking an effective land recording system, property rights are uncertain and frequently brought before the courts for hearing. See Suzanne Daily, Who Owns This Land? In Greece, Who Knows?, New York Times. Like Fannie & Freddie, land recording systems advance the policy interests of stabilizing private home ownership.
Fannie and Freddie aren’t required to pay locally collected recording taxes. Their “share” of the overhead for maintaining the land recording system come from other sources. This includes the recording fees paid by ordinary parties in real estate closings across the country. Does this give the mortgage giants an unfair competitive advantage over other institutional investors in the re-sale of foreclosed homes?
Are these differing tax treatments properly considered in the CFPB’s discussion about the “pain points” in closings? Settlement statements provide clarity regarding the charges listed. The transfer and property taxes assessed in real estate closings are confusing and overwhelming, in part because they represent hidden costs. These hidden costs include the exemptions afforded Fannie Mae and Freddie Mac. The purpose of these institutions is to help mortgage consumers. Should the tax loophole should be closed or the hidden costs be disclosed to consumers? Perhaps one of these change would advance the CFPB’s “Know Before You Owe” initiative.
photo credit: J.D. Thomas via photopin cc. (not particular to any of the cases discussed herein)
