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Arlington County has moved to sue yet another individual transportation official in its pending HOT lanes project in federal court in the District of Columbia.  The pending case, a fight over the HOT/HOV lanes in I-395, argues that VDOT and the US Department of Transportation failed to undertake appropriate traffic, environmental, and other studies in approving the northern section of the project.

In its inital papers, Arlington elected to not only sue the various governmental agencies, but also the highly regarded Pierce Homer, then Secretary of Transportation for the Commonwealth of Virginia, individually.  The primary thrust of the case relates to an alleged failure to consider environmental, traffic and other impacts of the project during the review process.  Arlington County sued Secretary Homer individually for engaging in civil rights violations by allegedly favoring suburban white people over less affluent minority residents of Arlington County.  The Complaint alleges, in a remarkably long, rambling, ninety plus pages, things like:

The use of public funding, to serve the interests of wealthy, predominantly white Virginia residents from the southernmost counties affected by the Project and at the obvious expense of the largely less affluent, predominantly minority and ethnic populations that reside in and along the corridor of the Northern Section, in particular in Arlington County.

Arlington has been widely and universally criticized by the business community, amongst others, for this approach.  The Northern Virginia Transportation Alliance, with virtually every significant regional business organization signing off, wrote Arlington County Board Chair Jay Fissette on May 28, 2010 and called out the County's lawsuit as an impediment to regional transportation efforts.  In particular, the letter stated the the civil rights allegations "are not credible and frankly an embarrassment to this region."

How did the County respond?  On June 22, Jay Fissette sent a reply letter to NVTC.  The silence was deafening in that the letter did not even respond regarding the civil rights elements of the lawsuit.  We now see that rather than focusing on the traffic and environmental issues in the case, the County has elected to double down on its strategy of filing suits against individual transportation officials.  The County now seeks to add Edward Sundra, a Senior Environmental Specialist for the Federal Highway Safety Administration, as an individual defendant.  The County again argues in its Motion to Amend and Amended Complaint for individual liability based on Mr. Sundra's alleged individual acts of civil rights violations.

In a time of deep fiscal challenges for state and local governments, Arlington has reportedly spent over $1,000,000 already on this lawsuit.  It is rare that I editorialize and opine rather than report, but it seems to me that money should have been used for a variety of other causes, like keeping the planetarium open, instead of further killing Arlington's credibility in Richmond.  This case, and in particular the allegations against the individual defendants, are easy fodder for the rest of the state to throw up their hands, scoff at Arlington, and say, "See, I told you so."  Continued delays in litigation threaten the Commonwealth's ability to tap into various federal funding sources and we desparately need investment into every potential transportation avenue, including roads, in the region.

For lessons learned on litigation strategy, this case brings to mind a couple of strategic litigation truisms which are worth sharing.  I will leave it for others to judge whether these can or should be applied to this case.

1. Focus on your strongest arguments, do not permit distraction
2. Never weaken a strong argument with a weak argument
3. Always keep your credibility in mind ... it is the hardest coin the gain and the easiest to spend
4. Never forget the big picture or the finder of fact, and
5. Brevity is the soul of wit, especially in drafting pleadings

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It’s hard to believe it’s already been over six months since we discussed this case in the blog post Never Underestimate the Value of Facetime, where Judge Williams of the U.S. District Court for the District of Virginia (Richmond Division) found a “distinct and ripe controversy” of whether PHH owed Kersey a face-to-face interview before foreclosing on her home.

Since that time, the parties chose to forego a bench trial and submitted a joint stipulation of facts for Judge Williams’ review. In reviewing those facts and the parties’ proposed conclusions of law, Judge Williams issued this recent Memorandum Opinion after he became troubled with whether the case should even have been in federal court.

Ms. Kersey had initially filed her complaint in Richmond City Circuit Court seeking a declaratory judgment that PHH did not comply with the Deed of Trust, particularly with the requirement of a face-to-face pre-foreclosure meeting. PHH removed the case to federal court, claiming in a Notice of Removal that Kersey’s complaint raised a federal question under the FHA and HUD regulations. The Notice of Removal also claimed that there was diversity jurisdiction, because Kersey is a Virginia citizen, PHH is a Maryland corporation with its principal place of business in New Jersey, and the amount in controversy exceeded $75,000. PHH did not offer any other affidavits, evidence or other support for these jurisdictional allegations.

In her proposed conclusions of law, Kersey joined PHH’s bandwagon, arguing the court had jurisdiction under the Truth in Lending Act. In a footnote, Judge Williams dispensed with the Truth in Lending Act argument because the complaint alleges only declaratory relief due to PHH’s purported failure to comply with the FHA and HUD regulations incorporated by the Deed of Trust. In any event, Judge Williams threw the burden of proving jurisdiction on PHH as the party removing the case to federal court.

Regarding PHH’s federal question argument, neither the FHA nor the HUD regulations provided Kersey a federal private right of action. Kersey’s complaint alleged a state law claim that would therefore need to raise a “substantial” federal question in order for the court to have jurisdiction. Kersey’s demand was for declaratory relief that PHH failed to comply with a contract, namely the deed of trust. It just so happened that the deed of trust incorporated a HUD regulation. This claim that PHH violated a HUD regulation that was adopted in the deed of trust was just not enough for Judge Williams to find a “substantial” federal question to properly land in his court.

Regarding PHH’s diversity argument, Judge Williams had no problems finding complete diversity. But he did not buy that the amount in controversy really exceeded $75,000. Recall that the mortgage in question was $71,397. PHH claimed that once you added in charges and fees, that amount tipped over the $75,000 mark. Judge Williams pointed out that the amount in controversy in a declaratory judgment case is the “value of the object of the litigation,” which could be the “direct pecuniary value” of the right the plaintiff seeks to enforce or the cost to the defendant to comply with the relief. Kersey’s suit asked the court to determine whether PHH owed Kersey a face-to-face meeting prior to foreclosure, and Judge Williams refused to speculate what the “direct pecuniary value” of that meeting was to Kersey, or how much it would have cost PHH to comply with the meeting requirement.

Lesson learned: Figure out from the get-go whether you belong in state court or federal court. This removal and remand yo-yo has undoubtedly cost the parties a great deal of time and money. And to think that all of this could have been avoided by a thorough pre-foreclosure reading of the Deed of Trust to ensure that all of the requirements – including a face-to-face meeting – were satisfied!

Stay posted for the remand in state court to find out whether PHH really was required to have that face-to-face meeting with Kersey, and if so, what the penalty will be for skipping that step!
 

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The US EPA was forced to withdraw a portion of its proposed storm water management regulations in the context of a pending court challenge by the National Association of Homebuilders (NAHB) and other parties.  In the pending appeal to the United States Court of Appeals for the Seventh Circuit, the EPA filed an unopposed motion to vacate part of its final rule regarding "Effluent Limitations Guidelines and Standards for the Construction and Development Point Source Category".

The rule proposed to establish a numeric effluent limitation on pollutants from construction and development.  The rule limited turbidity to an average daily level of 280 "nephelometric turbidity units" (NTUs).  EPA concedes in its motion that, "[T]he Agency has concluded that it improperly interpreted the data and, as a result, the calculations in the existing administrative record are no longer adequate to support ..." the rule.

While we are not in a technical position to evaluate engineering and cost impacts of these regulations, NAHB has quoted, and ABC has supported, an estimate of up to $10 billion in cost annually to meet the overall national regulations as proposed by EPA.  We just commented on the regulations generally last week and we believe this is a very significant issue for the construction and development industry.  Ann Cosby at Sand Anderson's Environmental Law blog has a nice summary post of the negotiations in Virginia over sediment limits for the Chesapeake Bay Watershed.

By agreement, the motion requested that the case be held in abeyance for 18 months until February 15, 2012, to allow EPA to address the flaw.  It will be quite interested to see whether the partial retreat by EPA sets off a chain reaction of challenges or delays in other aspects of the pending regulations.

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The Environmental Protection Agency is in the process of developing proposed national rulemaking to strengthen its stormwater program. The proposed rulemaking, which was previously announced in the Federal Register on Dec. 28, 2009, could dramatically alter the playing field for development of all types.

This is particularly true in the D.C. region given its placement in the Chesapeake Bay watershed. The EPA has recently proposed sediment limits for the Chesapeake Bay in addition to previously issued limits for nitrogen and phosphorous.

I previously commented on the Bean Kinney law blog regarding Virginia’s efforts to regulate stormwater impacts from development, the resulting pushback and modification of those regulations, and the eventual tabling of those regulations in the wake of the election of Gov. Bob McDonnell. Others have noted that the EPA efforts appear to go far beyond the limited regulatory changes proposed and dropped by Virginia.

Supporting developers in their efforts to combat tightening run-off regulations may feel a bit like suing Santa Claus to many, but this regulation could be extremely expensive and burdensome. Some very conscientious builders have indicated to me that the regulations do little if anything to attack primary nitrogen sources, such as air pollution from vehicles, agriculture, or fertilizers used by existing home owners.

As a LEED AP and father of two young children, I am definitely a believer in sustainability in development and construction but a balanced approach is important as is the economy. The building industry is a very easy regulatory punching bag for what is a truly systemic problem.

Commercial developments certified by U.S. Green Building Council under the LEED program may already be subject to some of the requirements to use best practices to minimize construction erosion or even to improve storm water quantity or quality. Some urban localities pay more attention to storm water management issues.

Even so, commercial developers, builders, site work contractors, property owners and the public should study this issue carefully. A dramatic change in stormwater regulations could have very significant cost impacts to the development industry. The regulations will hit an important economic segment that is already beaten down. Worse still, the regulations will hit a market that is very soft and arguably unable to absorb and pass on additional expenses to eventual purchasers or tenants. Interested parties should definitely speak up on this issue early, regularly and often to pass along their points of view.

This article is copyrighted 2010 by the Washington Business Journal, used by permission and originally posted here.

PS - as an interesting post-script, I received an update from ABC this morning that EPA has apparently been forced to make changes in its Effluent Guidelines Limitations in the context of pending litigation.  This story is going to continue to resonate and we will provide updates and the change to comment as received.

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This year's proposed Constitutional Amendments are now up for review prior to being voted on during the November 2, 2010 General Election this fall.  There are three proposed amendments on the table:

1. Property Tax Relief,
2. Veteran Property Tax Exemptions, and
3. Increasing the Revenue Stabilization Fund

The first proposed amendment, while technically a real estate tax amendment, facilitates aging in place policies.  Currently, the General Assembly can give localities the authority to grant exemptions from real estate taxes to persons 65 years of age or older, or for persons permanently and totally disabled, for their residence where the normal tax bill would amount to "an extraordinary tax burden" in relation to their income and financial worth.  The amendment now proposed, however, would allow localities to remove the requirement about the "extraordinary tax burden" and gives the General Assembly the authority to allow localities to determine their own income or financial worth limitations for tax exemptions.  If approved,  the senior citizen vote would then be open for bidding in localities across Virginia.

The second proposed amendment relates to the first, which contemplates allowing localities to extend the same real estate tax exemptions to veterans.   As proposed, the amendment would require the General Assembly to pass a law exempting from local taxation the principal residence owned and occupied by any veteran with a one hundred percent service-connected, permanent, and total disability. Also, the veteran's surviving spouse could continue to claim the exemption so long as he or she does not remarry and continues to occupy the home as his or her principal residence.  I'm not sure what would qualify as a "permanent, total disability" but I would expect subsequently enacted legislation would clarify and define these terms.

The third proposed amendment, from the fiscal responsibility front, allows the General Assembly to increase the size of its rainy day fund, entitled the "Revenue Stabilization Fund," from 10% to 15% of its revenues derived from annual income taxes and retail sales taxes.  Note that the fund will not be required to be 15% of these revenue, the amendment merely raises the limit of the fund to a maximum of 15% of these revenues.  If the fund exceeds the 15% maximum limit, the excess is required to be transferred to the general fund.

If you're dying to read the amendments yourself before heading to the voting booth this fall, click here for the actual text amendments.

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Many plaintiffs attempt to allege fraud claims in construction cases.  These attempts generally fail in Virginia because a claimant must allege a basis for a fraud claim that arises outside the context of a contractual duty.  This theory was clearly established in the Richmond v. McDevitt Street Bovis case in 1998, but we still see it regularly playing out in Virginia state and federal courts. 

Fraud claims have a couple interesting features.  First, they must be pleaded with specificity and particularity.  Second, a host of case law establishes that the types of "representations" that can support a fraud claim are quite limited.  These first two features mean that a plaintiff can expect extensive aggressive motions practice attacking their offensive pleading and courts often throw out fraud cases.  Third, fraud claims have an elevated burden of proof.  Rather than proving fraud by a preponderance of evidence, the plaintiff must prove fraud by clear and convincing evidence.  Fourth, fraud claims allow recovery of punitive damages in egregious cases.  Fifth, fraud claims can also allow recovery of attorney's fees in some circumstances.

Why invite all this hassle and increased expense and effort into a case?  The reality is that recovery of punitive damages is extremely rare and punitive damages are capped in Virginia at $350,000.  The potential for attorney fee recovery is nice and may represent leverage in negotiations, but in my estimation this is not the driving issue.  The two biggest reasons in my mind are 1) attempting to gain the benefit of a discovery accrual trigger for statute of limitations, and 2) finding ways to circumvent the economic loss rule.

As we recently discussed, Virginia law has a hair trigger on when the limitations clock starts to run.  Unlike neighboring Maryland and DC, Virginia uses a damage trigger instead of starting from when a plaintiff knows they have a problem.  In construction cases, many elements of the project are covered up and defective work can take years to manifest in observable damages.

Fraud also may offer a way to sidestep the economic loss rule.  We have often discussed the economic loss rule which is critical to analyzing who can be sued for what.  In cases where a party is not in contract with the plaintiff, options are limited under Virginia law.  Fraud is one way to potentially get around that boundary, but it is a very narrow passage and subject to significant obstacles.

That being said, many plaintiffs seem to use the kitchen sink method of pleading and allege every cause of action that exists in Virginia.  This may not only be risky from a perspective of good faith pleading, it can be a strategic nightmare.  Why drive up litigation costs, invite hosts of well taken motions, and lost credibility in a case just to stretch to allege a claim that will ultimately fail?

Links to recent fraud posts by Heidi Meinzer:

Broken Promises Won't Get You a Fraud in the Inducement Claim

Broken Promises, Part 2

Construction Law Musings Reply: Fraud and Construction Contracts: Like Oil and Water?

Image by Marco Bellucci

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Last month, we looked at Station #2, where the Virginia Supreme Court refused to turn a breach of contract allegations into a fraud claim. Contrast that with Nathan, et al. v. Long & Foster, Real Estate, Inc., et al., in which the Circuit Court for the City of Roanoke has allowed a fraud in the inducement claim to go forward.

Geeta Nathan and Santam Singh were looking to buy a home in Roanoke, and worked with Barbara Michelsen, a Long & Foster real estate agent. They signed a Purchase Agreement to buy a home for $260,000, and the agreement listed Michelsen as the selling agent.

Under the Purchase Agreement, Long & Foster and Michelsen hired Donald Field to conduct radon testing of the home. Michelsen told Field to test for radon only on the first floor, and to ignore any readings in the basement. The testing revealed excessive levels of radon for the basement. Field mailed and faxed the results to Long & Foster and Michelsen.

In the meantime, the seller had signed a disclosure statement dated March 25, 2006, checking “yes” beside the question “Has the property been tested for radon gas?” However, Field did not conduct the testing until April 6, 2006. The seller and Michelsen had also signed a radon acknowledgment form that said they had “no knowledge concerning the testing of this property for radon or the presence or absence of radon in this property.”

Before closing, Nathan and Singh asked Michelsen about the radon test results, explaining concerns about radon and that a child would be living in the house. Michelsen assured them that everything was fine, and gave them a copy of the test results for the first floor only. Nathan and Singh closed on the house the same day.

Some time later, Nathan and Singh contacted Field when they were making repairs in the basement, and Field asked them whether the radon problem had been taken care of. Nathan and Singh had further radon testing done, and found elevated levels of radon. Not only did Nathan and Singh have to pay the costs of fixing the radon problem, but their house also diminished in value due to the fact that they would have to disclose the prior radon levels.

Nathan and Singh sued Long & Foster and Michelsen for breach of contract and fraud in the inducement. Long and Foster and Michelsen agreed that the breach of contract claim was properly pled, and Nathan and Singh agreed that they could not state a fraud claim against Long & Foster. That left the issue of whether Nathan and Singh could go after Michelsen for fraud in the inducement.

Michelsen argued that any duty to disclose the radon levels was contractual, not tort-based. She also argued that she complied with her obligations to disclose and was therefore protected by Virginia Code Section 55-523 of the Virginia Residential Property Disclosure Act (“VRPDA”).

Judge Dorsey wasn’t buying either of these arguments. Judge Dorsey found that Michelsen, as a real estate agent first employed by Nathan and Singh to be their agent, had a fiduciary duty that included the duty to disclose a complete set of the radon test results. Unlike the facts in Station #2, this duty was more than a mere contractual duty and could support fraud in the inducement. Judge Dorsey also ruled that because Michelsen and the seller never properly advised Nathan and Singh of the radon issue, Michelsen was not entitled to the protection of the VRPDA.
 

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We are very enthused to announce that I have been asked to regularly post as a guest blogger with the Washington Business Journal.  WBJ is one of our very favorite sources of information, news and commentary regarding business, law and real estate.  The guest blog spots will be weekly and part of their Biz Beat page alongside posts by WBJ reporters.  Our initial post is an expansion of our previous discussions regarding how little stimulus funding for transportation has actually been spent.

We have a very high regard for WBJ and follow numerous WBJ reporters on twitter and publisher Alex Orfinger.  We regard being invited to serve in this capacity by the go-to information source as quite an honor.  For those not familiar or not as focused on the WBJ's offerings, we strongly recommend not only their print subscription, but signing up for their daily e-mail news alerts which contain critical updates for the business community.  We will keep everyone posted on further developments on this front here and invite you to check out the Biz Beat blog!

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Statute of limitations defenses are a hotly litigated and important aspect of construction law.  This is particularly true in Virginia where the clock often starts ticking based on a literal bright line trigger.  This means the time for filing suit can often start running in Virginia before anyone even knows there is a case.  In construction litigation, where problems can stem from latent defects which do not manifest for an extended period, these rules can be pivotal in limiting risk.

This backdrop is in sharp relief when you consider the impact of the huge snow storms throughout the DC metro region this winter.  There are numerous roof collapse cases working their way throught the system.  A couple weeks ago, ENR highlighted a story from the Roanoke Times about the Blacksburg Virginia High School roof collapse.

What caught my eye in the story were these quotes:

The entire school remains closed as officials also examine the safety of classroom areas after engineers, in the wake of the gym collapse, found six concrete beams that did not meet 1974 building codes ... The school board filed several lawsuits against Fralin's company, along with other contractors and suppliers involved in the high school's construction, in 1977. Three suits were settled out of court in 1978 with the defendants agreeing to pay $371,000 to provide the school with a new roof.

Beyond the question of whether any claim is already settled by the prior litigation, going after parties involved in the design and construction of facilities built in 1977 has some significant potential timing hurdles.  As can be seen from the report below, the school is forced to address a very serious roof collapse at this point.

Most construction cases focus on a five year written (or occasionally three year unwritten) contract statute of limitations.  The rub comes in that the limitations period begins to run "when the breach of contract occurs in actions ex contractu and not when the resulting damage is discovered".  Cases looking at this issue in Virginia had generally stated that the owner suffers damage when a project is defectively built, not when those defects translate into problems such as a collapsed roof.

We have talked in passing regarding statute of limitations matters and statute of repose matters in the past, but we are going to delve into them a bit over several post over the next few weeks.  For those interested in looking at North Carolina law on the topic, our friend Melissa Brumback has recently covered limitations and repose issues under that state's law.

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With all the buzz about Congressional ethics investigations and the kinks being worked out of the reformed Virginia General Assembly and Senate ethics rules, I thought it might be an appropriate time to reflect on the rules that govern our local officials here in Virginia.  On this side of the river, conflicts of interests, prohibited conduct and disclosure requirements for local officials are set forth in the State and Local Government Conflict of Interests Act.

Not only does the Act prohibit the expected tainted conduct (see Section 2.2-3103) and contractual relationships (see Section 2.2-3107) that we would all consider to amount to corruption, the Act then provides a number of generous exceptions to the rules, like, for instance, apparently you can be an officer or employee of a governmental agency, have an interest in a contracting company in excess of $10,000.00 doing business with that governmental agency, so long as you don't have the "authority" to participate in the procurement of the contract.  The rules also apparently don't apply if an officer or employee whose personal interest in a contract with a governmental agency is by reason of his marriage to his spouse who is employed by the same agency.

Quite surprisingly, legislators and public officials may also apparently participate in transactions in which they have an interest so long as they merely declare (see Section 2.2-3112(2)) their interest by stating (i) the transaction involved, (ii) the nature of their personal interest affected by the transaction, (iii) that they are a member of a business, profession, occupation, or group the members of which are affected by the transaction, and (iv) that they are able to participate in the transaction fairly, objectively, and in the public interest. 

While local legislators and government officials may, but are not necessarily required to, recuse themselves from matters in which they have a personal interest, all local legislators, constitutional officers (such as the treasurer, sheriff, commissioner of the revenue, etc.), and certain government officials are still required to disclose their personal interests every year by January 15th.  These disclosures are made by filing a Statement of Economic Interests as set forth in Section 2.2-3117 of the Code of Virginia.  This Statement of Economic Interests is full of good information, such as whether the person (or someone in his or her family):

1. Is a paid officer of a business,
2. Owe more than $10,000 in debt to anyone,
3. Own (and outline the interests) securities in various types of entities,
4. Have been paid for speaking, meeting or publishing anything by anyone,
5. Accepted any gifts from anyone that might affect their judgment,
6. Have any other employers that pay them in excess of $10,000,
7. Have been paid as a lobbyist or to represent the interests of any businesses, or are closely financially associated with anyone that has,
8. Have any real estate assets, or any interest in a real estate asset, that could pose as a conflict.

An interesting loophole in the disclosure requirement for item #6 above existed until just this last legislative session, where legislators and officials, as well as their family members, did not have to report income they receive from other governmental or advisory agency positions.  It should be noted that SB 4, during the last legislative session, was an attempt to close this loophole, and after being "incorporated" with SB 512, it looks like a compromise was struck and the language creating the loophole has been removed, so everyone's disclosure statements next January should yield some additional interesting information.

So what happens to officials that aren't even smart enough to scoot through one of the Act's several loopholes?  Well, they're going to have to deal with the Attorney General, through the local Commonwealth Attorney's Office, who can pursue a Class 1 Misdemeanor, among several other punishments, such as removal from office, civil penalties, etc.

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