Fifth Circuit Reverses Dismissal of Fair Debt Collection Practices Act Claim Based Upon Demand Letter Seeking Collection of Time-Barred Debt

The Fifth Circuit recently joined the more expansive view of prohibited collection activity under the Fair Debt Collection Practices Act. On September 8, 2016, the Court rendered its decision in Daugherty v. Convergent Outsourcing, holding: “a collection letter seeking payment on a time-barred debt (without disclosing its unenforceability) but offering a “settlement” and inviting partial payment (without disclosing the possible pitfalls) could constitute a violation of the FDCPA.” The opinion expressly sided with the 6th and 7th Circuit Courts of Appeal on this issue, in disagreement with the 3rd and 8th Circuit Courts of Appeal.

The full opinion can be read here: http://cases.justia.com/federal/appellate-courts/ca5/15-20392/15-20392-2016-09-08.pdf?ts=1473355929

 

 

Management Company Liability

Below is an article that was recently published in the Dallas/ Ft. Worth Community Associations Institute Chapter magazine, Community Contact, Spring, 2014, which addresses potential liability faced by management companies and protection strategies to minimize risk.

Sole Survivor of Manager Island: the Reality of Management Company Liability

By Julie E. Blend, Esq.

When it comes to litigation, most plaintiffs’ attorneys tend to sue anyone and everyone connected to the underlying facts of a lawsuit. This means for community association litigation, the finger is often pointed at the management company. With lawsuits on the rise, property managers should be aware of what lurks in the liability minefield. The following is a general discussion of common claims, and is not intended to cover all possible bases of liability.

Suits by Third Parties

Many third party lawsuits against management companies involve common law tort claims for negligence, gross negligence or fraud. Negligence involves a breach of duty of care that holds the management company to the standard of care that an ordinary manager would exercise. Mere negligence will not support an award of punitive damages, as Texas requires gross negligence, fraud or malice to support such a finding. Defamation claims for libel and slander, harassment, and invasion of privacy are possible claims a manager may face that can support punitive damages. Plaintiffs have obtained large punitive damage awards against community association managers. Just ask the Bevills, a Hawaiian couple that sued the Ke Nani Kai Condominium Association, its resident manager and others, for claims including gross negligence and intentional infliction of emotional distress. The jury returned a verdict of $190,000 in punitive damages against the manager alone, and over $ 3,000,000 combined against the other defendants. Although the appellate court set aside the entire verdict on procedural grounds, a new trial has been scheduled.

Premises liability (negligence) suits are frequently brought against management companies, including slip and falls, dog attacks, and criminal acts.   In Texas, liability is based upon the right to control or maintain the property, and varies depending on the plaintiff’s status as an invitee, licensee, or trespasser. An invitee enters the property with the possessor’s knowledge and for their mutual benefit, and includes owners, tenants, employees, contractors, the mailman, policemen responding to a call, and utility company personnel. An invitee must prove (1) their status as invitee; (2) the defendant was the owner or possessor of the property; (3) a condition of the property posed a reasonable risk of harm; (4) that the defendant knew or should have known of; (5) the defendant failed to both adequately warn of the condition and failed to make the condition safe; and that such failures were a breach of duty of ordinary care that (6) proximately caused injury. A licensee is a person who comes on the property with the consent of the owner or possessor of the property. A licensee can include guests of owners, volunteer firefighters, and off-duty employees. A licensee has the additional burden to prove that the defendant knew of the dangerous condition and the licensee did not know of it, and a trespasser must prove that the defendant acted willfully or with gross negligence.

Many statutes present potential liability for management companies as well. Liability can be based on discrimination laws under the Fair Housing Act, the Civil Rights Act, and similar state statutes. Fair housing is one of the largest exposures to management companies. Protected classes under fair housing laws include race, color, national origin, age, gender, religion, handicap, and familial status. Familial status is one of the most overlooked protected classes. Familial status protection includes families that have children under the age of 18. Recently a management company in Edina, Minnesota paid over $ 40,000 along with the condominium association it managed to settle a HUD investigation of familial status discrimination. Although the association argued that it was age-restricted, fifty-five plus age restrictions are only appropriate if the association has met federal qualifications, such as routinely verifying residents’ ages. Owners must be treated the same and the management company must know what to do when a reasonable modification or accommodation is requested.   For example, if a disability is known or apparent, the owner must not be requested to provide proof of disability. Work with an attorney to assure compliance and avoid statutory damages and penalties.

Last year the 11th Circuit Court of Appeals held that property management companies are exempt from liability under the Federal Fair Debt Collection Practices Act (“FDCPA”) if collection efforts are merely “incidental to a bona fide fiduciary obligation.”   See Harris v. Liberty Community Management, Inc., 728 F.3d 1298 (11th Cir. 2012).   If assessment collection is the primary role of the management company, however, then the exemption would not apply. While Texas falls within the jurisdiction of the 5th Circuit Court of Appeals, the Harris case is persuasive and consistent with other appellate court decisions. The United States Bankruptcy Code does not provide a similar exemption for property managers, who must remain vigilant in avoiding violation of the automatic stay.   Upon filing a bankruptcy petition, debtors are afforded automatic stay protection and all collection efforts must cease. The stay is effective until discharge takes place, dismissal of the bankruptcy proceeding occurs, or unless the bankruptcy court grants a motion to lift the automatic stay with regard to a specific debt. Even though the debtor is required to pay post-petition assessments, avoid liability by consulting an attorney for the best course of action.

Suits by an Association

Although not pleasant to think about, associations have sued their management company. The most common claims asserted by an association include breach of contract and the tort of breach of fiduciary duty. Other possible tort claims include negligence, gross negligence and fraud.   While a breach of contract claim can support an award of attorneys’ fees, a tort claim cannot. An intentional tort claim, however, can support an award of punitive damages, whereas a contract claim cannot. It is possible to allege contract and tort claims in the same lawsuit, in what the law recognizes as “contort.” Courts will look to the source of the duty that gives rise to the injury and the nature of the injury suffered in determining whether a claim is characterized as breach of contract, tort, or both.

A management company generally owes a fiduciary duty to the association it manages and, therefore, can be subject to fiduciary liability. Based upon the language of the management contract, however, the management company might be able to argue that a fiduciary duty does not exist, or that certain fiduciary duties are limited. Texas public policy favors freedom of contract and duties owed by an agent to its principal may be modified by agreement unless the law provides otherwise.   A management company in Tennessee was successful in arguing no fiduciary relationship existed because the parties were merely in an arm’s length business transaction and the management company did not exercise control over the association. See Condominium Management Associates Inc. v. Fairway Village Owner’s Association, 2010 WL 424592 (Tenn. App. 2010). The language of the management agreement is essential to the determination of the existence and scope of the fiduciary duty. In most traditional cases, a fiduciary duty will exist.

Professional negligence claims are becoming more prevalent and management companies are not exempt.   As more states adopt manager license or certification legislation, the standard of professional care expected of management companies will likely become more definitive. Additionally, every state has an unfair business practices statute that can subject management companies to liability for deceptive acts.   The Texas Deceptive Trade Practices Act (“DTPA”) provides for recovery of treble damages and attorneys’ fees. Courts will compare the alleged violation to the language of the statute, which prohibits misrepresentations, deception, causing confusion, and failure to give notice when required. Although the DTPA provides an exemption for professional services that a management company should argue in defense to a claim, it does not apply in all circumstances.

If the association/management company relationship becomes adverse, the best course of action usually is to part ways amicably without litigation. Management companies tempted to sue an association should think through the decision thoroughly before jumping the gun. The adage “the best defense is a good offense” holds true for litigation. Oftentimes plaintiffs forget that the filing of a lawsuit opens the door to counterclaims. Once a counterclaim is on file, the plaintiff no longer has the opportunity to drop the lawsuit on its own decision. The consequence can be a messy, prolonged lawsuit.

Protections: Risk Management, Insurance and Well-Drafted Contracts

A risk management plan is essential to avoiding liability. Management companies should provide managers with thorough knowledge of potential liability exposures.   One of the best protections against liability is written policies and procedures communicated to every employee. For example, employees should have written guidance and training that equips them with knowledge of how to recognize and handle a fair housing issue. CAI offers many educational programs and publications to assist the management company in risk management.

Insurance is an absolute must. It cannot be emphasized enough that the management company needs its own coverage, over and above what is provided by an association’s insurance. The management contract should require the association’s insurance company to add the management company as an additional named insured, and the managing agent rider to the association’s fidelity bond should extend coverage to the management company. Even beyond this, however, the management company needs its own coverage. In addition to an errors and omissions policy, at a minimum the manager should have general liability, crime and employment practices coverage. Consult an insurance expert that specializes in community associations to develop an insurance plan, and understand its exclusions. Most E & O policies contain fraud or malice exclusions. Unless exclusions apply, an E & O policy may cover punitive damages, which Texas law allows in certain contexts. Many states do not allow coverage for punitive damages as against public policy.

A well-drafted contract is also essential for protection of the management company. Three important clauses to reduce liability include an indemnification provision, a limitation of liability provision, and a termination clause. A liquidated damages clause may also act as an incentive to prevent a party’s breach of the agreement, and helpful provisions in reducing costs of potential litigation are a choice of law and venue clause, and a waiver of the right to a jury trial. Describe the services of the manager in detail so there is no room for ambiguity. Always have an attorney review your management contract to ensure its enforceability.

Every management contract should include an indemnification by the association, including an indemnification for negligence.   An indemnity for a party’s own negligence must meet the requirements of the express negligence doctrine, which requires that the indemnity give fair notice to the indemnifying party, and appear conspicuously in the contract. A limitation of liability clause can expressly limit the management company’s exposure to a certain dollar amount that is usually connected to a percentage of the management fee. Courts will uphold a limitation of liability clause that does not violate public policy (when there is not a substantial disparity in bargaining power between the parties). A termination clause that sets forth the length of the term of the contract and the grounds for termination provides a clear exit for both parties. If early termination occurs, a liquidated damages provision will provide protection. Courts will enforce a liquidated damages clause when the injury caused by the prospective breach is incapable or difficult of estimation, and the amount of liquidated damages set forth in the contract is a reasonable forecast of just compensation to the injured party. If the liquidated damages clause does not meet these two requirements, then it is an unenforceable penalty.

Risk management alone, while helpful, is not enough. Neither are insurance or an excellent contract alone enough. These steps must co-exist together to maximize protection for the management company. By taking preventative measures and staying informed of legal trends, management companies can be confident that they are as adequately protected as possible from liability.

 

 

Association Liability for Criminal Acts

The tragic shooting death of Trayvon Martin in a Sanford, Florida homeowners association in February 2012 captured the attention of national news media.  Questions arose as to the liability of the homeowners association for his death, which occurred as a result of a fatal shooting by the association’s neighborhood watch volunteer.  The volunteer, George Zimmerman, was acquitted a few days ago after being tried by jury in a criminal lawsuit.    Below is an article that was recently published in the Dallas/ Ft. Worth Community Associations Institute Chapter magazine, Community Contact, 2nd Quarter, 2013, which discusses the law in Texas for liability of a community association for criminal acts.

 

Crime in Your Community – Legal Liability for the Association?

 

By Julie E. Blend, Esq.

Dealey Zimmermann Clark Malouf & Blend, PC

 

Crime affects us everyone.  The most recent Federal Bureau of Investigation’s Uniform Crime Report shows a slight increase in violent and property crimes across the nation. Crime will invariably happen – the only question is when and where.  What if it happens in your neighborhood?  Can the owners’ association be held liable?  The answer depends on the extent that the association assumes a duty to provide security.

 

Liability Must Be Based Upon a Duty to Provide Security

 

In Texas, the general rule is there is no duty to protect a person from the criminal acts of a third person. The legal theory that provides an exception to this general rule is premises liability, which is a type of negligence claim.  If a legal duty to provide security exists in the premises liability context, then a breach of that duty can serve as a basis for tort liability for foreseeable criminal activity.

 

The Texas Supreme Court has declined to squarely hold that an owners’ association automatically owes such a duty to owners, although it has acknowledged that courts in other states have declared the existence of a duty (Florida, for example, has applied landlord duty to owners’ associations to provide protection to tenants from foreseeable criminal activity, and California has applied landlord duty to an association for crimes occurring on the common areas over which the associations have control).  In contrast, to be liable in Texas for a criminal act of another person, an association has to have “specific control over the safety and security of the premises [where the crime occurred].”  In the 1995 case of Centeq Realty, Inc. v. Siegler, 899 S.W.2d 195, the Texas Supreme Court ruled in favor of a corporation with majority voting rights to elect the board of directors of a condominium association because it did not control the security of the parking garage where the plaintiff was attacked. The court determined that a “general right of control” over the premises is not enough.  Id. at 199.

 

If a duty to provide security is established, the association can be liable only if causation is found – i.e., did the breach of the duty to provide security cause the plaintiff to suffer damages from a third party crime?  In a recent unpublished California opinion, Girardi v. San Rafael Homeowners Association, owners sued the association alleging it breached a duty to protect the owner from theft after two burglaries took place in their home.  The court found that the association did not to have a duty to protect the owners’ property from theft.  The court further determined that even if such a duty existed, the plaintiffs failed to present evidence that breach of that duty actually caused the burglaries to take place.  The court noted that the plaintiffs could not prove who had committed the burglaries, and the testimony of the plaintiffs’ security expert did not provide a factual basis to support the opinion that the lack of repaired street lighting and secured gates, and the failure to hire security guards and install surveillance cameras, contributed to the burglaries.

 

What if an association does provide a security function and thereby has a clear duty?  An association can assume a duty to provide security either expressly (in their governing documents) or impliedly, (by acting in a manner that provides security measures). The provision of security to owners comes with a legal duty of care in providing security.  Under these circumstances, an association could be liable for foreseeable crimes.  To determine if a crime was foreseeable to the association, a court will consider evidence of whether prior crimes had occurred in or near the neighborhood, the frequency and timing of the prior crimes, whether the prior crimes were similar, and if the association knew of the prior crimes (or should have known).

 

What can an association do to minimize the potential for liability?  Best Practice: do not create a duty to provide security if one does not already exist.  If the association truly does not provide security measures, do not state anything to the contrary.  If the association provides an employee or agent at the gate or entrance that checks the identification of persons seeking admission, do not refer to them as a “security guard.”  Use terms such as “gate monitor” instead.  Advise owners that the association does not provide security and they are responsible for their own safety.  Maintain proper upkeep of common areas by appropriate light bulb replacement, and periodic checks of locks and gate function. Communicate any knowledge of crime in the area to owners, and advise them to take precautions.  Think twice before endorsing a neighborhood watch program.

 

 

Neighborhood Watch Programs Are A Potential Basis For Liability

 

A Neighborhood Watch program can create liability for an association.  Most people are aware of the tragic Trayvon Martin fatal shooting that took place in Florida on February 26, 2012.  The volunteer captain of the neighborhood watch for The Retreat at Twin Lakes Homeowners’ Association, George Zimmerman, shot Martin allegedly in self-defense, and will stand trial for second – degree murder.    Since the shooting, there has been much discussion about the homeowners’ association’s potential liability for the incident. A settlement was announced in April 2013 between the parents of Trayvon Martin, the Twin Lakes Association and its insurance company. According to the Orlando Sentinel, although the amount of the settlement is confidential, it is expected to have been over one million dollars.

 

Issues that likely played a factor in the settlement include whether the Twin Lakes Association crossed the line and stepped into a law enforcement role by appointing the volunteer to provide a security function, whether the Association adequately screened volunteers before placing them in the neighborhood watch program, and how well the Association monitored volunteer activities. Did the Board run a background check looking for prior violent behavior by the volunteer to determine if he was fit for the neighborhood watch program? Did they know their volunteer carried a gun?  Negligent training or supervision of volunteers can create liability.  Traditional neighborhood watch programs instruct volunteers to report suspicious activity to local police authorities. Actual pursuit of any potential criminal should be left to the police authorities, not the volunteer.

 

If an association creates or runs a neighborhood watch program it could serve as a basis for a duty to provide security. Neighborhood watch programs, sponsored by the National Sheriff’s Association, are set up in conjunction with local law enforcement.    If your neighborhood does not have one, consider carefully whether to start such a program.  Communicate to owners that any neighborhood watch program created is maintained by owners in conjunction with local authorities and is not affiliated with the association.  An association should clearly communicate to owners that the neighborhood watch program is merely an awareness mechanism, and not a provision of security to the owners.

 

If your neighborhood already has a watch program that has been endorsed by the board of directors, consult your insurance provider to confirm that coverage is available and the scope of such coverage.  Check the governing documents to ensure the board has the authority to create and maintain such a program.  Any existing neighborhood watch program that is already affiliated with an association should have proper procedures to select, train and monitor volunteers.  It is incumbent upon associations to instruct their neighborhood watch volunteers on the proper course of action.  Having a committee charter setting forth the parameters could help protect an association from potential liability.  The procedures should expressly prohibit volunteers from carrying a weapon.  Although Texas, like many states that have “Castle Doctrine” statutes or “Stand Your Ground” laws, currently does not impose a duty to retreat, volunteers should be directed to not engage or pursue a potential criminal.  If a volunteer observes suspicious activity, they should only contact law enforcement authorities.

 

“Castle Doctrine” statutes vary in degree as to what protection is afforded a person from liability for the use deadly force in response to an assault in the person’s home or vehicle.  “Stand Your Ground” laws have broader application and generally apply when the person is in a place where they have a right to be.  In Texas, the statute (found in Chapter 9 of the Texas Penal Code) currently provides that there is no duty to retreat and the person may use lethal force if the person reasonably believes the use of force is necessary for protection against an attack in a place where they have a right to be.  Many states have pending bills to weaken “Castle Doctrine” and “Stand Your Ground” statutes in the wake of the Trayvon Martin shooting death.  Regardless of the wording of the “Castle Doctrine” statute, it will not protect an association from civil liability if a volunteer pursues and injures another person through the use of deadly force.

 

Minimize Association Exposure Through Insurance   

 

Associations can maximize protection with strong insurance coverage, including a commercial general liability policy, directors and officers’ liability protection, and umbrella coverage.  With the rise of financial crimes against associations through embezzlement and fraud, a fidelity bond is a good idea and may be required by the governing documents.  Carry the fidelity bond in the name of the association with a managing agent rider that extends coverage to your management company.  Consult an insurance professional who specializes in community associations to determine the best options for your association.  Discuss whether exclusions and endorsements could apply to leave the association exposed.  The insurer for the Retreat at Twin Lakes Association contested coverage for the shooting death of Trayvon Martin through a declaratory judgment lawsuit against the association, which sought a ruling that the policy’s exclusion for bodily injury (including death) applied.  The lawsuit was dropped in November 2012, however, and the party paying the settlement proceeds from the announced settlement with Trayvon Martin’s parents remains confidential.

 

In conjunction with an insurance assessment, an annual legal audit with your attorney that includes an association risk management plan can go a long way to reduce exposure.  Be sure association board members are aware of whether the association provides security and the importance of the distinction.  If the association does not provide security, continuously communicate that fact to the owners.  Follow your risk management plan.  If a crime occurs in surrounding areas, notify the owners of the specifics and advise them to take extra precautions.  In the unfortunate event that a crime does happen in your neighborhood, immediately contact law enforcement, your insurance carrier and your attorney.