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Archive for the ‘Commercial Litigation/Directors & Officers’ Category

9th Circuit Holds Inadmissible Evidence May Support Class Cert

Posted on: May 17th, 2018

By: Ted Peters

Courts around the country are split over whether admissible evidence is needed to support a class certification.  The Fifth Circuit requires it, and the Seventh and Third Circuits appear to be of the same opinion.  In contrast, the Eighth Circuit has indicated that inadmissible evidence can be considered.  On May 3, 2018, the Ninth Circuit join ranks with the Eighth Circuit when it issued an opinion indicating that certification of a class action can be supported by inadmissible evidence.

The case arises out of the district court’s decision to deny class certification to a group of nurses based, in part, on the finding that two of the named plaintiffs had not offered evidence that they were underpaid.  Their only evidence consisted of a paralegal’s analysis of time cards reflecting that hours were not properly calculated.  While perhaps not sufficiently trustworthy to be admitted at trial, the Ninth Circuit concluded that the district court prematurely rejected such evidence when ruling on whether the class could be certified.  The Court stated: “Notably, the evidence needed to prove a class’s case often lies in a defendant’s possession and may be obtained only through discovery.  Limiting class-certification-state proof to admissible evidence risks terminating actions before a putative class may gather crucial admissible evidence.”

The Court also concluded that, because there was no consideration as to whether the employer controlled the nurses after they clocked in, the district court misapplied the definition of “work” under California jurisprudence.  Lastly, the Court was critical of the finding that the law firm representing the putative class action was incapable of properly representing the class, focusing on “apparent errors by counsel with no mention of the evidence in the record demonstrating class counsel’s substantial and competent work on [the] case.”

If you have questions or would like more information, please contact Ted Peters at [email protected].

Winemakers Decan’t Warn a Consumer About Every Risk

Posted on: May 16th, 2018

A Pour Result for Plaintiffs’ Attorneys in California, but a Grape Win for Vintners

By: Robyn Flegal

In May 2018, the California Court of Appeals refused to revive a class action lawsuit claiming wines made by fifteen winemakers should contain an arsenic warning. The lawsuit was originally filed in 2015, alleging that these wines exposed consumers to arsenic in violation of California law. The panel of the California Court of Appeals held that the alcoholic beverage warning on these wines sufficiently notified customers about the potential risks associated with consuming the wine, despite the lack of a specific arsenic warning.

California’s Proposition 65—the safe drinking water and toxic enforcement act of 1986—protects the state’s drinking water sources from being contaminated with chemicals known to cause cancer, birth defects, or other reproductive harms. Prop 65 requires businesses to disclose exposures to such chemicals to Californians.

The appeals court held that the Office of Environmental Health Hazard Assessment requires companies to disclose one chemical for each health risk. Thus, because the alcoholic beverage warning alerted customers that wine could result in cancer and reproductive harm, the additional arsenic warning was unnecessary. The failure to provide a separate arsenic warning was therefore not a violation of the regulations.

Companies doing business in California should be aware of Proposition 65 and the labeling and disclosure requirements thereunder. For more information, please contact Robyn Flegal at [email protected] or any of FMG’s Commercial Litigation Professionals.

Banks Attempt to Expand the Scope of Liability for Escrow Companies

Posted on: April 27th, 2018

By: Bryce M. Van De Moere

The collapse of the subprime mortgage market in 2008 created shock waves still felt today.  Over-extended lenders such as Washington Mutual and Countrywide failed; larger financial institutions absorbed their loans and were tasked with trying to administer, process and enforce hastily executed loans poorly documented.

As the surviving financial institutions complete clearing out the remaining bundled loans, a trend has emerged where large institutions attempt to shift responsibility for collection of outstanding loans to other professionals in the real estate sales market.  A target of big banks seeking to protect themselves from bad debt, uncollectible loans or defective security instruments has become the title insurers and the escrow holder.  Historically, escrow has held the position of the third party in a real estate sales transaction that holds money while ownership, money and title transfer. The escrow holder is the fiduciary to the buyer and seller, tasked with following the buyer and sellers’ instructions in the sale of real property that ordinarily includes extinguishing existing loans in favor of buyer’s new mortgage.  The title insurer protects the buyer and buyer’s lender to ensure the new mortgage is in priority to protect the lender’s security interest.

Where this issue has arisen is in the repayment of the mortgage after the sale of property, usually a home equity line of credit (HELOC) that was offered by the now-defunct lender.  Much of this commercial paper was acquired in pools as opposed to individual transactions with a matching promissory note and deed of trust.  New lenders change loan numbers from the old defunct lender’s account number to account numbers matching the system by the new owner of the paper.  Other instances, the loan is marked as a secured but the original deed of trust is missing or no assignment of the security interest is recorded.  A third situation occurs where there is an accounting issue when a seller claims to have made payments that are not credited on the account.  Finally, in the waning days of Countrywide and Washington Mutual, people refinanced their loans but the paid deed of trust was not re-conveyed and included in the pool of notes and trust deeds transferred.  Buyers and their lenders want free and clear title.  Escrow can only rely on what the principle tells them the loan number on any HELOC is or if the old loan number is printed on the deed of trust pulled from the assessor’s office.  If the loan number is the old number, a payoff demand may or may not pick up the correct loan account.  Big lenders use clearing houses to issue reconveyances that may or may not record within the statutory 75 days required under California Civil Code 2941.  A new buyer may receive a notice from its lender that has picked up an re-conveyed lien on the property that was to be free and clear.  A title insurer wants to protect its insured so it will issue a release to clear title.

All the while big bank is putting the pieces of the puzzle together on the old account and realizes they have been underpaid.  Civil Code 2943(d) offers a remedy, but it is often an empty remedy since the loan obligation is still enforceable, but only as an unsecured contract debt and their former borrower is long gone.  What to do?  Big Bank sues the escrow for preparing a faulty payoff statement and the title company for statutory violation of Civil Code 2941(b)(6), wrongful recording of the release.

Although existing case law holds the escrow holder’s duty is only to the depositors and not a third party outside of the escrow (Summit Financial v. Continental Lawyers Title, 27 Cal. 4th 705 (2007)); more and more trial courts are allowing bank’s claims against escrow companies to survive summary judgment forcing escrow companies to the exposure and risks of trial.  Second, on statutory violations against title insurers, banks are using the remedy of subsection (b)(6) as a statutory indemnity, threatening title insurers with exposure to the remaining balance plus all accrued interests, costs, penalties and attorney fees.

Big institutional lenders are well positioned to force changes, legislatively and judicially in what was once thought of as solid law limiting insurers and professional clients’ liability.  The next new horizon looks to be an assault on those limits of liability.

If you have any questions or would like more information, please contact Bryce Van De Moere at [email protected].

Circuits Now Split Three Ways Over False Claims Act Limitations Period

Posted on: April 26th, 2018

By: Robyn Flegal

The Eleventh Circuit Court of Appeals (governing Georgia, Alabama, and Florida), recently held that the three-year statute of limitations for the False Claims Act (FCA) begins when the government learns of alleged violations of the FCA, rather than when a whistleblower/relator learns of alleged violations.  As we previously explained in the FMGBlogLine, the FCA allows whistleblowers to bring claims for violations on behalf of the government in return for a share any recovery.  In United States of America ex rel. Billy Joe Hunt v. Cochise Consultancy, Inc. d/b/a The Parsons Corporation, a former employee alleged that certain contractors defrauded the Department of Defense out of millions of dollars for work performed pursuant to a wartime contract in Iraq.  According to the Complaint, an Army Corps of Engineer officer forged contract documents after accepting bribes and gifts.  The United States declined to intervene in the lawsuit.

The United States District Court for the Northern District of Alabama dismissed the suit on the basis that Billy Joe Hunt (the employee) was outside of the three-year limitations period for FCA claims.  FCA claims must be filed (1) within six years after the violation occurred, or (2) within three years of the time the appropriate government body is made aware of the violation and within ten years of when the fraud occurred.  The Eleventh Circuit determined that this second, three-year limitations period applies even where the United States declines to intervene in a qui tam action.  Indeed, although the employee knew of the fraud more than three years before he filed suit—his claim was timely because he filed the suit within three years of disclosing the underlying facts to the United States officials.  Simply put, in the Eleventh Circuit, the limitations period begins to run when the relevant federal government official learns of the facts; when the whistleblower learns of the fraud is simply immaterial to the statute of limitations.

There is now a three-way circuit split in the Federal Courts of Appeals regarding the tolling deadlines for FCA claims.  In contrast to the Eleventh Circuit’s holding above, the Fourth, Fifth, and Tenth Circuits have ruled that the three-year limitations period does not apply to whistleblowers at all.  The Third and Ninth Circuits have held that the three-year period begins when the whistleblower learns of the fraud.  As there is a split in the circuits, this particular action could be ripe for a decision by the Supreme Court if the defendants petition for a writ of certiorari.

As such, we will continue to monitor developments in this area.  For questions please contact Michael Bruyere at [email protected], Robyn Flegal at [email protected], or Ali Sabzevari at [email protected]

Homeowners’ Associations: Banning Short Term Rentals May Violate California Coastal Act

Posted on: April 9th, 2018

By: Jeffrey R. Cluett

The California Court of Appeal overturned a denial of a preliminary injunction of a homeowners’ association resolution banning short term rentals (“STR”).  It found that appellants made a prima facie case that the ban violated the California Coastal Act, which requires a permit for any “development” that changes “the intensity of use or access to land in a coastal area.”  Greenfield v. Mandalay Shores Cmty. Ass’n (2018) 2018 Cal.App.LEXIS 258, **1-2.

Mandalay Shores is a development in the Oxnard Coastal Zone.  Id., *2.  For decades, non-residents have rented homes there on a short-term basis.  Id.  In June 2016, Mandalay Shores Community Association (“Association”) adopted a resolution banning STRs for less than 30 days.  Id. at *3.  In August 2016, the Coastal Commission advised the Association that the ban was a “development” under the Coastal Act requiring a coastal development permit.  Thereafter, the Greenfields, who own a residence at Mandalay Shores, sued for declaratory and injunctive relief.  Id. at *4.  The trial court denied the Greenfields’ ex parte application for a temporary restraining order and motion for preliminary injunction, finding that the STR ban was not a “development” within the California Coastal Act.   Id. at *5.

The Court of Appeal disagreed.  It noted that the California Coastal Act intends to “[m]aximize public access to and along the coast and maximize public recreational opportunities to the coastal zone consistent with sound resources conservation principles and constitutionally protected right of property owners.”  Id. (citation omitted).  “Development” includes any change in the density or intensity of use of the land.  Id.  The courts interpret “development” expansively to respect the Coastal Act’s mandate that it be liberally construed.  Id. at **5-6.  Accordingly, courts have held that closing and locking a gate that is usually open to the public is a “development,” as is posting “no trespassing” signs on a parcel used to access the beach.  Id. at 6.

The court found that the Greenfields made a prima facie showing to issue a preliminary injunction staying enforcement of the STR ban until trial.  Id. at *8.  The court therefore ordered the trial court to enter a new order granting appellant’s motion for a preliminary injunction.  Id.  The key takeaway for Associations with homes with beach access, therefore, is that changing regulations concerning who can rent those homes may fall afoul of the California Coastal Act.

This case is set for a Status Conference on May 21, 2018, where it will presumably be set for trial; the November 6, 2017 trial had been vacated pending appeal.  At trial, the case will turn on whether the STR ban is a “development” that would result in “a change in intensity of use or access.”

Despite the Court of Appeals ruling, the Association could yet prevail.  With the ban, residents and long-term renters would have beach access.  Therefore, that precluding short-term renters from renting may not be a “development” that “results in a change in the intensity of use or access to land in a coastal area” because residents and long-term renters would have beach access.  The question, therefore, is whether the California Coastal Act allows an Association to determine which people may have beach access.  Because this is a different situation from posting “no trespassing” signs or closing and locking a gate, which seeks to bar all beach access, the court may come to a different conclusion.

If you have any questions or would like more information, please contact Jeff Cluett at [email protected].