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March 2010, The Legal Intelligencer

Reprinted with permission of The Legal Intelligencer © 2010 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

 “Defining a Party in Interest”

In an urban environment such as Philadelphia, rows and run-ins between neighbors are simply par for the course.  As practitioners, we expect this.  Provocative, distracting billboards and rodents vying for the remnants of last night’s special at that quaint little neighborhood BYOB are the things of a metropolis.  Party wall issues, nuisance complaints, unpermitted construction gripes are a dime a dozen.  And of course there’s always the hotly contested variance request.  Picture the hypothetical fraternity wreaking proverbial havoc upon a once sleepy family neighborhood.  Initiation rituals, drinking games… Enough said.  Fortunately there are nuisance and zoning laws governing these potentially chaotic forces, constantly at work.   

There is also the Abandoned and Blighted Property Conservatorship Act (Title 68, Chapter 26).  In essence, that Act empowers a party in interest to clean up an abandoned slash blighted property.  But how does one define a “party in interest” after all?  Technically, it is an entity or person who has a direct and immediate interest in a residential, commercial or industrial building, such as a resident within 500 feet of the building.  So it is not altogether inconceivable that one’s neighbor might one day step into that owner’s shoes.  Notably, merely being a neighbor may give rise to standing to pursue claims on an owner’s behalf.

Bearing this mind, the Superior Court very recently handed down an illustrative decision that clarifies a neighbor’s rights, or lack thereof, in the specific context of a sheriff sale.  The Court had to decide whether a person who maintained a neighboring property for seven years was a party in interest under the Rule of Civil Procedure 3132 and had standing to set aside the sheriff sale of the neighboring property.  The procedural history in U.S. Bank National Association, as Trustee v. Powers 2009 Pa. Super. LEXIS 4483 is as follows:  A neighbor of the property owner, Mr. Powers (hereinafter Petitioner or she) expeditiously filed a Motion to contest the validity of the tax lien sale in the Court of Common Pleas of Philadelphia County and subsequently filed a Petition to Intervene and a motion to Amend the Motion to Contest.  She had no ownership or leasehold interest in the property.  She claimed that a recorded ownership interest in the property was not required to challenge the sale.  She did allege however, that she possessed a "reasonably discoverable" interest in the property and was legally entitled to notice. The claim was based on a three and one half year series of communications with the lienholder’s counsel and counsel’s promise to notify her of the sale date.  The foreclosed property was an empty lot abutting another vacant lot east of Petitioner’s home.  According to the Court's opinion, she had maintained the property for the seven years, a fence annexed the property to her yard, and she asserted that most of her neighbors believed that she owned the property, and "she [has] ostensibly [been] in possession of the property for the past seven years...”  After a series of setbacks in the Philadelphia Court of Common Pleas from December 2007 - February 2008, an appeal was perfected to the Superior Court.

Pa.R.C.P. 3132 requires both that the Petition be filed before the delivery of the sheriff deed and that the Petitioner be a party in interest.  Pa.R.C.P. 3132 does not define a party in interest nor is party in interest specifically defined anywhere in the Pennsylvania Rules.  By this holding, the Superior Court is refining who is classified as a party in interest.  The Powers Court distinguished the two cases Petitioner relied upon in support of her claim that she had standing as a party in interest to set aside the sale: Merrill Lynch Mortgage Capital v. Steele 859 A.2d 788 (Pa. Super. 2004) and Kaib v. Smith 684 A.2d 630 (Pa. Super 1996).  In Kaib, the issue was not whether a tenant under a valid lease with an option to buy was a "party in interest.”--- he undoubtedly was--- the issue was a  whether the purchaser of the property at sheriff sale had knowledge of the tenant's interest in the property when his lease was not recorded.  Pa.R.C.P. 3129, requires all parties with a record interest to receive notice of a sheriff sale.  Since the purchaser at sheriff sale had neither actual nor constructive notice of the tenant’s unrecorded interest, the Kaib Court held the lack of notice did not violate Rule 3129 and refused to set aside the sale.  Unlike the instant case, the Petitioner in Merrill Lynch received title in fee the day before the sheriff sale, in an arms-length transaction, which obviously qualified him as a party in interest.

In the U.S. Bank National Association v. Powers case, the Court held that since the Petitioner lacked standing there was no need to consider either whether she was a proper Intervenor under Pennsylvania Rule of Civil Procedure 2327 or her claim that she was legally entitled to notice of the date of the sheriff sale.  Rule 2357 requires, in general, that the Intervenor show that she could face legal liability if not permitted to intervene, could have been joined in the lawsuit, has a legally enforceable interest adversely affected by the sale.

To be a party in interest you must have some type of ownership interest or leasehold interest.  Once you are determined to be a party in interest then the court may consider whether you are entitled to notice as was done in the above referenced Kaib case. Apparently, the lienholder’s counsel’s knowledge that you have an interest in the disposition of the property, concern for its ultimate disposition, or have maintained it in some fashion to your benefit, the benefit of your neighbors and the benefit of the lienholder will not elevate your status to a party in interest to confer standing to challenge the sale.

Perhaps another lesson to be gleaned from the decision is that the law will not protect you from a promise that is not supported by consideration or a promise that you did not reasonably rely on under the principle of promissory estoppel.  Assuming arguendo the truth of Petitioner’s allegation as to a promise to provide her notification of the sheriff sale date, there is still no legal recourse if you are not a party in interest. 

Conceivably, a detrimental reliance claim could be asserted as a basis for relief but there is no suggestion of facts supporting such a claim contained within the opinion itself.  Hypothetically, someone in Petitioner’s position, with the financial wherewithal, could have successfully bid for the subject property at a price lower than would be gained in an arms length transaction.  Once title is vested in the mortgagee, as occurred here, the property is listed for sale, ostensibly for a price higher than could be realized at a sheriff sale.  If you are not a party in interest yet wish to bid or monitor the public sale, it would behoove you to read the newspapers and visit the sheriff’s website.

Harper J. Dimmerman is an adjunct professor at Temple University’s Fox School of Business, vice chairman of the law practice management section and co-chairman of the solo/small firm committee of the Philadelphia Bar Association. He represents clients in general litigation, various land use, residential and commercial real estate matters. His law firm also provides approved attorney title insurance services statewide. He can be reached via e-mail at harper@hjdlaw.net or telephone at 215-545-0600.

James M. Lammendola is an instructor at Temple University’s Fox School of Business. He may be reached via e-mail at james.lammendola@temple.edu or telephone 215-204-4147.

January 2010, The Legal Intelligencer

Reprinted with permission of The Legal Intelligencer © 2010 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

“Recourse for Consumers Aggrieved by Deceptive Title Insurance Practices”

Legions of consumers could attest to the mystique frequently associated with a residential real estate deal.  And this is not to suggest by any means that the opacity is artfully crafted by the professionals purportedly working on a consumer’s behalf.  Akin to legal terms and doctrine, each deal is comprised of numerous moving and generally arcane parts.  The operation of contingencies, financing alternatives, legal descriptions are merely a few obvious examples.  Land title insurance too could certainly be placed in the generally incomprehensible category, especially for first time home buyers.  Assuming an understanding of the underlying purpose of this type of insurance is achieved, that still leaves various unanswered questions concerning the application of a rate structure to a particular deal.  And of course consumers are generally resigned to the reality that they have no choice but to heed the explanations and advice of those collaborating to get the deal to closing.   

Take Nancy White for instance, a consumer who recently decided to refinance her Philadelphia County home.  As is the custom, Ms. White engaged the services of a title insurance agency, which proceeded to conduct a title search for the benefit of the lender.  The lender required the borrower to remit a fee for the issuance of a Lender’s Policy, which she did pursuant to the instruction of the title agent.  It can be inferred from the opinion that Ms. White trusted the agent and relied upon the accuracy of the quoted, required amount.  Notably, the borrower never supplied a copy of the prior policy at settlement. 

At some point subsequent to her refinance, Ms. White discovered that she had been overcharged for title insurance.  Pursuant to the then effective section of the Insurance Manual of Rates, Policies and Endorsements, a borrower is entitled to a special reduced, refinance rate where the refinance occurred within three years of the prior policy and there has been no change in fee simple ownership.  Allegedly deserving of this special rate, Ms. White instituted a class action suit at the end of 2006, in Philadelphia County.  The title agent’s underwriter, Conestoga, was the sole named Defendant, compelled to respond to the allegation that through its agents, it systematically failed to provide legally mandated discounted rates.  Ms. White asserted various common law theories of recovery (unjust enrichment, restitution, etc.) along with a violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. 

Eventually Ms. White moved for class certification, which in turn was vigorously opposed by Conestoga.  The challenge involved the trial court’s subject matter jurisdiction, as the plaintiff was arguably required to first exhaust the statutory remedies outlined in the Pennsylvania Title Insurance Companies Act (TICA).  As an ancillary matter, Conestoga was unsuccessful in arguing that Ms. White waived the right to receive a discounted rate because she failed to produce the prior policy at closing; the plaintiff combated this claim by submitting evidence of repeated violations of the rate structure and consistently charging the maximum approved rate, without discretion.  The lower court ultimately dismissed Ms. White’s suit with prejudice for failure to exhaust administrative remedies pursuant to TICA.  The certification motion was denied as moot. 

On appeal, our Superior Court confronted the issue of whether the TICA does in fact provide an exclusive administrative remedy.  The appeals court turned to the Statutory Construction Act for guidance, which in pertinent part provides: “In all cases where a remedy is provided or a duty is enjoined or anything to be done by any statute, the directions of the statute shall be strictly pursued, and no penalty shall be inflicted, or anything done agreeably to the common law, in such cases, further than shall be necessary for carrying such statute into effect.”  Simply put, if an administrative remedy is exclusive, then no common law form action may be pursued.  That administrative remedy must also be adequate.  That in mind, does the TICA provide such a remedy?  In fact, is the TICA even applicable to the instant case? 

The TICA contains the following language: Every rating organization and title insurance company which makes its own rates shall provide, within this Commonwealth, reasonable means whereby any person aggrieved by the application of its rating system may be heard, in person or by his authorized representative, on his written request to review the manner in which such rating system has been applied in connection with the insurance afforded him.  Furthermore, other TICA language, related to penalties, expressly states that “[s]uch penalties may be in addition to any other penalty provided by law,” a clear indicator that the legislature never intended to preclude actions at law as well.  For the appeals court however, the TICA was wholly inapplicable to Ms. White’s claims.  Instead, Ms. White was permitted to proceed upon her UTPCPL theory.  Ammunition to support this conclusion came in the shape of Pekular v. Eich (Pa. Super. 1996), where the Superior Court concluded that the Unfair Insurances Practice Act (absorbed by TICA and addressing deceptive business practices like Ms. White’s) was not an exclusive administrative remedy and that a private action under UTPCPL was nonetheless available.  It was “incongruous for Conestoga to suggest that the Legislature intended the TICA to control and be the exclusive administrative remedy for claims of unfair and deceptive insurance practices that tangentially relate to insurance rates, when it clearly did not intend the UIPA [Unfair Insurances Practices Act], a more pertinent statute, absorbed by the TICA, to be an exclusive administrative remedy over such claims.” 

The brief amicus curiae submitted by the Pennsylvania Insurance Commissioner himself, which concurred that the TICA does not provide an exclusive remedy that must be exhausted, also helped to sway the appeals court.  Authority in the United States District Court, Eastern District of Pennsylvania and the District for New Jersey, only bolstered the court’s holding.  Finally the lower court erred in applying the doctrine of primary jurisdiction (acknowledging “that when an issue within the jurisdiction of any administrative agency involves complex subject matter before the knowledge of judges and juries, it is best that the court refrain from exercising its jurisdiction until the agency has made a determination.”) to any extent.  In the wake of the mortgage debacle and heightened scrutiny of recent lending practices, one can rest assured that the associated Settlement Statements will reveal inconsistencies with the application of title insurance rates to consumers.  And the White decision just made it a whole lot easier to bypass the administrative process and get into court, armed with viable consumer protection claims.  Exposure to treble damages and attorneys’ fees on facts like those of Ms. White has officially been enhanced.

Mr. Dimmerman is an adjunct professor at Temple University’s Fox School of Business, Vice-Chair of the Law Practice Management Section and co-chair of the Solo/Small Firm Committee of the Philadelphia Bar Association. He represents clients in general litigation, various land use, residential and commercial real estate matters. His firm also provides approved attorney title insurance services statewide. He may be contacted via email: harper@hjdlaw.net or telephone (215) 545-0600.

November 2009, The Legal Intelligencer

Reprinted with permission of The Legal Intelligencer © 2009 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

“Res Judicata – A Bar To Recovery Under TILA?”

A veritable sea of mortgage defaults and the accompanying foreclosure litigation indubitably represents a sign of the current economic times.  And with such activity, allegations of predatory lending practices in the form of Truth-in-Lending (TILA) violations should come as no surprise to practitioners on either side of the bar.  These demands for relief, whether recessionary or monetary in nature, at times, may never be asserted until after foreclosure litigation has already been commenced. 

In what many will consider a victory for lenders throughout the state, our Pennsylvania Superior Court was recently called upon to review a Chester County decision that implicated the doctrine of res judicata, as applied to TILA claims asserted subsequent to the entry of a default judgment.  The operative facts in the Stuart v. Decision One Mortgage Co., LLC and RFC Homecomings Financial 975 A.2d 1151 (Pa. Super, 2009) matter are relatively straightforward.  In January of 2004, Alan and Elizabeth Stuart secured a loan from Decision One through a mortgage broker.  The Stuart’s soon defaulted and a foreclosure action was commenced.  Moving at a clipping pace, the lender had managed to obtain a default judgment.  Then, in a matter of days, Decision One sold its interest in the judgment to another entity, co-defendant RFC Homecomings Financial.

Approximately one week from the assignment, the Stuart’s, through counsel, attempted to assert their right of rescission.  It was not until another approximate two years time had passed that the borrowers commenced litigation in the Chester County Court of Common Pleas.  Although not apparent from reading the opinion, the Stuart’s soon filed for Chapter 13 protection and initiated an Adversary Proceeding seeking judicial enforcement of their TILA recession and alleging material violations of the disclosure requirements.  The Bankruptcy Court exercised its discretion and abstained from hearing the claim for TILA damages. To do otherwise, and grant any relief, would serve to “undo the effect of the state court judgment.”   Stymied in their effort to gain relief in the federal forum, the Stuart’s then brought their state court action, demanding rescission and money damages pursuant to the TILA.  Lender’s counsel raised res judicata as a bar to recovery, in responding to the Stuart’s amended complaint; the Stuart’s conceded that a judgment had been entered based upon the very transaction they claimed to have rescinded.  Nonetheless, the mortgagors argued that the lender had a statutory duty to permit rescission, even though a petition to open/strike judgment was not filed.

The doctrine of res judicata is well-settled in the Commonwealth.  Courts have adopted a four-prong test in analyzing such a defense: A subsequent action is wholly barred if it shares with the earlier judgment a concurrence of four elements: (1) an identity of the thing sued upon; (2) an identity of the cause of action; (3) an identity of the person and parties to the action; and (4) an identity of the quality or capacity of the persons suing or being sued.  The Supreme Court’s perception of the concept is that court judgments should be conclusive as between the parties and their privies in respect to every fact which could properly have been considered in reaching the determination and in respect to all points of law relating directly to the cause of action and affecting the subject matter before the court.  (Bearoff v. Bearoff Brothers, Inc.)

Even in the face of this standard, the Stuart’s maintained that raising a rescission issue in the underlying foreclosure action was infeasible, as their right was not exercised until after the default judgment had already been taken.  Furthermore, there was no identity of the thing, cause, person or parties, and the capacities of those persons or parties.  Unfortunately for the Stuart’s however, the Decision One court found an analogue in a First Circuit case, in which Puerto Rican law precluded just such a TILA claim raised post-judgment.  (R.G. Financial v. Vergara)  The Vergara court proclaimed that “[i]t would be impossible for Vergara to prevail on his claim that the loan transaction [was] subject to rescission without flatly contradicting the state court’s affirmation of [the lender’s] right to foreclose on the encumbrance securing that loan.”  The Decision One court ultimately concluded that permitting a TILA claim to render a judgment a nullity was an untenable result, potentially undermining the entire execution process. This decision should give any foreclosure defense attorneys pause, especially where viable TILA claims might exist.  Once a default judgment in foreclosure is secured and not subsequently opened, the TILA claims may not be entertained in either forum.

Mr. Dimmerman is an Adjunct Professor at Temple University’s Fox School of Business, Vice-Chair of the Law Practice Management Section and co-chair of the Solo/Small Firm Committee of the Philadelphia Bar Association. He represents clients in general litigation, various land use, residential and commercial real estate matters. His firm also provides approved attorney title insurance services statewide. He may be reached via email: harper@hjdlaw.net or telephone (215) 545-0600.

James M. Lammendola, is an Instructor at Temple University’s Fox School of Business. He may be reached via email james.lammendola@temple.edu or telephone (267) 254-3324.

September 2009, The Legal Intelligencer

Reprinted with permission of The Legal Intelligencer © 2009 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

“Entitlement Theories in Land Use”

“One who undertakes to make use of real estate for commercial purposes without inquiring as to whether the use is permitted by the municipality’s zoning ordinance, does so at his own peril.”  (Springfield Twp. v. Kim, 2002).  An important decision was just handed down by the Commonwealth Court at the tail end of last month, with obvious implications for zoning and land use practitioners.  A detached four-bay garage, constructed in 1930, would become the focal point of litigation in Montgomery County.  The appellant, husband and wife owners of a single family dwelling on East County Line Road in Ardmore, zoned R-6A Residential, magnanimously permitted their son and daughter-in-law to reside there, in a dwelling on the property.  The son, catching the entrepreneurial bug decades earlier, utilized the largish garage and a paved driveway at the site for his landscaping business.  In fact, he had been running the company there for 38 years until the Township broke the ghastly news.

Thanks to the vociferous complaints of a disgruntled neighbor, a September 2007 letter from the Township Zoning Officer apprised the Pietropaolo clan that their little gardening enterprise was in serious jeopardy.  More precisely, the allegation was that the business was unpermitted.  Compelled to appeal that star-crossed determination, the family put its proverbial best foot forward.  The two theories, which became pivotal as the appeal inevitably swelled, were as follows: entitlement as a nonconforming use and variance by estoppel. 

Concerning the estoppel theory, first, the Commonwealth Court, on a prior occasion, enumerated the following factors, to be proven by clear, precise and unequivocal evidence: (1) a long period of municipal failure to enforce the law, when the municipality knew or should have known of the violation, in conjunction with some form of active acquiescence in the illegal use; (2) the landowner acted in good faith and relied innocently upon the validity of the use throughout the proceeding; (3) the landowner has made substantial expenditures in reliance upon his belief that his use was permitted; and (4) denial of the variance would impose an unnecessary hardship on the applicant (Borough of Dormont v. Zoning Hearing Bd. of Borough of Dormont, 2004). 

Testifying on behalf of the applicants at the Zoning Hearing Board level, Arcolino Bianco shed immense light on the history of the neighborhood, over the course of the past six decades.  Mr. Bianco had grown up there, in the immediate vicinity of the subject property.  Apparently the garage was erected in 1930 by the prior owners, who utilized the structure either for vehicle storage or additional income, renting out two of the spaces at one point; the property was zoned for business at that time.  Even after a house was eventually constructed at the location in 1948, the garage continued to be used solely for vehicle storage.  It was not until the applicants acquired the property that it was employed as part of a landscaping business.

Of course, in the estimation of the ZHB, the applicants’ evidence proved no match for the sleuthing of the embittered neighbor.  Keen to the realization that they can be worth a thousand words, the objector offered up numerous photographs.  Her testimony focused upon the loud and cacophonous goings-on associated with the landscaping business - early morning truck activity, boisterous mowers, the din of blades upon a grinding stone and the loud conversations of the workers.  The business had even spilled over to the garage of an adjacent property, and one interestingly enough owned by the father as well.  A one-time peaceful residential existence had become a living hell, a labor-intensive enterprise enveloping the immediate neighborhood.  The supposed assurances by the son that the business had been grandfathered in by the Township could only assuage her concerns for so long. 

The Pietropaolo Court concluded that the ZHB had gotten it right with respect to the estoppel claim.  Somewhat predictably, the most glaring and crippling piece proved to be hardship.  In light of a standard requiring a showing that a particular restriction renders a properly virtually worthless, the applicants certainly had their work cut out for them.  Where is the hardship after all, when the son and daughter-in-law can still reside there, even utilize the garage for storage?  What’s a little economic loss here or there?  The property would still have value, with or without the business.  As for the Township’s acquiescence, the applicants were simply unable to offer any clear and unequivocal evidence.  The acquiescence must be active, which is not its failure to issue a citation.  Rather, a municipality must commit an affirmative act, such as issuing a permit for an impermissible use; that never happened here. 

On the nonconforming use front, the applicants were constrained to argue that the garage had been continuously used as a commercial “storage house” since about 1930, then a permitted use.  The storage of landscaping equipment there was consistent and merely became nonconforming in 1939 when the property was re-zoned R-6A Residential.  Most problematic however was the following legal doctrine, articulated by our Supreme Court: “The use of property which the ordinance protects, or 'freezes,' is the use which was in existence at the time of the passage of the ordinance or the change of a use district but it offers no protection to a use different from the use in existence when the ordinance was passed.  The latter does not render the ordinance invalid.  The nonconforming use which is within the orbit of protection of the law and the Constitution is the nonconforming use which exists at the time of the passage of the zoning ordinance or the change in a use district under a zoning ordinance, not a new or different nonconforming use…”(Hanna v. Board of Adjustment of Borough of Forest Hills, 1962). 

Even the concept of natural expansion, which involves the right of a landowner to expand for economic reasons so long as that expansion is not harmful to the public welfare, safety and health, proved ineffectual.  In the eyes of the Pietropaolo Court, the ZBH was correct in concluding that the applicants’ conduct constituted a prohibited change in use.  Even a similar use may be permissible, such as a public garage.  Nevertheless, activities outside the structure must be accessory to the storage.  On balance, assumptions are dangerous, even lethal in the world of zoning and land use.  All it takes is one noise averse neighbor and suddenly your client’s livelihood may be at stake.

Mr. Dimmerman is an adjunct professor at Temple University’s Fox School of Business, Vice-Chair of the Law Practice Management Section and co-chair of the Solo/Small Firm Committee of the Philadelphia Bar Association. He represents clients in general litigation, various land use, residential and commercial real estate matters.  His firm also provides approved attorney title insurance services statewide.  He may be reached via email: harper@hjdlaw.net or telephone (215) 545-0600.

July 2009, The Legal Intelligencer

Reprinted with permission of The Legal Intelligencer © 2009 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

“Contract Wins the Day in the Old Swedes Decision”

Pennsylvania’s Uniform Condominium Act, specifically Section 3307(a), addresses maintenance responsibilities between unit owners and an association in the residential context.  “[T]he association is responsible for maintenance, repair and replacement of the common elements and each unit owner is responsible for maintenance, repair and replacement of his unit.  Each unit owner shall afford to the association and the other unit owners and to their agents or employees, access through his unit reasonably necessary for those purposes.  If damage is inflicted on the common elements or any unit through which access is taken, the unit owner responsible for the damage, or the association if it is responsible is liable for the prompt repair thereof.”  In a nutshell, an association’s obligations are limited to common elements. 

In a matter decided earlier last month by the Commonwealth Court, Condominium Association Court of Old Swedes v. Emily Stein-O’Brien, Charles P. O’Brien, what was commenced as a seemingly minute dispute over unpaid condominium fees, snowballed into a protracted suit with relatively high stakes.  The Association of the Condominium at the Court at Old Swedes (Association) filed a Statement of Claim in Philadelphia County Municipal Court in 2004, prevailing against Emily Stein-O’Brien, a unit owner at the luxury Queen Village court.  As a footnote, the Gloria Dei or Old Swedes’ Church, located at Columbus Boulevard and Christian Street, was the very spot where Betsy Ross tied the know with Joseph Ashbourn in 1777.  An appeal ensued, resulting in a counterclaim in assumpsit by Stein-O’Brien.  She contended that the Association had breached its contractual duty to maintain the common elements, which included the roof over Unit 29, one of her two units.  The Association was awarded $14,410 at arbitration, while Stein-O’Brien recovered $20,000 on her countersuit, prompting the matter to proceed to a jury.

The crux of the dispute was whether the Association shirked its responsibility with respect to common elements at the subject property.  More particularly, Stein-O’Brien contended that problems with her roof, patio and deck, all common elements in her estimation, had resulted in significant financial harm.  The principle culprit was water intrusion, which began to infiltrate as early as 1999, mounting its attack upon the roof over a small bedroom on the unit’s top floor.  She voiced her concerns to the Association’s president at the time, as well as other officers.  In turn, they evaluated and went so far as attempting repairs, albeit unsuccessfully.  Her handyman’s attempts to remediate, over the course of nearly five years, also proved futile.

Rather surprisingly, Stein-O’Brien’s very first written communication to the Association, spelling out her dilemma acquatic, was not tendered until the summer of 2004, with the chief complaint involving the roof’s condition in close proximity to the air-conditioning platform.  Notably, several years earlier, at about the time her troubles began, the Association’s president had reminded owners about their duty to maintain these very platforms; wires from the air conditioning unit pass down through the roof to the utility room below.  At last, by 2005, Stein-O’Brien was at her wit’s end, exceedingly frustrated with what she characterized in her 2004 letter as the Association’s “timeliness and ineptness in making the necessary repairs.”  Hence she elected to replace the roof altogether, to the handsome sum of about ten grand.  The repair, which involved the replacement of rotted plywood as well as a rotted platform, proved only moderately successful.  The water penetration persisted, this time gaining access beneath the third floor deck.  Again, Stein-O’Brien contended that the decks, along with patios, were the sole responsibility of the Association.  Nevertheless, she did go so far as acknowledging that there was no contractual obligation per se in that regard.  Instead, it had undertaken that obligation by paying for flood insurance to cover previous damage to lower unit decks.  The minutes, which were said to bear out this assertion, were never offered into evidence. 

As to damages, Stein-O’Brien tendered various documents, all in support of expenditures for water remediation efforts.  Receipts and an even a handwritten list reflected a total of about fifteen grand.  Estimates for interior and deck work were also offered as was testimony concerning lost rental income.  For instance, in 1998, Stein-O’Brien had successfully entered into a two year lease for the subject unit.  After 2000, however, due to the “slum conditions” caused by the water damage and her unwillingness to incur the liability of “ruining someone else’s possessions”, she forwent further rental opportunities.  At the time of trial, the very first time she apprised the Association of her belief it was even liable for lost rental income, Stein-O’Brien demanded $174,000 on that front alone, a pretty penny to say the least.    

The trial court ultimately directed a verdict in favor of the Association as to unpaid condominium fees and attorney’s fees.  It also directed a verdict in Stein-O’Brien’s favor on her contract claim for direct and consequential damages, concluding that her losses were all caused by a “defective roof.”  That court went so far as awarding her attorney’s fees, despite a Code of Regulations which expressly forbade such a charge to owners as a common expense.  Inclusive of counsel fees, Stein-O’Brien walked away with a cool $293,000 judgment.  This amount didn’t even include the delay damages tacked on post-trial.  Compare this to the Association’s measly $12,000 recovery, accounting for condominium fees solely. 

On appeal, the Old Swedes court commenced its analysis with a summary of the principles of condominium ownership, referencing the pertinent sections of the Uniform Condominium Act.  It proceeded to tether its rationale to the actual contractual language framed by the Code of Regulations and Declaration.  Albeit the Association may be responsible for the “common elements,” unit owners have a duty to look after the “title line” portions of their respective units.  As defined by the subject Declaration, "title lines" include “[a]ll patios and decks . . .”  Additionally, with respect to air conditioning, a unit owner “has responsibility for all pipes, ducts, wires, cables, conduits and other electrical[,] plumbing, lighting, telephone, communication, heating, air-conditioning[,] sewer, water and other systems and equipment or installations whether or not within the title lines of [the unit] but serving only such unit.” 

In the estimation of the Old Swedes court, the governing contractual language could not be any clearer.  And echoing the Association’s challenge, where the terms of a contract are unambiguous, they may not be contradicted by parol evidence in the absence of fraud, accident or mistake.  As we all know, this is little more than hornbook law.  Moreover, the conflicting evidence concerning the location of damage to the unit and its precise cause (the platform, roof or deck), should have properly been submitted to the jury.  As for damages, specifically consequential damages, which may be recoverable in the contract context, the Commonwealth court took serious issue with the trial court’s justification.  The cause of the lost rental income should have been sorted out by the jury, with Stein-O’Brien bearing the burden of proving that such damages were even anticipated by the parties at the time she acquired the unit.  And her “dilatory conduct,” at least in the estimation of the Commonwealth Court, belied such a claim.  Her 2004 correspondence made no mention whatsoever of these alleged losses and her failure to mitigate, years earlier, was questionable at best.  As a matter of contract, attorney’s fees were unavailable to Stein-O’Brien.  And finally, delay damages, recoverable in tort, have no applicability to contract disputes.  As purchasers take their condominiums subject to an array of contractual provisions, indubitably it behooves them to parse out their obligations versus those of the association, early on.  Perhaps even have a contractor interpret precisely where the maintenance obligations lie...      

Mr. Dimmerman represents clients in real estate matters and is the principal of his firm and founder of DST Land Transfer, Inc., a land title insurance company licensed in PA and NJ.  He may be reached via email: harper@hjdlaw.net or telephone (215) 545-0600.  He is co-chair of the Philadelphia Bar Association’s Solo and Small Firm Committee and an Executive Committee member of the Law Practice Management Committee. 

May 2009, The Legal Intelligencer

Reprinted with permission of The Legal Intelligencer © 2009 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

“Reliance Upon Alleged Misrepresentations”

A Philadelphia County commerce court decision, just handed down at the end of March, 2009, is illustrative of the oftentimes complex issues which lurk just beneath the surface of that seemingly facile real estate deal.  Consider, if you will, the danger presented by the following relatively benign email, upon a purchaser’s discovery that the originally negotiated due diligence period was proving to be inadequate:

“Mark, at this point in time, I can not recommend to my partners here and AIG that we proceed further at the risk of $ 1m.  Our September 8th date was actually based on where everyone thought we would be with PADEP [Pennsylvania Department of Environmental Protection] and an accurate cost to the environmental clean-up and today we are just not there.  We have been told to perform extensive additional tests and site characteristics beyond what was initially discussed and agreed upon back in June.  PADEP has gone further and requested additional activities for the compound perchlorate which was never mentioned.  PADEP also requested further testings on some radon type gas that, as we are told, could require venting slabs in certain areas and we have no way of knowing the retailer tolerance if this were to occur.  The storm water testing is just another . . . With all this being said, we remain very very positive and interested in staying the course but until we get factual data/costs and final positions from PADEP we just can not place our deposit at risk. We will continue to fund our side in an effort to reach closure on the remediation required by PADEP . . . Our professionals see mid November as the timeframe for the first round of comments from PADEP and sometime in January as final.  At whatever time that occurs, we are ready to go hard.”

This communication would figure quite prominently into the trial court’s analysis, in Arsenal, Inc. v. AIG Baker Development, a case tracing the contours of breach of contract and misrepresentation theories, in the commercial real estate realm.  In early 2005, Arsenal and AIG negotiated and entered into an agreement for the sale of property to AIG.  AIG, which intended to construct a large retail “box” store on the property, was apprised of the environmental issues impacting this particular site; the land represented a portion of the former Frankford arsenal.  Needless to say, after years of the federal government utilizing this property as a munitions manufacturing and testing facility, contamination issues abounded.  Any development of the property would have necessarily entailed an environmental cleanup, or containment at a minimum, of the contaminants in the soil and ground water.  Further, any such effort must first be approved by the PADEP. 

AIG elected to proceed in the face of these environmental issues.  After all, Arsenal, which had apparently been in contact with the PADEP for many years regarding the subject property, assured AIG that the PADEP approval process, in the form of what is referred to a “Buyer/Seller Agreement” would only take six months and an outlay of $150,000 in legal and engineering fees.  Upon execution of the contract between the parties, AIG was required to tender a $500,000 initial deposit.  That same day would also mark the commencement of a ninety day due diligence period, during which time AIG had agreed to conduct rigorous feasibility studies.  Only one month later, AIG would be obligated to identify and retain an engineering firm and legal counsel for the purpose of preparing the Buyer/Seller Agreement.  Furthermore, the estimated cost associated with these professionals, was to be placed in escrow, with those amounts to be released to Arsenal should AIG elect to terminate the deal for any reason other than the default of the seller.  An additional $500,000 deposit was set to come due at the expiration of the due diligence period, unless of course notice of termination was given prior thereto. 

At about one month into the due diligence phase, AIG took what would be the first in a series of meetings with PADEP, as it endeavored to conduct necessary inspections prior to fully committing to the acquisition.  Unfortunately though, AIG gradually came to discover that the state of environmental affairs at the property was more serious than originally represented by Arsenal.  It was that realization which prompted an AIG employee to draft and transmit the email at issue, to a higher-up over at the seller.  At bottom, the email called for additional time to work through the environmental concerns, in light of a much greater than originally anticipated cost of remediation.  Tendering the second deposit precisely at the time called for in the underlying contract simply did not appear to make financial sense. 

Resultantly, the parties entered into a series of “Amendments to Agreement of Sale”, which repeatedly extended out the due diligence deadline, presumably giving AIG much-needed breathing room to further evaluate elements of feasibility.  And despite the assumption that perhaps these extensions also pushed out the original second deposit cutoff date, when the deal eventually went south and litigation ensued, suddenly these Amendments were of little, if any significance, in the estimation of Arsenal.  Fittingly, Arsenal fired the first shot across the bow, with a breach of contract suit; AIG’s failure to tender the second deposit and failure to go to settlement were two of many enumerated breaches.  Notably, AIG responded with allegations of fraudulent and innocent misrepresentation and omission. 

The Arsenal court engaged in a rigorous analysis concerning the misrepresentation claims, citing to our seminal Supreme Court decision in Bortz v. Noon, which entailed allegations of misrepresentation against a realtor, amongst others.  Critically, the key elements of intentional misrepresentation are as follows: A representation; which is material to the transaction at hand; made falsely, with knowledge of its falsity or recklessness as to its truth; with the intent of misleading another into relying upon it; justifiable reliance on the misrepresentation; and a resulting injury proximately caused by the reliance.  Compare this cause of action to intentional non-disclosure, which contains virtually the same elements.  Yet with non-disclosure, the party intentionally conceals a material fact instead of making an affirmative misrepresentation. 

In Arsenal, AIG contended that Arsenal failed to disclose letters and estimates from PADEP, for instance, which unequivocally demonstrated significantly higher costs and more onerous efforts associated with treating the environmental problems.  Employing the Second Restatement of Torts (§ 542), the court concluded that AIG was not justified in relying upon what AIG perceived to be either material omissions or misrepresentations.  The court viewed these supposed misrepresentations as “statements of opinion”, an especially interesting position in light of the plain fact that at least one of these conspicuously absent documents was directly from the PADEP.  Nonetheless, the recipient of a fraudulent misrepresentation solely of the maker’s opinion is not justified in relying upon it in a transaction with the maker, unless the fact to which the opinion relates is material, and the maker: purports to have special knowledge of the matter that the recipient does not have, or stands in a fiduciary or other similar relation of trust and confidence to the recipient, or has successfully endeavored to secure the confidence of the recipient, or has some other special reason to expect that the recipient will rely on his opinion.  And in light of the integration and disclaimer provisions within the agreement, coupled with the existence of the due diligence period, the court refused to conclude that a misrepresentation had occurred: “The fact that one of the two parties to a bargain is less astute than the other does not justify him in relying upon the judgment of the other.” 

Needless to say, notwithstanding counsel fees and consequential damages, the Arsenal court determined that AIG had in fact breached the agreement with the seller and awarded called-for damages.  Even in the face of several Amendments to the deal, the court still found that AIG was obligated to tender that second deposit or terminate.  This case strongly suggests that sophisticated parties to a commercial transaction should heavily discount the representations of a seller or risk forfeiting significant sums of money, even when they may feel justified in stipulating to a lengthier review process.

Mr. Dimmerman represents clients in real estate matters and is the principal of his firm and founder of DST Land Transfer, Inc., a land title insurance company licensed in PA and NJ.  He may be reached via email: harper@hjdlaw.net or telephone (215) 545-0600.  He is co-chair of the Philadelphia Bar Association’s Solo and Small Firm Committee and an Executive Committee member of the Law Practice Management Committee. 

January 2009, The Legal Intelligencer

Reprinted with permission of The Legal Intelligencer © 2009 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

“Checking and Balancing Municipal Taxes”

Thomas Jefferson, controversial and perhaps the greatest intellectual to ever assume the Oval Office, shared this rather bleak perspective on taxation: "We must not let our rulers load us with perpetual debt.  We must make our election between economy and liberty or profusion and servitude.  If we run into such debt, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our calling and our creeds...[we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers...And this is the tendency of all human governments.  A departure from principle in one instance becomes a precedent for [another]...till the bulk of society is reduced to be mere automatons of misery...And the fore-horse of this frightful team is public debt.  Taxation follows that, and in its train wretchedness and oppression.”  More than two centuries later, the Pennsylvania Supreme Court would decide two matters, both exploring the contours of a local government’s taxing power as it relates to real property. 

Both decisions were handed down at the tail end of last year and illustrate the extent to which modern day municipalities go to generate additional revenues.  Before discussing the Mazur v. South Strabane Township and Lynnebrook and Woodbrook Associates, L.P. v. Borough of Millersville cases, a brief description of the concept of tax increment financing (“TIF”), is warranted.  Fundamentally, TIF is a vehicle utilized by municipalities to spur local economic development by allocating property tax revenues from increases in assessed values within a specific TIF district.  As the Mazur court points out, typically this tool involves bond issuances to finance land acquisition and other up-front costs.  There is also a statutory requirement that the proposed district is a blighted area containing characteristics of blight as described in the Urban Redevelopment Law and the project to be undertaken is necessary to eliminate such conditions of blight.

It was that same blight determination which sparked the firestorm of litigation in Mazur.  There, two private individuals and a citizens’ group took serious umbrage with a $400 million project known as the Victory Centre, which was to include retail stores, restaurants and a hotel, all situated on a mostly undeveloped parcel in South Strabane Township; less than 10% would be financed by the TIF mechanism.  Six Common Pleas Court actions, all seeking to set aside the taxing entities’ (Township, County and School District) decisions to approve and/or participate in the TIF proposal, were consolidated and then dismissed for lack of subject matter jurisdiction.  The Commonwealth Court affirmed, refusing to meddle in the realm of legislative enactments.  The Local Agency Law speaks to adjudications, not legislative acts.

The Mazur Court easily sustained on the question of the applicability of the Local Agency Law to appeals from non-adjudications.  Critically, “a certification of blight does not, in and of itself, have a legal effect on property rights.” (In re Condemnation by the Urban Development Authority of Pittsburgh)  Going one step further however, claims that an authority acted arbitrarily, in bad faith, contrary to statutory procedures, or in contravention of any constitutional safeguards, which we have here, very well may place the challenge within the province of the judiciary.  That appears to be no easy feat however, as the Appellants ultimately discovered.  In focusing upon the fact that the targeted site was a prime location for regional shopping and entertainment, as acknowledged by the Township’s own previous vote, they failed to consider the possibility that superior location and blight are not necessarily mutually exclusive. 

The Lynnebrook decision, which implicates the Local Tax Enabling Act (“LTEA”), involved a different sort of taxation device.  There, the Millersville Borough rather innovatively concluded that taxing residential lease transactions would be a good idea and passed an Ordinance to that effect.  In relevant part, the Ordinance provided that “[a] tax is hereby levied and imposed, for general Borough purposes, on every Lease Transaction, at the rate of thirty  ($30.00) dollars.”  Despite the relatively de minimis amount, a prominent landlord with significant real estate holdings, displayed an aversion to the tax and sought a declaratory judgment that the law is violative of LTEA. 

The Lancaster County Court of Common Pleas cited precedent in support of the proposition that the tax was in fact permissible.  The Commonwealth Court affirmed, observing that the LTEA prohibits taxes on real estate transfers under certain circumstances, yet leases are not contemplated as a matter of statutory construction.  The Lynnebrook Court confronted what amounted to a debate regarding statutory interpretation between the parties, with the taxpayer arguing for an exception and the taxing authority seeking an exemption, as the respective presumptions hinged on that determination.  And that analysis regarded the following subsection of the LTEA, which declares that local authorities shall not have authority “[t]o levy, assess and collect or provide for the levying, assessment and collection of any tax on the transfer of real property when the transfer is by…lease[s].”

As for parsing the language at issue, the Court was advised by Millersville that an exemption would apply to leases which transfer real property.  On the other hand though, the taxpayer contended that either under the plain language rule or that against surplusage, the Borough’s decision was unfounded.  With a keen eye to observing legislative intent, the Court resorted to the Statutory Construction Act and scrutinized the plain meaning of the words.  Yet it concluded that neither suggested interpretation, albeit plausible, led to a fully grammatical result when applied to the other clauses in the statute; the statute was unclear.  Thus further judicial interpretation became necessary, which included such considerations as the mischief to be remedied, the object to be attained and the consequences of a particular interpretation. 

Perhaps Jefferson would’ve been pleased to know that the LTEA was enacted to curb municipal taxation, thereby supporting the broadest possible interpretation of the lease exception.  To read the exception narrowly, as proposed by Millersville, would potentially expose thousands of residential lease transactions in the Commonwealth to an unanticipated tax burden, a Pandora’s Box of unforeseen liability.  And clearly such a result does not comport with the restrictive purpose of the enactment.  Finally, and unfortunately for the Borough, any doubts as to the proper interpretation must be resolved in favor of the taxpayer.  Maybe next time around the Borough will get into the commercial development game, where the chances of raising some real capital seem to be in its favor.   

Mr. Dimmerman represents clients in real estate matters and is the principal of his firm and founder of DST Land Transfer, Inc., a land title insurance company licensed in PA and NJ.  He may be reached via email: harper@hjdlaw.net or telephone (215) 545-0600.  He is co-chair of the Philadelphia Bar Association’s Solo and Small Firm Committee and an Executive Committee member of the Law Practice Management Committee.