"Electric Snooping" - Is Recording Family Members Legal?

Forget about "Big Brother", start worrying about your "little sister". 

With I-Phones and I-Pads empowering everyone to record and disseminate all communications, privacy is rapidly evaporating and everything you say and do may be used against you.  

However, the wiretap laws not only make certain recordings unusable in litigation, but subject those making and subsequently using the recordings to criminal and civil penalties. 

Further, with rapidly developing technology and issues such as "multiple use smart phones", "shared phone plans", "spyware on children’s phones", and "GPS location applications", most existing wiretap laws require immediate and continued updating. 

Wiretapping Laws Overview 

Pennsylvania’s Wiretapping and Electronic Surveillance and Control Act, 18 Pa. C.S.A. §§5701 et seq. ("Act") extends the federal Electronic Communications Privacy Act, 18 U.S.C. §§2510 et seq., ("ECPA") wire, oral, electronic and stored communications' protections. 

The Act makes it illegal to record any person (including your spouse or child) or for any person (including your attorney) to attempt to use those communications in any way, including in litigation.  Specifically, the Act bars intentionally: (1) intercepting, endeavoring to intercept, or procuring any other person to intercept any wire or electronic or oral communication; (2) disclosing or endeavoring to disclose any wire or electronic communication's contents if aware, or having reason to be aware, that information was obtained through wire, electronic, or oral communication's interception; and (3) using or endeavoring to use wire, electronic, or oral communication's contents, or evidence derived there from, if aware, or having reason to be aware that information was obtained through wire, electronic, or oral communication's interception. 

However, it is only an Act violation to record an oral communication if speaker has a "reasonable expectation of privacy".  For example, because someone yelling at another in a public place has no reasonable privacy expectation, that conversation's recording would not be an Act violation. 

Confusingly, the statute is limited to actual or attempted interception of oral, electronic or wire communications; thus video recordings, without sound, are not currently subject to the Act. 

Also, the Act exempts certain communications recording and sharing from its coverage. First, under the Act, you may record communications if you have the consent of all parties to the communication (unlike the ECPA and New Jersey statute which only require one–party consent). 

Second, the Act permits "Police and Emergency Communications Systems Recordings" including 911 tapes. 

Third, any victim, witness, or private detective may intercept a communication if under a reasonable suspicion that intercepted party is committing, about to commit, or has already committed a crime of violence and evidence of that crime of violence may be obtained from interception. 

Criminal and Civil Penalties 

Act violations are a third degree felony punishable by up to 7 years in prison. 

The Act also imposes civil penalties including actual damages (computed at $100/day or $1,000, whichever is higher), punitive damages, and reasonable attorneys’ fees and costs. 

The Act also criminalizes unlawfully accessing stored communications including e-mails, voicemails and text messages.  Specifically, it is an offense to obtain, alter or prevent authorized access to a wire or electronic communication while in electronic storage by intentionally accessing, without authorization, a facility through which an electronic communication service is provided or exceeding the scope of one’s "facility access authorization".  

This Act also makes it illegal to read or use a spouse or significant other’s e-mails or text messages, the penalties for which range from $5,000-$250,000 fines and imprisonment. 

Wiretapping Laws and Developing Technology 

Two recent Pennsylvania Act cases - Commonwealth v. Spence, 91 A.3d 44 (Pa. 2014) and Commonwealth v. Diego, 2015 PA Super 143, ____ A.2d ____ (Pa. Super. 2015) - address wiretapping and the Act's definition of "device".  

Spence involved an I-Phone (which, as falling within "telephones 'device' definition exception", was deemed outside of the Act) and Diego regarded an I-Pad (determined to be an intercepting device outside of Act's telephone exception despite having identical capabilities of - and being used to text in the same manner as - - a smart phone).  

Spence and Diego's seemingly contradictory holdings point up the need to revise the Act and wiretap laws to accommodate modern technology and issues such as "multiple use smart phones", "shared phone plans", "spyware on children’s phones", and "GPS location applications".

Medical Marijuana in the Workplace

Confusingly, although federal law classifies it as a Schedule 1 drug (like heroin), medical marijuana is legal under the laws of 23 states including New Jersey.

 

In this ever shifting landscape, what policies must employers create - - and how will they be implemented and communicated - - as to: "drug testing", "zero-tolerance" complying with federal law but not violating state law permitted medical or recreational usage; and balancing "employee privacy protection" against "workplace safety and productivity" concerns.  

Increased Workplace Marijuana Usage 

Even before most states legalized marijuana usage, the number of workers testing positive for marijuana use increased by 6.2 % in 2013 alone. 

Anything impacting employees' ability to perform their job function is of concern to employers and, although state laws vary, none presently require employers to permit drug use in the workplace or tolerate employees reporting to work "under the influence".   

Thus, although employers may institute drug-free-workplace policies, how these policies are defined and implemented is critical, particularly for multistate workplaces in jurisdictions having conflicting marijuana usage laws. 

Drug Screening and Workplace Usage 

Pre-employment drug screening is legal in most states and requires that the applicant be notified.  However, because medical testing of employees may violate federal anti discrimination laws, requiring a drug test only after the applicant has accepted the job offer may be the safer practice.  

Federal regulations still prohibit marijuana use and require several classes of employees to undergo regular marijuana testing.  The Department of Transportation's ("DOT") "Drug and Alcohol Testing Regulations" bars "any 'safety-sensitive employee' subject to drug testing under DOT’s regulations to use marijuana”, which includes pilots, school bus drivers, truck drivers, train engineers, subway operators, aircraft maintenance personnel, transit fire‐armed security personnel, ship captains and pipeline emergency response personnel. 

Similarly, the Americans with Disabilities Act ("ADA") does not require employers to allow marijuana use as a "reasonable accommodation" for someone with a disability, even if a registered medical marijuana patient, and has been interpreted by the federal appeals court as not protecting "medical marijuana users who claim to face discrimination on the basis of their marijuana use.”

Workplace Medical Marijuana Policies 

Although two bills before Congress seek to reclassify marijuana as a schedule 2 drug, myriad federal and state issues presently require clear policies uniformly implemented and clearly communicated.

At the very least, complying with conflicting state and federal "workplace drug testing and marijuana usage" laws and regulations requires that employers:

            #determine whether policy's objective is barring impairment or drug use, the latter of which allows instituting a zero-tolerance policy expecting all employees to be clear headed in order to minimize risk to themselves and others;

            #review federal regulations and state anti-discrimination and marijuana usage laws to ensure that the policies are consistent and compliant; 

            #update drug-use and testing policies to ensure that they clearly explain "drug testing, impairment, and marijuana use outside of the workplace" expectations;

            #implement systems and controls ensuring consistently following stated procedures;
            #communicate policies to all employees clearly stating what is expected; and
            #train managers about confidentiality issues regarding sensitive employee information including drug-test results and requests for exemptions for covered medical conditions for which marijuana is prescribed.

PA Refuses to Create Duty of Care To Protect Confidential Personal Data

Despite daily "data breaches" and "unauthorized confidential personal and financial information access and disclosure", Pennsylvania is presently refusing to recognize any  "duty of care" to safe guard against third-party criminal activity.

Instead, in Dittman v. UPMC, No. GD-14-003285 (Allegheny County C.C.P. May 28, 2015), Pennsylvania rejected recognizing data breach negligence claims refusing to provide plaintiffs with a common law basis to pursue "failure to provide reasonable data security protections" claims and damages.

However, because of overwhelming public policy issues and the Dittman opinion's urging of amending Pennsylvania's Breach of Personal Information Notification Act, 73 P.S. § 2301, et seq. ("Act") to create private right of action, those collecting and maintaining confidential personal and financial information may soon be liable for failing to employ safeguards from attack. 

Dittman v. UPMC Overview

After their names, birthdates, social security numbers, confidential tax information, addresses, salaries, and bank account information were stolen, 62,000 current and former University of Pittsburgh Medical Center (“UPMC”) employees filed a putative class action claiming UPMC's failure to exercise reasonable care to protect and secure this information violated a common law "duty to protect private, highly sensitive, confidential and personal financial information, and tax documents with which it had been entrusted from seizure".

Specifically, arising out of the employee/employer relationship, the Dittman plaintiffs argued that UPMC’s duties included designing, maintaining, and testing its security systems to ensure that personal and financial information was adequately secured and protected including processes that would timely detect a security systems breach and failing to meet industry standards in the face of a reasonably foreseeable risk. 

In finding that "no common law data breach cause of action" exists, the Allegheny County Court of Common Pleas held that Pennsylvania’s economic loss doctrine precludes a negligence claim for monetary loss stemming from a data breach, public policy considerations mitigated against creating an affirmative duty of care, and Pennsylvania’s legislature's prior actions evidenced an intent not to impose such a duty. 

Specifically, the Court concluded that, when enacting the Data Breach Act, Pennsylvania's General Assembly extensively considered the issues surrounding data breaches and refused to create a common law duty or private cause of action, but, instead, imposed only a notification obligation in the event of a breach.  

Dittman v. UPMC Impact 

The Dittman v. UPMC decision provides only a temporary stay against imposing a duty of care on those collecting and maintaining confidential personal and financial information to employ reasonable safeguards from attack and economic exposure for foreseeable wrongdoing.  To the contrary, the Dittman opinion simply passed the buck to the Pennsylvania legislature to fashion a remedy.

While unclear of the timeline, in light of the massive accumulation of financial information and inevitable third party criminal activity, public policy will force information gathers to conform to a standard of care and shoulder direct and actual damage negligence liability. 

Information gatherer and storers need to be designing, maintaining, and testing their security systems to ensure that personal and financial information was adequately secured and protected including processes that would timely detect a security systems breach.

Litigation Secret Weapon #7: Video Depositions

Although the costs keep dropping and benefits keep rising, lawyers fail to fully exploit video depositions.

Unlike a standard deposition, in which the questions and answers are merely recorded and reduced to a transcript, a videotape deposition fleshes out the witness's testimony and credibility while more profoundly engaging jurors' decreasing attention spans.  

Video Depositions' Costs and Benefits

 While more expensive and requiring greater preparation that a traditional deposition, video depositions capture and yield vastly more.  

First, beyond the testimony's content, video depositions catch the witnesses' tone of voice, appearance, and body language.   Thus, even the most damning testimony can be diffused by an inadequately prepared witness who speaks poorly, is dismissive (shrugs, rolls eyes, distracted/fidgety) or is unappealing.   

Second, video depositions favor the questioning lawyer.  A well spoken attorney offering well framed questions is often more compelling and persuasive than the most responsive of answers.

Third, video depositions muzzle obnoxious and unethical lawyers.  Unlike a transcript which fails to reflect shenanigans like rustling papers, sarcasm, eye-rolls and improper witness coaching, video captures everything.  As sunlight kills vampires, video depositions defang the most bullying attorney.   

Fourth, unlike an official transcript which requires days/weeks to transcribe, video deposition are immediately available in a digital form and easily provided to a client.

Fifth, video depositions better engage and persuade judges and juries.  In information age comprised of constant sensory bombardment and rapidly deteriorating attention spans, reading a deposition transcript into the record is just not compelling.   In the ongoing fight for a fact finder's attention, video depositions defeat oral transcripts every time.  

Video Deposition Strategy

Even more than with traditional depositions, video depositions hinge on witness and lawyer preparation.   Although the rules for taking or defending a pretrial video deposition mirror those for oral-only deposition, failing to prepare for the nuisances of video can be a critical error.

1. Appearance 

Many witnesses and attorneys neglect to adequately groom or dress for a video deposition.  Because the video may be shown at trial, both the witness and lawyer should avoid appearing casual and, instead, be "trial handsome": dressed appropriately, well groomed and composed.

2. Behavior 

Like at trial, video deposition witnesses are on display with the most powerful of spotlights shining upon them.   

Because behavior, body language and demeanor are under intense scrutiny, any "eye-roll", "gum chewing" or cell phone glance can profoundly undermine the witness' credibility or testimony's value.

3. Presentation

Because testifying is public speaking, no excuse exists for failing to prepare the information's presentation.  

While not every deponent can achieve "riveting", a weak tone of voice or poor cadence in responding to questions can shade the witness as disinterested, evasive or angry.

Attorneys Ghostwriting Their Expert's Reports

May an attorney draft his expert’s report?    

The recent Numatics v. Balluff, 13-CV-11049 (E.D. Michigan) (Dec. 16, 2014) opinion delineates the scope of attorney "assistance" in preparing expert reports in the wake of last year's Barrick v. Holy Spirit Hospital, 91 A.3d 680 (Pa. 2014) ruling - - codified into Pa. Rule of Civil Procedure 4003.5 - - shielding attorney and expert communications from discovery by the attorney work-product doctrine.

Prior to the new rules, because communications between a party's attorney and his testifying expert were routinely obtained through discovery, an attorney's guidance and input into his expert's report could often be tracked.  While bringing Pennsylvania practice in line with federal expert discovery rules, the Barrick decision and Rule 4003.5 fail to clarify whether an attorney may draft his expert’s report as long as the expert's theories are incorporated therein. 

Numatics v. Balluff Opinion

 Numatics involved an “infringement of technical patent” dispute in which plaintiff moved to exclude defense’s expert liability opinion arguing that the report was wholly written by defense counsel and the expert was "unaware" of elements necessary to establish "invalidity defense". 

After recognizing that an attorney may "assist" in report preparation, including coaching expert to ensure that the report touches all legally required bases, the Numatics Court scolded counsel for drafting the report merely to have the expert "review and sign". 

The Numatics Court was unpersuaded by defense counsel’s claim of only reviewing and correcting report portions inconsistent with his case view, deeming it insufficient to make report actually authored by expert following expert's testimony that, if he had written it, the report would have only been 5 pages and omitted the "legalness".

The Numatics Court was also troubled by expert’s spending only 2 or 3 hours reviewing 2,600 pages of depositions, less than 8 hours reviewing technical literature, and half of his 30 case hours at or traveling to defense counsel's office.

 

After noting that report’s “obviousness” section was "nearly indistinguishable" from counsel’s prior attorney-drafted contentions, the Numatics Court precluded the testimony of the expert, whom it deemed a "highly qualified puppet".

Pennsylvania Expert Report Ghostwriting 

While differing from the more restrictive Federal “disclosure of attorney-expert communications” rules, post-Barrick Pennsylvania practice is now more limited in its disclosure requirements. 

While Federal Rule of Civil Procedure 26(a)(2)(B) states that the report must be "prepared" and "signed" by the expert, Pennsylvania’s equivalent, Rule 4003.5, only requires that "answer [to expert interrogatories] or separate report shall be signed by the expert", omitting the word "prepared" does not authorize attorneys to write the expert's report.  

Although the general rule is that attorneys can fine-tune reports to comply with submission’s technical legal requirements (i.e., formatting, legal elements and scope), an attorney may not assume expert's role in preparing and drafting the report, the final draft of which must form a true representation of expert's own thoughts and conclusions. 

Additionally, although attorney-expert communications are protected, because expert time sheets and compensation are increasingly scrutinized, properly documenting and allocating time spent on the file is critical.

Pennsylvania Requiring Banks to Prevent "Elder Financial Abuse"

Last month Pennsylvania's Supreme Court's Elder Law Task Force's "elder abuse prevention" report (http://www.pacourts.us/courts/supreme-court/committees/supreme-court-boards/elder-law-task-force)("Report") imposed " financial abuse prevention" responsibilities on financial institutions.

The Report ranked "financial abuse" as among the leading mistreatment suffered by adults age 60 and above compromising 30% of Pennsylvania's adult protective services abuse claims and costing $2.9 billion annually.

 

The Report's recommendations for reducing elder financial abuse include requiring financial institutions to take an active role. 

After noting that they're often in the best position to detect, report, and prevent elder financial abuse, the Report recommended that financial institutions be:

            R designated as mandatory reporters of suspected elder abuse (like in Maryland and other states);

            R required to provide training, in conformance with state-mandated standards, for employees processing elder customers transactions; and

            R provided with the authority to hold transactions for five (5) days, during which time the institution would report the suspicious activity and determine whether to permit the transaction. 

The Report urges following Maryland, which has some of the most stringent elder financial reporting laws in the country (including both an oral and written notification requirement), for both reporting suspected elder abuse and providing mandatory employee training. 

Though the Report's recommendations, including the requirements imposed on financial institutions, require legislative action before becoming binding, financial institutions should be preparing elder abuse prevention and reporting programs to comply with heightened state and federal interest. 

Strategies For Minimizing E-Discovery Costs

Electronically stored information's ("ESI") explosion and e-discovery's skyrocketing costs have radically altered the playing field. 

To avoid e-discovery landmines, take full advantage of the new wave of e-discovery rules and technologies, and keep e-discovery costs as low as possible, planning ahead, knowing your data and cooperating with opposing counsel early in the discovery process is critical.  

Skyrocketing Costs 

Discovery comprises 70 percent of total litigation costs in cases that are not tried, litigants spend approximately $18,000 to collect, process and review a single gigabyte of data, and larger cases' potentially responsive data measure in the hundreds to thousands of gigabytes.  

Moreover, in 2009, e-discovery sanctions were awarded in more federal cases than in all the years before 2005 combined, with a $1 million "e-discovery mismanagement sanction" issued in the In re Pradaxa Products Liability Litigation in late 2013. 

Proposed "E-Discovery" Model Orders 

Over the last 3 years, more than two-dozen federal courts, including the District of Delaware, the Eastern District of Texas and the Northern District of California, have utilized local rule-making powers to enact e-discovery model orders and guidelines.  

The new rules call for phased ESI discovery, limits on email discovery and preserving and collecting certain categories of ESI, increased cooperation between litigants on e-discovery issues, and enhanced cost-shifting provisions to discourage e-discovery overreaching.  

While imposing new obligations on litigants, the new rules also create significant opportunities to secure rational and cost-efficient e-discovery frameworks tailored to the case's circumstances and transparently describe what will be covered and why.  

Taking advantage of the new rules requires extensive planning at the case's outset including: realistically assessing risks posed by litigation and own discovery needs; understanding where own relevant data resides, how much there is and difficulty of  collecting; crafting a comprehensive, justifiable e-discovery plan including limits on noncustodial ESI sources need to be preserved and collected, ESI custodians, and email discovery.  

While significantly reducing the volume of ESI that ultimately will need to be reviewed, these limitations also restrict the discovery that may be obtained from other parties.  

Advanced E-Discovery Tools 

One of the market's hottest e-discovery tools is "predictive coding", in which, after humans code an initial subset of documents, the computer “learns” what is relevant from the human coding and applies it to other documents via a designated algorithm.   

While requiring up-front effort, when dealing with a large volume of documents predictive coding substantially reduces the amount of data requiring expensive human review and curbs e-discovery costs. 

Because the law governing e-discovery tools is rapidly evolving, litigants must tread carefully, plan ahead and negotiate with opposing counsel early and transparently.  

Other parties will need to know what you plan to search, how you plan to search it and who (or what) will determine responsiveness.   

While often resulting in wider breadth of disclosed information, courts are conditioning their approval of this technology on such transparency.

Corporate Designee Deposition Strategies

Because the vast majority of cases never go to trial and depositions form the sole in-person testimony either party may elicit or live cross-examination opportunity, each deposition requires careful preparation. 

Care is particularly required in preparing a corporate designee, an entity's designated witness to answer its adversary's questions which will bind the entity in the litigation, to be deposed. 

Avoiding costly mistakes and discovery sanctions requires that in-house and outside counsel understand the governing rules - - Federal Rule of Civil Procedure 30(b)(6) or Pennsylvania Rule of Civil Procedure 4007.1(e) - - to carefully prepare for corporate designee depositions. 

Responding to Corporate Designee Deposition Notices 

All Rule 30(b)(6) requires for noticing a corporate designee deposition is a notice directed to the entity "describing with reasonable particularity the matters for examination." 

Limits do exist on the "matters for examination" description barring qualifier "including, but not limited to" or other language indicating that listed topics are not exclusive which renders the notice overbroad and subject to a motion to quash.  Reed v. Bennett, 193 F.R.D. 689, 692 (D. Kan. 2000). 

Instead, to ensure that the entity is capable of designating witnesses who can testify about each of the listed topics, rather than face the "impossible task" of designating a witness who can testify about all possible questions that may be asked, the adversary must define the "outer limits" of the subject matter of the corporate designee's deposition.  

Upon receiving a Rule 30(b)(6) notice, an entity must produce deposition witness(es) capable of giving "complete, knowledgeable and binding answers on behalf of the corporation" about each of the topics listed in the deposition notice.  Marker v. Union Fidelity Life Insurance, 125 F.R.D. 121, 126 (M.D.N.C. 1989). 

Thus, the entity must educate and prepare its designees to testify about any matter outside the designee's personal knowledge specified by the Rule 30(b)(6) notice.  Failure to do so "is tantamount to a failure to appear and warrants the imposition of sanctions".  United Technologies Motor Systems v. Borg-Warner Automotive, Civil Action, LEXIS 21837, at *4 (E.D. Mich. Sept. 4, 1998). 

Corporation May Designate Existing/Former Employees 

Not limited to its present employees, Rule 30(b)(6) permits an entity to designate existing or former "officers, directors, or managing agents, or ... other persons who consent to testify on its behalf" as its corporate designees. 

In Beauperthuy v. 24 Hour Fitness USA, LEXIS 104906, at *17 n.5 (N.D. Cal. Nov. 9, 2009), the court held that "the text of Rule 30(b)(6) leaves no doubt that a former employee can and should be designated as a Rule 30(b)(6) deponent, if the former employee is the most knowledgeable individual and as long as the former employee consents." 

Rule 30(b)(6) does not limit proper designees to people employed by or otherwise affiliated with the entity.  Any "other person who consent[s]" to testify on behalf of the entity and has the requisite knowledge and preparation may do so. 

Questions Corporate Designees Must Answer 

The corporate designee must testify about both facts within his and the entity's knowledge and answer questions about the entity's "subjective beliefs," "interpretation of documents and events" and "position" on any of the topics in the deposition notice. 

Some courts also permit questioning beyond deposition notice topics' scope but the designee's answers are treated like those of any other fact witness and do not bind the entity.  Detoy v. City & County of San Francisco, 196 F.R.D. 362, 367 (N.D. Cal. 2000). 

Other courts hold that the adversary may not ask questions beyond the Rule 30(b)(6) notice listed topics, but the entity's counsel cannot enforce that limitation by instructing the designee not to answer the questions.  Paparelli v. Prudential Insurance Co. of America, 108 F.R.D. 727, 728-31 (D. Mass. 1985).  Instead, the designee must answer the questions to the extent possible and the adversary has no recourse if the witness disclaims knowledge of matters outside the deposition notice's scope.

Effect Of Corporate Designee's Testimony 

Within the deposition notice's scope, the designee's answers are the entity's answers.  Although the entity may later alter its answers or positions, doing so subjects its representatives to cross-examination at trial and the designee's deposition testimony may be admissible as a prior inconsistent statement or a statement against interest. 

Similarly, "if a party states it has no knowledge or position as to a set of alleged facts or area of inquiry at a Rule 30(b)(6) deposition", the entity "cannot argue for a contrary position at trial without introducing evidence explaining the reasons for the change". 

A corporate designee's deposition presents both risks and opportunities for the entity involved in litigation.  By understanding the rules governing such depositions, entities' in-house and outside counsel may entities use them to great effect while minimizing the risks to their client's litigation positions.

Non-Compete Clause's Unenforceable Without "Additional Consideration"

In Socko v. Mid-Atlantic Systems of CPA, Inc., 2014 WL 1898584 (Pa. Super. May 13, 2014), Pennsylvania's Superior Court held that neither contractual language satisfying the Uniform Written Obligations Act, 6 P.S. §33 ("UWOA") - - i.e., a statement that parties “intend to be legally bound” - - nor an employee's continued employment are sufficient consideration to support a covenant-not-to-compete's enforcement.

 

Specifically, the UWOA provides that “[a] written release or promise, hereafter made and signed by the person releasing or promising, shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound”.

 

The Superior Court unanimously upheld a trial court’s ruling that a non-compete agreement was not enforceable against an at-will employee signing the agreement following a year's employment as a waterproofing company salesman despite “intend to be legally bound” and "not to compete for 2 years after employment's termination" language because employee received no benefit or job status change at the time of entering into the agreement.

 

After setting aside conflicting federal district court decisions, the reasoning of which were found to be unpersuasive, the Superior Court concluded that it was necessary to review Pennsylvania's history of restrictive covenant's enforcement "to determine the precise nature of the consideration required to support them”.

 

After noting that adequate consideration could take the form of a corresponding benefit to employee or beneficial job status change, citing the George W. Kistler, Inc. v. O’Brien, 464 Pa. 475, 347 A.2d 311 (1975) decision, the Superior Court identified 3 forms of consideration inadequate to support a non-compete: continued employment even if relationship is terminable at will; execution of "under seal" employment agreement; and "nominal" consideration recital (e.g., $1).

 

Rejecting Mid-Atlantic’s "UWOA's application rectified non-compete's lack of consideration" argument, the Superior Court explained that, unlike most contracts for which consideration's adequacy is not examined in determining contract's validity, Pennsylvania courts consistently inquire into the adequacy of consideration sufficient to support restrictive covenants.  The Superior Court held that “[l]anguage in an employment contract that the parties intended to be legally bound does not constitute valuable consideration in this context”.

 

The Superior Court stated: “[w]hen the restrictive covenant is contained in the initial contract of employment, the consideration is the job itself.  But when the restrictive covenant is added to an existing employment relationship, however, to restrict himself the employee must receive the corresponding benefit or change in job status.”

 

Although the “legally intending to be bound” language in Mr. Socko’s contract may have satisfied UWOA requirements, the Superior Court concluded that it did not provide him with any actual benefit and could not support the restrictive covenant's enforcement.

 

What the Socko v. Mid-Atlantic Systems of CPA, Inc. opinion fails to provide is what   consideration will be deemed adequate to support a restrictive covenant entered into after employment's commencement presumably a case-specific inquiry requiring a court to weigh factors including nature of the benefit conveyed to employee and the restrictive covenant's scope and duration.

Deficiency Judgments' Recoverable Interest and Attorneys Fees

In last month's Liberty Philadelphia REO, LP v. EFL Partners V, L.P., 989 EDA 2013 (Pa. Super. March 3, 2014) opinion, Pennsylvania's Superior Court addressed "deficiency judgments" and what attorneys fees and interest may be recovered on them.



Deficiency Judgments in Pennsylvania


If a mortgage foreclosure sheriff's sale proceeds are insufficient to satisfy the underlying judgment, the Deficiency Judgment Act, 42 Pa.C.S.A. §8103 allows for imposing personal liability against - - and executing upon the assets of - - a mortgagor for the judgment's unpaid balance.

Specifically, although mortgage foreclosure judgments are in rem against the property, and not in personam against the mortgagor, the Act provides that if the real property sheriff's sale price is insufficient to satisfy the judgment amount, interest and costs, the creditor may collect the balance due by petitioning the court to assess the sold property's fair market value following which the judgment creditor may execute against the debtor's personal assets to collect the debt's balance.  42 Pa.C.S.A. §8103(c).

The Deficiency Judgment Act's objective is to relieve a debtor from further personal liability to the judgment creditor when the real property executed upon has a fair market value on the sale date sufficient so that the judgment creditor can dispose of it to others without a further loss.  Home Sav. and Loan Co. of Youngstown, Ohio v. Irongate Ventures, LLC, 19 A.3d 1074, 1078 (Pa. Super. 2011).


Superior Court Limits Deficiency Judgment Interest and Attorneys Fees


The Liberty Philadelphia REO, LP v. EFL Partners V, L.P. court slashed $1,459,682.22 of attorneys fees deemed as "unreasonable and unconscionable" ruling that a $4 million deficiency judgment from a confession of judgment tacked onto an $8.4 million property value judgment needed "recalculation" by the trial court.

The Liberty Philadelphia REO, LP deficiency judgment arose out of a January 5, 2010  $11,214,861.05 confession of judgment, of which $1,459,682.22 was attorneys fees. 
Following the dispute's first appeal in which the confessed judgment was modified to $9,755,718.83 to reflect the attorney fees removal and a $2,444 per diem interest rate was affirmed, the judgment was executed upon via an October 5, 2010 sheriff sale of condominiums.

On February 19 2013, following a Deficiency Judgment Act petition, the Court assessed the property's fair market value at $8,400,000, entered a $4,005,226.47 deficiency judgment comprised of "January 5, 2010 through February 19 2013 $2,444 per diem interest" but, despite unpaid balance's post sheriff 's sale decrease, omitted any per diem interest rate reduction.  

Citing the Dearnley v. Survetnick, 63 A.2d 66, 69 (Pa. 1949) ruling, the Superior Court held that a plaintiff "cannot charge interest on the [principal] from the time of the sheriff's sale in 1933 [to the time the property was sold to him in 1941] ... any more than he could charge such interest if he had been paid that same amount in cash at the time of the sale".

The Liberty Philadelphia REO, LP court held that the assessing a $2,444 per diem interest rate from the October 5, 2010 sheriff's sale date to February 19, 2013, without crediting the unpaid balance with the $8.4 million plaintiff had recovered from the condominiums' sale, was erroneous and required "recalculation" by the trial court.

Pennsylvania Updates Judicial Code of Conduct

Following years of scandals and awful press, last month Pennsylvania's Supreme Court unanimously updated its Code of Judicial Conduct. 

The new amendments require Pennsylvania's 450 elected judges to quit corporate boards, bar them from hiring relatives, and force them to withdraw from cases involving lawyers who have made substantial donations to their judicial election campaign.  

These amendments are the first since 1992 and scheduled to take effect in July 2015. 

Recent Abuses 

In 2013, Pennsylvania state Supreme Court Justice Joan Orie Melvin resigned after using her elected office and taxpayer-funded staff for political purposes and the Federal Bureau of Investigation is probing into referral fees earned by the top aide and wife of state Supreme Court Justice Seamus P. McCaffery.  

In 2009, a federal grand jury returned a 48 count indictment against two former Luzerne County judges who were later convicted in connection with the “kids for cash” scandal. 

Further, until recently, Carbon County's president judge also served on the board of the county's largest bank and may have presided over matters involving the bank he served. 

Scope of Judicial Conduct Code's Amendments  

Pennsylvania's state court judges are elected, not appointed, and the Code of Judicial Conduct comprises the code of ethics governing their conduct.  While not forming criminal statutes, Pennsylvania judges have been suspended and removed for Judicial Conduct Code violations. 

Forming the first revision since 1992, the updated Judicial Conduct Code is modeled after a 2007 American Bar Association version and is nearly three times the previous Code's length. 

A substantial addition to the Code includes language expressly prohibiting nepotism stating that “[i]n making administrative appointments and hiring decisions, a judge: shall exercise the power of appointment impartially and on the basis of merit; and shall avoid nepotism, favoritism, and unnecessary appointments.”  

Presently both Chief Justice Ronald D. Castille and Justice McCaffery have their wives employed as their top aides and the change is silent on immediate family members currently employed by the judiciary. 

A provision has also been added explicitly prohibiting the “use of court staff, facilities, or other court resources in a campaign for judicial office.”  Judges will now also be prohibited from sitting on corporate boards.  Additionally, judges will be required to recuse themselves from cases where a party, a party’s lawyer, or the law firm of a party’s lawyer has made a direct or indirect campaign contribution in an “amount that would raise a reasonable concern about the fairness or impartiality of the judge’s consideration.” 

The majority of the Judicial Conduct Code new provisions will take effect on July 1, 2014 and Judges will be expected to resign from corporate boards by July 1, 2015.

OSHA Launches Online Whistleblower Claim System

To protect employee "whistleblowers", on December 5, 2013, the Occupational Safety and Health Administration ("OSHA") launched an online whistleblower complaint system at http://www.whistleblowers.gov/.

"Whistleblowing activity" includes reporting a work-related injury, illness, or fatality, participating in safety and health activities, or reporting a statutory or regulatory violation.

Although known primarily as the federal agency responsible for regulating workplace health and safety under Occupational Safety and Health Act, OSHA's "Whistleblower Protection Program" enforces the whistleblower protection provisions of 22 different federal statutes including:
°Asbestos Hazard Emergency Response Act;
°Clean Air Act;
°Comprehensive Environmental Response, Compensation and Liability Act;
°Consumer Financial Protection Act;
°Consumer Product Safety Improvement Act;
°Energy Reorganization Act;
°Federal Railroad Safety Act;
°Federal Water Pollution Control Act;
°International Safe Container Act;
°National Transit Systems Security Act;
°Pipeline Safety Improvement Act;
°Safe Drinking Water Act;
°Sarbanes-Oxley Act;
°Seaman's Protection Act;
°Section 1558 of the Affordable Care Act;
°Solid Waste Disposal Act;
°Surface Transportation Assistance Act;
°FDA Food Safety Modernization Act; and
°Toxic Substances Control Act.

Mirroring the existing paper complaint form, OSHA's free online system provide workers with an accessible way to file whistleblower complaints without fear of retaliation. 

Workers can now file whistle blower complaints by calling an agency hotline or a regional office, submitting a written complaint, or using the online form. 

Given the ease with which employees now can file complaints, employers should anticipate a likely whistleblower claims increase by updating internal policies and educating managers on the whistleblower statutes.

CFPB Issues Final "RESPA/TILA Disclosures" Rule

Pursuant to the Dodd-Frank Wall Street Reform Act, the Consumer Financial Protection Bureau just released 1,900 pages of regulations regarding integrated Truth in Lending Act ("TILA") and Real Estate Settlement Procedures Act ("RESPA") required disclosures that consumers must receive in applying for and closing on a residential mortgage loan
http://files.consumerfinance.gov/f/201311_cfpb_final-rule_integrated-mortgage-disclosures.pdf ("Disclosure Rules").

While not taking effect until August 1, 2015 and excluding home-equity credit lines, reverse mortgages, mobile homes mortgages, and creditors making five (5) or fewer mortgages per year from their coverage, the Disclosure Rules require two (2) disclosures: the three (3) page Loan Estimate (replacing the Good Faith Estimate ("GFE") and initial Truth in Lending Disclosure) and five (5) page Closing Disclosure (replacing the HUD-1 and final Truth in Lending Disclosure).

Loan Estimate

Replacing both the GFE and initial Truth in Lending Disclosure, the Loan Estimate summarizes contemplated loan terms, estimated loan and closing costs, and additional application disclosures.  Although it may also be prepared by either a mortgage broker, the creditor is responsible for complying with all Loan Estimate requirements.

The requirement of providing a Loan Estimate is triggered by a "loan application submission" consisting of the consumer's name, income, Social Security number, property's address and estimated value, and the loan's amount.  Prior to receiving these specific items, lenders may provide consumers with a pre-application written estimate containing a disclaimer that it is not an official Loan Estimate.

The Disclosure Rules require providing a Loan Estimate within three (3) business days of the application's submission and at least seven (7) business days before the loan's closing.

The Loan Estimate is three (3) pages long, the first of which contains information identifying the borrower and loan, loan terms, projected monthly payments, total estimated closing costs, and total estimated cash needed to close.  The second page breaks down the closing costs including prepaid and escrowed amount information and cash needed to close.  The third page summarizes five (5) years of loan costs (for comparison with other loan products) and required disclosures regarding the appraisal's delivery, whether the loan is "assumable", it's servicing may be transferred and homeowner's insurance is required, and late payment fee information.

Closing Disclosure

Replacing both the HUD-1 and final Truth in Lending Disclosure, the Closing Disclosure provides a summary of the actual loan terms, the loan costs, other settlement costs, and additional closing disclosures.

The Closing Disclosure must be provided to the consumer at least three (3) business days before the loan's closing.  If "changes" occur between issuance and closing, an updated Closing Disclosure must be provided within another three (3) business days or at closing.  "Changes requiring an updated Closing Disclosure" include APR changes of greater than .125% (or .25% for loans with irregular payments or periods), changes to the loan product, or the addition of a prepayment penalty.

The Closing Disclosure is five (5) pages long, the first of which mirrors the Loan Estimate's first page identifying the borrower and loan, the loan terms, the projected monthly payments, the total closing costs and total cash needed to close.  The second page contains a closing costs itemization including whether each particular cost is paid by the borrower, seller, or a third party.  The third page includes a calculation of the cash needed to close and a summary of the borrower's transaction and seller's transaction.  The fourth and fifth pages contain additional loan disclosures (including whether loan is assumable, has demand or negative amortization features, escrow requirements, late payment information, and whether servicing may be transferred) and the creditor, brokers, and settlement agent's contact information.

The fifth page also includes a calculation of the total payments, finance charges, amount financed, and total interest percentage over the loan's terms.

Closing Costs Increase Restrictions

The Disclosure Rules limit the circumstances in which borrowers may be required to pay more for settlement services than the amount stated on the Loan Estimate.

Unless an exception applies, the following service charges for cannot increase: (1) creditor's or mortgage broker's services charges; (2) charges for services provided by creditor or mortgage broker's affiliate; and (3) charges for services for which the creditor or mortgage broker does not permit the consumer to shop for a provider.

Charges for other "creditor required services" may increase but not by more than 10% percent unless: (1) consumer asks for a change; (2) consumer chooses a service provider that was not identified by creditor; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires.

Recordkeeping

The Disclosure Rules require creditors to retain records evidencing compliance with Loan Estimate and Closing Disclosure requirements for three (3) years from the later of the closing or when the disclosure was required.

Consistent with existing RESPA requirements, a creditor must retain the Closing Disclosure and all related documents for five (5) years after closing.

Punitive Damages Recoverable for Fraudulent Transfers

Although Pennsylvania's Supreme Court has yet to rule on the issue, in last month's Klein v. Weidner, --- F.3d ----, 2013 WL 4712752 (3d Cir. 2013) opinion, the U.S. Court of Appeals for the Third Circuit ruled that Pennsylvania's Uniform Fraudulent Transfer Act, 12 Pa. Cons. Stat. Ann. §5-101, Et. Seq ("Act") permits creditors to obtain punitive damages from debtors who conceal assets through property and business transfers.
 

The dispute in Klein v. Weidner stemmed from Defendant's purchasing and transferring of real estate and a limited liability company to himself and current wife as "tenants by the entireties" to evade a $548,797 "unpaid child and spousal support judgment" while telling Plaintiff ex-wife she'd never see "a red cent" from him.

The Third Circuit unanimously affirmed the trial court's holding that Defendant pay both $548,797 in back child and spousal payments and $548,797 in punitive damages due to his outrageous fraudulent transfers conduct.

The Third Circuit held that "although the Act did not explicitly authorize punitive damages, its 'remedies of creditors' section contains a critical 'catch-all' provision - -§5107(a)(3)(iii) - - expressly providing that a creditor may obtain 'any other relief the circumstances may require.'"  2013 WL 4712752 p 9.

The Third Circuit held that because Defendant presented "an example of outrageous and intolerable behavior that punitive damages are designed to punish and deter", "where [the] plaintiff can show outrageous conduct, coupled with a fraudulent transfer, a court may award punitive damages" under the Act.  Id.

By authorizing recovery of punitive damages under the Act, the Klein v. Weidner opinion will be spectacularly helpful for judgment creditors.

Previously, other than paying what they already owed, little leverage existed to prevent  shifty judgment debtors from fraudulently transferring assets.  

By imposing harsh consequences for fraudulently transferring assets and increasing the focus on the wrongdoer's shenanigans, Klein v. Weidner gives the Act teeth, fortifies judgment creditors' leverage, and provides incentive for judgment debtors not to hide assets.

Insurance's Consent to Settle Clauses

In Babcock & Wilcox Co. v. American Nuclear Insurers, --- A.3d ----, 2013 WL 3456969 (Pa.Super. 2013), the Superior Court of Pennsylvania addressed whether an insured lacking its insurer's consent may settle a case without violating the insured’s duty to cooperate under an insurance policy's "Consent to Settlement Clauses".  

Like virtually all commercial insurance policies, the American Nuclear Insurers ("ANI") policy at issue in Babcock & Wilcox Co. contained a "consent to settle clause" providing that the insured Babcock & Wilcox Co. ("B&W") "shall not, except at its own cost, make any payment, assume any obligation or incur any expense".  

After ANI paid for independent defense counsel to defend B&W under a reservation of rights in radiation exposure claims, B&W entered into a $95 million settlement that was less than the insurance policy’s limits and to which ANI objected.  ANI then refused to reimburse B&W arguing that it had violated the policy's "consent to settle" clause.  

Although the trial court ruled - - and the jury found - - that the settlement was fair, reasonable, and non-collusive and that B&W was entitled to reimbursement, the Superior Court reversed adopting the Taylor v. Safeco Ins. Co., 361 So.2d 743 (Fla. Ct. App. 1998) rule that an insured’s obligation to honor "consent to settlement clauses" depends on whether the insured accepts an insurer’s tender of a qualified defense. 2013 WL 3456969, pg. 22. 

If it accepts a defense subject to a reservation tendered by the insurer, the insured is bound to the consent to settlement clauses' terms and the insurer retains full control of the litigation.  Id.  Under these circumstances, if an insurer objects to settlement, the insurer is only responsible for the settlement costs if the insured can show that the insurer’s refusal to accept the settlement constituted "bad faith".  2013 WL 3456969, pg. 22. 

Conversely, if it declines an insurer’s tender of a qualified defense and furnishes its own defense, the insured retains full control of the litigation including control over a settlement decision, and the insured may recover its fair and reasonable defense and indemnity costs even when the insurer objects to settlement, if the settlement was entered into in good faith.  Id.

Fair Debt Collection Practices Act's "Debt Validity Notice Requirement

Everything's harder in New York, even collecting a debt.

In Hooks v. Forman, Holt, Eliades & Ravin, LLC, --- F.3d ---, 2013 WL 2321409 (May 29, 2013), the Second Circuit Court of Appeals ruled that letters stating that debtors could only dispute debts in writing and not orally violated the Fair Debt Collection Practices Act, 15 U.S.C. §§1592, et seq. ("Act") "debt validity notice provision".

 

Thus, unlike Third Circuit states like Pennsylvania and New Jersey, New York debtors may derail debt collection efforts with a phone call or voice mail arguing that they don't owe any money.

Because this Second Circuit holding contradicts the Third Circuit's "consumer debtor must send a written statement to contest debt's validity" requirement, until issue is resolved by the United States Supreme Court mayhem will ensue.

Act's "Disputing Validity of Debt" Notice Requirement

The Act regulates "debt collection activity" on "family, personal or household purposes" transactions and defines a “communication” as the “conveying of information regarding a debt directly or indirectly to any person through any medium.  15 U.S.C. §1692(a).

The Act requires a debt collector to send a written notice to any consumer debtor with whom it communicates in connection with the collection of a debt containing “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector.” 15 U.S.C. §1692g(a)(3).

Although it fails to specify whether the consumer's disputation must be written, the Act provides that if the consumer “notifies the debt collector in writing” that the debt is disputed, the debt collector must “cease collection of the debt, or any disputed portion thereof" until the debt collector mails verification of the to the debt collector and, upon the consumer's "written request", provide the original creditor's name and address if different from the current creditor.  15 U.S.C. §1692g(a)(4)&(5).

Hooks v. Forman Opinion

After failing to make timeshare mortgage payments, the Hooks v. Forman consumers received a collection notice letter setting forth that unless "written notice" disputing the debt was received within 30 days, the debt collector would presume the debt was valid ("Notice"). 

The consumers sued the debt collectors in the United States District Court for the Southern District of New York alleging that because it required that a challenge to the debt's validity be made in writing, the Notice failed to comply with §1692g(a)(3) of the Act.  The District Court granted the debt collector's dismissal motion concluding that a notice requiring that disputes must be presented in writing does not violate §1692g(a)(3).

In vacating the district court’s complaint dismissal, the Second Circuit held that under the statute's “straightforward language”, the Act does not require a written dispute to avoid an assumption by the debt collector of the debt's validity.

The Second Circuit distinguished language in different portions of §1692g, some portions of which require written disputes or requests from debtors for various rights to apply, from that which deals with a debt's presumed validity holding that because “[t]he right to dispute a debt is the most fundamental” of those set forth in §1692g and “it was reasonable to ensure that it could be exercised by consumer debtors who may have some difficulty with making a timely written challenge”, requiring consumers to take extra step of putting a dispute in writing before claiming “the more burdensome set of rights” afforded by §1692g (like requiring all debt collection efforts to cease) made sense.

Circuit Split Requires Supreme Court "Debt Disputation" Clarification

While whether a "debt disputation" may be oral or must be in writing is an issue of first impression for the 2nd Circuit, two (2) other circuits have considered the issue reaching different conclusions.

In Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991), the Third Circuit concluded that a  consumer debtor must send a written statement to contest the debt's validity holding that "reading §1692(a)(3) not to impose a writing requirement would result in an incoherent. system in light of the explicit writing requirements in §§ 1692g(a)(4), 1692g(a)(5), and 1692g(b)".

Conversely, in Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir. 2005), the Ninth Circuit concluded that a consumer debtor need not send a writing to contest the debt under §1692g(a)(3) for reasons including that the Act's contrasting explicit writing requirements "showed that Congress did not intend to impose a writing requirement".

Schain Law Firm: 5 Year "Mortgage Foreclosure Judge" Anniversary

Five (5) years ago I was appointed as a Philadelphia Mortgage Foreclosure Court Judge Pro Tempore and the results have been astonishing.

 

Since 1998's "mortgage foreclosure meltdown", residential foreclosure cases have comprised 19% of Philadelphia's civil case inventory.

 

Philadelphia's conciliation program requires lenders to meet face-to-face with residential homeowners in every owner-occupied property subject to foreclosure before the foreclosure proceeds.

Each meeting is supervised by an experienced consumer lending attorney serving as a "Judge Pro Tempore" seeking to forge a permanent resolution ranging from workout alternatives including forbearance and modification agreements.

 

Each week between 150 to 300 cases appear before the foreclosure court and the results have been spectacularly impressive.

 

Over the past sixty (60) months, our nationally renowned diversion program has served 23,000 Philadelphia residents and saved over 5,000 homes from sheriff's sale.

 

In 2008, 95.3% of foreclosures were resolved in 7 to 13 months; in 2009, 53.7% were resolved in 7 to 13 months, in 2010, 88.6% were resolved in 7 to 13 months, and in 2011, 67% were resolved in 7 to 13 months.

Despite these impressive statistics and case backlog reduction, 6304 foreclosures are pending and the number of filings have not diminished.

 

Further, new issues keep emerging including foreclosures of seniors living alone whom die, are deemed mentally incompetent or face crippling financial trouble of which their families are unaware.

 

Philadelphia's Mortgage Foreclosure program has implemented an innovative dual-track process integrating the handling of both the foreclosure and estate situation to simplify and accelerate resolving the dispute.