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.