'Distressed property' statute distresses real estate industry

By Jeffrey P. Downer

Real estate professionals face expanded liability under a new “distressed property” law in the State of Washington that is intended to protect property owners who face foreclosure from being defrauded out of their home equity.

The new law passed Washington Legislature easily, but with little thought to how it might affect real estate professionals. It went into effect June 12, 2008. The statute imposes new duties on “distressed property consultants,” which include not only persons who claim to be helping strapped homeowners avoid foreclosure, but also real estate agents and brokers who are involved in such transactions.

The new law was intended to prevent foreclosure-rescue schemes. Typically, a scam artist trolls public records of pending property foreclosures. The scam artist approaches the homeowner and offers to help, often by buying the property and leasing the property back to the distressed homeowner. The homeowner usually is duped into thinking that the scam artist will help work out a payment plan with the lender and not realizing that the property is actually being sold.

After the sale closes, the scam artist evicts the homeowner, keeps the property, and pockets the equity in the property. The practice is sometimes called “equity skimming” or “equity stripping.”

The new law defines a “distressed home” as a house that is in danger of foreclosure or at risk of loss for nonpayment of taxes, or is in the midst of a foreclosure proceeding. The statute defines a person who helps the homeowner sell such property as a “distressed home consultant.” That definition is broad enough to include real estate agents.

The statute requires: (1) that distressed-home consulting transactions be in writing in the same language the consultant used to describe the services to the homeowner; (2) written disclosure of the specific services and the consultant’s name and address; (3) a warning in large type that discloses that the seller could lose the property in the transaction; and (4) a five-day period in which the seller can cancel the contract without penalty.

Violation of the statute is a felony. A violation also renders the distressed-property consultant liable to repay at least 82 percent of the property’s value to the victimized homeowner, treble damages up to $100,000, and reasonable attorney fees.

Washington’s real estate industry is trying to correct these problems in two ways. First, lawyers for multiple-listing services and industry associations have drafted new forms of listing agreement that contain a warranty that the seller is not selling a “distressed home” as the new statute defines the term. That warranty will avoid problems for real estate professionals in most cases. If the home is a distressed home, then a new form will give the seller all of the statutorily required disclosures and urge the seller to seek legal advice. Second, the industry will lobby the Legislature to amend the statute to exempt licensed real estate professionals from its terms, since the statute’s drafters never intended to create that liability.

Insured's payment of one SIR satisfies two policies

By Jennifer R. Porto

An insured’s payment of its self-insured retention under one liability insurance policy satisfies that obligation under another policy covering the same loss, the Washington Court of Appeals has held.

In Bordeaux, Inc. v. Amer. Safety Ins. Co., no 59947-0-I (Jul. 7, 2008), Bordeaux developed a condominium complex. After the condominiums were completed, their owners sued Bordeaux for construction defects. Bordeaux tendered the defense of the action to its liability insurers, the American Safety and Zurich insurance companies. Both insurers agreed to defend Bordeaux under a reservation of rights.

American Safety's policy covered a 2000-01 policy period, followed by the Zurich policy with a 2001-02 policy period. Each policy had a similar self-insured retention (SIR), which required Bordeaux to pay $100,000 per occurrence. The SIR provision did not address how to fulfill the SIR requirement if a claim triggered coverage under more than one policy.

The American Safety policy also contained a subrogation provision that said that if Bordeaux had rights to recover any of the insurer’s coverage payments, those rights were transferred to the insurer.

The condo owners and Bordeaux settled their lawsuit for $630,000. By this time, Bordeaux had incurred more in defense costs than the $100,000 that each policy’s SIR provision required. However, American Safety asserted that the defense costs merely satisfied Zurich’s SIR provision. American Safety said that it would not pay benefits under its policy until Bordeaux paid a second $100,000. Bordeaux disagreed, contending that it need pay only one SIR to meet both policies’ requirements, and presented documentation to American Safety showing that it had incurred more than $100,000 in defense costs.

When the deadline for funding the settlement arrived, Bordeaux paid the homeowners the $100,000 that American Safety would not. The insurers paid the remainder of the settlement. Bordeaux later settled with several subcontractors. Those funds were held pending a court determination of whether American Safety could recover those funds before Bordeaux was made whole.

At the same time, Bordeaux’s sister corporation, Cameray, Inc., was insured under American Safety and Zurich policies that were identical to Bordeaux’s. Cameray also built condominiums, also was sued for construction defects, and also settled the claims with the homeowners. Like Bordeaux, Cameray obtained settlements from contractors, and those funds were held in trust pending determination of whether American Safety had a right to recover before its insured.

Bordeaux and Cameray then sued American Safety, seeking $100,000 that Bordeaux had paid in settlement and a ruling that they were entitled to retain their SIRs out of the third-party settlements before any proceeds were paid to their insurer. The trial court granted summary judgment to Bordeaux and Cameray on both issues. American Safety appealed.

The court considered whether Bordeaux must pay an SIR under each policy and concluded that it was not required to do so. Neither policy expressly said that the SIR must be paid twice, one for each policy. The court affirmed the trial court’s award of $100,000 to Bordeaux.

The Court of Appeals rejected American Safety’s argument that an SIR was truly self-insurance, with the insured acting as its own insurer. The court said that “traditional insurance involves risk shifting, while self-insurance involves risk retention.” The court noted that the subrogation provision in American Safety’s policy did not allow it to collect sums that it did not pay, such as the SIRs. The insureds were entitled to full reimbursement of their SIRs before the insurers could receive any of the funds recovered from third parties.

Around The Firm

August G. Cifelli and William R. Kiendl, with regional counsel for Kia Motors America, won summary judgment in Torres v. Kia Motors America. Plaintiff was injured in a near head-on collision and alleged that the airbag and seatbelt systems were defective, which contributed to the claimed injuries. The court held that plaintiffs lacked sufficient evidence to support their design and manufacturing-defect claims.

Philip B. Grennan and Rosemary J. Moore won summary judgment for defendant The Lakeside Group, in Ferguson v. King County, et al. Plaintiff was injured when a scaffolding ladder he was descending during a concert at Marymoor Park broke loose, and he fell. Plaintiff sued the venue owner, Lakeside, the concert promoter, the scaffolding manufacturer, and the union that provided laborers for the concert. Plaintiff was a union worker whom Lakeside hired to run the spotlight. He filed a worker’s-compensation claim for his injury. Phil and Rosemary argued that Lakeside was plaintiff’s employer for the purposes of this accident, based on Lakeside’s payment of worker’s-compensation premiums and the collective-bargaining agreement with plaintiff’s union. Plaintiff argued that he had not consented to that employment arrangement with Lakeside and instead believed he was employed by the union. The court held that Lakeside was the immune employer and dismissed all claims against it.

Joel E. Wright and Rosemary Moore won summary judgment in Lombard v. O'Rourke & Snell. The plaintiffs and 140 other homeowners possess the right to use a community beach on Lake Washington. They retained attorney Snell to continue prosecuting a claim for nuisance and for an injunction to prevent overnight parking and storage by those persons who were misusing their right to use the beach for recreational purposes. After obtaining an injunction, the plaintiffs sued their lawyers complaining that they should have been advised to bring a quiet-title action to determine ownership to the community beach. The court agreed with Joel and Rosemary that plaintiffs could not show that they had suffered any damage or that their lawyers had breached the lawyer’s standard of care and dismissed the action.

Craig L. McIvor won a motion on the merits, an appellate motion that is similar to summary judgment, in Riehl v. Valley Med. Center, a medical-malpractice case. Plaintiff was treated in the emergency department on two successive days for knee pain. At the second visit, she was found to have necrotizing fasciitis, or flesh-eating bacteria, and was transferred by helicopter to a regional trauma center. She sued the hospital and emergency physicians, alleging delay in diagnosis. Craig won partial summary judgment motions, limiting the claims against his hospital client. The case was tried for three weeks, and the jury returned a verdict for all defendants. On appeal, plaintiff argued several issues of hospital liability but not any issue against the defendant physicians. Craig moved to dismiss the appeal because all claims of hospital liability depended on a finding of negligent medical care. The Court of Appeals agreed, granted the motion, and dismissed the appeal.

Steven G. Wraith and Marc Rosenberg won summary judgment in Johnson v. Horizons West Dev., Inc. They defended a negligence claim against a general contractor for a trip-and-fall on a clubhouse pool patio by a resident of the community. The court agreed with Steve and Marc that the contractor owed no legal duty, and there was no expert testimony to show breach of the standard of care.

Joel Wright and Mary E. DePaolo won the most recent round in Nelson v. Schnautz, a legal-malpractice action. Plaintiff alleged that the defendant attorney negligently failed to file a personal-injury claim against a decedent’s estate that resulted in plaintiff’s failure to obtain joint and several liability against the remaining defendants. Plaintiff was involved in an auto accident with the decedent, who died in the accident and had no assets or insurance. But the owners of the car the decedent was driving had $100,000 in liability insurance. The defendant lawyer sued the decedent’s estate, the car’s owner, and others, but failed to make a timely probate claim against the estate. But the insurer of the car defended the claim against the decedent anyway, and settled it for policy limits. The defense prevailed in the Court of Appeals because plaintiff had recovered as fully as possible against the estate, and joint and several liability remained among the other defendants. Plaintiff then petitioned the Supreme Court, which denied review.

Frank A. Cornelius won an arbitration defense verdict in Jones v. Rideout. The case arose out of a side-swipe car accident. The defense admitted liability but disputed causation as to plaintiff’s injuries. Plaintiff had a long history of back complaints, and other problems. At the time of the accident, plaintiff was being treated for unrelated injuries. After the accident, he sought treatment at several medical facilities for other medical issues. Not until four months after the subject accident did he seek medical treatment related to his back or mention the car accident. Plaintiff’s post-accident physicians were not given plaintiff's complete medical history and based all opinions solely on plaintiff’s own subjective complaints. The arbitrator agreed with Frank that plaintiff had not proven that this accident caused his claimed damages.