The Consumer Financial Protection Agency: What it May Mean to Your Practice Consumers vs. Debt Collectors: Consumer Rights Under the Fair Debt Collection Practices Act Venue in Complex Bankruptcies in the Wake of Volkswagen The Credit CARD Act of 2009 Houston Bar Association Consumer Law Task Force
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Volume 47 – Number 4
Consumer/ Bankruptcy Law
January/February 2010
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contents Volume 47 Number 4
January/February 2010
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FEATURES Consumer Financial 10 The Protection Agency: What it May Mean to Your Practice By Michael A. Lee
vs. Debt Collectors: 16 Consumers Consumer Rights Under the Fair Debt Collection Practices Act By Dana Karni
in Complex Bankruptcies 22 Venue in the Wake of Volkswagen:
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28
Ammunition to Keep Defendants from Remote Venues in Adversary Proceedings? By Dori Kornfeld Goldman
Credit CARD Act of 2009 28 The By S. David Smith the Conflict: 34 Resolving The Federal Arbitration Act
Versus The Bankruptcy Code By Deborah J. Karakowsky
Changes Impacting 38 Legislative the Residential Landlord Tenant Relationship in Texas
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By Elizabeth M. Bruman
Bar Association 42 Houston Consumer Law Task Force
The Houston Lawyer
By Peggy Montgomery
The Houston Lawyer (ISSN 0439-660X) is published bimonthly by The Houston Bar Association, 1300 First City Tower, 1001 Fannin St., Houston, TX 77002-6715. Periodical postage paid at Houston, Texas. Subscription rate: $12 for members. $25.00 non-members. POSTMASTER: Send address changes to: The Houston Lawyer, 1300 First City Tower, 1001 Fannin, Houston, TX 77002. Telephone: 713-759-1133. All editorial inquiries should be addressed to The Houston Lawyer at the above address. All advertising inquiries should be addressed to: Quantum/SUR, 12818 Willow Centre Dr., Ste. B, Houston, TX 77066, 281-955-2449, www.thehoustonlawyer.com, e-mail: leo@quantumsur.com Views expressed in The Houston Lawyer are those of the authors and do not necessarily reflect the views of the editors or the Houston Bar Association. Publishing of an advertisement does not imply endorsement of any product or service offered. For article REPRINTS, please contact Wright’s Reprints: 1-877-652-5295. ©The Houston Bar Association, 2009. All rights reserved.
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January/February 2010
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contents Volume 47 Number 4
January/February 2010
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47
departments Message 6 President’s By Barrett H. Reasoner the Editor 8 From By Ann D. Zeigler
44
60th Harvest Party
Raises Over $500,000 for Houston Bar Foundation
Reviews 47 Media The Little Red Book
48
49
of Wine Law: A Case of Legal Issues Reviewed by Linhuyen Pham
the Record 48 OffContending Classic Car Counsel By Fred A. Simpson Profile in Professionalism: 49 ATracie J. Renfroe
King & Spalding LLP
The Houston Lawyer
50 Legal Trends 55 Placement Service 56 Litigation MarketPlace
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president’s message
By Barrett H. Reasoner Gibbs & Bruns, L.L.P.
HBA Offers Ways to Help Yourself and Others During Hard Times
The Houston Lawyer
T
he economic downturn of the last two years has affected people throughout our community with varying degrees of severity. The economic climate has also substantially affected our profession. First, it is no secret that the prospects for recent and upcoming law school graduates are not as bright as they have been in recent years. Law school deans from around the state have reported that the job market for their graduates is as tough as it has ever been. I remain convinced that a law degree is one of the most valuable graduate degrees you can obtain. A legal education teaches you how to think in a focused and disciplined way, and opens up job opportunities in almost any field. The job market for law school graduates also tends to go through cycles, and the market here in Houston has historically been as strong and resilient as any in the country. In the meantime, however, bar associations are making significant efforts to help new law graduates transition into the practice of law. State Bar of Texas President Roland Johnson has created two new resources in this area. On the website www.afterthebarexam.com, new graduates have access to free videos about finding your place, managing your practice, ethics and professionalism and connect-
6
January/February 2010
ing with the profession. The HBA has placed a link to this site on its homepage as well. The State Bar has also implemented a Transition to Practice mentoring program for new lawyers. For many years, the HBA’s Professionalism Committee has also had a mentor/protégé program, which allows new lawyers to have a mentor in the area of practice that interests them. In addition, our HBA CLE Committee has tailored its offerings this year to include more relevant information for new lawyers setting up their own practice and for more experienced lawyers who are setting up a solo practice for the first time. Another impact of the economic downturn is that some practice areas are thriving while others are suffering. By most accounts, the practice for lawyers in the corporate and real estate transactions areas, for example, has been relatively slow. On the other hand, bankruptcy practices and some types of litigation have been busier. Those who have been in the profession for years know that the ebb and flow of different practice areas is something that also goes in cycles. Whether your practice area is up or down at the moment, membership in an HBA section is well worth your time. It offers great networking pos-
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sibilities as well as the opportunity to hear from lawyers who are going through the very same things you are. Whether it is advice about building your practice or even just hearing that “this too shall pass” from someone who has been around long enough to know, you will benefit from the professional fellowship. At the macro level, the downturn has been less severe in Houston than elsewhere in the country, but that is of little comfort to individual Houstonians suffering the effects. In reaction to this, the Houston Bar Association has set up a Consumer Task Force, which is charged with insuring that our legal advice clinics are providing advice that is tailored to meet the needs of the current times. Peggy Montgomery of ExxonMobil is Chair of this task force, and this group has already accomplished a great deal. The Consumer Legal Clinic in November served about 60 Houstonians with consumer-type problems. I recommend Peggy’s article in this issue that describes the task force’s activities. I also urge you to come out and help at one of their events. Although times are harder than usual in our profession, there are many ways to help yourself and to help others.
HBA-CLE Online HBA members will find more than 117 hours of HBA/CLE Seminars available online at CLEonline.com. To receive a 20% discount on HBA programs online, HBA members must call (713) 759-1133 prior to registering. Seminars are 1.25 - 4.0 hours and many include ethics credit. All seminars are available online 24 hours a day for your convenience. www.hba.org
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January/February 2010
7
from the editor
By Ann D. Zeigler Nelson S. Ebaugh, P.C.
Associate Editors
Mark A. Correro Attorney at Law
John S. Gray Gardere Wynne Sewell LLP
Robert W. Painter The Painter Law Firm
The Houston Lawyer
Don Rogers Harris County District Attorney’s Office
Tamara Stiner Toomer Jesse R. Pierce & Associates, P.C.
8
Support Your Magazine
H
ow did we do that? It’s 2010 already—another fresh New Year, just waiting for us to do something clever with it. This means that we have used up another year. Not only that—we have used up an entire decade of our shiny new century. An entire tenth of the twenty-first century is now in the past tense. All right then. It’s time to get serious about this useof-time thing. I don’t have time to waste looking backward, and I’m sure you don’t either—especially in light of the old expression about looking over your shoulder to see what’s gaining on you. Instead I’m looking around and looking forward. Here is your latest issue of The Houston Lawyer, with thanks to guest editor Shawn Bates. The special issue topic is consumer and bankruptcy developments. In case you haven’t noticed, things have quietly become more technological at THL. At www.thehouston lawyer.com you can see all the articles and columns from the current issue online, along with past issues going back to July-August, 2003. You’ll also find additional content such as current news bulletins, and ads of interest to legal professionals, plus links to lists of entertainment and public affairs events around the Houston area. And here’s a new treat. For some issues, you can find additional articles online that we know are important, but we didn’t have room to put them in the paper edition. With this year full to the brim with special topic issues, we’re not giving up on important information because of physical constraints. Like the idea? Well, here’s the trade-off. We as read-
January/February 2010
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ers need to make a renewed effort to support our magazine’s advertisers, in both the print and web editions. Next time you patronize a firm that advertises in THL, mention that you saw their ad. We all know exactly how much buzz we can create when we put our minds to it—it’s what we do for a living. So, put that sticky-note on the corner of your monitor. And send the message on to your support staff. They are also important users of your firm’s economic power. In addition, please consider the benefits of advertising your own firm in our community publication. Our ad rates are a bargain, especially given your target market. The Houston Lawyer’s editorial board is committed to serving you every way we can, including electronically. It’s important for you to make it mutual. Let us know how you like the two versions of your magazine, not only by contacting us but by supporting the businesses who make it possible.
Editor’s Note: On December 20, 2009, we lost Fred Simpson, an excellent lawyer, a dear friend, and my immediate predecessor as Editor in Chief. Fred taught many of his juniors a critical skill—being a great listener and observer, and a clear, responsive communicator. He was the oldest person to serve as Editor in Chief of The Houston Lawyer, proving (in case of any possible doubt) that age is not an issue in accomplishing great things. He will be greatly missed by many of us.
BOARD OF DIRECTORS President
Secretary
Barrett H. Reasoner
M. Carter Crow
President-Elect
Treasurer
T. Mark Kelly
Denise Scofield
First Vice President
Past President
David A. Chaumette
Travis J. Sales
Second Vice President
Brent A. Benoit
DIRECTORS (2008-2010)
Benny Agosto, Jr. Laura Gibson
Todd M. Frankfort Warren W. Harris.
Alistair B. Dawson Jennifer A. Hasley
DIRECTORS (2009-2011) Hon. David O. Fraga Daniella D. Landers
editorial staff Editor in Chief
Ann D. Zeigler Associate Editors
Mark A. Correro Robert W. Painter Tamara D. Stiner
John S. Gray Don W. Rogers
Carolyn Benton Aiman Keri D. Brown Angela L. Dixon Don D. Ford III Al Harrison Catherine Anh Thi Le Robert K. Morris III Linhuyen T. Pham Mark Schuck Fred A. Simpson Mark R. Trachtenberg
Editorial Board
Shawn M. Bates Patrice B. Childress Nelson S. Ebaugh Dori Kornfeld Goldman Misty Hataway-Coné Farrah Martinez Judy L. Ney Nicole Sain Hannah Sibiski William R. Stukenberg Nejd Jill Yaziji
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January/February 2010
9
The Consumer Financial Protection Agency:
What it May Mean to Your Practice
O
By Michael A. Lee
n June 30, 2009 the Obama administration proposed the Consumer Financial Protection Agency Act of 2009 (“CFPA” or “Act”) as the cornerstone of its entire financial regulatory reform effort.1 Since then, both House and Senate sub-committees have considered legislation closely modeled after the President’s proposal.2 The House passed legislation to create a Consumer Financial Protection Agency and the Senate recently began its debate over the measure.3 Most observers expect the CFPA will pass, in one form or another, sometime next year.
Regulatory reform does not usually make front-page news. That may explain why the debate over the CFPA remains largely unnoticed by the general public. Lawyers outside the banking sector might also be forgiven for not paying attention, but they might soon regret that decision. This seemingly modest regulatory reform effort could (if passed) change not only how banks and other financial institutions operate, but also the rules and future legal liability for a surprising number of nonfinancial businesses that fall within the CFPA’s jurisdiction and enforcement powers. The new Agency’s powers include the authority to: • ban products or services outright, • mandate consumer disclosures, • establish sales and marketing procedures and operational standards, • create duties, including fiduciary duties, • establish minimum requirements for consumer access to information, • make acts or practices unlawful, • cancel or rescind agreements, • ban the use of mandatory arbitration clauses, • sue for money damages, and more. After briefly outlining the perceived regulatory shortcomings that proponents designed the CFPA to address, this article will detail the key provisions of the CFPA Act and the powerful new Agency it creates, including the Agency’s scope, general and specific authorities, enforcement powers, and use in civil litigation. Reasons for Change Regulation of consumer financial products and services is fragmented, overlapping, confusing, and ineffectual.4 Under the current system responsibility for protecting consumers from inappropriate financial products or services depends
on the identity of the party offering the product or service, rather than the characteristics of the product or service. Thus, the regulator for a savings and loan (Office of Thrift Supervision) differs from the regulator assigned to supervise nationally chartered banks (Office of the Comptroller of the Currency). The current system arose by historical accident rather than by a well-conceived plan.5 At least six different federal agencies and scores of state agencies share responsibility for overseeing financial products and services offered to consumers.6 Congress and the courts’ use of expansive federal preemption have only exacerbated problems inherent in the current fractured regulatory system. Broad federal preemption of state consumer protections without replacement with equivalent new federal measures has created gaps in consumer coverage.7 According to supporters of the CFPA Act, those two factors spawned four structural deficiencies with the current system of consumer financial regulation.8 First, consumer protection is an “orphan mission” because no single agency sees consumer financial protection as its primary mission.9 As one critic put it, “the result is that because consumer protection is everyone’s responsibility, it becomes no one’s responsibility and accountability and performance suffer therewith.”10 Second, most federal banking agencies with consumer protection responsibility also have conflicting missions. Bank regulators naturally view bank safety and soundness as their primary job.11 Abusive, deceptive, and unfair consumer practices can be highly profitable. As a result bank regulators might view questionable banking practices less critically. When that happens consumer protection almost always loses out.12 Third, because no single agency has overall responsibility for consumer finan-
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January/February 2010
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cial safety, no agency has the incentive to invest the substantial time and resources necessary to develop deep expertise in consumer protection. Fourth, under the present system financial institutions can and do select their own regulators from overlapping state and federal agencies. This has created a “race to the bottom” as banks and other financial institutions “charter shop” for the agency with the weakest consumer protection regulations.13 The CFPA Act addresses three of these problems by creating a single federal agency with broad jurisdiction and authority focused solely on consumer financial protection. The CFPA addresses the fourth structural problem by adopting a novel, yet controversial approach to federal preemption that sets a “floor” of consumer protection rather than a “ceiling.” The Agency The CFPA Act establishes an independent umbrella federal agency known as the Consumer Financial Protection Agency (“Agency”). The Agency will be run by a single Director appointed by the President subject to the advice and consent of the Senate. Once approved the Director may only be removed for cause before the expiration of a five year term.14 Mandate and Objectives The Agency is to “promote transparency, simplicity, fairness, accountability, and equal access in the market for consumer financial products and services.”15 The Director may exercise (note regulation is discretionary) all of the powers and enforcement authority granted under the Act to ensure that (1) consumers have, and use information they need to make responsible
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decisions; (2) consumers are protected from abuse, unfairness, deception, and discrimination; (3) markets operate fairly and efficiently; and (4) traditionally underserved communities receive equal access to financial services.16 Covered Persons The CFPA Act applies to: (A) Any person who engages directly or indirectly in a financial activity, in connection with the provision of a consumer financial product or service; or (B) Any person who in connection with the provision of a consumer financial product or service, provides a material service to, or processes a transaction on behalf of a person described in... (A).17 (Emphasis added.) The definition is intended to be extremely broad. Coverage depends on two questions. First, is the product or service used primarily for personal, family, or household purposes? The statute provides no guidance regarding the degree to which a product or service must be used for personal, family, or household purposes. Courts will have to draw this critical line. Second, is the consumer product or service a “financial activity.” The Act provides better guidance on this key term, and it is exceedingly broad. Thirteen separate categories of products or services qualify as financial activities.18 The Act also contains a catch-all clause empowering the Director to determine that “any other activity” is a “financial activity” based on three factors set forth in the Act.19 Together, these terms implicate a huge range of consumer products and services.
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Finally, a “Covered Person” need only have minimal connections to the financial activity. The Act applies to anyone who advertises, markets, solicits, sells, discloses, delivers, maintains or provides services in connection with a consumer financial product or service.20 Finally, for businesses that deal directly with consumers, the Act applies to the business and any “Related Persons” (broadly defined to include employees, agents, and in certain cases independent contractors).21 Exemptions If read literally the scope of the Act is incredibly broad. For that reason, many groups have lobbied for exemptions from the Act. The list grows by the day. According to the latest statutory language,22 the following businesses are generally exempt from the Act: • Financial/Investment Advisors so long as they are registered by the SEC or Commodity Futures Trading Commission. • Traditional Insurance Businesses • Automobile Dealers (but not under the Senate proposal by Chairman Dodd) • Attorneys • Accountants and Tax Preparers • Real Estate Brokers and Agents • Pension, 401(k) and 529 Plans Providers • Merchants, Retailers and other Non-financial Businesses that extend credit directly to consumers for goods or services sold directly • Ministerial Service Providers General and Specific Authorities The Agency will have broad jurisdiction, consolidating virtually all federal power
related to consumer financial products and services.23 In addition to federal authority transferred from other agencies, the Director may also exercise rule-making authority and issue such rules and regulations as appropriate to fulfill the Agency’s mandate and objectives. The Act also grants additional “specific authorities” to the Director described below. Power to Ban Unfair, Deceptive, or Abusive Acts or Practices The Director possesses “organic” authority to issue rules, regulations, or even outright bans on unfair, deceptive or abusive consumer products or services.24 The Federal Trade Commission has the same authority and will retain and share that authority with the CFPA in the future.25 They must consult with the federal banking agencies concerning the “consistency of the proposed regulation with prudential, market, or systemic objectives administered by such agencies.”26 Disclosure Requirements The Director may issue rules to insure “the timely, appropriate, and effective disclosure to consumers of the costs, benefits, and risks associated with any consumer financial product or service.”27 The Director must take into consideration disclosure requirements found in other laws in order to enhance compliance and reduce the burden on consumers. The Agency may develop model disclosures or issue guidance to covered persons regarding particular disclosures. The use of a model disclosure provided by the Agency will constitute per se compliance with the Act. Finally, within one year after the effective date of the Act, the Agency will prepare model-combined disclosures currently required pursuant to the Truth-in-
Lending Act and the Real Estate Settlement Procedure Act, if needed.28 Sales and Marketing of Financial Products The Agency may issue rules, orders,
and guidance regarding how consumer financial products and services are marketed to consumers. Specifically, the Agency may issue regulations to make sure that the risks, costs, and benefits of various financial products and services are fully and accurately represented to consumers both at the time of acquisition and during the lifetime of the product or service at issue.29 Operational Standards to Deter and Detect Fraud Subject to exceptions for entities subject to state and federal banking regulators, the Director can encourage states to adopt and enforce operational standards designed to allow businesses to deter and detect unfair, deceptive, abusive, fraudulent, or illegal transactions in the provision of consumer financial products or services.30 Duties The Director may, (after considering var-
ious factors)31 impose duties, including fiduciary duties, upon any covered persons who deal or communicate directly with consumers so long as those duties are appropriate or necessary to ensure fair-dealing with consumers.32 The Director may also establish duties regarding compensation practices applicable to covered persons or their employees, agents, or independent contractors who deal or communicate directly with consumers. Only the Agency may enforce these duties and then only through an administrative proceeding.33 Attorneys are expressly excluded from this section.34 Consumer’s Right to Access Information Covered persons must provide consumers with access to information in a usable electronic form regarding any transaction, series of transactions, or accounts, including costs, charges, and usage data within the control or possession of the covered person.35 The Agency will adopt standards to promote standardized formats for information. There are a number of exceptions including confidential commercial information, information necessary to prevent fraud or money laundering or to detect and report potentially unlawful conduct, or that is required to be kept confidential by law, or that cannot be retrieved in the ordinary course of business. Unlawful Acts The Act makes it unlawful for a person to advertise, market, offer, sell, enforce, or attempt to enforce, any term, agreement, change in terms, fee or charge in connection with a consumer financial product or service that is not in conformity with any regulations or orders issued by the Director.36
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Enforcement The Act provides the Director with ample tools and remedies to enforce the CFPA’s broad rule making authorities. Any covered person who violates the Agency’s rules or orders will be subject to a variety of stiff legal and equitable remedial powers, including but not limited to rescission or reformation of contracts, restitution/ refund, money damages and penalties.37 The Director also has broad authority to investigate possible violations of the Act, including by demanding production of documents, written reports and answers to questions, and oral testimony from witnesses.38 If an investigation turns up criminal activity, the Director may refer any criminal matters to the Department of Justice for prosecution.39 The Director may institute administrative cease and desist proceedings to stop ongoing violations of its authority.40 Litigation Within three years from the discovery of a violation of any rules or orders issued by the Agency, the Director may institute a civil action in state or federal court.41 Although the Act does not create a private cause of action for individual plaintiffs, it does authorize every state attorney general to bring a lawsuit in state or federal court for monetary or equitable damages for violations of the CFPA Act and any violation of a state’s consumer protection laws.42 The Act expressly disallows punitive damages, but does authorize the Director, a state attorney general, or state bank supervisor to recover the costs incurred in connection with prosecuting an action to enforce provisions of the CFPA.43 Finally, states can pursue CFPA claims by hiring private law firms, even pursuant to contingent fee agreements.44 Preemption Finally, the CFPA only narrowly preempts state consumer laws. All of the Agency’s rules, regulations, orders, and guidance preempt only those state consumer laws that offer less protection to consumers. Thus, the CFPA will not cause consum14
January/February 2010
ers to lose important state law rights. The CFPA will provide a nationwide minimum standard, or “floor” protecting consumers, rather than a “ceiling” that takes away state consumer protections. Not surprisingly, the financial industry is working hard to remove this consumer protective view of preemption.45 Michael A. Lee is a partner at Susman Godfrey LLP, where he has served as lead counsel on behalf of both plaintiffs and defendants in claims involving antitrust, breach of fiduciary duty, consumer fraud, and other complex cases. Endnotes 1. The Administration’s larger reform effort as well as rationale for the proposed CFPA is described in a 90-page document prepared by the Department of Treasury, Financial Regulatory Reform, known as the “President’s White Paper,” available at http://www.financialstability.gov/docs/regs/ FinalReport_web.pdf. 2.The House Financial Services Committee chaired by Barney Frank (D) Mass., approved H.R. 3126 as amended on October 22, 2009. At press, time the Senate was considering a nearly identical bill sponsored by Senate Banking Committee Chairman Chris Dodd (D) Ct., available at, http:// banking.senate.gov/public/_files/AYO09D44_xml.pdf. Because the final version of CFPA legislation remains a moving target until presented to the President for his signature, the remainder of this article will reference H.R. 3126 as approved by the House Financial Services Committee, available at, http://www.house. gov/apps/list/speech/financialsvcs_dem/markup_100809.shtml. Readers should check the final language of the legislation if it passes for subsequent changes. 3. On December 11, 2009 the full House passed the CFPA Act, now part of H.R. 4173 in a party-line 223-202. The Bill also contained other pieces of the Administration’s financial regulatory reform efforts (Financial Stability Improvement Act, Corporate and Financial Institution Compensation Fairness Act, Over-the-Counter Derivatives Markets Act, Private Fund Investment Advisers Registration Act, Accountability and Transparency in Rating Agencies Act, Investor Protection Act). The CFPA Act starts at Title IV of H.R. 4173, available at http://thomas.loc.gov/cgibin/bdquery/z?d111:HR4173:/. 4. See President’s White Paper, page 2. 5. See FINANCIAL REGULATION: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, Statement of Gene L. Dodaro, Comptroller General of the United States, United States Government Accountability Office, GAO-09-314T, January 21, 2009, available at, GAO-09- http://www.gao.gov/new.items/ d09314t.pdf . 6. See, FINANCIAL REGULATION. 7. Traditionally, responsibility for protecting consumers from deceptive or misleading financial products or services rested with individual states via anti-fraud and unfair deceptive litigation brought by state AGs on behalf of citizens of individual states against financial institutions located in their state. However, recent federal statutes created federal agencies or delegated federal authority specifically intended to supplant state consumer protections laws without replacing all of those protections with equivalent federal provisions. See, http://www.consumerlaw. org/issues/legislative/content/RestoretheRoleofStates091609. pdf. 8. See, Adam J. Levitin, “The Consumer Financial Protection Agency, PEW Financial Reform Project, Briefing Paper #3: The CFPA,” Aug 6, 2009, available at, http://www.pewfr.org/ admin/task_force_reports/files/CFPA-FINAL.pdf. 9. See, Testimony of Lauren Saunders, National Consumer Law Center, To U.S. House of Representatives Subcommittee on Monetary Policy Committee on Financial Services at p. 32 (July 16, 2009), available at, http://www.consumerlaw.org/issues/legislative/
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content/Testimony7-16-09.pdfhttp://www.consumerlaw.org/issues/legislative/content/Testimony7-16-09.pdf 10. See, Adam J. Levitin (PEW Financial Reform Project Briefing Paper No. 3). 11. Briault, Clive, Revisiting the Rationale for a Single National Financial Services Regulator (February 2002). Financial Services Authority Occasional Paper No. 16. Available at SSRN: http://ssrn.com/abstract=427583 or DOI: 10.2139/ssrn.427583. 12. See, Testimony of Lauren Saunders, National Consumer Law Center, page 32. 13. Since there are multiple federal and state agencies with authorization to charter financial institutions, agencies must compete for business with other agencies. This creates a powerful incentive for regulators to lower standards. Although regulators usually will not admit this is a problem, it is indisputable that charter fee revenue often accounts for a majority of an agency’s budget. In a particularly egregious example just prior to the economic meltdown, two of the largest subprime mortgage originators in the United States–Washington Mutual and Countrywide–switched chartering agencies to become thrifts. Thrifts are regulated by the less stringent regulations of the Office of Thrift Supervision (“OTS”). The OTS even rewarded their loyalty by asserting broad federal preemptive authority over state consumer protection laws that the banks opposed. The OTS subsequently used its actions on their behalf as a marketing tool to attract other depository institutions. 14. CFPA Act § 112. H.R. 3126 calls for a governing structure with a single powerful director. Both the President’s proposal as well as the Senate version would have the Agency run by a board composed of four members appointed by the President and confirmed by the Senate. 15. H.R. 3126 § 121 (a). 16 Id. § 121. 17. Id. § 101(8)(A)-(B). 18. Id. § 101(18). 19. Id. § 101(18)(N). 20. Id. § 101(29). 21. Id. § 101(30). 22. See the amendments to H.R. 3126 (note 2 above) for the latest language regarding exemptions from the Act. 23. While that is an impressive list of authority, the Director and Agency will be subject to significant limitations. The CFPA Act does not create a single new cause of action; prohibit or punish any currently available financial practices, products or services; impose usury caps; and allow for the recovery of punitive damages for violations of the Act. In addition the CFPA Act leaves all future rulemaking to future regulators of the new Agency. 24. H.R. 3126 § 131. 25. 15 U.S.C. § 57a. Presumably, the CFPA will focus on consumer products and services while the FTC regulates other products or services within its jurisdiction. 26. H.R. 3126 § 131(D). 27. Id.§ 132(a). 28. Id. § 132(d). 29. Id. § 133. 30. Id. § 135(A). 31. The Director must consider the following factors in prescribing such duties: (1) whether the covered person explicitly or implicitly represents that they are acting in the best interest of the consumer; (2) whether the covered person provides advice to the consumer; (3) the consumer’s justifiable reliance under the circumstances; (4) the benefits to the consumer from imposing the duty outweigh the cost; and (5) any other factor the Director deems appropriate. 32. H.R. 3126 § 136(a)(1). 33. Id. § 136(b)(2). 34. Id. § 136(c). 35. Id. § 137. 36. Id. § 139. 37. Id. § 155. 38. Id. § 152 (c). 39. Id. § 156. 40. Id. § 153 (b). 41. Id. § 154 (a). 42. Id. § 142. 43. Id. § 155 (b). Indeed 24 state attorneys general sent a letter to the President strongly supporting the formation of the CFPA. See, http://www.responsiblelending.org/mortgage-lending/policy -legislation/states/2009-state-ags-cfpa-sign-on-letter-aug-17. pdf. 44. The Chamber of Commerce used this possibility to stir up opposition to the measure. See, http://www.chamber post.com/2009/09/state-attorneys-general-and-the-cfpa.html. “While the Chamber has a number of serious concerns about the proposed Consumer Financial Protection Act, not least among them is the probability of increased litigation from some state attorneys general, who, with new federal authority to enforce the CFPA, will be hiring private plaintiffs’ lawyers on contingency fee contracts.” 45. During the mark-up to H.R. 3126 the CFPA opponents partially succeeded in expanding the preemptive scope of the CFPA to the extent that enforcement of state consumer protection laws prevent or significantly interfere with the operation of certain federally insured banks. See the Watt/Moore amendment to H.R. 3126, available at, http://www.house.gov/apps/list/speech/financial svcs_dem/cfpa_wattandmoore101509.073.pdf. The Senate bill attempts to regain ground lost during the House markup and retains the original narrow preemptive scope proposed by the President.
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Consumers vs. Debt Collectors: Consumer Rights Under the Fair Debt Collection Practices Act
By Dana Karni
I
n recent months, there has been no shortage of reporting that the nation’s financial institutions
have taken a hit. With all the talk about bailouts, recession and unemployment, at the end of the day it comes as no surprise that consumers have been hit hard, too. On average, American families are saddled with over $8,000 in debt stemming from credit cards alone.1 According to the Federal Reserve, the total amount of consumer debt in the United States reached $2.56 trillion at the end of 2008.2
Last summer, the National Association of Attorneys General released its report of the top ten consumer complaints, listing abusive debt collection as the number one complaint nationwide for 2008.3 According to the Federal Trade Commission, one of several agencies to track consumer complaints, it “receives more complaints about the debt collection industry than any other specific industry.”4 With over 78,000 complaints received by the FTC in 2008, 18.9 percent of them related to debt collection.5 While the attorneys general and the federal trade commission have taken legal action against abusive debt collectors, the vast majority of cases are brought by individuals suing under the Fair Debt Collection Practices Act (“FDCPA”).6 Obvious debt collection violations stem from abusive communications, whether through collection calls or dunning letters. With few exceptions, collectors are prohibited from communicating with a third party regarding a consumer’s debt7 or continuing collection efforts on a disputed debt.8 Bill collectors are strictly prohibited from using profanity,9 calling consumers in the middle of the night,10 or threatening wage garnishment.11 Congressional Findings In promulgating the FDCPA, Congress found “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors.”12 Congress also found that abusive “collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs and to invasions of individual privacy.”13 The number of consumer bankruptcies topping one million filings in the first nine months of 2009, is synchronous with the growing percentage of abusive debt collection claims.14
FDCPA Threshold Requirement: What qualifies as a “debt?” One stated purpose of the FDCPA is the elimination of abusive debt collection. The statute largely limits potential claims in its definitions of “debt” and “debt collector.” The Act only applies to consumer debt, specifically debt obligations arising out of transactions for personal, household or family purposes.15 The Act’s definition of “debt” and supporting case law clearly exclude commercial debt. Not uncommon is the debt arising out of a defaulted credit or charge card used for both personal and business purchases. The determination of whether such a mixed-purpose obligation is consumer or commercial in nature may result in a jury question.16 A number of obligations seeming to stem from personal, family or household purposes have been excluded from the definition of “debt.” At least one federal district court in Texas held that child support payments are not “debts” covered by the Act.17 Similarly, criminal fines are excluded and not subject to the FDCPA.18 “Debt Collector” Defined Even if an obligation falls under the rubric of “debt,” with few exceptions, the Act only protects consumers against violations by third-party debt collectors.19 The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debt owed or due or asserted to be owed or due another.20 At least two types of collectors have been scrutinized in case law to determine their status as “debt collectors.” With a growing number of debts being sold from
one buyer to the next, a common argument is that a debt buyer assumes the status of creditor, thereby excluding itself from coverage under the FDCPA. A number of courts have ruled that it is immaterial whether the defendant-collector owns the account they are attempting to collect. Rather, courts must look at “whether a debt was in default when acquired to determine the status of ‘creditor’ vs. ‘debt collector.’”21 To the extent that attorneys collecting debt were attempting to avoid liability under the FDCPA, the Act was amended in 1986 to include attorneys.22 Presently, an attorney who regularly collects consumer debts is subject to the Act. In 1995, the United States Supreme Court reinforced and expanded coverage of attorneys as “debt collectors” under the FDCPA. In Heintz v. Jenkins, the Court ruled that Act applies to lawyers engaged in debt collection litigation.23 “In ordinary English, a lawyer who regularly tried to obtain payment of consumer debts through legal proceedings is a lawyer who regularly ‘attempts’ to ‘collect’ those consumer debts.”24 Ramifications for Attorney Debt Collectors: The Fifth Circuit Issues Words of Caution Frequently, debt collectors—and debt buyers in particular—will retain a collection firm to communicate with consumers. While attorneys are subject to all of the FDCPA’s provisions, certain sections of the Act will more readily apply to an attorney than any other debt collector. Developing case law further limits actions by lawyers collecting consumer debt.An attorney may not misrepresent or exaggerate his involvement in the collection of a debt.25 Applicable to any debt collector, the FDCPA prohibits “[t]he use of any false representation or deceptive means to collect or attempt to collect any
“The number of consumer bankruptcies topping one million filings in the first nine months of 2009, is synchronous with the growing percentage of abusive debt collection claims.” 18
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debt or to obtain information concerning a consumer.”26 Specifically dealing with attorney involvement, the FDCPA prohibits “[t]he false representation or implication that any individual is an attorney or that any communication is from an attorney.”27 Consistent with other courts, the Fifth Circuit ruled that collection letters purportedly signed by an attorney who was not actually involved in a case violate the FDCPA.28 Indeed, many collection firms now add a disclaimer suggesting that no attorney has personally reviewed a particular letter or file, in an effort to shield themselves from liability under the Act. The Fifth Circuit recently reversed and remanded a 12(b)(6) ruling in a case involving a collection letter sent out by a law firm.29 In Gonzalez v. Kay, the Kay Law Firm sent out an unsigned letter on the firm’s letterhead in its attempt to collect a consumer debt. Gonzalez asserted that operative disclosures that the letter was from a “debt collector” and that “[n] o attorney with [the] firm has personally reviewed the particular circumstances of [the] account,” were not conspicuous, and that as a result, the letter was deceptive. In fact, the disclosures were printed on the back of the letter, in the “legalese,” as referred to by the court. The court found that the disclaimers on the back “completely contradicted the message on the front” that the Kay Law Firm had been retained to collect the debt. The Fifth Circuit went so far as to “caution lawyers who send debt collection letters to state clearly, prominently and conspicuously that although the letter is from a lawyer, the lawyer is acting solely as a debt collector and not in any legal capacity when sending the letter.”30 Bona Fide Error Defense The FDCPA contains an affirmative defense provision which states that a debt collector will not be held liable for violations that are “not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.”31 Where the bona fide error cited by a defendant thehoustonlawyer.com
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debt collector is the result of some clerical error, courts have sustained the defense.32 Another aspect of the bona fide error defense—asserting mistakes of law—has been emerging in FDCPA cases. The issue of whether a debt collector can defend itself by citing ignorance of the law will be taken up by the United States Supreme Court in Jerman v. Carlisle, on appeal from the Sixth Circuit.33 In Jerman, the debt collector law firm’s validation notice to a consumer improperly required the consumer to dispute the debt in writing. The district court granted the defendant’s motion for summary judgment, finding that the bona fide error defense shielded the collector from liability, and the Sixth Circuit affirmed.34 Id. Conclusion With collection abuse on the rise, FDCPA litigation is increasing nationwide. Attorneys involved in consumer debt collection matters, whether handling collection itself or pursuing consumer rights against
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rogue collectors, are sure to see continued developments through case law. Changes in Washington are also likely to impact consumer rights’ legislation, including the Fair Debt Collection Practices Act. Dana Karni is an attorney in private practice in Houston with the Karni Law Firm, P.C. From the time she was licensed in the State of Texas, Karni has solely practiced in the area of consumer advocacy. Her primary focus is on consumers’ rights with respect to credit and debt. Endnotes 1. See http://www.creditcards.com/credit-card-news/creditcard-industry-facts-personal-debt-statistics-1276.php citing Nielson Report, April 2009. 2. Federal Reserve’s G.19 report, February 2009. 3. Thttp://www.naag.org/top-10-listof-consumer-complaints-for-2008-aug.-31-2009.php 4. Annual Report 2009: Fair Debt Collection Practices Act, page 4. 5. Id. Because the FTC considers FDCPA complaints as those dealing with third-party collection agencies only, the report also cites over 104,000 collection complaints when combining both third-party bill collectors and in-house collections for 2008. 6. 15 U.S.C. § 1692 et seq. (1978); see e.g., In the Matter of State of Texas and NCO Financial Systems, Inc., Cause No. 08-14928 in the 193rd Judicial District Court, Dallas County, Texas (alleging inter alia that NCO made harassing calls to Texas consumers, failed to verify debts were owed, and threatened to report debts over 7 years old to credit reporting agencies); United States v. LTD Financial Services, Cause No. 4:07-cv-3741in the United States District
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Court for the Southern District of Texas (alleging the Texas defendant threatened wage garnishment and criminal actions against consumers, resulting in a civil penalty judgment of $1.375 million). 7. 15 U.S.C. § 1692c. 8. 15 U.S.C. § 1692g(b). 9. 15 U.S.C. § 1692d(2). 10. 15 U.S.C. § 1692c(a) (2). 11. 15 U.S.C. § 1692e(4). The FDCPA does not specifically prohibit threat of wage garnishment; rather Section 1692e(4) prohibits “[t]he representation or implication that nonpayment of any debt will result in ... garnishment, attachment or sale of any property or wages of any person unless such action is lawful...” Id. 12. FDCPA, 15 U.S.C. § 1692(a). 13. Id. 14. Consumer Bankruptcy Filings Surge Past One Million During First Nine Months of 2009, October 2, 2009, American Bankruptcy Institute. See http://www.abiworld.org/ AM/Template.cfm?Section=Home&CONTENTID=58852& TEMPLATE=/CM/ContentDisplay.cfm 15. 15 U.S.C. § 1692a (5). 16. Moss v. Cavalry Inv., LLC, 2004 WL 2106523 (N.D. Tex. 2004). 17. Campbell v. Baldwin, 90 F. Supp. 2d 754 (E.D. Tex. 2000). 18. U.S. v. Phillips, 2004 WL 2368237 (5th Cir. 2004) (unpublished). 19. 15 U.S.C. § 1692a(6). Remedies are available against original creditors under the Texas Debt Collection Act, codified in the Finance Code. Tex. Fin. Code § 392.001 et. seq. 20. Id. 21. Federal Trade Comm’n. V. Check Investors, Inc., 502 F.3d 159, 168-169 (3d Cir. 2007). See also McKinney v. Cadleway Props., Inc., 548 F.3d 496 (7th Cir. 2008) (holding that a debt buyer is a “debt collector” as defined in the Act since the account was in default when the debt buyer purchased it.). 22. Pub. L. No. 99-361, 100 Stat. 768 (effective July 9, 1986). 23. 514 U.S. 291, 115 S. Ct. 1489, 131 L. Ed. 2d 395 (1995). 24. Id. 25. 15 U.S.C. § 1692e(3) and (10). 26. 15 U.S.C. § 1692e(10). 27. 15 U.S.C. § 1692e(3). 28. Taylor v. Perrin, Landry, deLaunay & Durand, 103 F.3d 1232, 1237 (5th Cir. 1997). 29. Gonzalez v. Kay 2009 WL 2357015 (5th Cir. Aug. 3, 2009). 30. Id. 31. 15 U.S.C. § 1692k(c). 32. See Wilhelm v. Credico, Inc., 426 F. Supp. 2d 1030 (D.N.D. 2006) (bona fide error defense sustained where debt collector showed it mistakenly entered principal and interest); Goodman v. Southern Credit Recovery, Inc., 1999 WL 14004 (E.D. La. Jan. 8, 1999) (sending a collection letter using an envelope with the wrong mailing address was a bona fide error). 33. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich L.P.A., 538 F.3d 469 (6th Cir. 2008) cert. granted, 129 S. Ct. 2863 (2009). 34. Id.
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Venue in Complex Bankruptcies in the Wake of Volkswagen: Ammunition to Keep Defendants from Remote Venues in Adversary Proceedings?
By Dori Kornfeld Goldman
S
hould a litigious debtor be able to hale defendants to a distant venue for adversary proceedings that have no relationship to that forum other than the location of the main bankruptcy case itself? Perhaps not, but longstanding practice has established a “home court presumption” favoring venue in the district where a bankruptcy is pending, however attenuated a connection it may have to the subject of the dispute. As a Texas court counseled in the early 1990s, in bankruptcy, the tactic of forum shopping too often “is masked by pious pronouncements about the debtor’s ‘right’ to select the most advantageous of several possible forums, in order to advance the prospects for reorganization. That rationale, however, should in the usual instance be taken with several grains of salt.”1 The debtor’s-choice stronghold in core adversary proceedings can pose hardships to defendants haled to a faraway forum and hamstrung by the “home court presumption.”2 However, a recent watershed case from the Fifth Circuit, In re Volkswagen of America, Inc.,3 could provide ammunition to defendants attempting to evade a remote venue that houses the underlying bankruptcy case. Statutory Guidance A Chapter 11 case, other than a case ancillary to foreign proceedings, can be initiated in the district in which the debtor’s domicile, residence, principal place of business, or principal assets are located or where there is a pending bankruptcy case of an affiliate, general partner, or partnership.4 An adversary proceeding then “may be” brought in the court in which the bankruptcy is pending, notwithstand-
ing the absence of any other connection of the suit to the venue.5 In addition, a federal court is authorized under section 1412 of title 28 to transfer a bankruptcy case or core adversary proceeding “to a district court for another district, in the interest of justice or for the convenience of the parties.”6 Despite the permissive language of the transfer statute, courts often give dispositive weight to the debtor’s chosen venue for the main bankruptcy case. Under the “home court presumption,” a court in which the underlying bankruptcy case is pending is presumed to be the appropriate district for hearing and determination of an adversary proceeding.7 This “strong presumption” has resulted in the litigation of most adversary proceedings in the home bankruptcy court.8 Changing Landscape under Volkswagen The Fifth Circuit’s en banc ruling in Volkswagen held that a plaintiff’s choice of venue does not control. Although decided under section 1404 of title 28, the general federal venue transfer statute, Volkswagen could have substantial implications for defendants attempting to transfer venue in a bankruptcy case. The case involved a car accident in Dallas, where the plaintiffs lived, witnesses to the accident resided, the car was bought, and the wreckage and other evidence were located. The plaintiffs sued Volkswagen in Marshall, and Volkswagen unsuccessfully moved to transfer venue to Dallas. On mandamus review, the Fifth Circuit held that the district court “clearly abused its discretion” by “misconstruing the weight of the plaintiffs’ choice of venue” and “glossing over the fact” that the allegations concerned a different venue.9 Observing that large corporations “often have sufficient contacts” to warrant venue in “most, if not all, federal venues,”
the Court of Appeals explained that Congress “tempered the effects of this general venue statute by enacting the venue transfer statute.”10 It found that the district court gave “inordinate weight” to the plaintiff’s venue selection by requiring the movant to show that the balance of convenience and justice “substantially” weighed in favor of transfer, a standard imported from the forum non conveniens analysis.11 Instead, it held, the proper standard is that the party seeking transfer must show “good cause.”12 When “the movant demonstrates that the transferee venue is clearly more convenient” than the venue chosen by the plaintiff, “it has shown good cause and the district court should therefore grant the transfer.”13 Noting that lower courts have applied the various venue transfer tests “with too little regard for consistency of outcomes,” the Volkswagen court set out four controlling “private interest” and “public interest” factors.14 The factors that the Fifth Circuit emphasized—ease of access to sources of proof; availability of compulsory process to ensure attendance of third-party witnesses; cost of attendance for willing witnesses; and local interest in having local issues decided at home—can be magnified exponentially in bankruptcy. Adversary proceedings may be filed hundreds or thousands of miles away from the locus of the dispute—substantially farther than the 150 miles that separated the Marshall and Dallas venues in Volkswagen. And, as the Court of Appeals counseled, once a case has been tried and appealed, “the prejudice suffered” by parties and witnesses “cannot be put back in the bottle.”15 Volkswagen’s Applicability to Adversary Proceedings Volkswagen’s rationale should apply to adversary proceedings brought in bankrupt-
cy. The statutory analysis is nearly identical, and the same practical considerations regarding the interest of justice and convenience of parties are at issue.16 As one court noted in applying the Volkswagen factors to a motion to transfer a Chapter 11 case, “there is nothing inherent about a bankruptcy case and nothing within § 1412 that suggests a different framework should be used to consider motions to transfer venue filed in civil cases versus bankruptcy cases.”17 Both sections 1404 and 1412 require a court asked to transfer an action to determine whether a transfer would be “for the convenience of the parties” and witnesses and “in the interest of justice.”18 Despite the near-uniformity of the transfer statutes, the parameters for a plaintiff’s initial choice of forum differ. While the federal venue provisions predicate venue on the location of the defendant and the site of the actions giving rise to the claim, the Bankruptcy Code omits any acknowledgment of the defendant from the choice of venue analysis.19 The broad latitude afforded to companies to file for bankruptcy relief in any district in which they or even a newly-formed subsidiary has a presence effectively allows debtors to choose jurisdictions likely to favor their interests. Given the ability to file a suit in a preferred district, notwithstanding the complete absence of connection between the transactions or disputed assets and the jurisdiction, forum shopping becomes a real concern (and inescapable conclusion). Indeed, forum shopping by debtors has been “rampant for decades.”20 When a debtor sues an out-of-state defendant regarding out-of-state conduct or out-of-state assets and the case’s only connection to the home bankruptcy venue is the main bankruptcy itself, the defendant has a strong argument for transfer under Volkswagen. A debtor may emphasize the
“Despite the permissive language of the transfer statute, courts often give dispositive weight to the debtor’s chosen venue for the main bankruptcy case.” 24
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Equal Access
Champions
What does it take to become an “Equal Access Champion”? The firms and corporations listed below have signed 5-year commitment forms that indicate they will uphold a pledge to provide representation in a certain number of cases each year, based on the number of attorneys in the firm or legal department. The goal is to provide pro bono representation in at least 1,500 cases through the Houston Volunteer Lawyers Program each year, and to increase that goal each year. For more information contact Kay Sim at (713) 759-1133.
Large Firm Champions Andrews Kurth LLP Baker Botts L.L.P. Bracewell & Giuliani LLP Fulbright & Jaworski L.L.P. Locke Lord Bissell & Liddell LLP Vinson & Elkins L.L.P. Corporate Champions Anadarko Petroleum Corporation Baker Hughes Incorporated BP CenterPoint Energy, Inc. ConocoPhillips Continental Airlines, Inc. ExxonMobil Corporation Marathon Oil Company Port of Houston Authority Rosetta Resources Inc. Shell Oil Company Waste Management, Inc. Intermediate Firm Champions Akin Gump Strauss Hauer & Feld LLP Beirne, Maynard & Parsons, L.L.P. Gardere Wynne Sewell LLP Haynes and Boone, L.L.P. King & Spalding Thompson & Knight LLP Mid-Size Firm Champions Adams & Reese LLP Baker & Hostetler LLP Chamberlain, Hrdlicka, White, Williams & Martin Greenberg Traurig, LLP Howrey LLP Jackson Walker L.L.P. Jones Day Morgan, Lewis & Bockius LLP Porter & Hedges, L.L.P.
Strasburger & Price, L.L.P. Susman Godfrey LLP Weil, Gotshal & Manges Winstead PC Small Firm Champions Abraham, Watkins, Nichols, Sorrels, Agosto and Friend Beck, Redden & Secrest, L.L.P. Doyle, Restrepo, Harvin & Robbins, L.L.P. Gibbs & Bruns, L.L.P. Hays, McConn, Rice & Pickering, P.C. Hirsch & Westheimer, P.C. Hughes Watters Askanase LLP Johnson DeLuca Kennedy & Kurisky, P.C. Kroger Frisby Martin, Disiere, Jefferson & Wisdom, L.L.P Powers & Frost, L.L.P. Schwartz, Junell, Greenberg & Oathout, L.L.P Shook Hardy & Bacon, L.L.P. Sutherland Asbill & Brennan LLP Weycer, Kaplan, Pulaski & Zuber, P.C. Yetter Warden & Coleman LLP Boutique Firm Champions Abrams Scott & Bickley, L.L.P. Coane & Associates Connelly • Baker • Wotring LLP Edison, McDowell & Hetherington LLP Fullenweider Wilhite PC Funderburk & Funderburk, L.L.P. Hicks Thomas LLP Jenkins & Kamin, L.L.P. Legge, Farrow, Kimmitt, McGrath & Brown, L.L.P. Ogden, Gibson, Broocks & Longoria, L.L.P. Ryan Glover LLP Squire, Sanders & Dempsey L.L.P. Strong Pipkin Bissell & Ledyard, L.L.P. Wilson, Cribbs & Goren, P.C.
Solo Champions Law Office of O. Elaine Archie Basilio & Associates Peter J. Bennett Bernard Bolanos PC Fatima Breland Law Office of Fran Brochstein Law Office of Barbara Calderon Law Office of Robbie Gail Charette De la Rosa & Chaumette Papa Dieye Frye & Cantu, PLLC Fuqua & Associates Law Office of David R. Garver Terry L. Hart Law Offices of James and Stagg, PLLC Katine & Nechman L.L.P. The Keaton Law Firm, PLLC Law Office of Kelly G. Kinto Clinton F. Lawson Gregory S. Lindley Law Office of Maria S. Lowry Martin R. G. Marasigan Law Offices The Law Office of Evangeline Mitchell, PLLC The Montalvo Law Firm Morley & Morley, P.C. Bertrand C. Moser Pilgrim Law Office Robert E. Price W. Thomas (Tommy) Proctor Gwen E. Richard Law Offices of Judy Ritts Cindi L. Robison Scardino & Fazel Shortt & Nguyen, P.C. Sadler Law Firm Jeff Skarda Teal & Associates Tindall & England, P.C. Diane C. Treich Norma Levine Trusch
ability to efficiently administer the estate, the time and effort already expended by the bankruptcy court, and the multiplicity of adversary cases, but retaining a case on such bases alone could preclude the transfer of any proceeding and effectively negate the venue transfer statute. An adversary proceeding at times can have little impact on the overall administration of the bankruptcy estate. Particularly since venue transfer motions are typically filed near the commencement of a case, a bankruptcy judge usually will have expended few resources on consideration of the case. Filing numerous lawsuits should not exempt a debtor from the rigorous venue rules or compel adversaries to defend themselves in remote forums unconnected to the disputes. Commonwealth Oil In rebutting the significance of Volkswagen, debtors may characterize In re Commonwealth Oil Refining Co.21 as the leading Fifth Circuit case on bankruptcy venue. The Commonwealth court reasoned that the “heart of a Chapter XI proceeding is working up a financial plan of arrangement” and decided that the case should remain where the debtor was based.22 Courts often cite the factors enumerated by Commonwealth, with its emphasis on the economic and efficient administration of the bankruptcy estate, as the controlling considerations in a venue transfer analysis.23 The flaw in that approach is that Commonwealth was decided under a different rule and resolved a different issue— whether to transfer venue of an entire Chapter 11 proceeding, not a single adversary suit. The Court of Appeals did not even purport to craft a venue transfer inquiry. Instead, it reiterated the convenience factors that the bankruptcy court had considered and refused to disturb
the analysis, since “[n]one of the parties ha[d] questioned the propriety of these considerations, nor ha[d] they suggested any additional ones.”24 Commonwealth involved the interpretation of former Bankruptcy Rule 116, which has since been replaced by Rule 1014. Former Rule 116(b)(1) stated that “the court may after hearing on notice to the petitioner or petitioners and such other persons as it may direct in the interest of justice and for the convenience of the parties, transfer the case to another district.” Section 1412—enacted in 1984, five years after Commonwealth—provides that a court “may transfer a case or proceeding” to another district “in the interest of justice or for the convenience of the parties.”26 These changes expanded the transfer powers of the bankruptcy court. Several observers have reasoned that the “change in language” under section 1412 “should result in a greater willingness to transfer cases,”27 and that the “helpfulness [of Commonwealth]”—and other like cases— “is limited.”28 Extension of Volkswagen Although no court has expressly applied Volkswagen to transfer an adversary proceeding under section 1412, one bankruptcy court recently applied it to a debtor’s section 1404 motion to transfer a non-core adversary proceeding to the home court of its later-filed bankruptcy. While declining to “address whether core matters can be more efficiently resolved in the court administering the bankruptcy case,” the court stated that it could see “no reason why” the Volkswagen analysis does not “undercut the home court presumption, particularly for non-core matters.”29 In denying the debtor’s motion, the court reasoned that “forcing a creditor into a distant and inconvenient venue to defend claims asserted by the debtor in a distant
and inconvenient venue raises Volkswagen concerns.”30 Courts have begun to recognize Volkswagen’s applicability in other contexts as well. In a patent case, the Federal Circuit emphasized that the Volkswagen “precedent clearly forbids treating the plaintiff’s choice of venue as a distinct factor” in the venue transfer analysis.31 Temporarily undermining the Eastern District of Texas’s status as the “IP Rocket Docket,” the court concluded that the denial of a motion to transfer the case from Texas to Ohio was a “patently erroneous result.”32 Volkswagen could be used to similarly disrupt large debtors’ apparent preference for resolving bankruptcy matters in the District of Delaware or the Southern District of New York, without regard to the inconvenience of defendants or the public interest in local resolution of claims.33 Conclusion Volkswagen provides promising new ground for defendants attempting to transfer adversary proceedings to a different district. The prevailing presumption that the debtor’s choice controls rewards litigation tactics that lessen or foreclose the ability of an adversary to defend itself, its major assets, and its stakeholders and employees. That a large corporation can file for bankruptcy relief in virtually any federal forum should not compel the conclusion that defendants must be forced to an unfamiliar and inconvenient forum to defend themselves against a debtor’s charges. A meaningful consideration of the multifactor analysis in Volkswagen, coupled by recognition that the plaintiff’s selection of venue does not control, could thwart the debtor-choice stronghold. A case and defendant’s connection to the plaintiff’s chosen venue may be even more attenuated in bankruptcy than in traditional civil suits,
In denying the debtor’s motion, the court reasoned that “forcing a creditor into a distant and inconvenient venue to defend claims asserted by the debtor in a distant and inconvenient venue raises Volkswagen concerns.” 26
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rendering section 1412—rehabilitated by the Volkswagen analysis—a crucial tool for an effective defense. Dori Kornfeld Goldman, a 2003 graduate of Harvard Law School, is a partner practicing in the Houston office of Yetter, Warden & Coleman, L.L.P., with a focus on litigation and appeals in a variety of complex commercial matters. Endnotes
1. In re Abacus Broad. Corp., 154 B.R. 682, 686-87 (W.D. Tex. 1993). 2. 28 U.S.C. § 157(b)(2) provides a nonexhaustive list of core proceedings, including determinations as to fraudulent conveyances and dischargeability of debts 3. 545 F.3d 304 (5th Cir. 2008). 4. 28 U.S.C. § 1408. 5. With the exception of certain suits to recover relatively small debts and claims arising after the commencement of the bankruptcy case, “a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.” 28 U.S.C. § 1409(a), (b), (d). 6. 28 U.S.C. § 1412 (“A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.”); see also Fed. R. Bankr. P. 7087 (“On motion and after a hearing, the court may transfer an adversary proceeding or any part thereof to another district pursuant to 28 U.S.C. § 1412.”). Claims that “arise under” the Bankruptcy Code or “arise in” a bankruptcy case are “core” matters; claims that “relate to” a bankruptcy case are “non-core.” WRT Creditors Liquidation Trust v. C.I.B.C. Oppenheimer Corp., 75 F.Supp.2d 596, 606 (S.D. Tex. 1999). Noncore proceedings may be transferred pursuant to 28 U.S.C. § 1404. 7. See, e.g., Orthodontic Ctrs. of Tex., Inc. v. Corwin, 2007 WL 173220, at *1 (S.D. Tex. 2007); Edge Petroleum Operating Co. v. Duke Energy Trading & Mktg., 311 B.R. 740, 745 (S.D. Tex. 2003); In re Continental Air Lines, Inc., 61 B.R. 758, 770 & n. 25 (S.D.Tex.1986). 8. See id. Likewise, a survey of cases from January 2000 to December 2007 found that motions to transfer venue of non-core proceedings from the home court to another venue were denied at a ratio of nearly two-to-one. See J. Gardina, “The Bankruptcy of Due Process: Nationwide Service of Process, Personal Jurisdiction and the Bankruptcy Code,” 16 Am. Bankr. Inst. L. Rev. 37, 59 (2008). 9. 545 F.3d at 309, 318. 10. Id. at 313. 11. Id. at 308, 314; see also id. at 308-09 (“a plaintiff’s choice of forum under the forum non conveniens doctrine is weightier than a plaintiff’s choice of venue under § 1404(a) because the former involves the outright dismissal of a case, and the latter involves only a transfer of venue within the same federal forum”); see also Norwood v. Kirkpatrick, 349 U.S. 29, 32 (1955) (“When Congress adopted s 1404(a), it intended to do more than just codify the existing law on forum non conveniens.”). 12. 545 F.3d at 315. 13. Id. 14. Id. at 319. The private interest factors are the relative ease of access to sources of proof; the availability of compulsory process to secure the attendance of witnesses; the cost of attendance for willing witnesses; and all other practical problems that make trial of a case easy, expeditious, and inexpensive. Id. at 315. The public interest factors are the administrative difficulties flowing from court congestion; the local interest in having localized interests decided at home; the familiarity of the forum with the law that will govern the case; and the avoidance of unnecessary problems of conflict of laws or in the application of foreign law. Id. 15. Id. at 319. 16. Compare 28 U.S.C. § 1404(a) (“For the convenience of the parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district court or division where it might have been brought.”) with 28 U.S.C. § 1412, supra n. 6; see also Edge Petro., 311 B.R. at 743 n.1 (“the inquiry is the same under either statute so the Court’s [section 1404] analysis would not be any different if it relied on § 1412”). 17. In re Victorville Aerospace, LLC, 2008 WL 5482785, at *3 n.4 (Bankr. S.D.Tex. 2008). 18. Supra note xvi. 19. Compare 28 U.S.C. § 1391 (setting jurisdiction in diversity cases where any defendant resides, if all defendants are from the same state; where a substantial part of the events took place or the property in dispute is located; or, if all else fails, where any defendant is subject to personal jurisdiction at the time the suit is commenced; and, where diversity is not present, vesting jurisdiction where any defendant resides, if all defendants are from the same state; where the events occurred or disputed property is located; or where any defendant “may be found”), with 28 U.S.C. §
1409(a), supra n. 5. 20. Lynn LoPucki, “Bankruptcy Forum Shopping,” 30 NAT’L L. J. 26 (Feb. 11, 2008). The “national trend” is for large corporations to file bankruptcy petitions in New York or Delaware. Longhorn Partners Pipeline L.P. v. KM Liquids Terminals, L.L.C., 408 B.R. 90, 102 (Bankr. S.D.Tex. 2009). From 2000 to 2004, 65 percent of the billion-dollarplus bankruptcies were filed in two jurisdictions (out of the 160 federal bankruptcy courts)—Delaware (35 percent) and New York (30 percent). Lynn LoPucki, “Courting the Big Bankrupts,” 28 LEGAL TIMES 29 (Jul. 18, 2005). 21. 596 F.2d 1239 (5th Cir. 1979). 22. Id. at 1247. 23. See, e.g., In re Cole, 2008 WL 2857118, at *3-4 (Bankr. N.D.Tex. 2008); In re Teal, 297 B.R. 922, 924 (Bankr. S.D.Ga. 2003); In re Harnischfeger Industries, Inc., 246 B.R. 421, 435 (Bankr. N.D.Ala. 2000); In re Bruno’s, Inc., 227 B.R. 311, 328 n.67 (N.D. Ala. 1998); Haworth, Inc. v. Sunarhauserman, Ltd./Sunarhauserman Ltee, 131 B.R. 359, 362 (Bankr. W.D.Mich. 1991); In re Portjeff Dev. Corp., 118 B.R. 184, 193 (Bankr. E.D.N.Y. 1990). 24. 596 F.2d at 1247. Commonwealth noted the following factors under the heading of convenience to parties: the proximity
of creditors of every kind to the Court; the proximity of the debtor to the Court; the proximity of the witnesses necessary to the administration of the estate; the location of the assets; the economic administration of the estate; and the necessity for ancillary administration if liquidation should result. Id. 25. Fed. R. Bankr. P. 116(b)(1) (repealed) (emphases added). 26. 28 U.S.C. § 1412 (emphases added). 27. 3W. Norton, Norton Bankr. Law & Prac. § 140:2 at 140-8. 28. In re Shorts Auto Parts of Warren, Inc., 136 B.R. 30, 35 (Bankr. N.D.N.Y. 1991). 29. Longhorn Partners Pipeline, 408 B.R. at 102. 30. Id. at 103 (emphasis in original). 31. In re TS Tech USA Corp., 551 F.3d 1315, 1320 (Fed. Cir. 2008). 32. Id. at 1321-22. Nevertheless, parties have managed to reignite the Eastern District of Texas as the hub of patent cases by creating exceptions to Volkswagen for cases where evidence and witnesses are dispersed throughout the country. See, e.g., Novartis Vaccines and Diagnostics, Inc. v. Hoffman-La Roche Inc., 597 F.Supp.2d 706, 711, 713 (E.D.Tex. 2009) (refusing to transfer venue, noting that physical evidence was not “confined to a limited region” and that “the witnesses are decentralized”). 33. See supra n. 20.
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27
The Credit CARD Act of 2009
By David Smith
S
tarting in the 1980’s and going forward, easy consumer credit was a hallmark of the American economy. Credit cards were (and are) a central feature of consumer credit and regulation of credit cards was historically viewed as an issue of disclosure as opposed to actual control of the terms and conditions of the credit card agreement.1 Known as open-ended credit accounts, they are broadly governed by the Truth In Lending Act (TILA) which in turn enables the Federal Reserve to issue regulations dealing with consumer credit issues.2 Passed in 1968, the concept of TILA through the years was to require certain uniform disclosures which, in theory, would allow the consumer to compare the terms of the credit offering, such as the annual percentage rates, annual fees and so forth.3 Although some incursions were made into this historical approach, the consumer credit crisis brought certain longstanding sore points to the forefront such that pressure built for Congress to “do something.” The result was the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the Credit CARD Act, in which Congress and the Federal Reserve are now openly governing features of credit card agreements, a trend that, once established, will likely
continue.4 Most consumers and even most attorneys are unaware of the terms and conditions contained in a cardmember agreement (the “CMA”); nonetheless, the CMA governs the relationship between the credit card company and the consumer. The CMA contains a number of features which are a surprise to most customers and have led to confusion and anger. A prominent issue addressed by the CARD Act is the CMA itself which, under existing case law, could be changed unilaterally by the credit card company—but not by the consumer. Another perceived problem was the practice of increasing the APR on an account even though the consumer was not late or delinquent. The Credit CARD Act not only addressed these items but also, over limit/ delinquent fees, damages under TILA, repayment ability (some times referred to as “suitability”), and access to debt management counseling.5 1. Advance Notice of Change in Terms Courts have long recognized that credit card issuers have the right, pursuant to the CMA and in some cases by statute, to amend the terms of the CMA by sending out a mailer and allowing the consumer the opportunity to opt out.6 The underlying policy has been that creditors, with millions of customers, needed to have a
method to change a term or condition (such as insertion of an arbitration clause) without requiring the explicit consent of the consumer. In other words, if the customer did not explicitly reject the change, then the new terms would apply to both the existing credit balance as well as purchases going forward. Under the new Act, the creditor now must give 45 days notice of increases in APR or “significant changes” to the CMA.7 This provision is in response to the perception that companies “hooked” customers on the credit card and then raised the rate without sufficient notice to allow the debtor to either pay off or move the balance. In addition, consumer advocates were displeased at what they believed to be creditors’ alleged sneaky insertion of arbitration clauses into CMAs. There are exceptions to the rate increase notification, such as a rate being previously pegged to a published rate or due to a default. As for “significant changes,” those have yet to be detailed by the Fed. Should a consumer decide to opt out, the creditor may not treat it as a default nor may the creditor demand immediate payment. Further, the CARD Act asks the Fed to regulate the conspicuousness of the opt out provision. 2. Increase of APR to Outstanding Balance As the sophistication of credit scoring and
information processing techniques increased, creditors had the ability to periodically review a customer’s credit history and determine whether that customer posed an increased risk of default. If so, then, pursuant to the CMA the creditor would increase the APR and apply it to the outstanding balance, as opposed to purchases on a going forward basis. The CARD Act bars increases, penalties or fees to “outstanding balances,” unless they fall into one of four exceptions.8 Outstanding balances are defined as that amount owed by the consumer 14 days after the consumer receives notice of a fee increase.9 The exceptions, which some contend swallow the protection, are (1) if the APR increases after a specified time; (2) the APR increases after the consumer completes (or defaults) on a workout program; (3) a variable APR increases as disclosed in the CMA, based on changes in published index not under creditor’s control; and (4) the increased APR, fee, or finance charge is due “solely” to fact that the account creditor itself has not received “a minimum payment” within 60 days after its due date. A creditor must give a 45-day advance notice before it can apply a penalty APR to outstanding balances. An APR increase notice must describe how a consumer can close their account before the effective date of “subject rate increase.”10 3. Penalty Fees/Over Limit fees With the announcement that record profits were being earned by the creditors in the midst of the credit crisis, and a large portion of that being derived from penalties and fees, there was pressure on Congress to include some restrictions in the CARD Act. Most of us are familiar with at 30
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least one of these fees: the dreaded “over limit” fee in which a transaction sends the outstanding balance over the limit previously set by the creditor. Typically, the consumer would then face multiple applications of this fee in such instances as subsequent transactions or a continued over limit balance in future billing cycles. Under the CARD Act, creditors can impose an over limit fee only once during the billing cycle in which the consumer goes over limit and once in each of the following two billing cycles, unless the consumer has “obtained an additional extension of credit in excess of such credit limit during any such subsequent cycle” OR “reduces the outstanding balance below the credit limit as of the end of such billing cycle.”11 However, Congress left it to the Fed to issue regulations governing the required disclosures and prohibit creditors from manipulating credit limits to increase over limit and other penalty fees. There is no indication as to when these regulations are expected to be issued nor the form that they might take.12 4. New Statutory TILA damages One of the perceptions about the handling of credit card accounts was that, regardless of TILA or Reg Z standards, the penalties for violations by a creditor were not sufficiently stiff to deter misconduct. Now, creditors that violate TILA may face enhanced statutory damages in connection with an “open-end consumer credit plan.” As revised, the statutory damages for such open-end plans will equal “twice the amount of any finance charge in connection with the transaction, with a minimum of $500 and a maximum of $5,000, or such higher amount as may be appro-
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priate in the case of an established pattern or practice of such failures.”13 5. Suitability—Repayment Ability The Credit CARD Act cannot be viewed in a vacuum and is subject to and the product of broader trends in consumer finance. One of the hottest ideas in recent years is the doctrine of “suitability.” Suitability comes to consumer finance from the world of securities law in which a broker or investment advisor must consider the level of sophistication, intelligence, etc. of the consumer when deciding the level of risk that is acceptable for a suitable investment for that customer.14 As expressed in the realm of consumer finance, and first espoused in terms of consumer mortgages, the burden would be placed upon the creditor to consider a consumer’s ability to repay a loan before extending credit to the debtor.15 This concept, much discussed in recent years and a favorite of House Representative Barney Frank (a primary mover behind much consumer finance legislation), was justified in the context of consumer mortgages under the belief that it would be an important tool to save people’s homes.16 The problem with the suitability doctrine is that neither the industry, consumer advocates, Congress nor the Fed has ever agreed upon an acceptable metric to determine whether a loan product is appropriate for a consumer.17 Regardless, the CARD Act fearlessly states that a creditor may not open any credit card account for any consumer, or increase any credit limit applicable to the account, unless the creditor considers the “ability of the consumer to make the required payments under the terms” of such account.18 No guidance is given on this front although it is expected that, again, the Fed will have to speak on the subject.19 6. Access to Debt Management/ Credit Counseling Services Suspicion that credit card issuers were making credit too easily available to consumers pervaded the debate concerning the sources of the credit crisis and filtered
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down to the Credit CARD Act. It was decided that consumers needed to be reminded about the risks of credit card debt. Further, it was deemed advisable that the customer receive information regarding credit counseling and/or debt management. To that end, the Fed must issue guidelines in consultation with the Secretary of the Treasury, for the es-
tablishment and maintenance by creditors of a toll-free number that can provide information about accessing credit counseling and debt management services.20 Conclusion For many years, credit cards were viewed as a matter of convenience with the recognition that the responsibility lay with the user to exer-
cise prudence in handling their purchases and corresponding debt. Congress and the courts agreed with this concept, focusing on “creditor disclosure” to allow consumers to make informed choices.21 Further, the convenience went hand-in-hand with the relatively cheap cost of credit which in turn helped fuel the expanding economy of the last 30 years. The Credit CARD Act moves away from this hands-off approach and in the direction of “protecting” the consumer from him or herself. No doubt some will argue that these protections were long overdue; however, with every incremental increase in protection, there could be a corresponding increase in the cost of credit or decrease in the availability of that credit. The law of unintended consequences may apply here. David Smith is a partner in the Houston office of McGlinchey Stafford PLLC. He is Board Certified in Consumer and Commercial Law by the Texas Board of Legal Specialization. Endnotes
1. The concept was known as “creditor disclose.” See Matthew A. Edwards, Empirical and Behavioral Critiques of Mandatory Disclosure: Socioeconomics and the Quest for Truth in Lending, 14 Cornell J.L. & Pub. Pol’y 199, 200-201 (2005); Christopher Peterson, Truth, Understanding, and High Cost Consumer Credit: The Historical Context of TILA, 55 Fla. L. Rev. 807, 818 (2003). 2. TILA itself was passed as a part of a larger series of legislative acts collectively known as the “Consumer Protection Act,” which perhaps foreshadowed the tension between the desire to overtly protect the consumer as opposed to merely relying on consumer sophistication in a free enterprise approach. Ralph C. Clontz, Jr., Truth-inLending Manual, ¶ 1.-02 (1997). 3. See 15 U.S.C. §1602 (f) (1968); Regulation Z, 12 C.F.R. § 226.3 4. See new TILA §171, et seq. 5. The CARD Act addresses many additional areas and should be read in its entirety. 6. See Grasso v. First USA Bank, 713 A.2d 304, 309 (Del. Super. 1998); Del. Code Ann. Tit. 5 §952 (b) (1) and (2), Amendment of Agreement. 7. New TILA §171(b)(1)-(3). 8. New TILA §171. 9. Id. 10. Id. 11. The CARD Act adds new sub-sections (j), (k) and (l) to the end of TILA §127 (15 USC §1637). 12. See Interim Final Rule and request for public comment, Regulation Z, 12 C.F.R. Part 226, Federal Register Vol. 74, No. 139, July 22, 2009. 13. 15 USC §1640(a)(2). 14. See §2310 of the NASD Rules: “In recommending to the customer a purchase of a security the member shall have reasonable grounds for believing that the recommendation is suitable for the customer based on the facts disclosed by the customer as to his other holdings, financial situation and needs.” 15. See Suitability and HOEPA, Koren, Bennet, 2007 Consumer Finance Legal Conference. 16. Frank was quoted by the Wall Street Journal: “We will pass a bill that won’t allow companies to loan people more money than they can pay back...” (WSJ, April 25, 2007) (in the context of discussion about the mortgage crisis). 17. Koren, Suitability and HOEPA. 18. New TILA §150. 19. Interim Final Rule, Regulation Z, 12 C.F.R. Part 226, Federal Register Vol. 74, No. 139, July 22, 2009. 20. The CARD Act refers to new requirements in TILA, sub-section (iv) of TILA §127(b) (11)(B). 21. See Ralph J. Rohner and Fred H. Miller, Truth in Lending, Chapter 1 (2000).
32
January/February 2010
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Resolving the Conflict: The Federal Arbitration Act Versus The Bankruptcy Code
By Deborah Karakowsky
F
or years now, more and more legal disputes are being resolved in arbitration. Given the Federal Arbitration Act’s (FAA) strict enforcement of arbitration agreements, many assume that a well-drafted arbitration clause is a guarantee of arbitration. However, to many contracting parties’ surprise and consternation, if a bankruptcy proceeding has been initiated, their well-drafted provision may be of little help and, depending on the nature of the claim, they may find their arbitration rights whittled away by a bankruptcy court.
The FAA mandates that federal courts enforce all valid and binding arbitration agreements by compelling arbitration of all arbitrable claims. The Bankruptcy Code directs that all actions against the debtor—including a proceeding in arbitration—must be automatically and immediately stayed after a debtor seeks the protection of bankruptcy. When the two collide, federal courts are presented with a difficult conflict. This article addresses the standards that have developed that can aid in predicting under what circumstances the Bankruptcy Code prevails and a bankruptcy court has the authority to deny enforcement of a valid arbitration agreement. Federal Courts Strictly Enforce Valid Arbitration Agreements Touting the benefits of arbitration as a streamlined alternative to litigation, in 1947 Congress enacted the FAA. The FAA directs that a written provision in a contract “evidencing a transaction involving commerce” to settle through arbitration any disputes arising out of the contract “shall be valid, irrevocable, and enforceable.”1 Congress enacted the FAA to ensure the “rapid and unobstructed enforcement of arbitration agreements.”2 The FAA therefore establishes a public policy that strongly favors the arbitration of disputes and requires courts to stringently enforce arbitration agreements.3 Once an arbitration agreement is established, a court will not deny arbitration “unless it can be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”4 Federal Bankruptcy Courts Must Automatically Stay Arbitration The Bankruptcy Code strongly favors the centralization of all disputes against a debtor in the bankruptcy court. “By centralizing all prebankruptcy civil claims against a debtor in the bankruptcy court, the debtor is granted a ‘breathing spell’ during which he is relieved of 36
January/February 2010
the financial pressures that drove him to bankruptcy.”5 Additionally, the centralization of all claims “permits the assets of the debtor’s estate to be marshaled for distribution to creditors in an orderly and equitable fashion.”6 Thus, when a debtor files a bankruptcy petition, any action against the debtor—including an arbitration proceeding—is stayed automatically, and a creditor must show cause to obtain relief from the automatic stay in order to pursue arbitration against the debtor.7 Finding Middle Ground The first appellate court to address the conflict between the FAA and the Bankruptcy Code was the Third Circuit when in 1983 it decided Zimmerman v. Continental Airlines.8 There, the court held that “because the underlying purposes of the Bankruptcy Reform Act impliedly modify the Arbitration Act, the granting of a stay pending arbitration, even when the arbitration clause is contractual, is a matter left to the sound discretion of the bankruptcy judge.”9 Accordingly, Zimmerman held that bankruptcy courts had broad discretion to refuse to compel arbitration. Four years later, the FAA’s mandate of strict enforcement of arbitration agreements was confirmed and intensified by the U.S. Supreme Court in Shearson/American Express Inc. v. McMahon.10 There, the Supreme Court held that the FAA, “standing alone, … mandates enforcement of agreements to arbitrate statutory claims.”11 The Court recognized that the FAA’s mandate may be overridden only if the party opposing arbitration can show that Congress intended to preclude arbitration of the statutory rights at issue.12 This congressional intent can be deduced from the statute’s text or legislative history, or from “an inherent conflict between arbitration and the statute’s underlying purposes.”13 Reacting to McMahon’s affirmation of the arbitration mandate and Congress’ 1984 amendments to the Bankruptcy Code,14 in 1989 the Third Circuit abandoned Zimmerman’s “sound discretion”
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standard. Applying McMahon to the context of the conflict between the FAA and the Bankruptcy Code, in Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith the court held that an agreement to arbitrate must be enforced unless the party seeking to arbitrate shows that “the text, legislative history, or purpose of the Bankruptcy Code conflicts with the enforcement of an arbitration clause.”15 Because the court found no evidence of such intent in either the legislative history or the statutory text of the Bankruptcy Code, it held the relevant determination is whether there is an “inherent conflict” between arbitration and the objectives of the Bankruptcy Code.16 If a severe conflict is found, then the court can properly conclude that, with respect to the particular Code provision involved, Congress intended to override the FAA’s general policy favoring the enforcement of arbitration agreements. Considering the claims before it, the court concluded that an adversary proceeding involving noncore matters would not “seriously jeopardize the objectives of the Code” and the court therefore did not have discretion to refuse to compel arbitration.17 Following Hays, for purposes of determining whether Congress intended to carve out an exception to the FAA’s mandate (and accordingly that a bankruptcy court has discretion to deny the enforcement of a valid arbitration clause), many courts have found useful the core/ non-core distinction mentioned in Hays. While the Bankruptcy Code does not offer a definition of a core proceeding, it can be defined as a proceeding involving a right created by federal bankruptcy law which would only arise in bankruptcy and that affects the adjustment of the debtorcreditor relationship.18 Claims that “arise under” the Bankruptcy Code or “arise in” a bankruptcy case are “core” matters; claims that “relate to” a bankruptcy case are “non-core.”19 28 U.S.C. 157(b) (2) contains a non-exclusive list of fifteen “core proceedings.”20 A bankruptcy judge may hear and determine any “core” proceeding. All other proceedings related
to a bankruptcy case are “noncore” and are those that could have been brought in a federal or state court in the absence of a bankruptcy petition. The determination of whether a bankruptcy proceeding is core or noncore is a question of law.21 The Hays holding with regard to noncore matters makes “eminent sense” and has been “universally accepted.”22 Thus, where a non-core proceeding is at issue, the majority of federal courts conclude that “the presumption in favor of arbitration usually trumps the lesser interest of bankruptcy courts in adjudicating noncore proceedings.”23 Thus, the “inquiry ends and the bankruptcy court lacks [the] discretion to refuse arbitration.”24 The law is less clear with regard to core proceedings, where the bankruptcy court’s interest is greater. Some courts have found the core/non-core distinction determinative of the bankruptcy court’s authority when core proceedings are at issue, holding that “as to core proceedings,…[the] court may exercise its full panoply of discretion…in determining whether to refer a proceeding before it to arbitration.”25 However, the majority position is that, while compelling arbitration of core proceedings is more likely to interfere with the objectives of the Code than compelling arbitration of non-core proceedings, the fact that a claim is “core” does not end the inquiry.26 In other words, that a proceeding is deemed to be core does not automatically give the Bankruptcy Court the discretion to deny arbitration. Instead, if a core proceeding is at issue, the bankruptcy court still must determine whether the McMahon standard is satisfied—whether arbitration of the proceeding would conflict with the purposes of the Code.27 Courts that have refused to find that core claims categorically vest bankruptcy judges with discretion to deny arbitration have done so because the category of core claims is too broad, such that it cannot be assumed that all core proceedings are premised on provisions of the Code that inherently conflict with the FAA. Instead, to determine whether arbitration would
conflict with the Code, these courts focus on why a claim is core—specifically, whether their “coreness” is procedural or substantive. Many proceedings are procedurally core—“they are garden variety pre-petition contract disputes dubbed core because of how the dispute arises or gets resolved.”28 The arbitration of a procedurally core dispute rarely conflicts with any policy of the Bankruptcy Code.29 Other proceedings are substantively core —they are not based on the parties’ prepetition relationship, and involve rights created under the Bankruptcy Code.30 It is more likely that arbitration of these claims will conflict with the policy of the Bankruptcy Code, and thus the bankruptcy court is granted much greater discretion to refuse to compel arbitration.31 Accordingly, for many courts, it is the underlying nature of the proceeding, not the label “core,” that determines whether arbitration would conflict with the purposes of the Code. Conclusion Where an otherwise applicable arbitration clause exists, a bankruptcy court likely lacks the discretion to deny its enforcement, unless the party opposing arbitration can establish congressional intent, under the McMahon standard, to preclude waiver of judicial remedies for the statutory rights at issue. In some jurisdictions the core/non-core distinction will determine the authority of the bankruptcy judge to refuse to enforce an arbitration agreement. In others, the core/ non-core analysis serves merely as a useful starting point, and if the claim is core, a deeper analysis is required. In either event, parties seeking to compel arbitration should take comfort in the knowledge that a bankruptcy court’s refusal to stay an adversary proceeding pending arbitration, though interlocutory in nature, is nevertheless appealable.32 Deborah Karakowsky, a 2008 graduate of the University of Texas School of Law, is an associate with the Houston office of Yetter, Warden, & Coleman LLP. Her
practice encompasses a variety of complex business disputes. Endnotes 1. 9 U.S.C. § 2. 2. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 23 (1983). 3. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985); Safer v. Nelson Fin. Group, Inc., 422 F.3d 289, 294 (5th Cir. 2005) (“The Fifth Circuit has repeatedly emphasized the strong federal policy in favor of arbitration.”). 4. AT&T Tech., Inc. v. Commc’ns. Workers of Am., 475 U.S. 643, 650 (1986) (emph. added). 5. McCartney v. Integra Nat. Bank North, 106 F.3d 506, 512 (3rd Cir. 1997). 6. Id. 7. However, as the stay is designed to protect the debtor, if the debtor is the party seeking arbitration, he may waive the stay’s protection and pursue arbitration without court approval. 8. Zimmerman v. Continental Airlines, Inc., 712 F.2d 55 (3d Cir. 1983). 9. Id. at 56. 10. 482 U.S. 220 (1987). 11. Id. at 226. 12. Id. at 227. 13. Id. 14. The 1984 Amendments undermined the goal of centralizing disputes before a single bankruptcy judge by granting the district court original but non-exclusive jurisdiction over actions and proceedings in bankruptcy. 28 U.S.C. §1334(b). 15. 885 F.2d 1149, 1157 (3d Cir. 1989). 16. The objectives of the Code that are relevant to this determination include the goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the power of the bankruptcy court to enforce its own orders. Nat’l Gypsum, 118 F.3d at 1069. 17. Hays, 885 F.2d at 1160-61. 18. See Nat’l Gypsum Co. v. NGC Settlement Trust & Asbestos Claims Management Corp., 118 F.3d 1056, 1063 (5th Cir. 1997). 19. WRT Creditors Liquidation Trust v. C.I.B.C. Oppenheimer Corp., 75 F.Supp.2d 596, 606 (S.D. Tex. 1999). 20. The list includes: administration of the estate, allowance of claims against the estate, counterclaims by the estate, orders regarding obtaining credit, orders to turn over property of the estate, avoidance of preferences, motions to lift the automatic stay, avoidance of fraudulent conveyance, dischargeability of debts, objections to discharges, determination of priorities, confirmation of plans, orders regarding the use of property, orders approving the sale of property, proceedings affecting the liquidation of assets, and the recognition of foreign proceedings. 28 U.S.C. s. 157(b) (2). 21. In re Mintze, 434 F.3d 222, 228 (3d Cir. 2006). 22. Nat’l Gypsum, 118 F.3d at 1066. 23. MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006). 24. In re Hagerstown, 277 B.R. 181, 202 (S.D. NY 2002). 25. In re Sacred Heart Hosp., 181 B.R. 195, 202 (Bankr. E.D. Pa. 1995). See also Selcke v. New England Ins. Co., 995 F.2d 688, 691 (7th Cir. 1993); In re Spectrum Info. Techs., Inc., 183 B.R. 360, 363 (Bankr. E.D.Pa. 1995); In re Am. Freight Sys., Inc., 164 B.R. 341, 347 (D. Kan. 1994); In re Glen Eagle Square, Inc., 1991 WL 71782 (Bankr. E.D. Pa. 1991). 26. Several courts have compelled arbitration of core issues. See In re Statewide Realty Co., 159 B.R. 719, 722 (Bankr. D.N.J. 1993); In re Chorus Data Systems, Inc., 122 B.R. 845 (Bankr. D.N.H. 1990); In re Bi-coastal Corp., 111 B.R. 999 (Bankr. M.D. Fla. 1990). 27. Selcke v. New England Ins. Co., 995 F.2d 688, 691 (7th Cir. 1993); In re Mintze, 434 F.3d at 231; Nat’l Gypsum, 118 F.3d at 1067; United States Lines, Inc. v. Am. S.S. Owners Mut. Prot. & Indem. Ass’n. Inc., 197 F.3d 631 (2d Cir. 1999); Pardo v. Akai Elec. Co., 2001 WL 984678 (S.D.N.Y. 2001); Cibro Petroleum Prods., Inc. v. City of Albany, 270 B.R. 108 (S.D.N.Y. 2001). 28. Hagerstown, 277 B.R. at 203. 29. Id. 30. Id. 31. Id. 32. Section 16 of the Federal Arbitration Act provides that an appeal may be taken from an order “refusing a stay of any action under section 3” and permits interlocutory appeals of orders favoring litigation over arbitration. See also McDermott Int’l, Inc. v. Underwriters at Lloyds Subscribing to Memorandum of Ins. No. 104207, 981 F.2d 744, 746-47 (5th Cir. 1993); Am. Cas. Co. of Reading, Pa. v. L-J Inc., 35 F.3d 133, 135 (4th Cir. 1994).
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Legislative Changes Impacting the Residential Landlord Tenant Relationship in Texas
By Elizabeth M. Bruman
T
he federal and Texas legislatures were busy in 2009 adding additional consumer protections to residential landlord/tenant relationships. On May 20, 2009, the federal “Protecting Tenants at Foreclosure Act of 2009” became effective.1 This Act is designed to protect tenants throughout the nation who are innocent victims in the foreclosure crisis. In addition, this Act applies to all foreclosures of all federally-related mortgage loans and to any dwellings or residential real properties.2 It appears to apply to tenants of single-family properties, multifamily properties, condominiums, and even mobile home renters if the mobile home is attached to real estate and sold at foreclosure.3 All these protections expire at the end of 2012.4 In Texas, the Texas Legislature provided additional tenant protections by prohibiitting residential landlords from interrupting utility services for nonpayment of rent and allowing courts to order landlords to repair premises.5 Federal Law Protecting Tenants at Foreclosure This Act enables a bona fide tenant leasing a premises being foreclosed upon to continue occupancy through the full term of the lease unless the purchaser at foreclosure intends to use the property as his primary residence.6 If the purchaser at foreclosure intends to use the property as his primary residence, he must give the tenant at least 90 days’ notice to vacate7—even if the lease has expired or is month-to-
month.8 Nothing in this section of the Act affects the requirements for termination of a federal- or state-subsidized tenancy or any state or local law that provides longer time periods or other protections for tenants.9 The Act defines a bona fide lease or tenancy.10 A lease or tenancy shall be considered bona fide only if: (1) the mortgagor or child, spouse, or parent of the mortgagor under the contract11 is not the tenant; (2) the lease or tenancy was the result of an arms-length transaction; and (3) the lease or tenancy requires the receipt of rent that is not substantially less than the fair market rent for the property or the unit’s rent is reduced or subsidized due to a federal, state or local subsidy.12 Conflict with Texas Property Code The Act conflicts with and presumably preempts the time frames for notice to vacate currently set forth in the Texas Property Code. In contrast to the protections provided by the Act, the Texas Property Code provides that under certain circumstances, such as where the property is purchased at a tax or trustee’s foreclosure sale under a lien superior to the tenant’s lease, the tenant may be entitled to only as little as 30 days’ notice to vacate.13 The new federal Act now presumably requires the 90 day notice, under the Doctrine of Federal Preemption.14 Moreover, the Texas Property Code provisions which allow a 30-day notice to vacate also explicitly requires a tenant to abide by the terms of the lease and pay rent.15 Texas law also implicitly
requires the new owner to abide by the lease and other applicable laws.16 Similar provisions are absent from the federal statute, but are likely to be reasonably inferred. Texas Legislative Changes In addition to federal changes to residential landlord/tenant laws, the Texas Legislature has been very active in providing additional protections to tenants in its recent legislative session. The Property Code amendments and repealing orders are effective January 1, 2010.17 The rights of residential tenants to obtain relief in Justice Court have been increased by two new procedures. Protection from Interruption of Tenant Utilities The Legislature repealed code sections that permitted residential landlords to interrupt tenant utility services for nonpayment of rent.18 The new amendments provide a remedy if a landlord interrupts tenant utilities.19 By sworn complaint and orally under oath, a tenant may request a Justice Court to issue an ex parte writ of restoration order for utilities to be immediately restored pending a final hearing.20 A landlord is entitled to service and a hearing within seven days of the landlord’s request for a hearing.21 A landlord’s failure to comply with a writ of restoration is grounds for contempt of court and is punishable by a fine or confinement to jail.22 Expansion of Jurisdiction for Orders of Repair to Premises As a second new procedural gain for tenants, Justice Courts are now allowed to issue a judgment, including an order of repair of leased premises, that does 40
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not exceed $10,000, excluding interest and court costs.23 The Justice Court must conduct a hearing on request of the landlord not earlier than the sixth day nor later than the tenth day after service.24 This judgment may be appealed to county court.25 “An owner of real property who files a notice of appeal” perfects the appeal and stays the effect of the Justice Court judgment without the necessity of posting an appeal bond.26 Protection for Lease Guarantors As a protection for residential lease guarantors, statutory limitations have been placed on guarantees of residential leases.27 The Property Code contains a new section which releases a lease guarantor from all liability arising from a tenant’s residential lease renewal unless the guarantor had expressly agreed by particular language in the original lease to guarantee the renewals or the guarantor signs a new, separate guaranty agreement at the time of the renewal.28 Protection for Victims of Family Violence Since 2005, a tenant who is a victim of family violence has had rights to terminate a lease under certain circumstances.29 Previously, a tenant could terminate the rights and obligations under a lease by presenting a temporary injunction issued under Subchapter F, Chapter 6 of the Family Code or a protective order issued under Chapter 85 of the Family Code.30 Now, a tenant may also present an ex parte order issued under Chapter 83 of the Family Code.31 To trigger the tenant’s right to terminate the lease prior to expiration, previously a judge had to sign the specified order, the tenant had to deliver a copy to the landlord, and the tenant had to vacate the dwelling.32 Now, the statute
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also requires a 30-day written notice of termination by the tenant.33 Tenant’s rights are expanded if the acts of family violence are committed by a co-tenant or cooccupant of the dwelling by eliminating the 30-day notice requirement.34 Tenants may not waive these rights.35 Protection for Victims of Sexual Offenses Similar to the existing provision excusing a tenant from a lease under certain conditions of family violence, a new section of the Property Code is entitled “Right to Vacate and Avoid Liability following Certain Sex Offenses.”36 This new Property Code section provides a tenant the right to terminate the lease, to vacate the dwelling, and to avoid liability “for future rent and any other sums due under the lease” if the tenant complies with subsection (c) following certain sexual offenses.37 A tenant must be a victim of a sexual assault or a parent or guardian of a victim of a sexual assault, aggravated sexual assault, or continuous sexual abuse of a child, which occurs during the preceding sixmonth period on the premises or at any dwelling on the premises.38 Upon presentation of any of four specific types of documentation, a written 30-day notice to the landlord, and vacating the dwelling, the tenant may exercise the right to terminate the future liabilities of the lease.39 A tenant’s liability for delinquent, unpaid rent and other sums owed prior to termination is not affected.40 A landlord in violation of this provision is subject to actual damages, a civil penalty of one month’s rent plus $500, and attorney’s fees.41 A tenant may not waive these rights.42 Protections for Hearing-Impaired Tenants The Texas Legislature has amended smoke detector requirements for hearing impaired tenants.43 A smoke alarm must be audible to the person in the bedroom it serves.44 Upon request of the tenant, as an accommodation for a person with a hearing-impairment disability or as required by law as a reasonable accommodation
for such a person, a smoke detector must not only be audible to the bedroom it serves, but it must be capable of alerting a person with a hearing impairment in the bedroom it serves.45 Clarity for Commencement of Late Fees Last, the Property Code was amended to clarify that a landlord may not assess a late fee until at least one full day has expired after the day on which rent was due.46 Conclusion The 2009 legislative changes, both federal and state, appear to be a reflection of the state of our economy and social conditions. While the federal amendments address our nation’s current economic crisis, the amendments to the Texas Property Code imposed by the Texas Legislature appear to reflect a need to reign in landlords from interrupting tenant utilities, to order immediate repairs, and to
provide tenants’ rights under conditions of family violence or sexual crimes. It is for the reader to ponder whether these rights should have been established years ago or if these statutory rights now reflect increasing abuses and violence in our society. Elizabeth M. Bruman has been practicing law for more than 22 years and is board certified in Civil Appellate Law and Commercial and Consumer Law, which she practices in Harris and surrounding counties through the Law Office of Elizabeth Bruman, P.C. (www.brumanlaw.com). Endnotes 1. Helping Families Save Their Home Act of 2009, Pub. L. No. 111-22, 123 Stat. 1632, § 701. 2. Id. at § 702(a). 3. Id. at § 702(a). 4. Id. at § 702(a). 5. See generally, TEX. PROP. CODE ANN. (Vernon Supp. 2009). 6. Helping Families Save Their Home Act of 2009, Pub. L. No. 111-22, 123 Stat. 1632, § 702(a)(1) [hereinafter “Home Act”]. 7. Id. at § 702(a) (2)(A). 8. Home Act at§ 701(a)(1); (a)(2)(B). 9. Id. at § 701(a)(2)(B). 10. Id. at § 702(b). 11. Curiously, the statute uses the word “contract” instead of “lease.” 12. Home Act at§ 702(b)(1) - (3). 13. TEX. PROP. CODE ANN. §
24.005(b) (Vernon 2000) (emphasis added). 14. There is no case yet providing this holding. 15. TEX. PROP. CODE ANN. § 24.005(b) (Vernon 2000). 16. See e.g., Id. at § 24.005(b)(e) (Vernon 2000). 17. See generally, TEX. PROP. CODE ANN. (Vernon Supp. 2009). 18. Id. at § 92.008(c) - (e), repealed by Acts 2009, 81st Leg., ch. 1112, § 3, eff. Jan. 1, 2010. 19. Id. at. § 92.0091 (Vernon Supp. 2009). 20. Id. at § 92.0091(b), (c) (Vernon Supp. 2009). 21. Id. at § 92.0091(e) (Vernon Supp. 2009). 22. Id. at § 92.0091(i) (Vernon Supp. 2009). 23. Id. at § 92.0563(e) (Vernon Supp. 2009). 24. TEX. PROP. CODE ANN. § 92.0563(d) (Vernon Supp. 2009). 25. Id. at § 92.0563(f) (Vernon Supp. 2009). 26. Id. at § 92.0563(f) (Vernon Supp. 2009) Why this section states “owner of real property” instead of “landlord” is a mystery. There could be a case in which the owner and a landlord are different parties and the owner of the property was not joined in the justice court suit as the rest of this section refers to the landlord. 27. Id. at § 92.021 (Vernon Supp. 2009). 28. Id. at § 92.021(b), (c) (Vernon Supp. 2009). 29. Id. at § 92.016 (Vernon Supp. 2005). 30. Id. at § 92.016(b) (Vernon 2005). 31. Id. at § 92.016(b)(2) (Vernon Supp. 2009). 32. TEX. PROP. CODE ANN. § 92.016(c) (Vernon Supp. 2005). 33. Id. at § 92.016(c)(3), (4) (Vernon Supp. 2009). 34. Id. at § 92.016(c-1) (Vernon Supp. 2009). 35. Id. at § 92.0161(g) (Vernon Supp. 2009). 36. Id. at § 92.0161 (Vernon Supp. 2009). 37. Id. at § 92.0161(b) (c) (Vernon Supp. 2009). 38. Id. at § 92.0161(c) (Vernon Supp. 2009). 39. Id. at § 92.0161(d) (Vernon Supp. 2009). 40. TEX. PROP. CODE ANN. § 92.0161(e) (Vernon Supp. 2009). 41. Id. at § 92.0161(f) (Vernon Supp. 2009). 42. Id. at § 92.0161(h) (Vernon Supp. 2009). 43. Id. at § 92.254 (Vernon Supp. 2009). 44. Id. at § 92.254(a)(2), (a-1) (Vernon Supp. 2009). It appears a landlord will need to determine in which bedroom a hearing-impaired person will sleep. 45. Id. at § 92.254(a)(2), (a-1) (Vernon Supp. 2009). 46. Id. at § 92.019(a)(3) (Vernon Supp. 2009).
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By Peggy Montgomery
Houston Bar Association
Consumer Law Task Force
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he federal and Texas legislatures were busy in 2009 adding additional consumer protections to residential landlord/tenant relationships. On May 20, 2009, the federal “Protecting Tenants at Foreclosure Act of 2009” became effective.1 Houston Bar Association (HBA) President Barrett Reasoner established as one of his initiatives a Consumer Law Task Force (the “Task Force”) to study and implement ways in which the HBA could provide information and services to consumers in our current challenging economic times, where legal issues involving foreclosure, bankruptcy and credit are quickly rising. One only had to attend the Housing Foreclosure Prevention Workshop sponsored by Congressman Al Green and the Houston Foreclosure Prevention Task Force this fall at the Willie Lee Gaye Hall Campus of the Houston Community College to realize the relevance of this initiative for our community. In excess of 200 people were at the workshop to seek assistance with credit and mortgage issues. This number represents only one defined area of Houston. Multiply it by many similar areas in Houston and the magnitude of the need for legal assistance for consumers is self evident. Fortunately, as shown by this workshop, the Task Force soon realized that there were already resources available on which to build to fulfill Barrett Reasoner’s desire to assist low-income Harris County residents with consumer issues. 42
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The term “Consumer Law” covers a number of legal issues, including credit liability, contracts, warranties, the Deceptive Trade Practices Act, debt collection, insurance and landlord/tenant. However, with the current economic crisis, the Task Force is focusing on credit liability, including fair credit reporting, repairing credit and payday loans, debt collection, mortgage foreclosure, and, of course, bankruptcy and tax issues that arise when consumers are un-
able to meet their credit obligations. With this focus in mind, representatives were appointed to the Task Force not only from the Commercial and Consumer Law Section of the HBA but also from the tax and bankruptcy sections. It also reached out into the community to add representatives from the Houston Foreclosure Prevention Task Force and the Center for Consumer Law at the University of Houston. Both of these or-
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ganizations already provide significant assistance for consumers, and the Task Force plans to expand and compliment these already existing valuable services. The HBA Consumer Task Force includes Houston attorneys knowledgeable in consumer law (Dean Richard Alderman and Robert Johnson with the University of Houston Center for Consumer Law and Matthew Probus of Wauson Probus) and foreclosure issues (Rob Harlow of Jackson Walker, LLP and Diane Jasso, who is a foreclosure counselor with Avenue CDC). It is also fortunate to have attorneys from the HBA Tax Section (Mitchell Tiras of Locke Lord Bissell & Liddell LLP) and HBA Bankruptcy Section (Janet Northrup of Hughes Watters Askanase and Mark Wege of King & Spalding). Additional committee members include Barrett Reasoner; the Hon. Reece Rondon of the 234th District Court of Harris County; Randy Sorrels of Abraham, Watkins, Nichols, Sorrels, Agosto & Friend; Joe Bill Whittenburg of Strasburger & Price, LLP; Tanya Garrison of Weycer, Kaplan, Pulaski & Zuber, PC; Suewan Johnson of The Bank of New York Mellon Trust Company, NA; and myself. In the brief time that the Task Force has been operating, it has been incredibly busy. Shortly after its first meeting this summer, there was a call for an attorney to participate in a PBS special Town Hall meeting on “Facing the Mortgage Crisis.” Fortunately, Rob Harlow stepped up to the plate and did an outstanding job responding to the community’s legal questions on foreclosure. At the same time, the Task Force was busy working with the HBA staff, Family Law Section and Commercial & Consumer Law Section to update the Family Law Handbook by adding a Consumer Debt Section, and the Consumer Law Handbook by adding a section on Payday Loans. As Barrett Reasoner promoted the consumer initiative in the community and
through the media over the summer, the Task Force set about adding a consumer law focus to the Saturday Legal Advice Clinics sponsored by the HBA’s Houston Volunteer Lawyers Program. The goal was to have volunteer attorneys ready to provide brief legal consultation on consumer matters at these clinics starting with the November 7, 2009, Saturday clinic. Realizing that the consumer material used at the clinics needed to be expanded, various Task Force members worked on a handbook that would provide general assistance to volunteer attorneys. Diane Jasso provided information on “Foreclosure Prevention Counseling Basics.” Janet Northrup, with the assistance of Anabel Hernandez, provided a summary of Chapter 7 and Chapter 13 of the Bankruptcy Code. Matthew Probus not only provided a flow chart to assist in determining a consumer’s credit status in order to better provide the right counseling, but also prepared summaries on Fair Credit Reporting and Payday Loans. The Task Force also obtained permission from the State Bar of Texas to reproduce Probus’ comprehensive article on payday loans from the Poverty Law Handbook, prepared by the State Bar’s Poverty Law Section . In addition to providing materials to assist attorneys, the Task Force planned to offer either a seminar or clinic. Fortunately, we learned that the University of Houston Center for Consumer Law was sponsoring
a Continuing Legal Education course titled “Consumer Law Basics – Know the Law!” prior to the November 7 Consumer Legal Advice Clinic date. The HBA advertised the course to its members and during the seminar Richard Alderman encouraged attendees to participate in the HBA Consumer Legal Advice Clinic. The course provided a great overview on consumer law for attorneys and potential volunteers. At the same time it was working with the HVLP, the HBA Consumer Law Task Force was also working with the Houston Foreclosure Prevention Task Force (HFPT) to arrange for credit and foreclosure counselors to be available at the November 7 Clinic. The HFPT is comprised of mortgage service providers, as well as public and non-profit agencies dedicated to providing free counseling, support and resources for Greater Houston area residents who are in or potentially facing foreclosure. It sponsors various workshops, including the one referenced above with Congressman Green, to provide mortgage and credit counseling to homeowners in distress. HFPT readily agreed to provide counselors to participate in the first HBA Consumer Legal Advice Clinic on November 7. The Task Force plans to continue to work with HFPT to hold joint workshops and legal clinics to assist low-income citizens with their mortgage and credit issues. As the day of the first HBA Consumer
Legal Advice Clinic approached, Task Force members were concerned whether we would have enough lawyers to meet the client need and whether there would be enough clients for the lawyers that volunteered. But those concerns were unfounded! The morning of the event the volunteer lawyers were there (including Justin Hayes, one of the students from the Center for Consumer Law), credit and foreclosure counselors were there, and nearly 60 clients received assistance with consumer issues. The HVLP staff did an excellent job of modifying its regular clinic so that the clients with consumer issues were seen by the lawyers who volunteered specifically for the Consumer Legal Advice Clinic. The consumer legal problems varied from credit/foreclosure issues and bankruptcy to landlord/tenant and property disputes. The first Consumer Legal Advice Clinic was a big success and a great template for future clinics. Where does the HBA Consumer Law Task Force go from here? The goal is to continue to recruit attorneys with an interest in handling consumer issues to volunteer for cases through the HVLP and to expand the availability of attorneys with consumer law knowledge at the Saturday Legal Advice Clinics. The Task Force also plans to identify ways volunteer lawyers can collaborate with the University of Houston’s Center for Consumer Law, and to expand the involvement of the Houston Foreclosure Prevention Task Force in our legal clinics, using its network to reach out to low-income citizens with credit and foreclosure issues. It also will look for opportunities to expand its outreach in the community to provide information and materials on consumer law issues. Would you like to join the Task Force in its efforts? Please contact Erum Jivani (erum.jivani@hvlp.org or 713228-0735, ext. 122) at the HBA’s Houston Volunteer Lawyers Program if you are interested in handling a consumer law case or want to be informed of our next Consumer Legal Advice Clinic. Peggy Montgomery is counsel with Exxon Mobil Corporation and chair of the HBA Consumer Law Task Force.
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60th Harvest Party Raises Over $500,000 for Houston Bar Foundation
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he 60th Harvest Party, co-sponsored by the Houston Bar Association, Houston Bar Association Auxiliary and Houston Bar Foundation, raised $502,000.00 in underwriting to benefit the Foundation, the charitable arm of the association. The Foundation supports programs such as the Houston Volunteer Lawyers Program, which provides pro bono legal services to low-income Houstonians. The event was held November 16 at River Oaks County Club, with nearly 1,100 HBA members and their guests in attendance. HBA Treasurer Denise Scofield of Morgan, Lewis & Bockius LLP and HBF Chair Stewart Gagnon of Fulbright & Jaworski L.L.P. served as event co-chairs. The Houston Bar Foundation is now in its 27th year of service to the legal community and the profession. The Foundation’s primary beneficiary is the Houston Volunteer Lawyers Program, which provides thousands of hours of pro bono legal representation each year.
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From left, John Norris; Sandy Norris, president of the HBA Auxiliary; Susan Reasoner; and Barrett Reasoner, president of the Houston Bar Association
Stewart Gagnon, 2009 chair of the Houston Bar Foundation, and Lynn Gagnon
John Eddie Williams and Sheridan Williams
Elizabeth Mata Kroger and Bill Kroger
Wendy Dawson and Alistair Dawson
Karen Rozzell and Scott Rozzell
John D. Ellis, Jr. and Danielle Ellis
David Chaumette and Jaqueline Chaumette
Mary Balagia and S. Jack Balagia
Marsha Parker and Charlie Parker thehoustonlawyer.com
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HARVEST PARTY UNDERWRITERS $25,000 Andrews Kurth LLP Baker Botts L.L.P. Bracewell & Giuliani LLP Fulbright & Jaworski L.L.P. Locke Lord Bissell & Liddell LLP Vinson & Elkins LLP Williams Kherkher Hart Boundas, LLP $10,000 Beirne, Maynard & Parsons, L.L.P. Jones Day Navigant Consulting, Inc. $7,500 ExxonMobil Corporation King & Spalding LLP $5,000 Akin Gump Strauss Hauer & Feld LLP Amegy Bank of Texas Baker & Hostetler LLP Beck, Redden & Secrest L.L.P BP Chamberlain Hrdlicka ConocoPhillips DLA Piper Gardere Wynne Sewell LLP Gibbs & Bruns, L.L.P. Haynes and Boone, LLP HBA Family Law Section HBA Litigation Section Howrey LLP Morgan, Lewis & Bockius LLP Pride International Corp. Schirrmeister Diaz-Arrastia Brem LLP Shell Oil Company Thompson & Knight LLP Weil, Gotshal & Manges LLP Winstead PC $2,500 Abraham, Watkins, Nichols, Sorrels, Agosto & Friend Adams and Reese LLP Ajamie LLP Anadarko Petroleum Corporation Bank of Texas, N.A. Caddell & Chapman, P.C. CenterPoint Energy James West Christian Coats l Rose Cokinos, Bosien & Young, P.C. Connelly • Baker • Wotring LLP De la Rosa & Chaumette Dewey & LeBoeuf LLP Dynegy Inc. Energy Transfer Partners L.P. Energy XXI Fisher, Boyd, Brown, Boudreaux & Huguenard, LLP Franklin, Cardwell & Jones, P.C. Frost Bank FTI Consulting Greenberg Traurig, LLP
Hogan & Hartson Huron Consulting Group Legge Farrow Kimmitt McGrath & Brown, L.L.P. Major, Lindsey & Africa Nickens Keeton Lawless Farrell & Flack LLP Noble Energy, Inc. Pillsbury Winthrop Shaw Pittman LLP Plains Exploration & Production Company Plains Marketing, L.P. Schwartz, Junell, Greenberg & Oathout, L.L.P. Skadden, Arps, Slate, Meagher & Flom L.L.P. Slusser Wilson & Partridge LLP StoneTurn Group Strasburger & Price L.L.P. Susman Godfrey LLP $2,000 Sutherland Asbill & Brennan LLP
$1,500 Duke Energy Corp. Siegmeyer, Oshman & Bissinger, L.L.P. $1,000 Abrams Scott & Bickley, L.L.P. Allen Boone Humphries Robinson LLP Bailey Perrin Bailey Berg & Androphy BJ Services Brown McCarroll, L.L.P. Buck Keenan Gage Little & Lindley L.L.P. Campbell Harrison & Dagley L.L.P. Clark, Thomas & Winters, P.C. Cooper & Scully, P.C. CRA International Cruse Scott Henderson & Allen L.L.P. Diamond McCarthy LLP Dobrowski L.L.P. EOG Resources, Inc. Nelson S. Ebaugh, P.C. Epstein Becker Green Wickliff & Hall P.C. Essmyer, Tritico & Rainey, LLP Tommy Fibich Fleming & Associates L.L.P. Fowler Rodriguez Valdez-Falui Frank, Elmore, Lievens, Chesney & Turet, L.L.P. Fullenweider Wilhite, PC Stewart and Lynn Gagnon Germer Gertz, L.L.P. Hagans Burdine Montgomery Rustay, P.C. HBA ADR Section HBA Appellate Practice Section HBA Corporate Counsel Section HBA Federal Practice Section HBA Labor & Employment Law Section HBA Real Estate Law Section Hewlett Packard Co.
Hinton Bailey Bond LLP Houston Lawyer Referral Service Jackson Walker L.L.P. Jenkins & Kamin, L.L.P. Jim Adler & Associates Johnson DeLuca Kennedy & Kurisky, P.C. JPMorgan Chase Kroger Frisby Lighthouse Legal Copy Lindeman, Alvarado & Frye Linebarger Goggan Blair & Sampson LLP Liskow & Lewis, A PLC Looper Reed & McGraw, P.C. M.A. “Mickey” Mills/The Mills Law Firm MacIntyre & McCulloch, LLP McGinnis, Lochridge & Kilgore, L.L.P. Munsch Hardt Kopf & Harr, P.C. Nathan Sommers Jacobs, P.C. Ogden, Gibson, Broocks & Longoria, L.L.P. Olson & Olson, L.L.P. Phelps Dunbar LLP Porter & Hedges, L.L.P. Providus Barrett and Susan Reasoner Reynolds, Frizzell, Black, Doyle, Allen & Oldham LLP Rhem Golvach, P.C. Gwen E. Richard Rimkus Consulting Royston, Rayzor, Vickery & Williams LLP Schiffer Odom & Hicks, PLLC Shannon Martin Finkelstein & Alvarado, P.C. Smyser Kaplan & Veselka, L.L.P. South Texas College of Law Sprott Rigby Newsom Robbins Lunceford & Bell PC Sterling Bank Strong Pipkin Bissell & Ledyard, L.L.P. Sysco Tekell, Book, Matthews & Limmer, L.L.P. The Ratliff Law Firm, PLLC Total Petrochemicals USA, Inc. US Legal Support Ware, Jackson, Lee & Chambers, L.L.P. Welsh & Chapoton LLP Westmoreland Hall Maines & Lugrin, P.C. Wright Brown & Close, LLP Yetter, Warden & Coleman, L.L.P. Zimmerman, Axelrad, Meyer, Stern & Wise, P.C. $500 Benny Agosto, Jr. HBA Law Practice Management Section HBA Oil, Gas & Mineral Law Section Perdue & Kidd, L.L.P. Stradley, Chernoff & Alford, L.L.P. UBS Wealth Management / Mark Elias and Dan Carter In Kind Contributions Bowne of Houston Business Extension Bureau
Media Reviews
The Little Red Book of Wine Law: A Case of Legal Issues By Carol Robertson American Bar Association 2008 165 pages, paperback
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Reviewed By Linhuyen Pham he Little Red Book of Wine Law is delightful to read for those curious to learn how the world of wine and the law have intersected. It is written by Carol Robertson, a 25-year practicing attorney who has represented clients in various wine-related litigation and regulatory matters. The book begins with a brief, anecdotal history of wine in the United States from the colonial days to the twenty-first century. The remaining 12 chapters of the book, each representing a bottle in a case of wine, examine interesting legal cases and developments that have impacted wine production and sales in the United States and worldwide over
the past century. The legal cases featured in the book, decided between 1910 and 2008, cover diverse wine subjects involving trademark law, antitrust law, criminal law, constitutional law, and even international treaties. Each chapter begins by explaining the case’s background, the court decision and its effects, and modern day applicability to the wine business. Notable cases discussed include the Supreme Court’s decision in Granholm v. Heald regarding the three-tier distribution system still utilized today in many states to regulate wine sales to the public, the trade dress infringement suit between Kendall-Jackson Winery and E. & J. Gallo Winery, and the legal battles of the Moramarco brothers, the Mondavi family, and the Gallo brothers over ownership of their family wine business and its namesake. Other cases shed light on the labor problems at the Charles Krug Winery and developments in protecting brand names and trademark rights since the unfavorable court decision in 1910 in the lawsuit filed by the Italian Swiss Colony against the Italian Vineyard Company to
protect the name of its then-famous “Tipo Chianti” red wine. There are short vignettes at the end of each chapter to explain a unique wine topic or provide a counterpoint to an issue mentioned in the cases. One learns from reading the vignettes the importance of “terroir” (a French word meaning “sense of place”) in selecting grapes grown in a particular geographical region when making wine and displaying the correct “appellation of origin” on wine bottles to comply with federal wine-labeling law. Other vignettes simply tell a good winelaw story to help the reader better understand the history of wine and the wine industry today. Overall, this book is interesting and delightful to read. The author presents the legal cases and wine topics in a comprehensible form so the reader does not have to be a lawyer or a wine expert to understand the issues. It is recommended to the untutored who would like to learn more about the wonderful world of wine and how it has been shaped by the law. Linhuyen Pham is an associate attorney at Heard & Medack, P.C. She is a member of The Houston Lawyer editorial board.
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OFF THE RECORD
Contending Classic Car Counsel By Fred A. Simpson
The Houston Lawyer
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ark L. Jones spends his spare time and money by “motoring” on Utah’s Bonneville Salt Flats, a time-consuming and expensive hobby, indeed. That’s of course when Mark is not pursuing his extensive law practice at Jackson Walker, advising directors on their fiduciary or statutory duties or explaining to them such things as the intricacies and pitfalls of the Troubled Asset Relief Program, When racing, Mark typically wears a “fire suit” weighing 25 pounds and worth its $1,500 pricetag. [Imagine wearing 25 pounds of clothing in a desert environment.] That suit is designed to allow only 30 seconds for the wearer/driver to exit a flaming vehicle, possibly traveling more than 200 miles per hour when fire breaks out. The car is equipped with a “Halon” fire suppression system and with a parachute to help slow the vehicle in an emergency. Mark personally achieved a recorded speed of 186 miles per hour in a 1927 Ford, but his next goal is to upgrade to the “Bonneville 200 MPH Club”1 which requires (a) driving the course in excess of 200 miles per hour, and (b) setting some form of new world record in motor racing at that 200-plus speed. Even so, Mark’s description of the thrills and challenges of driving at a mere 186 miles per hour for an extended distance on the salt flats is fascinating. Mark is a member of the “Contrivance Engineering Racing Team” based in Houston, under the leadership of Neil Akkerman, a retired businessman. Other team members include a chief executive officer, a chief operating officer, and several oilfield engineers. This team already holds eight land speed records between 215 and 280 miles per hour in an old car on the Bonneville Salt Flats, and the team plans to build an all-wheel drive vehicle that should achieve more than 600 miles per hour, greater than existing world records. 48
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Mark’s interest in classic cars began at age 14 when his grandfather (a car collector and Galveston beach racer) gave him a 1934 Ford that required lots of hands-on encouragement to stay mobile. His interest in renovating classic cars was founded on that maintenance experience. Mark now owns eight classic vehicles which he keeps in his garage and in a rented warehouse: three 1932 Fords and five 1934 Fords. Most of these vehicles
have won high awards as restored cars in their respective classes. Mark is currently rebuilding one of the 1932 Ford roadsters into a 1940’s vintage racer in which he expects to compete next year. This racer has some of the rarest vintage speed equipment available in the late 1940’s, including a Sc.O.T. Italmeccanica blower, Navarro high compression engine heads, and Halibrand quick-change rear-end. 1. For more information on Bonneville go to www.bonnevilleracing.com.
Fred A. Simpson, the immediate past editor in chief of The Houston Lawyer and a partner at Jackson Walker LLP, passed away on December 20, 2009. He was a long-time editorial board member, a prolific writer, and an exacting editor who is missed by all his colleagues.
A Profile
in professionalism
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Tracie J. Renfroe King & Spalding LLP
he lawyers that we admire win our respect and admiration not for their win/loss record, but for the way they win or lose. These lawyers practice, and by their examples embody, three essential tenets of professionalism: • Service to clients, Bar, and community • Candor • Teaching the art of professionalism to the next generation of lawyers Service In the daily milieu of competing for clients, fighting their battles, and surviving in a tumultuous economy, it’s easy to overlook our obligation to the judicial system as we give our best to serve (and keep) our clients. Yet, I believe that serving our clients with an eye on serving our judicial system is the best way to serve our clients. By this I mean winning, not at any cost, but by advocating your client’s cause consistent with the rules of fair play. Achieving results for your client in a manner consistent with the rules of fair play instills confidence in our legal system by clients, and more importantly by the adversaries whom they seek to bind by judgment or agreement. Consider the choice between a win-by-cheating or a loss in a fair contest. Whether to produce the smoking gun document; disclose the
overlooked witness who can hurt more than help your client; or withhold material information to get the deal closed. In these and myriad other choices that approach the borderline of the rules of fair play, what would you choose? The lawyers we admire never face these choices because they practice the art of advocacy in the courtroom and the boardroom in the way that serves both client and the legal system. This is Professionalism. Candor If faithful service to the justice system is the key to serving the client, candor is the currency that makes it work. Candor with ourselves is the starting point. We must never sacrifice our judgment of right and wrong to the perceived wishes of clients. Indeed, clients depend on our objective judgment of right and wrong to serve them best. In our zeal to succeed for our clients, lawyers both young and old can easily lose this perspective and fail to deliver candid assessments. However, clients deserve our best judgment, whether good news or bad, the popular option or not – unqualified candor is required. Candor with adversaries and the courts is equally important, particularly in the Houston legal community, where a culture of trust and respect among adversaries still thrives. Teaching the art of professionalism to the next generation of lawyers Good stewardship of our remarkable judicial system requires that we teach the art of professionalism to the next generation of lawyers, and that we do so in real time. Though this seems obvious, we must recommit ourselves to doing so. Advocacy and negotiation skills are taught naturally as we discharge our legal work. The greater challenge – one embraced by the legends of our legal community – is to teach young lawyers the art of practicing law on the highest road, on the road that serves rather than undermines the judicial system. Teaching young lawyers how to succeed on this road, rather than succeeding at any cost, is the hallmark of professionalism. Simply stated, professionalism means serving our clients in a manner that promotes rather than undermines the judicial system, rigorous candor with all, and dedication to teaching young lawyers these “practice skills.” thehoustonlawyer.com
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LEGAL TRENDS
Appellate Court Rules on Calculating Prejudgment Interest, In-house Counsel Fees By Ben Westcott
The Houston Lawyer
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n AMX Enterprises, L.L.P. v. Master Realty Corp., 283 S.W.3d 506 (Tex. App.—Forth Worth 2009) the Fort Worth Court of Appeals addressed three matters of first impression. For the first time a Texas appellate court ruled on whether: 1) a trial court has the equitable power to toll the accrual of prejudgment interest under the Prompt Payment to Contractors Act (“PPCA”); 2) whether a contractor who prevails under the PPCA is entitled to common law prejudgment interest in addition to the statutory interest under the PPCA; and 3) whether attorney’s fees for in-house counsel should be calculated under the market value method or the cost-plus approach. The controversy in this case arose from $46,900 of deficient payments claimed by AMX Enterprises, L.L.P. (“AMX”), a contractor, for work performed on a hotel with flood damage. AMX brought claims against the hotel owner for breach of contract, violation of the PPCA, judicial foreclosure of its constitutional lien and attorney’s fees, most of which were attributable to the work of AMX’s in-house counsel. At trial, AMX was awarded $46,900 in contract damages and $18,758.43 for statutory interest under the PPCA, an amount which excluded interest for the 745 days attributable to litigation delay. The court did not award common law prejudgment interest or attorney’s fees. On appeal, the Fort Worth court agreed with AMX’s argument that the trial court
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did not have the equitable power to toll the accrual of statutory interest under the PPCA for periods of delay in litigation. In its decision, the appellate court noted the PPCA contains “no provision for tolling the accrual of interest during periods of litigation delay” and the absence of case law affording a trial court such authority. Currently, in a time when delay in litigation is common, this decision was a substantial victory for the wrongfully unpaid contractor that seeks recovery under the PPCA. For example, in this case, the appellate court awarded $46,354.62 in statutory interest compared to the trial court’s award of $16,792.38. On the second matter of first impression, the court of appeals rejected AMX’s argument it should have been awarded the 6 percent common law prejudgement interest on the $46,900 in contract damages in addition to the 18 percent statutory interest under the PPCA. The appellate court explained prejudgment interest is intended to compensate a claimant for the period of time their money was unavailable for use and to facilitate faster settlements of debts. The court further reasoned allowing a contractor to recover interest under the PPCA and the common law would “allow a double recovery of two kinds of interest designed to promote the same two goals.” Additionally, for the first time a Texas appellate court rendered a decision on whether the market value method or the cost plus method is the appropriate approach for calculating attorney’s fees for work performed by in-house counsel. The market value method awards attorney’s fees for services of an in-house counsel calculated at a common hourly rate for attorneys of similar experience and skill. On the other the hand, the cost plus method calculates attorney’s fees for in-house counsel based on cost, plus over-head incurred by the prevailing party. In weighing its decision, the court surveyed other jurisdictions’ de-
thehoustonlawyer.com
cisions in favor of both the market value and cost plus calculation methods. In the end the court was persuaded by the arguments in favor of the market value method. Particularly, the court noted the market value method provided a system that was easier to administer, that would prevent a windfall for a losing defendant that benefited from a winning party’s choice to be represented by in-house counsel, and that is consistent with other factors Texas courts currently employ to determine attorney’s fees. Ben Westcott (ben.westcott@lawamc.com) is a shareholder in the law firm of Andrews Myers Coulter & Hayes, PC. His practice focuses on transactional and dispute resolution aspects of construction law..
The Texas Supreme Court Elaborates on the Recovery of Damages for Legal Malpractice By Polly Graham
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he Texas Supreme Court recently settled a debate among the intermediate appellate courts regarding recovery of attorney’s fees as damages for legal malpractice. The Court also addressed the “collectability” of a favorable judgment in a suit underlying a malpractice action. See Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. National Development and Research Corporation,
Join the Houston Bar Association’s 100 Club The Houston Bar Association 100 Club is a special category of membership that indicates a commitment to the advancement of the legal profession and the betterment of the community. The following law firms, corporate legal departments, law schools and government agencies with five or more attorneys have become members of the 100 Club by enrolling 100 percent of their attorneys as members of the HBA. Firms of 5-24 Attorneys Abraham Watkins Nichols Sorrels Agosto & Friend Abrams Scott & Bickley LLP Adair & Myers PLLC Ahmad Zavitsanos & Anaipakos PC Ajamie LLP Allen Boone Humphries Robinson LLP Andrews Myers Coulter & Hayes PC Bair Hilty PC The Bale Law Firm, PLLC Barker Lyman PC Bateman/Pugh PLLC Bell Ryniker & Letourneau PC Berg & Androphy Bingham, Mann, House & Gibson Boyar Miller Brewer & Pritchard PC Brown McCarroll LLP Buck Keenan Gage Little & Lindley LLP Burck Lapidus & Lanza PC Bush & Ramirez PC Butler I Hailey Caddell & Chapman Cage Hill & Niehaus LLP Campbell & Riggs Christian Smith & Jewell LLP Cochran Baker Williams & Matthiesen LLP Cokinos Bosien & Young Conley Rose PC Connelly • Baker • Wotring LLP Cooper & Scully, P.C. Cozen O’Connor Crady Jewett & McCulley LLP Cruse Scott Henderson & Allen LLP Currin, Wuest, Mielke, Paul & Knapp, PLLC David Black & Associates De Lange Hudspeth McConnell & Tibbets LLP Devlin Naylor & Turbyfill PLLC Diamond McCarthy LLP Dinkins Kelly Lenox Lamb & Walker LLP Dobrowski LLP Dow Golub Remels & Beverly, LLP Doyle Restrepo Harvin & Robbins LLP Drucker Rutledge & Smith LLP Ebanks Taylor Horne LLP Ellis Carstarphen Dougherty & Griggs PC Essmyer Tritico & Rainey LLP Faubus & Scarborough, LLP Fibich Hampton & Leebron LLP Fisher Boyd Brown & Huguenard LLP Fizer Beck Webster Bentley & Scroggins PC Fleming & Associates LLP Foreman DeGeurin & Nugent Franklin Cardwell & Jones PC Fullenweider Wilhite PC Funderburk & Funderburk LLP Galloway Johnson Tompkins Burr & Smith PC Germer Gertz LLP Givens & Johnston PLLC
Goldstein Faucett & Prebeg LLP Gordon & Rees LLP Gordon Arata McCollam Duplantis & Eagan LLP Hagans Burdine Montgomery & Rustay PC Handlin & Associates Harris Hilburn & Sherer LLP Harrison Bettis Staff McFarland & Weems LLP Hays McConn Rice & Pickering PC Henke Law Firm, LLP Hicks Thomas LLP Hirsch & Westheimer PC Hogan & Hartson LLP Holm I Bambace LLP The Hudgins Law Firm Ireson & Weizel PC Jackson Gilmour & Dobbs PC Jenkins Kamin LLP Johnson DeLuca Kennedy & Kurisky PC Johnson Radcliffe Petrov & Bobbitt Johnson Trent West & Taylor LLP Jones Walker Waechter Piotvent Carrere & Denegree LLP Kane Russell Coleman & Logan PC Kasowitz Benson Torres & Friedman LLP Kelly Hart & Hallman, LLP Kelly Sutter & Kendrick PC Linebarger Goggan Blair & Sampson LLP Liskow & Lewis A PLC Lorance & Thompson PC MacIntyre & McCulloch, LLP Manning Gosda & Arredondo LLP McGinnis Lochridge & Kilgore LLP McGlinchey Stafford PLLC McLeod Alexander Powel & Apffel PC Mehaffy Weber PC Mills Shirley LLP Morris Lendais Hollrah & Snowden Munsch Hardt Kopf & Harr PC Nathan Sommers Jacobs Nickens Keeton Lawless Farrell & Flack LLP Ogden Gibson Broocks & Longoria LLP Ogletree Deakins Nash Smoak & Stewart PC Pagel Davis & Hill PC Perdue Brandon Fielder Collins & Mott Phelps Dunbar LLP Phillips & Akers Pillsbury Winthrop Shaw Pittman LLP Ramey Chandler McKinley & Zito Ramsey & Murray PC Reich & Binstock Roberts Markel PC Ross Banks May Cron & Cavin PC Rusty Hardin & Associates PC Rymer Moore Jackson & Echols PC Schirrmeister Diaz-Arrastia Brem LLP Schwartz Junell Greenberg & Oathout LLP Schwartz Page & Harding LLP Seyfarth Shaw LLP
Shannon Martin Finkelstein & Alvarado PC Short Carter Morris Singleton Cooksey LLP Slusser Wilson & Partridge LLP Smith & Carr PC Smith Murdaugh Little & Bonham LLP Smyser Kaplan & Veselka LLP Sprott, Rigby, Newsom, Robbins, Lunceford & Bell, P.C. Steele Sturm P.L.L.C. Strong Pipkin Bissell & Ledyard LLP Sutherland Asbill and Brennan LLP Tekell Book Matthews & Limmer LLP Thompson Coe Cousins & Irons LLP Tribble, Ross & Wagner Tucker Taunton Snyder & Slade PC Ware Jackson Lee & Chambers LLP Watt Beckworth Thompson & Henneman LLP Westmoreland, Hall, Maines & Lugrin, P.C. Weycer Kaplan Pulaski & Zuber PC White Mackillop & Gallant PC Williams Birnberg & Andersen LLP Williams Kherkher Hart Boundas, LLP Williams Morgan & Amerson PC Willingham, Fultz & Cougill, LLP Wilson Cribbs & Goren PC Wilson Elser Moskowitz Edelman & Dicker Wong Cabello Lutsch Rutherford & Brucculeri PC Wright Brown & Close LLP Yetter, Warden & Coleman, L.L.P. Ytterberg | Deery LLP Zimmerman Axelrad Meyer Stern & Wise PC Zukowski Bresenhan & Sinex LLP Firms of 25-49 Attorneys Baker & McKenzie LLP Beck Redden & Secrest LLP Gibbs & Bruns LLP Greenberg Traurig LLP Hoover Slovacek LLP Hughes Watters & Askanase LLP Jones Day Littler Mendelson PC Looper Reed & McGraw PC Morgan Lewis & Bockius LLP Olson & Olson Susman Godfrey LLP
Porter & Hedges LLP Thompson & Knight L.L.P Winstead P.C. Firms of 100+ Attorneys Andrews Kurth LLP Baker Botts LLP Bracewell & Giuliani LLP Fulbright & Jaworski LLP Haynes and Boone LLP Locke Lord Bissell & Liddell LLP Vinson & Elkins LLP Corporate Legal Departments Anadarko Petroleum Corporation AT&T Texas BP CenterPoint Energy El Paso Corporation Kellogg Brown & Root Inc Lyondell Petrochemical Company MAXXAM Inc Newfield Exploration Company Petrobras America Inc. Plains Exploration & Production Co. Pride International Inc. Rice University Sysco Corporation Texas Children’s Hospital Total E&P USA Inc. University of Houston System Law School Faculty South Texas College of Law Thurgood Marshall School of Law University of Houston Law Center Government Agencies City of Houston Legal Department Harris County Attorney’s Office Harris County District Attorney’s Office Harris County Domestic Relations Office Metropolitan Transit Authority of Harris County Texas Port of Houston Authority of Harris County Texas
Firms of 50-100 Attorneys Akin Gump Strauss Hauer & Feld LLP Baker Hostetler LLP Beirne Maynard & Parsons LLP Chamberlain Hrdlicka White Williams & Martin PC Coats Rose Gardere Wynne Sewell LLP Howrey LLP Jackson Walker LLP King & Spalding Martin Disiere Jefferson & Wisdom LLP
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LEGAL TRENDS
fees and remanded the claim for fees back to the court of appeals. The Texas Supreme Court also rendered judgment that NDR take nothing on its claim for the damages it would have recovered in the underlying suit. With respect to the latter holding, the Court started from the established principle that when a malpractice claim rests upon improper representation of a plaintiff in an underlying suit, the plaintiff must prove and obtain findings as to the amount of damages that would have been recoverable and collectible if the underlying case had been properly prosecuted. The Court determined that the evidence was legally insufficient to support the jury’s finding that the underlying judgment would have been collectible. The Court’s holding rested upon two important conclusions. First, collectability is generally determined as of or after the date an underlying judgment is signed. Evidence of
The Houston Lawyer
-- S.W.3d --, No. 07-0818, 2009 WL 3494978 (Tex. 2009). The case involved an appeal by Akin Gump from a malpractice suit brought against it by NDR. The malpractice jury awarded NDR over $922,000 in damages and the trial court rendered judgment on the verdict. The award included, inter alia: (1) attorneys’ fees that NDR paid to Akin Gump for representation in the underlying suit, and (2) the amount that would have been collectible from the underlying defendant if Akin Gump had properly prosecuted the underlying suit. The Dallas Court of Appeals reversed the award of attorney’s fees, stating that attorney’s fees are not recoverable as damages for legal malpractice, and affirmed the remainder of the judgment. After both parties appealed, the Texas Supreme Court held that the Dallas Court erred in reversing the award of attorney’s
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prejudgment collectability could be relevant only if accompanied by evidence demonstrating a reasonable probability that the underlying defendant’s financial condition did not deteriorate prior to the time the court signed the judgment. Second, the amount that would have been collectible in an underlying suit is the greater of (1) the fair market value of the defendant’s net assets subject to legal process for satisfaction of the judgment, or (2) the amount that would have been paid by the underlying defendant or another, such as a guarantor or insurer. The Court next turned to the award of attorney’s fees, concluding that a malpractice plaintiff may recover damages for attorney’s fees paid in an underlying suit to the extent the fees were proximately caused by the defendant attorney’s negligence. In so holding, the Court rejected Akin Gump’s reliance on the American Rule—the well-established principle that a party cannot recover attorney’s fees absent a statute or contract allowing for recovery—because NDR did not seek fees incurred in prosecuting the malpractice suit. Rather, NDR sought only certain fees paid in the underlying suit—particularly fees incurred in hav-
LEGAL TRENDS
ing to appeal the underlying judgment— as a measure of compensatory damages. The Texas Supreme Court’s opinion signals that future malpractice disputes will focus on the difficult question of which fees were proximately caused by an attorney’s negligence. Polly Graham, a Harvard Law graduate, is an associate in the appellate section of Haynes and Boone, LLP and recently completed a clerkship for Judge R. Lanier Anderson on the Eleventh Circuit Court of Appeals.
Texas Supreme Court Denies Right to Search Opponent’s Emails and Sets Standards for E-Discovery By N. Jill Yaziji
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n In re Weekley Homes, L.P., 295 S.W.3d 309 (Tex. 2009), HFG Enclave Land Interests, Ltd. (“HFG”) sued Weekley Homes, L.P. (“Weekley”) alleging that it fraudulently induced plaintiff to enter into a lot-purchase agreement with another defendant.1 During discovery, HFG requested email exchanges between Weekley and the other defendant and received 31 responsive emails—one of which referred to an engineering analysis discussing the existence of “multiple unsafe subdivision lots” that required “reme-
dial measures.” While Weekley produced the engineering analysis itself, it did not produce any other emails discussing the analysis with the other defendant. This led HFG to suspect the existence of other relevant emails that were not produced, and to file a motion to compel requesting that Weekley search its employees’ files for responsive “emails stored on servers or back up tapes.” In a hearing on the motion, Weekley’s general counsel testified that it was company policy to delete emails periodically, and that while deleted emails were backed up on hard drives, these in turn were retained only for 30 days. In other words, the requested emails were not “reasonably available . . . in the ordinary course of business” to require their production pursuant to Texas Rule of Civil Procedure 196.4. The trial court denied HFG’s motion. Next, HFG sought “limited access” to Weekley’s hard drives in search of the possibly relevant, but deleted emails. HFG’s experts proposed to create images of Weekley’s hard drives according to “forensically sound” methods. The experts would then search those images for deleted emails containing twenty-one specified terms. Weekley in turn complained about the intrusiveness, loss of confidentiality, disruption of business, and the ultimate feasibility of plaintiff’s proposed methodology to retrieve the deleted emails. This time, the trial court granted HFG’s motion. Weekly sought mandamus relief, which was denied by the court of appeals. The Texas Supreme Court, which granted oral argument, held that the trial court abused its discretion by ordering Weekley’s employees to turn over their hard drives to HFG’s experts in search of deleted emails that may have discussed
safety issues related to a sale of lots. A party seeking direct access to another’s electronic files must show that the benefits of directly granting access outweigh the burdens imposed on the defendant. In this instance, the plaintiff failed the benefit-burden test not only because it relied on conclusory statements as to the possible existence of the emails, but also because its highly intrusive proposed search failed to demonstrate that any deleted emails can be retrieved after two-andhalf years of being created given Weekley’s deletion and overwriting methods. In sum, this opinion discourages direct access to an opponent’s files. One seeking such access should be able to show: (1) the party resisting discovery defaulted in its obligation to search for the requested material, i.e. a more diligent search would likely yield the information requested; (2) the search can be done through qualified experts who can articulate a search methodology based on familiarity with the opponent’s filing method to assuage the court’s concern that it is not just a fishing expedition2; and (3) a close connection between the electronic storage device and the claim in controversy that warrants such an invasive method of discovery. N. Jill Yaziji is the principal of the Yaziji Law Firm. She is a member of the Editorial Board of The Houston Lawyer. Endnotes 1. Emails stored in an electronic form, including deleted emails, are “electronic data,” subject to the specificity requirement of Texas Rule of Civil Procedure 196.4. Therefore, a party seeking emails in electronic form should expressly request “deleted emails” in order to circumvent lengthy discovery battles. 2. Texas rules do not have a provision similar to those under Federal Rules of Civil Procedure 16(b) and 26(f). Nevertheless, the Texas Supreme Court expressly encourages “early discussions” and “discovery requests” to learn about an opposing party’s electronic systems and filing procedures.
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Positions Available
The Houston Bar Association Lawyer Placement Service will assist members by coordinating placement between attorneys and law firms. The service is available to HBA members and provides a convenient process for locating or filling positions. 1. In order to place an ad, attorneys and law firms must complete a registration record. Once registration is complete, your position wanted or available will be registered with the placement service for six months. If at the end of the six-month period you have not found or filled your position, it will be your responsibility to reregister with the service in writing. 2. If you are registered, resumes will be sent out under their assigned code numbers. Once a firm has reviewed the resumes, they are to contact the placement office with the numbers they are interested in pursuing. The placement coordinator will then contact the attorney, give him/her some background information on the inquiring firm, and the attorney will then let the coordinator know if he/she wishes personal information to be released to the firm. This process will insure maximum confidentiality and get the information to the firms and attorneys in the most expedient manner. 3. In order to promote the efficiency of the Houston Lawyer Placement Service. PLEASE NOTIFY THE PLACEMENT COORDINATOR OF ANY POSITION FOUND OR FILLED. 4. To reply for a position available, send a letter to HBA, placement coordinator at the Houston Bar Association, 1300 First City Tower, 1001 Fannin Street, Houston, Texas 77002 or e-mail Brooke Eshleman at BrookeE@hba.org. Include the code number and a resume for each position. The resume will be forwarded to the firm or company. Your resume will not be sent to your previous or current employers.
5084 Full time associate position available. 5+ years experience required. Must have commercial and personal injury background. Competitive compensation package.
PLACEMENT DEADLINES Jan. 1 Jan./Feb. Issue Mar. 1 March/April Issue May 1 May/June Issue July 1 July/August Issue Sept. 1 Sept./Oct. Issue Nov. 1 Nov./Dec. Issue If you need further information about the Lawyer Placement Service, please contact HBA, placement coordinator, at the HBA office, 713-759-1133.
5092 Prominent Houston personal injury law firm seeks litigation attorney. Experience required. Board certification a plus. 5094 PROBATE LAWYER. Sugar Land estate planning/ probate firm with HoustonGalleria office seeking attorney with extensive experience in TX probate and trust administration, Form 706 preparation, estate and gift tax planning. 5098 Seeking litigation attorney with good academic credentials and prior firm experience of 3-6 years. Require first chair jury trial experience and ability to handle a number of files. Positions Wanted
2062 Very Experienced Trial Attorney intimately familiar with the mechanics and operation of the Commercial Mortgage Backed Securities (CMBS) industry, including the securitization process of commercial loans and the duties and responsibilities of Mortgage Loan Originators/Depositors, Underwriters of REMIC Trusts, Rating Agencies, Trustees, Servicers and Special Servicers. Looking for in-house position. 2064 Attorney with extensive experience in collections and enforcement of judgments will take cases on a fee-for-service or – if meritorious – on a contingency basis.
2086 Over ten years experience in corporate, employment, and consumer law. Seeking contract or of counsel work. Will take or defend depositions, and attend hearings. No criminal or family law.
2096 Sr. Attorney / CPA – Recent large law firm retiree seeks contract work: appellate briefing, forensic accounting, hidden asset searches, workouts.
2092 Attorney with experience in business, health care and energy seeks position with law firm or business entity. Experience includes start-ups, M&A. Can Travel.
2098 Licensed For 27 years; Moved From SA, TX; Seeking Full/Part Time Work on Contract Basis; Ins. Defense; Collaborative Family Law; Mediator at $100 Hr / Party
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Veronica H. Foley has joined the Firm as a Participating Associate Veronica is Certified as a Family Law Mediator and as a Civil Law Mediator Veronica speaks English, Spanish, French and Portuguese and is an honors graduate of the South Texas College of Law When you need a professional, skillful and bilingual mediator, please consider Veronica H. Foley
4000 Washington Avenue Integrity Bank Plaza, Suite 203 Houston, Texas 77007 Telephone: 713.470.7000 vfoley@vansuslaw.com • www.vansuslaw.com february 1, 2010
thehoustonlawyer.com
January/February 2010
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placement service
PLACEMENT POLICY
LITIGATION MARKETPLACE
Document Examiner
Expert Witness
Expert Witness Petroleum Engineer Vance Usher, TX PE - $90/Hr 4400 Memorial Dr., #1101 Houston, TX 77007 610-329-1056 (cell) / 713-880-2472(fax) vance_usher@netzero.com (email) Office Space
HOUSTON - Beautiful “Class A” downtown office space available in First City Tower, in an office-sharing arrangement with other attorneys. Conference room, high speed photocopier, excellent phone and voice mail system, fax, kitchen, high end build-out with lots of glass, marble, hardwoods and art work. One partner corner office and one smaller office available with secretarial station. Call 713-652-5002.
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January/February 2010
HOUSTON – TANGLEWOOD. Woodway Frost Bank Building. Window office(s) for sublease in beautiful suite furnished with antiques and Oriental rugs. Includes wood-paneled conference room, eat-in kitchen, advanced phone system answered individually for each attorney. Receptionist included in rent and available for secretarial work. Excellent shared-suite environment since 1991. Call Lynn at 713-977-9600. HOUSTON/ ALLEN PARKWAY Luxurious office space with beautiful view of downtown Houston or Buffalo Bayou. Several office sizes available. Amenities include conference rooms, library, kitchen, receptionist, fax, copier, etc. Call Judy 713-526-1801. thehoustonlawyer.com
Two offices (one 17x17 and Woodlands Offices for lease. one 16x13) in office-sharing Two office suite with clerk suite with other lawyers. office or five office suite with Amenities include spacious file room in The Woodlands, conference room with impres- close to I-45 and Town Censive views of Downtown, reter. Onsite management, ceptionist, phones, high-speed receptionist, notary service, internet, copier, fax, postage, conference room with power kitchen, parking, etc. Great point, T1 internet access, location in Frost Bank Build- kitchen, monitored security ing on Greenbriar near US 59 system, fax, janitorial service, in Houston. Contact Dan or 24 hour access. Contact Judy Richard at 713-523-1200. 281-362-7082. www.woodlandsprofessional Lorance & Thompson, P.C., building.com. a well established litigation firm, has a few extra offices HOUSTON that were reserved for expan- Beautifully remodeled buildsion. With the current econ- ing in fantastic location next omy, that isn’t gong to hapto Memorial Park. 10,000 pen any time soon. The firm sq. ft. available. Includes would like to sublet them to file room, 19 offices and a small firm specializing in a secretarial space, law library, non-litigation practice. If inthree conference rooms, terested, please contact Phil copier, fax, kitchen, teleSummers, 713-868-5560. phone system, with excellent parking. Near 1-10, on Executive offices available Westcott. Non-smoking 550 to 700 per mo; 3 conf building. rooms; kitchen; reception serCall 713-861-3595 vice; tele system; maid; interExecutive net access; in two connected, Office remodeled houses. Quiet, Space Available: beautiful, with nice aesthetics. ranging from $850-$995 per Jason Ezer 832-623-8882. month. Amenities include: 2 conference rooms; maid Houston Lyric and reception services; full Office Centre 2 Beautiful Offices, 1 Secre- kitchen. Heights Boulevard tarial Office. Beautiful view of address. Broker/owner. 713-880-4700. Courthouses. Referrals from successful P.I. Atty. Call Leigh GREENWAY 713-224-6774. PLAZA Lovely partner/window ofHOUSTON / fice with secretarial station MUSEUM DISTRICT and associate/paralegal ofNewly remodeled Historic Home, minutes from the Court fice. Beautiful, professional House. On-site Management, environment with access to receptionist, three conference copier, file storage, fax, postrooms, kitchen, small library, age, reception and conference rooms. Includes kitchen telephone system, internet acand Hi-speed Internet. cess, copier, fax and free parkCall Pam at ing. Several offices available. 713-877-1600. Call 713-840-1840.
HWY 59N/WESLAYAN, window office + sec. space, includes fax, copier & postage meter (reasonable usage), internet, kitchen, conference room. Free covered parking. $700.00 713-960-9696 Dianne.
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Tickets, DWI, Hit & Run, Suspended License and Driver License Issues, including DPS hearings. *Traffic Warrants Removed.* Positions Available Personal injury and accidents. Attorneys Wanted Eutsler Law Firm. For contract assignments and Tel. 713-464-6461 permanent positions in the Houston area. PROVIDUS is seeking resumes from in- MEXICAN LAW EXPERT. terested attorneys in all ar- Attorney/former law professor eas of the law with strong testifying since 1997 in U.S. academic credentials and lawsuits involving Mexican solid work experience. Since law issues. Co-author, leading 1988, we have been provid- treatise in field. Plaintiffs/deing contract and permanent fendants. State/federal courts. attorneys and paralegals to David Lopez 210-222-9494 dlopez@pulmanlaw.com prominent law firms and corporate law departments. Research Please apply online @ http://eresume.ProvidusGroup. com. Legal Document Tel: 713-586-6586 Our company is looking for part time workers for the post of ACCOUNT REP / SALES REPS / PAYMENT REPRESENTATIVES and Bookkeeping. Requirements. Should be a computer literate, NO age discrimination, must be efficient and dedicated. For more info, Contact Michael Mertins, Email: mertins1970@gmail.com
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January/February 2010
57
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