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Publication Category: Real Estate

Understanding the Home Improvement Consumer Protection Act

The Pennsylvania Home Improvement Consumer Protection Act (“HICPA”), 73 P.S. § 517.1, is a fairly recent law that substantially impacts the rights and duties of both consumers and contractors. The purpose of the HICPA is to regulate and offer additional guidelines for the transactions that take place between consumers and contractors. It imposes a number of additional requirements upon contractors and sets forth penalties for “Home Improvement Fraud.” Some of the most important requirements by which contractors must now abide include the following:

All contracts must be in writing, be legible and contain:

a. the signature of the consumer or his/her agent;

b. the signature of the contractor or his/her agent;

c. the date of the transaction;

d. copies of all required notices (attached to the contract);

e. the name, address and telephone number of the contractor (PO Boxes are not valid);

f. a description of the work to be performed as well as the materials (this cannot be                       changed without a written change order signed by both the owner and contractor);

g. estimated start date and completion date;

h. the total price due;

i. the telephone number for the Bureau of Consumer Protection (1-888-520-6680); and

i.  contain the contractor’s registration number.

This last requirement can be a source of problems for both homeowners and contractors. Additionally, not only must the contract contain a contractor’s registration number but it must also be displayed on all advertisements.

The Bureau of Consumer Protection, run by the Office of the Attorney General, issues contractor registration numbers. In order to determine whether a contractor is registered and, if so, obtain the contractor’s registration number, homeowners can call the telephone number listed above which must also be listed in all contracts. In order to register with the Bureau of Consumer Protection, contractors must complete an application which may be obtained online or can be requested and mailed with the $50.00 fee to the Pennsylvania Office of Attorney General, Bureau of Consumer Protection, 15th Floor, Strawberry Square, Harrisburg, PA 17120. Registration must be renewed biannually.

The HICPA also criminalizes “Home Improvement  Fraud.” Included in the definition of home improvement fraud is the receipt of advance payment by a contractor and the contractor’s subsequent failure to perform or provide the services or materials specified in the contract. If the amount of advance payment taken by the contractor is over $2,000, the act is automatically deemed a third degree felony. If the homeowner is 60 years of age or older, the offense will automatically become a second degree felony. There are additional criminal penalties and prohibited behavior identified in the HICPA. Answers to frequently asked questions can be found on the website of the Pennsylvania Office of the Attorney General.

Although the courts have had few opportunities to interpret the HICPA to date, the Pennsylvania Superior Court has held that an oral contract can be enforced by a contractor if substantial work has been performed and the contractor has been left uncompensated under a theory of quantum meruit.(Durst v. Milroy, 52 A.3d 357 (Pa.Super. 2012). Quantum meruit is an equitable remedy used to provide restitution for unjust enrichment in the amount of the reasonable value of services. Essentially, where no contract exists but denying a party payment for services rendered would be unconscionable, the law will imply that a contract exists. The Pennsylvania Superior Court has applied the same theory to allow payment to a contractor who entered into a written contract with a consumer, performed services pursuant to the contract but failed to register with the Bureau.(Shafer Elec. & Const. v. Mantia, 67 A.3d 8 (Pa.Super. 2013).  In essence, a consumer cannot allow work to be performed by a contractor, benefit from that work and then refuse payment altogether by relying on the requirement that the contractor be registered pursuant to the HICPA.

Although the two cases cited above have allowed recovery by a contractor who has not complied fully with the Act, it is in the best interest of every contractor who anticipates performing services in Pennsylvania to abide by the Home Improvement Consumer Protection Act in order to avoid potential legal troubles. It also benefits homeowners to be familiar with the Act so that they know their rights and limitations.

Executory Contracts and Unexpired Leases

Contributed by:
Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.

In bankruptcy cases, it can be beneficial to have an “executory contract” when your customer files a chapter 11. An executory contract is a contract which both parties have some obligation under the contract yet to perform. While leases are executory contracts, they may also enjoy some extra special protections. A trustee in bankruptcy may assume (live with) or reject (breach and terminate) an executory contract. In a reorganization case, the debtor, as debtor-in-possession, may also assume or reject an executory contract. Assumption or rejection in either case is subject to court approval.

If an executory contract is assumed, any default must be cured or adequate assurance given that the default will be promptly cured. This includes pre-petition defaults! Additionally, the non-debtor party must be compensated for any actual loss suffered as a result of the breach. The debtor or trustee assuming the lease must also give adequate assurance of future performance under the contract. If the contract is rejected, it is treated as though it were breached the day before the bankruptcy filing and the non-debtor party is entitled to damages. Unfortunately, except to the extent the contract benefited the debtor post-petition, the rejection damage claim is a pre-petition, unsecured claim.

The rule that any default must be cured prior to assumption does not apply to situations where the default was based solely on the fact that the debtor filed for protection under the Bankruptcy Code. That is, if the contract provides that any filing of a bankruptcy petition is a default, that is a default that will not have to be cured prior to the assumption of the contract.

In a chapter 7 case, the trustee must assume an executory contract within 60 days of the date of filing. Otherwise, it is automatically rejected. Except as regards non-residential real property, there is no specific time limit for assumption or rejection in a Chapter 11 or 13 case. For non-residential real property, the time limit is 120 days, with ability to get one 90-extension for cause. Beyond 210 days, the Debtor must get the landlord’s consent for any further extensions.

From a debtor’s or trustee’s point of view, an executory contract should be assumed if it is beneficial to the bankruptcy estate. Otherwise, it should be rejected. For instance, if the contract calls for the manufacture of a component which the debtor requires to complete a project for which it will earn a profit, and if the profit will be more than the cost of curing the pre-petition default, the contract should be assumed. If the project will incur a loss, the contract should be rejected. The debtor incurs very little expense in rejecting a contract, since any damage claim is treated as any other pre-petition, unsecured debt.

Any amount owing under the contract as a result of post-petition services, etc., however, could be treated as an administrative expense and would have to be paid in order to get a reorganization plan approved. Therefore, if the debtor is not benefiting from the contract, it is usually in the debtor’s best interest to reject an executory contract early, before administrative expenses accrue. Occasionally, it is in the debtor’s interest to drag out the contract and reject it at the last minute, thus benefiting from the creditor’s post-petition performance under the contract, and not having to pay the pre-petition obligations.

From a creditor’s point of view, it is often best that the contract be assumed, especially if the debtor has accrued a substantial pre-petition obligation. However, if the debtor is plainly not able to meet its obligations under the contract, a creditor is better off with the contract being rejected. This will free up the resources of the creditor by releasing it of obligations under the contract, so that the creditor’s time and money can be put to more productive uses.

If the debtor’s intentions are unclear, or if for any other reason the other party to the contract wants the debtor to either assume or reject the contract, the debtor (or the trustee) may be compelled on request of that party to either assume or reject the contract within a specified period of time.

Determining whether you have an executory contract is an important step in setting your strategy in a bankruptcy case. Having an executory contract can make the difference between full payment and not. As with so many technical bankruptcy provisions, ask your advisor.

Protecting Lease Transactions in Indian Areas

Robert S. Bernstein
Kirk B. Burkley
Bernstein-Burkley, P.C.

This article appeared in the Equipment Leasing Newsletter , January 2003

There are over 500 nationally recognized Indian Tribes in the United States, and as a general rule, state civil laws do not apply to transactions arising in Indian country. As gaming and other profitable enterprises, such as the mining of raw materials, continue to expand in Indian Country (whether on Reservations or not), so do the tribes’ coffers. It is expected, therefore, that more business transactions will occur with Indian Tribes.

Due to the increasing amount of commerce taking place with and in Indian Nations, it is not unlikely that more equipment lessors will soon find themselves examining potential lease agreements with various types of businesses located in Indian Country, as well as with the nations, themselves. A basic premise and rule of thumb for companies seeking to do business in Indian Country is that a tribe has the sovereign power to enact and enforce civil laws regulating the conduct of its members and of non-Indians who come upon tribal land. Uniform Laws and Tribal Legislation; One Tribe’s Perspective, 26 Am. Indian L. Rev. 89, 95 (2002).

When choosing to do business in Indian Country lessors need to be aware of a couple important issues when determining how to protect their interest in property. Lessors first need to discover where (and how) to record notice of their interest in property. In most cases this means where to file UCC financing statements. Furthermore, lessors must analyze the appropriate procedure for recovering their property if a lessee defaults on the lease. The outcome of these issues varies from tribe to tribe and the specific tribal code must be examined before entering into a transaction.

Similar to a state, a tribe may regulate, through taxation, licensing, or other means, the activities of nonmembers who enter consensual relationships with the tribe or its members, through commercial dealing, contracts, leases, or other arrangements. Id. Because of this tribal autonomy, before entering into a lease agreement with an entity located in Indian Country, a lessor should examine how that particular tribe treats secured transactions. This done, if tribal law is unclear or different than the law under which the lessor normally operates, the transaction has to be fully analyzed to determine the risks and the rewards. A large value, but marginally profitable transaction may very well be discouraged.

The reality that the uncertainty of this situation is detrimental to the tribe has caused numerous Indian tribes to enact some form of common and predictable legal system. The Sac and Fox Tribe in Oklahoma, for example, adopted a version of the UCC Article 9 for its own use. The Sac and Fox Secured Transactions Code was adopted into law on November 2, 1984 and governs all security interests created by contract including, among others, pledge, assignment, chattel, mortgage, conditional sale, lien or title retention, and lease or consignment intended as security. Id. at 102. This code was recently complimented in 2000 with three new pieces of legislation dealing with private business organizations conducting commercial and business activities within the Sac and Fox Indian country. Entities doing business with the Sac and Fox Nation now have a greater range of options under the laws of the Sac and Fox Nation when doing business with the Tribe. Id. at 104.

Some tribes, including the White Mountain Apache Tribe of Arizona, completely defer to the commercial code of the state in which they sit. The White Mountain Apache Business Code § 6.3, UCC Provisions, provides that: “Insofar as there is no conflict with the provision of this chapter, the provisions of the Uniform Commercial Code dealing with secured transactions, and set forth in Title 47 of the Arizona Revised Statutes shall supplement this chapter and shall apply to disputes arising in connection with its administration and enforcement.” Due to the White Mountain’s deferral to the Arizona system, lessors doing business with the tribe file their financing statements as they would in any other transaction.

Other tribes, however, such as the Choctaw Nation in Oklahoma, have not addressed the commercial code in any meaningful way. They haven’t enacted their own form of the commercial code, nor do they refer to the state system. Lessors doing business in Indian country where there is no formal business code or method of deferring to the state need to proceed with extreme caution.

In the absence of specific rules, one suggestion for lessors doing business in Indian Country, similar to the Choctaw Nation in Oklahoma, is to file in the otherwise appropriate state system. This should give other creditors notice of the lessor’s interest in the subject equipment. At least it is better than not doing anything to “perfect” one’s interest. If litigation arises over ownership of the property, this constructive notice may carry the day in court for the filing lessor. Furthermore, even if adversarial proceedings take place in tribal court, one would hope that justice would require that filing in the state system would give the filing lessor a stronger argument as to ownership.

Another suggestion is to negotiate collateral or security located outside of the Indian Area or Tribal ownership, or the assignment of the right to receive payment of the proceeds from others types contracts. This is what a mortgage bank and real estate development company did in Rothschild v. Northwestern National Bank of Saint Paul, 309 Minn. 35, 37, 245 N.W.2d 844, 846 (1976), where Rothschild took as security the right to receive payment from construction contracts on Indian land, rather than an interest in the real property that Rothschild financed, because Rothschild could not have perfected a security interest in real property located on the Reservation.

Lessors may also run into problems when they attempt to recover property located in Indian Country. For example, the Yankton Sioux Tribal Code of Creditors’ Rights and Responsibilities, Title IX § 9-1-1 has eliminated all forms of self-help. Most Indian Tribes, including the Yankton Sioux, require that before a creditor can recover their property, the creditors must first obtain a judgment in the Tribal Court and then apply to have the appropriate tribal authorities recovery the subject property. The difficulty of repossessing property may further justify lessors negotiating a security interest in external collateral similar to that in Rothschild.

Many tribes will recognize foreign judgments. The Oglala Sioux Tribe for example, allows a creditor to enforce a final foreign court judgment after review by the Tribal Court of a written petition that must be filed with the Court. This may substantially lessen the expense of repossessing property when lessees are in default. Lessors must examine the particular tribes rules on the recovery of property when calculating risk and the cost of the subject lease.

In recognition of the uncertainty presented to companies dealing with Indian tribes, the National Conference of Commissioners on Uniform State Law (“NCCUSL”) created the Committee on Liaison with Native American Tribes. The purpose of this Committee is to encourage uniformity of laws among tribal nations and the states on appropriate subjects. The hope is that the final product will be beneficial both to tribal governments and entities wishing to do business in Indian Country, but for now lessors must settle with analyzing their transactions on a tribe-by-tribe basis.

There are several sources available to lessors who want to examine a particular tribe’s code before entering into a transaction. The University of Oklahoma School of Law maintains an excellent website at http://thorpe.ou.edu with links to numerous tribal codes and constitutions. Lessors may also contact the Bureau of Indian Affairs for the state where the tribe is located or check the website of the particular tribe with which one seeks to do business. When all else fails, contact the tribal counsel or legal department and find out how other lessors are protecting their interest when doing business with that tribe. Most tribes welcome commerce and will provide companies with the information they need to make an informed decision about doing business in Indian Country.

Remember, the various Tribes’ positions on secured transactions and leases vary widely. The issues arise when doing business with an Indian Tribe and when doing business in Indian Country. Lessors would do well to watch these issues to enhance the likelihood of recovery in the event of a default.

Lawsuit Danger Alert: Be Careful How You Dispose of Old Records

Changes in law that take effect this December will increase your chances of being sued for unmanaged attrition of records when litigation is likely. Protect yourself now!

I.  An Issue That’s Now Taking the Spotlight.

As if you didn’t have enough to worry about, litigation-wise, a threat is moving to the forefront. It’s called “spoliation of evidence,” and it’s been around for a while-but upcoming changes in the Federal Rules of Civil Procedure are making this risk even riskier.

Without any reference at all to the actual merits of a controversy, businesses have suffered the disaster of an adverse verdict of thousands, millions, or even billions of dollars, when a court determines in hindsight that “relevant” records were destroyed with “culpable intent” after the company had “reason to know” that it may be sued in a particular matter. Several recent, high-profile cases indicate that these kinds of claims are catching on. See: Glover v. Costco Wholesale Corp., 153 Fed. App. 774, 2005 U.S. App. Lexis 23943, CA. 2 (negligence is a sufficiently “culpable state of mind” to ground spoliation sanction); Coleman Holdings, Inc. v. Morgan Stanley & Co., Inc. , 2005 W.L. 679071, (Fla. Cir. Ct., March 1, 2005) (jury instruction on “adverse inference” grounding $1.45 billion verdict); Zubulake v. UBS Warburg, LLC, 229 FRD 422, 2004 U.S. Dist. Lexis 13574 (S.D.N.Y., 2004) ($20.2 million in punitive damages awarded in employment discrimination case following spoliation instruction).

As of December 1, 2006, the magnitude of this risk will increase dramatically for those businesses that ignore the legal requirements imposed upon them by amendments to the Federal Rules of Civil Procedure. In the works for over ten years, the rule amendments are intended to “catch up” with the dramatic and far-ranging effects of evolving information technology and the way businesses communicate and handle electronically stored information (ESI). In practice , these amendments will focus the attention of would-be plaintiffs and their attorneys on the possibility of raiding corporate larders-not based on the merits of an actual claim, but on shortcomings of the architecture and management of modern information systems. The resulting “feeding frenzy” is likely to splash over into litigation in the state courts as well. If you are ignorant of these developments, you and your business will likely become victims.

You can and should take steps to manage this risk.

II. The Importance of a Robust and Established “Hold” Procedure.

The courts have acknowledged that businesses have a right to purge information from their records, both paper and electronic. See proposed F.R.C.P. 37 (effective December 1, 2006):

Rule 37. Failure to Make Disclosures or Cooperate in Discovery; Sanctions

* * * * * * * * * *

(f)  Electronically stored information . Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.

Committee Note

Subdivision (f). Subdivision (f) is new. It focuses on a distinctive feature of computer operations, the routine alteration and deletion of information that attends ordinary use. Many steps essential to computer operation may alter or destroy information, for reasons that have nothing to do with how that information might relate to litigation. As a result, the ordinary operation of computer systems creates a risk that a party may lose potentially discoverable information without culpable conduct on its part. Under Rule 27(f), absent exceptional circumstances, sanctions cannot be imposed for loss of electronically stored information resulting from the routine, good-faith operation of an electronic information system.

III. Timing Is Critical.

However, deliberate destruction (or even “merely” negligent purging in some jurisdictions) of “relevant information” will not be tolerated once the business “has reason to know that litigation is likely.” This critical point does not just start upon the receipt of the suit papers, but can go back in time as far as the making of a claim or demand, or even the occurrence of an event indicating the “likelihood” of litigation.

IV. “Deemed Violations”-A Serious Matter.

Once this triggering threshold is deemed in retrospect to have been reached, a business, its in-house counsel, and its retained outside counsel all will be held to an affirmative duty to communicate a ” litigation hold ” on the destruction of relevant information to ” key witnesses, IT, and paper records managers, ” and to others who may possess information relevant to the litigation. Businesses and their lawyers have suffered reprimands, sanctions, and imposition of liability for failure to discharge this duty (notwithstanding even “automatic” rewriting over drives).

“Relevant information” can be broadly defined to include not just admissible evidence, but information that could “reasonably lead to discovery of admissible evidence.” It won’t be sufficient to produce static images on a CD. Today’s savvy litigators want to examine the “meta-data” that reveals the sources, evolution, and interconnectedness of data. (Imagine what a hostile lawyer can learn by retrieving “deleted” drafts of a sensitive document!) In the recent case of Cooper v. Schoffstall , Pa. 212 MAP 2004 (9-7-06), the Supreme Court of Pennsylvania interpreted the “for cause” discovery methodology as permitting a Court to authorize inquiry into an expert’s financial records, including tax returns, to discern the degree to which his past earnings as an expert witness may call his objectivity into question.

If you give your adversary’s imagination a “toe-hold” to argue that you are hiding something, you could be in for a bad time. Chillingly, even “attorney work product” and “attorney/client communication” privileges can be deemed set-aside by the “crime-fraud” exception, following in-camera review of information by the court. Mistakes, oversights and misstatements can easily be misconstrued, with disastrous consequences.

Following are some examples of criminal or disciplinary provisions that could take you unawares:

Bankruptcy/Insolvency

Bankruptcy Code – 11 U.S.C. §727(a)(3):

The court shall grant the debtor a discharge, unless the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.

Crimes Code (Bankruptcy Crimes) – 18 U.S.C. §152(8):

A person who after the filing of a case under title 11 or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor shall be fined under this title, imprisoned not more than 5 years, or both.

Crimes Code (Bankruptcy Crimes) – 18 U.S.C. §152(9):

A person who after the filing of a case under title 11, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court or a United States Trustee entitled to its possession, any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor shall be fined under this title, imprisoned not more than 5 years, or both.

“Normal” Business in a Post-Enron World

Sarbanes-Oxley was enacted by the Republican Congress in 2002, under pressure from the series of business scandals typified by Enron.

Sarbanes-Oxley is primarily focused upon publicly traded companies and companies in bankruptcy. However, by an insidious process of “incorporation” it affects many insurance and government contracts, as well as lenders’ covenants, and may also overlap with tax, environmental, labor/employment, or industry-specific requirements. Auditing accountants of public companies have direct document retention responsibilities under Sarbane’s-Oxley lasting five (5) years.

Crimes Code (Sarbanes-Oxley Act of 2002) – 18 U.S.C. §1519 (Destruction, alteration, or falsification of records in connection with Federal investigations or bankruptcy):

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

District of Columbia Code (Criminal Offenses) – DC ST §22-723 (Tampering with physical evidence; penalty):

(a) A person commits the offense of tampering with physical evidence if, knowing or having reason to believe an official proceeding has begun or knowing that an official proceeding is likely to be instituted, that person alters, destroys, mutilates, conceals, or removes a record, document, or other object, with intent to impair its integrity or its availability for use in the official proceeding.

(b) Any person convicted of tampering with physical evidence shall be fined not more than $5,000, imprisoned for not more than 3 years, or both.

District of Columbia Rules of Court (Rules of Professional Conduct) – DC R RPC Rule 3.4:

A Lawyer Shall Not:

(a) Obstruct another party’s access to evidence or alter, destroy or conceal evidence, or counsel or assist another person to do so, if the lawyer reasonably should know that the evidence is or may be the subject of discovery or subpoena in any pending or imminent proceeding. Unless prohibited by law, a lawyer may receive physical evidence of any kind from the client or from another person. If the evidence received by the lawyer belongs to anyone other than the client, the lawyer shall make a good faith effort to preserve it and to return it to the owner, subject to Rule 1.6.

Comment to DC R RPC Rule 3.4:

[2] Documents and other items of evidence are often essential to establish a claim or defense. Subject to evidentiary privileges, the right of an opposing party, including the government, to obtain evidence through discovery or subpoena is an important procedural right. The exercise of that right can be frustrated if relevant material is altered, concealed or destroyed. To the extent clients are involved in the effort to comply with discovery requests, the lawyer’s obligations are to pursue reasonable efforts to assure that documents and other information subject to proper discovery requests are produced. Applicable law in many jurisdictions makes it an offense to destroy material for purpose of impairing its availability in a pending proceeding or a proceeding whose commencement can be foreseen. Falsifying evidence is also generally a criminal offense. Paragraph (a) applies to evidentiary material generally, including computerized information.

[4] A lawyer should ascertain that the lawyer’s handling of documents or other physical objects does not violate any other law. * * * This Rule does not set forth the scope of a lawyer’s responsibilities under all applicable laws. It merely imposes on the lawyer an ethical duty to make reasonable efforts to comply fully with those laws. The provisions of paragraph (a) prohibit a lawyer from obstructing another party’s access to evidence, and from altering, destroying or concealing evidence. These prohibitions may overlap with criminal obstruction provisions and civil discovery rules, but they apply whether or not the prohibited conduct violates criminal provisions or court rules. Thus, the alteration of evidence by a lawyer, whether or not such conduct violates criminal law or court rules, constitutes a violation of paragraph (a).

V.  Who Pays? Shifting Expense Burdens (of Retrieval and Production of Information).

You can become subject to this “litigation hold” not only as a prospective party to a lawsuit, but also under amended F.R.C.P. 45, as a nonparty witness (including a business) when you receive a subpoena. You merely have to “be on notice” to preserve information. For nonparty witnesses, the opportunity to prevent disclosure on the basis of hardship, and/or keeping the (usually) expensive compliance costs on the seeker, is much greater. However, broad discretion resides in the court as far as “cost-shifting.”

Generally, you as responding party bear the cost of production of “accessible” information, while “inaccessible” information should be retrieved at the expense of the party seeking the information.

While “back-up tapes” and “disaster archives” of a party that are “not readily accessible” most often shift the burden of persuasion and expense of retrieval to the party seeking them, evidence of “suspicious” deletion of relevant information from operating systems or operating accessibility to those archival information pools has often been cited as sufficient reason to compel the production and/or shift the cost of retrieval to the respondent. “Sampling” (random searches) has also been allowed, which frequently permutates into a foot-in-the-door progression of retrieval and disclosure, increasingly at the responding party’s expense. Mistakes in IT architecture or management can have disastrous consequences.

Respondents to an “ESI” request are expected to act in a timely manner. Parties are expected to address known issues of privilege, or other bases of a protective order, as part of the Rule 26(f) disclosure process, very early-on in Federal Court litigation.

In the context of litigation, it is important for the respondent’s counsel to be “out in front of” the opposition, seeking a protective order and/or skillfully negotiating a “MAD” (mutually assured destruction) understanding with opposing counsel. (What’s good for the goose is good for the gander.)

So what can you as a businessperson do to protect yourself from this exposure?

VI.  Your Records Retention and Disposal Practices Must Pass the Test of Being Deemed “Reasonable” in Hindsight by an Unknown Judge.

First, have a disciplined, well-defined information storage, management and destruction policy. So long as the information is purged routinely, pursuant to such a system, and without “reason to know” litigation is likely, you are within your rights in purging information.

You may wish to designate an official “records-manager officer,” and routinely segregate information you know is important, while deleting information that is not.

There should be a clear-cut, established procedure for the regular retention and destruction of information pursuant to identified criteria and documented compliance with those company policies and procedures.

Second, have a documented and robust “litigation hold’ procedure in place. Make sure it’s broadly construed by your management and employees so that you can demonstrate to the court that an honest and energetic effort has been made, and nothing has intentionally been left outside of the “spotlight,” once you had “reason to know litigation was likely.” Make sure key witnesses, IT, and document storage personnel are officially noticed, and that the “hold” is in fact observed (issue memorializing “reminders” of the hold from time to time).

VII. So, How Do You Know When You Are “Safe”?

The bottom line? We do not want our clients to become victims of this tactical fad, nor do we want to become victims ourselves. We look forward to your successfully managing this risk and will assist in any way that we can. Unfortunately, the risk can only be managed, not eliminated.

In Brotech Corporation v. Delmarua Chemicals , 2003 Pa.Super. 281, 831 A.2d 613; 2003 Pa.Super. Lexis, 2327, two judges of the Pennsylvania Superior Court came to diametrically opposed conclusions, based upon the same record.

The majority, in reversing the Trial Court’s entry of a summary judgment as a sanction against the party for spoliation of evidence, noted that a discovery sanction must be procedurally supported by the existence of a motion for discovery sanctions. Further, the majority reasoned that the other party had ample opportunity to examine the evidence, albeit only a few days before trial, and was not in fact prejudiced in preparing its defense.

The dissent vigorously pointed out that the respondent failed to make discovery as requested for over two years, and produced the requested discovery only 11 days before the start of trial. The dissent further noted that there had never been a satisfactory explanation for the failure to make timely discovery, and that the court case below was characterized by contentious discovery behavior.

Broad discretion of the Trial Court is reviewed under a five-point test:

  • the nature and severity of the discovery violation;
  • the willfulness or the existence of bad faith in the failure to make discovery;
  • the prejudice to the opposing party;
  • the ability to cure the discovery violation with a lesser sanction; and
  • the relative importance of the precluded evidence in light of the failure to comply with the discovery.

The dissent conceded that the sanction for spoliation (in Pennsylvania State Court) is granted only in cases of willful failure to make discovery, and where the opposing party is actually prejudiced.

The dissent would have sustained the Trial Court’s entry of discovery sanctions in the form of summary judgment against the respondent!

Theoretically, the Supreme Court of Pennsylvania and the Third Circuit Court of Appeals have both adopted the same test for “spoliation.” See Schroeder v. Commonwealth of PA Dept. of Transp. , 551 PA 243, 710 A.2d 23, 1998 PA Lexis, 564; Tenaglia v. Procter and Gamble, Inc., 1999 Pa.Super. 220, 737 A.2d 306, 1999 Pa. Super. Lexis 2790 (the Pennsylvania Supreme Court has adopted the spoliation test adopted by the Third Circuit Court of Appeals in Schmid v. Milwaukee Electric Tool Corp., 13 F.3d 76 (3 rd Cir., 1994)).

The more recent federal case of Paramount Pictures Corp. v. John Davis , 234 F.R.D. 102, 2005 U.S. Dist. Lexis 31065, defines “spoliation” as the destruction or significant alteration of evidence, or failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.

Noting the Third Circuit Decision in a case out of New Jersey , Mosaid Xtechs v. Samsung Elecs, 348 F.Supp. 2d 332 (D.N.J., 2004), the Court noted the preconditions for a finding of spoliation:

  • that the evidence in question be within the party’s control;
  • that there has been an actual suppression or withholding of evidence;
  • that the evidence destroyed was relevant to claims or defenses; and
  • that it was reasonably foreseeable that the evidence would later be discoverable.

The Court noted that the range of sanctions for spoliation are on a continuum from dismissal of a claim or granting of judgment in favor of the prejudiced party, to the suppression of evidence, to adverse inference instruction, to fines and the imposition of attorneys’ fees and costs.

While there is no bright line rule, the Court’s discretion in granting or denying spoliation sanctions should generally consider (1) the degree of fault of the party who altered or destroyed the evidence, (2) the degree of prejudice suffered by the opposing party, and (3) whether there is a lesser sanction that will avoid substantial unfairness to the opposing party; and where the offending party is seriously at fault, will serve to deter such conduct by others in the future. The Court should choose the most appropriate sanction for spoliation that would be the least onerous corresponding to the degree of willfulness of the destructive act and the prejudice suffered by the victim.

The Court should consider the extent to which the responsible party acted deliberately to impair the ability of the other side to effectively litigate its case, as well as the degree of actual prejudice suffered by the party and whether that party had a meaningful opportunity to examine evidence before it was destroyed.

Yet, the fact remains that these are usually “judgment calls” about which reasonable minds can, and often do, differ. Don’t be caught unprepared, or it can really cost you. Get your information system in order. While there are no guarantees in this or any other legal area, at least you’ll be able to sleep at night knowing that you did everything possible to prevent litigation. That alone will make your efforts worthwhile.

Lawyer Up!

Everyone knows the benefits of hiring an attorney to fight for you regardless of what side of the courtroom you’re on. However, not everyone knows the detriments of not hiring an attorney. Sure, the law can be complicated and fraught with nuances and technicalities, but can’t one just ask around to a few lawyer-friends or relatives and seek their way through?

Problem #1 – The Office of the Prothonotary (the office in which all pleadings for civil court are filed and recorded) will often accept any writing by the Defendant whatsoever and time-stamp it as an “Answer” to the Plaintiff’s Complaint. The main problem with this practice is the fact that there are very specific rules under the Pennsylvania Rules of Civil Procedure that govern the wording and structure of a proper Answer. Although it may seem counterintuitive, simply writing language to the effect of “I, the named Defendant, deny the allegations set forth in Plaintiff’s Complaint and intend to defend myself in Court” will spell certain death for your case. A quick Motion for Judgment on the Pleadings will magically twist those words of denial into a complete admission of every allegation in the Complaint. Trust me. I’ve done it. In the best case scenario and with a sympathetic judge, you may be given a period of time, 20 days typically, in which to retain an attorney and file a proper response.

And the rules governing the proper format and wording of pleadings doesn’t end with Answers to Complaints. These rules apply to every one of the myriad of pleadings filed in Pennsylvania Courts.

Problem #2 – Are you incorporated? Pursuant to Pennsylvania case law, an entity that is incorporated must be represented by an attorney licensed to practice law in the Commonwealth of Pennsylvania. This means that even if you’re the President, Vice President and CEO of your corporation, you may not appear in court on behalf of your corporation. In addition, if you would like to file suit against another entity or individual, you must hire an attorney to enter his/her appearance and sign your pleading. Likewise, if suit is filed against your corporation you may not personally file a response on behalf of your corporation. Again, you must hire an attorney to enter his/her appearance on your behalf and file your response. If you do not, the Court will grant the opposition’s preliminary objections and give you 20 days in which to retain counsel and file an amended pleading. Trust me. I’ve done it.

Problem #3 – Timing. In the law, timing really is everything. Different areas of the law have different statutes of limitations (timelines for how long a Plaintiff is able to wait before filing suit). For example, a Plaintiff in Pennsylvania has 4 years in which to file an action for breach of contract after the date on which the contract was allegedly breached by the Defendant. If you try to file an action for breach of contract 4 years and 1 day after the Defendant breached the contract, your action will be thrown out.

In addition to issues surrounding the statute of limitations, each pleading that is filed is associated with a period of time during which the opposing party must respond. In some instances, if this deadline is missed, the case may be dismissed without the merits ever having been heard by a judge.

What it comes down to is that while some people have successfully represented themselves in court, many more people have unsuccessfully done so. The first step that should be taken in any legal situation, whether you’re the plaintiff or defendant, is to hire an attorney who specializes in the area with which you’re dealing. This way, win or lose, you will do so on the merits of the case and not due to a miniscule error that could have been prevented.