Community Associations Update Fall 2008

Date: December 8, 2008

Fraud Claims May Continue to Haunt Developers
A developer's decision to build a housing development on an 18th century cemetery has come back to haunt it in a recent court decision.
By: Matt L. Troiani, Esq.

In Rhee v. Highland Development Corp., the Maryland Court of Special Appeals took an unusual opportunity to consider for the first time whether a claim for fraudulent concealment may be brought by a subsequent purchaser against a developer.

According to the complaint, Highland Development Corp. (Highland) and Fisher, Collins & Collins (FCC) sought to create a residential subdivision in Clarksville, Maryland, in the 1980s. The complaint also alleged that during the creation of the development, Highland and FCC discovered a 18th century cemetery on the property known as Lot 20. The cemetery was not recorded in Howard County land records. However, the complaint alleged that Highland and FCC knowingly desecrated the cemetery and concealed its existence by removing the headstones and removing any evidence of its existence in the work sheets that were submitted to the county and state.

Lot 20 was sold to the initial purchasers, who were not aware of the existence of the cemetery. The initial purchasers then sold the property to the Rhees in 1991. According to the Rhees, a former associate of Highland informed them of the existence of the cemetery and Highland's attempts to conceal its existence. The Rhees then filed suit against Highland and FCC alleging that the fraudulent concealment of the cemetery induced the Rhees into purchasing the property and that the value of the property is significantly reduced by the cemetery's presence.

The Circuit Court for Howard County dismissed the suit, holding that the developers did not owe any duty to subsequent purchasers of the property. The Rhees appealed to the Court of Special Appeals, which reversed the trial court's decision.

The Court of Special Appeals recognized that fraudulent concealment and fraudulent misrepresentation claims are generally brought by the initial purchasers. However, the Court also held that these claims may be brought by the "class of people" the developer has "reason to expect" will rely on the misrepresentation or concealment. This class of people who the developer has reason to expect will rely on misrepresentations or concealment may include subsequent purchasers of the property.

So what's the bottom line? Cases brought in Maryland for fraudulent misrepresentation or concealment by a subsequent purchaser will be allowed even though the purchaser did not contract with the developer to purchase
the property in the first place.

Community associations and their condominium or homeowners will likely be prime beneficiaries of this ruling. Developers will be even more hesitant to commit fraud while developing a community because they know that their liability will not be extinguished in a short amount of time when properties are resold. The longer the developers may be held liable, the greater chance that any wrongdoing will be discovered. Therefore, developers will likely be more careful to avoid even the slightest hint of fraud in the future.

On-Call Policies: How to Use Them Correctly & Reduce Labor Costs
By: Erin L. Roberts, Esq.

In today's tough financial times, companies throughout our area are struggling to control or reduce their fixed costs and overhead. A large part of this effort is a reduction in labor costs. While layoffs are inevitable for some,
others attempt to avoid the need for such a drastic step by making their workforces work more efficiently and reducing unnecessary expenditures on overtime and unnecessary staffing during slow or idle time periods. They have turned to technology in order to make all of this work while still meeting the needs of their clients. Pagers, PDAs and mobile telephones allow companies to respond to clients' needs while reducing hourly wage costs. By placing employees on-call rather than maintaining staff in the office, they can reduce the amount of compensable time.

Is this as easy as it sounds? Absolutely not. On-call policies are fraught with potential wage and hour pitfalls. If designed incorrectly, they can lead to claims for unpaid wages, as well as civil penalties under the Fair Labor Standards Act (FLSA).

The FLSA provides that non-exempt employees must be paid at least minimum wage for all time worked on behalf of their employers (whether or not those hours were requested or even approved) up to 40 hours per week, and 1.5 times the "regular rate" for time over 40 hours. It may sound simple, but in contexts such as this, it can be quite complex. What is compensable and what is not can be tricky. Clearly, any and all time spent actually responding to calls must be compensated. To accomplish this, employees must be required to keep careful track of their time. Any time spent over 40 hours gets paid at the overtime rate and, if a lump sum is paid to employees as compensation for taking on-call duty, that amount must be factored into the regular rate in order to properly determine the amount of overtime.

Beyond these basic principles, the more difficult issue is whether the time spent on-call, but not actually responding to calls, is compensable. Even when employees are not required to stay at work, the time may be considered working time. The relevant inquiry here is whether the employee is "waiting to be engaged" or "engaged to wait." The Department of Labor looks at whether the wait predominately benefits the employer or if the employee is able to use the time for his or her own purposes. The time will be compensable when "the conditions placed on the employee's activities are so restrictive that the employee cannot use the time efficiently
for personal pursuits."

Based upon this distinction, here are some best practices to follow when drafting an on-call policy:

  • Do not unduly restrict the physical location or activities of employees on-call. They should not be required to stay on site or at home, though you can require that they remain in a condition to perform work (i.e., sober).
  • Make sure that the calls are not so frequent that they are essentially chained to the telephone.
  • Provide a reasonable amount of time for them to call back. Twenty minutes is acceptable, though you may not want to push it too far past that.
  • Post the on-call schedule, allowing substantial notice to the employees, and rotate the schedule. It is also advisable to permit employees to trade with others.
  • Do not put employees on 24-hour, 7-day a week call.
  • Be careful with discipline for violations of the policy. Certainly discipline outright or repeated violations, but discipline for minor infractions may undermine your position that the time is not compensable.
  • Have the policy in writing, with all elements well-defined and explicitly stated.

Applying these principles, you can steer clear of wage and hour quagmires and properly employ on-call employees while reducing your labor expenditures.

Think Before You Type
By: Dennis Robinson, Esq.

In the wake of amendments to the Federal Rules of Civil Procedure regarding the discovery of electronically stored information and similar rules adopted (or being considered for adoption) by several states, courts and parties involved in litigation are placing an increased emphasis on e-mails and other electronically stored information.

What does this mean for your organization?
E-mail is quickly becoming the preferred means of communication, and this development has not gone unnoticed. When litigation arises, parties often recognize that the informal nature of e-mail makes it a potential goldmine for damaging communications. You should expect that e-mails will likely be the subject of litigation discovery requests. Not only will the contents of some e-mails be featured when brought to light during discovery or at trial, but failure to preserve the e-mail and other electronically stored information can result in the imposition of sanctions, including monetary penalties, instructions to the jury that they should assume the missing document was unfavorable to the party, and dismissal of a claim. There are various ways to minimize the risks associated with discovery of e-mails.

What steps can you take to minimize risks before a document is created?
Advising members not to use e-mail is not practical because it is commonplace in most organizations, but there are a number of steps that can be taken to minimize the risk of damaging communications at the outset:

  • Consider alternative means for communication. Your organization can avoid the risks associated with a damaging e-mail coming to light by not sending an e-mail under certain circumstances. For example, if an issue is sensitive, consider picking up the phone or having a face-to-face meeting. It will be reminiscent of the days when people used to speak to each other, plus it will prevent a damaging record from being created in the first place.
  • Take time to cool off. If the message pertains to a particularly "heated" topic, consider imposing a "cooling-off" period before responding to an e-mail. Take time to think about what you want to say and how to respond in a manner that will not be damaging if the e-mail becomes a poster-size exhibit in a courtroom.
  • Create a favorable record. Because a party will almost inevitably have access to your organization's (or your personal) e-mails through discovery, it is important to consider what you type. Which e-mail would you prefer to have in the hands of an opposing party if your organization was involved in a dispute with a resident because he or she installed a fence that the association's architectural review committee considered to be less than desirable?:
  • Did you see the request we received from "you know who" to install a wooden fence. I recognize that, although we prefer other kinds of fences, we have approved wooden fences in the past. However, unless the resident starts paying dues and stops spreading gossip throughout the community, there is no way we are going to approve this request. Or...
  • I recognize that the committee does not generally approve requests for residents to install wooden fences. However, we should, as we always do, approach this particular request with an open mind and apply our standard guidelines regarding fences to determine if we should approve it.

What can you do to manage the records once created?
Because the use of e-mails does not appear to be ending any time soon, your organization should consider what can be done to manage the records:

  • Implement a records management policy. Consider implementing a policy to govern the retention and destruction of e-mails and other types of documents. This policy should be sent to each member of the association's board of directors and established committees. Apply the policy consistently. Every records management policy should include a retention schedule with a list of the categories of documents generated and how long the records will be retained. Retention schedules must be followed consistently because having selectively enforcing a policy is worse than having no policy at all.
  • Include a "legal-hold" provision. Develop a policy that includes a process for implementation of a "legal hold" to preserve documents if litigation, a regulatory investigation, or any other situation triggering a preservation obligation is reasonably anticipated. Once someone becomes aware of or reasonably anticipates litigation or some event requiring preservation of records, there is a duty to preserve documents regardless of format. This is important because many e-mail systems include a feature that systematically deletes information after the lapse of a specific amount of time. These types of systems must be suspended when a "legal hold" is implemented, or your association faces the risk of sanctions.

E-mails are increasingly becoming the subject of requests in connection with litigation and regulatory investigations. Although there are several risks associated with e-mails coming to light, the risks can be minimized by taking a few simple steps to prevent damaging e-mails from being created. The risks of damaging e-mails coming to light can also be reduced by implementing a records management policy that governs the association's e-mails and other records. And don't forget: think before you type!