Litigation ReportTM Trichilo, Bancroft, McGavin, Horvath & Judkins, P.C. are pleased to welcome three new associates to the firm. Quarterly Publication Published by: Trichilo, Bancroft, McGavin, Horvath & Judkins, P.C. 3920 University Drive Post Office Box 22 Fairfax, Virginia 22030-0022 Volume 2, Issue 2 March 2005 703.385.1000 703.385.1555 fax www.vadctriallaw.com Lessons Learned email: in the Synthetic Stucco Litigation Letters to the Editor: By: Stephen A. Horvath, Esquire Melissa H. Katz, Esquire [email protected] Starting in the early 1990’s an exterior cladding for houses known as “EIFS” (Exterior Insulation Finish System) became c 2005 All Rights Reserved Pictured left to right is Stephen A. Marshall, Jennifer L. McRobbie, and Jeremy Paner popular in the Washington Metropolitan area. The product had a number of advantages. It looked like stucco, but did not have the weight of stucco, and would not crack like stucco. It had an insulation quality to it. There was a layer of a Styrofoam type product which made it as though you were wrapping your house in a Styrofoam cooler. It was decorative and could be easily shaped, to add attractive features to the exterior of the house. Finally, its finish was impervious to water, and would in theory keep water out. The use of this popular cladding resulted in a large number of and new law was developed by the Circuit Court and Virginia subcontractors being trained by the manufacturers of the product Supreme Court. to install it on houses. Although some very strict installation The first two cases that were tried by other firms in Fairfax requirements were set up, the subcontractors would frequently County resulted in verdicts of approximately $1.4 million and Trichilo, Bancroft, McGavin, Horvath & Judkins, P.C. PRESORTED not follow the requirements. As a result, water could infiltrate $1 million. In those cases, there were no aggressive challenges 3920 University Drive • Post Office Box 22 FIRST-CLASS between the house sheathing, and the EIFS, and the water would to the plaintiffs’ experts and the attorneys “ran away” from the U.S. POSTAGE be trapped. Over time, the elevated moisture levels would cause benefit and quality of the EIFS product. The third case in Fairfax Fairfax, Virginia 22030-0022 PAID rotting of the wood sheathing and framing. County, which was tried by this firm, resulted in a $17,000 FAIRFAX, VA In the mid to late-1990’s, as a result of newspaper articles verdict, which was reduced to zero because of a prior settlement Permit No. 6241 and TV programs, the public became aware of a number of with the installer. While the Court did award costs and attorney’s serious potential problems. For many of the homeowners the fees, the attorney’s fees awarded were one-seventh of the amount time for which to make a warranty claim under their purchase requested. agreement had expired. Plaintiffs’ attorneys were left to try a Successful handling of these cases depended upon a number number of novel approaches, including alleged fraud, or violation of factors: First, at the pleadings stage, the allegations were of consumer protection acts to develop a theory for recovery. aggressively challenged by use of demurrers and motions craving With leaky homes and huge bills for repair, the oyer. While the plaintiffs’ attorneys attempted to sue subcontractors homeowners were sympathetic plaintiffs. directly, through successful use of motions, most, if not all, the The fraud allegation usually went like this: claims directly against the “I contracted to buy stucco. Stucco should be subcontractors were a cement based product which has been used ultimately dismissed. Inside for hundreds of years. The product you put Second, although EIFS did on my house is Styrofoam and plastic. You have its problems, the idea Synthetic Stucco Litigation...... 1 have lied to me.” Hundreds of lawsuits were behind EIFS was excellent. filed alleging stucco defects in the Northern It was a good idea, but had Economic Loss Rule...... 3 Virginia area. The Fairfax Circuit Court to be carefully installed. created a special three judge panel to Attorneys who attempted Frolic or Detour...... 3 hear the stucco cases, to provide for to shift the burden to EIFS uniformity in the decision making. on behalf of their Payment by Debtors...... 4 This firm handled almost one hundred defendants, or who agreed of these cases, representing both the subcontractors and the that the product was fraught with Picking an Expert...... 5 general contractors. We were successful in either having the cases problems, continued to have dismissed, or reaching resolutions on the cases, and paying only a problems with their defenses. If General Assembly Update...... 6 small amount of the damages claimed. A number of lessons were the product was embraced, and it learned in how to handle the homeowner building defect cases, continued on page 7 Worker’s Compensation...... 2 continued from page 1 Workers’ 1999). In that case, the employer requested review of a Deputy was explained that there were a few minor problems which that at this time. If you do not include any statement, it will be By: Commissioner’s decision holding that a pending claim for disability could be fixed, the results were better. Third, the plaintiffs’ assumed that you are not relying upon any verbal statement or representation made by the seller in entering into this contract.” Compensation Benjamin J. Trichilo, Esquire benefits survived the claimant’s death from an unrelated cause. experts were frequently individuals who had little or no Because a significant legal issue was involved, the full Commission experience with the use of EIFS prior to being involved in the When the purchaser would later claim fraud in reliance on Corner considered the appeal, and upheld the Deputy Commissioner’s ruling EIFS litigation. One expert from North Carolina was used in what they were told about “stucco”, this statement from the that the claim did survive the claimant’s death. hundreds of the cases in this area. He had been involved in so contract would then be read back to them, and a number of the many cases, that within a few years time, his company’s total homeowners would confirm that it was correct, they did not Another example is provided by Grimes v. A-1 Towing, VWC File fees for examination and testing exceeded $3 million. Out of rely on any statements. Number 155-46-42 (December 22, 1997) where the Commission over 1,200 houses that he examined, he found the product Finally, after the first wave of lawsuits, some of the builders heard an appeal by the claimant requesting that a witness subpoena defectively installed over 1,200 times. Although he had never brought a second wave of lawsuits against their subcontractors 1. Death of claimant allows insurer to withdraw settlement: for a deposition be quashed. The Commission noted that interlocutory had any experience in the installation, application or repair of attempting to recover for money they paid out to homeowners to Liability settlements are generally governed by principles appeals are normally not appropriate for evidentiary matters, unless EIFS prior to being involved in litigation, he was an “expert” on re-clad the houses. In this second wave of lawsuits, some of the of contract law: timely acceptance of an offer creates a binding there is a showing of good cause. The Commission found that the subject who stated that it was always defective, and could builders were not very successful because of the inaccuracies agreement. The rules for settlements under the Virginia Workers’ substantial prejudice would result if it did not rule on the motion, not be installed correctly. Aggressively challenging the expert in how they identified themselves to their subcontractors, and Compensation Act are much different. Settlements are not binding heard the appeal of the claimant, denied the motion to quash, and helped in the final resolution of the cases. to their sellers. They had set up so many different entities for until approved by the Virginia Workers’ Compensation Commission. allowed the deposition requested by the employer to proceed. Because the claims were fraud based, some of the seller’s construction of the house versus sales versus ownership of the property, that they became bogged down in their own web of Even after the settlement Order is entered, the Commission has contracts allowed for additional defenses that were not available 3. When are employers subject to the Act? to other sellers. Some of the contractors included paragraphs in entities, and were unable to establish a claim against the discretionary authority to vacate that award within twenty-one days Every employer that regularly employs three or more employees their contracts which stated to the effect as follows: “Frequently subcontractors. for good cause. “Good cause” may be simply a change of mind disputes arise between the purchaser and the seller because of Most of the EIFS litigation has been concluded. The lessons by the claimant. Should that occur, then the settlement proceeds in the Commonwealth of Virginia is subject to the jurisdiction of the Virginia Workers’ Compensation Commission, and is required to confusion of what may have been said at the time the parties learned can help establish ways to handle future construction must be returned before the Commission will vacate the settlement negotiated the contract. As a result, if you intend to rely on any defects claims. Order. carry Workers’ Compensation insurance. The burden of proving that the employer does not regularly conduct business with three or more statement or representation made by the seller, please include In a recent full Commission decision, Pringle v. WMATA, employees is upon the employer. That burden can be difficult to VWC File Number 186-92-40 (February 5, 2005), the claimant’s overcome, as discovered by the employer in Perry v. Tom Delisle beneficiaries learned that the Commission procedures do not t/a R&T Construction, 44 Va. App. 415, 605 S.E.2d 330 (2004), re- always favor the claimant. The claimant and the insurer entered hearing en banc granted February 1, 2005. The employer was a into a settlement agreement and submitted the executed documents sole proprietor who operated a construction business for ten years. Not so well known to the Commission on November 12, 2004. Ten days later, the Facts The claimant sustained work-related injuries on April 4, 2001. The claimant’s counsel advised the Commission that his client had died employer regularly employed three or more employees for three three days earlier. Counsel requested that the Commission approve years prior to the injury, during 1998, 1999, and 2001. However, Funnies the settlement previously agreed upon by the parties. The insurer it had only two regular employees between December, 2000 and Printed objected and requested that the endorsed settlement Petition and August, 2001. PRESIDENT’ S QUIZ

Order be withdrawn. by

The full Commission found that the employer met its burden of So far this year we have inaugurated a new president and permission The full Commission agreed with the insurer’s position, finding proving that he did not regularly employ three or more employees celebrated president’s day. The history of the Oval Office, and that by statute, either party has an absolute right to withdraw a because three months prior to the accident, and four months

its varied occupants, is often fascinating. You can test your of

settlement before it is approved. The claimant’s death following the thereafter, he operated with only two employees. On appeal, a panel familiarity about some well-known facts, and some that are not H.L.

settlement agreement did not detract or diminish from the insurer’s of the Court of Appeals reversed, in a two-to-one decision, finding well-known, in the quiz that follows: Schwadron right to elect not to proceed with the settlement. that the Commission applied an erroneous legal standard. 1. At 5’ 4”, he was our shortest President. 2. Can you appeal before the case is over? The majority held that “an employer cannot be allowed to 2. He was the only President to participate in three duels oscillate between coverage and exemption as its labor force exceeds and the only President to kill an opponent in one of The general rule is that only final Orders are appealable to the or falls below the minimum from day to day.” The employer regularly those duels. full Commission or Court of Appeals. However, the Virginia Workers’ employed more than three employees for three years prior to the 3. His wife grazed sheep on the White House lawn. Compensation Commission has created an exception in certain accident, and the mere fact that it employed only two employees 4. The heaviest President (352 pounds) and the only one to cases where it has allowed interlocutory appeals. Where there is for a period of seven to eight months was due to “transient factors.” become stuck in a bath tub at the White House. a significant legal issue, or where one party may suffer substantial What may have most persuaded the majority however, is the fact 5. The first President born under the flag of the United prejudice, an interlocutory appeal will be allowed. This means that the States. that the owner hired, at his own expense, another individual to help 6. His mother told him “never sue for assault or slander, aggrieved party can pursue the appeal even though compensability to construct his residence during 2000 and 2001. This individual was settle them cases yourself.” This President became an of the case has not yet been determined. not placed on the payroll of R & T Construction. After the accident attorney, and followed the advice of his mother. However, not every legal or evidentiary issue justifies an however, this individual and another employee were added to the 7. Our youngest President (age 42). payroll of the company as employees. Accordingly, the employer 8. The only President who was an only child. interlocutory appeal. In Campbell v. Systems Applications, Inc., VWC 9. This President said “My friends, some years ago the federal government declared war on poverty - - and poverty won.” File Number 217-63-26 (October 22, 2004), the full Commission had three employees at the time of the accident if the employee individually hired was included; and four employees immediately 10. When his daughter received a poor review for a musical performance, this President wrote the following note to the critic: held that an interlocutory appeal was not proper where a deputy “Some day I hope to meet you. When that happens, you’ll need a new nose, a lot of beef steak for black eyes, and commissioner refused to dismiss a claim on jurisdictional grounds. following the accident. perhaps a supporter below!” The Commission found that there was no substantial prejudice to the employer if the case was allowed to go forward, and that the claimant The dissenting opinion would have affirmed the Commission’s Answers in reverse at bottom of page.

was entitled to present testimony, in addition to the allegations in her factual finding that the employer’s regular business activities at the

claim for benefits, to establish jurisdiction. time of the accident did not require three or more employees. A Truman. S.

re-hearing has been granted, and a final decision will be rendered 10.Harry Reagan. 9.Ronald Sorry. question. trick a is This 8.None. Roosevelt. 7.Theodore Jackson. 6.Andrew independence. American before territory U.S. on An interlocutory appeal was deemed appropriate in Echols v. by the entire Court of Appeals later this year. That decision will be born were Presidents Earlier VanBuren. 5.Martin Taft. Howard 4.William Wilson. 3.Woodrow Jackson. 2.Andrew Madison. 1.James Quiz: President’s to Answers 2 Rite Aid Corporation, VWC File Number 185-92-20 (January 26, reported in one of our future newsletters. 7 TRICHILO, BANCROFT, MCGAVIN, HORVATH & JUDKINS, P.C. (703) 385.1000 • Fax (703) 385.1555 • www.vadctriallaw.com 2. HB2659 and SB 1173--These are identical bills which VIRGINIA GENERAL passed both houses. They address matters involving medical CONSTRUCTION DAMAGES AND THE malpractice litigation. The bills were strongly supported ASSEMBLY UPDATE by the VADA and represent significant improvement in this ECONOMIC LOSS RULE by: Michael J. Carita, Esquire by: John D. McGavin, Esquire area of litigation. The specifics of the legislation provide:

On February 27, 2005, the Virginia General Assembly --expert witness must certify a breach of the standard of Homes or other buildings are often damaged by alleged defects in construction or repairs done to the building in question. When a closed for the 2005 session. There were several important care and that such breach was a proximate cause of injury building owner (or their insurer) seeks to recover monetary damages for the loss, they are usually met with a full or partial defense of the developments regarding legislation that was offered and before a medical malpractice case may be filed. case based upon the “Economic Loss Rule.” A fuller understanding of the “Economic Loss Rule” can assist building owners and their defeated as well as legislation that was successfully --an expression of sympathy by a health care provider insurers in properly assessing whether they have a recoverable claim against the allegedly faulty contractor, and in selecting the proper passed. TBMHJ has been active throughout the session to a patient shall not be used as evidence of an admission. theory on which to base their case. --8.01-399 is amended to allow all information from in monitoring this legislation and providing input to the When it comes to construction cases, the “Economic Loss Rule” holds that where a building damages itself because one of its component General Assembly. In my role as president of the Virginia a treating provider to be used as evidence. This represents a significant improvement in the statute. Previously, parts is defective, it is deemed a purely economic loss, and is not considered property damage. In such a case there will be no tort cause Association of Defense Attorneys (“VADA”), I serve on of action against the builder of the building, rather, the only cause of action is one for breach of contract. the Legislative Committee and work closely with our information could be kept from the jury about the care and lobbyist to monitor legislation. I speak regularly during treatment of a patient. This statute has application in all personal injury matters. The application of the Economic Loss Rule over the past 15 years has resulted in many claimants alleging that the damage to the build- session with the lobbying team and provide practical --medical malpractice insurers shall submit annual ing caused by the defect in the construction was not actually damage to the building work, but rather property damage to an object which advice on the implications of legislation. reports regarding claims made against providers. was not part of the “building“ or “work” itself. This theory resulted in much confusion between the various courts, as defendants would The legislative initiatives of particular importance are: --requires the state medical board to assess the move to strike tort-based claims under the Economic Loss Rule and plaintiffs would argue that the damage at issue in the lawsuit was to competency of any practitioner who has 3 claims paid in “property” and not the “work” or “building.” 1. HB 2254--This legislation would create a statute any 10 year period. consistent with Federal Rule of Evidence 702. This Recently in the case of Filak v. George, 267 Va. 612 (2004), the Virginia Supreme Court has given some additional guidance in the Eco- would give Virginia a statutory basis to challenge the 3. HB 2209--General District Courts, Medical records. nomic Loss Rule. The Filak Court reasserted that losses suffered as a breach of a duty assumed only by agreement rather than a duty imposed by law would only be recoverable in a breach of contract claim, not a tort or negligence claim. The Court also pointed out that qualifications and opinions of expert witnesses consistent This bill will apply to cases that are removed from when a defendant’s duty arises solely from a contract, the only cause of action which would be allowed is one for breach of that contract, with the Daubert line of Federal cases. We believe this not a claim of negligence. The Filak Court attempts to shift the focus of the Economic Loss Rule from whether or not the damaged home is a necessary change to Virginia law. Since Virginia General District Court. It will allow the removed case to use the General District Court rules regarding medical bills constitutes “property” or “the work itself” to the source of the duty between the parties. Where the parties involvement arises out of con- law does not permit the use of depositions to support tract, the only cause of action against the defendant will be one of contract, and not tort. summary judgment, one of the ways to attack frivolous and records. In General District Court, the plaintiff may cases is to exclude unqualified experts. Unfortunately, put on evidence of bills and records with use of an affidavit. this bill was tabled. The Virginia Trial Attorneys Now, the plaintiff will be able to use the same procedure in (“VTLA”) had targeted this bill for defeat as their highest Circuit Court on any removed case. FROLIC OR DETOUR? LIABILITY AND THE COMPANY CAR priority. The plaintiff’s bar is opposing any measure This represents a win for the plaintiff’s bar. It will be By: Jennifer L. McRobbie, Esquire that would make summary disposition a possibility much easier for the plaintiff to get evidence before the jury, under Virginia law. It remains in their interest to have including medical records of health care providers. Usually, every case go to the jury. This bill would make that less in Circuit Court this evidence is inadmissible. Whether the issue is workers’ compensation benefits, insurance coverage, or general liability, employers and insurers likely and the VTLA strongly opposed it. The VADA is frequently want to know when an employer is liable for the tortious acts of his or her employee in Virginia. There is no fail-safe, going to continue in support of this bill for next year. In We should consider this statutory change when discussing quick test to determine if an employee is acting within the scope of his or her employment; however, the following principles practical application, our inability to use depositions to whether to remove a General District Court case to Circuit may assist you in determining whether coverage should be afforded: Court. support summary judgment and the absence of a clear Virginia courts employ a two part test to determine if a principal is liable for torts committed by an agent: Daubert standard means that our Virginia cases must be If you have any questions about these issues, Liability or Frolic? completely prepared with an expectation that they will please give me a call. (1) Does a principal-agent relationship exist? The answer to this question is as simple as A -B - C: go to the jury. A - Assent. There must be an agreement between the principal and agent to conduct work. B - Benefit. The agent’s conduct must be for the principal’s benefit or on behalf of the principal. continued from page 3 C - Control. The principal must be able to exercise control over the agent. For example, the principal must have the power to supervise or direct the manner of the agent’s work. A frolic is a new and independent journey. A detour, on the other hand, is a mere departure from an assigned task. Here are some examples: (2) Was the agent acting within the scope of the relationship? To determine if the act occurred within the scope of the principal-agent relationship, the • Boss owns a grocery store in ATown. Employee is charged with driving to BTown to buy produce. As part of that trip, Employee usually stays with his following must be answered in the affirmative: brother in BTown for the evening, then returns to ATown in the early morning with the produce. On one occasion, Employee decides to drive to CTown to cure boredom. While on this drive, Employee gets into an accident. Who is liable? If the accident had occurred when going to his brother’s house A. Was the conduct “of the kind” the agent was hired to perform? in BTown, Boss would likely be liable. However, the Virginia Supreme Court held that since the Employee was on a frolic of his own, his actions were outside the scope of his employment. As a result, Boss was not liable for Employee’s actions. Phoenix Indemnity Co. v. Anderson, 170 Va. 408 This is a factual question that should be answered by comparing the actions of the employee to the type of work the employee was hired to perform (1938). or the type of work that is incidental to an employee’s job. This is troublesome to many insurers because of the omnibus clause requirement under Virginia Code § 38.2-2204 to extend coverage to any person legally operating a motor vehicle with the express or implied permission of the owner. • D was the employee of V. V customarily drove D home or to the place of D’s choice after work was completed. One day, after work, V and D, enroute If an employee was not acting within the scope of his or her employment, however, the actions will not be deemed to be within the permission of the to D’s place, stopped to drink beer and play horseshoes with friends. V and D then resumed their trip to D’s place. While driving, V got into an accident owner. where D was injured. Is D entitled to workers’ compensation benefits? According to the Virginia Supreme Court of Virginia, “yes.” Drinking was merely a detour from the regular course of business of traveling back to D’s place. Vaughn’s Landscaping & Maintenance v. Dodson, 262 Va. 270 (2001). However, there are some instances when an employer may be liable even if his employee was operating a vehicle without permission. If an employer entrusts his vehicle to an employee that is knowingly an unfit driver, the employer may be liable despite the fact that the employee was acting outside C. Did the agent “intend to benefit” the principal through his actions? the scope of employment. See, e.g., McNeill v. Spindler, 191 Va. 685 (1950) (where no proof shown that driver was unfit); see also Crowell v. Duncan, Usually this question goes hand in hand with whether or not a tort occurred “on the job.” Essentially, a detour implies that an employee still has the 145 Va. 489 (1926) (where father ought to have known son was unfit driver). employer’s best interests in mind. A frolic, on the other hand, is a complete abandonment of the employer’s interests or desires to venture out on one’s B. Did the tort occur “on the job?” own. If a tort occurs “on the job,” then the actions of an employee will be deemed to be within the permission of an owner. Likewise, if a tort is committed Finally, the mere fact that an employee was driving his employer’s vehicle at the time of an accident does not always mean that there is coverage. Ad- outside the scope of employment, the actions will be deemed outside the permission of the employer. To determine whether an action is “on the job” ditional investigation is necessary to determine whether the employee was within the scope of his employment at the time of the accident or on a “frolic” or not, ask yourself whether the employee’s actions constitute a frolic or a detour. 6 or “detour.” This analysis is critical to determine whether coverage should be afforded or denied. continued on page 6 3 TRICHILO, BANCROFT, MCGAVIN, HORVATH & JUDKINS, P.C. (703) 385.1000 • Fax (703) 385.1555 • www.vadctriallaw.com even be sent certified, with return receipt required. It may even Picking an Expert – PREFERENCE ACTIONS: be sent to a P.O. Box, branch location, or a specific officer of your business. Default judgment is a greater possibility in preference What to look for and what to avoid. by: Sandy Mastro Jack, Esquire WHEN PAYMENT BY A actions and can be devastating to your business. DEBTOR CAN BE TAKEN AWAY! To you and your business, a preference action seems to be In certain cases, time is of the essence in investigating the scene or objects leading to the claim. Although ideally an expert By Stephen A. Marshall, Esquire inequitable and unfair (and it may very well be so). You entered would be picked once a lawsuit is filed and the case has been referred to defense counsel, some claims require immediate atten- into your business to provide goods and services and expect to tion and review by a qualified individual who may later be required to testify. In those times when it is necessary to obtain an be fairly compensated for them. In this case, you have only expert early on the case, here are a few tips of what to do and not do when trying to find the right expert: If your business supplies materials on a credit basis, received payment that is rightly due to your business for what it goods, or labor, you may one day become all too has already provided to the client/debtor. Now the Bankruptcy Do . . . familiar (if you haven’t already) with a very Trustee seeks to strip you of the compensation to which you are 1. Review the resume or curriculum vitae of the expert powerful bankruptcy tool called the “preference rightly entitled. action.” These actions are filed against businesses, Although it may seem obvious, one of the most important things to do before retaining an expert like yours, by a Trustee in bankruptcy, a The United States Congress created the preference powers under is to review his or her qualifications. Look at the individual’s training and experience to make “Debtor-In-Possession” or the Unsecured Section 547 to ensure that an unsecured creditor receiving sure that your expert’s background matches the exact field in which you are looking for testimony Creditors’ Committee. These are a type payment immediately prior to the debtor’s bankruptcy and expertise! Although some persons holding themselves out as experts may have a great deal of of “mini-action” in a bankruptcy lawsuit, filing would not receive more that its “fair share.” education, they may be lacking in practical or useful experience in the field which could hinder their ability to testify. called “Adversary Proceedings.” In essence a debtor is not permitted to “prefer” one Aim for a resume that appears well rounded in training, experience and prior expert testimony. creditor over another by making payments to it instead Why are these preference actions so of another, less preferred creditor. Congress believed 2. Be as specific as possible noteworthy? Their effect on businesses, that the Trustee would be in a better position to fairly The closer you get in experience and training to the exact field of testimony, the better. General experience in engineering is not like yours, are substantial and there are and equally distribute payments to creditors from the as helpful as bio-mechanical engineering or electrical engineering, etc. If your case requires specific scientific or medical testi- an increasing number of these actions bankruptcy estate without the temptation of preferring mony, the best expert will be the one whose expertise is in the specialized area of the testimony. appearing in the bankruptcy courts. The certain creditors. The effect has missed wide of what preference action arises from a federal statute in Congress intended when it created the statute. Nevertheless, 3. Talk to the expert Title 11 of the United States Code (commonly known the bankruptcy preference, for the meantime, is here to stay and A qualified expert with massive experience and extensive training does not automatically lead to the best testimony. Presenting as the Bankruptcy Code). Briefly, 11 U.S.C. § 547 holds your business must act quickly and decisively when faced with testimony to a jury requires the ability to effectively communicate and express ideas, as well as using language and examples that a trustee (or any of the entities mentioned above) may avoid a preference action. Although the preference action may seem a will make the subject matter comprehensible to a jury. Take the time to put a call in to your expert to personally discuss the issues any transfer of an interest of the debtor (in bankruptcy) that daunting entity, there are very effective ways to defend against you need addressed and make your own determination as to how that person will appear to a jury. the debtor made to a creditor within ninety days of the filing of such an opponent. the (bankruptcy) petition, while the debtor was insolvent. This 4. Consider location three month period is extended to an entire year if the creditor Section 547 provides statutory defenses to a preference claim. is considered an “insider” of the debtor. There is a rebuttable The first is a contemporaneous exchange between the creditor When looking for an expert, keep in mind the venue in which suit may eventually be filed. It will save you and defense counsel presumption of insolvency for any transfers the debtor made and debtor for new value given to the debtor. This is a two- time and money to pick an expert that is geographically located in the area where the case will be tried. during this period. pronged test. First, a creditor must show that it and the debtor Don’t . . . had the requisite intent to make a contemporaneous exchange for What can this mean for your business? Well, say you know (or new value. Establishing the debtor’s intent is the most crucial 1. Use an “expert for all seasons” do not know) your client is undergoing financial difficulty, and element in this defense. Second, the exchange must actually Be wary of individuals who hold themselves out to be an expert in many fields in various areas of study. Self-proclaimed experts you are concerned that he will not be able to pay for overdue be contemporaneous in time. The second defense is a transfer may assert knowledge and expertise that they do not have to the degree that you would want for your case. Make sure to do a services, supplies or goods that are rightly due to you. You are that was made in the ordinary course of business or financial little digging into the expert’s background to make sure there is support for the assertions that your expert is making and that they concerned that the client may enter bankruptcy and have heard affairs of the debtor and the creditor. This payment must be for a are familiar with the issues you need addressed. For example, one member of our firm interviewed an expert with a degree in that often creditors, like your business, rarely recover the full debt incurred by the debtor in the ordinary course of its business polymer science that could not explain when asked what a polymer actually was. We did not retain that expert. amount of the payment that the client owes you. In fact, if you and must be made according to ordinary business terms. The have an unsecured credit interest with the client, you know third defense is transfers made to create a security interest in the 2. Rely solely on an expert database or service that you will get just pennies on the dollar, or worse, nothing property acquired by the debtor. This is commonly known as at all. The worst part of this is yet to come. After the debtor/ the “enabling loan.” This is most common for purchase money Although expert services may be helpful in providing potential names or avenues to explore for expert witnesses, they should not client receives a discharge from the bankruptcy court, he is no security interests (PMSI). Another common defense is transfers be relied on solely. These services are a good place to start, but it is still necessary to do the research on any individual name that longer liable on those debts he incurred prior to his bankruptcy that create a security interest in inventory of the debtor on the is provided to ensure that the person meets your needs. The database services categorize experts into field names that may not discharge. This includes the monies owed to your business. You proceeds of the inventory. This is known as the “floating lien.” exactly fit what you are looking for- do not rely on them exclusively. are understandably concerned. Section 547 provides other defenses to the preference action, One member of our firm shared a story in which opposing counsel had used an expert service and designated an expert in the field Then, the clouds begin to part. The client surprises you by paying but the ones referenced above are the most common. The of heating and air conditioning systems. This individual, however, had never designed or installed a heating and air conditioning part or all of the amount due to your business. A month later, the best proven defense, however, to a preference action is active system, and had no idea what licensing requirements were needed to be a technician. He further did not know what technique of client files for bankruptcy protection. You figure, “That was a defense against the claim. Obtain legal counsel when faced with installation the technician in question had been using and could not say what was required to keep the relevant system running close one. We just made it.”...... Think again. a potential preference problem and resolve the matter quickly. properly. You receive a letter from the Bankruptcy Trustee several months Often trustees file many preference actions in the same petition Relying solely on an expert with these qualifications can lead to serious problems in a case, or may help the opposing party strike later that states your business has been named a defendant in and have little time to conduct discovery. All the normal rules for your expert. Make sure to do your own homework before allowing these services to help. federal discovery apply in an Adversary Proceeding. Therefore, a preference action and it is apparent that the Trustee seeks to Note on medical experts... disgorge the payment that the debtor made to you the month before use this opportunity to propound discovery requests upon the he filed bankruptcy. To make matters worse, your response to the Trustee to assess the strength of the preference claim. Discovery Although in general, a medical expert or doctor to perform an independent medical examination will not be necessary until after lawsuit is due in thirty days, assuming you have diligently opened will also cause the Trustee to compromise or dismiss preference suit is filed, in certain cases it may become important to obtain a doctor early in the case. In these cases, consult with defense today’s mail. Unlike most lawsuits that require a defendant be claims that are found to be weak or without merit. Above all, counsel to get a recommendation for the type of doctor needed. Some judges have held that the defendant may not obtain a sec- personally served with notice of a lawsuit, the Federal Rule of take control of the preference action to resolve the matter as ond independent medical exam once the case has been filed if the plaintiff went through an exam prior to filing suit. It therefore Bankruptcy Procedure 7004(b) allows the Adversary Proceeding quickly as possible to avoid delays and disgorged payments. becomes important to determine what doctor the defense attorney would suggest to defend the case. Plaintiff to serve defendants by regular U.S. mail. It need not 4 If you are faced with a preference action, please do not hesitate If you have questions about how to pick an expert or what type of expert you will need, please feel free to contact us. 5 TRICHILO, BANCROFT, MCGAVIN, HORVATH & JUDKINS, P.C. (703) 385.1000 • Fax (703) 385.1555 • www.vadctriallaw.com