Month: August 2017

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Vandeventer Black Keeps Leaving an Imprint in the Hampton Roads Community

The Firm has raised more than $82k for United Way of South Hampton Roads in 5 years

Vandeventer Black joined efforts with the United Way of South Hampton Roads 2017 Annual Campaign. This year, the firm raised a total of $17,260 through employee contributions, and sponsorships.

This amount will help provide:

·  3,718 meals for children and adults in shelter

·  77 weeks of therapeutic horseback riding for a special needs student

·  72 adults with urgent dental services for 1 year

·  23 mothers will receive eight weeks of childcare while searching for a job

·  11 children in hospice, and their families, with a year of counseling support group sessions

·  11 move-in packages to cover basic needs for a person transitioning from homelessness to supportive housing

“We support the local United Way Chapter because we believe that they make a difference in our community,” said Michael L. Sterling, Managing Partner.

Copyright Law for Community Associations

A common issue that community associations encounter is the proper use of copyrighted material.  Whenever an association shows a movie or plays music at a common element/area location within the community, it most likely is using material that is protected by copyright law.  If the association has not obtained a license allowing it to use the copyrighted material, it may be subject to penalties for copyright infringement.

Under the U.S. Copyright Act, original works of authorship fixed in a tangible medium of expression are protected from unauthorized use.  The type of works protected include, without limitation, books, music, movies, photographs and paintings.  The owner of the copyright has the exclusive right, among other rights, to perform the work publicly and to display the work publicly.

To “perform” a work means to recite, render, play, dance, or act it, either directly or by means of any device or process or, in the case of a motion picture or other audiovisual work, to show its images in any sequence or to make the sounds accompanying it audible.  This includes the playing of music, either live, or by a disc jockey or through the radio or otherwise, and the showing of movies and other videos.

To perform a work or display a work publicly means:

1.            to perform it or display it at a place that is either open to the public or at any place where a substantial number of persons outside of a normal circle of family and its social acquaintances is gathered; or,

2.            to transmit or otherwise communicate a performance or display of the work to a place specified by clause (1) or to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.

Performances in places such as such as clubs, lodges, churches, schools and camps are considered to be performances in public places.  This would include places such as an association’s clubhouse or pool area.

Use of copyrighted works without a license from the owner constitutes copyright infringement. The civil penalties for copyright infringement range from $750 to $30,000 per infringement, or, if the infringement was committed willfully, up to $150,000 per infringement.  Each showing of a movie, or each song that is played, without a license may constitute a separate infringement.

Therefore, it is important that a community association obtain a license prior to using any works that are protected by copyright.  A license for the performance of music (either by a disc jockey, a live band, through the radio or otherwise) must be obtained from one or all of the three music licensing companies, Broadcast Music, Inc. (BMI), The American Society of Composers, Authors and Publishers (ASCAP) or the Society of European Stage Authors and Composers (SESAC).  Similarly, a license to show movies must be obtained from one of the movie licensing performance rights organizations, such as Movie Licensing USA.

Jane Tucker is Of Counsel with Vandeventer Black in the firm’s Norfolk office.  Jane concentrates her practice in intellectual property law, business transactions, ERISA and employee benefits matters, and creditors’ rights law.

Jane’s intellectual property practice involves trademark and copyright registration, as well as protection, sale and/or licensing of all forms of intellectual property, including trademarks, copyrights, patents, and trade secrets.  Jane was recently named as one of Virginia Business’ “Legal Elite” in the area of intellectual property law.

This article is intended to bring awareness to this topic and is not meant to serve as legal advice. If you have questions about copyright law, please contact Jane Tucker at jtucker@vanblacklaw.com, 757-446-8625.

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27 Vandeventer Black Attorneys Named ‘The Best Lawyers in America’ of 2018

Best Lawyers®, a respected publication that ranks attorneys based on peer review, recently announced ‘The Best Lawyers in America’ list (2018 Edition). Attorneys from the law offices of Vandeventer Black LLP, were selected to receive this prestigious recognition in one or more categories. The recognized attorneys are:

  • Admiralty and Maritime Law: Mark T. Coberly, Richard H. Ottinger, and Edward J. Powers
  • Arbitration: William E. Franczek
  • Banking and Finance Law: Bryant C. McGann
  • Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law: Daniel R. Weckstein
  • Business Organizations (including LLCs and Partnerships): Cristopher Ambrosio and Richard S. Guy
  • Closely Held Companies and Family Businesses Law: Patrick W. Herman
  • Commercial Finance Law: Bryant C. McGann
  • Commercial Litigation: Robert O’ Donnell
  • Community Association Law: Deborah M. Casey
  • Construction Law: William E. Franczek, Patrick A. Genzler, James R. Harvey, Neil Lowenstein, and Michael L. Sterling
  • Corporate Law: Anita O. Poston
  • Employment Law – Management: Anne G. Bibeau, Dean T. Buckius, and Arlene F. Klinedinst
  • Environmental Law: Patrick A. Genzler
  • Financial Services Regulation Law: Bryant C. McGann
  • Health Care Law: Anita O. Poston
  • Insurance Law: Douglas M. Palais
  • Labor Law –  Management: Dean T. Buckius and Arlene F. Klinedinst
  • Litigation –  Banking and Finance: Bryant C. McGann
  • Litigation – Construction: William E. Franczek, Patrick A. Genzler, and Neil S. Lowenstein
  • Litigation – Environmental: Patrick A. Genzler
  • Litigation – Securities: Douglas M. Palais
  • Mediation: William E. Franczek
  • Mortgage Banking Foreclosure Law: Bryant C. McGann
  • Personal Injury Litigation – Defendants: Anita O. Poston
  • Project Finance Law: Bryant C. McGann
  • Securities / Capital Markets Law: Douglas M. Palais
  • Tax Law: Patrick W. Herman
  • Transportation Law: Mark T. Coberly and G. William Birkhead
  • Workers’ Compensation Law – Employers: R. John Barrett, F. Nash Bilisoly, Adam S. Rafal, and Brian L. Sykes

In addition to the Best Lawyers’ designation, Vandeventer Black attorneys have also received: Virginia’s Business Legal Elite, Top Lawyers of Coastal Virginia, The Best Lawyers in America, Lawyers of the Year, Super Lawyers, Rising Stars, Women In The Law, as well as several recognitions given by respected Bar Associations. In addition, the law firm’s legal team have hold leadership positions as members of boards, governing committees, and fellowships within various organizations.

Top Reasons to Amend a Community Association’s Governing Documents

Whether your community’s documents are relatively new or have been recorded for several decades, this article is intended to provide a basis for determining why amendments should be considered.  Governing documents generally include the Declaration (or Master Deed for condominiums created under the Horizontal Property Act), Articles of Incorporation (for associations that are incorporated), Bylaws, Rules and Regulations, Plats, and Plans.  The governing documents may also include Design or Architectural Guidelines.  A Public Offering Statement is not part of the governing documents.  It is important to consider which document(s) will be amended in order to determine the correct process and procedure.

As community association lawyers, we spend a large part of our time drafting governing documents, reviewing governing documents, interpreting governing documents and, in many cases, amending all or some provisions of those documents.  We can distill that experience into a handful of reasons that documents should be amended.  While it is a good idea to review governing documents each year when the state laws change to determine what, if any, effect the new laws have, this is more likely to be done by most associations on a less frequent basis (like every 20-25 years), at transition from declarant control, when recommended by counsel, or only when facing a particular situation (or crisis) that requires an intensive look at the documents.

1.            Delete Obsolete Provisions.

This first set of reasons might be called clean up.  It is a de-cluttering of governing documents.  Governing documents initially are drafted on behalf of the declarant, or developer.  After transition or the expiration of declarant rights, it is appropriate to delete provisions related to expansion, contraction and other declarant rights.  These provisions tend to take up several pages throughout the Declaration and Bylaws.  And, unlike other provisions that can create confusion, they simply are no longer needed or relevant.

In this age of accelerations, advances in technology have changed many aspects of common interest community life.  Provisions relating to old technology should be deleted or modernized through amendment.    When satellite dishes were the size of a small helicopter, it was appropriate to prohibit them in associations – they were huge and obtrusive.  Not only has technology changed such that many are less than one meter or less in diameter, but federal law has preempted restrictions on “covered antennas” making those provisions no longer enforceable.  Restrictions on some building products similarly have come a long way, making some products more attractive and durable than products on the market at the time documents were put to record.  It may make sense to remove a restriction against vinyl fences, for instance, as they may require less maintenance and last longer.  Virginia law further recognizes that notices, voting, consents and other aspects of association governance can be aided by technology.  Documents should be amended to permit technology to aid the process and increase participation.

Provisions citing incorrect or repealed provisions in the Virginia code or other laws, or the documents, should be deleted or updated.  The Condominium Act superseded the Horizontal Property Act.  Terminology should be updated and provisions amended to comply with the Condominium Act.

2.            Remove Unenforceable Provisions. 

Federal law has trumped provisions in association documents in a few areas, including satellite dishes.  Provisions prohibiting all antennas and requiring advance approval for antennas one meter in diameter or less in an owner’s exclusive use area are no longer enforceable.  Keeping such restrictions in governing documents can be misleading and confusing.  Boards may not know that such provisions are unenforceable or the parameters on enforceability.  Fair Housing laws, federal and state, provide another example of laws that impact the enforceability of provisions in governing documents.  In some cases, accommodations from provisions of the governing documents are required for those with a disability.  Modifications to property may also have to be permitted for a similar reason.  The governing documents should be reviewed to determine if there are any “red flags” with regarding to “children” or other fair housing implications.

Changes in state law also have the effect of making provisions unenforceable.   This is more likely to result in rules being unenforceable.  There are particular subject matter rules that no longer are enforceable unless specific authority exists in the recorded documents.  Some examples include rules related to rentals, transfer fees and solar panels.

3.            Clarify Rights and Responsibilities.  

Perhaps the area that results in the need for legal opinions most often is the responsibility for maintenance, repair and replacement.   To determine who is responsible, it is usually necessary to identify the particular components at issue, many of which are not identified with particularity in the documents.  Condominium boundaries generally are identified by broad definitions.  Sometimes the plans depict more specificity.  The Virginia Code also provides some clarification when the documents do not otherwise provide.

It is not always easy or apparent how a building component is classified, and that leads to the need for a legal opinion.  To assist in determining who is responsible for the various building components, it is usually very helpful to work with association counsel to develop a maintenance chart that identifies building components, classifies them and sets forth who is responsible for maintenance, repair and replacement.  This provides a useful tool for owners, the Board and management, and may save cost in the long run.

Once a component has been identified, the documents generally set forth the various responsibilities to maintain, repair, replace and insure.  The responsibility to maintain, repair, replace and insure do not have to be consistent with classification or “ownership”.  The responsibility for unit or lot components is not always on the unit or lot owner.  The documents may slice and dice those responsibilities between the owner and the association.  In a high rise, for example, the repair and replacement responsibility for balconies (that may be classified as part of the unit, limited common element or common element) may rest with the Association, while the obligation to maintain the balconies (i.e. keep clean and free from snow, ice, debris) may rest with the unit owner.  Or, maybe only the responsibility to replace the balcony railing rests with the association.  It would be difficult for an individual owner to contract and coordinate a balcony repair ten stories off the ground, but not as difficult for the Association.

In some cases, it may be the desire of the Association to shift the obligation from one party to the other.  This would be a good reason to amend.  If owners, for instance, are responsible for all aspects of the balconies, but it is not practical, then an amendment to shift that responsibility from the owners to the Association may be the solution.  Conversely, if it makes more sense for the owners to repair a certain unit or limited common element component rather than the Association, then an amendment may be the answer.

Similarly, an association may decide that it is more appropriate for the insurance requirements of certain components (generally unit components) should follow the obligation to maintain, repair or replace.  Therefore, an amendment to the insurance provisions to, for example, to remove master policy coverage of finished surfaces of units, may be in order.  It could reduce claims, preserve the ability to obtain insurance at favorable rates and align maintenance with ownership.  Alternatively, it may be more appropriate to amend to allocate responsibility for the deductible under the master policy.  The approval requirement for an amendment to change maintenance, repair, replacement and insurance obligations is less than changing classification and addresses the issue.

4.            Remove Obstacles to Governance.

Limits on the amount of the annual assessment, high quorum requirements, proxy witness requirements, certified mail requirements for most notices, restricted borrowing authority, higher than required amendment requirements, inadequate enforcement authority and lack of assessment collection remedies (late fees, interest, acceleration, attorneys’ fees) are some of the more prevalent obstacles Boards face to carrying out the business of an association and accomplishing Association goals.  Any or all of these may be prevent or delay a Board from performing its duties that can decrease property values, hamper progress and stymie decision making and governance.

Dollar and percentage limits on the increase in the annual assessment are arbitrary, tend to lose relevance over time and are not related to the actual needs of an association.

With apathy running rampant in many associations, high quorum requirements are an impediment that is unnecessary.  Many older documents have quorum requirements of 25-50%, which is too high just to call a meeting of owners to order.  The Virginia statutes permit quorum as low at 10%.  This does not affect the requirement necessary to take action, but at least a meeting can be held.

The requirement to have a proxy witnessed was removed from the Condominium Act over a decade ago.  Yet, many condominium instruments still require that proxies be witnessed.  This is one more hurdle that could invalidate a proxy and decrease participation.  Removing the requirement by amendment is one way to facilitate the process and make it easier for owners to be part.

Certified mail requirements can add expense, and do not insure that owners will receive a notice or letter.  Many owners are not home when mail is delivered and will not take the time to pick it up later.  Unless required by statute or other good cause, consider removing this requirement and saving expense.

Documents may contain an amendment requirement that is more onerous than is required by statute.  An amendment to lower the approval requirement (to statutory minimums) or streamline the amendment process itself may be needed to make needed changes and progress.

Not having adequate enforcement remedies in the recorded documents can be a source of frustration to associations trying to achieve their objectives.  It can result in increased cost for court action that may be impractical or not justified under the circumstances, and hamstring a Board in its ability to seek compliance.  If documents do not provide the ability to suspend facilities or services for non-payment or assess charges for violations (in accordance with Virginia law) or utilize self-help (ability to correct violation if owner fails or refuses), then consider an amendment to include these important tools.

Assessments are the lifeblood of an association.  Failure to pay results in a drain on the association and the other owners have to make up the deficit.  There is a cost to non-payment.  Not only is there the time value of money, but there is administrative and legal cost and expense.  The documents need to provide adequate remedies in event of default so the association can be made as whole as possible.  With a provision making the owner responsible for attorneys’ fees, for instance, an association can only recover such fees if it obtains a judgment and prevails, and there is no guarantee a judge will award all fees incurred.    Post-judgment collection efforts, such as garnishment or debtors’ interrogatories are not considered as part of a court award, and there is no opportunity to seek them after a judgment is final.

5.            Address Particular Circumstances; Changes in Community.

Addressing particular circumstances is more likely to result in amendment of one or a few provisions of the governing documents rather than a wholesale review and amendment and restatement.  Examples include high rental occupancy rates, short-term rentals, home-based businesses, smoking, pets and zoning/proffer-related obligations.

It is also important to note that as a community develops and evolves, the desires and constituency of its membership may change and call for amendments.  Perhaps it was envisioned as a “retirement” community originally, but the demographics have changed and young families or millenials inhabit a community, or vice versa.   Or, perhaps an office park was envisioned to encompass only certain business, but as the community develops, additional uses are desired.  This may lead to the desire to add or delete restrictions to adapt to changed uses.

6.            Clarify Conflicting, Ambiguous or Complex Provisions.

Believe it or not, many governing documents are put to record or created with contradicting provisions.  For instance, the Declaration may provide for a late fee of a percent of the assessment, but the Bylaws have a specific dollar figure.  Or, perhaps a rule is enacted that has a figure that does not agree with Declaration provision.  While Virginia law provides rules on complementarity, with the Declaration and Articles of Incorporation controlling over the Bylaws and the Bylaws controlling over the rules (unless included as an Exhibit to the Declaration), the more specific governing the general, etc., these inherent contradictions tend to create confusion or enforcement problems that can be alleviated through amendment.

In other cases, documents are ambiguous, and could be improved by clarifying ambiguous or complex provisions that are difficult to read and understand.  Older documents frequently contain provisions in the Declaration or Bylaws and rules that are duplicative, and in some cases conflicting.  It is not necessary to have the same provision in multiple documents, and it may simplify the documents (and save some pages and trees), and reduce conflict and ambiguity to remove the repetition.

7.            Make Document User-Friendly.

This category of change may not be reason alone to undergo the amendment process, but if amendments are in play, it provides a good opportunity to clean up existing documents and make them more user-friendly.  Documents that are easy to read and identify lead to great understanding and compliance.

When amending, consider including a table of contents, headings and other organizational tools.  Consider changing font, letter size, adding charts and tables, section numbers, indentation and offsets and other formatting tools that can make documents easier to read.  This is also a good opportunity to correct typos and other errors, some of which may be amended by a corrective amendment.

When documents have been amended several times in piecemeal fashion, it can be difficult to determine what the current provision is on a particular issue.  It also can lead to errors in record keeping, resale packets and decision-making based on changes that get missed.  If documents have been amended several times, consider amending and restating into a single document that encompasses all changes to date and alleviates the need to flip through several documents to locate a provision.  It can save time and expense and lead to a greater understanding.

There are many reasons to amend governing documents.  It can facilitate the governance of an association, save time and expense and further the goals of enhancing property values, by leading to a greater understanding by owners, boards and management, all of which increases compliance, reduces confusion and conflict and brings more clarity.  Amending documents is a technical process.  It is an unauthorized practice of law for a non-lawyer to prepare amendments that affect title to or an interest in real estate.  Consult your association attorney about amendments that may be right for your community.

Deborah Casey is a partner with Vandeventer Black LLP, a law firm with offices in Norfolk and Richmond, Virginia.  Debbie chairs the firm’s Community Association Law practice group and serves on the firm’s Executive Board.

Debbie is an active member of the Community Associations Institute, having served as President of the Southeastern Virginia Chapter and on the Virginia Legislative Action Committee for 10 years, and 3 as Chair.  She is a fellow in the College of Community Association Lawyers.  She has been active in her community and various organizations.  She is rated AV preeminent by Martindale-Hubbell® legal directory, listed in Best Lawyers in America for Community Association Law, Virginia Super Lawyers, Legal Elite and Coastal Virginia Magazine Top Lawyers, and is the recipient of several awards.

This article is intended to bring awareness to this topic and is not meant to serve as legal advice.

A Corporate Formality with Significant Implications – Carefully Select our Community Associations Registered Agent

Virginia law related to registered agents is deceptively simple:

  • Every corporation authorized to transact business in Virginia (including incorporated community associations) are required to maintain a registered office and a registered agent within the state;
  • Registered agents in Virginia have only one statutory duty – to forward to the business entity at its last known address any process, notice or demand that is served on the registered agent;
  • Individuals may serve as registered agents if they are residents of Virginia, are members of the Virginia State Bar or part of the management of the corporation (i.e., an officer or director), and agree to serve as registered agent.
  • Business entities that are authorized to transact business in Virginia may also serve as registered agent for another business entity if it agrees to serve in that capacity (even though a business entity may not serve as its own registered agent).

Because of its simplicity, selection of a community association registered agent is often times viewed merely as a corporate formality.

Initial convenience, cost and inadvertent inattention to the implications of selecting a registered agent have led many community associations to select a community association volunteer leader (i.e., an officer or director) to serve as registered agent.  Appointment of a community association volunteer leader as registered agent has significant risks, outlined below, which must be understood and addressed by community associations.

Risk 1:  Registered Agent appointment and contact information will become stale.

Community association volunteer leaders are, by their nature, temporary positions.  Volunteer leader positions are subject to term lengths and, in some circumstances, term limits.  Community association volunteer leaders serving as registered agent might move out of state, resign from their positions, or fail to be re-elected or re-appointed.  Each of these events could disqualify the individual from serving as registered agent and would force the association out of compliance with Virginia law.

Risk 2:  Registered Agent will mishandle (or disregard) service of process.

The sole statutory duty of a community association registered agent in Virginia is to forward to the association, at its last known address, any process, notice or demand that is served on the registered agent.  But, registered agents are not infallible.  In addition to their duties as officers and directors, community association volunteer leaders have other obligations and distractions, including work or family obligations.  These distractions, especially when combined with a lack of understanding of the significance of service, could cause a registered agent to mishandle (or disregard) service of process.

Anecdotal evidence suggests this has occurred in Virginia (we are not aware of specific examples in Virginia), and a review of case law from other jurisdictions illustrate the possibility.  See, for example, Goodman Associates, LLC v. WP Mountain Properties, LLC, 222 P.3d 310 (Colo. 2010); Danny’s Sports Bar Chicago Style Pizza v. Schuman, 2015 Ind. App. Unpub. LEXIS 1; Gutierrez v. G&M Oil Company, Inc., 2010 Cal. App. LEXIS 640.

Risk 3: Registered Agent will not be available to accept service.

When community association directors or officers serve as registered agents, there is a significant risk that the registered agent will not be available to accept service.  Virginia’s statutory scheme contemplates that the registered agent will be available at the registered office to accept process and notices for a business entity during normal business hours.

Unsuccessful attempts to serve a Virginia registered agent allow the plaintiff to use substituted service, serving the documents on the Virginia State Corporation Commission.  Service through the Virginia State Corporation Commission will cause delays in actual receipt of service of process, cutting into an association’s timeframe to respond to a suit.

Using an individual director or officer as registered agent may have more significant implications.  In 2016 the Code of Virginia was amended to allow substituted (posted service or delivery to a family member over the age of 16) if the registered address of the corporation is a single-family residential dwelling.  By using a director or officer’s home address for service, service can be effected merely by affixing the court documents to the director’s front door or by handing it to the director’s 16-year-old son or daughter.  If a director or officer is away from their home for an extended period, there is significant risk that the association will not respond timely to a lawsuit.

Risk 4:  Registered Agent will not mishandle (or disregard) corporate documentation requests and filing requirements.

In addition to mishandling of service of process, individual registered agents may also mishandle or disregard requests for annual reports, even if inadvertent.  Each Virginia corporation is required to file an annual report in the Office of the Clerk on or before the last day of the 12th month after it was incorporated or issued a certificate of authority.  The annual report form contains certain corporate information of record in the Office of the Clerk.

If a community association fails to file an annual report, the corporate status of the association will lapse.  If an association’s corporate status is purged for a period of more than five years, the corporate status will be purged and cannot be reinstated or restored.  The purging of an association corporate status can have significant implications on an association’s ability to enforce the governing documents.

Risk 5:  Registered Agent will become adverse to the Association.

In some circumstances, individual directors may become adverse to the association (whether legally adverse or otherwise).  Certain directors and officers (or former directors and officers) may file suit against the association or be the defendant in a suit, making it is easy to see how that individual’s service as registered agent could complicate the litigation process.

Even if directors are not legally adverse to the association (by being a party in a lawsuit against the association), directors may still be adversarial.  If an individual becomes disgruntled during their service to the association, or frustrated from dealing with association issues after their service to the association is completed, that director may simply stop forwarding documents.

Risk 6: Registered Agent may be named in a lawsuit.

It is not uncommon for litigants (particularly pro se plaintiffs) to name a registered agent as a defendant in a lawsuit along with the association.  And, while there is unlikely to be liability in those circumstances, the registered agent may incur costs of defense in being extricated from the suit.

The prevalence of these actions (inappropriately naming registered agents as defendants) has caused many management companies to refuse to serve as a registered agent.  The risk of being named in a suit is simply too high for the management company.  A similar risk applies to having an officer or director act as registered agent.

Risk 7: Registered Agent may create personal liability.

Finally, serving as a registered agent may create personal liability for a community association volunteer leader.  In at least one instance, a Virginia registered agent was arrested and led in handcuffs from his law office because he was listed as a registered agent for a business that skipped a court hearing over an unpaid tax bill (see the March 2017 unpublished opinion of the U.S. Court of Appeals for the Fourth Circuit in Ryu v. Whitten, et al. here).

Serving as registered agent for an association is generally outside the scope of responsibility for a director or officer, and failure by a registered agent to comply with statutory duties might not be covered by all directors and officer’s liability policies.  Similarly, limitations on liability and requirements for indemnification may not extend to the additional responsibilities a director or officer assumes as registered agent, creating the potential for personal liability for that individual.

Recommendations

Because of the significant risks (outlined above) involved in the appointment of a registered agent, association legal counsel should be consulted on the selection of the registered agent.

This article is intended to bring awareness to this topic and is not meant to serve as legal advice.

A Corporate Formality with Significant Implications – Carefully Select our Community Associations Registered Agent

Virginia law related to registered agents is deceptively simple:

  • Every corporation authorized to transact business in Virginia (including incorporated community associations) are required to maintain a registered office and a registered agent within the state;
  • Registered agents in Virginia have only one statutory duty – to forward to the business entity at its last known address any process, notice or demand that is served on the registered agent;
  • Individuals may serve as registered agents if they are residents of Virginia, are members of the Virginia State Bar or part of the management of the corporation (i.e., an officer or director), and agree to serve as registered agent.
  • Business entities that are authorized to transact business in Virginia may also serve as registered agent for another business entity if it agrees to serve in that capacity (even though a business entity may not serve as its own registered agent).

Because of its simplicity, selection of a community association registered agent is often times viewed merely as a corporate formality.

Initial convenience, cost and inadvertent inattention to the implications of selecting a registered agent have led many community associations to select a community association volunteer leader (i.e., an officer or director) to serve as registered agent.  Appointment of a community association volunteer leader as registered agent has significant risks, outlined below, which must be understood and addressed by community associations.

Risk 1:  Registered Agent appointment and contact information will become stale.

Community association volunteer leaders are, by their nature, temporary positions.  Volunteer leader positions are subject to term lengths and, in some circumstances, term limits.  Community association volunteer leaders serving as registered agent might move out of state, resign from their positions, or fail to be re-elected or re-appointed.  Each of these events could disqualify the individual from serving as registered agent and would force the association out of compliance with Virginia law.

Risk 2:  Registered Agent will mishandle (or disregard) service of process.

The sole statutory duty of a community association registered agent in Virginia is to forward to the association, at its last known address, any process, notice or demand that is served on the registered agent.  But, registered agents are not infallible.  In addition to their duties as officers and directors, community association volunteer leaders have other obligations and distractions, including work or family obligations.  These distractions, especially when combined with a lack of understanding of the significance of service, could cause a registered agent to mishandle (or disregard) service of process.

Anecdotal evidence suggests this has occurred in Virginia (we are not aware of specific examples in Virginia), and a review of case law from other jurisdictions illustrate the possibility.  See, for example, Goodman Associates, LLC v. WP Mountain Properties, LLC, 222 P.3d 310 (Colo. 2010); Danny’s Sports Bar Chicago Style Pizza v. Schuman, 2015 Ind. App. Unpub. LEXIS 1; Gutierrez v. G&M Oil Company, Inc., 2010 Cal. App. LEXIS 640.

Risk 3: Registered Agent will not be available to accept service.

When community association directors or officers serve as registered agents, there is a significant risk that the registered agent will not be available to accept service.  Virginia’s statutory scheme contemplates that the registered agent will be available at the registered office to accept process and notices for a business entity during normal business hours.

Unsuccessful attempts to serve a Virginia registered agent allow the plaintiff to use substituted service, serving the documents on the Virginia State Corporation Commission.  Service through the Virginia State Corporation Commission will cause delays in actual receipt of service of process, cutting into an association’s timeframe to respond to a suit.

Using an individual director or officer as registered agent may have more significant implications.  In 2016 the Code of Virginia was amended to allow substituted (posted service or delivery to a family member over the age of 16) if the registered address of the corporation is a single-family residential dwelling.  By using a director or officer’s home address for service, service can be effected merely by affixing the court documents to the director’s front door or by handing it to the director’s 16-year-old son or daughter.  If a director or officer is away from their home for an extended period, there is significant risk that the association will not respond timely to a lawsuit.

Risk 4:  Registered Agent will not mishandle (or disregard) corporate documentation requests and filing requirements.

In addition to mishandling of service of process, individual registered agents may also mishandle or disregard requests for annual reports, even if inadvertent.  Each Virginia corporation is required to file an annual report in the Office of the Clerk on or before the last day of the 12th month after it was incorporated or issued a certificate of authority.  The annual report form contains certain corporate information of record in the Office of the Clerk.

If a community association fails to file an annual report, the corporate status of the association will lapse.  If an association’s corporate status is purged for a period of more than five years, the corporate status will be purged and cannot be reinstated or restored.  The purging of an association corporate status can have significant implications on an association’s ability to enforce the governing documents.

Risk 5:  Registered Agent will become adverse to the Association.

In some circumstances, individual directors may become adverse to the association (whether legally adverse or otherwise).  Certain directors and officers (or former directors and officers) may file suit against the association or be the defendant in a suit, making it is easy to see how that individual’s service as registered agent could complicate the litigation process.

Even if directors are not legally adverse to the association (by being a party in a lawsuit against the association), directors may still be adversarial.  If an individual becomes disgruntled during their service to the association, or frustrated from dealing with association issues after their service to the association is completed, that director may simply stop forwarding documents.

Risk 6: Registered Agent may be named in a lawsuit.

It is not uncommon for litigants (particularly pro se plaintiffs) to name a registered agent as a defendant in a lawsuit along with the association.  And, while there is unlikely to be liability in those circumstances, the registered agent may incur costs of defense in being extricated from the suit.

The prevalence of these actions (inappropriately naming registered agents as defendants) has caused many management companies to refuse to serve as a registered agent.  The risk of being named in a suit is simply too high for the management company.  A similar risk applies to having an officer or director act as registered agent.

Risk 7: Registered Agent may create personal liability.

Finally, serving as a registered agent may create personal liability for a community association volunteer leader.  In at least one instance, a Virginia registered agent was arrested and led in handcuffs from his law office because he was listed as a registered agent for a business that skipped a court hearing over an unpaid tax bill (see the March 2017 unpublished opinion of the U.S. Court of Appeals for the Fourth Circuit in Ryu v. Whitten, et al. here).

Serving as registered agent for an association is generally outside the scope of responsibility for a director or officer, and failure by a registered agent to comply with statutory duties might not be covered by all directors and officer’s liability policies.  Similarly, limitations on liability and requirements for indemnification may not extend to the additional responsibilities a director or officer assumes as registered agent, creating the potential for personal liability for that individual.

Recommendations

Because of the significant risks (outlined above) involved in the appointment of a registered agent, association legal counsel should be consulted on the selection of the registered agent.

This article is intended to bring awareness to this topic and is not meant to serve as legal advice.

Maintaining Company Minutes

“An Ounce of Prevention is Better Than a Pound of Cure”

Many who organize small businesses, such as corporations or limited liability companies, assume that the benefits of such entities are absolute.  However, these benefits are not maintenance-free. Once your company is formed, it is easy to go back to business as usual and forget to comply with necessary formalities, such as preparing detailed company minutes.  When properly kept, minutes constitute a record of company proceedings and should be regularly prepared for the following reasons: (i) reducing exposure to personal liability, (ii) proving authorization of major business decisions, and (iii) preserving a credible record for audits.

When claims are made against commercial enterprises, a primary concern is whether the entity formed will shield owners’ personal assets from claims against the business.  Since many owners are never told why organizational formalities are important, they are often at risk that creditors may be able to disregard the company’s separate legal status and impose personal liability upon the owners.  In the absence of current minutes, creditors will argue that the owners discounted the significance of the company’s separate legal status and that the rest of the world should just be able to do the same.  The best evidence to defeat such an action is to keep accurate minutes of company meetings.

Maintaining minutes will help confirm whether major business decisions were properly authorized by the correct individuals.  This comes into play whenever you try to (i) transfer ownership interests in the company, (ii) transfer substantial portions of company assets, or (iii) obtain financing for a company project.  If not confirmed in the minutes, your attorneys will spend numerous hours analyzing company documentation to ascertain whether the action was authorized and whether all voting interests were taken into account.

The regular preparation of minutes affords companies an opportunity to preserve evidence in their favor in the event of a future audit.  If such records are prepared to close to the time the company action was taken, they are usually of great value to the company, because testimony given by certain principals, which is not supported by minutes, may be viewed as inherently self-serving and given little weight as evidence.

Keeping regular minutes should be viewed as preventative maintenance that may address important issues before potential conflicts arise.  If you are uncertain as to what to include in minutes, your attorney can assist you in preparing minutes and other documentation, which will help maintain the integrity of the company’s form and serve as evidence that company action was properly authorized.

Existing Caselaw that Honors U.S. Choice of Law Clauses in International Contracts is Left Undisturbed by Supreme Court

Since the 1970s, courts have generally recognized the choice of law and forum provisions contained in contracts between international parties.  In some contexts, however, a party will challenge a choice of law provision as unenforceable for reasons of fairness, or because to enforce the clause would conflict with existing law.  Recently, the issue has been raised in a number of cases in the context of admiralty law, where contracts between non-U.S. entities have specified U.S. law in their contracts, without any other apparent connection with the United States in the transactions.  In particular, companies that provide fuel oil to ships have learned that U.S. law pertaining to maritime liens is more favorable to contractors which supply fuel and other supplies and services to ships than the laws in most of the rest of the world.

When litigation arising from these contracts is initiated in the U.S., often the foreign vessel owner challenges the validity of the U.S. choice of law clause.  The basis for the challenge can be wide ranging but typically includes that there are no U.S. contacts in the transactions and that the law of the countries where the parties reside, the transaction was made, and where the contract was performed differ from U.S. law.

Lower courts have generally upheld the contract clause, applying the choice of law and forums the parties had specified in their contracts.  And, where this issue of applying U.S. maritime lien law based on the choice of law clauses in foreign contracts has been presented at the appellate court level, three appellate courts also have held the choice of law in the contract should be followed – The Fourth Circuit, the Fifth Circuit, and the Ninth Circuit.

The issue was taken to the Supreme Court of the United States last year when it was petitioned to review the ruling from the Fifth Circuit in World Fuel Services (Singapore) Ltd. v. Bulk Juliana, Ltd., 822 F.3d 766 (5th Cir. 2016).  Among other issues raised in the Petition for Certiorari to the Supreme Court, was whether the exercise of in rem jurisdiction premised on the existence of a maritime lien that only exists by virtue of a contractual choice of U.S. law, violates the axiom that jurisdiction that would not otherwise exist cannot be conferred by the parties’ consent.

On January 9, 2017, the high court decided to request the position on the issue from the Solicitor General, who speaks for the United States government.  Bulk Juliana, et al. v. World Fuel Services, 580 U.S. 2 (2017).  The Solicitor General recommended the Supreme Court decline the case, and on June 26, 2017, an order was entered by the Court denying the petition. Bulk Juliana, et al. v. World Fuel Services, 582 U.S. 9 (2017).

This is the second time in recent years that the Supreme Court has denied a petition to hear a case with a challenge to a U.S. choice of law clause that benefited a maritime lien holder.  Previously the Court declined to review the similar case of Splendid Shipping Sendirian Berhad v. Trans-Tec Asia, 555 U.S. 1062 (2008).

The message of these cases to parties to international transactions that incorporate U.S. law, including maritime lien law, is that those clauses are enforceable and that the Supreme Court is unlikely to change that interpretation anytime soon.

Why Contract Relationships are Just as Important as the Terms of Contracts Themselves in a Construction Dispute

If you are a contractor in Virginia, you may have heard of the “economic loss rule.”  This legal rule helps preserve a distinction between contract law and tort negligence.  Contract law upholds agreements made between parties, and Virginia courts value the terms of the parties’ agreement.  For example, if a project owner hires you to construct a building and your work has an unreasonable number of problems, then the project owner may recover the cost to correct your mistakes as damages in a breach of contract action.  The costs to correct errors in your work are a type of economic loss, which is governed by your contract with the owner.

On the other hand, there is also a “common law” duty not to harm people in the community.  This is the concern of tort negligence.  For example, if the building collapses due to a defect in your work and people are injured by the collapse, then those people can probably recover damages from you, as the contractor, for the harm they suffered.  The injured people might have a viable claim for personal injury or property damage even if you did not have a contract with them.

This analysis becomes more complex when, as often happens in construction projects, there are many different subcontractors and sub-subcontractors, each of which is party to a different contract.  Among other things, the economic loss rule helps to prevent building owners from converting one breach of contract issue into a broad tort negligence lawsuit directed against all project participants.

For example, imagine a project where you are a subcontractor responsible for a discrete part of the project.  Perhaps the owner thinks your work was inadequate, but nobody has been injured.  The owner’s disappointed expectations in your work, absent personal injury or property damage beyond the building itself, will still be governed by the owner’s contract with the prime construction contractor.  The owner’s claims for the cost of repairing your work must, therefore, flow through the series of contracts, starting first with a lawsuit against the prime construction contractor.   See Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236 Va. 419 (1988).  There will undoubtedly be contract terms allocating this risk throughout the chain of individual construction contracts, but the economic loss rule benefits the entire construction team by ensuring that claims flow through that negotiated contact structure and that recoverable damages are limited to contract damages.

Building owners who do not have a contract directly with the targeted member of the construction team may try to short-circuit the economic loss rule analysis to support a claim directly against that remote sub- or sub-subcontractor.  For example, the owner might argue that a sub-subcontractor negligently breached a duty to follow applicable building codes.  This argument draws on an appreciation that building codes promote public safety, and public safety sounds like a tort negligence issue.

But just because something sounds like a tort, doesn’t mean that it is a tort.  After all, the purpose of building codes is to protect the safety of the public, not to protect a building owner’s economic interests.  See Zuberi v. Hirezi, 2017 WL 436278 (E.D. Va. Jan. 30, 2017).  Simply recasting disappointed expectations about a construction project through the lens of an obscure building code violation is not likely sufficient for a building owner to overcome the economic loss rule.

All of this is to say that the analysis of construction claims is no more intuitive than the analysis of building codes you perform in your own daily work.  The analysis can follow many twists and turns, and you should promptly seek the advice of a construction attorney when a project owner references a potential claim affecting your work in any way.

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