[Posted April 20, 2012] Today, the Supreme Court of Virginia hands down 15 published opinions in cases argued in the March session. Two additional cases are decided by unpublished order.

Before we dive into today’s rulings, here’s one more reminder to sign up for next week’s Virginia Appellate Summit in Richmond. The program has indeed been fully approved for CLE credit. Here’s a chance to satisfy over half of your annual MCLE requirement (including the new requirement to live, in-person presentations) and mingle with appellate jurists and some of the state’s top appellate practitioners.

Civil procedure
We’ll start today with something that was once rare in the Supreme Court, but is now becoming more and more common – a split decision. Laws v. McIlroy is a 4-3 close call in an appeal over the tolling provisions relating to nonsuits.

This decision actually involved two consolidated appeals, considering companion suits brought over a vehicular collision. The suits were timely filed, and during the pendency of the cases, the plaintiffs decided to nonsuit them. The plaintiff submitted nonsuit orders on January 8, 2010, and then refiled their suits eleven days later. But there was a delay in entry of the nonsuits; those were eventually entered on February 4, while the refiled actions were already pending.

There doesn’t appear to be anything particularly untoward about these circumstances, but the defendant took a close look at the tolling statute and quickly asserted the bar of the statute of limitations. Here’s the relevant text from the tolling statute:

If a plaintiff suffers a voluntary nonsuit as prescribed in § 8.01-380, the statute of limitations with respect to such action shall be tolled by the commencement of the nonsuited action, and the plaintiff may recommence his action within six months from the date of the order entered by the court, or within the original period of limitation, . . . whichever period is longer.

The defendant contended that this tolling provision only applies to suits that are refiled within six months after the date of the nonsuit order; it does nothing for plaintiffs who refile before a judge enters the nonsuit order. The trial court agreed with the defendant and dismissed both suits.

Today, a bare majority of the Supreme Court reverses and sends the case back for trials. The majority (Justice Lemons, joined by Justices Goodwyn, Mims, and Powell) notes that the statute doesn’t say that you have to recommence the action within six months after the date of the nonsuit; it just says within six months, and six months can be counted forward or backward. These refiled actions were within that window, so they were improperly dismissed below.

Justice Millette, joined by the chief justice and Justice McClanahan, issues a fiery dissent in which he advocates a result that he acknowledges is harsh; the defendant admittedly suffered no prejudice as a result of the “early” refiling of the second suits. But he can’t stomach the idea of using the words recommence and from in this way, in this context. He quotes this language from earlier in the tolling statute: “After a nonsuit no new proceeding on the same cause of action or against the same party shall be had in any court other than that in which the nonsuit was taken.” (Emphasis in slip opinion.) He also disagrees with the majority’s recitation of other opinions in which the court has seemingly used the word from to act retrospectively instead of prospectively, since those cases always used the phrase away from, not simply from.

The dissent concludes that this may be a statutory problem, but contends that the justices weren’t hired to fix statutory problems; only the legislature can do that. Indeed, it’s conceivable that the legislature might take this up next year, to add a provision similar to that added by the Supreme Court recently to Rule 5:9, allowing the “pre-filing” of notices of appeal. But for now, these cases are headed back for a trial on the merits.

Here’s the setup in Keith v. Lulofs: A man and a woman, each of whom has been married before, get married to each other and decide to make reciprocal wills. The wills are identical in that they leave everything to the other spouse, and then to the husband’s son and the wife’s daughter, each from the earlier marriage. Seven years later, the couple took out an insurance policy, ostensibly to fund the estate; the new step-siblings are listed as primary beneficiaries at 50% each.

Two years later, the husband dies, and his wife takes all of his estate. But two months later, she executes a new will that cuts her stepson out entirely. She later changes the beneficiary provision on the insurance policy, again listing her daughter and making no provision for her stepson.

The issue here is what happens when the wife dies and her daughter wants to probate the estate. If you think you’re in for a good, old-fashioned step-family feud, well, you’re probably right.

We only get the sanitized, appellate version, of course. The issue today is whether the execution of wills under these circumstances is enough to establish a contract to keep the property split at 50-50, even after one spouse dies. The court today decides that the trial court got it right in ruling for the daughter. While you might be able to make a case if these were contracts, wills are different; they can be changed unilaterally. The court also holds that the son’s parol testimony (in which he laid out his plans and even his distrust of his new wife) wasn’t corroborated as required by the Dead Man’s Act.

Of course, if they had created an irrevocable family trust, they wouldn’t have had this problem. But that’s one for the estate lawyers to chew over in their idle hours.

The personal-injury bar (both sides of the aisle) will be very interested in Arnold v. Wallace, which discusses two questions that are quite likely to recur in tort litigation. This one looks like a garden-variety auto-collision case. During discovery, the defendant got a copy of the plaintiff’s medical file, and it contained information about several preexisting conditions that looked awfully like some of the complaints she was making after the collision. The defense thus sought to introduce the records.

The plaintiff insisted that the records were hearsay, and objected when the defendant tried to have them admitted as business records of the doctor’s practice. The doctor duly testified that these records were regularly kept in the ordinary course of his office’s medical practice, and that the records were consulted by whichever doctor happened to be seeing the patient on a given day. That wasn’t good enough to satisfy the plaintiff, who pointed out to the judge that the defendant “[h]asn’t laid the elements of the business records foundation, and I don’t want to tell him what it is. That’s his job.”

We’ll take a small detour here to consider what the justices think of a lawyer who decides he’s going to make the bare-minimum objection, and hope that the other side doesn’t guess correctly. Rule 5:25 states that you have to object timely and do so “with reasonable certainty.” True, a judge might be onto the problem immediately, and sustain a vague, hide-the-ball objection; but that didn’t happen here. The judge overruled the objection and allowed the records, and all that otherwise-hearsay, into evidence.

The problem with this approach becomes clear with the next step in the proceedings: The doctor was allowed to read the damaging material to the jury, with nary a peep from the plaintiff. On appeal, the plaintiff argued that the medical records could only come in to the extent they constituted factual statements, but opinions were not within the business-records exception to the hearsay rule. The court today rules that this issue was waived, because a general objection to foundation does not encompass other objections to specific items within the document. In this instance, the plaintiff’s lawyer played it too cute by making a vague objection and hoping that it would be read broadly on appeal.

The court decides one other issue that will be of continuing interest. The defense indicated that it would call a doctor to testify as an expert, until the plaintiff pointed out that she had consulted that very doctor earlier in the case before deciding not to use him at trial. The defense then got another doctor in the same practice group to take the first doctor’s place. The issue here is whether the second doctor was disqualified on an imputed basis, based on the consultation with his partner.

The court holds today that a party who seeks disqualification in this light has to show that the substituted doctor received some confidential information, so as to be disqualified in turn. The court doesn’t regard the fact of practicing in the same group as an automatic disqualification. Since the plaintiff didn’t meet that burden here, the trial court was correct in allowing the second doctor to testify for the defense.

The court today takes up two certified questions of law, in Wyatt v. McDermott. The questions engender some interesting historical perspective and yet another 4-3 split among the justices.

Since the case stalled in US District Court over a 12(b)(6) motion, the facts are as alleged in the complaint. Keep in mind that the plaintiff may or may not be able to prove these things. The complaint was filed by the father of a baby girl. He alleged that the child’s mother (to whom he was not married) conspired with her father, a couple in Utah, a Utah adoption agency, and some Utah lawyers to facilitate the clandestine adoption of the little girl without the father’s consent, or even knowledge. A Virginia court had awarded custody to the father, while a Utah court had awarded custody to the Utah couple.

Normally, you’d expect this to be about which court has jurisdiction over the child and the dispute. But this opinion contains a surprise: The father filed a civil suit for money damages, alleging tortious interference with the parental relationship. He named everyone except the birth mother as defendants in a suit filed in the Alexandria Division of the US District Court. Confronted at the motion-to-dismiss stage with the question of whether such a right even exists in Virginia, the district court asked the Supreme Court for guidance.

Justice Millette writes today’s majority opinion on behalf of the chief justice and Justices Lemons and Powell. The majority acknowledges that there is no statutory cause of action for this situation, so it turns to the common law, starting with that of England before the Jamestown settlement. There, the majority notes, a father could bring an action for loss of services where his son was abducted. (Note the use of the masculine, and rest assured that I’m not being sexist; the law only allowed men to sue, and only for the loss of male heirs.)

The majority concludes that this old right of action, even with the sexist language, has not been abrogated by any act of the legislature (although the abolition of an action for alienation of affection comes close). The majority holds that such an action does exist in Virginia, although it now applies equally to parents and children of both sexes, thanks to our current constitution. The court then lays out the elements of the tort and the defenses available to resist it; notable among these is the defense of justification, such as where the defendant reasonably and in good faith believes that the interference is necessary to protect the child from harm.

I promised you a 4-3, and by golly, I’m going to deliver. Justice Mims files a short dissent in which he agrees with a separate, longer dissent by Justice McClanahan (joined by Justice Goodwyn). The longer dissent take the majority to task on a number of grounds, starting with the old English right of action. This action, Justice McClanahan notes, was only to protect the parent’s property interest in the heir’s marriage prospects, not in a family relationship. She contends that if such a right of action is to be conferred, it should be created by the legislature, not the courts.

The most instructive opinion of the day, in my opinion, is Burns v. Gagnon. It arises from a suit filed by a Gloucester High School student who was assaulted in the school lunchroom. The victim sued his assailant, the assailant’s sister (who urged her brother to attack the victim), and an assistant principal who had been warned in advance by another student that there would be a fight that day involving the victim.

While today’s opinion repeatedly refers to the event as a fight, I don’t think you can fairly describe it as such, since to me, a fight involves action by both parties. This was an assault:

Gagnon was approached by another student, James S. Newsome, Jr. (Newsome), in the school’s cafeteria. The two exchanged words, and Newsome’s sister and fellow student, Christine D. Newsome (Christine), who was standing behind Newsome, said, “either . . . hit [Gagnon] or walk away.” Newsome then punched Gagnon once in the face, knocking his head back into a brick pillar.

A jury awarded damages totaling $5 million, divided in discrete amounts among the three defendants. The assistant principal appealed, and the victim cross-appealed two rulings. The assailant and his sister, who are presumably judgment-proof, did not appeal, so the judgment against them is final.

I described this as the most instructive opinion of the day because of the sheer number of rulings that the justices take up, many of which result in reversals of the trial court’s rulings. The primary issues relate to the principal’s claim of immunity. Here’s a list of the significant issues that the court decides today:

The principal did not have a common-law special relationship with the victim. This is consistent with earlier decisions that express a reluctance to impose special relationships upon public officials who are sued in their official capacities.

On the other hand, the law does impose a duty upon the principal to exercise ordinary care to supervise him, as in the recent case of Kellermann v. McDonough. This doesn’t make the principal an insurer of the student’s safety.

Also based on Kellermann, a party may assume such a duty, and there was evidence in the record here that might support a claim based o such an undertaking. But since neither the jury nor the trial judge made that ruling, the justices send the case back for an initial decision on that claim.

The trial court had ruled that the principal was not immune from liability for simple negligence, and that the complaint failed to state a claim for gross negligence. The Supreme Court reverses both of these rulings, so on retrial, the plaintiff is going to have to establish that the principal was grossly negligent. The court specifically rejects a claim that statutory immunity protected the principal, since the statute to which he points protects teachers, not school administrators.

In an unrelated ruling, the court describes how a deposition can be used in refiled proceedings after a nonsuit. The deposition had been taken in the first suit, before the plaintiff nonsuited it. On the refiled action, the parties were slightly different, but the principal was involved both times. Based on this, the court rejects the principal’s contention that the use of this deposition under Rule 4:7 requires complete identity of parties. The principal had participated in the deposition, so he couldn’t complain on behalf of other parties.

The court adds some predictable hearsay rulings, but even without those, this opinion provides plenty of citeworthy holdings for trial lawyers of all persuasions.

A discussion of third-party-beneficiary doctrine and a familiar appellate-waiver problem appear in Environmental Staffing Acquisition Corporation v. B&R Construction Management. Before you finish reading this short slip opinion, you’ll wonder what else can go wrong for the poor environmental contractor who’s the appellant here.

It starts with a contract between a developer and the Portsmouth Redevelopment and Housing Authority for demolition of a property in that city. The developer hired a general contractor – that would be B&R – to perform the demo work, and the contractor, in turn, hired a subcontractor for some of the work, and that sub hired Environmental Staffing as a sub-subcontractor to handle asbestos abatement. The authority required that the developer obtain a payment and performance bond for the project, so the developer got one from a company called Genesis Capital.

Things started to go bad for Environmental when its invoices to the subcontractor went unpaid. It notified B&R that it would make a claim on the bond. That would be fine, except that the bonding company (1) wasn’t authorized to do business in Virginia, and (2) was out of business anyway, a mere five months after the original contract between the authority and the developer. (What, nobody checked?)

Environmental sued the contractor, claiming that it was a third-party beneficiary of the contract between the developer and the contractor. The trial court sustained a demurrer, looking to this language in the original contract:

Nothing in the Contract Documents shall be deemed to create a . . . direct or indirect contractual relationship between the PRHA and any of the contractors, subcontractors or subsubcontractors nor shall anything contained in the Contract Documents be deemed to give any third party any claim or right of action against PRHA or HUD . . .

That’s pretty powerful stuff, except that the sub has some heavy artillery of its own:

[I]f a covenant or promise be made for the benefit, in whole or in part, of a person with whom it is not made, or with whom it is made jointly with others, such person, whether named in the instrument or not, may maintain in his own name any action thereon which he might maintain in case it had been made with him only and the consideration had moved from him to the party making such covenant or promise.

Code §55-22. The requirement for providing a bond unquestionably benefited Environmental, since its purpose was to guarantee that people like subs got paid. So we have a contract fighting a statute.

On appeal, the first thing the justices do is sweep aside two of the sub’s four assignments of error, because they relate to the wrong contract. Both assignments recite that they relate to the original contract between the authority and the developer, while the argument in the brief relates to the very different contract between the developer and the general contractor. Since Rule 5:17(c) specifically requires that you support your assignments with arguments, and no argument was presented in support of these unfortunately worded assignments, those two die quick deaths.

From what I can tell, that mistake might not have been dispositive of the appeal, as the court addresses the merits of the case as raised in the other two assignments. Alas, that doesn’t go well for Environmental, either. The court acknowledges that Environmental was an incidental beneficiary of the bonding requirement, but it rules that this contract wasn’t entered into with the express intention of benefiting Environmental.

The court does throw Environmental something of a lifeline – maybe. In a detailed footnote, the court observes that Environmental is not “left without options.” It points out that the sub certainly is an intended third-party beneficiary of the statutory bond. Indeed, the original complaint included a count based on that document, but when Environmental field an amended complaint, it omitted that claim. I’m not sure whether that claim can now be revived; conceivably it could, though Rule 1:6 and the statute of limitations might be procedural problems.

Let’s turn now to public-procurement contracts, and Professional Building Maintenance Corporation v. Spotsylvania School Board. Back in the Twentieth Century, when I worked at Virginia Beach City Hall, I occasionally defended challenges to the awards of public contracts by the City after competitive bidding processes. I learned of the hallmark statutory principle that the City would award a contract, after sealed bidding, to the lowest responsive, responsible bidder. Being a responsive bidder primarily means meeting the public entity’s specifications for what it wanted; for example, if the invitation to bid called for a Bentley, and you proposed to supply a Yugo, you weren’t responsive.

The concept of a responsible bidder is potentially more troublesome. A bid that meets the invitation precisely, but is submitted by a fly-by-night group with no performance history, or that’s obviously under-staffed to perform, may be regarded as not responsible. From the contractor’s standpoint, no one wants to be regarded as not responsible, because that can have ripple effects in future contracts. Being found not responsive, in contrast, is pretty much benign. After such a finding, there’s no stigma at all; you just move on to the next contract.

A year after I left City Hall, the legislature added language that permitted public agencies to award contracts based on something called “Best Value.” That enables the agency to shape its procurement decision in a more nuanced way, to encompass more than the three existing factors (responsiveness, responsibility, and price). The Spotsylvania County School Board decided to use this new approach to award a janitorial contract for several schools, employing a weighted points system to evaluate several factors.

PBM is a janitorial company that bid on the contract. It was the lowest responsive bidder, and no one suggested that it wasn’t responsible. But the Board decided to award the contract to someone else, based on the points system. PBM followed the prescribed path of administrative appeals, and then filed suit to challenge the award. The trial court sustained the Board’s demurrer, but the company got a writ.

Today, the Supreme Court reverses unanimously – sort of. Six justices take one path, and one (the Great Concurrer, Justice Mims) takes another, but the result is never in doubt. The majority holds that despite the introduction of Best Value principles, the statutes still require an award to the lowest responsive, responsible bidder, and everyone agrees that that’s PBM. The majority observes that the only contracts for which public agencies can shape Best Value awards are for design-build or construction-management projects, and this wasn’t one of those. For everything else,

Although the Act permits public bodies to “consider best value concepts when procuring goods and nonprofessional services,” Code § 2.2-4300, it does not provide the School Board with a method of procurement in lieu of competitive sealed bidding.

The court thus returns the case to the trial court for further proceedings. If I’m correctly reading the parties’ admissions from this opinion, it looks as if PBM may be on its way to a contract award.

The aforementioned Great Concurrer notes the stigmatic effect of a finding of non-responsibility, and would urge the court to specify that this failure, where there is one, goes to responsiveness, not responsibility. As the only former legislator on the court, he opines that when the General Assembly added the Best Value concept in 2000, it botched the job by leaving inconsistent language elsewhere in the Public Procurement Act, thereby creating internally inconsistent provisions. His approach, he says, would try to give effect to what the legislature was trying to do.

Today is a dark day for policyholders as the court issues two opinions that provide insurers with significant wins. In PBM Nutritionals, LLC v. Lexington Insurance Company, the court applies a pollution exclusion to find that no coverage exists for infant formula that was spoiled as a result of a manufacturing misfortune. When a valve failed, it caused super-heated water to destroy internal filters, and the materials in the filters, including something called melamine, got into a huge batch of formula.

This infiltration of foreign material rendered the manufactured formula unusable, so the manufacturer had to destroy it. The company filed a declaratory-judgment suit seeking coverage for the industrial loss under its property-insurance policies. Its pool of insurers persuaded the trial court that no coverage existed because of pollution-exclusion language in the policies.

Perhaps the decisive issue here is that the manufacturer used an insurance broker to help it select suitable policies. The broker started by crafting what’s called a manuscript policy that looked very promising. Here’s the relevant policy language:

This policy does not insure:
. . . .
H. Pollution. The Insurers will not cover loss or damage solely and directly caused by or resulting from the presence, release, discharge or dispersal of “pollutants” unless the presence, release, discharge or dispersal is itself caused by a peril insured against.
Definition: Wherever in this policy the word “pollutant(s)” occurs, it shall be held to mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.

You’ll note the exception in there, where pollution is covered if it’s caused by “a peril insured against,” which this industrial accident almost certainly was. But when the broker signed up actual insurers to deliver policies, they insisted on using their own forms as endorsements, and while each of those had pollution-exclusion language, none of them contained the “peril insured against” language. The trial court ruled that the pollution exclusions applied to bar coverage.

Today, the Supreme Court affirms the judgment in favor of the insurers. The manufacturer argues in vain that paragraph 9H at least created an ambiguity, and under clearly established insurance law, ambiguities in insurance policies are always construed in favor of the insured. The court rules that the exception in 9H does not create coverage where no coverage existed. The court also rejects the manufacturer’s contention that the exclusions only apply to pollution that escapes into the environment, not pollution that’s confined within a factory.

The other case decided today is one we’ve seen before: AES Corporation v. Steadfast Insurance Company was decided in September, resulting in a win for the insurer in a duty-to-defend setting. But the insured filed a petition for rehearing, and in a rare (though hardly unprecedented) move, the court granted that motion, and the case was reargued in late February. You can read my earlier analysis of the case here; I won’t repeat the factual background other than to say that the case is about whether an insurer has a duty to defend nuisance claims for erosion in remote Alaska, based on greenhouse gas emissions by several energy companies.

Today, the court again affirms the trial court’s finding that there was no duty to defend. The court again holds that since the underlying tort suit alleged that the insured energy company knew or should have known that its activities would cause global warming (and therefore coastal erosion thousands of miles away), the complaint stated only a claim for an intentional tort. This is so despite unambiguous allegations of negligence language in the complaint.

The court holds that an allegation that the harm claimed was the natural and probable consequence of a defendant’s actions, states only an intentional-tort claim, even though negligence is also plainly alleged. Go back and read that sentence carefully before you approve the final draft of your next tort complaint, and consider the warning issued by Justice Mims in a lone concurrence. Here’s the Reader’s Digest version of that warning:

A. The majority today holds that if the complaint alleges that the damage was the natural and probable consequence of the defendant’s actions, then it’s not an accident, which means it isn’t an occurrence, which means there’s no coverage – either a duty to indemnify or a duty to defend, which is broader. (Keep in mind that allegations of foreseeability are quite common in tort suits, and are required in most instances.) For claims like that, the defendant may be liable, but the insurer doesn’t have to pay.

B. The other possibility is that the complaint could allege, in an effort to preserve coverage, that the damage was not reasonably foreseeable by the defendant. In that case, the defendant isn’t liable; foreseeability is a necessary component of tort liability (except in rare cases of strict liability). That means that the defendant isn’t liable, and again, the insurer has to pay nothing.

In the past, the Supreme Court has evaluated occurrences by analyzing whether they’re “unexpected from the viewpoint of the insured.” If so, they’re accidents, and there’s coverage. This approach seemed promising for the insured here, since the chain of causation in the underlying tort complaint was, to put it diplomatically, extraordinarily tenuous. But by applying the eight-corners rule (the four corners of the policy plus the four corners of the complaint) in this way, the court appears to have written the viewpoint of the insured out of Virginia law. Now, allegations are analyzed only from the viewpoint of the language of the complaint, with no consideration given to how unpredictable the causation chain actually is.

The line of cases that leads us here has thus, in Justice Mims’s view, “painted [the court] into a jurisprudential corner.” The concurrence begins with this foreshadowing observation: “Our jurisprudence, developed over more than a century, is leading inexorably to a day of reckoning that may surprise many policy holders.” I will disagree with Justice Mims’s verb tense here: That day of reckoning arrived today, shortly after 9:00 am, when this opinion was handed down.

There’s a narrow ruling of law in Orthopedic & Sports Physical Therapy Associates v. Summit Group Properties. Rather than spend a lot of space describing the complicated fact pattern here, I’ll just tell you that it’s the story of a sort of joint venture by a couple of groups that, judging from the opinion, descended into greed. Facially, it’s a claim by a landlord for unpaid rent, but the real dispute, based on a counterclaim for fraud, goes much deeper than that. It involves allegations of treachery by one’s business partners. For example, here’s the text of a footnote that illustrates what kind of double-dealing was going on (or at least alleged):

Although OSC surreptitiously hired two physical therapists from OSPTA in 2007, OSC did not open its physical therapy practice for some time. This advance hiring was done to allow the employees’ non-compete agreements to expire prior to the opening of OSC’s Massaponax office.

Is that sneaky, or what? Even though the Supreme Court of Virginia has canopenered every covenant not to compete that it’s seen since the Coolidge Administration (no, not really; it just seems that long), one party decided to do everything it could to prevent the other from having any sort of claim.

I’ll get to the legal point here: The court reverses a judgment in favor of the landlord because of an erroneous jury instruction. Here’s what you need to know if you’re asserting a claim of fraud against an LLC, based on an act by one of its members:

1. If you show that the act was taken in the ordinary course of the company’s business, it binds the company unless the actor had no authority to act, and the person defrauded was on notice of the lack of authority.

2. If the act wasn’t in the ordinary course of the LLC’s business, you have to prove that the other members authorized it.

The jury was given a correct instruction regarding #1 above, but the instruction for #2 inexplicably omitted the “not in the ordinary course” language. That meant that the jury got two competing instructions on the same legal point. Since the court presumes in these situations that the jury relied upon the erroneous instruction (the presumption is rebuttable, but it wasn’t rebutted here), the case is sent back for a new trial.

Local governments
The shortest opinion of the day (always a happy thing for a guy who has to read and analyze ‘em all) comes from the pen of Justice Mims. Seabolt v. Albemarle County is a tort claim against the county for gross negligence in the operation of a park. Responding to the suit, the county demurred, and separately pleaded that it was entitled to sovereign immunity. The trial court didn’t sustain that plea, but it did sustain the demurrer, evidently finding that the negligence alleged wasn’t gross.

On appeal, the justices turn first to the issue of immunity, even though the county didn’t assign cross-error. Since courts don’t have jurisdiction to entertain suits against immune entities like the Commonwealth (and counties, which share the state’s immunity), this is the first thing the court has to do before delving into the merits of the case. It also means that the defendant can’t waive that defense, such as by a failure to plead it or even assign cross-error.

The court finds that the county is indeed immune. The plaintiff had relied upon the recreational facility statute, which holds that cities and towns can be liable for gross negligence. It then says that “The immunity created by this section is hereby conferred upon counties in addition to, and not limiting on, other immunity existing at common law or by statute.” The plaintiff reasoned that the county was thus on the same footing as cities with regard to recreational facilities, so it could be sued for gross negligence.

No dice, the court rules today. The quoted language confers an immunity upon counties, in addition to what they already have. If sovereign immunity is to be waived, it has to be waived expressly and unambiguously, and this statute just doesn’t do that, That means that the litigation was supposed to be dead before it started (or at least shortly thereafter).

Mortgages and deeds of trust
My discussion of Mathews v. PHH Mortgage is going to come with a couple of caveats, in the interest of those of my readers who have delicate cardiac conditions. I’m doing this for you, my loyal readers; I will always look out for you. Please read this entry even if you don’t normally handle foreclosures, and I’ll try to make the prose sparkle.

Mr. and Mrs. Homeowner borrowed $118,000 and secured the FHA loan with a note and a deed of trust. Seven years later, during the economic downturn, they experienced financial difficulties and the note went into default. The mortgage holder scheduled a foreclosure sale. The Homeowners filed a DJ action, seeking a ruling that the mortgage holder hadn’t complied with the terms of the deed of trust, so it couldn’t lawfully carry out the sale.

The mortgage holder quickly slapped down a demurrer that pointed out that the DJ suit came right out and admitted that the Homeowners were in default; it’s right there in the Homeowners’ pleadings. That, the mortgage holder reasoned, meant that the Homeowners had been the first parties to default on the deed of trust, so they were not entitled to sue to enforce its terms. The trial court agreed with this contention and sustained the demurrer.

The Supreme Court begins its analysis of this issue by acknowledging that the doctrine of first breach does indeed prohibit a party from suing on a contract where he’s the first one to breach it. And yet, enforcing this doctrine would leave the Homeowners without any sort of remedy; it would enable the mortgage holder to do anything it wanted, and the Homeowners could never say, “Boo” about it. In the language of today’s opinion, ”prohibiting the borrower who has breached from bringing an action to enforce the conditions precedent in a deed of trust would nullify such conditions. The mere fact of the borrower’s breach alone would become, de facto, the only condition precedent to foreclosure.”

This can’t be; there has to be a way to ensure that the mortgage company plays by the rules, right? And the court finds one.

It is at this point that I interject the first of my two warnings about this opinion. If you represent noteholders and conduct foreclosure sales for a living, I strongly urge you to put down your cup of coffee before reading further in this paragraph; the last thing either of us wants is for you to go snorting coffee through your nose when you read the last sentence here and gag. You have been warned. A solid majority of the court backs Justice Mims’s conclusion that “non-payment of a note is not a material breach of a deed of trust . . .”

You read that correctly, and here’s the explanation. (You can pick up your coffee now and take a careful sip; the rest of this isn’t nearly so shocking.) The court reasons that a material breach is, by common-law definition, a breach that defeats an essential purpose of the contract. But deeds of trust are designed to deal with nonpayment; indeed, their very purpose is to lay out the rules for how the bank can take your house away when you don’t pay the mortgage. Non-payment is certainly a material breach of the note, of course (a point the opinion takes care to lay out in a footnote), but the court holds today that it isn’t a breach of the deed of trust. Accordingly, the trial court erroneously dismissed the Homeowners’ DJ action.

The trial court made one other significant ruling, and that one will call for a warning to a different group of my readers. HUD regulations required, before institution of foreclosure proceedings, that the lender must conduct a face-to-face meeting with the obligors. This mortgage holder didn’t do that with the Homeowners. The company pointed to a provision that exempted noteholders from this requirement where the company has no branch office within 200 miles of the property.

This produced the following back-and forth:

COMPANY: We don’t have a branch within 200 miles of you.

HOMEOWNERS: Oh, yes, you do; there’s a branch located at [some location not listed in today’s opinion].

COMPANY: That one doesn’t count; that’s a loan-originating office. We don’t service loans there.

HOMEOWNERS: Who cares what you do there? It’s a branch office.

COMPANY: Oh, yeah? Take a look at this little ditty from the HUD website, under Frequently Asked Questions (heh, heh, heh):

The Department is aware that many Mortgagees maintain “branch offices” that deal only with loan origination and some of these offices may only be staffed part-time. For the most part, individuals that staff an origination office are not familiar with servicing issues and are not trained in debt collection or HUD’s Loss Mitigation Program.

The Department has always considered that the face-to-face meeting must be conducted by staff that is adequately trained to discuss the delinquency and the appropriate loss mitigation options with the mortgagor. Therefore, for the purpose of this discussion, the face-to-face meeting requirement referenced in [the Regulation] relates only to those mortgagors living within a 200-mile radius of a servicing office.

HOMEOWNERS: Oh, yeah? Well, . . . what does HUD know about its own regulations, anyway?

The trial court had held that the mortgage holder didn’t have a servicing office within 200 miles, so it ruled that the face-to-face meeting didn’t have to take place.

Time for our next warning: If you’re a government lawyer, sit down and be calm as you read this paragraph. The court today rules that HUD didn’t know what it was talking about when it issued this interpretive ruling. The regulation isn’t ambiguous, the court rules, and it simply says “branch office.” The FAQ even acknowledges that originating offices are branches, so what the author of the FAQ answer is trying to do is modify the regs. No administrative agency can do that; you can’t amend regulations under the guise of interpreting them. The court concludes that the mortgage holder’s originating office is close enough for government work. (The court also adds that, in a pinch, the face-to-face meeting could take place by videoconferencing, a suggestion that gave me a start. But this is assuredly dictum anyway, so I won’t lose sleep over the question.)

We get two concurrences. The chief justice notes that the Homeowners cited the wrong face-to-face requirement; the one they cite really doesn’t apply to this loan. She suggests that the court might have been justified in sustaining a demurrer based specifically on this failing. But she points out that the mortgage holder didn’t raise that issue in its demurrer, and since demurrers can only be sustained based on the grounds asserted therein, it would have been error to grant this one. This may provide the parties with a roadmap on remand, as the mortgage holder will no doubt raise this issue, and the Homeowners will seek leave to amend their pleadings to allege the correct basis.

There’s one more dissent, and it comes from Justice McClanahan, who raises the point that was thundering through my head while I read the majority opinion: Whaddaya mean, first breach? That’s an affirmative defense to a suit for breach of contract, such as a claim for damages. This is merely a declaratory-judgment action, in which one party asks the court to state what the parties’ respective rights are. Her approach is, in my view, much cleaner than the majority’s, and it has the added benefit of avoiding that throat-catching statement about nonpayment not being a material breach of a deed of trust.

There, now; that wasn’t so bad for a dry area of the law, now, was it?