Abortion Clinics: Shareholder Liability

It is settled law that corporate officers can be held responsible for damage they cause, even if the corporation itself is also found responsible.  But what about shareholders of a corporation?  Courts with equity powers (such as the DC courts) will deprive shareholders of the privilege of operating as a corporation and assign individual liability if the evidence shows misuse of the corporate form to perpetrate fraud or wrong.  An egregious local example of shareholder liability for misuse of the corporate form is that of Mrs. Vuitch, ex-wife of abortion-purveyor Dr. Vuitch.  His “clinic annex” was housed at their residence.  Although Mrs. Vuitch moved out after their divorce, she remained as a shareholder in their business and as CFO.  Educated in business and finance, she paid the bills for the vast clinic, and was aware of a brazenly illegal clinic policy that led to a gruesome injury and a jury finding of her personal liability, although she did not directly participate in the misconduct.  The case was Vuitch v. Furr, 482 A.2d 811 (D.C. 1984).

The Vuitches operated (1) a surgical center, and (2) “clinic annex.”  The two entities were incorporated separately for the purpose of skirting District of Columbia law. 

Dr. Vuitch performed a dilation & curettage abortion on Andrea Furr in 1981 at the surgical center.  He caused a laceration of the uterine wall, which he attempted to suture, and kept her overnight at the clinic despite knowing that the law under which the clinic was licensed (D.C. Ambulatory Surgical Treatment Center Licensure Act, D.C. Law 2-66, 24 D.C. Register 6836, Jan. 19, 1978) prohibited overnight stays, requiring that patients either be discharged in ambulatory condition, or be admitted to a hospital.  The next night, Dr. Vuitch moved Ms. Furr to the “clinic annex” (his residence), then returned her to the surgical center the next day and discharged her. 

The day after the discharge, Ms. Furr went to a local hospital in severe pain.  Two obstetrician-gynecologists discovered that an unsutured laceration had caused pelvic and intestinal peritonitis (inflammation of the membrane lining the abdominal cavity) and infected the uterus.  The doctors had to perform a total hysterectomy, during which they found a mass of unremoved dead fetal tissue that had traveled into the abdomen through the laceration. 

Dr. Vuitch admitted that he regularly kept patients overnight at the surgical center and, if they suffered further complications, admitted them to the clinic annex (his home) because of the D.C. regulations that prohibited keeping patients overnight at the surgical center.  The legislative history of the Licensure Act revealed its purpose was to close the gap in the licensure laws regarding non-hospital surgery, “to assure the highest level of skilled care was provided at such clinics.”  The Court held that Dr. Vuitch admitted to

a knowing and intentional violation of the District of Columbia law pursuant to corporate policy, and the record indicates he used corporate property to carry out his policy.  Courts will not allow the interposition of a corporation to defeat legislative policy.  Vuitch, supra, at 819 (citing Anderson v. Abbott, 321 U.S. 349, 362-63 (1944)). 

Mrs. Vuitch claimed she was just the business arm, and had no role in setting the medical policy.  However, the evidence showed she was the second-ranking officer in a substantial for-profit medical enterprise, and that she knew about the illegal policy of moving patients to the clinic annex to treat complications.  In fact, when she lived at the “clinic annex” during her marriage to Dr. Vuitch, Mrs. Vuitch with Dr. Vuitch had driven patients to the clinic annex from the surgical center for treatment.  She even met with a lawyer after the licensing law was enacted in 1978 and assisted in obtaining equipment necessary to comply with the 1978 law.  Although incorporated separately, the two entities (surgical center and clinic annex) had the same shareholders—Dr. and Mrs. Vuitch.  For years, all of the surgical center’s bills were paid by the annex, and the surgical center’s employees were covered by the annex’s pension and trust plan; Dr. Vuitch used a car owned by the surgical center to transport patients to the annex; the annex (which wasn’t licensed to treat patients), served as his personal residence and the business office of the annex.  The Court found:

The pattern of intermingling the identities and property of the two corporations and disregarding some corporate formalities is probative evidence that the two corporations did not have separate identities and were in fact the Vuitchs’ alter-ego for the operation of medical facilities for personal gain.  (Footnote omitted).  Vuitch, supra, at 817 (citations omitted).  

Today D.C.’s licensing requirements for ambulatory surgical facilities don’t expressly prohibit overnight stays (or impose the requirement of “same-day” treatment, which was the focus through 2014), but continue to emphasize that ambulatory surgical facility treatment is unique in that it is “not hospitalization.”  Hospitals, then and now, are regulated differently from “ambulatory surgical facilities” and “maternal centers.”  This suggests that Vuitch v. Furr is still seminal on the subject of shareholder liability for misuse of the corporate form and that its sound reasoning had a lasting influence upon the D.C. Council. 

The penalties for violating the licensing laws have changed as well.  In 1978 the maximum penalty was $300 or 90 day’s imprisonment for violating the licensing laws; today, violations are charged as misdemeanors with penalties of up to $25,000 or 180 days’ imprisonment or both. 

Marijuana: Seizure of Evidence

Under federal law, possession of even small amounts of marijuana is still a crime in the District.  Federal law enforcement can still arrest anyone for possession in D.C., although local law enforcement (the Metropolitan Police Department) complies with local decriminalization of possession of up to 2 ounces by a person over age 21.  But whether you’re 21 and under, or over 21, the government must not exceed constitutional prohibitions against unreasonable searches and seizures (whether seizure of a person or evidence of an alleged crime).  The Fourth Amendment of the U.S. Constitution gives enhanced protection to preserving the sanctity of the home.  Privacy in your home extends to all types of warrantless “searches,” whether the search is conducted in person by police, or through infrared technology.  Your privacy might even be protected from warrantless surveillance flights above your property, depending on how common such flights are, if you maintain a “reasonable expectation of privacy” from such intrusions.

You can voluntarily relinquish your Fourth Amendment protections by volunteering to let government and enforcement authorities into your home.  The main question in these cases is whether you voluntarily consented, or gave in to unlawful coercion.  If the authorities forced you to comply with an unlawful search, you may have grounds to prevent the evidence from being used against you. 

The circumstances of your case also impact the unlawfulness (or lawfulness) of the search.  For example, use of infrared technology does not mitigate the intrusion, Kyllo v. United States, 553 U.S. 27 (2001), and a surveillance flight over a covered portion of your acreage still requires a warrant in most circumstances, Florida v. Riley, 488 U.S. 445 (1989).  But the courts have allowed warrantless searches of garbage bags placed at the curb for pickup, asserting that the police did nothing more than what anyone on the street could have done lawfully, in California v. Greenwood, 486 U.S. 35 (1988), and have allowed police to bring drug-sniffing canines into a private driveway to sniff the outside of the garage door, in U.S. v. Holley (5th Cir. 2016).  If the canine alerts police to the presence of contraband, warrants are obtained to seize the evidence in the garage. 

Even the late U.S. Supreme Court Justice Antonin Scalia, a strict constructionist of the U.S. Constitution, wrote for the U.S. Supreme Court’s majority in Florida v. Jardines, 133 S. Ct. 1409, 569 U.S. ___ (2013), that a canine sniff of a homeowner’s front porch was an unconstitutional warrantless search.  But the U.S. Court of Appeals for the Fifth Circuit reasoned that a driveway is not a porch, because the private home life of the individual does not extend into the driveway, and that a drug-sniffing canine is not sense-enhancing technology (on the order of Kyllo).  Holley, supra.  Holley filed a petition for certiorari on February 3, 2017.  

Unusual circumstances in warrant execution and investigation also allow the government to chip away at the Fourth Amendment’s protections.  One of the most relevant for the marijuana debate is the use of illegally-seized evidence in sentencing, that is, even when the Fourth Amendment prevents use of the evidence to determine guilt, if other evidence exists that convinces a jury to find guilt, the illegally-seized evidence can be used to increase a sentence—in some cases, to the same extent as if the illegally-seized evidence had been admitted at the trial.  As the U.S. Court of Appeals for the Sixth Circuit emphasized:

[G]iven that disputed facts at sentencing need only be established by a preponderance of the evidence, see U.S.S.G. § 6A1.3, comment.; United States v. Herrera, 928 F.2d 769, 774 (6th Cir. 1991), rather than beyond a reasonable doubt, state officers now have the somewhat perverse incentive to rely more heavily on sentencing than trial to establish facts that may be of overriding importance in determining a defendant’s length of imprisonment—for example, the total amount of drugs involved in a criminal scheme.  As a result, sentencing has to a significant extent replaced trial as the principal forum establishing the existence of certain criminal conduct.  United States v. Nichols, 979 F.2d 402 (6th Cir. 1992). 

Relief was afforded to criminal defendants, however, in Alleyne v. United States, 570 U.S. _____ (2013), in which the U.S. Supreme Court held that facts that aggravate the prescribed range of sentences to which a defendant may be exposed (e.g., such as possession of a firearm during commission of the offense) are not merely "sentencing factors" but "elements" of the offense(s) of which the defendant is accused, and, therefore, must be submitted to a jury and proven beyond a reasonable doubt.  

Therefore, if the admission of illegally-seized evidence during sentencing aggravates the permissible range of sentences (by either lowering the minimum sentence, or increasing the mandatory sentence), the sentence is an unconstitutional violation of a defendant's right to jury trial.  See Alleyne, supra.  

If you have an arrest record for possession of marijuana, you may be eligible to have the record of the arrest sealed.  The Criminal Record Sealing Act of 2006 opened a pathway to sealing for many former criminal defendants charged with “eligible misdemeanors,” such as possession, or felony failure to appear (the only “eligible felony”).

D.C.’s “Post-Condominium” Era?

Has the District of Columbia’s real estate market entered a “post-condominium” era?  Could be, according to testimony at the D.C. Council’s December 2015 hearing on proposed legislation to strengthen the rights of condominium owners vis-a-vis Condominium Boards (“The Condominium Owners Bill of Rights Amendment Act of 2015,” 2015 Bill Text DC 443).  Although the condo form of home ownership was originally intended to expand affordable housing options in D.C., the drive for profit-taking through the mechanism of non-judicial foreclosure of condo liens has created opportunities for abuse.  So much so that, at the December 2015 hearing, a D.C. Council Member emphasized that one of the Council’s purposes for the hearing was to determine whether the condominium form of home ownership remained a viable one for the District.

A steady stream of condo owners testified at the hearing about intimidation tactics by Condo Boards (such as exorbitant penalties for technical infractions, illegal lock-outs, filing false liens, insider profit-taking through non-judicial foreclosures, votes conducted in secret, contracts awarded to relatives, etc.).

The hearing was conducted in the shadow of the D.C. Court of Appeals’ landmark ruling in Chase Plaza Condominium Ass’n v. JPMorgan Chase Bank, 98 A.3d 166 (D.C. 2014).  In the Chase Plaza case, D.C.’s highest municipal court held that foreclosure of a condo association’s “super-priority lien” for a mere 6 months’ worth of condo assessments extinguished a first mortgage (or deed of trust).  JPMorgan Chase had argued that allowing the condo associations’ “super-priority” liens to extinguish bank liens would cripple mortgage lending on condo properties in D.C.

At the D.C. Council hearing, the competing interests were portrayed as “condo owner vs. condo association,” despite the fact that an owner is a member of the association, as well.  The owner isn’t always a member of the Board of Directors, however.  The Board, which is comprised of Officers (President, Vice President, Treasurer, and Secretary, in most condominiums), governs the rest of the association.  During the hearing, numerous condo lawyers who represent “condo associations” (but who report to Condo Board Members) attempted to portray the divide as one between “owner vs. association.”  Such antics demonstrate why the proposed legislation is so necessary to protect the rights of individual condo owners.

Among the bill’s provisions is the imposition of a fiduciary standard of conduct (the highest ethical standard under the law) for Board Members.  The bill would require Board Members to (1) “uphold their fiduciary duty to refrain from promoting personal interests, gain, or biases, and shall only use the power and resources of their position to advance the interests of the members of the unit owners’ association”; (2) “ensure that the governance of the unit owners’ association is conducted openly, transparently, efficiently, equitably, and honorably”; (3) “governance shall be in a manner that permits unit owners to make informed judgments, and to be able to hold officers and members of the executive board accountable for their actions”; (4) neither request or grant to, or withhold from, any person any special consideration, treatment, or advantage or disadvantage different from that which is available to every other unit owner in similar circumstances”; and (5) “always remain mindful that the appearance of impropriety can be as corrosive of a unit owners’ confidence in the unit owners’ association as an actual impropriety ....”

But to hear Condo Boards tell it, individual owners who don’t pay their condo assessments are the culprits.  Because assessments remain unpaid, so the assertion goes, basic services (such as garbage collection, snow removal, maintenance, cleaning, etc.) can’t be provided.  Allegedly that’s why Condo Boards are cracking down, despite the fact that basic services don’t cost very much (and therefore overpriced assessments are a huge factor when people forego paying assessments).  Many condo lawyers at the hearing advocated that the Council vote down the bill’s requirement that a mandatory mediation be conducted before a Condo Board can non-judicially foreclose its super-priority lien and obtain clear title to a condo property worth several hundreds of thousands of dollars without ever having to explain the validity of the lien to a judge or mediator.

On the alleged exorbitant costs of basic services:  One public witness testified that a prohibition against “self-management” is written into the bylaws of some condominiums, to prevent unit owners (even in very small communities of 4 units) from soliciting bids for competitively-priced garbage collection, maintenance, snow clearing, etc.  Such small communities may be forced under their bylaws to hire a management company, which uses vendors with whom they have cozy relationships.  Many condominium associations operate on the erroneous assumption that basic services must be exorbitantly priced.  As the witness emphasized, “[The provision of overpriced services through the management company] is a racket ....”

The proposed legislation also would require the establishment of an Advisory Council, reporting to the Mayor, the Council, and District agencies.  The Advisory Council would include community members and appointees.  Such an Advisory Council could be very beneficial to D.C. condo communities, if empowered to provide education to D.C.’s Condo Board Members on how to solicit competitively-priced basic services, how to avoid ethical conflicts, how to establish procedures for transparency, how to keep financial and other records, etc. 

Foreclosure of D.C. Condo Lien Extinguishes First Mortgage

Residential real estate lenders are still reeling from the August 2014 ruling of the D.C. Court of Appeals in Chase Plaza Condominium Association v. JPMorgan Chase Bank, 98 A.3d 166 (D.C. 2014), in which D.C.'s highest municipal court held that foreclosure of a condo association’s “super-lien” (a super-priority lien for 6 months of unpaid assessments) extinguishes all junior liens, including a bank's lien for a first mortgage (or first deed of trust). 

JPMorgan Chase had argued that the condo association’s “super-lien” (which was enacted by statute in 1991 as an amendment to the D.C. Condominium Act) was entitled only to priority of payment.  But a three-judge panel of the D.C. Court of Appeals held that the “super-lien” was a true senior lien, which, under common-law principles of lien priority, extinguishes all junior liens in a foreclosure sale.

Reversal of the ruling is unlikely, despite the unease of banks regarding (1) the statute's lack of a notice requirement, until the 2017 amendment,* and (2) the assertion that the “super-lien” might be considered an unconscionably low purchase price for a condominium unit (the unit at issue was mortgaged for $340,000, while the purchase price was a mere $10,000; the amount of the super-lien was $9,415). 

JPMorgan Chase had argued that extinguishment of the bank’s lien under such circumstances would cripple mortgage lending in D.C., while the condo association had argued that it must be permitted to enforce its super-lien to prevent the condo community from falling into disrepair due to unpaid assessments.  As to such competing policy considerations, the Court of Appeals indicated it would take no position, deferring to the D.C. Council on matters of policy.

While Chase Plaza Condo Association did send notice of the scheduled foreclosure sale to the record beneficiary of the first deed of trust (Washington Mutual, a.k.a. WAMU), that interest was subsequently acquired by JPMorgan Chase.  The evidence is unclear as to whether the condo association knew that JPMorgan Chase had subsequently acquired the first deed of trust after WAMU filed for bankruptcy (apparently the issue of who succeeded WAMU as the beneficiary had been litigated extensively in the bankruptcy courts, and so JPMorgan Chase’s claim was on the public record). 

The condominium association would have faced practical difficulties attempting to send notice to a lienholder whose interest was unrecorded, in any event.  Constitutional Due Process does not require a party to do the impossible, that is, send notice to an unknown entity whose name and address are not "reasonably ascertainable through the exercise of reasonably diligent efforts."  Small Engine Shop, Inc. v. Cascio, 878 F.2d 883 (5th Cir. 1989) (citing Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983)).  Furthermore, "state action" would have to be established for Due Process protections to attach.  A footnote in the Court of Appeals’ opinion questions whether the lack of a notice requirement in the Condominium Act might render that portion of the statute unconstitutional, either facially or as applied to JPMorgan Chase, but the Court declined to consider the issue since the parties had made no constitutional arguments in the trial court.*

The Court of Appeals opinion also expresses doubt that an association could waive its statutory right of priority by contract.  As the Court of Appeals observed, the Condominium Act, D.C. Code § 42-1901.07, states that “[e]xcept as expressly provided by this chapter, a provision of this chapter may not be varied by agreement and any right conferred by this chapter may not be waived.”  See Chase Plaza, supra, at 178.

* UPDATE: On February 9, 2017, the D.C. Mayor signed into law an amendment to the D.C. Condominium Act requiring among other things notice to a first mortgage holder before an association forecloses its lien for unpaid assessments. 

Duty To Disclose “Non-Discoverable” Defects Before Selling Your Condo

There is a duty to disclose “non-discoverable” defects in an old condo unit.  If you’re planning to sell real estate with defects that you know about (such as recurring water damage), it is unlawful to fix the defects just for the purpose of sale and fail to disclose the recurring damage to the potential buyer.  Such actions may be construed as “active concealment,” and subject you to liability for misrepresentation and fraud.

It’s also unlawful to remain silent in the face of a known misunderstanding by the potential buyer, or to omit information that a reasonable person would consider important.  Special duties also are imposed upon agents toward their principals.  For instance, if a sales agent represents a buyer, the sales agent cannot conceal defects or fail to disclose defects in the hope of making a sale.  Such action would subject the sales agent to additional liability for breach of fiduciary duty, not to mention potential disciplinary action by the Real Estate Board.

The statute of limitations for fraud in D.C. is three years.  A buyer who finds himself or herself the owner of a defective property should ask neighbors whether the previous owner suffered the same type of damage.  If so, the buyer could investigate further and consider filing a lawsuit against the previous owner for the cost of the damage, as well as punitive damages. 

Was a home inspection conducted before the purchase? If the inspection revealed no major defects, it may be an indication of “concealing” repairs by the seller for the purpose of sale, or a negligent home inspection that failed to discover defects that a reasonably diligent inspection would have discovered.  The home inspection report will contain disclaimers and limitation of liability provisions. Review those provisions carefully, as you may have a cause of action against the home inspector as well.

Move-In And Move-Out Fees: Are They Legal?

The Condo Association generally has broad authority to regulate the internal affairs of the condominium, but such power is not without limit.  Move-in and move-out fees are assessments against individual unit owners, and, as such, are over and above the condo fees paid by unit owners each month according to their pro rata share of the condominium's expenses.

In Westbridge Condo. Ass'n, Inc. v. Lawrence, 554 A.2d 1163 (D.C. 1989), the D.C. Court of Appeals invalidated a $150 move-in fee imposed by the Condo Association because the condominium’s governing documents did not authorize it.  The governing documents limited assessments against individual unit owners for use of the common elements to situations involving owner negligence, misuse, and neglect.

The Condo Association argued that the move-in fee was justified because the loading dock, doors to the entryway, elevator, and common area floor were all used during move-in.  However, the evidence at trial showed that move-in involved merely temporary and non-exclusive use of the common elements.  No resident was denied access to the common elements during the move-in, and no damage to the common elements resulted.  The trial court held that the move-in fee was an invalid double charge for services already paid for by monthly condo fees.

In Westbridge, the Court determined that the Condo Association acted beyond the legal powers granted to it by the condominium’s governing documents and by statute.  The statute limited the power of Condo Associations to those expressly granted by the governing documents, or those not prohibited by the governing documents and subject to any limitations therein.

“Owner Occupied” Condo Communities: Unreasonable Restrictive Covenants?

A condominium's governing documents frequently prevent condo purchasers from renting their units to tenants for a period of one year or so after the initial sale of a new unit.  Beyond the typical one-year period, rules and regulations of the Condominium Association may require owners who want to lease their units to place their names on a waiting list, with only a small percentage of units permitted to be rented at any one time. 

Such restrictive covenants may or may not be reasonable.  Some Condominium Boards are vigilant about maintaining primarily "owner-occupied" communities, on the theory that owners exercise greater care over their property than renters.  However where those restrictions go beyond what is necessary to maintain a well-cared for community, such restrictions may violate the property rights of owners, and the civil rights of prospective tenants. 

In a typical case, an affordable community seeking advantageous property tax credits or perhaps in an effort to meet lending criteria limits the number of units that can be rented at any one time.  Such restrictions, enacted for a seemingly legitimate purpose, may have a disproportionate impact on certain unit owners, and may violate the civil rights of certain prospective tenants (those who pay for their rentals through vouchers, for instance).

In such a scenario, the community association may be skirting dangerously close to violating federal fair housing laws that prohibit discrimination in housing. 

Waiving Miranda Rights Through Ambiguous Conduct

The U.S. Supreme Court held in the case of Berghuis v. Thompkins, 560 U.S. 370 (2010), that a suspect in custody who has been read his Miranda rights must invoke his right to remain silent unambiguously.  That is, if he does not expressly state that he wants to remain silent, the police need not end the interrogation, and need not ask for clarification of ambiguous conduct that may or may not indicate that the accused wants to remain silent. 

On the other hand, if a suspect wants to waive his right to remain silent, he need not make a formal waiver.  Ambiguous conduct is sufficient to waive Miranda rights.  Thompkins, supra (citing North Carolina v. Butler, 441 U.S. 369, 376 (1979)).

Before a statement given after waiver of Miranda rights can be used against the suspect in court, the prosecution must show that the defendant voluntarily waived his rights, and that he knew what rights he was giving up.  Although the Miranda decision in 1966 emphasized that the prosecution had a heavy burden to demonstrate a knowing and intelligent waiver, a later decision in the Miranda line of cases stated that the "heavy burden" is no more than a preponderance of the evidence.  Thompkins, supra (citing Colorado v. Connelly, 479 U.S. 157, 168 (1986)).

In Thompkins, the suspect was taken into custody and shown a piece of paper that contained the Miranda warnings (right to remain silent; anything you say can and will be used against you in a court of law; you have the right to talk to a lawyer before answering and to have the lawyer present during questioning; if you cannot afford a lawyer one can be appointed to represent you before any questioning; you have the right to decide at any time before or during questioning to use your right to remain silent and to talk with a lawyer). 

The Thompkins suspect was asked to read the last warning out loud to determine if he could read and understand English.  The Court also noted that there was no basis in the case to conclude that the defendant did not understand his rights. Nor was there any contention by the defense that the suspect did not understand his rights.

The interrogation by police was skillfully done.  The suspect was silent for most of the three hours of interrogation, with limited “yeah,” “no,” or “I don’t know” responses.  Then the detective asked, “Do you believe in God?”  The suspect then admitted that he did believe in God, as his eyes welled up with tears.  The detective asked, “Do you pray to God?”  The suspect answered “yes.”  The detective asked, "Do you pray to God to forgive you for shooting that boy down?”  The suspect answered “yes” and looked away.  But he refused to make a written confession. 

The Court held that a "suspect who has received and understood the Miranda warnings, and has not invoked his Miranda rights, waives the right to remain silent by making an uncoerced statement to the police."  Evidently the Court believed that the suspect’s confession, as described above, was uncoerced.  The Court also emphasized that the suspect could have invoked his Miranda rights at any time, even after he had begun speaking.