Lawsuit

[johncriss]

Glad to find the forum! I have to say that I've been more fortunate than a lot of people that I read about on the forum and I'm thankful for that. What brings me here is that I was notified recently that I am being sued by the person who we sold our last house to. We sold the house for about $400,000 and they are suing us for a couple million for alleged undisclosed defects, mental anguish, anxiety, etc.

I'd rather not go into the details, but the lawsuit is frivolous and was started because the people who bought the house are going into pre-foreclosure. I think that it's unlikely they would ever get a judgment in their favor, but I'm a worrier and like to prepare for things. A few questions:

1. Let's say they get a judgement for $2,000,000. My assets are nowhere near that. Does that mean Chapter 7?
2. We have substantial assets in retirement funds (401k, Rollover IRA, Roth IRA, SEP IRA). Are these untouchable?
3. We have substantial assets in 529 accounts that have been there for some time. Are these likewise untouchable?
4. We have substantial equity in our house. Living in PA, they have no homestead exclusion which I think would push me into opting for Federal exemptions of $43,250 between me and my wife.
5. For equity in our house above the federal exemption, can they force us to sell the house? If so, how does that work? That is, does it look like a standard sale where we live in the house until it sells, fill out a seller's disclosure form, etc?
6. My wife and I own two cars that were paid off. Before we were notified of the lawsuit, I refinanced my car to take advantage of great rate at my credit union. I planned to do the same thing with my wife's car but then we were notified of the lawsuit. Would it be inadvisable to get a loan on my wife's car at this point now that we're aware of the lawsuit?
7. Between the court date set for a year from now and any inevitable appeals of a large verdict, I probably have 18-24 months to prepare. What things should I be doing now? I read the "bk pre-planning" and saw some good advice in there. Is there anything specific to my situation that might be different?

Thank you for all your help!

[nceguyfromne]

Only $2 million? Why not two-hundred? Look, I think we both know what they're going for here. They are in trouble financially and looking to you to either pay off their soon-to-be-foreclosed home or buy it back. Personally, I wouldn't give them a penny. Unless you intentionally failed to disclose lead paint (and bragged to your former neighbors about it) and then their 3-year-old subsequently incurred $2 million in medical bills as a result, or you, say, planted a landmine under the house during construction and it blew up on them, I wouldn't take this too seriously. Let's say, worst case scenario, they can prove that you went out of your way to hide rotted drywall. What are we talking about here, $10K in repair bills? $20K? So maybe they'll get a judgment for a portion of that $10K or $20K, assuming they can prove they had a competent home inspection and it was reasonable for them to miss this on account of your deception, and you can ward that off for a few years until they've moved on to their latest and greatest lawsuit or take a small loan from one of your retirement assets, pay them and put this all behind you.

As for your assets: The 401(k)'s are untouchable and the IRAs are practically untouchable. In bankruptcy, the IRAs would be safe up to about $1.2 million for each spouse. One thing you'll want to be mindful of is taking distributions during the 6 months prior to a bankruptcy case as this will be considered income and could cause issues on the Means Test. Any funds that have been in the 529 plan(s) for more than 2 years are untouchable. Less than 2 years, some or all of the contributions could be taken back and placed into the bankruptcy estate if you cannot exempt them.

The excess equity in your house may or may not trigger a sale in Chapter 7, depending on how much excess equity there is. If you own it, say, 90+% outright, that could be a problem. If you are just a little over the exemption, the trustee probably wouldn't see an opportunity to generate decent proceeds after paying off the mortgage(s), other liens, commissions, etc. If you are particularly concerned about your home, perhaps a Chapter 13 would be more beneficial to you. Your secured debts (such as your home) will receive priority treatment and you would probably end up paying only a token sum on this $2 million lawsuit before the rest is discharged. Or, perhaps a second mortgage or HELOC might be in your future? (*wink, wink*)

Wishing you all the best! BTW, make sure you or your attorney are filing every possible answer and motion to this lawsuit, forcing the Plaintiffs to do the same. Assuming they must be short on cash, this will probably help to run down whatever funds they are using to pursue this case against you and may eventually force them to give up altogether.

[despritfreya]

Let's say they get a judgement for $2,000,000. My assets are nowhere near that. Does that mean Chapter 7?

Yes if there is no reason to do a Chapter 11. With such a large judgment/claim you most likely would not have to deal with means testing as you would be a non-consumer filer.

Once there is such a large judgment you would not be eligible to do a Chapter 13. If you file bk before a judgment is entered this claim would be “contingent, disputed and unliquidated” and, therefore would not be used in calculating whether or not you are over the debt limits for a 13.

We have substantial assets in retirement funds (401k, Rollover IRA, Roth IRA, SEP IRA). Are these untouchable?

Most likely “yes”.

We have substantial assets in 529 accounts that have been there for some time. Are these likewise untouchable?

Yes to the extent contributions have not been made within the past two years. There are exceptions and qualifications but for the most part the funds would not be property of the bk estate.

For equity in our house above the federal exemption, can they force us to sell the house? If so, how does that work? That is, does it look like a standard sale where we live in the house until it sells, fill out a seller's disclosure form, etc?

The Trustee will sell the home, pay all closing costs, pay off the underlying mortgage and give you your exemption allowance. The balance of the funds will be utilized to pay the Trustee, the Trustee’s attny and your creditors, beginning with any priority debt such as taxes. You should be able to reside in the home until closing, just like if you sold the home.

Would it be inadvisable to get a loan on my wife's car at this point now that we're aware of the lawsuit?

If the value of the vehicle is above any state (or federal - in the context of a bk) exemption you could use the vehicle as collateral but you would then have to legitimately spend the money so all you would be doing is changing the form of the asset and creating a debt you have to repay. Tough call.

Between the court date set for a year from now and any inevitable appeals of a large verdict, I probably have 18-24 months to prepare. What things should I be doing now? I read the "bk pre-planning" and saw some good advice in there.

Pre bankruptcy planning when you know there is a potentially large claim looming is a dangerous path. The smartest thing you can do is consult with numerous attnys.

Remember, filing of the bk is not necessarily a silver bullet. Please do not think that by filing the buyers will just “go away”. The truth is, they may or may not go away. If they have alleged some sort of fraud or misrepresentation they can pursue you inside the bk and ask the bk court to determine that the obligation is non-dischargeable. If they already have obtained a judgment against you that includes findings of fraud etc, they may win a non-dischargeability argument on summary judgment. Further, the longer the state court action proceeds the more likely it will be that a bk judge will lift the stay to allow the state court action to continue so that liability can be established. Once so established the bk court can then determine if the findings rise to the level of a 523 non-dischargeability claim.

Bottom line - start interviewing attorneys. Consultations are usually free.

Des.

[tobee43]

des is right on point.

my question to you without getting into the nuts and bolts of all the details is how exacting are they claiming you have violated Pennsylvania Real Estate Seller Disclosure Law; 68 P.S. § 7301. was your broker aware of what the dispute is based on. were they made aware of the situation prior to the sale?

just addressing the lawsuit here, PA is not a vey good place for the sellers beware position:


"The doctrine of caveat emptor (let the buyer beware) in the sale of residential real estate has been eroded steadily over the years by changes in the law. One of the most significant changes has been an increased responsibility for sellers to timely disclose to buyers defects and other issues which affect the value of the subject property. More and more, buyers are pursuing lawsuits where they feel a seller was less than honest about the condition of real estate they purchased. Increasingly the law is favoring the buyer who can show that the seller was not forthcoming in properly disclosing defects.

While many lawsuits brought by buyers will also include claims for common law fraud, breach of the agreement of sale, and violation of the consumer protection law, a fairly simple and direct claim for failure to disclose may exist under the Pennsylvania Real Estate Seller Disclosure Law; 68 P.S. � 7301, et seq. (the "Disclosure Law"). Under the Disclosure Law, there is no need to prove fraud but merely that the seller did not provide adequate disclosure as required.

The Disclosure Law is intended to require sellers of residential real estate to disclose all known defects in order to allow a buyer to fairly evaluate the property. It applies to all residential real estate transfers with a couple of minor exceptions (including that it does not apply to transfers of new residential construction and transfers by a decedent's estate). The Disclosure Law provides that a seller must provide a buyer, prior to entering into an agreement of sale, with a written disclosure statement disclosing all known material defects about the property being sold.

The Disclosure Law defines a material defect as "a problem with the property or any portion of it that would have a significant adverse impact on the value of the property or that involves an unreasonable risk to people or the property." It provides a sample seller's property disclosure statement which requires the seller to disclose facts relating to the property including occupancy, roof, basements, crawl spaces, termites, structural items, additions/re-modeling, water and sewage, plumbing system, heating and air conditioning, electrical systems, other equipment and appliances included in the sale, land (soil, drainage and boundaries), hazardous substances, and legal issues affecting title or use and enjoyment. Sellers should be aware that many of the questions require the seller to explain whether there has ever been a problem.

From the seller's standpoint, the Disclosure Law makes it reasonably clear what is required and therefore compliance by the seller can actually be used as a means of defense to any claims later raised by a buyer. It can further serve as a defense for Realtors who in the past were frequently drawn into disputes about undisclosed defects. The Disclosure Law puts the burden of disclosure directly on the seller, rather than on the Realtor. Most Realtors will refuse to fill out the disclosure statement and will insist that the seller supply all information and fill out the statement independently. However, if the agent knows of any material defect not disclosed or any misrepresentation, that person may still be liable with the seller.

It is very important that the seller carefully prepare the disclosure statement and disclose anything even marginally affecting the property. It is preferable to negotiate about issues of potential or arguable defects up front rather than being subject to a lawsuit after the sale has been completed. The buyer has two years from final date of settlement to bring a lawsuit under the Disclosure Law. It is thus very likely that a buyer will discover any defects which were not disclosed in time to pursue legal action. However, by the time a lawsuit is threatened or instituted, the seller is at a distinct disadvantage trying to handle claims which, if raised before settlement, could have been easily resolved on a negotiated basis.

From the buyer's perspective, the Disclosure Law has become a very powerful tool for a buyer who discovers that the seller has been less than honest and forthcoming in the sale of residential real estate. The seller has significant legal exposure especially where it can be confirmed through contractors, neighbors, and others that the seller was or should have been aware of defects not disclosed. Also, the Disclosure Law does not limit pursuing common law claims and therefore the buyer will usually bring an assortment of other claims against the seller. If a defect is discovered after purchasing a property, the buyer should immediately refer back to the disclosure statement and agreement of sale to confirm that the seller fully complied with the law."

has the broker been names in the suit? again, i would take des's advise and seek council, also find out exactly where you stand and why before you make a decision on this situation.





there also is in situation

[johncriss]

The Trustee will sell the home, pay all closing costs, pay off the underlying mortgage and give you your exemption allowance. The balance of the funds will be utilized to pay the Trustee, the Trustee’s attny and your creditors, beginning with any priority debt such as taxes. You should be able to reside in the home until closing, just like if you sold the home.

Thanks for all your points. One follow-up on this one. Since I'm currently being sued for lack of disclosure on my last house, if I'm asked to fill out a Pennsylvania Seller's Disclosure form under duress, you can imagine that it would paint as accurate of a picture of the house as I can possibly do. What if, due to my stringent honesty on the state of the house the house doesn't sell? Do I effectively live there forever, paying my mortgage every month?

Just to be clear, I have no significant debt other than the possibility of a judgement over a year from now. What debt I do have today, I have no issues paying for it.

[johncriss]

has the broker been names in the suit? again, i would take des's advise and seek council, also find out exactly where you stand and why before you make a decision on this situation.

I have an attorney that is handling the lawsuit for me and I am very confident in him as he came highly recommended from multiple people I know including someone who was the Plaintiff in a similar suit that my attorney successfully defended.

The nature of the lawsuit is that they are suing for Fraud, Failure to Disclose and Unfair Trade Practices. They are making three claims: 2 of which are completely bogus without even a hint of a grain of truth to them. The third is in regard to water intrusion in the basement and here is what happened:

On x date, we signed the seller's disclosure and listed the house never having had water intrusion.
On x + 3 months, to improve chances of selling the house we had a landscaper completely re-design the landscaping in the front yard. He re-graded it, pulled out two dozen decades old bushes (with a Bobcat) and re-planted about two dozen new bushes, seeded, etc.
On x + 5 months we had a very heavy rain. We had about a quarter inch of water seep into the unfinished area of the basement. We cleaned it up and it wasn't an issue.

Shortly after this occurred and before settlement I sent an email to the buyer whereby I informed him of the water intrusion we had and my theory that it was caused by me not cleaning out the gutters. Our old house is in a literal forest - 2.5 acres of 100+ tall trees and you needed to clean out the gutters weekly at certain times of year otherwise they just let the water run down right next to the house. At the settlement table, I asked the buyer if he read my notice. He said that he had read it and pointed to a printout of it on the settlement table. Now if he had continued water intrusion into the basement, I can only guess as to what caused it. Either he wasn't cleaning the gutters out, or the re-grading of the front yard done a few months before settlement created a water intrusion problem where one otherwise did not exist. In any case, I informed him in writing via a supplemental disclosure of the water intrusion which he acknowledged reading and had a printout of on the table before settlement.

They filed their lawsuit on the last day of the statute of limitations in hand-written chicken scratch. Though they hired a professional home inspector to inspect the home (who did find non-related issues and they negotiated an amount before settlement to compensate for them), they were not able to add him to the suit because the statute of limitations on suing the home inspector is apparently only one year. They also waited too long to add the brokers / realtors to the suit.

So they're asking for recision of the sale, mental anxiety, medical bills, for money they spent to fix the house, and treble damages. All totaled, about $2 million.

The bottom line: this guy could not afford this house. At the time he bought it, he had one child and one house and managed to save up $0 for a no-downpayment mortgage. After he bought it, he had 2 kids and 2 houses (he retained his old house). When the inevitable falling behind on bills occurred, he began looking for a way out and apparently he thinks that a tiny bit of water coming into the basement is his ticket to riches, but I guarantee he does not remember the supplemental disclosure sent to him which he will be reminded of next week when my attorney submits our answer to the suit. And honestly I'm not even giving a tiny fraction of our defenses to this case here. Also it's important to realize that they're suing a private citizen for $2MM!! Apparently they have mistaken me for Walmart. My net worth is a fraction of what they are suing me for and what little I do have is in retirement funds and 529s for my young children.

So, I don't think this has much of a chance of going anywhere, but I am a cautious person. Would it make sense to talk to a separate attorney specializing in bankruptcy now just in case this does go to court and through some miscarriage of justice they get a major award 18-24 months from now?

[tobee43]

so are you saying this was a "private" sale? because i do want you to know if you did have a broker and they were aware of the situation they are just as liable. have you consulted a civil atty. i know it's so expensive to hire someone. i don't think a bk atty would be able to give you advise on the doctrine of caveat emptor, although i'm certain they would have some general knowledge. then again if you see a civil atty they will go lets counter with malicious prosecution and whatever else they can add to a counter on your behalf which could cost you a fortune in legal fees.

however, if you find a GREAT atty, and i don't know if des practices in your state ( )....and you have absolute solid proofs that he/she rec'd the email and were informed prior to the closing of the house of the water problem, a good or great atty would negotiate the suit away with such proofs and it shouldn't go to far. however, i do want to warn you about going that route. i have seen and experience people pay over 250k in legal fees on a 2k law suit citing principal over a "land" issue and, although they were in the "right" they lost and had to pay the firm the 250k in legal fees.

personally, if it were me, i would go to a civil atty first and then a bk atty. i wouldn't do a thing until i heard all the legal ramifications that can happen. get FREE consults and get a few so you can hear different views of how to handle the situation. i didn't read the law enough to understand the awarding of treble damages....such as in nj would could be under a consumer fraud case, it would treble damages and all atty fees, however, i'm not that familiar with PA laws.

[johncriss]

so are you saying this was a "private" sale? because i do want you to know if you did have a broker and they were aware of the situation they are just as liable.

Nope, it was a public sale. They were represented by a buyer's agent and buyer broker and I was represented by a seller's agent and seller's broker.

however, if you find a GREAT atty, and i don't know if des practices in your state ( )....and you have absolute solid proofs that he/she rec'd the email and were informed prior to the closing of the house of the water problem, a good or great atty would negotiate the suit away with such proofs and it shouldn't go to far.

The attorney I hired literally teaches the course on this subject to other attorneys and Realtors in the area. His entire practice surrounds Real Estate law. He has also successfully gone against the Plaintiff's attorney in the past for cases like this. My attorney's reaction to the suit (and I'm quoting here), "The likelihood of Plaintiffs getting a major award is less likely than if a recount in the 2012 Presidential Election was announced and it was determined that Bill Clinton was the actual winner."

The Plaintiff's attorney specifies on their website that they specialize in DUI/DWI, Estate Planning and Family Law.

[tobee43]

"The likelihood of Plaintiffs getting a major award is less likely than if a recount in the 2012 Presidential Election was announced and it was determined that Bill Clinton was the actual winner."

too funny!

however, remember this: it will cost you! although, it may be worth it provided the matter can be settled and NO atty can guarantee, even if the law is as clear as the nose on your face that you will win in court. it would be really good if the matter could be settled in a simple way and hopefully it will.

best of luck and keep us posted!