FOR BROKERS: Case Study

The attorney’s call
Back to square one
Quality control to curb legal wrangles
Taking care of business

BY ROBERT FREEDMAN

Living with litigation

With remediation specialists in airtight suits transporting materials in special containers, the scene looked like something out of a horror movie. And in a sense it was—at least for Wally Folks, GRI, broker-owner of Century 21 Folks Realty in San Antonio.

Back in 1999, one of Folks’ associates worked with buyers on the purchase of a one-story brick house in the north-central part of San Antonio. The buyers thought they were getting a modest house that needed a few cosmetic upgrades. But while replacing the carpet, the buyers found a mold-infested crack in the cement slab where the previous owners had had some remodeling work done.

The creatures crawling out of the crack, as the buyers described the scene during a mediation session, were only part of the horror. The buyers alleged allergies and other health problems from the crack and another patch of mold discovered behind the kitchen sink. They wanted their life set right. They sued the sellers, Folks, and Folks’ associate.

The case was every broker’s nightmare, hitting just when the country’s focus on mold was intensifying. Suddenly, Folks found himself contending with the emotional strain his associate was suffering, the prospect of a costly lawsuit, concern for his other associates’ state of mind, and the need to keep business moving smoothly during a time when “fast-paced” was an understatement. And strangely enough, he was feeling sympathy for the plantiffs.

Regardless of a its merit, a lawsuit can be devastating to brokers and associates alike. “Most cases I defend are tenuous or groundless,” says Robert Bass, a broker defense lawyer in Phoenix. Still, the financial and emotional toll can be significant.

Folks’ experience, however, shows that lengthy litigation doesn’t have to be crippling. The keys, he says, are to be upfront with everyone about the facts of the case, prepared with plenty of documentation, and supportive of the associate involved. Above all, it’s critical to keep control of your time. Otherwise the legal action will threaten to overtake the good parts of your life.

The attorney’s call
Few calls are less welcome than the one from an attorney representing a disgruntled party. When the attorney for the buyers of the mold-infested house called, Folks suggested they strive to resolve the complaint through mediation. The attorney agreed, and a mediator was secured.

Given the reasonable prospects for resolving the complaint, Folks proceeded with mediation without informing his errors & omissions insurer of the matter. “I thought we were looking at something that would involve a few thousand dollars, and for that, I didn’t want to get a black mark with my E&O company,” says Folks.

His biggest concern: that a claim would drive up his premiums.

To prepare for the mediation, Folks and the associate sat down with a pen and a notepad to retrace the events leading up to the complaint. Folks numbered each event—starting with the associate’s first contact—identified the date it occurred, and summarized it in a sentence or two. To refresh her memory about what happened when, the associate referred to documents such as the home inspection report and her own notes taken during the transaction.

“That session showed me how important it is to keep notes on everything you do,” says Folks. “When you have a phone conversation, just take out your pad and start writing. It’ll help you recollect what you’ve done.”

Note taking also forces you to analyze the situation as it’s happening and can be a good way to catch red flags early in a transaction.

Back to square one
Despite Folks’ high hopes, the mediation failed. “The buyers went into hysterics,” says Folks. “The husband said his wife had suffered migraines and allergies and had missed work.”

The buyers showed pictures of the mold, and Folks admits, “They were horrifying. I felt very sorry for them.”

The buyers’ attorney said his clients wanted Folks to buy back the house for $99,000, its purchase price, and fork out $63,000 to cover costs for mold remediation and matters related to the buyers’ health concerns.

Faced with those demands, Folks contacted his E&O carrier and quickly learned that insurers want a call from you at the first hint of a claim. (See “Proper coverage is critical,” page 38.)

“The first thing the insurance company did was chew me out for not calling right away,” he says. “But I thought I was saving them a few thousand dollars.”

Folks’ insurer secured him an attorney from Austin, 75 miles from San Antonio. To clarify the chain of events that led to the complaint, the attorney spoke with Folks periodically by phone and traveled to San Antonio several times, including before each of four depositions that were taken—one for each of the sellers and one for each of the buyers.

The depositions were integral to clarifying points of contention between the parties. For example, the buyers contended that Folks’ associate had told them plumbing work under the cement slab—part of the remodeling work that had been done—had a lifetime guarantee. Leakage from that plumbing was believed to have contributed to conditions that caused the mold. But in the depositions, the contention about the plumbing guarantee wasn’t corroborated by the other depositions. “What came out was that the associate had turned to the seller, and the seller had said the slab, not the plumbing, was guaranteed for the life of the house,” says Folks.

During the depositions, the buyers concentrated on their compensation for the cost of the house, the remediation, and their attorney. They no longer raised the health issues that had come up during the mediation. “They just wanted the house and their attorney taken care of,” says Folks.

Four years since the start of the case, Folks sees the light at the end of the tunnel. The mold has been eliminated, and mold spores have been contained. The buyers’ insurance company bought the house, paid for the remediation, and sold the house to a buyer who fixes up distressed houses for sale.

What’s more, there’s no indication that the buyers intend to take the case to trial or seek settlement terms. Folks continues to take the case one day at a time—but he’s already feeling that, as horror movies go, this one could’ve had a much worse ending.

Quality control to curb legal wrangles

It’s unlikely you’ll ever eliminate lawsuits, but a quality control process can greatly reduce the likelihood of your being sued.

John Foltz, president of Realty Executives in Phoenix, implemented such a system five years ago, and he says he’s cut his legal tussles to a fraction of what they once were and slashed his risk management costs—E&O insurance premiums, deductibles paid, legal fees, and settlement costs—by 70 percent.

He starts with a standardized review process. Three dedicated staff members review each of the 130 transactions his 1,300 associates generate each day.

Each transaction is reviewed to make sure four goals are met:

• All disclosures have been properly made.
• All inspections have been recommended or performed.
• A home warranty has been ordered.
• A final walkthrough has been completed.
  
  If one of the goals hasn’t been met, the associate receives a pink slip that says the commission will be held if the review finding isn’t addressed.
  
  “The slip is the only piece of paper in the office that’s pink, so when associates get one, they pay attention to it,” says Foltz.
  
  The key is consistency. Each transaction is reviewed the same way each time, no matter who the associate is.
  
  When he first implemented the procedure, he held a few checks a week. Now he almost never has to hold a check. But more important than the stick is the carrot, says Foltz, who reminds associates that the professional behavior that helps them avoid lawsuits is the same behavior that will help them attract more business.

Taking care of business

As consuming as a legal complaint can be, it’s imperative to stay focused on business and remain sensitive to the mood of the office.

Faced with a mold lawsuit, Wally Folks, GRI, of Century 21 Folks Realty in San Antonio was quick to inform the 25 associates in his office.

“We called a meeting immediately,” he says. “The associate who was involved gave her story, and everyone encouraged her to hang in there.”

That encouragement was critical to helping the associate—who held a GRI designation and had been in the business about seven years—deal with the emotional turmoil she was experiencing, Folks says.

“She was shell-shocked,” he says. She effectively left the business for six months, coming in only for meetings with the attorney and to talk with other associates. When she did get leads during that period, she referred them to colleagues.

“She felt that she had done everything right, so she was petrified that something like this could happen to her again despite her best efforts,” he says.

To keep the associate engaged in the business and office goings-on during her absence, Folks called her once a week. And in conversations and meetings, Folks and the attorney offered her reassurances.

Meanwhile, Folks kept his eye on mold coverage in the media. That enabled him to see the complaint in a larger context. “We could see this case as part of a trend,” he says.

That trend is starting to cool, Folks believes, as insurance companies limit their mold coverage, lessening the incentive for people to seek mold-related damages.

Besides providing support for his associate, Folks concentrated on keeping his own priorities straight. “You have to set aside time to take care of the case,” he says, “but then you need to move on to other things on your schedule. If you dwell on a lawsuit, it’ll drive you nuts.”

Strong time management practices can help you stay on task. And as remote as it seems from the problem at hand, paying attention to your health is integral, too. “If your health is good, that makes it easier to cope,” Folks says. “You have to eat right and get plenty of rest. It’s all related.”

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