The Sentinel Case III

Penalties Doubled in Sentinel Case

Reprinted from The Washington Post

By Ann Mariano
Washington Post Staff Writer
Copyright The Washington Post, January 11, 1986

An Alexandria Judge has doubled the daily penalties against Virginia developer, his attorneys and their law firm for their failure to comply with a court order to pay $750,000 in damages and buy back the Sentinel of Landmark condominium owners.

A Northern Circuit Court Judge Donald H. Kent ruled this week that developer John DeLuca, lawyers Russell S. Rosenberger and Ronald C. Proffitt and the firm of Bettius, Rosenberger and Carter must now pay $10,000 a day in sanctions. The unit owners won a lawsuit against DeLuca and the attorneys for violating Virginia law by failing to register the condominiums properly and by not giving the owners correct public offering statements.

In early December, Kent ordered DeLuca, the lawyers and their firm to start paying sanctions of $5,000 a day when they did not meet the Nov. 29 deadline for paying the damages and buying back the units at an estimated cost of $1.5 million. Kent also told the defendants to pay the condominium owners’ attorneys’ fees and cover expenses they incur because of the delay.

Shortly before the November settlement date, the developer and the lawyers told Kent the financing they had arranged to pay the Judgment had fallen through and they could not make the payment.

In another move to enforce compliance with his orders, Kent authorized levies against the defendants’ properties. Eventually, the properties could be sold to cover the damages, if the developer and the attorneys do not pay them. The unit owners’ attorney, James C. Brincefield, said he also has asked that the defendants be told to appear for “debtor interrogatories,” where they would be questioned about assets they have that could be used to pay the settlement.

When the Judge increased the sanctions this week, he also ordered the defendants to appear in court Monday for another hearing.

Kent has not yet ruled on a request by Brincefield that the defendants be required to make December and January mortgage payments for the 25 condominium owners and pay their condominium fees. Because the Judge ordered the defendants to take back the units by the late November settlement date, DeLuca and the Defendant’s attorneys should be responsible for the mortgage and condo fees that come due after November, Brincefield argued.

After a long and complex trial, the Judge ruled in May 1985 that Rosenberger and DeLuca were guilty of fraud for mishandling the condominium documents given to the unit owners who sued. The Judge said Proffitt was guilty of “constructive” fraud, described by Kent as innocent and mistaken representation. in the settlement of one purchase. Other partners in Rosenberger’s law firm are liable under Virginia law although they did not take part in the fraud.

Lawyers for DeLuca, Rosenberger, Proffitt and the law firm did not return a reporter’s telephone calls about Kent’s latest ruling.

Owners of 27 units in the Sentinel complex, at 6300 Stevenson Ave. in Alexandria, filed separate suits more than three years ago. Kent dismissed two cases on legal technicalities, and the other 25 cases were tried together over a period of nearly a year.

The Sentinel owners said that in addition to receiving invalid documents, they were misled when they bought their units. They said they were assured 80 percent of the 272 condos in the building would be owner occupied, a big selling point for condominium purchasers who fear that a large number of tenants in a building will lower the units’ value. Instead of selling most of the condominiums to individuals, however, DeLuca sold more than 200 of them to a Boston syndicate, which controls the owners’ association and rents out the apartments.

DeLuca denied during the trial that he deceived the purchasers.

Sentinel Developer Pays Condo Owners $800,000;
Court Ordered Deal Delayed 2 Months

Reprinted from The Washington Post

By Ann Mariano
Washington Post Staff Writer
Copyright The Washington Post, February 8, 1986

The developer of the Sentinel of Landmark condominium and his attorneys have paid more than $800,000 in cash to the owners of 26 units in the building and have taken back the apartments, bringing to a close a long running and complex lawsuit surrounding the Alexandria development.

The cash award was divided among the unit owners according to the amounts they spent on their Sentinel down payments, settlement costs and other expenses, as well as expenses they incurred because of a two month delay in the court ordered payments.

Alexandria Circuit Court Judge Donald H. Kent ruled last May that the unit owners had been defrauded and ordered developer John DeLuca, two attorneys working for him and their law firm to pay the damages to the owners by last Nov. 29. Kent also ordered the developer and the lawyers to cancel the sales contracts of 25 unit owners and release them from their mortgages, worth about $1.5 million. An additional lawsuit was dismissed earlier in the trial on a legal technicality, but the defendants paid the unit owner who filed it along with the other 25, apparently to avoid a new suit.

Griffen Garnett Jr., DeLuca’s attorney, said a recently formed company, whose partners include Milton Schneiderman and Russell S. Rosenberger, DeLuca’s former attorney, now own the Sentinel units, situated at 6300 Stevenson Ave. in Alexandria. Rosenberger now works for Schneiderman’s firm, The Milton Co. of Vienna, a major Washington area development company.

Kent found Rosenberger guilty of actual fraud, defined as willful, deliberate fraud, for failing to properly register the Sentinel’s condominium documents with the state and for not giving the unit owners correct public offering statements. DeLuca and Rosenberger’s law firm, then Bettius, Rosenberger and Carter, were liable for Rosenberger’s actions under Virginia law, Kent said. Attorney Ronald C. Proffitt was found guilty of constructive fraud, which state law says is innocent and mistaken representation, in the settlement of one of the unit purchases.

When DeLuca and the lawyers failed to meet the November deadline, the Judge imposed sanctions of $5,000 a day against them, ordered them to pay the condominium owners’ attorneys fees and cover expenses resulting from the delayed settlement. DeLuca and the attorneys told Kent at the time that the financing they had lined up to pay the Judgment had fallen through. The Judge increased the sanctions to $10,000 a day in early January.

After the defendants paid the unit owners last week and took back the apartments, Kent said DeLuca and the attorneys did not have to pay the sanctions, Garnett said. The sanctions would have totaled about $400,000.

Part of Kent’s decision in favor of the condominium owners was an order to vacate their apartments by the November settlement date. They complied, many buying or renting new homes, expecting to receive the money in time to cover down payments and deposits. The money the unit owners last this way, plus moving expenses and other costs were covered by the money they received last week, as well as an estimated $25,000 in attorneys’ fees and legal costs.

“I’m just so glad it’s all over,” said Linda J. Desell, whose plan to buy a new home fell through because of the delay. She said she has found another home and expects to complete the purchase soon.

The money arrived “right on time for me,” said Terry Corner. He and his wife are living in another Alexandria condominium under a preoccupancy agreement. “I’m ready to settle on the new unit,” he said.

The 27 Sentinel owners filed separate lawsuits more than three years ago, charging that, in addition to receiving invalid condominium documents, they were misled when they purchased their apartments. They were assured that 80 percent of the 272 units in the building would be owner occupied, but learned later that DeLuca sold more than 200 of the apartments to a Boston syndicate. The syndicate, which controls the owners association, rents out the apartments.

In the view of many condominium owners, large numbers of renters in a condominium development lower the resale value of the units. Tenants, who have nothing invested in the building, will not shoulder a fair share of maintenance and management costs, condominium owners have said.

Two of the original lawsuits were dismissed on legal technicalities, and the remaining 25 were tried together. Although one of the two unit owners was included in the settlement payments, the other appealed the dismissal to the Virginia Supreme Court, which has not decided the case, according to the unit owners’ attorney, James C. Brincefield Jr.

Fairfax Firm Wins Sweet Revenge For Liability Insurer’s Bad Faith

Reprinted from the Legal Times

By Rich Arthurs
Copyright egal Times, July 28, 1986

One year ago, zoning lawyer Marc Bettius’ Fairfax, Va., firm, then known as Bettius, Fox and Shumate, hid six lawyers and a thriving practice. In 1985, according to two lawyers familiar with the firm’s finances, Bettius, Fox grossed $1.2 million, netted $500,000, and was doing zoning work for such Northern Virginia developers as The Artery Organization Inc., Four Thirty Seven Land Co. Inc., John Driggs Co. Inc., and Richmarr Construction Corp.

Today, however, the firm is little more than a “corporate shell,” according to a lawyer representing Bettius, and is engaged in winding down what little business remains.

The abrupt nosedive in Bettius, Fox’s fortunes can be traced to the firm’s representation of a condominium developer and a related contempt citation handed down against the firm last Dec. 4, when it failed to meet a deadline for settling a large fraud suit against it and one of its former partners. From Dec. 4 through Jan. 31 of this year, when the fraud case was ultimately settled, Bettius’ firm was assessed a total of $230,000 in fines for its continuing failure to come up with the settlement money.

But in an apparent vindication earlier this month, the firm successfully passed the blame for its failure to settle that suit to its professional liability insurance carrier, New York based National Union Fire Insurance Co. On July 11, after a four day trial, a federal jury in Alexandria awarded Bettius, Fox $7 million in damages against National Union, finding that the insurer had acted in bad faith. That award – which included $5 million in punitive damages – was the largest ever in a bad faith insurance suit in Virginia, according to the lawyers involved in the case. Bettius, Fox’s lawyers Thomas Mains Jr. of Alexandria’s five lawyer Mains & Nichols, and Wallace’ Duncan of Washington, D.C.’s 17 lawyer Duncan, Weinberg & Miller – maintain that a key element in the jury’s assessment of damages was the firm’s bleak profit picture.

Bettius, Fox was caught in a nightmarish situation: The firm’s liability insurance became the deep pocket for a former partner’s wrongdoing, and the insurance company dragged its feet on paying up.

“The evidence [in the recent bad faith insurance trial] showed that Bettius was hung out to dry” by National Union, charges Francis McDermott, a partner in Fairfax’s 45 lawyer Hazel, Beckhorn and Hanes. McDermott represented Bettius, Fox in the matter until it became apparent earlier this year that McDermott would be Bettius’ star witness at trial. ‘They left him in contempt of court for 39 days to the tune of $2,307,000 . . . The jury heard enough to be pretty angry,” McDermott says.

“It really was a classic, classic case of bad faith,’ suggests Bettius, 47, who formed a new 6 lawyer firm in May. “These guys were flat caught with their pants down.”

Celebrated Condo Dispute

Bettius, Fox’s problems began four years ago with a condominium dispute that became a cause celebre in Northern Virginia legal and real estate circles. That litigation involved a 272 unit project known as Sentinel of Alexandria, located in the southwestern corner of Alexandria.

According to interviews with attorneys involved in that case and court papers, the developer, John DeLuca, began selling units in the project in 1980, telling prospective buyers that the project would be primarily owner occupied. One year later, however, DeLuca had sold only 69 of the units and was encountering financial difficulties. As a result, he sold the remaining units to a Boston based company, which rented them out.

The condo owners started suing DeLuca in October 1982, alleging that they had been defrauded. Twenty-seven suits were ultimately consolidated for trial in Alexandria Circuit Court. James Brincefield Jr. of Alexandria’s five lawyer Brincefield & Associates represented the condo owners in those suits, which named as defendants not only DeLuca and his corporate entities, but also a number of real estate agents, the law firm then known as Bettius, Rosenberger and Carter, and name partner Russell Rosenberger Jr.

Rosenberger had prepared the necessary public offering statements for DeLuca. The law firm also represented the developer at the closings on a number of the units.

Rosenberger, during his deposition in the condo owners’ suit, admitted that he had improperly handled the condominium’s public offering statements, according to Brincefield. Now an executive with The Milton Co., a large real estate development concern based in Vienna, Va., Rosenberger did not return calls seeking comment.

According to Brincefield, Rosenberger allowed DeLuca and his sales agents to give condominium purchasers a public offering statement that had never been filed with the state real estate commission, as Virginia condominium law requires. “He allowed them to use that statement for 11 months” before a revised statement was finally filed with the state real estate commission, Brincefield says.

The crux of Brincefield’s case was that the two offering statements differed so significantly as to constitute a fraud on the purchasers. For example, the original statement said that 7,000 square feet of commercial space in the project would be a common element, meaning that its sale or lease would benefit the condominium association. In the revised statement, however, the commercial space was no longer included among the common elements. DeLuca had subdivided it and sold it for his own gain, Brincefield says.

While several attorneys involved in that litigation suggest that Rosenberger did not profit from the misrepresentations and erred in his handling of the offering statements purely as a result of “overwork,” Brincefield maintains that Rosenberger clearly intended to deceive the condo purchasers. While acknowledging that “Rosenberger has never given any reason for what he did,” Brincefield points out that Rosenberger’s “law firm was being paid based on the number of settlements they did. If they didn’t do settlements, they didn’t get paid.”

Rosenberger was expelled from the Bettius firm in January 1983, according to one of Rosenberger’s former partners. Rosenberger voluntarily surrendered his license to practice law in Virginia in November 1983, and submitted a statement to the Virginia State Bar acknowledging that he had acted improperly in two earlier cases, according to David Beach, clerk to the Virginia Supreme Court. The court formally revoked Rosenberger’s license to practice in early 1984. Beach describes the court’s file on Rosenberger as demonstrating “a continued course of misdealing both with his firm and with clients” in those earlier, unrelated cases.

The condo owners’ case went to trial in May 1984. At the trial, which lasted five months, Brincefield exploited a bizarre incident that occurred during a litigation strategy meeting between Brincefield and his clients in June 1984, shortly after the trial had gotten under way, according to attorneys for the Bettius firm.

During that meeting, which was held at the condo, the group discovered that they were being surreptitiously taped. Brincefield filed criminal charges against a former manager of the condominium, alleging that he had bugged the meeting in violation of the state’s wiretapping statute. The manager was later acquitted.

But Brincefield “used [the bugging incident] as his main tool at the trial, says McDermott, one of Bettius, Fox’s lawyers. “He got a lot of mileage out of that.”

At the trial before Alexandria Circuit Court Judge Donald Kent, the condo owners sought recision of their purchase contracts and reimbursement of their costs. Late in the trial, Kent dismissed the condo owners’ claim for punitive damages. One of Brincefield’s clients has appealed that ruling to The Virginia Supreme Court.)

Kent issued a written opinion in the case on May 107 1985, finding that Rosenberger had committed actual fraud in his handling of the public offering statements. While finding that the law firm’s “other partners are innocent of any participation in the fraud,” Kent held the firm liable under “general agency principles” of Virginia law. He also found DeLuca vicariously liable for the fraud committed by his attorney, and found Ronald Proffitt, a former associate at the Bettius first liable for constructive fraud for having made what Kent called “an innocent and mistaken misrepresentation” to one condo owner based on Rosenberger’s original offering statement. Proffitt, now a partner at the two lawyer Fairfax firm of Fox & Proffitt, declines comment on the matter. The judge found no evidence of fraud on the part of the real estate agents named in the suits.

Vent ordered Rosenberger, DeLuca, Proffitt, and the Bettius law firm to make the condo owners whole by rescinding their purchase agreements, repaying the condo owners a combined total of approximately $541,000 in down payments and closing costs, and assuming their mortgages, which totaled roughly $1.5 million in outstanding debt.

“The verdict was perfectly digestible” for the defendants, says Paul Sheridan, the attorney retained by National Union to defend the Bettius firm under a $2 million professional liability policy. Sheridan, an Arlington County Circuit Court judge, was, at the time, a partner in the 10 lawyer Fairfax firm now known as Siciliano, Ellis, Dyer & Baccarosse.

Sheridan notes that instead of the large punitive damages the plaintiffs were seeking, they merely won their money back, while the defendants could take back the units and would benefit from any appreciation in their value. “I felt the defendants would have been crazy to appeal the verdict,” Sheridan says. Indeed, no appeal was filed.

Rocky Settlement Talks

Coming up with the money to buy out the condo owners proved difficult, however. DeLuca’s financial troubles made it questionable whether he could pay back the condo owners and take back their units. Bettius suggested that the defendants organize an investment syndicate to acquire the units, Sheridan noted in a May 14, 1985, letter to National Union claims personnel. The Milton Co., which hired Rosenberger after he left the Bettius firm, was among the potential Investors, according to the law firm’s exhibits in the insurance case.

In June, DeLuca filed cross claims against the law firm, seeking $10 million in damages for Rosenberger’s fraudulent handling of the public offering statements. Those cross claims are still pending. DeLuca’s attorney, Griffen Garnett III of Arlington’s three lawyer Garnett, Garnett & Lewis, declines comment on the litigation.

On June 17, Bettius met with Sheridan and demanded that the insurer contribute $400,000 to the condo syndicate, according to a June 20 letter from Sheridan to National Union. Sheridan then relayed Bettius’ demand to a National Union claims adjuster, who for the first time questioned whether the policy covered the verdict in light of the judge’s finding that Rosenberger had committed fraud. The policy contained an exclusion for fraud.

In a July I letter to Sheridan, Bettius called the insurer’s questions about coverage “disingenuous.” He argued that, aside from Rosenberger, the law firm’s liability is “derivative . . ., and clearly covered under the terms of the policy.” Bettius asked for a clear affirmation of coverage and a commitment by the insurer to contribute a minimum of $250,000 to the proposed syndicate. Bettius warned that National Union’s failure to respond would be viewed as an act of bad faith.

As the negotiations with DeLuca, Rosenberger, and Bettius dragged on, Brincefield asked the court to clarify its May 10 ruling and hold all of the defendants jointly and severally liable so that a judgment could be entered. On Sept. 3, Kent granted Brincefield’s motion.

Shortly after that ruling, Bettius retained McDermott to represent the law firm in its dealings with National Union. On Sept. 6, McDermott wrote the claims adjuster a terse letter demanding a response to Bettius’ July 1 letter. McDermott noted that the insurer’s continuing “silence will be fatal to the success of very delicate settlement discussions.”

On Sept. 12, a National Union claims supervisor wrote Bettius that, with the exception of Rosenberger, the firm had “valid coverage and on Sept. 19, the insurer retained William Bayliss of Richmond’s 42 lawyer Browder, Russell, Morris and Butcher to represent it in negotiations to settle the condo owners’ suit. However, McDermott notes, “it was six weeks before [Bayliss] got actively involved.”

Sheridan went on the Arlington County bench an Sept. 19 and handed the case off to his partner, Joseph Dyer. In his final correspondence to National Union an Sept. 12, Sheridan noted that Brincefield’s settlement demands were increasing as the negotiations plodded along. He added that the demand on Bettius’ insurance policy was back up to $350,000. In a postscript, Sheridan wrote, “One of the great frustrations I have had in the practice of law is the failure of this case to settle.”

As a court imposed Nov. 29 deadline for settlement approached, the defendants agreed on two possible settlement options. One called for National Union to pay $350,000. Rosenberger’s employer, Milton Schneiderman, head of The Milton Co., would put up $450,000. The combined $800,000 would be used to pay off the condo owners and reimburse DeLuca for his legal fees. Schneiderman would assume the condo owners’ mortgages and take title to the units. National Union would get a release from any claims arising from the matter in return for releasing Rosenberger from any claims the insurer might have against him.

The second option called for National Union to put up the entire $800,000, assume the mortgages, and take title to the units.

On Nov. 15, McDermott wrote to Bayliss, saying, “We are all seriously and genuinely concerned about the risk of a runaway Judge should these claims not be settled” by the Nov. 29 deadline. In a letter dated three days later, Bayliss presented both options to his client National Union. The lawyer concluded: “It will be extremely important that we act quickly.”

A Deadline Missed

On Nov. 27, however, Schneiderman backed out of the deal. McDermott immediately called Bayliss to advise him of this development. Later the same day, Bayliss wrote McDermott a letter saying that National Union had finally agreed to contribute $350,000 to the Schneiderman plan.

“It was a meaningless gesture,” says Duncan, adding that Bayliss “already knew [Schneiderman] had pulled out.”

Judge Kent was advised of the breakdown in the settlement plan that same day. He agreed to consider Brincefield’s motion that the defendants be held in contempt and set Dec. 4 as the date for the contempt hearing.

In anticipation of a Nov. 29 settlement date, the condo owners had vacated their apartments. “So the day before Thanksgiving [the defendants] tell me they didn’t have the money to settle. I had 27 families out on the street, and that situation remained through Christmas and New Year’s” Brincefield says.

On Dec. 4, Kent found the defendants in contempt and imposed fines of $5,000 a day on DeLuca, Rosenberger, and the Bettius firm. In mid-December, Schneiderman reentered the settlement negotiations, but insisted that National Union pay at least $250.000 more than its earlier offer. On Dec. 17, Brincefield initiated collection proceedings, and an New Year’s Eye the Bettius firm was visited by sheriff’s deputies attempting to seize the firm’s assets.

Meanwhile, on Dec. 16. the firm had filed its suit against National Union in federal court in Alexandria, alleging breach of contract and fiduciary duty, bad faith, and fraud.

Duncan says National Union “did nothing until finally Judge Kent really blew his stack at hearing” on Jan. 6, in which the Judge doubled the contempt penalty to $10,000 a day and threatened to double it again on Jan. 13 unless the defendants satisfied the judgment. Shortly after that Jan. 6 hearing, the insurance company increased its offer to $400,000. With Schneiderman agreeing to pay the remainder of the approximately $1 million in cash that Brincefield by then was demanding, the cases finally settled on Jan. 31. As a result of the settlement, Kent rescinded all of the contempt fines against the defendants.

But by that point, the damage to Bettius’ firm had already been done, according to Bettius’ attorneys. The contempt citation and mounting fines produced “terribly bad publicity” for Bettius and the firm, says Duncan. “All his lines of credit were cut off, and the sheriff tired to collect on his assets. The law firm basically folded up,” Duncan says.

Beginning in February, “everybody [except for Bettius and partner Douglas Sanderson] kind of split up and went out an their own,” says Mains, adding that the contempt order and fines “just fractured everybody’s ability to practice law. It was awful. Everybody was looking at everybody else to see who was responsible for the situation, and it just poisoned the well.

In February, Mains and Duncan succeeded McDermott as Bettius, Fox’s counsel. Given the mounting damage to the firm’s practice, they amended Bettius’ complaint against National Union to include a treble damage RICO claim. They also began extensive discovery of the insurance company’s claims practices.

What they found “was just mind boggling,” says Mains. He claims they found 170 lawsuits alleging bad faith on the part of the company since 1980. It was just astonishing the number of claims they refused to pay,” Mains says. (The Bettius firm had obtained the insurance through the Virginia State Bar, which contracted with National Union to write policies for bar members between 1981 and 1984. According to Samuel Clifton, executive director of the Virginia State Bar in Richmond, the bar switched carriers two years ago for cost reasons unrelated to any complaints about National Union’s claims handling.)

Judge Claude Hilton of the Eastern District of Virginia refused to let Bettius’ lawyers present their evidence of other bad faith claims against National Union to the jury, ruling that it was not germane to Bettius’ case. As a result, he dismissed the RICO claim in a bench ruling at the close of the trial saying that the necessary predicate acts for a RICO Violation had not been established.

The trial began on Monday, July 7. Bettius, Fox built its case largely an the correspondence between the firm and its insurer, and the insurer and its own lawyers. The letters and testimony by lawyer McDermott, it argued, showed the insurer’s bad faith. National Union countered that it had lived up to its obligations by providing a defense far the law firm throughout the condo owners’ case, by offering the $350,000 an Nov. 29, and by increasing that offer to make the settlement possible.

Sheridan, who was called as a defense witness at the trial, says that in his testimony “I blamed everybody for not trying hard enough to settle [the condo owners”] case. It wasn’t just National Union.”

The trial concluded late on Thursday, July 10. The six member jury returned the $7 million verdict the following morning. National Union trial counsel David Durbin and Paul Krause, partners at Washington, D.C.’s 31 lawyer Jordan, Coyne, Savits & Lopata, were out of town last week and could not be reached for comment. Jayson Spiegel, a Jordon, Coyne associate who worked on the case, says the firm will not comment on the matter in light of pending post trial motions and the likelihood of an appeal. Bayliss, who was a witness at the trial, declines comment, as does Timothy Maloney, a National Union claims manager in New York who also testified at the trial. Maloney says the insurer has a firm policy of not commenting on pending litigation.

Defense counsel “had a tough case,” Mains observes, adding that “the jury was absolutely convinced that these insurers were a callous bunch … who just did not consider the interests of that law firm.”

“The insurance company was a horrible, horrible wrongdoer in this case,” agrees Brincefield, adding, “I just wish there had been a way for my clients to participate” in the $7 million award to the law firm.

As for Bettius, lawyers who know him are confident he’ll be able to rebuild his practice at his new firm – the six lawyer Bettius, Connor, Duff & Sanderson in Fairfax. That firm was formed on May 1 when Bettius and Sanderson, his last remaining partner from Bettius, Fox, merged their practice with the four lawyer Connor & Duff.

“Marc’s a real good zoning lawyer and has built a good reputation over the years,” says Mains. He adds, however, that the publicity surrounding the Sentinel of Alexandria contempt citation “has sullied him. There’s no question about that.”

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