OFAC COMPLIANCE

FINANCIAL PROFESSIONS AND THE WAR ON TERRORISM:
OFAC COMPLIANCE

On September 23, 2001, President Bush issued Executive Order 13224 to aid in the war against terrorism. This Order blocked all property and interests in property in the U.S. of certain individuals or entities, known as Specially Designated Nationals, who have committed, pose a risk of committing, assisting, sponsoring or financing acts of terrorism. Attached to the Order was a list of these Specially Designated Nationals. This list has been updated since September 23, 2001. Transactions or dealings by any U.S. person or within the U.S. in blocked property of these Specially Designated Nationals is prohibited.

Penalties for violations of the Order are significant. They include civil penalties which may be imposed regardless of the violator’s intent and criminal penalties for willful transgressions. OFAC (The Office of Foreign Assets Control), a division of the Treasury Department, is authorized to block assets subject to the Order and maintain a list of individual Specially Designated Nationals and their entities whose assets are frozen and who are barred from conducting business dealings.

OFAC compliance affects business professionals in many ways. The most obvious is the banking industry. Financial institutions receive transactional funds (including by wire and through the use of letters of credit) and conduct financial transactions. Institutions must therefore take steps to insure that they are complying with OFAC requirements. Institutions should maintain OFAC compliance procedures, for if noncompliance is determined, then the procedures employed by the institution may be considered as a mitigating factor in determining the penalty.

The real estate industry is also particularly affected by OFAC. Landlords, both commercial and residential, conduct transactions with proposed tenants who may be Specially Designated Nationals and blocked persons. Further, Specially Designated Nationals may attempt to purchase real estate to launder, invest and secure funds in the U.S. and thus title companies and lenders assume OFAC obligations. Of course, in both leasing and sales transactions, real estate brokers might be involved, and thus OFAC obligations may fall on them as well. Indeed, even an assignor may unwittingly assume OFAC liability.

Attorneys, accountants, financial advisors and other professionals may also have OFAC obligations. Accepting a Specially Designated National as a client may well constitute a transaction. The receipt of payment from the client could constitute receiving funds or services for the benefit of that person. The range of other professionals who can be subject to OFAC is limited only by the imagination of the government officials charged with enforcing the Order.

There are steps that can be taken in light of the above. Software can be purchased that updates and scans the Specially Designated Nationals list and checks variations in spelling. If a match is made then further investigation is warranted to insure it is not a “false positive”. If, after this, you have reason to believe that a match has been made, OFAC must be contacted.

Those involved in contracts for the sale or lease of real property can include appropriate representations, warranties, and indemnifications in the applicable contracts. Whether OFAC compliance is the ultimate responsibility of the seller or lessor of the real property at issue or of the broker who is the procuring cause of the transaction, may be a matter of negotiation between the parties.

MAKING THE BARK AS BAD AS ITS BITE

In Tracey v. Solesky, decided April 26, 2012, the Court of Appeals of Maryland ruled that when an owner or a landlord is proven to have knowledge of the presence of a pit bull dog1, or should have had such knowlege, and the dog attacks someone on the landlord’s property, a prima facie case of liability against the owner or landlord is established. It is not necessary that the pit bull’s owner or the landlord have actual knowledge that the involved dog is dangerous. The Court found that the aggressive and vicious nature of the pit bull, and its capability to inflict serious and sometimes fatal injuries, cause this breed of dog to be “inherently dangerous.” Thus, where it is proven that a dog involved in an attack is a pit bull, the dog owner, or such other person who has a right to control the pit bull’s presence on the premises and who knows or has reason to know of that the dog is a pit bull, is strictly liable for the damages caused by the dog’s attack on or from the premises. The strictly liable party includes a landlord who has the right and/or opportunity to prohibit such a dog from being on the premises.

In reaching its decision, the Court of Appeals, which is the highest appellate court in the State, reviewed the history of pit bull related decisions in Maryland and in other states. The Court noted the first reported appellate case involving the “mauling of young children by pit bulls” occurred as early as 1916, and that no less than seven instances of serious maulings by pit bulls had reached Maryland’s appellate courts in the last thirteen years. The Court provided details of the reported cases, describing the viciousness of the attacks, the severity of the injuries suffered, and the innocent acts in which the victims had been engaged immediately prior to the attacks. Included in the descriptions were the facts of the Tracey case, where a pit bull named “Clifford” escaped his enclosure and attacked at least two different boys at different times on the same day, causing the second one, Domenic Solesky, to sustain life threatening injuries and to undergo several surgeries over a seventeen-day stay at Johns Hopkins Hospital. Although the trial court initially ruled for landlord Tracey, finding that there was insufficient evidence of her negligence to send the case to a jury, the Court

1 The Court’s opinion initially extended to cross bred pit bulls and pit bull mixes. However, by the granting of a Motion for Reconsideration on or about August 21, 2012, the Court deleted all references in its opinion to such cross bred and mixed dogs.
approved a reversal of the trial court’s finding and directed that the case be sent back to the trial court in light of the landlord’s strict liability.

In its analysis, the Court described the history of the common law of Maryland in such matters. It noted that in its decision in the 1882 Goode v. Martin case, the Court, citing English common law, had ruled that an owner of a dog would not be liable to one bitten by the animal unless it was proven that that the dog was fierce and the owner had knowledge that he was fierce. In the 1916 case of Bachman v. Clark, the Court stated that when a dog is of a vicious nature, and the owner has knowledge of that, responsibility attaches to the owner to keep the dog from “doing mischief as the keeper of an animal naturally ferocious would be subject to and proof of negligence on the part of the owner in unnecessary.” This standard had generally continued up to this day: that one keeps dangerous animals at one’s peril, and it is not a defense that one employed reasonableness or diligence to control the creature or prevent its escape. This is to be contrasted with dogs that are not of vicious nature, where the general theory of liability rests on negligence, and owners are given “one free bite.”

The Court noted that the common law “is subject to judicial modification in the light of modern circumstances or increased knowledge.” With this underlying precept, the Court considered a number of resources, including the Journal of the American Veterinary Medical Association, an article in the “Annals of Surgery” entitled “Mortality, Mauling and Maiming by Vicious Dogs,” the Center for Disease Control, and appellate cases from other jurisdictions [including a D.C. case that involved a violation of the Pit Bull and Rottweiler Dangerous Dog Designation Emergency Act of 1966 (known as the Pit Bull Act)] and concluded that the common law needed to be changed to apply a strict liability standard with respect to attacks by pit bull and cross-bred pit bull mixes. No longer will a plaintiff have to prove that the landlord knew that his tenant’s dog was dangerous; it will be sufficient if it is proven that the landlord knew or should have known that his tenant had a pit bull, as that dog is now considered inherently dangerous.

Three of the seven Court of Appeals Judges dissented, arguing that the majority had gone too far in its decision. The dissenters questioned the empirical evidence (or in their view the lack thereof) that the majority relied upon to determine that pit bulls were inherently dangerous. The dissenters questioned the wisdom of having liability turn upon a particular breed and not the applicable facts, including the prior propensity of the dog to be
vicious, or the owner’s or landlord’s knowledge of this. The dissenters pointed out that there was nothing in the Tracey record to prove that the landlord knew that the dog would be likely to attack people, and were thus troubled by the Court finding the landlord strictly liable. Indeed, the dissent analyzed that the only thing a landlord could now do to avoid liability for the harm that a pit bull might cause would be to prevent possession of such a dog on the premises. The dissent argued that if the State desired strict liability for pit bulls than that should be a legislative decision rather than the Court “legislating from the bench.”

While the Court’s opinion turned upon the action, or inaction, of a landlord, the opinion also has ramifications for community associations. The issue for the Court was the landlord’s right to control the pit bull’s presence. Just as a landlord can, by its lease, prohibit tenants from keeping pit bull dogs on the premises, a community association can, by virtue of its Declaration, By Laws and/or rules and regulations, govern its members and reasonably dictate their pet choices. In addition to prohibiting pit bulls the association would need to diligently inspect its premises to ensure that the prohibition was being followed, and take immediate action if a violation is discovered. Neither landlords nor associations want to spend time in Court disputing whether or not they knew or should have known that a pit bull was being kept on the premises. The language in the Court’s opinion imposing a strict liability standard “in respect to the owning, harboring, or control of pit bulls” is rather expansive; it can be easily argued that any landlord or association that does not prohibit such animals is allowing them. If an association does not presently prohibit pit bulls, as is likely, then it is suggested that steps be immediately taken to revise or amend the association’s governing documents and/or its rules, guidelines and standards. It should be noted that legislation was proposed to address the issue of pit bull liability for landlords and associations but the legislative special session ended without a law being passed. Although legislative relief may again be proposed the issue of landlord and association liability remains a current concern.

TOPA

OFF THE TOPA MY HEAD

Do you know about TOPA? If you are a landlord or tenant in the District of Columbia, or contemplating gaining this status, you should! TOPA restricts a landlord’s right to sell residential property and proscribes a tenants’ right to purchase the leased property.

The Tenant Opportunity to Purchase Act (“TOPA”) is found in the Title IV of D.C. Act 3-86, the Rental Housing Conversion and Sale Act of 1980. Born of concerns that the District’s rental housing stock was being depleted and to protect tenants in the event of a sale of their rental homes, TOPA confers on tenants, or a tenants’ association, a first right of purchase in connection with any sale or demolition of residential real property. As such, if a residential landlord wants to sell the property, then that landlord must give notice of the proposed sale by issuing an Offer of Sale to the tenant. The tenant then has thirty days to provide the landlord and the Condominium and Cooperative Conversion and Sales Branch of the District of Columbia Department of Consumer and Regulatory Affairs with a written statement of interest in purchasing the property. If the tenant fails to provide the written statement within the thirty-day period then the tenant’s rights under the Offer of Sale expire, except as to the tenant’s right of first refusal. If the tenant does submit a written statement of interest, then the tenant has a minimum of sixty days to negotiate a sales contract. This sixty-day negotiation period does not include the thirty-day response time period. The Offer of Sale must state the sale price of the property, the tenant must be informed of financing arrangements acceptable to the selling landlord, and disclose other material terms of sale. The deposit required from the purchasing tenant cannot be more than 5% of the contract price, and will be refundable in the event of a purchasing tenant’s good faith inability to perform under the contract. The purchasing tenant will have a minimum of sixty days to secure financing and go to settlement. If a lending institution or agency estimates that a financing decision will be made within ninety days of contract ratification, then the landlord is to provide the tenant with an extension of time consistent with the lender’s written estimate. If applicable, the selling landlord is to provide the purchaser tenant with information regarding the property including operating income and expenses, capital expenditure, and recent rent rolls.

If the seller has contracted to sell the property to a third party, then a copy of the contract must be provided to the tenant and the tenant is given a fifteen-day right of first refusal period to match the contract. The tenant’s right of first refusal applies even if the tenant did not submit a statement of interest or declined to negotiate a sales contract. If the landlord signs a contract with a purchaser that is more than ten percent less than the price offered to the tenant, or upon other terms that would constitute bargaining without good faith, then a new Offer of Sale notice must be issued to the tenants. Further, if the property has not been sold within 180 days from the date of the Offer of Sale then the landlord must again comply with the Act if it desires to sell the property. Although a tenant cannot waive its right to receive an Offer of Sale, a tenant can assign its rights for consideration.

Forms have been printed in English and Spanish to implement these procedures and these forms, as well as information about landlord obligations or tenant rights under the Act, can be obtained form the District of Columbia Condominium and Cooperative Conversion and Sales Branch at 941 N. Capital St., NE, Room 7100, Washington, D.C. 20002; telephone number 202-442-4610.

The foregoing are TOPA considerations at their simplest. For example, if the property being sold is a multiunit building (i.e. – an apartment building) then each tenant has his or her own TOPA rights. As a result, in TOPA transactions, there can be two or more claims made by tenants, with each claiming a superior right of purchase. Buildings with 5 or more rental units must form a tenant’s association and register same within a certain time period. Is a transaction exempt? A transfer, even though for consideration, by a decedent’s estate to a member of the decedent’s family, or an inter-vivos transfer between husband and wife, parent and child, domestic partners, siblings, and grandparent to grandchild is exempt. Other exemptions are too numerous to state in this article. Certain exemptions require a Notice of Transfer, others do not. Selling landlords have tried to come up with scenarios in which the Act does not apply. For example, an owner of an apartment building sold 95% of the interest in the building, retaining 5% and contended that a sale within the purview of the Act was not effected. Although a D.C. Regulatory Agency issued a letter ruling confirming the inapplicability of the Act, the Superior Court of the District of Columbia held that the agency was without authority to issue such a ruling and that the sale was governed by the Act. To conclusively resolve such matters the District of Columbia council thereafter

amended the Act to , among other things, broaden the definition of the word “sale.” See New Capitol Park Plaza Tenants Association et al., vs. D.C. et al (Superior Court No. 04-CA-7465). In Allman v. Snyder, decided December 15, 2005, the District of Columbia Court of Appeals held that, under TOPA, a tenant has an unrestricted right to assign his or her rights and the assignment does not lapse if the tenant moves out of the property.

As you can see from the above, tenants have substantial purchase rights which must be fully satisfied before a sale to a third party can be consummated. A landlord wishing to sell a tenant occupied real estate interest in D.C. needs to be prepared to meet tenant obstacles and consider same in structuring a sale contract. Conversely, tenants should realize the value of their TOPA rights and appropriate value for them. Further, a third party interested in purchasing tenant occupied real estate in the District of Columbia needs to consider the impact TOPA rights can have on the purchase transaction and on any future sale. It should be noted that title insurance to cover potential TOPA claims may not be readily available and instead offered on a special risk basis.

The foregoing article is merely the beginning and not the end of the TOPA discussion. Consequently, we recommend our clients contact us prior to purchasing or selling property in the District of Columbia or when presented with tenant rights issues. Our firm is available to assist with title and escrow responsibilities serving as “the title company” and closing transactions.

THE MARYLAND PROTECTION OF HOMEOWNERS IN FORECLOSURE ACT (PHIFA)

THE MARYLAND PROTECTION OF HOMEOWNERS IN FORECLOSURE ACT (PHIFA)
by Mitchell Alkon

In the winter of 2008 I wrote an article entitled, “Alternatives to Foreclosure.” Unfortunately, as the year comes to an end, the news has not improved. Economic conditions have spawned a new cottage industry of “foreclosure consultants.”

Effective April 3, 2008, the Maryland General Assembly passed the Protection of Homeowners in Foreclosure Act (“PHIFA”). PHIFA defines a foreclosure consultant as a person who offers to perform a service that the person represents will (i) stop, delay, or set aside a foreclosure sale; (ii) obtain forbearance from foreclosure from a loan servicer, a beneficiary or a mortgagee; or (iii) save a homeowner’s residence from foreclosure. There are exceptions, including a lawyer performing activities related to his/her regular practice of law, a person holding or servicing a mortgage loan secured by a residence in default, a person doing business under a law regulating banks, trust companies, savings and loans, and credit unions, and licensed real estate brokers.

PHIFA details activities that the foreclosure consultant cannot engage in, including involvement in a foreclosure rescue transaction (i.e., when a residence in default is conveyed by a homeowner who retains a legal or equitable interest in all or part of the property, including a lease-purchase agreement), collection or charging compensation prior to the full performance of the consultant’s obligations, and acquiring any interest in a residence in default from a homeowner with whom the foreclosure consultant has contracted.

The essence of the law is found in the Maryland Code Real Property Article, Section 7-305, which permits a homeowner to rescind a foreclosure consulting contract at any time. The homeowner must repay, within 60 days, any funds paid or advanced by the foreclosure consultant plus interest at 8% per year. However, PHIFA expressly provides that “the right to rescind may not be conditioned on the repayment of any funds.” Homeowners will contend that the right to rescind “at any time” means they can rescind a foreclosure consulting contract well after funds have been disbursed to them, even years later. Foreclosure consultants will point to the repayment provision in PHIFA; homeowners will acknowledge this obligation but argue that it is not a condition to the right of rescission, leaving the foreclosure consultant with a mere unsecured claim against the homeowner.

PHIFA also provides that an owner of a residence in default has the right to rescind a contract for the sale or transfer of the residence within 5 days of execution of the contract. During this 5-day period the deed to the residence cannot be recorded. Within 10 days after receipt of a notice of rescission the purchaser must return, without condition, the original deed, title contract or other document signed by the homeowner. A residence in default is subject to other restrictions. The purchaser cannot represent that he is assisting the homeowner to save the home or make any statement that has the likelihood to cause confusion or misunderstanding. The latter statements include those regarding the value of the residence or the proceeds the homeowner will receive after a sale or transfer.

PHIFA is an attempt by Maryland to regulate this growing industry and protect a vulnerable class of individuals. PHIFA may be applicable when a transaction involves a home in default, and is applicable where a foreclosure is pending, where the seller is a homeowner in default who is being offered a chance to live in the home after the sale, where a power of attorney is used, where a seller is assigning proceeds, and where save-the-home or credit repair promises are made. The rescission rights provided by PHIFA establish a statutory cooling off period for the homeowner in default and provides a warning to those offering assistance that their activities will be scrutinized. A violation of PHIFA may subject the wrongdoer to injunctive relief, attorney fees, triple damages and criminal penalties.

If a homeowner in default is unable to use one of the options described in the Winter 2008 newsletter, a foreclosure consultant may be a last resort. The homeowner should consult with counsel before entering into a contract or transaction with such a consultant. Similarly, persons who seek to do business with homeowners in default as foreclosure consultants should get legal advice about their obligations under PHIFA.