As most Owners know, 12 Owners have sued the Club seeking millions of dollars in compensatory and punitive damages. It's been nearly five months since the J-Lot Owners filed suit and it's worth updating the Owners on the status of the dispute. I'll have more to say about the substance of the seawall dispute in a second post. But many Owners don't understand the litigation process and I thought it would be worthwhile to explain the process before we discuss settlement issues.
On May 23, 2022, the Club "answered" the Complaint filed by the J-Lot Owners on February 18, 2022. Here are links to the Complaint and the Answer. The "Complaint" is the document which initiates a lawsuit. Once the J-Lot owners filed the Complaint, the Club was required to file a responsive pleading. In this case, the Club filed an "Answer," which also stated defenses and counterclaims. On June 30, the J-Lot owners "replied" to the Club's counterclaims--here's a link to the reply.
The Complaint sets forth the J-Lot owners' position (the J-Lot Owners are also known as the "Plaintiffs"). The Answer contains the Club's view of the dispute (the Club is the "Defendant"). And the "Reply" sets forth the J-Lot Owners' view of the Club's counterclaims set forth in the Answer. So at this point, we have two conflicting views of the rights and duties of the parties to the dispute. Resolving such disputes are what the courts are for, and the legal process will sort out the facts and the law and draw a conclusion about which party is responsible for what costs--now and in the future.
Lawsuits are complicated. I'm not admitted in South Carolina, so just view this post as observations by a retired out-of-state attorney. There are four major paths for resolving litigation:
- The Plaintiff fails to state enough facts in the Complaint to indicate that the Defendant is liable. In such an event, the Defendant typically moves to dismiss the case for a "failure to state a claim." The Club "answered" the Complaint, rather than making a "motion to dismiss" the Complaint for failure to state a claim upon which relief can be granted (although that is a defense stated by the Club).
- The Plaintiff and the Defendant sometimes agree on the facts, but disagree on the legal significance of the facts. In such case, a trial is not required (trials determine "facts" (the "fact-finder"is either the jury in a "jury trial" or the judge in a "bench trial")). One or both parties move for "summary judgment" and the judge rules on the case. But there are generally disagreements about facts and motions for summary judgment are not usually granted.
- The Plaintiff and Defendant disagree about the facts and a trial is required to determine the facts. Once the facts have been determined, the judge applies the law to the adjudicated facts and rules on the case.
- The Plaintiff and the Defendant settle the case rather than risking an adverse outcome at trial. This outcome occurs in a large majority of lawsuits.
As part of the litigation process, the parties engage in "discovery." Each side gets to ask the other side questions in writing, demand access to documents, and "depose" each party orally by asking them questions. Make no mistake, discovery is very expensive and emotionally exhausting. And that's the stage that we've reached.
We're also at the point where each side will need to hire "experts" to determine the physical state of the seawall and to determine what "damages"--if any--occurred because of an alleged breach of the covenants. Two points. Experts are very expensive. And there are plenty of experts willing to work for each side.
One of the critical issues where expert testimony will be required is the issue of damages. Damages are more complicated than most people realize. If there's one thing lawyers love, it's hypothetical examples. Simply put, damages restore the injured party to their previous position. Let's say it will take $3 million to restore the seawall to tip-top condition. And let's further say that even if the seawall had been perfectly maintained, it would still cost $2 million to restore the seawall to tip-top condition (time and tide will damage the seawall regardless of the maintenance regime). The damages attributed to less than perfect maintenance would be $1 million--not $3 million (actually, the damages would be less than $1 million because perfect maintenance would have cost more and would have been paid for in large part by the seawall lot owners)..
At trial, competing expert witnesses would provide analyses of: (1) the cost to restore the seawall; (2) what maintenance would have been reasonable; (3) whether the Club's maintenance of the seawall was "reasonable; (4) the useful remaining life of the seawall; and (5) what the cost to restore the seawall would have been had "reasonable" maintenance been conducted. The Club will argue that its maintenance was reasonable and the seawall lot owners are responsible for the full cost of restoration. The seawall lot owners will argue that the Club didn't conduct "reasonable maintenance" and that reasonable maintenance would have been inexpensive and would have significantly reduced the cost to restore the seawall to pristine condition.
As you can imagine, the cost of trial would be quite high. Which raises two issues: (1) under the governing documents the Club can collect its cost of defense from the seawall lot owners if it prevails at trial (but the seawall lot owners have no such right) and (2) the Club has made a claim under its Directors and Officer's Insurance Policy and the insurer is paying for a portion of the Club's legal expenses and possibly any damages that are assessed against the Club. Given this dynamic, there is no reason for the Club to be stampeded into a bad settlement.
In addition, civil litigation can go on for years--particularly if neither party is pushing for a prompt resolution. And COVID has only made matters worse. Given the potentially huge impact on the Owners of the uncertainly surrounding the responsibility for paying for the seawall, one would think that they Club would be aggressively moving the ball forward, rather than agreeing to extensions and delays that add years to lawsuits.
I'll have a separate post on settlement issues. But an understanding of the litigation process is useful background for understanding what's happening in this lawsuit.
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