Episode 5: Texas Law Firm Fined $2 Million & Suspended from Louisiana

All right, good morning, everybody. Welcome to Overruled, brought to you by Scott Vicknair Law Firm. I’m here with my co-host, Brad Scott. We have some very interesting topics to get into today. I’m going to jump right into our first topic, Brad, and that is the fire sale and looming debt crisis in commercial real estate in the country, veering off the path of legal topics. I thought I was the dooming gloob guy. Well, truth be told, the, the thing that really caught my eye and attention on this was that I had a couple, friend of mine, two good friends of mine who both just went and visited San Francisco and were blown away by the vacancies in downtown San Francisco.

And now, in some ways, San Francisco’s situation could be considered unique because of the rampant crime and issues associated with the pandemic that have hit companies like Meta, Salesforce, and other tech companies that have typically housed themselves in the downtown San Francisco district. But this article in the Wall Street Journal, really caught my attention, which says that there’s essentially a fire sale on a property at 350 California Street. This particular office building was worth about $300 million four years ago, in 2019, before the pandemic. And it’s about to be auctioned off. And real estate experts in that area expect it to sell for nearly 80% less than its value four years ago. So they expected auction prices like $16 million opposed to its value four years ago, $300 million. As I mentioned, the article in the journal goes on to discuss issues like Salesforce, Meta, other types of tech companies who have gone more remote work and moved out of the commercial office space. But I think there’s a larger economic issue facing the country at play. And don’t just take my word for it. It really caught my attention whenever Charlie Munger, Warren Buffett’s longtime investing partner, commented on this recently in the Financial Times.

Now, with a caveat that Warren Buffett always likes to say that he thinks economic forecasters are worthless and a waste of money. Charlie Munger commented, essentially saying that he feels like the commercial debt crisis is not as bad as the housing crisis was in 2008, but it’s pretty bad, essentially. His quote was that Berkshire’s restraint in the real estate arena is partially due to risks that could emerge from banks, numerous commercial property loans. And essentially he said, quote, a lot of real estate isn’t so good anymore. We have troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. A lot of agony out there. The journal also had interviewed, a market insider interviewed, the CEO of Carol, Patrick Carol, who commented on the commercial debt crisis and also said that unfortunately, the situation we’re in, things need to bottom out, and they haven’t bottomed out yet. So, I really kind of went down this rabbit hole, Brad, and looked into this.

And what’s kind of happening here is this about $1.5 trillion of debt on US commercial properties. So when we say commercial properties, we’re talking about loans tied to, for example, the building that we’re filming this in, a large 40-story commercial building asset that is owned by a developer. It’s got complicated commercial financing tied to it. Debt that matures with variable rates. Much different than an everyday consumer who goes and buys a house and they think, okay, my options for debt on this property are either like a 30-year fixed loan or an arm, a 17-year arm when I go buy my house or invest in a little investment property. These commercial properties are hundreds of millions of dollars in debt that’s held by banks, which are another little facet of this too, as the public scene recently with Silicon Valley Bank, first Republic Bank, various banks failing. They are held by these banks, and they have maturity periods. So we’ve got about $1.5 trillion of debt, which is maturing in the next three to four years. You tie in the recipe and, and not to be too much of a cajun, but the recipe of gumbo going into this whole pot of things happening here. One, we had the pandemic in 2020, which immediately makes office space less desirable, as more companies have factored in partial remote work and allowed different remote work that wasn’t happening before the pandemic. So you first have like a decrease in demand for these commercial properties, right? Plus a lot of businesses are shutting down. Absolutely. So those developers and landlords have lost the demand. Number one. Number two, interest rates. I think all of our listeners know and everybody who’s been paying attention, interest rates have been spiking egregiously as the Fed has tried to keep up with the rate of inflation and control it. And so the interest rates have spiked. What does that mean for commercial loans? That means that when these loans, which are not custom 30-year fixed loans that most people are used to with their houses, go to, to adjust, that those developers who had assumed their property was worth so much money, assumed that the cash flow and the rents would be coming in at this percentage of Tennessee and assumed that the numbers would make sense based on this percentage of interest, have kind of been hit by all sides. The math’s completely changed for them. Absolutely. Interest rates have gone up, demand has gone down, and their values have decreased substantially. So, this has got a lot of people very concerned and not. I see a lot of people in economics always concerned, always making these wild predictions. And you kind of take that stuff with a grain of salt, right? You don’t know what’s going to happen next in the economy. You don’t know what’s going to happen next in the real estate market. But when I start seeing people like Charlie Munger, and people who are not the doom and gloom type artists who are more seasoned and fair-minded investors and people who watched the different markets, really start sounding the alarm bells about this stuff. And then you see real-life examples, for example, like this building and what’s happening in San Francisco. It starts to make you concerned. And then on a larger macro-economic scale, you’re not just dealing with it in San Francisco.

This is happening all over the country. And so, what does that mean? To me, you, who aren’t involved in the, in large bundled commercial properties and commercial debt, like, it means a lot. I mean, no, no different than how a bank failing could affect how other banks do business, unaffected where we decide to invest our money and hold our accounts and things of that nature. If a lot of these different real estate assets fail, or if there are large scales of it, that will have macro effects and kind of wave into the other effects of the market and the economy. Our listeners have 401Ks, they have IRAs, they have their own money that they put in index funds. That will have an impact because a lot of those stocks are bundled up in the REITs and different types of commercial brokerage. Everything’s connected. You know, it’s like dropping a rock in the middle of a pond. The waves go out from the center. So anytime you have any kind of big macro event like that, that’s going to take place, you’re going to feel it throughout the economy. Interesting though, I follow a guy named Ray Dalio. Never, I don’t know if you’ve ever heard of him or seen some of his materials, but he’s been talking for a long time that the US economy and the world economy for that matter, we have these large macro cycles of debt and credit and issues like that. And he’s been saying for a very long time that we’re kind of on the cusp of one of those things crashing on us. So I think we’re kind of in the first inning of, this particular game. We’re seeing some of these bigger debts, you know, coming due and having to refinance. But, I think you’re going to see a lot more of this play out throughout the economy, especially with inflation going up, issues with the dollar being devalued and not being pegged for oil and things like that.

There’s a lot of macro environmental type things happening to us right now. Yeah, it’s not all doom and gloom. There is some things I read, for example, in this, this article about an analysis from Morgan Stanley. There has been an uptick in conservative lending practices that were tethered to the financial crisis and housing market collapse in 2008, that have somewhat, in their mind, made the impact of a potential commercial debt crisis less severe than it could have been. However, as much as 70% of commercial real estate loans that are going to mature over the next five years are held by banks, according to the report that Morgan Stanley ran. And that is sort of also interconnected, as I mentioned earlier, to some of these bank failures. And there’s, there’s almost like connected concerns from these bank failures, this commercial debt crisis, like what is that going to mean for the market? And so it’s definitely an economic issue that I’ve seen serious people such as Ray Dalio, Charlie Munger, even Elon Musk. I saw last week tweeted about it and said this is actually the largest economic crisis facing the facing the country. And so I think it’s something to certainly pay attention to, because that commercial debt crisis can definitely have ripple effects into everybody’s investments, their retirement accounts, things of that nature. And keep in mind, when things like this happen, too, they also create opportunities. When office buildings become less valuable, it creates opportunities to buy these types of assets also. So, you know, whether it is pain, there also is potentially gain for other people who are going to take advantage of these opportunities. And if you’re looking for those opportunities. No doubt. So, what you got for us today, Brad? What caught my eye, and, you know, we’re filming this at the beginning of May, the, the WGA, the Writers Guild of America, strike, that happened about 15 years ago, you may remember, they went on strike and that’s what really gave us a big boom in reality TV. Your Survivor, American Idol, those types of things came to fruition back then. So I think we’re in for a summer of reruns, unfortunately. Just when the kids are getting out of school. But the writer strike, you know, last time lasted a couple months, I believe.

But this is going to impact things from your late-night TV. Those of you who enjoy Jimmy Kimmel and the tonight show, the late show, those things are all written daily. So those things are immediately going into reruns. We’re not going to see those things. Your favorite Paramount and Amazon series, if you’ve been, binge-watching those things, good chance a lot of those aren’t coming back anytime soon. But the interesting issue that kind of came up that I was looking at, you know, obviously as far as this strike, they’re wanting more money. The streaming services have kind of killed the writers’ income. Apparently with the streaming services like the Paramount and the Netflix, they use a much smaller writing crew, and they’re not paying as much money on back-end profits and stuff like that. But the interesting thing I saw that they, they’re after, and this kind of ties into what we’ve talked about before for the podcast, is they’re trying to basically, they’re fighting for their survival in face of AI technology, artificial intelligence. These writers are very concerned that things like ChatGPT and similar tools are going to start being used by production companies to write scripts. And it kind of replaced their, their way of doing business. There was a quote by, one of these writers, Adam Conover. He tweeted, we are fighting for nothing less than the survival of writing as a viable career.

And, you know, it becomes interesting and, you know, kind of start making me think, this is not the first time this has happened, where technology has come into play and expanded and potentially threatened jobs. Technology and the job labor market, kind of, are odds at sometimes because the more technology you have, lots of times with less, we need people to do various things. But it’s also going to be interesting if you remember, like I said, the strike last time resulted in reality TV shows, but you may put these producers in a position this time where they have to start using AI writers to start replacing these writers who are on strike. The very thing they’re striking about may give rise to a boom in AI writing for some of these, for these productions that we see. And I was just kind of going through, you know, history has had many examples of where, technology, any type of technology has threatened jobs. You know, going back to even the Industrial Revolution, 18th and 19th century. Same kind of thing. They started replacing workers, who are craftsmen, with machines to do their labor. Guess what? People were striking and protesting about the same thing. Similar to what’s happening now. Moving into the 20th century, you had the advent of automation and manufacturing. Same kind of thing happened. People were striking, they worried about their jobs. But what history has really taught us is that you really can’t get in front of this moving train. When technology is changing, you either have to get on and ride it where it’s going. But trying to resist, it’s not going to do you any good. And historically, if you look at all these examples, what ends up happening is productivity increases. Because the person that you’re hiring can actually do more with the technology.

And when productivity increases, the price of producing things go down. If you look at the Model T, back when Henry Ford did that, he was able to have one employee produce like 20 or 30 per day, or something like that. The price came down, which made the product more affordable, which actually increased the demand for the product. Which when the industry grows, that means more people are actually working in the industry. So although we initially think it’s going to eliminate jobs, in the long run, history has taught us that technology, technological advancements, you know, things that improve, actually create more jobs, just the different the skill set has to change. But I found it interesting that the, the writers are basically saying, hey, we don’t want AI here. It’s going to do away with what we’re doing. Instead of trying to embrace it and make them more efficient, maybe produce more content, more production. They’re like, no, no, no. We’re going to try and negotiate away from this thing. Right. Yeah, makes me think, back to the time whenever for the first time, if you remember back in the olden days, it feels like, that there was going to be an automatic checkout at Walmart. Right. Walmart, at Home Depot, at Lowe’s. And back then, everyone was talking about how the automatic checkout was going to replace the cashier. Didn’t replace the cashier.

The cashier is still needed. The human is still needed to advance the interest of the company, right? And produce and do certain things that technology really does not have the human capability to do. If anything, it just probably made those companies more efficient and let them allocate resources to employees doing different types of things that they maximize. That example. I mean, one of those cashiers moved off the front of the store, but now they moved to the back. Because being personal shoppers. Now they’re collecting stuff and bringing it out to your car. So it changes things, but the skill set just needs to shift a little bit. No question. And I also saw a report from IBM, an article in them. They, they’re very open about this. They just replaced 7800 jobs with AI technology. And they said more is coming. So, yeah, if this is something that’s definitely happening, get on board the train and I don’t think standing in front of it, trying to stop it, it’s going to do anybody any good. What else you have? Well, my last issue to talk about today, it’s fascinating as, it is, is about a, a Texas law firm getting hit with $2 million in fines, from the insurance commissioner. I haven’t seen this. What happened here? Well, it really caught my attention because how long have you been practicing law for? 12 years. How much? For the 9th. So I’ve been doing practicing for 12 years now and gonna be honest, I saw this headline. I’m like, I didn’t know the insurance commissioner or even had the authority to find law firms. But apparently, he does. Jim Donnellan does. So, Texas law, story here is Texas law firm of McClenney, Moseley and Associates. Started hearing. I personally started hearing snippets of this here and there about six months ago from different firms who were handling a lot of cases out in the Western District from Hurricane Laura. This is a law firm out of Texas that came into Louisiana. I think some of the firms, lawyers were licensed here and they were handling essentially hurricane claims. So, but your property gets damaged due to the hurricane, you don’t feel like the insurance company is paying you enough, being fair enough. They’re delaying. You go to hire a lawyer to handle the claim against the insurance company, try to get what you’re need, what you’re owed, to fix the house.

And then in Louisiana law, this is the guess your legal minute and legal word of the day, has bad faith penalties. Bad faith penalties are essentially these multipliers that if the insurance company does not timely pay you and do certain things that they’re entitled to do and are required to do, protecting you as the insured, that you can collect either 50% of your damages against the insurer or, in some cases, double the damages resulting from the insurer’s bad faith. So we’re trying to make the insurance companies play fair with you. Absolutely. No question. And so Louisiana for many years has had bad faith penalties and attorney fees in it to ensure that there’s a financial lever against the insurance companies to timely take care of the people they’re supposed to protect, supposed to be in the keyword. They’re insureds. So McClenney Moseley and Associates comes in, there’s obviously a lot of work out there after Hurricane Laura and Ida, given the vast scale of damage and destruction unfortunately that happened. The insurance companies are behind, they’re misadjusting properties, people, this many of them, this is their homes, these are their primary investments. And they can’t just be strung along for months and months and not get money to actually initiate repairs. So there’s a ton of legal work, which our firm was handling a good bit of it in representing homeowners, business owners for commercial properties against their insurance companies for hurricane damage. McClenney Moseley and Associates comes in and essentially was representing hundreds and hundreds of clients. They’ve admitted to this now. This, there is a judge in the Western District, Judge Kane, who’s been overseeing most of the Hurricane Laura litigation. And as well as the department of insurance claim, which was filed in front of, Judge Michael North here in the Eastern District, he’s a Magistrate Judge. MMA. I’m reading this from the advocate. MMA admitted that in at least 856 cases, in which it claimed to represent Louisiana policyholders, so Louisiana insureds, it was actually retained by a roofing company. So, essentially, what they did is they had a relationship with a company called Apex Roofing. And Apex Roofing can solicit clients. Lawyers have different solicitation rules that private companies don’t. When it comes to advertising, they would go out and get work to repair people’s roofs. And then they would bring MMA in, and MMA would sign a contract with Apex Roofing. But the client never actually signed a contract with MMA, the law firm to represent them. They were saying they were representing people that they weren’t technically representing. Correct.

And in Louisiana, you know, but in Louisiana, if you’re going to represent somebody and handle their case on a contingency, what we call it, which is simply, we’re going to get a percentage of any money we recover in your motor vehicle claim, your offshore injury case, your homeowner’s claim against your insurance company, whatever you get, we get a percentage of that. This percentage, if you don’t get anything, we don’t get anything. That’s just a contingency fee agreement under Louisiana law. And we represent people under contingency all the time. Many law firms do. And at the outset of the representation, there’s a written fee agreement that the client, many times with us electronically signs. And we have been developed, an attorney-client relation with that client. They had for many of these cases, they admitted, 865 of them, didn’t do that. And that’s a big no-no. You can’t represent somebody in Louisiana under or you’re not supposed to represent somebody under contingency without a written fee agreement. And so in many cases, that, when Judge Kane essentially stated, all of their cases, barred them from nine for 90 days from representing anybody or handling any legal work in the Western District. And then when that happened, and that sort of hit the news two or three months ago, I believe, is with, with a pulse of complaints going to the Louisiana Insurance Commissioner, put Jim Donnellan in action to sort of investigate and what was going on with this law firm MMA and led to his fines. He fined $2 million total. So, $500,000 each against the firm’s founding partners, James McClenney and John Moseley, as well as $500,000 against the managing partner William Hugh, for a total of $2 million. Quite a hefty fine. Pretty good slap. Yeah, I, gotta be honest, I was kind of taken aback because I didn’t even know the insurance commissioner could really, what was the basis of him fining them? I mean, what was his authority, feel? Most of it was founded upon the concept of insurance fraud.

And so, or his allegations, Commissioner Donnellan’s allegations that they had essentially committed some level of insurance fraud by sending, so we begin to represent somebody and you send a letter of representation to the insurance company. We’re representing them that we do actually represent these people. Now, you know, as in any business, sometimes there’s a case here and there where maybe you accidentally send it to the wrong insurer or there was a mix up on the client’s name. And those are ministerial errors, which nobody really, you know, you correct them in the course of doing business. But in, in this case, there were hundreds, potentially thousands of situations where they didn’t actually represent the insured, but were telling the insurance company that they represented him. Settled their cases without. There was nine cases in this, in this law.com article in this, nine cases where they settled the claim and the client didn’t even know that it had been settled. And so those are really big no-nos in our line of business. We have to communicate promptly with the clients. Get authority to settle cases, let them know like what the settlement offer is, and make sure that we have consent to the settlement. And so there was a lot of stuff brewing here and it kind of looks like that there’s a lot more to come from the insurance commissioner, as well as potentially from the Louisiana Ethics Council. Yeah, I’m sure the bar association may have something to say about this too. Neither the advocate article, nor this article, on the topic, which I had, read at the ABA journal, got into the side of, for those for our listeners don’t know, Charles Platt, Myers, is the lead ethics counsel for the State Bar Association. And he has other lawyers at work for him with the State Bar Association who regulate our conduct and law firm’s conduct. And so, I maybe some disciplinary action. I didn’t read anything about that, but my assumption is that anybody at that firm is very possibly going to potentially be seeing some ethical issues related to their license here in Louisiana, given that the scale of this. And, you know, the last thing I’ll leave is on this topic is that I thought it was just interesting and reading the insurance commissioner’s quote on this, one of the most egregious cases that has ever come through his department. So, you know, That’s a slap. I found to be quite telling. And I don’t know if it’s hyperbole, he is a political actor, so he’s prone to hyperbole.

But in any event, not nothing I’ve ever seen, I’ve never seen a law firm in all the years of my practice. I don’t think you have. Have you? Get this kind of fine over conduct in representing clients against insurance companies. Well, hopefully, next time a storm, you know, passes through the area, people will think twice about having this kind of behavior and trying to represent clients and being that aggressive. When that’s a concern, right? Is we don’t, it’s one thing, there’s the abundance mindset, right? There’s like tons of work for everybody. There’s like a lot of, a lot of people in different situations who need a lawyer, whether it’s, you’re in a family, you’re in a divorce and you need a family lawyer, you have an immigration issue and you need an immigration lawyer, or you’re in a terrible car accident or offshore injury incident, you need an injury lawyer. Tons of law work out there. Tons of good lawyers and good law firms in the state, both North and South Louisiana. And, and I don’t even, I’m not one of those people, like some lawyers who get all snippety about like out-of-state law firms coming in and doing work here. Come on in. Like the more the better. You know, across those types of lines. The more competition. But it is a concern whenever there’s a big scale event. And you have an out-of-state firm that comes in and kind of behaves in this manner or potentially takes advantage of people. And that’s the worst of the professional. Well, it hurts the profession. Yeah, people consumers and people out there see this kind of stuff and they think, oh, lawyers are like this. And they’re not. It’s the few bad apples that spoil the whole bunch, as they say. Yeah, I mean, how many people do we know? Many, many lawyers who work 60 hours a week, 70 hours a week, 80 hours a week have built firms.

Not some startup firm that just started yesterday but spent decades building their law firm, building their reputation, their foundation, their reputation and really takes seriously their fiduciary obligation to the client, to the bar, to the court. And then, you know, it just it That stuff isn’t in the newspaper. It doesn’t. Never does. It’s not a big headlines topic, but it’s always I hate to see these types of things because like you, I think it does overall injure the profession. Yes. We don’t need it. All right. Well, great discussion today. I thought that was a lot of really interesting topics that we hit on from the debt crisis to the screenwriters not being happy about technology, along with some issues with this law firm and this $2 million fine from the insurance commissioner. Really enjoyed discussing it today. Thanks everybody to all of our listeners for being with us today. Just one last note. How about that sign? I think it looks pretty good. It’s kind of bright. It’s hitting off your head there. A little powder next time, right? This has been Overruled. I’m brought to you by Scott Vicknair Law Firm and we’re looking forward to seeing you next time. Thanks for being with us today. Y’all take care. Information is for illustrative purposes only and does not constitute tax, investment or legal advice. Always consult with a qualified investment, legal or tax professional before taking any action.