Business Counsel Services

Red Flag Rules — Update on Impact to Health Care Industry

On December 4, 2003, the Fair and Accurate Credit Transac­tions Act of 2003 was signed into law. As part of this Act, in November 2007, the Federal Trade Commission ("FTC") created the Red Flag Rules ("Rules") to combat prevailing identity theft issues. Ultimately this resulted in the FTC apply­ing financial institution and creditor regulations to a physi­cian's practice to combat iden­tity theft within the health care industry. 

This article is intended to pro­vide a summary of the Rules and an update on the status of the enforcement of the Rules. Our previous article in the Set­tlePou Newsletter, August 2009, Volume 6, Issue 3, pro­vides a more in-depth look into the Rules.

 Summary of the Rules

The Rules require financial in­stitutions or creditors that of­fer or maintain one or more covered accounts to develop and implement written identity theft prevention programs.

A creditor is defined as any person who regularly extends, renews, or continues credit, including businesses that regu­larly defer payment for ser­vices or.provide services and bill customers later. As you can see, this expansive defini­tion can cover health care providers who engage in prac­tices such as (I) regularly bill­ing patients after the comple­tion of service, including for the remainder of medical fees not reimbursed by insurance; (2) regularly allowing patients to set up payment plans after services have been rendered; and (3) assisting patients in getting credit from other sources. Covered accounts can be: (I) accounts that creditors offer or maintain-primarily for personal, family or household purposes-that involve or are designed to permit multiple payments or transactions (i.e., patient billing accounts); and (2) any other account that a creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the creditor from identity theft (i.e., patient records). It is because of these broad defini­tions that health care provid­ers may become subject to the Rules.

Once a health care provider falls within the scope of the Rules, they are required to establish programs that de­tect, prevent, and mitigate identity theft. Our previous article further examines the fundamentals to establishing a prevention program.

Entities that fail to comply with the Rules may be fined $2,500 per violation; however, the scope of "violation" is unclear and so it is uncertain how this fine will be applied. In addition, it is possible that entities will be required to comply with consent decrees or settlement agreements for future monitoring by and re­porting to the FTC.

Status of the Rules

The Rules have been in effect since January 1, 2008 and had an original compliance date of November 1, 2008. However, as may not be too surprising, this compliance date has sub­sequently been delayed numerous times, including twice since our previous article (three times if you count the delay issued immediately prior to publishing the Newsletter). Currently, the new compli­ance date is December 31, 2010. The American Medical Association ("AMA") is con­tinuing to voice its objections to the FTC regarding the Rules' applicability to health care providers. However, the FTC remains steadfast that the delays are not in response to these protests and doctors are subject to the Rules.


Once again, given the numer­ous state and federal law re­quirements already burdening health care providers, provid­ers are likely to have existing policies that can be utilized as the foundation of a program that will satisfy the Rules. Health care providers should monitor the discussion sur­rounding the Rules and review their policies and procedures to update them accordingly.

By Michael S. Byrd and Bradford E. Adatto

Real Estate

Homeowners Associations’ Foreclosure of Assessment Liens An Ounce of Prevention…

The Homeowners Association –appreciated by many, reviled by some. When a homeowner makes the investment for the purchase of a house, generally the desire is that the house and neighborhood selected will not deteriorate, be it aesthetically or monetarily. The primary purpose of the Homeowners Association ("HOA") is for such upkeep, maintenance and preservation of a neighborhood. News reports about HOAs often do not reflect their beneficial attributes, par­ticularly when foreclosure of a person's home is involved.

This was certainly the case in the recent local articles on the fore­closure of the Dallas-area home of one Texas soldier while he was on active duty. While all of the specific facts of this case are unknown at this time, there can be no argument that the situa­tion is more than unfortunate. For both homeowners and HOAs, avoiding unpleasant sce­narios, like this one, starts with understanding the processes, pitfalls, and protections of assess­ments and HOA foreclosure of assessment liens, particularly on a service member's home.

Creation of Assessment Lien

The Texas Supreme Court has addressed HOA assessment liens in Inwood N. Homeowners' Assoc.v. Harris, 736 S.W.2d 632 (Tex. 1987). Generally, assessments, their corresponding liens, and foreclosure thereof, are an in­herent characteristic of the property right – the only method by which other owners won't be forced to pay more than their fair share or be forced to accept reduced ser­vices. In Inwood, the Texas Su­preme Court recited that the creation of a contractual HOA lien is accomplished when the developer records a declaration of covenants, conditions & re­strictions ("CC&Rs") in the county where the land is lo­cated.

The CC&Rs run with the land and are binding on all parties acquiring rights to any property in the subdivision. Typically included in the CC&Rs are covenants—i.e., promises—by the homeowners to pay the annual, special, or other stated assessments as specified in the CC&Rs. Additionally, the CC&Rs often state that these assessments are a charge on the land and shall be secured with a contractual lien upon the lot against which such assessments or charges are made which may be foreclosed. The /mood Court recognized the harshness of foreclosure, especially when a relatively small amount of money is owed compared to the value of a home. Texas law, however, requires enforcement of agreements entered into concerning the payment of as­sessments. Whether developing a neighborhood or governing an existing one, it is paramount to have CC&Rs drafted which provide for the necessary as­sessments to sustain a neighborhood that also explain the utilization and procedural aspects of such assessments for use and understanding by the residents.

Steps to Foreclosure

Texas Property Code §51.001, et seq. addresses the non-judicial foreclosure process in Texas. First, unless there is an agreement that states other­wise, an HOA must serve a homeowner in default with written notice by certified mail stating that the homeowner is in default under the CC&Rs assessment lien provisions and give the debtor at least 20 days to cure the default before no­tice of sale can be given. Service by certified mail is complete when notice is deposited in the U.S.mail, postage prepaid and addressed to the homeowner at his last known address.

Second, a notice of sale must be provided to the homeowner at least 21 days before the date of the sale, and it must include a statement of the earliest time at which the sale will begin. This notice includes: (I) posting at the courthouse door of each county in which the property is located a written notice desig­nating the county in which the property will be sold; (2) filing in the county clerk's office of each county in which the prop­erty is located a copy of the notice posted on the court­house door; and (3) serving written notice of the sale by certified mail on each debtor who, according the HOA's re­cords, is obligated to pay the debt.

Finally, the sale must occur on the first Tuesday of the month within any three-hour period between 10:00 a.m. and 4:00 p.m. at the county courthouse in any county where the house is located, unless otherwise stated by the county. One item to remember is Texas Property Code §209.009 mandates that an HOA cannot foreclose an assessment lien if the debt se­curing the lien consists solely of (1) fines assessed by the HOA, or (2) attorney's fees incurred by the HOA solely associated with fines assessed by the HOA.

Notice to Homeowner after Foreclosure Sale

Texas Property Code §§209.010 and 209.011 require certain post-foreclosure actions by the HOA of non-condominium property. No later than 30 days after the foreclosure sale, the HOA must send the home­owner and each lienholder of record written notice stating the date and time the sale oc­curred and informing the home­owner and lienholders of the right to redeem the property. Such notice must be sent by certified mail, return receipt requested, to the homeowner, each lienholder of record, and each transferee or assignee of a deed of trust that has notified the HOA of such assignment or transfer. No later than 30 days after sending the notice, the HOA must record an affidavit in the real property records of the county, stating the date the notice was sent and a legal de­scription of the lot.

If desired or necessary, the HOA or other person who buys occu­pied property at foreclosure sale must commence and prosecute a forcible entry and detainer action to recover possession of the property.

Homeowner's Right of Re­demption after Foreclosure

Texas Property Code §209.01 1 also provides redemption rights following an 1-10A foreclosure of non-condominium property. The affected homeowner or any lien-holder of record can redeem the property from the foreclosure-sale purchaser no later than the 180th day after the HOA mails written notice of the sale. A lien-holder cannot redeem the prop­erty before 90 days after the date notice was sent, and only if the owner has not previously redeemed.

Generally, redemption will re­quire payment to the HOA of all unpaid assessments as well as fees and costs incurred by the HOA for the foreclosure. If the property was purchased by a third party, redemption will also require the payment of the pur­chase price to the third party purchaser. If the property is re­deemed, the purchaser must immediately execute and deliver to the redeeming party a deed transferring the property to the lot owner.

The purchaser at the foreclosure sale, or any person to whom he transferred the property, can presume conclusively that the homeowner or lienholder did not redeem the property unless the homeowner or lienholder files in the real property records of the county (l) a deed from the purchaser of the property at the foreclosure sale; or (2) an affidavit that states the prop­erty that has been redeemed, contains a legal description of the property, and includes the name and mailing address of the person who redeemed the property. Should the redemp­tion period expire without re­demption being properly exe­cuted, the HOA or third-party foreclosure purchaser is re­quired to record an affidavit in the real property records of the county in which the property is located stating that the home­owner or a lienholder did not redeem the property during the redemption period.

Servicemembers Civil Re­lief Act

The Servicemembers Civil Re­lief Act ("SCRA"), 50 U.S.C.S. Appx. §50I, et seq., provides protection in scenarios like those described above for members of our armed forces. The purpose of the SCRA is to (I) provide for, strengthen, and expedite national defense through protection to service-members of the United States to enable such persons to de­vote their entire energy to the defense needs of the nation; and (2) to provide for the tempo­rary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of service-members during their military service.

Under §533 of the SCRA, fore­closure of property for breach of an obligation is not valid if made during, or within 9 months after, the period of the servicemember's military ser­vice. Exceptions are a sale, fore­closure, or seizure which is made upon a court order granted before such sale, fore­closure, or seizure with a re­turn made and approved by the court; or a sale, foreclosure, or seizure that is made pursuant to an agreement. This 9 month period only applies between July 30, 2008, and December 31, 2010. On January I, 2011, the statute returns to pre-amendment language, which still provides protection, but only 90 days instead of 9 months after the servicemember's mili­tary service.

Violation of the SCRA is a mis­demeanor punishable by fines and/or imprisonment for not more than I year if a person knowingly makes or causes to be made a sale, foreclosure, or seizure of prohibited property, or knowingly attempts to do so. Section 533 of the SCRA ap­plies to obligations on real or personal property owned by a servicemember that (I) origi­nated before the period of the servicemember's military ser­vice and for which the service-member is still obligated; and (2) is secured by a mortgage, deed of trust, or other security in the nature of a mortgage. Typically, foreclosing entities will make a determination on the military status, if any, of their debtor to ascertain the applicability of the SCRA. One website to locate such informa­tion is https:// 


Effective June 19, 2009, Texas passed H.B. 3857, which was codified as Texas Property Code § 51.015, titled Sale of Certain Property Owned by Mem­ber of the Military_ This section generally follows the SCRA and should be consulted during any HOA foreclosure occurring after the effective date ad­dressed above.

Foreclosure is typically an effort of last resort for HOAs to col­lect their assessments. There are risks and responsibilities for both sides involved in any fore­closure, and it is always advis­able to have the assistance of experienced counsel to navigate the detailed and nuanced proc­ess. Likewise, when preparing or revising the CC&Rs for your community, it is always advis­able to consult with an experi­enced attorney so efforts can be taken to minimize the perils involved with enforcing assess­ment liens.

By Scott Conrad and Jeffrey J. Porter

Business Counsel Services

Do You Own What You Believe You Have Paid For?

Custom Software, Other Work Products and Copyright Ownership

A startup company with an e-commerce platform as its sole intended business engine re­tains a software developer to develop the company's online platform and related functional­ities. The parties have a friendly and informal relationship and never enter into a written agreement detailing the terms of the arrangement.

The developer creates and en­hances the platform for a cou­ple years until their relationship sours because the company has outgrown the capabilities of the developer. Believing that the company owns what it retained and paid the developer to cre­ate, the company notifies the developer of its desire to move on and requests the source code to the platform.

The developer responds that she never intended for the company to own her work product, but instead the com­pany has only a limited license to the platform. The company contacts its legal counsel and is shocked to learn that it may not own ‘its’ e-commerce platform and may be facing a costly legal battle.

Like the example above, some companies find out too late that the tens of thousands of dollars, or more, that they have spent for a software developer to create a customized software solution, which they thought they owned, in fact is owned by the software developer.  While the company may have acquired some sort of license to use the software program, the developer retained ownership of the copyright because the parties either did not address copyright ownership in their written agreement, or they didn’t have a written agreement in the first place.            

Unfortunately, this situation occurs more often than it should, often when the software is a critical element or even the dominant business engine for the company.  The situation plays out in many other areas as well when one party is creating copyright material or other works for another party, including, for example architectural drawings, photographs, films, or literary works.

The general rule under copyright law is that the author of the work owns the copyright. In the context of software, the software developer or the person writing the computer code would be the author.  Ownership of the copyright is paramount as the owner will have the exclusive right, among other things, to distribute, reproduce, and create derivative works from the original work.

For both the client and the software developer, having a written agreement, in place clearly setting forth the terms of ownership of the copyright prior to the beginning development is of critical importance.  The Copyright Act of 1976 is the federal law that addresses the subject.

While generally the author or creator of a work is the owner of the copyright in the work, the Copyright Act provides an exception.  This exception is known as the “work made” for hire doctrine.

(1) a work prepared by an employee within the scope of his or her employment; or

(2) a work specially ordered or commissioned for use as a contribution to a collective work; as a compilation; as an instructional text; as a test; as answer material for a test; or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a “work made for hire” (17 U.S.C. §101).

Software, however, notably does not fall into any of the categories described in part (2) above.  Accordingly, if you engage a software developer to create a custom software program for you, your written agreement with the developer will need to contain provisions assigning the copyright to you, if your intent is to own the software.

Often the developer may also be creating instructional manuals or other materials related to the software that could qualify as a work made for hire.  The best option is thus to ensure your agreement has both the appropriate “work made for hire” clause and backup assignment provisions to cover all types of works you are commissioning from the developer 

When it comes to third party creation of copyright material, as with almost any arrangement, the importance of getting a written agreement in place which clearly sets forth the parties’ intent, duties, and obligations, as well as the

Terms of the arrangement, cannot be overstated.

By James M. Stanford