Author: gks256

AZ Model regulatory HOA agency fact sheet

Explanation

This proposed bill was adapted from Florida’s SB 1348 (2015) and specifically tailored for Arizona. (It was initially proposed in 2008 by Florida’s Cyber Citizens for Justice, http://ccfj.net).  Its objectives are the creation of a state agency called the Department of Homeowners Associations headed by a Commissioner, and the creation of an HOA advisory board to make recommendations to the Commissioner.  It was modeled along the lines of the AZ Department of Real Estate.

Understand that the bill must specify in detail the powers, authority and procedures to follow in conformance with the law.

The format of the bill follows generally accepted standards for bill drafting.  It uses CAPS for new words and strike-outs for deletes.  These are the important provisions of the bill.  The remainder, in normal formatting, is presented as unchanged wording that must appear as required by bill drafting standards.  Generally, they may be ignored. Each part of the statutes is introduced with “Section n,” not part of the statute, followed by the title of the actual statute being changed, such as “Section 33-1806.” A descriptive, either a “is repealed” or “is added”  in total, or  “is amended” phrase follows. Changes are then presented along with the required unchanged wording of the section.

Adapting to other states. The areas to focus on in order to understand the proposed agency are those, as mentioned above, in CAPS and strike-outs.  They may be incorporated into the statutes of other states as is.  However, no complex bill is without links or references to other statutory sections that relate and bear directly on the validity of the new agency.  These ‘links’ would need to be modified and adjusted, most likely extensively, if the bill is to be introduced outside Arizona.  It requires someone with sufficient understanding of bill formatting and who can work with legislative staff to assist in making these necessary adaptations.

The descriptions given below may contain the advisory, “IGNORE,” which identifies code unique to Arizona and probably needs to be changed if adapting for use in other states.

Understanding the bill, Sec. by Sec.

Note that the bill contains seemingly duplicative changes.  One addresses 33-1200 et seq. (and following) and the other addressing 33-1800 et seq. This is because the 1200 sequence pertains to condos and the 1800 sequence pertains to HOAs (planned units).

Sections 1 and 2 add additional wording to title of existing statutes. IGNORE.

Section 3 adds the Department of Homeowners Associations and establishes the office of an HOA commissioner under Title 41, Chapter 20, 41-2325.  Paragraph (A)(3) defines the duties and powers of the department, including the authority to use the Office of Administrative Hearings (OAH) for dispute resolution. Subsections (B) and (C) present the intent and purpose of the bill.

Section 4 adds the powers of the Commissioner to enforce the condo and HOA statutes, which under subsection (B) includes training and education requirement.  Subsection (C) grants the Commissioner the power to set rules that have the power of law. Many agencies have been granted his power, including the real estate department.

Sections 5 and 6 detail the procedures to follow and powers of the Commissioner to handle complaints and investigate complaints, respectively.

Section 7 specifies the penalties for violating the proposed bill statutes, a requirement absent from HOA governing documents, but required by public criminal law.  It’s a notice requirement.

Section 8 adds the funding requirement of $4/door to support the agency.

Section 9 adds the establishment of the HOA advisory board. Subsections (A) and (B) specify the breakdown of the homeowner dominated board.  Subsection (E) defines the authority to recommend revisions in the best interest of the public.

Sections 10 – 16 specify the procedures regarding HOA disputes and OAH hearings since the existing agency is set to expire in 2019. It just moves current law into a new section of code, Chapter 20.  IGNORE.

Sections 17 and 18 revise linked statutes to the addition of Chapter 20 above.  IGNORE.

Section 19.  Omitted in error.

Section 20 repeals the existing OAH funding.

The unconstitutional delegation of implied rulemaking powers to HOAs

Here I present evidence of the explicit and implicit delegation of rulemaking powers to HOAs, which, if not unconstitutional, would alone establish HOAs as state actors.

In an earlier Commentary[1] I discussed the implied delegation of legislative functions to HOA private governments. Putting the issue in simple terms, I quoted Stephen Wermiel’s comments on a constitutional delegation case before the US Supreme Court,

The dispute before the [Supreme] Court . . . [involves] the even less well-known principle that Congress may not delegate legislative authority to private entities. . . . [T]he Justices must decide if the authority given to Amtrak by federal law is legislative in nature, and whether Amtrak is a private corporation or a public entity.[2]

“Rulemaking” is a term that deals with the grant of legislative powers to state agencies and, in a more restrictive mode, to private entities. It is the authority to adopt rules that have the effect of law, which can be found in the federal and state Administrative Procedures Acts (APA)[3]. The point is that the term “rulemaking” is a state agency process and is not found in the nonprofit corporation law even though these nonprofits have rules.

However, it has been applied to the supposedly nongovernmental, private nonprofit HOA corporation. In Tierra Rancho [4]  the court quoted The Restatement (3rd) Servitudes (the common law legal authority in the absence of statutory law) § 6.13(1)(b) and (c) in paragraph 25, “[the HOA has] the duty to ‘act reasonably in the exercise of its discretionary powers including rulemaking, enforcement, and design-control powers.’”  The HOA rulemaking powers are set forth in detail in § 6.7.

Ҥ 6.7 Power to Adopt Rules Governing Use of Property [my emphasis],

(1)        Except as limited by statute or the governing documents, a common-interest community has an implied power to adopt reasonable rules to

(b)        govern the use of individually owned property to protect the common property.”

Comment “b” to 6.7 (p. 141, second paragraph) goes even further,

Even in the absence of an express grant of authority, an association enjoys an implied power to make rules in furtherance of its power over the common property.  The association has no inherent power to regulate use of individually owned properties, however, except as implied by its responsibility for management of the common property.

And finally, examples of implied delegation of rulemaking powers can be found in state statutes.[5]

It is quite evident that the public policy of every state contains an implied delegation of legislative rulemaking powers to private HOA corporations.

Stephen Wermiel explained the non-delegation doctrine in Amtrak (my emphasis),

“[I]n theory delegation to the private sector can never be constitutional. . . . The Solicitor General argues that there is no unconstitutional delegation to a private entity because government officials retained control . . . . The Association of American Railroads (AAR) argues that the delegation to Amtrak is for actual rule-making authority and that Amtrak is . . . a private entity for purposes of the nondelegation doctrine.”[6]

In regard to the Solicitor General’s argument, we know this is not true with HOA statutes.  As there is no oversight, no enforcement, and no effective penalties against HOAs that violate the law, there is no government control.[7]  Having the homeowner enforce the HOA laws does not constitute government control or oversight.  In regard to AAR’s argument, the above evidence supports an unconstitutional delegation of legislative rulemaking powers to private HOA entities.

No matter how you view the private entity non-delegation doctrine, HOA rulemaking is unconstitutional and the covenants are thereby invalid. (The Restatement, § 3.1, Validity of Servitudes, General Comments.)

 

References

[1] Unconstitutional delegation of power to HOAs.

[2] Stephen Wermiel, SCOTUS for Law Students: Non-delegation doctrine returns after long hiatus.  (SCOTUSblog Dec. 4, 2014)

[3]See federal Administrative Procedure Act (5 U.S.C. Subchapter II, § 551(4) and § 553).

[4] Tierra Ranchos HOA v. Kitchukov, 165 P.3d 173 (Ariz. App. Div. 1 2007).

[5] A sample of implied rulemaking statutes by state.  Arizona: ARS 33-1803(A) and (B) for HOAs; 33-1242(A)(1) for condos. California: Civil Code §§ 4340-4370 (Part 5, Chapter 3, Article 5, Operating Rules). Florida HOAs:  Title XL, § 720 et seq. do not explicitly address rules per se, but speak to enforceable “guidelines” and “standards”; Florida Condos:  Title XL, § 718 et seq. (in particular, § 718.1035, the general statement on “association rules”). Nevada: “NRS 116.31065  Rules.  The rules adopted by an association” (with 5 “musts” imposed on the HOA).

[6] Supra, note 2.

[7] In regard to the delegation of legislative powers to private entities, a review of the fuzzy case history of the Non-delegation doctrine indicates a constitutional requirement for governmental control or oversight of the private entity’s decisions and rules.  See “ A New Private Delegation Doctrine?”.

Unconstitutional delegation of power to HOAs

Article I. Section 1, of the US Constitution states that “All legislative powers herein granted shall be vested in a Congress of the United States” and nowhere in the Constitution is there any mention that Congress can delegate its exclusive law making powers to any other branch of the government or to any other organization.  State constitutions have similar wordings like that of Arizona, “The legislative authority of the state shall be vested in the legislature, consisting of a  . . . .” 

The legislative authority and powers of the state are past down to subdivisions of the state known as cities, towns, counties, taxing districts, etc.  These powers are said to be delegated from above to the subdivision, and it is common sense that if an entity does not have the power then it cannot delegate that power to anyone else.

This delegation of authority is carried out through a state’s municipal corporation and county laws (and to executive agencies by means of enabling acts of authority).  Reading the municipality laws reveals authority for a defined territory, large or small and often referred to as a community, to elect a governing body, establish courts, make laws and ordinances (rules and regulations), enforce laws, have courts, have a police department, establish fines for violations, have a jail, and to assess residents and collect taxes.  All under the approval and oversight of the state legislature.  These subdivisions are also known as state entities, public bodies or arms of the state.

We must first, once again, decide if HOAs are state actors and arms of the state like any other municipality, or are they just private nonprofit corporations. If found to be a state actor, the 14th Amendment applies and no further investigation into the constitutionality the delegation of legislative authority is necessary.

HOAs as state actors

Let’s start anew and compare state constitutions and city/town charters with the duties, powers and functions of the homeowners association governing body widely set forth in its declaration of conditions, covenants and restrictions (CC&Rs). The CC&Rs declares and defines the authority for the HOA to act in certain manners. We can easily see almost identical powers and duties with municipal corporations, far more so than can be found in a business charter, as CAI like to argue, or in a nonprofit charitable organization, or in a professional association, or in a trade association, or in a union charter, or in a for profit property management service business.

Seeking, attaching and using special meanings to common everyday words and concepts to fit a square peg in a round hole, as the pro-HOAs forces have made an art form, flies in the face of reality.  CAI likes to argue that assessments are not like taxes, that fines are not penalties for violations, rules and regs are not ordinances, etc. Dismissing these special definitions, HOA CC&Rs are almost identical to municipal charters of authority, which becomes quite apparent when we strip away these contrived definitions of words and look and the total picture that reveals the entire intent of the CC&Rs.  And that’s to govern the subdivision or community, to regulate and control the people within the subdivision.

In effect, HOAs are de facto political governments.  I choose the description of HOAs as a political entity and not a quasi or mini-government, because it more accurately describes the nature of the governing body – ruling over people in their homes. As I recently wrote,

The policy makers fail to understand that the terms and conditions of the HOA CC&Rs cross over the line between purely property restrictions to establishing unregulated and authoritarian private governments.[1]

The argument has been made that HOA governments are equivalent to municipalities with respect to powers, duties and authority and as such are indeed state actors subject to the 14th Amendment’s restrictions.

 

Unconstitutional delegation of legislative powers to HOAs

We must now address the argument that HOAs are not state actors, but private actors or entities not subject to the 14th Amendment.  We need to determine the legitimacy and constitutionality of these private actors, these private corporations formed under a private agreement. This takes us back to the question raised in the beginning of this paper of the constitutional delegation of legislative authority and powers not to agencies, but to private entities.

(The case where it is believed that there was no delegation to HOAs at all will be addressed below.)

This question of delegating legislative powers, or the non-delegation doctrine, has, like constitutional questions, undergone multiple court opinions resulting in a complex web of: what is the law?  To make things short, my layman’s summary comes down to deference to private entities, because they know better about their business or corporation than does the court.  And if the owners have elected a governing body, then that body speaks for the owners. A prime example of this judicial philosophy that should be familiar to most homeowners is the business judgment rule. The board knows best, unless it can be shown that it has acted unreasonably.

Sadly, the courts have shown less and less concern for constitutional intent and values or in protecting individual rights in favor of a money oriented practicality of efficiency of government — one that favors the privatization of legislative authority.  Yes, I know, confusing and unbelievable, but remember the quote from the Forward in The Restatement, “Therefore this Restatement is enabling toward private government.”[2]  Private actors (unlike the executive branch) have virtually no public accountability, and legislatures may be too busy to address their misdeeds by repealing legislation. Checks and balances and government oversight are of little concern as we are quite familiar with their absence in HOA state laws.

I can hear CAI shouting, way over here, that there is no delegation of legislative powers to private HOAs!  Precisely! There are no enabling acts granting HOAs such legislative powers. That makes CC&Rs and HOAs an unconstitutional usurpation of legislative authority.  If municipal corporations, agencies and private entities must have delegated authority to act, no matter how broad or detrimental to individual rights, then how can HOAs not be outside our constitutional system of government?  Even a state’s most liberal adoption of the home rule doctrine requires allegiance to the state and US constitutions. (See HOAs violate local home rule doctrine and are outlaw governments).

Our government cannot look aside and ignore this assault on the foundations of our system of government!  We cannot tolerate everything goes, especially self-anointed political governments.

In defense of this unacceptable attitude by elected officials, it can be argued that even though there may not be explicit delegation there is an implied delegation of legislative powers, based on the nature and intent of the state’s HOA acts and statutes. These state laws permit those functions and powers of a municipal government, as stated in above, that regulate and control the peoples within a subdivision, large or small.

(Some states do have a statement of general government interest to overcome any judicial scrutiny as to constitutionality under the 14th Amendment, which can be challenged. The basis is that the statutes also contain serious harm to others.  In Shelly, “the States have denied petitioners the equal protection of the laws and that, therefore, the action of the state courts cannot stand”[3] and that constitutional rights were denied.)

US Supreme Court to address delegation to private entities

The question of the delegation of legislative powers to private entities is now before the US Supreme Court in DOT v. Association of American Railroads.[4]   Stephen Wermiel writes that “The Solicitor General argues that there is no unconstitutional delegation to a private entity because government officials retained control . . .[5]   We know this is not true with HOA statutes.

Wermiel continues,

The Supreme Court must decide if the delegation of authority to Amtrak is an unconstitutional grant of legislative powers to a private entity. To reach that decision, the Justices must decide if the authority given to Amtrak by federal law is legislative in nature, and whether Amtrak is a private corporation or a public entity.[6]

Either way, whether HOAs are de facto political governments and state entities, or are an unconstitutional delegation of legislative powers, they can only legally function as an arm of the state under the restrictions of the 14th Amendment.

References and authorities

[1] See CC&Rs are a devise for de facto HOA governments to escape constitutional government.

[2] Restatement Third, Property: Servitudes (American Law Institute 2000).  The full statement reads, from the Forward: “Professor Susan French [Reporter (chief editor/contributor) for this Restatement] begins with the assumption . . . that we are willing to pay for private government because we believe it is more efficient than [public] government  . . . . Therefore this Restatement is enabling toward private government, so long as there is full disclosure . . . .”

[3] Shelly v. Kraemer, 334 U.S. 1 (1948).

[4] DOT v. Association of American Railroads, No. 12-1080 (SCOTUS).

[5] Stephen Wermiel, SCOTUS for Law Students: Non-delegation doctrine returns after long hiatus.  (SCOTUSblog Dec. 4, 2014)

[6] Id.

CC&Rs are a devise for de facto HOA governments to escape constitutional government

This commentary takes a long look at the validity of HOA covenants and the need for judicial enforcement in order to invoke state action with respect to fundamental rights and freedoms.   It informs the reader that such enforcement depends upon the member’s voluntary agreement to be bound by the declaration, and raises issues of the lack of genuine agreement.  The agreement requirement is not analyzed under contract law, but under HOA law that has been designed to protect the HOA and position the declaration as the supreme law of the HOA community.

Long ago in 1994 Professor McKenzie wrote, “HOAs currently engage in many activities that would be prohibited if they were viewed by the courts as the equivalent of local governments.[i]

Two years after Marsh v. Alabama[ii] — the 1946 Supreme Court opinion setting the misguided “public functions” test for a municipality — the Court specifically dealt with the question of the constitutionality of restrictive covenants.  The issue in Shelly v. Kraemer[iii] was “that judicial enforcement of the restrictive agreements in these cases has violated rights guaranteed to petitioners by the Fourteenth Amendment.”

With respect to restrictive covenant enforcement the Shelly court said:  “That the action of state courts and of judicial officers in their official capacities is to be regarded as action of the State [‘state action’] within the meaning of the Fourteenth Amendment, is a proposition which has long been established by decisions of this Court. . . . The federal guaranty of due process extends to state action through its judicial as well as through its legislative, executive, or administrative branch of government.”   The Court held “that in granting judicial enforcement of the restrictive agreements in these cases, the States have denied petitioners the equal protection of the laws and that, therefore, the action of the state courts cannot stand” (my emphasis).

Unfortunately, the Court chose a narrow view of this issue limiting it to that involving racial discrimination.  A more expansive application of the 14th Amendment can easily be applied to any covenant that violates a member’s rights, freedoms or privileges and immunities as a citizen, but that has not been the case.

The 1976 Florida case, Brock v. Watergate Mobile Home,[iv] directly addressed the question of an HOA declaration and its actions under the Declaration.  It used the Marsh “public functions” test and the additional “close nexus” test (HOA action is closely resembles government action). No state action was found.  The HOA was not like a company town and the state’s involvement, as occurred in the limited context of the case, was not a close nexus.

Please understand that CC&RS and covenants are not automatically invalid or unconstitutional.  It requires a court to declare them so, at the expense of a homeowner lawsuit.  

Also, it is important to note that the court question was not about the validity of a restrictive covenant itself, but the court enforcement of that covenant. (This requires a lawsuit in which the court upholds the covenant and a subsequent lawsuit charging a violation of the 14th Amendment.)  The Shelly court’s view was that as the 14th Amendment applied “only to governmental action, as contrasted to action of private individuals, there was no showing that the covenants, which were simply agreements between private property owners, were invalid.”   Furthermore, “[The 14th] Amendment erects no shield against merely private conduct, however discriminatory or wrongful” (my emphasis).  In Arizona, today, the appellate court is to decide whether a CAI attorney amendment to Terravita’s CC&Rs that directly contradicts state law will be held valid.[v]  Behold the power of private contracts!

In view of the above we can ask, what makes a valid agreement?  Fortunately, a condition was attached to this view, which is never ever mentioned by pro-HOA supporters including those renowned CAI attorneys: “So long as the purposes of those agreements are effectuated by voluntary adherence to their terms.”  Sadly the courts have unquestionably accepted the validity of the CC&Rs as a voluntary agreement and this consent to be bound has become legal doctrine. For example, in Midlake v. Cappuccio the PA appellate court upheld a valid consent to agree by the buyer at time of purchase: “The Cappuccios contractually agreed to abide by the provisions in the Declaration at the time of purchase, thereby relinquishing their freedom of speech concerns regarding placing signs on this property.”[vi]   There have been numerous other cases where the court has upheld a valid consent to agree per se and a waiver/surrender of constitutional rights under said holding.

But, is there a genuine consent to agree?  I have written several commentaries about the lack of a genuine consent to agree as a result of misrepresentation, fraud, half-truths and hidden factors not fully disclosed to homebuyers.[vii]  Certainly not according to contract law 101 with its requirements for full disclosure, a meeting of the minds, and absence of fraud.

Unfortunately, once again, HOA declarations and covenants are seen as a law unto themselves that is based on a cutting and pasting of various laws, including constitutionality law, to provide for the protection and survival of HOAs.  We have pro-HOA statutes in every state and a Restatement of Servitudes[viii] (covenants) that was written to promote and protect HOAs. “Therefore this Restatement is enabling toward private government, so long as there is full disclosure”[ix] (my emphasis).

The Restatement advises judges — and is regarded as precedent — that its collection of laws known as HOA law dominates all others.   Section 6.13, comment a, states: “The question whether a servitude unreasonably burdens a fundamental constitutional right is determined as a matter of property law, and not constitutional law”. Section 3.1, comment h, states: “in the event of a conflict between servitudes law and the law applicable to the association form, servitudes law should control.”

And we have CAI, the national HOA lobbying organization, repeatedly making it clear that the HOA is a city-state, an independent principality, and the decisions of the HOA are the supreme law of the community.[x]  It is easily concluded why CAI has vehemently denied and opposed any reference or declaration that HOAs are de facto governments — mini or quasi-governments — and argue that HOAs remain free from constitutional restrictions on government entities.

HOAs have been institutionalized under this state of affairs, this public policy, and unquestionably accepted as this is the way it is.  Nothing will improve the conditions to which HOA residents are subject unless HOA public policy changes. Public policy today rejects constitutional government for HOAs and allows HOAs to operate outside the law of the land.

The policy makers fail to understand that the terms and conditions of the HOA CC&Rs cross over the line between purely property restrictions to establishing unregulated and authoritarian private governments.

 

References

[i] Evan McKenzie, Privatopia: Homeowners Associations and the Rise of Residential Private Governments, Yale Univ. Press, 1994.

[ii] Marsh v. Alabama, 326 U.S. 501 (1946). The holding was that a company town was no different from a municipal town.

[iii] Shelly v. Kraemer, 334 U.S. 1 (1948).

[iv] Brock v. Watergate Mobile Home, 502 So. 2d 1380 (Fla. 4th Dist. App. 1987). This case was a civil rights violations case based on 42 US 1983 as a result of various acts by the HOA.

[v] Brown v. Terravita, 1 CA-CV 14-455. See Will Arizona allow HOA covenants to dominate state laws? and  Does the Constitution support the will of the HOA no matter what?

[vi] Midlake  v. Cappuccio, 673 A.2d 340 (Pa.Super. 1996) (PA appellate court). .

[vii] See “Consent to be governed, No. 4,” HOA Common Sense: rejecting private government;  Proposed “consent to be governed” statute, the “Truth in HOAs” bill; and court examines consent and surrender of rights in HOA CC&Rs.

[viii] Restatement Third, Property: Servitudes (American Law Institute 2000).

[ix] Id., From the Forward: “Professor Susan French [Reporter (chief editor/contributor) for this Restatement] begins with the assumption . . . that we are willing to pay for private government because we believe it is more efficient than [public] government  . . . . Therefore this Restatement is enabling toward private government, so long as there is full disclosure . . . .”

[x] See CAI: the HOA form of government is independent of the US Constitution;  Misrepresentation: CAI comes with unclean hands and Will the real CAI standup: its contradictory beliefs, pronouncements and goals.