Author: HOAGOV

This case study involves an Arizona condo concerned about the condo’s finances, and adopts a resolution to do away with the 15-day grace period for the payment of assessments. The November 2009 Mesa Terrace board meeting minutes show that a homeowner objected to the removal of the grace period, but cited the wrong Arizona statute in his argument. The minutes contain the following entry:

The communication was reviewed with the HOA Attorney. He determined that the statute cited was incorrect as Mesa Terrace Condominium is not a planned
community, but rather a condominium association. Different statutes apply.

Statue 33-1242 is the proper statute which applies to Mesa Terrace Condominium and Section 11 and 12 permit the current late fee(s) and late fee(s) procedure currently in effect.

The minutes indicate that a motion was made to proceed with the no-grace period change, and unanimously adopted. There were no other related entries in the minutes.

Now, within 1 hour of being informed of this issue, it was discovered that:

1. The CC&Rs contain section 7.4.1. granting a 15-day grace period on the payment of assessments.

2. The quoted ARS sections in the minutes, related to the powers of the board, and attributed to the attorney, do grant the HOA power to levy assessments and late fees, but is silent on any grace period. Not mentioned in the minutes was any reference to the relevant ARS sections, 33-1255 and 1256, pertaining to assessments and late payments. Neither said anything about any grace period.

3. Given the silence of the condo statutes (the planned community statutes, however, do impose a 15-day grace period) one must look to the CC&Rs for answers. And, as indicated in (1) above, there is a CC&Rs 15-day grace period. Consequently, didn’t the attorney know about this section and advise the board accordingly? Or, did the board ignore the advice of the attorney, if it were given? We don’t know. We don’t have any written advice to request from the board, and as proper board procedure requires, attached to the board minutes as an exhibit. All “according to Hoyle”, all above board.

4. In order for the no-grace period to be valid, the CC&Rs would have to be amended in accordance with the procedure in the Declaration., sec. 12.5, which requires a 2/3 vote of the members. There is no such amendment.

Taking the minutes at face value, it seems that the attorney was providing half-truths in violation of ethical conduct rules, 4.3, Truthfulness to Others. (See my Commentary on this issue of attorney ethics at “HOA ethics: vigorous performance or collusion?”). It is unconscionable and unethical that the HOA attorney gave such half-truths. (Read my comment to the above-mentioned Commentary on failure to obtain written attorney advice).

The attorney appears to be Maxwell & Morgan, CAI member attorneys. CAI is a national lobbying organization dominated by lawyers and management firms, and is a business trade group. It cannot have HOA members. Maxwell is a member of its College of Community Association Lawyers.

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This post is basically a second case study on HOA atttorney – member relations.
Excerpt:

In my email to the Board’s attorney I stated:

“…., I believe you have forgotten that you are also representing all the other Homeowners and myself in Morrison Ranch Estates Homeowner’s Association so your representation should be in the best interest of all Homeowners. It is quite apparent that you are now working (your fees are paid exclusively by the Homeowners) trying to defend the Board members for not following the Bylaws, CC&Rs and Civil Codes that govern us.”

This exchange between a California HOA attorney and a concerned homeowner can be found on the Morrison Ranch Neighbors blog The blog is not the “official” Morrison Ranch HOA website.

Arizona attorney David Dodge raised the question of the extent to which overzealous attorneys can go without overstepping the line. (See Ethical obligations of attorneys to HOA members, and the Dodge article, Fiduciary). Referring to an Oregon appellate court opinion (Reynolds v. Schrock, 2005), Dodge writes,

However, the court said, the privilege of rendering professional services is not absolute, and lawyers should not be free to substantially assist their clients in committing tortious acts. The way to protect lawyers in these cases, the court suggested, was to strictly interpret the common law elements of aiding and abetting the alleged breach of a fiduciary duty, as found in the RESTATEMENT, which requires “substantial assistance or encouragement” by the lawyer.

In layman’s terms, Dodge is speaking about what I simply call “collusion”, or an agreement to get get around the law or the contractual obligations of the HOA board (See definition below). In terms of attorney ethical conduct, I am speaking about ethical rule 4.1. Truthfulness to Others, of the AZ Code of Professional Conduct, Rule 42, shown below. In these “real life” questionable situations, the attorney says that he is acting under the instructions of his client, the HOA board, while the board tell its members that it is acting, “upon the advice of our attorney.” When pushed, the attorney will say, “it’s my job to defend my client to the best of my ability.” It is instructional if I present an actual situation for your consideration as to questions of whether or not any illegal and/or unethical acts are involved.

The facts, as I know them:

1. The Terravita Community Assn in Scottsdale, AZ will vote for two amendments to their CC&Rs. The first is a sweeping rewrite of a 1993, 77 page Declaration, with some several hundred revisions. The second amounts to a number of revisions to a specific section(s) of the Declaration. Why these changes were singled out from all the others remains unanswered.
2. The members had a “redlined” version available for viewing on the Terravita webpage (available to members only), but, as it turned out, it was some intermediary version prepared by the HOA attorneys, the Ekmark & Ekmark law firm, in 1997. It was never adopted, yet was posted to the website. After being given notice, and the membership and Board were also informed, the attorneys said, in affect, “a clerical error”, and posted the correct, valid version of the Declaration.
3. The secret ballot only asked for a Yes/No vote on the two “proposed actions” indicated in (1) above. AZ statutes, ARS 33-1812, require that each proposed action be listed on the ballot, and that a Yes/No vote for each proposed action be contained on the ballot. This statute is quite specific, and its intent is quite clear, as I have presented in the prior sentence. Yet, the attorneys, also having been given notice, as had the HOA board, have not halted the vote or issued a ballot in compliance with state law.
4. The attorneys released a letter to the voters saying that they believe that the 2-choice ballot does not violate the law. No rational was provided. This is what can be called a “black letter” issue where the meaning and intent of the statute is quite unambiguous — quite clear. And there are numerous Arizona cases that have upheld the plain meaning of a statute or contract. What is the attorney’s rationale that the ballot conforms to the statute?
5. Based on a reliable homeowner’s statements, I was informed that the board was asked to obtain a “third-party” opinion from another attorney on the matter, but has refused to so. The board has also refused to halt the vote pending further review, saying that they are acting on the advice of their attorney.

You decide

Based on the above, what is your opinion? Have the attorneys gone too far? Are they just vigorously doing their job according to their client’s wishes? Has the Board acted in good faith, and as a prudent person would? Please read the linked materials and the ethics rules shown below, and then cast your vote in the poll.

References:

Collusion: (Black’s Law)
An agreement to defraud another or to obtain something forbidden by law.

AZ Code of Professional Conduct, R 42,
ER. 4.1 (relevant excerpts)

In the course of representing a client a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third person; or
(b) fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by ER 1.6.

[E.R. 1.6(d), Confidentiality of Information, essentially states that lawyers are now permitted to disclose facts that will prevent or rectify harm done by their clients to others while using the lawyer’s services.]

Comments under the 4.1
[1] A lawyer is required to be truthful when dealing with others on a client’s behalf, but generally has no affirmative duty to inform an opposing party of relevant facts. [This is why you must ask direct questions of the lawyer]. A misrepresentation can occur if the lawyer incorporates or affirms a statement of another person that the lawyer knows is false.
[3] Under ER 1.2(d), a lawyer is prohibited from counseling or assisting a client in conduct that the lawyer knows is criminal or fraudulent.

ER 1.13. Organization as Client
(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
(b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances, to the highest authority that can act on behalf of the organization as determined by applicable law.

“Scott raised doubts about the increasing use of mandatory homeowners’ associations . . . [they] weakened citizens’ connection with their local government; their exclusivity encouraged economic and racial segregation, thus weakening the fabric of American society; and the central role of the developer and the requirement of property ownership  . . . weakened local democracy.”

“Basic criticisms of the FHA-ULI homes association policy are . . . . the assignment of open space, parks . . . bypasses local government [who are] custodians of such property. . . . Any significant inclusion of multiple dwellings appears to be discouraged by FHA policies, and lower-income brackets [renters, perhaps] are viewed as a likely source of special problems.  Policies of exclusiveness [sic] are only thinly veiled as efforts to  ‘maintain high standards’, or ‘insure property values’, or provide a ‘private community.’ [Note the inclusion of the mortgage entity].

 “The automatic homes association and its binding covenant would be designed and established by the developer [sic] before a single house had been sold — that is why they are called ‘automatic.’  Yet anything so important as the life of a community as control of . . . shared facilities is sufficiently affected with public interest to justify a strong public role . . . when the community-to-be is without residents.

For the protection of its own interests, FHA-ULI urge the developer to retain control [sic] of each homes association [and] to exercise a strong benevolent paternalism [like a grandfatherly autocratic government] in determining the composition of the association’s leadership and influencing its policies.  Surely alternative methods can be found for a more publicly responsible stewardship . . . . The 1964 ULI report [The Homes Association Handbook] recognizes some real difficulties in making these ‘private governments’ [sic] work effectively and responsibly.

“The legitimate desire for maximum financial stability and security of the housing developments — viewed as investments —  [read as developer and FHA investments] appears to be given overriding importance that it may obscure other equally important goals [like democratic governance and remaining subject to the Constitution].”