Category: Opinion

Posts by GKS

HOA ethics: vigorous performance or collusion?

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.

Contemporaneous critique of the 1964 FHA-ULI homeowners association model

In 1967, just three years after the ULI publication of The Homes Association Handbook, Technical Bulletin #50 [for an anlaysis of this bulletin, see n.1]  (which I have repeatedly designated as the “HOA bible”), a Univ. of Calif. Public Affairs Report criticized the concept or model of a homes association [n. 2], as HOAs were called back then.  The value in looking back is that after the passage of many years there has been the inescapable slow, but steady, erosion of the values and attitudes that once were. Looking back, we can see more clearly what was gained, and what was lost.
 
First, here’s a quote from what the editors of the 1994 book, Common Interest Communities (see n. 2, containing a reprint of the article) wrote:
 
“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.”
 
Scott is concerned with the privatization of government by profit seeking developers who bypasses local government.
 
“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].” 
 
In this 1967 article, Scott concludes with, “Associations are not the final answer.  We should not be satisfied —  as FHA and the Urban Land Institute appear to have been — with the assumption that home association provides a final answer.”
 
 
We should ask ourselves what has happened over the past 43 years since this 1967 report.   Why weren’t corrective measures taken by state legislatures to recognize HOAs as indeed de facto governments, and that they must be made equivalent to a public entity?  To what extent did the creation of the Community Associations Institute (CAI) in 1973, just 6 years after this the publication of this report, have on future developments?   Many of us who are interested in the facts can see how CAI influenced legislatures as they re-constituted themselves as a national lobbying organization in 1992 to oppose the voices of reform.
 
 
 
Notes
1.  The Foundations of Homeowners Associations and the New America, “Part I, The Mass Merchandising of Planned Communities”, George K. Staropoli, 2006. 
 
2.  “The homes association: Will ‘private government’ serve the public interest?”, Stanley Scott, Public Affairs Report, Bulletin of the Institute of the Governmental Studies, Univ of Calif., Berkely, Vol. 8, No. 1 (1967).  Reprinted in Common interest communities: Private governments and the public interest, Stephen E. Barton and Carol Silverman. eds, Institute of Governmental Studies Press, Berkeley, CA, 1994.

HOA debt collection practices

Let me say right at the start that my non-lawyer research into homeowner association lawyers as debt collectors was very productive. The attention of attorney generals, the courts, and state legislatures needs to be directed to fully investigate this area, because the existing laws, designed to protect consumers from abuse, fall quite short when it comes to HOAs with their laissez-faire and free-wheeling acts not accountable to the state. And that includes their adhesion “contracts” favoring the HOA. The consumer members of the associations need heightened protections.

HOA member debts have been declared consumer debts under FDCPA (Fair Debts Collection Practices Act), and attorneys who regularly collect debts are debt collectors. Generally, however, the HOA is not seen as a debt collector. While state laws may exempt attorneys as debt collectors, but not, as Arizona statutes state, “when engaged in the regular course of their respective businesses” — that’s when practicing law not when collecting debts as many lawyers clearly state on their dunning letters and websites. CAI attorney Maxwell was acting clearly as a debt collector in the 1999 Arizona Caron v. Maxwell case, but the HOA was not so acting.

So, what can and cannot debt collectors do? First, it appears they can add attorney fees if the law or member-HOA agreement allows it. And they generally say so, but to the HOA not to the attorney! Is it legal for an attorney to say that the debtor owes the attorney the money, directly, or that continued disputing of the debt will result in increased attorney fees? I wonder. How does the attorney really know that the debt is correct? It seems from my experience, many attorneys just take the word of the HOA or its management firm that the debt owed is valid, and that the amount is correct. I have seen claims where the HOA or it management firm rejects checks without offering any justifiable reason. Or that the board will not talk to the debtor, sending him to the attorney, and the attorney says to the debtor, “You are not my client go away” Or the attorney is not compliant with the debtors questions for info, yet keeps tacking on attorney fees.

What does the law have to say about debt collector conduct? Let’s look at some of the Arizona statutes and Arizona Administrative Code governing Collection Agencies, as a representative example (emphasis added),

R20-4-1518: A collection agency’s records shall document each client’s account in writing. The records for an account shall include either a written agreement between the client creditor and the collection agency, or a written direction from the creditor to the collection agency concerning a specific debt placed for collection. . . . The records for an account shall separately state: . . . 2. The terms or rate of compensation paid to the collection agency . . . .

R20-4-1521. A collection agency shall give copies of its evidence of the debt to the debtor or the debtor’s attorney on request. After providing the evidence, but before continuing its collection efforts against the debtor, the collection agency shall investigate any claim by the debtor or the debtor’s attorney that: 1. The debtor has been misidentified, 2. The debt has been paid, 3. The debt has been discharged in bankruptcy, or 4. Based on any other reasonable claim, the debt is not owed.

Under the statutes, ARS 32-1001 et seq., the agency must provide the debtor, upon request, with copies of any document relevant to the debt or its collection. The debtor also has the right of access to the collection agency’s books and records regarding the debtor or the debt. The collection agency has a duty to investigate debt disputes if the debtor has a reasonable claim that s/he does not owe the debt.

What is particularly disturbing is the attorney’s activity for collection of fines as a reslut of a violation of HOA rules or documents, when the attorney well knows that the member is not given his day in court to contest the alleged violation. As we know, including the attorney, all the HOA is obligated to do is, “upon an opportunity to be heard.” Period! While the attorney is acting in the capacity of a debt collector and is obligated under R20-4-1521, he still is an attorney, and has the the further duty under the Rules of Professional Conduct and Rule 11(a) of the Civil Procedure to conduct a reasonable investigation into the alleged violation.

The relationship between the HOA/management firm and the attorney-debt collector must be subject to proper investigation by the appropriate authorities, the attorney general, finance department who regulates collection agencies, or the legislature, and necessary corrective actions taken.

Ethical obligations of attorneys to HOA members

James Hazlewood, a partner in Carpenter Hazlewood, in his gratuitous instructions on how  to institute homeowner association transfer fee charges  (CH enewsletter, Oct. 23, 2009, “Resale Amendment”), justifies the imposition of an HOA transfer fee by claiming that it applies equally to all members who happen to sell. He fails to recognize that the transfer fee does not apply equally to all members.  This concern is important since the transfer fee does NOT  apply equally to all members within the annual or special assessment period, but only to those who happen to sell that year.  Simply put, those who sell in any year are assessed more that other members who did not.  Is this a valid reason to create this separate class of members?  
 
 
Further disturbing in Hazlewood’s enewsletter is his gratuitous advice that goes beyond a lawyer’s neutral stance of providing legal advice to clients, but amounts to advice one would receive from a management consultant on how to raise money.  Hazlewood advises the board 1) to make the fee an assessment, making it a lien, and the escrow company must collect the payment or the house won’t sell, 2) that the seller can put into contract that the buyer must pay the fee, failing to mention that the buyer can always walk and there goes the sale, and 3) that although this transfer fee would require a CC&R amendment, not to worry since the homeowners are all for it. 
 
 
This advice amounts to, in my opinion, unconscionable legal and ethical advice.  First, it seems to have the smell of extortion by the HOA:  the homeowner will pay because he has been put under duress, otherwise he will suffer the financial consequences of not selling.  Second, the validity of the transfer fee rests on a vote of a separate class of members who benefit from the imposition of the fee on the other class, which will not benefit from this fee and who are no longer in the HOA.  Third, it can be seen as restriction by a private group on the free transfer of real property between the seller and a third-party buyer.  How would you like it if the HOA, to raise funds as a result of its incompetence,  decides to charge an entrance fee, a toll, on all visitors, but not the owners?  Can be done.  All legal mechanisms are in place, just a vote of your neighbors is needed.  The courts have repeatedly upheld almost any amendment that simply adheres to the CC&Rs amendment procedures.
With regard to the gratis advice given by Hazlewood to the public above, and not exclusively to clients, David D. Dodge wrote about the ethical obligations of attorneys (E.R. 1.13, to clients,  and E.R. 4.1, truthfulness to others) to the members of their client organizations.  This should be a bold red flag when it comes to clients with members in a mandatory association with compulsory dues — HOAs with broad powers equivalent to governments.  In the June 2005 Arizona Attorney, “Derivative Liabilities a Danger”, a State Bar monthly for lawyers, Dodge cautioned lawyers:

“What appears to be happening is that courts are finding more direct paths to holding lawyers liable to the people whom their fiduciary–clients injure when those lawyers have substantially assisted the breach of the duty violated.” 

He continues with,

“What should concern us is the apparent expansion of classes of non-clients to whom a lawyer can be liable, even in situations in which the client is not acting as a fiduciary.”

Dodge further warns the lawyers that under E.R. 1.6, “they can no longer hide behind the claim of confidential information.  He informs the lawyers 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”.

Read the Dodge article at Fiduciary.

HOA secession is not bad, advises CAI attorney

HOA attorney Scott Carpenter, a long-time Arizona CAI member, lobbyist and Chair of its Legislative Action Committee, states on his new blog that these are his personal views, yet the blog contains his firm’s imprimatur, “Carpenter, Hazlewood, Delgado & Wood blog”, and Carpenter still remains the CAI LAC chair.    Can a public figure make such a declaration and in all honesty expect the people to believe it?   That would be like a member of a campaign staff claiming to make personal comments, so the candidate can disclaim any responsibility as to shared beliefs.  Must we now ask CHDW and CAI whether or not they agree?  “Could you clarify any differences of view?”
 
Last year, Arizona Rep. Nancy Barto attempted to get her bill that public roads belong to the public, and are not under the control of a private HOA regime, into law.  This session, she re-introduced this very important bill, HB 2153, that has constitutional ramifications: can we allow secessionist private HOA governments, not subject to the 14th Amendment restrictions and protections of individual rights, to control public streets and set the equivalent of municipal ordinances?
 
Attorney Carpenter seems to thinks so.  Not being able to find applicable justification under the law, he must find a reason under “an extension of law” and resort to philosophical beliefs, beliefs amounting to serious political and social changes, that a privatization of government functions, not services, is not bad.  He writes in “Authority over the Roads”, “There is no philosophical reason or justification for why the ability of a planned community to exert “authority” over an area “dedicated to a governmental entity” is bad after the developer is done but is acceptable before.”   Don’t be confused by the concern for the developer’s role.  Carpenter is just mucking up the issue.
 
The answer to his concern about developer privileges is a resounding, Yes, it is an undemocratic grant of special privileges and immunities to the developer!  But, that’s not the real issue.  The real issue is that there are fundamental philosophical reasons against this granting of government powers, and Carpenter’s implied “innocence” of constitutional law is disgraceful!  
 
 
He then makes a carefully crafted statement, posing it as a conditional statement, but in reality is a false statement of fact: “If a planned community has a contract with a governmental entity that provides for the planned community to maintain landscaping on government property, why should that agreement be voided?  Why is that bad?”   He well knows that the legislature has not delegated authority or has permitted a grant of a franchise to HOAs. 
 
In his argument, he bypasses the issue of the constitutionality of a statute that delegates legislative powers to a private entity. Article II,Declaration of Rights, Section 13, Equal Privileges and Immunities, of the Arizona Constitution is quite clear on the matter: “No law shall be enacted granting to any citizen, class of citizens, or corporation other than municipal, privileges or immunities which, upon the same terms, shall not equally belong to all citizens or corporations.”
  
HB 2153 puts a small stop, but nevertheless an important stop, to the unconstitutional encroachment of the Arizona Constitution by these private governments, who, by the very nature of not being subject to the 14th Amendment, have seceded from the Union.