Category: Opinion

The question of statutory and consensual liens that permit HOAs to foreclose on a homeowner for debts, often less than 10% of the home value,  has always been very disturbing to me. I view it as legalized extortion that constitutes a cruel and unusual punishment as a result of the excessive and draconian loss of all the homeowner’s equity.  Especially since the HOA has not advanced any hard cash as do the banks and mortgage companies, where foreclosure can reasonably be accepted as a valid mechanism to protect of the lender.  The HOA is more in the position of a municipality where a resident has failed to pay his taxes, but who has certain alternatives to an immediate wipe-out of his home.

I also view this foreclosure right as discriminatory against homeowners who have paid their mortgage and assessments for many, many years, and who have built up substantial equity. This high equity value makes it more feasible that an HOA foreclosure would indeed return cash to the HOA.  Since the HOA lien is inferior to the mortgage, it can only hope to collect if there is cash in excess of the mortgage that gets paid off first.  And, if there is substantial debt, the HOA does not dare use foreclosure in order to collect delinquent assessments, because it would have to pay off the mortgage or assume the mortgage at the sheriff’s sale.  Even the astute HOA attorneys from CAI have belatedly admitted that this is how the procedure works.  Unless, of course, there’s no need to pay the mortgage company.

So, it came as quite as a surprise when I became aware of an incident where an HOA was able to acquire a condo unit this past September 2009 for as little as $15,000 in the nice town of Fountain Hills, AZ.  (See Maricopa Superior Court,  CV2007-021000).  Leaving aside the question as to why an HOA would acquire real property in its own name, I was intrigued by the most likely condition that the HOA somehow got around an outstanding mortgage.  I could not believe that an HOA would assume or payoff an existing mortgage.  Of course, I realized the small possibility that there was no outstanding mortgage.  My research of the county clerk’s public records showed a $160,000 mortgage dating back only to 2005, and that the mortgage company loan was “extinguished” by the HOA foreclosure. The lender, for some reason, did not bid at the sheriff’s sale and the HOA took possession for the debt owed it, amounting to some $15,000.  Not a bad deal!  Not good for the mortgage company, however.

How could this happen, I pondered.  Did the lender not care anymore?  Perhaps I missed a satisfaction of loan — that the loan was paid off prior to the sheriff’s sale?  No, I couldn’t find any such release, and the homeowner was in and out of trustee sales for the past 2 years, indicating that he had no funds to pay the mortgage off.  However, I did find a release of a prior loan just one month prior to the recording of the second loan of $160,000.  Why didn’t the HOA attorneys uncover this new mortgage that I uncovered within a few hours?  Further puzzling was the fact that the attorney had filed a lis pendens (notice of an impending action affecting the unit) in 2007 that recognized two smaller $8,000 loans, both of which were paid off prior to the sale, but missed the whooping $160,000 mortgage.  How could that be?  My conclusion was that the mortgage company was not notified of the HOA foreclosure.  Or, did I miss something?

I was quite disturbed by this finding since the HOA attorneys of record were well known CAI member attorneys from the Ekmark & Ekmark law firm.  Further disturbing was the fact that these same attorneys were involved in the 2004 HOA foreclosure that had come to my attention where, once again, the HOA seemed to get around an outstanding mortgage. (See Maricopa Superior Court, CV2003-00394).  In this earlier instance, a $96,000 mortgage was not addressed (the deed digits ending in “033”), but a smaller mortgage, made the same day by the same mortgage company, in the lesser amount of some $8,000, was addressed (the deed digits ending in “034”).  The mortgage company had acknowledged to the court that it had assigned this particular mortgage to another company, but had not recorded it, and declared that it had no interest in the foreclosure property.  But, there was no mention of the larger mortgage deed, “033”, in the “no interest” statement to the court, nor was there any “no interest” or satisfaction statement from the assigned mortgage company for the smaller mortgage.  Yet, the court granted the sheriff’s sale and the HOA acquired the property for some $8,000 — there was no mortgage company bid at the sheriff’s sale.  Did I miss something again?

It follows from the above that it is possible for a homeowner to escape his mortgage debt by allowing the HOA to foreclose on his home. He is then in a position to make some deal to reoccupy or re-purchase the home from the HOA for an amount owed the HOA, plus, perhaps, some little “extra”.  Or, the HOA could sell it a nice profit.  Not a bad deal at all!

Caution:  Both court foreclosure orders state:

 The Court reserves jurisdiction to hear, decide and determine any claim for post-judgment attorney’s fees and costs and any other matters that may properly come before the Court.

Community Associations Institute (CAI) is a national organization dedicated to fostering vibrant, competent, harmonious community associations. For more than 30 years, CAI has been the leader in providing education and resources to the volunteer homeowners who govern community associations and the professionals who support them.

Boards also have to operate in the business sphere. . . . Even worse, now that we are in a truly bad economy, boards are even more willing to justify holding the line on assessment increases because “times are tough”. . . . The rationale appears to be that homeowners are struggling, so the corporate association should struggle alongside them. That becomes the political reason during these times, based on apparent sensitivity for the human condition. They are ignoring the business reality of having foreclosures and bad debt than needs to be offset.

Perhaps “political” is not the right word for the third sphere. Perhaps it is “community minded”. Or, perhaps it is “short-sighted”. It is the same view that some legislators have about raising taxes even though it is necessary. They cannot do it because of fear they will look bad to the voters. However, directors have the luxury of being unpaid volunteers. They do not have to campaign or have funds to run for office.

How  long will legislators continue to close their eyes to this betrayal of American values?  How long will they accept the personal agenda propaganda that HOA regimes are good for America, and that the people, of their own free will with explicit consent, agreed to be so governed and to have openly surrendered their individual rights and freedoms?  How long will they follow the path of these self-proclaimed property lawyer philosopher-kings, these legal-academic aristocrats, who believe that that have found the utopian society for land use?   And, in doing so, have subverted the US Constitution! 

I have written about the national lobbying group,  Community Associations Institute (CAI), a business trade group, that actively and vehemently opposes constitutional protections of homeowners’ rights.  I have also written about the comments of the property lawyer “legal-academic aristocrats”, the would-like-to-be philosopher-kings in the Restatement Third, Property: Servitudes, recommending that servitudes law should dominate constitutional law.

The California Law Review Commission (CLRC), in its planned rewrite of the Davis-Stirling Act that governs HOAs/condos, added Chapter 2, Member Bill of Rights, but it was a blank entry marked “reserved.”  Around that same time, 2006, Texas real estate lawyers sought to have Texas adopt a modified version of the national model of the Uniform Common Interest Ownership Act (UCIOA), called TUPCA in Texas.   

This writer, in 2007, called this proposed UCIOA bill of rights a mockery (UCIOA amendments: a pretend homeowners bill of rights).  With the above approach taken by these real estate-property philosopher-kings, it is not too surprising not to find any section in the 2008 UCIOA or UCIOBORA acts devoted to the unalienable Rights of the Homeowner, rights that no government, nor private contract, can remove; and which would  hold the association subject to the 14th Amendment as any other government entity is held.  Or a section on HOA prohibitions.  

Have these legislators ever thought about whether there exists an ideal HOA  constitution that is compatible with the Constitution?  Well, there can be, as I have explored in Part 1 – Is there an ideal HOA constitution?.

Read the complete Commentary, No Bill of Rights.

HOA statutes as indirect government acts and devises that circumvent the Constitution 

Arizona Superior Court Judge Downie, in her decision on the unconstitutionality of OAH adjudication of homeowner association disputes,[i] summarily dismissed the legitimate intent of the legislature to attain a constitutional due process adjudication for homeowners, who sought a fair and impartial hearing of their HOA complaints.

The legislature may have had valid policy reasons for devising a different system for resolving homeowner association disputes. But it appears that the Department of Fire, Building and Life Safety is a mere figurehead or “parking lot” for those disputes.

Judge Downie had said that, in effect, DFBLS was  a devise or a scheme (“a mere figurehead or ‘parking lot'”) to get around the constitutional constraints on the delegation of legislative powers.  However, in her analysis of legislative intent, as part of the four-part Hancock test, she omitted any discussion of the actual intent of the legislature with respect to HOA adjudication, and focused solely on the original purpose to establish the DFBLS agency. In short, she failed to address the intent to modify the agency’s powers in regard to the HOA enabling statutes, summarily dismissing it as a devise.  The legislature’s intent is clearly stated in the Attorney General’s brief (not mentioned in her decision, yet the HOA’s reply to the brief is quoted as part of the judge’s reasoning),

Fourth, as a practical matter, permitting OAH to adjudicate complaints arising from the Community Planning Act is critical to the goal of ensuring compliance with the Act.  Without this remedy, an owner would be forced to go to court even if the nature of the complaint did not justify the time, effort, and expense of going to court or forego any relief from violations of the Community Planning Act. See Minutes of Meeting Before the H. Comm.. on Judiciary on Feb. 16, 2007, 471h Leg. 2nd Reg. Sess. 10 (Ariz. 2007).  (Representative Farnsworth advised that going to court was not an adequate remedy to resolve owners’ complaints against homeowners’ associations); see also J. W. Hancock, 42 Ariz. at 406,690 P.2d at 125 (noting that public policy favored permitting the Registrar of Contractors to resolve disputes between private parties because some disputes “would not justify the time and effort of going to a court”).[ii]

It is well accepted doctrine that there are several general purposes for delegating authority to and creating administrative agencies, and modifying their enabling acts.  The judiciary has long accepted the position that as long as it has the right of review, as in this instance, there is no violation of the separation of powers doctrine  “That the essential attribute of judicial power are retained [by the judiciary] so long as [it] may fully correct agency determinations on the matter of law and overturn unreasonable findings of fact.”[iii]  And, the generally reasoning of,[iv]

1.      The assignment of very limited and specific powers: DFBLS was only to process HOA complaints and forward to OAH for adjudication,

2.      Handling by specialists: ALJ judges specialized in judicial decision-making, which was the extent of the delegation of authority to hear HOA disputes, and

3.      Contributing to  “inexpensive and expeditious” administrative processes (“to avoid the hostility to labor as the courts had then shown”): OAH was a cost effective and amenable procedure — no rules of civil procedure or attorneys —  for resolving disputes; even the less costly (as compared to superior court costs) JP courts were under the rules of civil procedure giving the HOA a decidedly unfair advantage in a very practical manner.

With respect to the delegation of authority itself, in regard to state agencies, a valid intent for delegation had to show “the persons and activities potentially subject to regulations” [homeowners subject to the condo and planned community statutes], “the harm sought to be prevented” [violations of state law and the governing documents], “and the general means intended to be available . . . to prevent the identifiable harm” [DBFLS processing of complaints for OAH adjudication].[v]  Yet, these factors seemed to have escaped the judge’s attention.

 _____________________________________________________

[i] Record Appeal Rule/Remand, Troon Village Master Assn v. AZ. Dept Fire, Building & Life Safety, LC2007-000598, Oct. 2, 2008, Nancy Waugaman, party in real interest.

[ii] The Attorney General’s brief in support of the constitutionality of A.R.S. §§ 41-2198 to -2198.05, Troon Village Master Assn v. AZ. Dept Fire, Building & Life Safety, LC2007-000598, June 13, 2008.

[iii] Allocation of Judicial Power, § 5.1, p. 123, Administrative Law, 2nd ed., (Thomson-West 2002).

[iv] Id, p.118.

[v] Id, The Delegation Doctrine, § 1.2, p. 29, footnote 5.