HOA Constitutional Government

California attorney Tyler Berding writes in the April 2010 Executive Council of Homeowners’ (see note 1) ECHO Journal, “Bankruptcy Won’t Work,” about “the practical and legal reasons why associations almost never go into bankruptcy.”  Essentially, Berding informs his readers that the HOA is communal, like a partnership, where all “partner-members” are responsible for the debts of the HOA “partnership”. Didn’t anybody tell you that before you bought your home? Or that your home is collateral for the survival of the HOA?

He correctly maintains that because the HOA has “deep pockets”, the pockets of its individual members, jointly and severally, the pursuit of a bankruptcy is not rationale. The judge will assess the remaining solvent homeowners to ante-up to pay all the debts of the HOA. One could say it’s one of those undisclosed pitfalls of HOA ownership. Pursuing individual homeowners who haven’t the means to bail the HOA out of its financial crises is just a fruitless undertaking by the members, who still do not want to accept the failure of the HOA legal structure to protect their individual assists. They have been blinded by the false propaganda of “the voice of the community” thinking that “community” means their own individual interests,  and do not see the communal nature of their HOA membership.

Berding does not mention that the failure to budget for bad debts, a standard accounting practice, reflects poor management by the HOA board, and its advisors (although he admits to understanding the meaning of “assessments for bad debts” below). Failure by incompetent boards and its advisors to act in a prudent manner, as required under law, is another inherent fault, another deficiency, within the structure of the HOA concept.

You can’t be successful in mass merchandising HOAs and getting all those people to buy if you bring up these serious financial negatives. Or to get the legislatures and planning boards and local governments to enthusiastically support and encourage HOAs if you bring up any negatives, can you?

Here are some of Berding’s messages from the ECHO Journal:

Ironically, it is not unusual to find that an association’s largest “creditor” is itself. The failure, year after year, to make reserve transfers creates unfunded liability and makes it impossible for the association to effect repairs when the time comes. . . . . The fact that some owners don’t pay their share of what their association owes to a creditor is not enough. That seeming shortfall becomes an internal debt to the association, which is in turn simply spread again across all owners in the form of assessment increases or emergency special assessments, until the creditor is paid in full. The ability of an association to pay its obligations is as deep as the combined equity of all property in the community and the assets of all of its members. This makes bankruptcy not a feasible option for associations.

“For all of these reasons, a bankruptcy filing will not normally be considered a remedy available to a community association. There would have to be no equity available in property in the community, and each individual owner would have to file his or her own bankruptcy petition for that to be effective as against the association’s creditors. That’s simply not going to happen or ever be a permanent situation. As owners walk away from property and mortgage holders take it back, the banks become responsible for the next round of assessment shares to pay the creditor. Lender foreclosures wipe out mortgages and create new market equity in property. Owner bankruptcies, even if pre-petition assessment debt is discharged, won’t address post-petition rounds of assessments for bad debt as they’re spread across all owners. Shares may slowly contract and debts can be negotiated, but the principle that the obligation is shared by all remains.”

Notes (emphasis added)

1. The Executive Council of Homeowners (ECHO) is a nonprofit membership corporation dedicated to assisting California homeowners associations.

“The mission of ECHO is to advance the concept, interests and needs of homeowner associations through education and related services to board members, homeowner members, government officials and the professionals in the industry.”

Please pay attention to the contradiction in the mission statement of ECHO above. Do they speak for the homeowner members or for the HOA boards? Anyone with anyone knowledge of the legal structure of corporations understands the “class” distinctions between management and owners. With respect to HOAs, the attorneys are careful to state that the HOA attorney’s client is the HOA, as represented by the board through its president, and not the class of individuals who are owner-members. To state that the HOA board represents the interests of any individual homeowner, or even the entire class of owners is a false and misleading statement. The statutes and CC&Rs do not grant the HOA board the authority to represent the interests of the membership before public entities.

Its name is misleading and should read: The Executive Council of Homeowners Associations,  ECHOA!

Once again, the necessity of obtaining an attorney to read and explain the
legalese of those CC&Rs or declaration cannot be overstated! Why? Because
Arizona government agencies do not protect home buying consumers!

With respect to the transfer fee demand by the Montelena HOA on a buyer to
pay a whopping $2,500 fee to the association (see Homebuyer: HOA
‘Unscrupulous’ In Raising Fee), let’s examine what the buyer would be
getting into. First, and highly questionable and undemocratic, the 440
members of Montelena HOA have unwittingly agreed to have the board, by
majority vote, to set forth rules that become and are held to be amendments
to the CC&Rs, without a vote of the membership (see Article 5.3 of the
CC&Rs). Generally, it usually requires a supermajority vote of the members
to amend the CC&Rs.

Furthermore, buried within Article 6 of the CC&Rs, titled “Membership and
Voting”, are sections 6.8 and 6.9 that require a new owner to pay 2 fees,
both equal to 1/6 of the then current annual assessment, as contributions to
the annual assessment and to the Reserves assessment. And, surprisingly,
section 7.15 allows an additional third fee, a transfer fee, designated as
such, imposed by either the board or the management company. How many fees
is that on the third-party buyer (as such, he is not a legal party to the
CC&Rs agreement). Article 8 grants the HOA the right to lien and foreclose
for nonpayment of assessments. On the third-party buyer, too?? (The buyer
must agree under his purchase contract with the seller, not the HOA, to
assume these assessments in order for the assessment to be binding on him.)
Under section 7.2, Annual Assessments, the board cannot increase assessments
above 20% without a 2/3 vote of the members. Section 7.8 says the
assessments must be uniform across all members, raising the issue that a
transfer fee on sellers alone violates the CC&Rs. (Note that transfer fees,
by whatever name, have been outlawed by new law this year, HB2768).

The public should be protected and made aware that there are so many powers
granted to the HOA or denied to the homeowner hidden within these 50 – 120 page legal agreements. Agreements, by law, that do not even have to be seen, read or acknowledged in order to be binding on unsuspecting homeowners. The real estate agent who is required materially disclose all information and to treat all parties fairly under the simple R. E. Commissioner’s Rule, R4-28-1101, is allowed to ignore this rule. Furthermore since the Arizona Constitution allows real estate agents to to real estate transactions, an additional duty to protect the buyer has been placed upon the agent.

Now, it is not unreasonable to argue that a prudent person buying, for many, their largest asset purchase would consider the above representative covenants as material to his decision to purchase in a particular HOA, or in any HOA. And, it is not unreasonable to argue that the real estate agent is duty bound to provide such material information to the prospective buyer, and that the real estate department, in keeping with R4-28-1101, would have promulgated guidelines and procedures in order to make this material disclosure a meaningful and effective rule. The rule has been ignored by ADRE with respect material information about HOAs.

Last month, in regard to another failure to protect a homeowner from HOA abuse (see Who prosecutes for homeowner justice against HOAs?), I wrote to the Arizona R. E. Commissioner, asking:

Who will protect homeowner justice against HOAs?   I ask ADRE why is it not adhering to its mission, as stated in its pamphlet, ‘The Arizona Department of Real Estate (ADRE) protects the Public Interest through Licensure and Regulation of the Real Estate Industry in Arizona’ . . . . Who, then, will protect the public interest if not the licensed real estate agent under ADRE regulation?  I call your attention to Commissioner’s Rules, R4-28-1101, Duties to Client.

A reply by the Assistant Commissioner side-stepped this questions posed above with a “not my job” reply:

We have been given no authority to adjudicate disputes between HOAs and its member-homeowners. The separation of powers doctrine places this adjudication role in the hands of the courts, not in the hands of the
executive government.

I clearly did not ask that ADRE adjudicate disputes, but to enforce R4-28-1101 and to stand behind its mission to protect consumers, all consistent with the existing delegation of powers to ADRE and to the Commissioner.

Qui Pro Domina Justitia Sequitur

(“who prosecutes on behalf of Lady Justice?”, DOJ seal)

Editorial comment. I suspect, like this year’s new law, HB 2774, “Take That George!” bill (my description), that explicitly states that government officials cannot be compelled to defend statutes, another bill, “Take That George, redux,” will be proposed that would explicitly say that ADRE cannot be compelled to provide consumer protection to buyers of HOA controlled property.

In the words of Jim Wallis, preacher and author of Rediscovering Values, “What has been deliberately and carefully made ‘socially acceptable’ was, not too long ago, thought to be irresponsible – both financially and morally.”