The HOA legal concept: the defects become exposed

In the recent Carpenter Hazelwood Oct. 30, 2009 eNewsletter,   these self-anointed CAI “elite” attorneys of the College of Community Associations Lawyers (CCAL) argue for more and more legal enforcement against those “nonperforming” homeowners.  This time its “raise those  assessments” to preserve the HOA as promoted, regardless of economic conditions and the realities of addressing the resultant problems.  Earlier it was enforce, enforce, enforce and foreclose on those delinquent homeowners. 
 
 
Are these lawyers true believers in the stated mission of CAI as “a national organization dedicated to fostering vibrant, competent, harmonious community associations”?  Or, are these practitioner-lawyers merely seeking to protect their income streams by means of adversarial enforcement, and by fostering division and hostility?  CAI continues with, “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.”
  

In sharp contrast to the above “dedication”, Carpenter Hazelwood argue,
 

Boards also have to operate in the business sphere. In the legal sphere (where lawyers are most comfortable), raising assessments is fairly black and white.

… The problem is many boards and managers either fail to understand the concept or they fail to consistently raise the ceiling so that assessments can be raised when needed…. 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.
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. Assessment raises should always be fair game for boards, even in this economic environment, or even particularly in this environment. Boards can raise assessments if they think long-term rather than short-term.

 
 
This advice is a short sighted, after the damage has been done approach to governing a community, and a denial of the above stated effort “to fostering vibrant, competent, harmonious community associations”.  Where was CAI with respect to educating HOA boards about “contingencies for bad debts”, a standard AICPA approach to prudently dealing with fluctuating and variable revenues from volunteers, or with declining city tax revenues, or with HOA member dues?   A proven technique that should have long ago been quickly employed in expectation of rapidly falling assessments as a  result of current economic conditions. 
 
No, all these lawyers, not businessmen, can see is raising assessments dramatically by means of unrestricted special assessments.  This detrimental and harmful approach will only accelerate the financial problems of the HOA since these dramatically increased assessments will only produce more foreclosures. And more legal fees for them when the HOA can ill afford to pay.  (If the HOA cannot collect payment on its attorney fees from the homeowner, the HOA is still responsible for payment to its attorney.)
 
As an example of seemingly misplaced loyalties, why is this HOA board pursuing a deficiency judgment against a homeowner who’s home will be foreclosed, and who has a “short sale” listed at $299,900, or some $99,000 “underwater” as its debt is $396,000?  The HOA debt amounts to a mere $2,285.84, as filed by Carpenter Hazelwood.  (See Maricopa County, AZ Notice of Trustee Sale: $396,000, July 9, 2009, recordation number 20090631656). 
 
This action, apparently approved by the HOA board, is astonishing!  Just earlier this year, not only Carpenter Hazelwood but Ekmark & Ekmark (another CCAL member) wrote about the almost zero expectancy of the HOA receiving any money from foreclosure. 
 
 

Under state law, an association’s assessment lien is extinguished when a first position lender (first mortgage) sells property pursuant to the terms of the recorded deed of trust, also known as a trustee’s sale. Therefore, the new owner, usually the first lender in this economy, takes the property free and clear of any junior liens, including an association’s assessment lien.  (Carpenter Hazelwood, eNewsletter Sept. 25, 2009).
“Both the Planned Community Act and the Condominium Act state that a lien for assessments is inferior to any first mortgage or first deed of trust recorded against the property, despite what the association’s declaration may provide. Once the first deed of trust is foreclosed, the association’s lien is wiped out and the new owner (whether a bank or an individual) takes title with a zero assessment lien balance.” (Ekmark & Ekmark, Homeowners Association Tip of the Week, Oct. 24, 2009).

  
  
What’s the point????   Who will pay for the attorney fees??  Is this the act of a prudent board in these difficult times?  Or, is this a conflict of loyalties by the attorneys, with acquiescence by an irresponsible HOA board?  Is this “fostering vibrant, competent, harmonious community associations”? 
  
Homeowners in HOAs beware.  You can be next.  The “deal” made when you bought your HOA controlled home favors the survival of the HOA, first and foremost, and not the advertised vibrant community with protected property values.  No, the HOA is a communal society and very much like a partnership where all the members are collectively responsible, under law, for the obligations of the HOA.  Those who can pay will pay, and those who can’t pay are “covered” by those who can.  Raising assessments is an option to maintain the same level or services.  The other option is, like municipal counterparts, services and perceived property values just have to suffer until favorable economic conditions return. It is a short-sighted option to foreclose the HOA out of business, or to tax the HOA out of business by raising assessments.
 
 
 
 
 

If HOAs are businesses, then should they be so regulated?

CAI continues its promotion that HOAs are communities,
 
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.
(Note that this quote does not even hint at a homeowner buying a business,  but entering into a  “superior” community.  CAI “About Us” webpage).
 
Yet, CAI practitioner-member lawyers continue to inform HOA boards that they are businesses and must act accordingly.  The most recent and ardent contradiction to the above comes from Arizona CCAL members Carpenter and Hazelwood in their eNewsletter.
 
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.
 
And a direct rebuttal of the HOA as a governing body of a community:
 
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.
  
  
If the misleading CAI promotional statements about community have indeed fallen by the wayside, then I believe that HOA corporations should be regulated as any other business and not as a nonprofit, since they are have a purely restricted, privately targeted basis, and not a public at-large basis — just the members of the particular subdivision. 
Since HOAs sell to the public at-large, however, they are ripe for regulation under small stock offerings, with all those bold, red-lettered, large font cautionary warnings about the downside of buying into the HOA real estate business. (The offering is referred to as the Red Herring prospectus).
 
 

HOA property lawyers do not reognize constitutional law

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 – Part 1

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.

HOA statutes as indirect government acts – Part 2

As a second thought, I wonder how Judge Downie would rule on the constitutionality of the entire CC&R legal scheme?  Where covenants are embedded in the common law of equitable servitudes running with the land, and where private parties are permitted to trespass upon constitutional rights and freedoms.   Would she rule them to be a devise to circumvent the US Constitution? Or would the Judge permit the State to do indirectly what it could not do directly?[i]  By allowing and permitting these private “contracts”, isn’t the State doing an end-run around the prohibitions and restrictions of the Constitution on government entities? 

 

Let’s examine how this indirect circumvention works.  In constructing and interpreting laws, the terms “shall” and “may” are clearly defined to distinguish a State mandated act from a discretionary act by the actor.  In many HOA statutes one find’s the term “may” when pertaining to an act of the board, such as when issuing fines.  In a few instances the term, “shall not” is used to prohibit an action, such as “the association shall not impose a fine . . . .” (ARS 33-1803(A)).  In a few instances the legislature does mandate a legally binding condition when it defines or declares an event, such as, “The association has a lien on a unit for any assessment when . . . .” (ARS 33-1807(A)).  However, the term “may”, although not prescribing a mandatory act or action, does carry a legal construction or interpretation that  “denotes permissible discretion[ii]“, and “‘May’ is permissive and confers a privilege or power. Normally the use of ‘may’ implies discretion or permission.[iii]“

 

Now, under the Ninth Amendment to the Constitution, rights not enumerated are “retained by the people“, and under the Tenth Amendment, the powers “are reserved to the people” if not delegated to the federal government or prohibited by the States.  The people have the power, and retain undeclared rights.  Often, when a dispute arises to challenge and clarify the legality of an action by the people, like, can an HOA fine a member, it often falls to the legislature to issue its standing on the matter, and either declare the act legal or not legal.  When the statute contains the word “may”, then the legislature is pronouncing the act or action as being not illegal, as consistent with the general good of the people and consistent with good public policy.  Otherwise it would use the term “may not” to prohibit and to declare the act illegal.  In other words the legislature has sanctioned or “blessed” the acts of private parties as legal by the very nature of the use of the term “may.”  (Similarly when a court rules that the act is not illegal).

 

Thus, the use the term “may,” in regard to discretionary board actions within a statute,  regulates who can or cannot behave, and/or the what or how-to of that behavior. In doing so, the legislature has declared the act not to be illegal, and not to be a violation of the Constitution (all statutes are presumed constitutional).  And, therefore, in the broader, cumulative picture, the legislature has declared that these private CC&R “contracts” are valid.  The legislature has declared that these bona fide governments, obviously not recognized as such by the State, yet functioning with more authority than granted to many incorporated villages and towns, are permitted to do what it, the government, cannot do directly.  HOA regimes are the surrogate entities of the State. The legislature has allowed and permitted these private agreements to circumvent the US Constitution.[iv]   The legislature could have said “may not.”  

 

In answering the question posed earlier, Judge Downie would not declare HOA private constitutions as a devise to circumvent the Constitution!  Judge Downie would allow the legislature to do indirectly, by means of sanctioning HOA statutes, what it cannot do directly under the prohibitions of the US and Arizona constitutions.

 Qui Pro Domina Justitia Sequitur  (“who prosecutes on behalf of Lady Justice”, DOJ seal)

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[i] Elrod v. Burns, 427 U.S. 347 (1976), “Since the government, however, may not seek to achieve an unlawful end either directly or indirectly . . . .”

[ii] Preamble, Arizona Rules of the Supreme Court, Part VII, R. 81 (2006).

[iii] “Use of Shall, Must  and May”, § 5.31, Arizona Bill Drafting Manual (2009) (Oct 11, 2009).

[iv] This is the greatest fear that evokes the strongest reaction from pro-HOA supporters, especially the national business trade group, CAI, whose members have immense influence and control over these private governments. The admission that HOA regimes are political governments and/or state actors is feared by CAI as a slippery-slope path to the severe curtailment of their power over HOAs, subjecting them to state accountability and oversight regulation.