HOA Constitutional Government

Homeowners associations fail to follow solid financial procedures.

AZ Capitol Times, States draw down rainy day funds (excerpt)

(http://azcapitoltimes.com/blog/2009/08/27/states-draw-down-rainy-day-funds/) By Stateline.org Published: August 27, 2009 at 8:01 am

Faced with historic revenue drops, lawmakers in states across the country tapped rainy day funds in fiscal years 2009 and 2010 . . . .

Nationally, this spending [by state governments] comes on the heels of heavy use of rainy day funds in fiscal 2009, when several states pared down their reserves by billions of dollars.

The recent eagerness to draw down reserves has rekindled a long-running debate in states about how much to put into these funds, which in practice exist in all states except Arkansas, Kansas and Montana.

Not all such funds are called “rainy day funds.” Minnesota’s is called a “budget reserve fund,” Louisiana’s a “budget stabilization fund,” and in New Jersey, such reserves are simply referred to as the budget surplus. States typically build up the funds during flush years to prepare for lean years.

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Now, as I’ve argued over and over again, responsible and prudent HOA boards should have established these reserves many years ago. In the corporate world, the equivalent of public “rainy day funds” is referred to as “contingency for bad debts” as described by standard CPA procedures.

Why haven’t they been adopted? Because this prudent managerial act is viewed as a negative, and no HOA negatives are permitted to be spoken, seen or heard Not even by the national lobbying organization claiming to be the educational expert for HOAs, CAI, that uses this contingency in its own corporate financial statements.

I wonder if HOAs were held accountable to the state and were required to maintain reserves under the law, and the laws were effectively enforced, would HOAs be viewed by pro-HOA supporters as, “We got a good thing here.”

 

Wake up Legislatures! You’ve been had! Stop blindly supporting HOAs!

Do CAI member attorneys and lobbyists  Carpenter and Hazelwood qualify for appointment as Judge Pro Tems?

 Carpenter Hazelwood partners, Carpenter and Hazelwood, were appointed as Maricopa County, AZ Superior Court Judge Pro Tems by Presiding Judge,  MUNDELL, Barbara Rodriguez . 

 Recall that CAI, (Carpenter was the CAI chapter’s lobbying co-chair) opposed legislation to level the litigation playing field, SB1162 and HB2724 (2008), bills that would have imposed fines on abuse of process by attorneys at OAH or in the courts.   SB1162 and HB2724 (both defeated, and both attempted to provide effective levels of due process protections for homeowners in terms of fair adjudication by an independent tribunal, OAH) that contained the same litigation reforms as well as a prohibition on HOA “ex post facto” amendments.   Ex post facto laws are prohibited by the Constitution, which is not applicable to HOA governments. This bill would have brought HOA justice into line with the Constitution. 

 And, after 2 years of litigation,   Nancy Waugaman wins her legal battle that sustains AZ Office of Administrative Hearings (OAH) findings of board error that was based on CAI attorney advice.     From the decision,

 First, the Association’s interpretation renders meaningless the phrase “total voting power” or, at minimum, construes it to mean “votes cost by those present.” That reading is unsupported by both the plain language of the statute and the Association’s actions . . . .

 The original 2007 OAH findings in Waugaman reveals that the board acted on their attorney’s advice: “Following the discussion in executive session, the Board, upon recommendation of its attorneys, passed a Resolution interpreting . . . .”

 The persistent role of the  Carpenter Hazelwood law firm in pursuing these unconstitutionality challenges raised the question of who were they fighting for?  The two separate HOAs?  Or, all the HOAs in Arizona?  This objective of “all HOAs” reflects the interests of the CAI national lobbying trade group: that of keeping constitutional protections away from homeowners in HOAs. 

 “In the context of community associations, the unwise extension of constitutional rights to the use of private property by members . . . .”  (CAI amicus curiae brief, p. 19, to NJ appellate court in Twin Rivers HOA free speech case).

 Will these CAI member attorneys best serve the interests of the judicial system, of justice, and the people of Arizona?  Let Presiding Judge Mundell know how you feel!  (See Waugaman-Carpenter).

  For more information . . .

 the complete document sent to Judge Mundell –  Waugaman-Carpenter

 The initial Waugaman and Merrit v. Phoenix Townhouse filings, with links at

The State of Arizona will not protect buyers of HOA homes!

 With respect to the default ruling in Merrit (in chronologial order):

Intervenor files for justice in OAH constitutionality case

Intervenor motion denied in OAH fair trial constitutionality case

New facts in HOA constitutionality due process case

Judicial integrity: support Constitutional protections or the New America of HOAs

Actions by AZ judge in HOA constitutionality case found ethical

 

Protecting HOAs and protecting individual liberties: Two state supreme court holdings

Addendum  A.   Cohen v. Kite Hill Community Assn, 191 Cal. Rptr. 209 (1983)

 It is interesting to note that even in California the rights and freedoms of individual owners in associations were placed on a higher level than in the Villa holding (see above post link), some 21 years later.  What changed?  The state laws governing HOAs were not established as a separate set of laws in 1983, and recourse was made to corporate and other civil code statutes.  That changed just 3 years later with the adoption of the Davis-Stirling Act in 1986.

 In reading Cohen, there is only one reference to state laws, and that pertained to contract law, Civ. Code § 1668.  Otherwise, legal doctrine and contract law were applied with respect to the question of the valid enforcement of board duties and obligations under the CC&Rs.   

The homeowner complaint read:

 Plaintiffs’ complaint alleged that the Association and its architectural committee, in approving the [homeowner’s] construction plans, had: (1) breached the covenants contained in the Declaration; (2) breached their fiduciary duty owed to plaintiffs; (3) breached their duty of good faith and fair dealing; (4) been negligent; and (5) committed “willful misconduct or other intentional conduct.”

 The court reasoned,

 It is a settled rule of law that homeowners’ associations must exercise their authority to approve or disapprove an individual homeowner’s construction or improvement plans in conformity with the declaration of covenants and restrictions, and in good faith. . . . [T]he power to approve plans … must not be exercised capriciously or arbitrarily.'”

 In a thoughtful article on Concepts of Liability in the Development and Administration of Condominium and Home Owners Associations (1976) 12 Wake Forest Law Review at page 915, the authors, Hyatt and Rhoads, note the increasingly “quasi-governmental” nature of the responsibilities of such associations. . . . As a ‘mini-government,’ the association provides to its members, in almost every case . . .

 With power, of course, comes the potential for abuse. Therefore, the Association must be held to a high standard of responsibility: “The business and governmental aspects of the association and the association’s relationship to its members clearly give rise to a special sense of responsibility upon the officers and directors…. This special responsibility is manifested in the requirements of fiduciary duties and the requirements of due process, equal protection, and fair dealing.”

 And to the point of the matter,

 Thus, like any government, the Association must balance individual interests against the general welfare. No decision of the Committee could possibly be deemed “arbitrary” as to an individual homeowner if it were based upon a superseding duty to the community at large. The Association’s duty of good faith subsumes an obligation to reconcile in a fair and equitable way the interests of the community with the interests of the individuals residing therein.

 Although the Declaration vests “sole discretion” in the Committee and allows for reasonable variances, their decisions must be “in keeping with the general plan for the improvement and development of the Project,” and of course, must be made in good faith and not be arbitrary.

 And with respect to CC&Rs verbiage to hold the board harmless,

 The law has traditionally viewed with disfavor attempts to secure insulation from one’s own negligence or wilful [sic] misconduct, and such provisions are strictly construed against the person relying on them, particularly where such person is their author.

 Furthermore, it is the express statutory policy of this state that “[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from the responsibility for his own fraud or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” (Civ. Code, § 1668.)

Once again we see the negative effect on individual liberties within the State of California as a result of pro-HOA statutes. Notice how the tone has changed between Villa and Cohen.

This simple example compares the decisions of two state Supreme Courts, California and North Carolina, with respect to their holdings on the validity of CC&R amendments.  In the 2004 California case, Villa de Las Palmas[i], the HOA was subject to the state’s association statutes, the Davis-Stirling Act.  In the 2006 North Carolina case, The Ledges HOA[ii], the association was not subject to the state’s Planned Community Act.  Let’s examine the court’s reasoning in these two holdings.  

 Villas de Las Palmas

The questions we confront in this case are whether use restrictions added to a declaration through an amendment and recorded after a homeowner has purchased an individual unit bind such an owner . . .

 We conclude that under the plain and unambiguous language of sections [of the Davis-Stirling Act] 1354, subdivision (a), and 1355, subdivision (b), use restrictions in amended declarations recorded subsequent to a challenging homeowner’s purchase of a condominium unit are binding on that homeowner, are enforceable via injunctive relief under section 1354, subdivision (a), and are entitled to the same judicial deference given use restrictions recorded prior to the homeowner’s purchase.

 Several provisions of the Act allow for the amendment of the declaration. . . .  “Except to the extent that a declaration provides by its express terms that it is not amendable, in whole or in part, a declaration which fails to include provisions permitting its amendment at all times during its existence may be amended at any time.”

 For the following reasons, we conclude that use restrictions added to a declaration by amendment bind not only subsequent purchasers, but current homeowners as well.

 Plainly read, any amendment duly adopted under this subdivision is effective against all homeowners, irrespective of when the owner acquired title to the separate interest or whether the homeowner voted for the amendment.

 The court also made the additional comments on HOA governance and the application of the Restatement of Servitudes.  Note that there is a clear absence of concern for the protection of individual liberties, and, once again as we have seen by the Reporter’s comments in the Restatement of Servitudes[iii], the presumption of an unwavering and full understanding of the HOA legal scheme and the public’s preference for HOAs.

 The declaration is often referred to as the development’s constitution (see Rest.3d Property, Servitudes, § 6.10, com. a, p. 1969)

 To allow a declaration to be amended but limit its applicability to subsequent purchasers would make little sense. A requirement for upholding covenants and restrictions in common interest developments is that they be uniformly applied and burden or benefit all interests evenly. [restrictions must be “uniformly enforced”] [sic]; Rest.3d Property, Servitudes, § 6.10, com. f, p. 200.).  This requirement would be severely undermined if only one segment of the condominium development were bound by the restriction. . . . This would undermine the stability of the community, rather than promote stability as covenants and restrictions are intended to do.

 [The defendant’s position would lead to the conclusion that] unanimous consent would be needed, which would often be unattainable.  The language of section 1355(b), however, makes clear that a simple majority is all that is required before an amendment becomes effective.

 Subjecting owners to use restrictions in amended declarations promotes stability within common interest developments. . . . We further observed that “anyone who buys a unit in a common interest development with knowledge of its owners association’s discretionary power accepts ‘the risk that the power may be used in a way that benefits the commonality but harms the individual.’

   

The Ledges HOA

Note that the North Carolina court ignores the common law Restatement of Servitudes and looks just to contract law. 

The dispositive question before the Court is to what extent the homeowners’ association may amend a declaration of restrictive covenants.

 We hold that amendments to a declaration of restrictive covenants must be reasonable. Reasonableness may be ascertained from the language of the declaration, deeds, and plats, together with other objective circumstances surrounding the parties’ bargain, including the nature and character of the community.

 Because we determine that the amendment to the declaration . . ., which authorizes broad assessments “for the general purposes of promoting the safety, welfare, recreation, health, common benefit, and enjoyment of the residents of Lots in The Ledges as may be more specifically authorized from time to time by the Board,” is unreasonable, we conclude that the amendment is invalid and unenforceable. [The court is saying that individual, specific amendments is the approach to take, as would be expected under contract law].

 [I]n a community that is not subject to the North Carolina Planned Community Act, the powers of a homeowners’ association are contractual and limited to those powers granted to it by the declaration.  {Obviously, these HOA acts modify contract law for HOAs.  The “why” has never been answered.]

 The Amended Declaration contains substantially different covenants from the originally recorded Declaration . . . .

 The word covenant means a binding agreement or compact benefitting both covenanting parties. . . . A covenant represents a meeting of the minds and results in a relationship that is not subject to overreaching by one party or sweeping subsequent change.

 The existence of definite and certain assessment provisions in a declaration does not imply that subsequent additional assessments were contemplated by the parties, and courts are “‘not inclined’” to read covenants into deeds when the parties have left them out.

 In a community that is not subject to the North Carolina Planned Community Act, the powers of a homeowners’ association are contractual and are limited to those powers granted to it by the declaration.

 Amendment provisions are enforceable; however, such provisions give rise to a serious question about the permissible scope of amendment, which results from a conflict between the legitimate desire of a homeowners’ association to respond to new and unanticipated circumstances and the need to protect minority or dissenting homeowners by preserving the original nature of their bargain.

 The supreme court takes note of the lower appellate court’s reasoning,

[T]hat the plain language of the Declaration is sufficient to support any amendment thereto made by a majority vote of Association members, noting “the declaration provides, ‘that any portion of the restrictive covenants may be released, changed, modified or amended by majority vote of the then property owners within this Subdivision.’

 But provided its opposing views,

 

Respondents contend that the Declaration of Restrictive Covenants expressly permits the homeowners’ association to amend the covenants; thus, any amendment that is adopted in accordance with association bylaws and is neither illegal nor against public policy is valid and enforceable, regardless of its breadth or subject matter. We hold that a provision authorizing a homeowners’ association to amend a declaration of covenants does not permit amendments of unlimited scope; rather, every amendment must be reasonable in light of the contracting parties’ original intent.

 “The law will not subject a minority of landowners to unlimited and unexpected restrictions on the use of their land merely because the covenant agreement permitted a majority to make changes in existing covenants.”

 This Court will not permit the Association to use the Declaration’s amendment provision as a vehicle for imposing a new and different set of covenants, thereby substituting a new obligation for the original bargain of the covenanting parties.

 

 Questions

Which court supports the New America of HOA-land?   Which court supports the constitutional protections of individual rights and freedoms?  Which court relied on those special and separate laws for homeowners associations?

  

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[i] Villa de Las Palmas v. Terifaj, 90 P.3d 1223 (CAL. 2004). 

^[ii] Armstrong v. Ledges Homeowners Ass’n, Inc., 633 S.E.2d 78 (N.C. 2006).

[iii] From the Forward: “Professor Susan French [Reporter (chief editor/contributor) for this Restatement] begins with the assumption . . . that we are willing to pay for private government because we believe it is more efficient than [public] government  . . . . Therefore this Restatement is enabling toward private government, so long as there is full disclosure . . . .”