The following is taken from page 5 of  “THE MASS MERCHANDISING OF PLANNED COMMUNITIES:  HOW AMERICANS  LOST THEIR CONSTITUTIONAL & PROPERTY RIGHTS”, August 31, 2006, which is an analysis of THE HOMES ASSOCIATION HANDBOOK, Urban Land Institute Technical Bulletin #50, 1964 (This publication can be obtained from the Research Department of ULI for a  cost of about $180). 

It is Part I of the unpublished THE TRUTH ABOUT THE EMERGENCE AND QUIET ACCEPTANCE OF PLANNED COMMUNITES AND HOMEOWNERS ASSOCIATIONS  (See http://pvtgov.org/pvtgov/downloads/HOA_truth.pdf, 2006, viewed Dec. 10, 2007).

In this manner, the Handbook set the stage for HOA local autonomy which the courts have repeatedly upheld over the US and state constitutions  (See Constitutional Local Government eEditorials, December 2007).

 

The Necessity for Covenants Running with the Land 

TB#50 makes it very clear in Chapter 1 that the homes association, by definition, is tied to covenants running with the land:

[W]e have taken the position that no organization is a homes association unless provided for, in some manner, in the covenants, deeds, or other recorded legal documents which affect title to the land within the development.”[1]

[T]he right to membership in such an association is automatic [mandatory in today’s jargon] for every home owner because it cannot be withheld from an owner whose land is charged with the obligation to pay its assessments.”[2]

This bible for creating planned communities impresses upon its readers that the community’s source of income is from maintenance funds, the assessments, that are legally levied against the land by recorded covenants, which bind each and every owner as a lien against the land. Numerous pages then explain and inform of the necessity for properly worded covenants that run with the land be part of the recorded declaration in order to make the association’s assessments on these members legally binding. The collection of assessments is the life-blood of the HOA, its source of revenue just as the state collects taxes to pay for its operation.

This obsession with the acceptance and survivability of the planned community dominates any concern for constitutional protections of homeowner rights to the extent that foreclosure becomes a weapon of enforcement against non-payment of assessments. This enforcement tool (for a detailed discussion of foreclosure, see Foreclosure below) is available because,

Fundamental to the legal arrangement for a homes association is the covenant for assessments which must be made to run with the land so that the association can be assured of a continuing, legally enforceable source of maintenance funds.[3]

In this manner, making use of equitable servitudes and covenants running with the land, TB#50 has side-stepped any and all contract law elements relating to a proper meeting of the minds, misrepresentation, proper notice of the covenants and restrictions, sufficient due process with respect to any surrender of constitutional rights. All these issues are easily bypassed by the real estate doctrine of constructive notice, the posting to the county clerk’s office leaving it the obligation of average Americans seeking to buy a home to discover what the had agreed to when they took possession of their new HOA controlled home. Recording the declaration also“establishes a ‘uniform scheme’ of land use . . . which is mutually enforceable among the home owners and by the homes association as their representative.”[4]

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[1] Chapter 1, “Is it a Homes Association or Isn’t it?”,  p.5,

[2] Id, p. 6.

[3] Chapter 23, “Affirmative Covenants”, p. 314.

[4] Chapter 12, “Setting the Legal Foundation”, p. 199.

 The right to create multiple constitutions as a result of allowing almost everyone – the Congress, the President, and state legislatures – to interpret the meaning and intent of the written “contract” between the states and federal government had its beginnings in the early 1800s.  To allow this alternative to the Supreme Court as the sole interpreter would also create as many constitutions as there were interpretations, with the resultant disorder and disarray to the general welfare of the people. 

In these times, we are faced with a rising problem of multiple constitutions as there are unregulated HOA Declarations that create a diversity of restrictions and loss of fundamental rights and liberties.  In the absence of a solid body of law, or resorting to that firmly established body of municipal law, we have witnessed the courts attempting to interpret and define just what homeowners had agreed to in these HOA constitutions long after the date of supposed agreement to unsigned documents.  The courts, in effect, in its elevation and supremacy of “private contracts”, have created binding agreements “on the fly” with the resultant disorder and disarray of individual rights.

Statesman, orator and attorney Daniel Webster (Debates in Congress, 1830, cited in Political Foundations of Judicial Supremacy, Keith E. Whittington, Princeton Univ. Press, 2007) faced this same issue in the 1830s relating to interpretations by the Southern States as to what they could or could not do (the question of slave states vs. non-slave states).  He asked could it be possible to allow for multiple interpretations by “popular bodies, each at liberty to decide for itself, and none bound to respect the decisions of others?”    Could these bodies, HOAs today, be “fit to be called a government? No sir. It should be called a collection of topics, for everlasting controversy . . . . It would not be adequate to any practical good, nor fit for any country [people] to live under”.  Webster summed up his arguments in support of the single Constitution with, “Could anything be more preposterous than to make a government for the whole Union, and yet leave its powers subject to [multiple] interpretations?” 

And, in our world today, those multiple interpretations are the HOA Declarations that are allowed set new restrictions and obligations on individual rights, and without due process under the 14^th Amendment.  These declarations are not founded in new political theories held superior to the theories upon which this country was created, but are founded upon the business profit motives of real estate interests.  The blueprint for the HOA scheme of private governments operating outside the Constitution are based upon the Homes Association Handbook, TB #50, Urban Land Institute, 1964.

Examples of state supreme court opinions holding HOA declarations with their covenants (equitable servitudes) superior to state constitutions can be found in the Texas homestead exemption case (Inwood v. Harris, 736 S.W.2d 632, 1987) where equitable servitudes trumped the Texas Constitution. Also, in the recent NJ constitutional rights case (Committee for a Better Twin Rivers v. Twin Rivers Homeowners’ Association, A-118-122-05, July 26, 2007) where the court reassured homeowners that there’s a good chance that some violations of fundamental rights by HOAs could be found, but not here.

For more information on these cases and equitable servitudes see, Welcome to New America, A Choice for Americans, and the standard common law reference, the Restatement Third, Property (Servitudes).

                          A recent Arizona appeals case relating to insurance policy enforcement reveals great news for homeowners facing HOA foreclosures.  The courts have and will set aside homeownee association foreclosures: “foreclosure sale may be set aside if price ‘is so gross as to be proof of fraud or shock the conscience of the court’”.   But, the homeowner must file a motion to set aside!!!                        

 “Purchasers may enjoy a windfall if, as in the usual case, the sale is not challenged.”  

This case also revealed the predatory practices of real estate speculators who seek and bid on HOA foreclosures to obtain windfall profits, with apparent cooperation from mortgage companies. The speculators involved in this instance are Arizona LLCs, Action Acquisitions, LLC and Free for Now, LLC.   

The brief history: Homeowners lost their home worth anywhere from $300,000 to $400,000 for a trivial $3,500 debt to HOA in 2005. The Purchasers, the 2 speculator firms, purchased the home subject to the $162,000 mortgage.  In other words, the mortgage wasn’t paid off and remains an obligation of the “real” homebuyers, the persons who will be buying the home from these speculators at a windfall price, assuming the house sells as fair market value.  And that is the objective of the predatory speculators. 

The homeowners filed a motion to set aside, and the trial court agreed that the price shocked “the conscience of the court”.  There went the windfall profits and the predators filed for insurance reimbursement under their policies.  The appeal concerned the right of the insurance companies to deny compensation, which they did and the court agreed.

  For our HOA purposes here, the appellate record reveals how these speculators operate [recall that CAI opposed bills to require a fair market sale in HOA foreclosures]: 

[Note 2]. The court explained, “When Defendants bid $3,500 for the purchase of the subject property, which they concede had a fair market value of between $300,000 to $400,000[,] they knowingly incurred the risk that the sale could be set aside as being commercially unreasonable. While they may not have anticipated that the homeowner would take action to set aside their acquisition of the subject property, they knew that their bid was woefully inadequate.”

                         [Author’s comment: This seems to require the cooperation of the mortgage company, or the silent acquisition of the mortgage company, to not offer a creditor bid to protect its loan, and an agreement to accept the purchase as “subject to”.  The mortgage company obviously agreed that the foreclosure purchase was a “steal”, and that there was no risk to them relating it its outstanding debt. I think this analysis needs to be substantiated by an attorney.] 

[The record continues]. Purchasers argue they are in the business of bidding at sheriff’s sales on homes that are foreclosed upon by homeowners’ associations due to unpaid assessments. Usually (and in this case), Purchasers bid on homes without seeing them and without knowing of any liens that might encumber the properties. They asserted on summary judgment that in the three-month period surrounding the transaction at issue, they made 17 such purchases. P. 13. 

[note 8]. Purchasers offered evidence of some of their successful bids; they acquired most of the homes for bids of only $3,000 to $6,200.  

Indeed, Purchasers’ counterclaim sought $400,000 in damages, which they contended was the value of the home they lost. Under their view, without having to bother with improving the home, finding a buyer or negotiating a full-value sale, Purchasers would receive insurance proceeds equal to the full cash value of a home they had purchased for only a small fraction of that amount.  

[note 9]. Purchasers’ damage demand apparently did not take into account the $162,000 encumbrance on the home.

In our case, the home was worth between $300,000 and $400,000 and was encumbered by a $162,000 deed of trust. Purchasers paid only $3,500 for between $138,000 and $238,000 of equity; their successful bid was between 1.5 percent and 2.5 percent of the equity they acquired.

 

First Amer. Title Ins. v. Action Acquisitions, 1 CA-CV 06-0782, 10-30-07

Case Authority citations

Mason v. Wilson, 568 P.2d 1153 (Ariz. App 1977).

Krohn v. Sweetheart Props., 52 P. 3d 774 (Ariz. App Div. 1 2002).

Homecraft Corp. v. Fimbres, 580 P. 2d 760, Ariz. App. 1978).

Restatement Third, Property (Servitudes) § 8.3, cmt b.

The NJ Supreme Court rationale and holding in the Twin Rivers HOA constitutionality question is not an isolated, singular event.1. In another state supreme court case, the 1987 Texas court held that the homestead exemption didn’t apply to homes in homeowners associations:

It is unquestioned that an owner of land may contract with respect to their property as they see fit, provided the contracts do not contravene public policy. Therefore, the developer of the subdivision, as owner of all land subject to the declaration, is entitled to create liens on his land to secure the payment of assessments.

A Declaration of Covenants evidences the intent of the original parties that the covenant run with the land, and the covenant specifically binds the parties, their successors and assigns.

We recognize the harshness of the remedy of foreclosure, particularly when such a small sum is compared with the immeasurable value of a homestead. Under the laws of this state, however, we are bound to enforce the agreements into which the homeowners entered concerning the payment of assessments.

P. 634 – 637.

Justices Mauzy & Gonzalez dissented (p. 637 – 639) (emphasis added) .

I respectfully dissent. The court herein has created a remedy in the name of “public policy” in direct contravention of the Constitution of this State.

A review of the history of the homestead exemption in Texas makes the matter as clear and bright as the Texas sky at night; the public policy of this State has been and is to protect homestead property from creditors’ claims.

TEX. CONST. Art. XVI, § 50 (1845, amended 1973) (emphasis added). “All debts,” as used in the foregoing passage of the Constitution, means precisely that; i.e., homestead property is exempt from forced sale for the payment of all debts except in the three constitutionally enumerated instances. The exceptions are: (1) for the payment of the homestead’s purchase money; (2) for unpaid taxes; and (3) for labor and materials utilized in the improvement of homestead property. The Constitution specifies the types of indebtedness for which there may be a valid lien; liens for any other purpose are invalid.

Applying the exceptions to the instant cause, maintenance assessments do not constitute part of the property’s purchase [**16] money; are not taxes, and are not monies for labor and materials for the construction of improvements on the land. Thus, pursuant to the Constitution, homestead property may not be the subject of a forced sale for sums owing for maintenance assessments.

Inwood v. Harris, 736 S.W.2d 632 (1987).

2. The Restatement Third: Property (Servitudes) § 3.1, Comment(h), the generally accepted common law compilation, states:

The emphasis on constitutional rights in this Comment is not intended to limit the general principle that a servitude that creates a risk of societal harm outweighing the benefits of validating the servitude violates public policy. [This legalese simple says that if the servitude harms more than benefits society it will be invalidated]. The question whether a servitude unreasonably burdens a fundamental constitutional right is determined as a matter of property law, not of constitutional law. [emphasis added].

The obvious conclusion to be made is that CC&Rs are not harmful to the public and do not violate public policy. Those CC&Rs include, among others, the exclusion of homestead exemption protections, the right to foreclose as excessive punishments, lack of due process by an independent tribunal, and the acceptance of ex post facto amendments rendering the original CC&Rs “contract” a worthless piece of paper

Last month I raised the following questions (“Homeowner Associations: ex post facto amendments, consent to be governed, contracts to avoid the Constitution”, HOA Constitutional Government, October 23, 2007):

Can we enter into a private contract to avoid the application of constitutional protections?

Can individuals contract to establish a governing body that controls and regulates the people within a territory, and avoid adherence to the US Constitution, by means of a contract that is contrary to and ignores the state municipality laws?

The NJ Supreme Court answered these questions with a resounding YES in its  Twin Rivers HOA decision, giving support to the establishment of the New America, the United HOAs of America.  Property laws and the business judgment rule are sufficient protections for homeowners in HOAs, and  Constitutional protections need not intrude into these privately contracted governments.  In its rather scant reassurance that constitutional protections are available to homeowners, the Court said,

“Our holding does not suggest, however, that residents of a homeowners’ association may never successfully seek constitutional redress against a governing association that unreasonably infringes their free speech rights.” P. 32.

View the video clips of the oral arguments made by the industry successfully arguing that HOAs should be left alone since they are the will of the people; and the homeowner arguments relating to the need for constitutional protections and oversight. 

The three 7 minute videos, and supplemental materials, including the complete Court decision, can be found at Twin Rivers under  the Establishing New America NJSC links.