ALJ HOA decisions in AZ are enforceable under a contempt order

One more attack on the validity of the OAH powers to handle HOA complaints bit the dust.  Three former attempts by Carpenter Hazelwood (CAI  member attorneys) to declare OAH unconstitutional resulted in a memorandum order from the AZ Supreme Court that declared the appellate ruling not admissible as precedent.[i]  Today, the appellate court in Whitmer (Pro Se)[ii] set the law straight as can be, although it seems that the HOA attorney and CAI member, Augustus Shaw, couldn’t seem to understand the law.

The case dealt with the explicit law, granting a homeowner the right to seek a court contempt order against the HOA for not obeying an ALJ  decision.  Without such a provision, OAH decisions would be meaningless, as I made clear back in 2005 when the original version of the law was put into effect. ARS 32-2199.02(B) reads,

“The order issued by the administrative law judge is enforceable through contempt of court proceedings and is subject to judicial review as prescribed by § 41-1092.08.”  How plain can that be?

Somehow in a confusing, twist of words, the HOA attorney makes a suspect argument that ARS 32-2199.02(B) states that “the proper venue for a contempt of court hearing is the administrative Courts.”[iii]

The Superior Court in its appeal of the ALJ decision said it had no jurisdiction to hear contempt pleadings.  Can you believe that?!!  This appellate court decision said that the superior court was wrong and it must hear Whitmer’s pleading for a contempt order against the HOA.

 What this important, but unnecessary decision, clears the way for is that an HOA’s failure to obey an ALJ order at OAH  is subject to contempt of court.   This is the homeowner’s act to get compliance, and if the contempt order is violated, then either fines or jail time for the violator.

 No wonder CAI fought a desperate battle!

 

References

[i] “The Court in addition to its regular fashion of terse announcements, DENIED or ACCEPTED, added an order under its powers to do so, AZ Supreme Court Rule 111(g), that the Gelb decision was not to be published. Not being published means that it is not binding authority, or precedent.” Gelb v. DFBLS, CV 10-0371-PR (2011).

[ii] Whitmer v. Hilton Casitas HOA, CA-CV 17-0543 (2018).

[iii] Whitmer v. Hilton Casitas HOA, CV2016-055080.

 

Should HOAs be tax free social welfare entities?

I am talking about federal tax exemption status for HOAs under 501(c)4. HOAs do not qualify for educational nonprofits, (c)3, or recreational services under (c)7. Of the 342,000 HOAs (CAI data) less than 1,300 have a (c)4 exemption as a social welfare organization. In general, a social welfare organization must provide social benefits to the community at large, or general public.

Now, getting tax free revenues is applaudable as almost all homeowners would agree. After all, they are being double-taxed at the state and local level. But, like on the national scene, the tax break goes not to the individual homeowner, but to the HOA corporation. The dream, the fantasy, of the homeowners is that these savings would trickle down to its members as lowered assessments. I wouldn’t hold my breath. There is no mandate in any of the rulings that might apply to an HOA to pass on the tax breaks to its members. Is it a good thing? Could be, providing . . . .

On the other side of the coin comes the constitutional and ethical question as to why should HOAs get a tax break in the first place? They operate and function outside our constitutional system of government that denies citizens individual property rights and fundamental rights as enjoyed by those not living in an HOA.

The CC&Rs do no mention social welfare as its purpose, but confines itself to maintaining property values and enforcing the CC&Rs as it main purpose. Some going as far as saying either, “for the members” or “for the community.” It’s a serious contradiction in purpose to say “private” and to say “including the general public” in one breath. It’s an oxymoron.

In 1989, a ruling by the Federal Circuit court hold that a WV HOA was not entitled to tax benefits, stating,

“When a group of citizens elects . . . to separate themselves from society and to establish an entity that solely advances their own private interests [an HOA], no potential for general social advancement [benefit] is implicated. Wholly private activity, however meritorious, confers no such benefit which would render a compensatory exemption [tax break] appropriate”[2].

That says it all!

There have been several rulings over the years trying to qualifying the broad, vague wording of the IRS rules, which is the love of CAI lawyers – parsing sentences and redefining traditional meanings of words. Gary Porter[1] — a California CPA and active HOA tax specialist is a CAI member and past national president of CAI (1998-99) — was the leading proponent of this “word game” that held that HOAs were quasi-governments and, as such, constituted a community as defined by the IRS. His views were heard by the IRS and cited in the Sun City Grand, Surprise AZ application in support of a tax exemption.

In short, the heart of an HOA is thrown out the window — its private, contractual nature for its members – and replaced by a social welfare organization for the benefit of the surrounding community. Since the beginning of HOA time, this has been the fundamental legal basis for HOA governments.

However, in spite of the Circuit Court ruling, in 2015 it seems that the IRS bought this argument. It determined that SCG could be both, a private organization and a “surrounding community” at the same time.

Now, how about all the other HOAs? Not a word was made public about this achievement in the 3 years since 2015. I wonder why?

Notes
1. “IRC Section 501(c)(4) and Gated Associations,” Gary A. Porter, CPA (July 2, 2018).
2. Flat Top Lakes Assn v. United States of America, 868 F. 2nd 108 (4th Cir. 1989).

Fed court rejected HOAs as a community or a social welfare nonprofit

Flat Top Lake HOA v. US (868 F.2d 108)  was a 1989 federal circuit court case on whether or not the WV HOA qualified as a social welfare nonprofit entitled to receive federal tax breaks. The IRS permits tax exempt status for HOAs as a social welfare entity under its 501(c)4 classification if certain requirements are met. In general, the HOA must primarily provide community benefits to the greater community rather than to its members only.

So much for history. Today, Sun City Grand (Surprise, AZ), a $20 +/- million operation with over 9,000 homes, has been functioning as a social welfare entity since 2015. As best determined, it claims that just being there is sufficient to be granted a tax exemption as a social welfare nonprofit and receive tax benefits.

But, a puzzlement! Why is the board seeking member approval of programs to be made available to the general public after 3 years have gone by?  Furthermore, the governing documents do not grant the board any such powers to change the nature of the subdivision without an amendment to the CC&RS. What is going on?

The Flat Top Court held that,

The homeowner’s association must serve a community [subdivision] which bears a reasonably, recognizable relationship to an area ordinarily identified as a governmental subdivision or unit. Congress recognized that a true “community” functions within a broader national fabric.

When a group of citizens elects . . .  to separate themselves from society and to establish an entity that solely advances their own private interests, no potential for general social advancement [benefit] is implicated.  Wholly private activity, however meritorious, confers no such benefit which would render a compensatory exemption [ tax break] appropriate.

So, from the dawn of HOA history it has been vehemently argued that HOAs are private entities and therefore hands off, we now have an about face just to claim tax benefits.   In other words, the HOA by its very nature withdrew from the greater society and cannot claim a tax benefit from it.

In dissenting from the majority holding, a judge maintained that “The Association performs [community benefits], as the majority recognized, ‘tasks of quasi-governmental nature’ for the Association members and others. . . and performs activities which the taxpayers otherwise would have to pay for.”   The judge did not address the question of double taxation as a result of reduced municipality services – paying HOA assessments and also paying taxes for services no longer provided by the municipality.

 

 

Political free speech both without and within the HOA

I recently came across a post by a Massachusetts law firm , MEEB, that basically summarized my arguments and positions on unconstitutional HOA governments.  In particular, alleged waivers of constitutional rights and the prohibition against private contractual government  HOAs from restricting political public speech.  That applies to both in the public domain and within the HOA community domain.

In its 2012 post, “Court Decisions May Make it Harder to Restrict Free Speech Rights,” decisions in 3 court cases (VT and MA) are reviewed. In essence, these decisions challenge “an assumption long held and widely recognized by courts in many jurisdictions that the freedom of speech guaranteed in the U.S. Constitutions does not apply in condominium communities.”  The reason offered, as I’ve mentioned many times, “citizens, a community association is not a governmental entity, so its rules are not subject to the same strict constitutional tests.

In contrast to Twin Rivers,  in Mazdabrook “the court noted [political speech] ‘lies at the core’ of our constitutional free speech protections.  Political signs advancing a resident’s candidacy are not by their nature incompatible with a private development. They do not conflict with the purpose of the development.”  And the court concluded “that the sign policy in question violates the free speech clause of the State Constitution.”

 In regard to the alleged waiver of fundamental rights (my emphasis),

The New Jersey court expressed serious concerns about whether and how condominium owners can  voluntarily waive their constitutional rights. Such waivers, the court said, “must be knowing, intelligent, and voluntary…. [and] at the very least, [they] must be clear.  Mazdabrook’s rules did not specifically require Khan to waive his free speech rights, the court noted. Rather, “he was asked…to waive the right to post signs before getting board approval, without any idea about what standards would govern the approval process. That cannot constitute a knowing, intelligent, voluntary waiver of constitutional rights.”

 Mazdabrook’s rules did not specifically require Khan to waive his free speech rights, the court noted. Rather, “he was asked…to waive the right to post signs before getting board approval, without any idea about what standards would govern the approval process. That cannot constitute a knowing, intelligent, voluntary waiver of constitutional rights.”

In the Preu (MA) decision, the court addressed state actions by the HOA,

The court found that a law suit filed to enforce a community association’s rights under the state condominium statute constituted a “state action” that could subject association regulations to a constitutional test.

 The constitutional test would require strict scrutiny, which requires a necessary and compelling reason to restrict fundamental rights. Lesser loss of rights, say under state laws, would be subject to a lessor test, but more than the broader “a government’s general interest” that can easily be extended beyond justifiable logic.

In addition to the above rulings, California’s SB 1265 that states the HOA is a quasi-government faces a test in the legislature tomorrow. Let’s hope it passes.  The sponsor, Senator Wieckowski,  also managed to have SB 407 passed last year that broader prohibits restrictions on free speech regarding meeting rooms, assemblies, use of common areas, etc.

“It is the intent of the Legislature to ensure that members and residents of common interest developments have the ability to exercise their rights under law to peacefully assemble and freely communicate with one another and with others with respect to common interest development living or for social, political, or educational purposes.” (New Civ. Code 4515(a).

Now members can even make use of the ‘house organ,’ the monthly online or hardcopy communication provided to the membership for equal access to the membership for campaigning or publicizing opposing views.

CAI’s “Home Sweet HOA” – how warm, how homey. How delusional!!

I’m tired of these CAI “satisfaction surveys,” the latest of which carries the title, “Home Sweet HOA.”  Is CAI having acceptance problems and has to resort to the above loaded slogan?  Thanks to the increasing, more down-to-earth critical internet articles and social media posts by homeowner rights advocates like myself, it sure seems so!

Don’t be fooled by a survey conducted by a leading pollster like Zogby as to the validity of the survey.  There is a lot that goes into an honest and valid survey that CAI does not provide the necessary details. In research surveys, like these surveys sponsored by CAI’s Research Foundation, questions need to be answered like, who are the respondents and what do they know about HOAs?  If their knowledge is limited and restricted as to the basic facts about HOA “communities,” then the validity of their responses must be questioned. Their responses are biased!

To use a legal term, there is probable cause to conduct a balanced survey into HOA satisfaction.

Two homeowner rights advocates, Sara Benson (Chicago) and Jill Schweitzer (Phoenix), were responsible for 2 online polls on homeowner satisfaction with HOAs.  In stark contrast, not surprisingly, the Combined Advocate Surveys, as I refer to them, revealed opinions and views refuting the results of the CAI “happiness” surveys.

In statistical terms, the George Analytics table below shows that the CAI and Combined [advocate survey] responses (average percentages) come from 2 distinct samples, segments, of the HOA population.

(See 2016 Combined Advocate Surveys vs. CAI surveys ).

The Combined Advocate Surveys demonstrate that the CAI surveys are not representative of all HOA members. They are not valid for the entire population of HOA owners, but just for that selected grouping of uninformed respondents.

I  CHALLENGE  CAI  TO  CONDUCT  A  SURVEY  BASED  ON  MY  2011  “Truth in HOAs Model Act.” Sections 1 and 2 of the proposed act pertain to mandatory inclusions in all CC&Rs, and simply states, in part,

No provision of any contract or any declaration of covenants, conditions, and restrictions affecting lawful property uses of residences in a subdivision or condominium is enforceable in this state unless the party [HOA] seeking to enforce the provision proves by clear and convincing evidence  that 1) the provision being enforced was knowingly and voluntarily agreed to . . . .

Section 3 spells out a required buyer agreement form to be signed by the potential HOA member, which explicitly alerts the buyer to hidden facts about life in HOA-LAND. Subsection 3(d) states, in part,

I understand that the association, as a private entity and not an arm of the state, is not subject to the restrictions and prohibitions of the 14th Amendment to the US Constitution that otherwise protects the rights of the people . . . .

And finally, section 4 is an explicit surrender and waiver  by the HOA that the HOA

herewith unconditionally and irrevocably agrees to be bound by the US and State Constitutions and laws of the State as if it were a local public government entity.

Let’s get to the bottom of these happiness allegations.  Let’s have the members speak for themselves.  If all is well and good as CAI has maintained over the years, there should be no problems signing the agreement or adopting the model disclosure act.