HOA Constitutional Government

An Arizonan trial case caused me to revisit the fundamental question of: Are the CC&Rs unenforceable adhesion contracts?  As with CC&Rs being unconstitutional, I do not find any evidence that the courts have directly addressed this most serious question in the past.  Most related cases centered on the arbitration clauses in the CC&Rs.

The Arizona case was challenged with the court finding that the clause was unconscionable and beyond the reasonable expectations of the homebuyer.  The Arizona court wrote,

The arbitration clause is in the Declarations of Covenants and Restrictions. Although the terms of the purchase contract may have been negotiable, the terms of the Declarations were not subject to separate negotiation with each Unit purchaser. Therefore, the Declarations which contained the arbitration clause were in the nature of a contract of adhesion (my emphasis).

“Factors showing substantive unconscionability include ‘contract terms so one-sided as to unfairly surprise an innocent party, an overall imbalance in the obligations and rights imposed by the bargain . . . .” (quoting from Maxwell v. Fid. Fin. Servs. Inc., 907 p .2d 51, an Arizona case).

However, as a trial court decision it lacks value as precedent to be cited in other cases.  It must be upheld upon appeal as CAI attorneys attempted to do with their constitutionality challenge to Arizona’s OAH statutes.  Will this decision pass muster on an appeal, if any?

Several cases from the Montana Supreme Court offer a favorable YES. But first I must explain the other criteria for an adhesion contract: the use of a standardized form.  A standardized form is basically one that is,

[D]rafted by one party (usually a business with stronger bargaining power) and signed by the weaker party (usually a consumer in need of goods or services), who must adhere to the contract and therefore does not have the power to negotiate or modify the terms of the contract. Adhesion contracts are commonly used for matters involving insurance, leases, deeds, mortgages, automobile purchases, and other forms of consumer [Legal Information Institute].

Now the Evil Empire and its loyal followers will argue that each Declaration is a unique contract prepared individually for each HOA.  Not really, as one can easily trace boilerplate from one Declaration to another, just like the boilerplate found in state statutes.  The point is, however, that the Declaration agreed to by each homeowner is one and the same Declaration making it a standardized-contract for that HOA!

 In the 2011 Montana Supreme Court Graziano v. Stock Farm HOA decision the homeowner argued that the arbitration clause was beyond his reasonable expectations and that he had received no notice or explanation of its contents.  The Court held that,

An adhesion contract is a standard form contract prepared by one party, to be signed by the party in a weaker position (usually a consumer), who adheres to the contract with little or no choice about its terms. The weaker party can either accept or reject the contract without the opportunity to negotiate its terms.

However, the Court rejected the CC&Rs as an adhesion contract, because the terms were negotiable, they were not beyond the homeowner’s reasonable expectations, and the owner was a sophisticated business person who knew better, so no surprise.

Although holding that the CC&Rs were not an adhesion contract due to the knowledge of the owner, a supporting Judge wrote,

Imposing and enforcing pre-dispute arbitration requirements in such circumstances is nothing more than a means of depriving landowners of their constitutional rights of access to the courts and to a jury trial under Article II, Sections 16 and 26, respectively, of the Montana Constitution.

 “[T]he landowner should not be bound by a pre-dispute arbitration clause imposed by the developer without negotiation on what amounts to be a “take it or leave it”—or, rather, “buy it and you’re stuck with them”—basis.

In the 2009 Woodruff v. Bretz Montana Supreme Court case (non-HOA, motor home case cited in Graziano above), the court found the arbitration clause to be an adhesion contract and unenforceable.   The explanation of “reasonable expectations” is highly informative and is relevant to HOA CC&Rs.

[R]reasonable expectations derive from all of the circumstances surrounding the execution of the contract, such as the consumer’s business experience and sophistication, any routine practice between the parties established through prior dealings, whether the consumer studied the agreement and comprehended its terms, whether the consumer had the advice or representation of counsel, and whether the challenged provision and the consequences of the provision were fully and adequately explained to the consumer. (My emphasis).

 As you can well see, the CC&Rs constitute unreasonable expectations of the homeowner, and we have more support for misrepresentation and fraud in the HOA selling process and in legitimate failure to be bound.

Who would sign the purchase contract if the homebuyer had full and complete knowledge of HOA-Land living conditions, and the legal restrictions contained in the CC&Rs? Expectations so foreign to the reasonable expectations of constitutional protections?    

Who would think that the legislature would not uphold the state constitution and laws that protect the individual property rights of their citizens and reject the standardized CC&Rs contract?  Who? 

It is an insult to the people!

This posting spells out a simple measure of evaluating how well advocates performed at the legislature.  It uses 2 indicators: one places a weight or importance factor to a bill and the other reflects whether or not the bill passed or failed.  Give it a try.

I use the current status of HOA bills in Arizona as an example.  Feel free to adjust the weights as you see fit.

ARIZONA HOA REFORM PERFORMANCE RATING

2017

(as of March 21, 2107)

BILL	VALUE	STATUS	WEIGHTED
HB 2146	1	F	-1
HB 2321	0	P	0
HB 2411	1	P	1
HB 2419	1	P	1
HB 2496	2	P	2
SB 1060	0	P	0
SB 1113	-1	P	-1
SB 1175	2	P	2
SB 1240	-2	F	2
SB 1288	2	F	-2
SB 1289	2	F	-2
SB 1400	1	F	-1
SB 1401	2	F	-2
SB 1402	1	F	-1
SB 1416	0	P	0
SB 1429	1	F	-1
TOTAL	13		-3

 

Performance rating:    -0.19 (-3/16)

Rather than a simplistic ‘body count‘ of bills, I prefer an Performance Rating (PR) where weights –  values –  are assigned to a bill.  Values from -2 to 2 are appropriate here, -2 being strongly opposed, 0 being neutral, and 2 strongly in favor.  Example:  take 4 bills.

Bill 1, value of  1

Bill2, value of  2

Bill3, value of  2

Bill4, value of -2

Total value 3. Divide by number of bills, 4, and PR becomes .75.  If bill4 is revalued at -1, then EM becomes 1 (4/4).  Take a lopsided case of -2, -2, 1, 0.  This produces an PR of -.75, a  real bad day at black rock.  Interpretation: a number of opposed bills passed.   Take another case where several bills are given a neutral value:  2,-1 0, 0 yields an PR of .25.  Not good for advocacy efforts.

Weakness lies not in the PR calculation, but in getting a fair assessment of values and not assigning values to make you look good.  Of course, values must be assigned beforehand or at time of an amendment.

An important aspect:  Passed and failed.  The value is result rated (PF) where Pass = 1 and Failed = -1.   A For bill passing gets a PF of 1 and if it failed it gets a PF of -1.  Similarly, an against bill gets 1 for passing and -1 for failing.

Using 2 factors allows you to assess the importance – value – of the bill and its legislative result, pass/fail. It is a much better measure of how well an advocacy campaign reached its goal of 2.

As you can well appreciate, there is a need for integrity in the rating process.  If you overrate the value and the bill fails, you lose big.

Why do state legislatures support, promote and defend HOAs?  Americans want to know why!

I have uncovered only one formal, legal and explicit statement of purpose and intent behind state legislators’ love of HOAs.  I am not speaking of the anecdotal defense and propaganda by CAI and its stalwarts, but the legitimate general government interest of your state legislature.  The one exception can be found in Colorado’s Revised Statutes, CRS 38-33.3-102 (2016)[i].

Please read the declaration of intent below and answer the following questions.  You need not publish your answers if you do not wish to do so.

 

Q1.       Overall, what do you see as the real intent of Colorado’s support of HOAs?

Q2.      Do you believe that the Colorado statutes, UCCIOA, “is in the best interests of the state and its citizens”?

Q3a.    Does Colorado’s economic prosperity depend “upon the strengthening of homeowner associations . . . with statutory assessment liens . . . enhancing the financial stability of associations by increasing the association’s powers to collect delinquent assessments, late charges, fines, and enforcement costs”?

Q3b.      In other words, do HOAs rise to a level of national and Colorado security concern whereby the survivability of HOAs present “a clear and present danger,” warranting restrictions and prohibitions of constitutional protections?

Q3c.       Let’s assume for a moment that HOAs do present a Colorado security concern in that the survivability of Colorado depends on the acceptance and survivability of HOAs.  If so, then the imposition of “military rule” that suppresses fundamental rights and freedoms is justifiable.

Q4.      Is this declaration’s assumption that HOAs provide safer loans and “a safer, more predictable basis because of standardized practices and prudent insurance and risk management obligations” valid?

 

I think advocate and the public should demand a response from their legislative leaders setting forth the WHYS.  You have the right to know.  And by asking, the state must reply.

 

Reference

[i] C.R.S. 38-33.3-102 (2016)

38-33.3-102. Legislative declaration

(1) The general assembly hereby finds, determines, and declares, as follows:

(a) That it is in the best interests of the state and its citizens to establish a clear, comprehensive, and uniform framework for the creation and operation of common interest communities;

(b) That the continuation of the economic prosperity of Colorado is dependent upon the strengthening of homeowner associations in common interest communities financially through the setting of budget guidelines, the creation of statutory assessment liens, the granting of six months’ lien priority, the facilitation of borrowing, and more certain powers in the association to sue on behalf of the owners and through enhancing the financial stability of associations by increasing the association’s powers to collect delinquent assessments, late charges, fines, and enforcement costs;

(c) That it is the policy of this state to give developers flexible development rights with specific obligations within a uniform structure of development of a common interest community that extends through the transition to owner control;

(d) That it is the policy of this state to promote effective and efficient property management through defined operational requirements that preserve flexibility for such homeowner associations;

(e) That it is the policy of this state to promote the availability of funds for financing the development of such homeowner associations by enabling lenders to extend the financial services to a greater market on a safer, more predictable basis because of standardized practices and prudent insurance and risk management obligations.

Dear Arizona House LIA Committee members:

Allow me to clarify the background of this bill, SB 1289, as I, a non-lawyer, see it.

There is a notorious case ((Terravita) in which an HOA amended its CC&Rs to specifically be awarded attorney fees if it won a hearing before OAH Office of Administrative Hearings).  This covenant in the CC&Rs flies in the face of existing law and should have been rejected by the HOA’s attorneys who are CAI members.  In Semple v. Tri-City Drywall (1992) the court held,

“May the trial court pursuant to ARS 12 341.01(A) award to the prevailing party attorney’s fees incurred in the proceedings before the Registrar of Contractors? We hold that the statute does not provide for such an award . . ..” [1]

In Brown v. Terravita [2] the AZ appellate court held,

“we have found no authority -including the plain language of the statute — to support the notion that the Legislature intended to integrate A.R.S. § 33-1805 as part of the declarations, bylaws, articles of incorporation, and rules of all planned communities.”

However, this decision was ignored, apparently, by the CAI attorneys. Terravita’s 2013 CC&Rs amendment flaunted Arizona law.

“Attorneys’ Fees in Administrative Proceedings. In the event the Association incurs legal expenses and costs . . . in an administrative action or proceeding, including but not limited to, proceedings before an Administrative Law Judge, and any appeal thereof, the Association shall be entitled to recover its attorneys’ fees . . . if the Association is a prevailing party in such action . . . .”  (Article XVII, Section 17.08(4) Terravita CC&Rs).

This is a prime example of the use of a private contract to get around constitutional protections, like the equal protection of the law and due process.  The bill would prevent HOA attorneys from amending CC&Rs to bypass state laws, and claim legitimacy because of the private contractual nature of the CC&Rs.  The bill prohibits any such CC&Rs provisions.

The HOA amendment procedure makes use of the “deprivation of owner rights” amendment clause in the CC&Rs whereby a person’s property rights are damaged without his consent.  Another private nature of HOAs that stands in sharp contrast to constitutional protections against eminent domain takings and the 14th Amendment.

Only a judge can award attorney fees!  In Brown the court acknowledged this covenant, “That provision authorized fee awards to prevailing parties in actions instituted to enforce the CC&Rs.” The covenant was not addressed by the court as Brown did not claim a violation of the CC&Rs, but of state law.

Now comes CAI strongly opposing SB 1289, apparently seeking to prohibit the use of this private contractual devise to bypass constitutional protections.     SB 1289 prevents the (OAH) Administrative Law Judge and Commissioner from awarding attorney fees to HOAs. It has long been the policy and law of OAH not to award attorney fees, as attorneys are not required.  But, HOAs like to hire attorneys and if the HOA loses, who pays the attorney?  Attorney fees are awarded by civil courts if the complaint involves a contractual dispute and the contract allows for attorney awards.  General favoring the HOA and silent if the homeowner wins.

Here are those CAI/AACM members plus CAI stalwarts who opposed the bill (from the RTS records).  Only 4 affiliations are not identified. AACM is the CAI trained managers in the CAI School of HOA-Land:

“Kathe Barnes, Self(01/31/2017); Jason Barraza, AZ ASSN OF COMMUNITY MANAGERS (AACM)(02/01/2017); Kayte Comes, Self(02/01/2017); Quinten Cupps, Self(02/27/2017); Kevin DeMenna, COMMUNITY ASSOCIATIONS INSTITUTE(01/31/2017); Ryan DeMenna, COMMUNITY ASSOCIATIONS INSTITUTE(01/31/2017); Connor Doyle, Self(02/28/2017); Mary Jo Edel, Self(02/28/2017); William Eisert, Self(02/27/2017); Carolyn Goldschmidt, Self(01/31/2017); Clint Goodman, Self(02/06/2017); Julia Holland, Self(02/27/2017); Mark Holmgren, Self(02/07/2017); Matthew Johnson, Self(02/24/2017); Spencer Kamps, HOME BUILDERS ASSOCIATION OF CENTRAL AZ(02/01/2017); Lynn Krupnik, Self(01/29/2017); Mark Lane, Self(02/01/2017); Linda Lang, Arizona Association Of Community Managers(02/01/2017); Brian Morgan, Self(02/01/2017); Jeff Sandquist, AZ ASSN OF COMMUNITY MANAGERS (AACM)(02/01/2017); Vicki Sears, Self(02/01/2017); Adrianne Speas, Self(02/01/2017); Mark Wade, Self(02/01/2017);”

Unstated affiliations:

Barnes (CAI member), Comes (CAI chapter staff), Cupps (CAI member), Doyle (CAI member), Edel (CAI member), Wisert, Holland (CAI member), Holmgren, Johnson, Krupnik (CAI lawyer), Lane, Morgan (CAI lawyer), Sears (CAI member), Wade (CAI chapter president).

 Unidentified as CAI lawyers: Goldschmidt, Goodman, Krupnik, Speas, and Morgan.

 

Notes

1. Semple v. Tri-City Drywall, 838 P.2d 1369 (Ariz. App. Div.1 1992).
2. Brown v. Terravita, CA-CV 14-0455 (Ariz. App. Div. 1 2015).