Tag: Arizona supreme court

CAI is worried about homeowner reasonable expectations

I am confused by two CAI Arizona supreme court briefs in defense of the HOA in CAO v. Dorsey;[i] one by Scott Carpenter and the other by Krupnik,  a former Carpenter attorney and, along with Scott, a member of the CAI attorney’s group, the College of Community Associations Lawyers (CCAL).  In my view dealing with CAI over 23 years in several states, it reflects the awareness by CAI of the potential loss of its dominance over HOA boards and state legislatures.

The CAI Krupnick brief

In Krupnick’s brief, she argues that condos are a creature of state law otherwise they could not exist. We all know that state HOA laws and Acts favor the HOA against member rights.

“Sui generis presents a view of HOAs as private government principalities supported by your state legislature and is used to justify special laws for a special organization, the HOA. But the condominium is a unique form of real property ownership and . . . are created and governed by specific statutory schemes that deal with ownership, administration, transfer, and termination of commonly held property interests. More fundamentally, it is that statutory scheme, not the common law, that frames the issues in this controversy”[ii]

Does that make them state actors —  arms of the state?[iii] Existing constitutional law is inadequate to support this model of local governance [sui generis] and so, in violation of US and state constitutions,  we see all those HOA/PUD/condo “Acts” in almost every state.  These Acts constitute a parallel supreme law of the land with sharp contrasts to the US Constitution.

Krupnik stresses state laws control and “reasonable expectations”[iv] is not involved. “the amendment to A.R.S. § 33-1228 . . . does not significantly impinge on the parties’ reasonable expectations.” Her argument is that it would create problems for the administration of the HOA to have so many grandfathered clauses as the governing documents are amended from time-to-time. Gee, for over 247 years we have lived with the protection of grandfathered clauses in the public domain. What’s the problem?  The fear mongered survival of the HOA and CAI’s member income stream, that’s what!!

In my early days a CAI member emailed me saying: “What are you doing, George? We have a good thing going here.”

The CAI Carpenter brief

I focus on an important aspect of this brief.

Carpenter follows Krupnick’s argument on the need for uniformity, citing a precedent which held that “majority and minority owners alike were subject to a uniform set of rules which were consistent with the parties’ collective expectations at the time of contract.” Adding, “If left unchecked, the Opinion will very quickly leave Arizona community associations struggling to discern which versions of the state’s robust statutory  schemes apply to which owners in their communities.”

Carpenter raises a valid question, one that I concluded with in my commentary on CAO, should the HOA need to ask each owner if he agrees to be bound by  state law? And also asked for agreement to reasonably expected future amendments to forced sale in a takeover scenario. How can one agree to something ill defined?   This is a question to mislead the focus of the lawsuit.  Carpenter ignores contract law that requires a bona fide meeting of the minds and an  understanding of the explicit terms, and any assertion to be bound by iffy amendments in the future is without validity.

Obviously, contract law implicitly raises the question of surprises and a true meeting of the minds. No putting one past the other party in a violation of good faith. We know that there is wide misrepresentation in the selling process!

“By focusing on the amorphous concept of an owners’ reasonable expectations at the time they took title subject to an association’s declaration, the Court of Appeals has ignored an important reality: the statutes which apply to owners and associations must be applied uniformly, unless they contradict a pre-existing express term of the contractual covenants.”

He is arguing that ex post facto HOA amendments are valid, and the constitutional protections  do not apply to private contracts. After all, according to CAI HOAs are sui generis and have their own “constitution” outside the US Constitution. Carpenter makes the anguished plea — my interpretation –

“By creating an untenable and unworkable rule which deeply burdens associations and the owners who comprise them, the Court of Appeals’ Opinion will make it nearly impossible for any future association to effectively terminate their condominium.”

Poor baby! It’s a cost of doing business under the HOA legal scheme, but CAI wants more favorable treatment.  It’s an HOA defect because of the limited number of payees to support the HOA —  the members who are severally and jointly responsible for the viability of the HOA. (If Pete can’t pay, we’ll get it from Joe or Mary who can pay).  Is that a reasonable expectation of members?? I don’t think that have any idea of their financial obligations.

Please note that five other amicus briefs were filed in favor of the homeowner, CAO, including one by the Cato Institute and one by Arizona’s Goldwater Institute.  Only CAI opposed the appellate decision.

Notes

[i] CAO v. Dorsey, CA-CV 21-0275 (Ariz. App. Div.1, 2022).

[ii] Why aren’t HOAs held as state actors based on USSC criteria? (2019).

[iii] Id. The US Supreme Court has held state laws  that are “supportive”, “cooperating,” “encouraging,” and “entwined” in both public policy . . . and in the “management and control” of the HOA create state actors.

[iv] See HOA constitutional “takings” and reasonable amendments.

HOA constitutional “takings” and reasonable amendments

Awaiting an Arizona Supreme Court decision is a case involving a fairly common event in which investors buy up a majority of the condo units and vote to dissolve the condo. The owners are then subject to a forced sale against their will. In Cao v. Dorsey[1] investors owned 90 of 96 units but a homeowner challenged this forced sale under constitutional grounds.[2]  I address one constitutional issue here.

With respect to the governing AZ statute on these “takeovers,” the Court  held,

[We] hold that the statute [ARS 33-1228] is constitutional when applied to condominium owners who bought a condominium unit subject to terms that incorporate the statute. We also hold, however, that if there have been substantive post-purchase changes to the statute, the version of the statute in place at the time of purchase controls.

The statute allows for amendments to the CC&Rs, as commonly stated in the CC&Rs, based simply on the vote of the required approval percentage of owner votes, which the investor controls. The plaintiff argued that  the statute “is an unconstitutional taking of private property.” The Court clarified the law,

“Generally, ‘[t]aking one person’s property for another person’s private use is plainly Prohibited’. . . . Without an exception to the general rule, A.R.S. § 33-1228 is unconstitutional on its face.”

The meaning of “takings” refers to the constitutional prohibition of eminent domain takings of property interests when the property owner contests to the taking by the government. My argument criticizing the HOA’s right to take personal property with no compensation to the objecting owner can be found in HOA principalities where there’s no ex post facto or eminent domain protections (2009) and  Homeowners do not have HOA ‘eminent domain’ protection (2022).

A discussion followed as to what version of the law applied as it was amended after the plaintiff’s purchase.  Getting to the heart of the matter, the Court stated,

“[W]e will not ‘allow substantial, unforeseen, and unlimited amendments’ to the Declaration, as that ‘would alter the nature of the covenants to which the homeowners originally agreed.’ . . . We ‘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 to existing covenants.’”

In short, no surprises and no adding new elements to the Declaration – CC&Rs without member approval. Future amendments, however, “cannot be ‘entirely new and different in character, otherwise they would exceed the reasonable expectations of the owners.’”  Furthermore, statutory amendments do not apply when, 

“the statutory amendments did not merely refine the statutes, correct errors, or fill in gaps, but substantively altered owners’ property rights beyond the “owners’ expectations of the scope of the covenants. . . . And substantive amendments to the Condominium Act cannot later be incorporated into the agreement without renewed consent.”

The Court vacated the trial court decision in favor of the HOA and sent the case back to the superior court based on its holdings. The decision has been appealed to the Supreme Court and we are waiting for its opinion.

What does this case mean?  What is all the hullabaloo about?  How important is a favorable supreme court decision? TEMENDOUSLY IMPORTANT! That’s why CAI is not only the HOA’s attorney but has also filed an amicus brief.  The holding of homeowner reasonable expectations regarding amendments opens the door to further challenges as to just what is reasonable in today’s HOA land agreements.  The opposition can say, “well, it is common that a development can be expected to be bought out, and therefore the holding is mute, not applicable anymore.”

The broader issue for advocates is to apply reasonable expectations to misrepresentations in the selling process that is intentionally designed to hide not only takings by the HOA but violations of the equal protection of the law. In the case of CAI, has its conduct over the years amounted to a coercive monopoly to keep control over the HOA-Land? How about the real estate agents and department looking the other way and concealing the facts?

It’s up to the homeowners and advocates to pursue these challenges that will open the doors to HOA reforms of substance.

Notes

[1]  CAO v. Dorsey, CA-CV 21-0275 (Ariz. App. Div.1, 2022). I would like to thank Dennis Legere, Arizona Homeowners Coalition,  for bringing this case to my attention and for providing me with the court filings. He has filed an AZ supreme court amicus brief  with attorney Jonathan Dessaules.

[2] This is the first of several planned reviews and case memoranda addressing the appellate court decision. To follow will be  reviews of the amicus briefs by AZ Homeowners Coalition,  The Goldwater Institute for the homeowner), and CAI (for the HOA), and the eventual supreme court decision.

AZ SC in Kalway holds CC&Rs as “special contracts”

Author’s note:  I make extensive use of direct quotes in order to avoid my interpretations “leaking” through.

The Arizona Supreme Court in Kalway[i] threw some light on the controversy that HOA covenants and CC&Rs are valid contracts and are held as such.   The Court held that, my emphasis,

“CC&Rs form a contract between individual landowners and all the landowners bound by the restrictions, as a whole. . . . in special types of contracts, we do not enforce ‘unknown terms which are beyond the range of reasonable expectation . . . . CC&Rs are such contracts.  Because covenants originate in contract, the primary purpose of a court when interpreting a covenant is to give effect to the original intent of the parties’ with any doubts resolved against the validity of a restriction.”

With respect to the requirement for very important but ignored homeowner notice, the Court continued, my emphasis,

“The notice requirement relies on a homeowner’s reasonable expectations based on the declaration in effect at the time of purchase—in this case, the original declaration.  Under general contract law principles, a majority could impose any new restrictions on the minority because the original declaration provided for amendments by majority vote. But allowing substantial, unforeseen, and unlimited amendments would alter the nature of the covenants to which the homeowners originally agreed. . . . Thus, “[t]he 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 to existing covenants.”

One of the most egregious injustices that I’ve come across is the failure of the courts to apply the full body of contract law to HOA covenants in CC&Rs.  Opinions and dicta refer to the CC&Rs simply as a contract, or an agreement interpreted as a contract — yet in spite of the above opinion — fail to protect the homeowner under contract law 101.  The Cornell Legal Information Institute lists the basic criteria for a valid contract:

 ‘The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.”

Added to this general description of a legal contract is the Opinion holding that the CC&Rs are special contracts that do not permit “unreasonable  expectations” and that the notice of reasonable expectations is set forth in the CC&Rs “at the time of purchase,” and the law will protect minority owners from any such expectations.   

As I have argued many times,[ii] the boilerplate  amendment process that binds non-agreeing owners solely on the basis of a majority or some super majority renders the original “contract” a meaningless piece of paper. 

Professor Barnett explains,

“A law may be ‘valid’ because it was produced in accordance with all the procedures required by a particular lawmaking system, [the HOA amendment procedure, for example] but be ‘illegitimate’ because these procedures were inadequate to provide assurances that a law is just.”[iii]

Conclusion

It should be evident to all that this constitutional issue of “signed the agreement” and are thereby bound to obey needs further thought. As it stands, homeowners in HOAs are subject to special laws, the numerous state HOA/Condo Acts, for special entities allowed to function as de facto private governments outside the protections of the US Constitution.

Notes

[i] Kalway v. Calbria Ranch, CV-20-o152-PR, ¶ 13 -16  (Ariz. March 22, 2022).

[ii] See HOA consent to agree vs. “the will of the majority”,  Contracts, the Constitution and consent to be governed and HOA Common Sense, No. 4: Consent to be governed.

[iii] Randy Barnett, Restoring the Lost Constitution, Princeton Univ. Press, (2004).

AZ Supreme Court landmark HOA opinion

“For the times they are a-changin’”[1]

The Arizona Supreme Court opinion in Kalway[2] is, in my view,  a landmark opinion supporting and protecting individual property rights of homeowners in HOAs that are subject to a broad, procedural CC&Rs amendment procedure.  The boilerplate CC&Rs in an intentional denial of fundamental property rights strip away eminent domain protections by ignoring the content of CC&Rs amendments —  anything and everything goes!

Referring to AZ statute 33-1817(A) that allows amendments solely based on a majority vote of the members, the Court stated:

“But § 33-1817(A) does not displace the common law, which  prohibits some amendments even if passed by a majority vote. The original declaration must give sufficient notice of the possibility of a future amendment; that is, amendments must be reasonable and foreseeable.”

The Court cited its 2010 opinion in Dreamland,[3]

“We agree that these cases tend to support the homeowners, in that each refuses enforcement of a new covenant that markedly changed the obligations of the implicated lot owners. . . . in those cases where courts disallowed the amendment of covenants, the impact upon the objecting lot owner was generally far more substantial and unforeseeable than the amendment at issue [in the case before it] “

I had addressed these concerns  regarding the Dreamland decision in my 2009-2010 Commentaries that provide  details on these substantive issues.[4]

Although not stated were issues of due process, equal protection of the laws, and eminent domain takings — not raised in the initial complaint or appeal, so the courts  did not offer a direct opinion —  this  opinion strikes at HOA eminent domain takings of homeowner property rights.  It also dealt with the question of homeowner notice (due process) and unexpected and unreasonable modifications to the CC&Rs (lack of equal protection under CC&Rs private eminent domain rights).

* * * *

The above represents my perspective as a longtime 22-year homeowner rights advocate and activist.  CAI Arizona has a different perspective favoring HOAs and their decisionmakers, the board of directors.[5]. Its presentation starts with the overall court opinion.

“Based on this recent case law, CC&R amendments must be reasonable and foreseeable in order to be enforceable. In other words, community associations can no longer amend CC&Rs to create new obligations where the original CC&Rs did not provide owners notice that they may be subject to the new obligations.”

But then adds its spin and advertising appeal:

“Please note that these amendments are specific to Calabria Ranch and its CC&Rs. In other words, an amendment that the Arizona Supreme Court found invalid in the Calabria Ranch case may be found valid for a different community association. Again, we strongly recommend consulting with the CHDB team to analyze your community association’s specific CC&Rs and any proposed, or previously adopted, amendments.”

Looking at the tremendous value toward HOA reform, the Court’s opinion would apply to any instance where the broad conditions — no notice and unexpected and unreasonable — apply, above and beyond those specific amendments dealt with in Kalway.  I’ve found the most prevalent are unexpected and unreasonable amendment modifications, and a failure to provide notice to the homeowner that abounds in the CC&Rs. It falls into those discretionary areas where the CC&Rs are silent, which the Court has declared doesn’t give the BOD unlimited rights.

This opinion presents a powerful tool, a powerful argument before the courts and before state legislatures when seeking HOA substantive reforms.

Yes, and how many times can a man turn his head
And pretend that he just doesn’t see?

The answer, my friend, is blowin’ in the wind
The answer is blowin’ in the wind

(Bob Dylan, Blowin’ In the Wind,  1963)

Notes

[1] Bob Dylan,  “For the times they are a-changin’”  (1964).  It’s interesting to note the coincidences of publication years for this song and The Homes Association Handbook.

[2] Kalway v. Calbria Ranch, CV-20-o152-PR (Ariz. March 22, 202).

[3] Dreamland Villa Community Club, Inc. v. Raimey, 224 Ariz. 42, 51 ¶ 38 (App. 2010).

[4] HOA principalities where there’s no ex post facto or eminent domain protections and AZ court ends open-ended “ex post facto” HOA amendments.

[5] “CC&R Amendment Update from the Arizona Supreme Court,” March 29, 2022 By Carpenter Hazlewood I News.

The roles of the Supreme Court vs the Legislature

At today’s Senate confirmation hearings of Judge Jackson, an intriguing dialogue took place between Jackson and Senator Lee (Utah).  The topic raised by Lee focused on the role that the Supreme Court is to say what the law is, and the role of Congress (or state legislature) is to say what the law should be creating public policy. The Court deals with the policies set by Congress.

The role of homeowner rights advocates is to say  to the legislatures what the law should be with respect to HOA-Land.  It is not to say that this happened to me and it’s wrong, or my HOA does so and so, which does not rise to the level of setting policy for all HOAs/condos  — no special laws for special entities.

And that’s another area where reform legislation often fails — too local.  Reforms must be broad as to have general concern for the state; as the courts have held from time to time, “This case Involves legal issues of statewide importance.”   And it must be explicitly stated or  implied.

Public policy today is harmful to the private property rights of HOA owners, and to a denial of due process protections and violations of the equal protection of the laws, treating HOAs as if they were independent principalities.  These policies and attitudes have created unjust, bad laws enforced by the courts, and used as precedent for more bad laws.

The cycle ends by advocates addressing the root cause of pro-HOA laws that treat HOA members as second-class citizens, which they are not!