Tag: business judgment rule

Illinois appellate court awards punitive damages for reckless indifference by condo

Note:  This case is based on Illinois laws and case history precedent with respect to punitive damages and the business judgment rule.  (Normally, punitive damages are not awarded for breach of contract claims, but this case was a breach of fiduciary claim). I believe other states have similar laws and case history that would make this opinion valid in the respective states.  However, the decision is not for publication or use as binding precedent.

It reflects a common sense approach to justice under the law and not a decision to uphold the view that the HOA can do nothing wrong; and that the HOA always acts in the best interest of the HOA’s obligation to all the members.

Plaintiff must ask for punitive damages.

 

The issue:  Over a 2-year period, condo ignored homeowner’s repeated requests for assistance in addressing water damage, forcing homeowner to incur expenses to make repairs and to hire an attorney to seek condo reimbursement.  Punitive damages against the condo were sought.

The Laws:  Condo board’s breach of fiduciary duty;   punitive damages award for willful or evil motive or reckless indifference to rights of others; business judgment rule.

Decision:   Affirmed trial court decision against condo for breach of fiduciary duty to homeowner, and the award of punitive damages amounting to $22,000 above the damages of $5,497.

Discussion by the Court: 

“The purpose of punitive damages is not compensation, but punishment of the offender and deterrence of the wrongdoer and others. Punitive damages may be awarded ‘where the defendant’s conduct is willful or outrageous due to evil motive or a reckless indifference to the rights of others.’ “The parties agree that a trial court may award punitive damages in a breach of fiduciary duty case.

“[The trial court] found the Association ‘acted with reckless indifference to the rights and needs of [plaintiff] who was forced to use her own funds to repair an apartment and then hire a lawyer to help her recover her reasonable cost.’”

[Business judgment rule opinion].

“We note here that the Association urges us to find an abuse of discretion [judge overstepped his authority] because the award conflicts with its business judgment. ‘Under the business judgment rule [. . .] absent evidence of bad faith, fraud, illegality, or gross overreaching, courts are not at liberty to interfere with the exercise of business judgment by corporate directors.’

“The rule protects directors who have been careful and diligent in performing their duties from being subjected to liability for honest mistakes of judgment. . . . That is not what occurred in this case, where the Association was neither diligent nor careful in performing its duties, but instead chose to ignore the plight of  [plaintiff].”

Comment:  Punitive damages are the only realistic method whereby homeowner’s can impose a meaningful detriment to continued board abuse, as state laws do not punish the HOA board for violations of state laws or the governing documents.

 

Case:   Shuh v. Plaza Des Plaines Condominium Assn, No. 1-13-1999 (IL App. 1st  Dist. July 24, 201) (Thanks to HOA Member Services, “This website is designed to provide people with all the information they need to understand and enhance their experience of working with or living in a common interest development that is governed by a homeowners association.”)

 

 

When can a homeowner withhold HOA assessments?

In January the Illinois Supreme Court agreed to hear the condominium case, Spanish Court Two Condominium Association v. Lisa Carlson, No. 115342, that breaks with the commonly held legal doctrine that HOA members are not permitted to withhold paying assessments, even when the HOA has failed to make necessary structural repairs to the condominium. Courts have held that HOAs are subject to servitudes law foremost, and that the common good required for the survival of the HOA is paramount.  Therefore, payments must not be withheld in spite of any outstanding controversy.

 In Spanish Court the appellate court held that a HOA condominium owner could withhold paying assessments because the relationship between the owner and HOA was similar to that of a tenant and landlord.  The contract in both situations involved mutual promises of making payments in return for HOA services to maintain and repair the property.  The court held that under contract law the withholding of payments was permitted. This decision broke with precedent, bringing justice to homeowners against special laws for HOAs.

 The courts in other cases and in other states have held that the declaration of Covenants, Conditions and Restrictions (CC&Rs) are a contract to be interpreted as a contract, but then apply servitude law over contract law, and even over constitutional law.  (See the Restatement Servitudes, § 3.1, comment h and§ 6.13, comment a).

 For example, this holding stands in contrast to the January 2013 Illinois Supreme Court ruling in Poris v. Lake Holiday POA (No. 113907) that allowed HOA security personnel to stop and detain drivers who are violating HOA rules, and not municipality ordinances. Here, servitude law prevailed over constitutional law.  And, in 2007 the Twin Rivers HOA (NJ) free speech case (CBTW v. Twin Rivers, 929 A.2d 1060) held that the business judgment rule would protect homeowner rights, and that there may be some instances where constitutional concerns could come into play.

 The Illinois appellate court admitted to the fact that its opinion stood alone in favor of the homeowner and contract law when HOAs are involved.  If the preponderance of the cases is to control, then homeowners can expect an Illinois Supreme Court reversal of the appellate decision as it did in Poris. Homeowners and justice should not be too enthusiastic about the right to withhold assessments in HOAs.

Learn to accept and love your HOA — It’s here to stay.

In the one week since seeking support for a White House petition to declare people living in HOAs still citizens of this country, only 50 have submitted a petition. I would like to thank those special 50 persons who took a simple step to fight for their rights. And your rights, too.

Homeowners living in HOAs and the people at large have spoken, or more correctly, have spoken with their silence. Homeowner rights advocacy is a myth, as is the America being taught to your children or grandchildren in public schools. At the local government level, government by business driven, profit-seeking organizations with their adhesion Declaration of CC&Rs contracts are becoming the norm for local government in America.

Political scientists like Robert H. Nelson, and none other than The Goldwater Institute in Arizona, have supported  local government by restrictive covenant contracts that are not subject to the US Constitution.

Over the years I’ve tried to present, discuss and explain the fundamental issues of our constitutional democratic government with respect to homeowners associations.  There is nothing more I can say or do.  You have spoken.

Welcome to the New America of HOA-Land.
Learn to accept and love your HOA. It’s here to stay.

Columbia Association: the iconic HOA private government ploy to circumvent the Constitution

In the ExploreHoward.com letter to the editor, CA should not be exempted from Homeowners Association Act, the reader is told that this master, master HOA is seeking legislation to have it declared not to be an HOA.  The writer strenuously objects, saying,

The purpose of the proposed legislation is to immediately exempt CA [Columbia Association] from some of the protections afforded Columbia residents by the Consumer Protection Act, and to exempt CA from all future amendments to the HOAA [HOA act]. . . .  The real purpose of CA’s attempted subversion of the residents’ protections is based on CA’s refusal to disclose the annual compensation of all of its employees, as required by the Consumer Protection Act.

The CA attorney’s defense is, according to the letter, “that CA has enough protection for residents in its bylaws and other documents so that statutory protections are unnecessary.”  Didn’t we hear that in Twin Rivers where the NJ Supreme Court said homeowners were protected by the business judgment rule, so no need to get all riled about the loss of constitutional protections?

What is CA all about?  Howard County, MD contains the city of Columbia with its Columbia Association, a mega, mega, master association that resembles a large city rather than a subsection.  Its Pubic Information Guide refers to CA as

A nonprofit public benefit corporation” — which has no legal definition or standing — with “nine villages and Town Center are organized into 10 village community associations . . . . Each of Columbia’s nine villages and Town Center has a community association, which is an independent, incorporated, nonprofit civic association. 

 The Articles of Incorporation, along with the Covenants of the nine villages, provide CA with all of the rights, powers and authority it needs to carry out its purposes. The two documents empower CA to collect the annual charge and promulgate rules governing the use of facilities, the integrity of architecture and aesthetics, and so forth. The documents themselves can be consulted for further information. (Part II, How CA is Organized and How It Works).

 CA has a 2012 budget of over $67 million.

The way this private government works is that the HOAs are mandatory HOAs with covenants running with the land.  In their “Covenants,” CC&Rs for everybody else, there is the tie-in wording granting the non-profit corporation, CA, control over the HOA communities.  The HOAs elect representatives to the CA board.  It is similar to other master private governments.

Since all entities are private contractual arrangements, Columbia Association is an independent principality on the scale of the charter organizations of the 1600s through 1800s.  You may recall two of the most notable enterprises: The British East India Company (operating mainly in India) and the Dutch East India Company (controlled what is now known as Indonesia).

Here and now, CA makes use of the various subdivision HOA covenants running with the land, the CC&Rs, to entrap homeowners into bondage under their de facto but unrecognized private government.  And it has to resort to newspeak by referring to them as “villages” and the CC&Rs as “covenants.”

 

What is the HOA liability for wrongful acts by its security officers?

 

As a private government, HOAs are not subject to government immunity as other government entities.  Its officers are not covered by limited immunity for discretionary decisions as government officials are.    Can the HOA board escape liability because they are volunteers?  Does their D & O insurance cover such negligence as appears to have occurred in the tragic incident described below?  Or escape liability under the pro-HOA attorney’s business judgment rule defense (my emphasis)?

 

The business judgment rule thus provides significant protection to directors (and officers) from personal liability for their good faith, informed, business decisions. The presumption may be rebutted where it is shown that a director . . . did not inform himself of all information that was reasonably available, failed to exercise the requisite level of care . . . .

 

In other words, doesn’t the HOA board of directors have a duty of care as a prudent person acting in good faith, and under fiduciary duties to the HOA to properly supervise and oversee the acts of their agents?    Under agency law and tort respondeat superior liability, the answer is YES.   And how much can that liability amount to?   Millions of $$$?  I think in the following incident it could well be.

I call your attention to the killing of a 17 year-old in a gated Florida HOA by an armed HOA security guard who is not even a police officer.  Read this report and judge for yourself:  Shooter of Trayvon Martin a habitual caller to cops.  By what authority do HOA governments usurp legitimate public government police powers to stop and detain others?  A recent Illinois court says that stopping and detaining, no less shooting others, was a violation of government authority. See How far will independent HOA principalities go in usurping police powers.

HOAs must be held subject to the Constitution and the laws of the land.  They must not be permitted to hide behind exaggerated claims of “private contract” exclusions and escape application of the 14th Amendment that applies to all legitimate public government entities. They must not be permitted to escape application of their state’s constitution and its Declaration of Rights.