By Deborah Goonan, Independent American Communities
A collection of interesting and important case law from around the U.S. New rulings affecting HOA Collections, foreclosure liens, and rules enforcement in several states across the U.S.
MARYLAND’S HIGHEST COURT HOLDS THAT CONDOS MAY NOT BY RULE SUSPEND A UNIT OWNER’S ACCESS TO COMMON ELEMENTS FOR DELINQUENT ASSESSMENTS
Posts by Raymond D. Burke, June 27, 2017
The Maryland Court of Appeals has invalidated a rule adopted by a condominium to suspend access to common elements for unit owners who are delinquent in paying assessments. In an opinion issued on June 23, 2017 in the case of Elvation Towne Condominium Regime II, Inc. v. Rose, No. 33, Sept. 2016, the Court held that, in order to restrict access to the common elements as a means of enforcing payment of condominium assessments, such a restriction must be provided in the condominium’s declaration. It may not be adopted by rule promulgated by the board of directors. The ruling affirmed prior rulings in the case by the Circuit Court for Anne Arundel County and the Maryland Court of Special Appeals.
This is the first ruling I have read where the court ruled that suspending access to common areas constitutes a “taking” under the U.S. and state Constitutions. The caveat — if the Declarations (Covenants, Conditions, & Restrictions) grant the condo association board the authority to suspend common area rights, and the homeowner “agrees” to those terms upon taking title to the property or moving into a unit, then it is apparently not a “taking” to suspend those property rights.
D.C. APPEALS COURT HOLDS THAT A CONDOMINIUM ASSOCIATION MAY NOT FORECLOSE ON ITS SUPER-PRIORITY LIEN WHILE LEAVING THE PROPERTY SUBJECT TO THE FIRST-LIEN MORTGAGE
On March 1, the District of Columbia Court of Appeals held that a condominium association acting on its six-month super-priority lien for unpaid condominium fees may not perform its foreclosure sale while leaving the property subject to a first deed of trust lien, even if the terms of the sale stated that the condo unit could be sold subject to the first deed of trust. The D.C. Appeals Court was tasked with deciding whether the mortgagee’s first mortgage lien was extinguished by foreclosure of the HOA’s super-lien under D.C. Code § 42-1903.13(a)(2). In the District of Columbia, condominium associations are granted a “super-priority lien” over first mortgage lienholders, which permits an association to collect up to six months of unpaid assessments upon foreclosure on a condominium unit. Foreclosure of a unit extinguishes all liens when the proceeds of the foreclosure sale are insufficient to satisfy them. The D.C. Appeals Court held that a condominium association could not foreclose on its super-priority lien while leaving the property subject to the unsatisfied balance of the first mortgage or first deed of trust.
The D.C. Appeals Court reversed the trial court’s order granting summary judgment to the mortgagee and remanded for further proceedings.
This is the second court decision confirming that, in District of Columbia, a condo or HOA foreclosure extinguishes all other liens, including the first mortgage. If a property foreclosed by the association does not generate a price that is high enough to cover the first mortgage, then the remaining balance of that lien is effectively wiped out.
Collecting assessments is one of the main ongoing tasks for any association. Although community association attorneys are clearly required to comply with the various state and federal fair debt collection laws, whether management companies have the same duty to comply with these laws is not quite as clear.
Under the federal Fair Debt Collection Practices Act (FDCPA), a company that handles collecting money on an account that is not in default is considered to fall outside the definition of “debt collector” for purposes of the FDCPA. However, a recent decision from the California Court of Appeal has now expanded the definition of “debt collector” under California’s Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) to include mortgage servicers. As mortgage servicers act to handle debts that are not yet in default like management companies, the potential for community association managers and management companies to be sued under the Rosenthal Act just became a lot greater.
The decision issued in Davidson v. Seterus, Inc. on March 13, 2018, held that mortgage servicers can be “debt collectors” under the Rosenthal Act. In this case, Edward Davidson brought a class action lawsuit against Seterus, Inc., a mortgage service company, and its parent company, International Business Machines Corporation (IBM). Davidson alleged that he and other class members were victims of Seterus’s unlawful collection practices because Seterus had threatened him with foreclosure of his home, threatened to report negative credit information to credit bureaus and harassed him with numerous threatening phone calls, causing him emotional distress and damages. The trial court dismissed Davidson’s complaint with prejudice, concluding that Seterus and IBM were not “debt collectors” because foreclosure on a mortgage is not debt collection and a mortgage lender or mortgage servicer is not a “debt collector” for purposes of the FDCPA.
The Court of Appeal reversed the trial court’s ruling noting that California’s Rosenthal Act was meant to have a broader definition of “debt collector” than that provided in the FDCPA. It held that there is nothing in the Rosenthal Act which would exclude mortgage servicers from liability under the act. In its decision, the Court stated that “the Rosenthal Act is a civil statute enacted for the protection of the public,” and that “the statute should be construed broadly in favor of protecting the public.”
The decision in this case is significant as mortgage servicers are not usually considered debt collectors because they act to service repayment of a debt that is not yet in default. The reasoning of the Court of Appeal here could be used to argue that a community association’s management company should be liable for the same type of collection activities that Seterus engaged in to recover money from Davidson. As this decision places more weight on the alleged harassment than on whether the debt owed by Davidson was actually past due or in default, it may signal a shift in how debt collection cases in California will be decided in the future. Managers and management companies may want to reconsider any practices that involve reporting information to credit bureaus or telephoning delinquent homeowners about assessment debt, as such practices may be considered harassing to the delinquent homeowner.
In one attorney’s opinion, California’s liberal definition of a debt collector to include mortgage servicers, could also include managers of association-governed, common interest communities.
(AZ) PATRICIA BOCCHINO, PLAINTIFF/APPELLEE, V. FOUNTAIN SHADOWS HOMEOWNERS ASSOCIATION, DEFENDANT/APPELLANT.
No. 1 CA-CV 16-0710 Court of Appeals of Arizona, Division 1.
Decided: April 03, 2018
Judge John C. Gemmill 1 delivered the opinion of the Court, in which Presiding Judge Michael J. Brown and Judge Maria Elena Cruz joined.Dessaules Law Group, Phoenix, By JonathanA. Dessaules, Ashley C. Hill, Counsel for Plaintiff/Appellee Carpenter, Hazlewood, Delgado & Bolen, PLC, Phoenix, By ChadP. Miesen, Charlene Cruz, Counsel for Defendant/AppellantOPINION
¶1 Fountain Shadows Homeowners Association (the “Association”) appeals from summary judgment in favor of Patricia Bocchino. We affirm the judgment requiring the Association to repay an amount of attorney fees to Bocchino. The Association was not entitled to unilaterally assess against her the attorney fees it incurred in obtaining from justice court an injunction against her, when the Association did not seek an award of attorney fees from the court and no fees were awarded by the court.
An association-governing board cannot directly bill one of its members to attorney fees, without first obtaining a court order awarding reasonable attorney fees.
ARBITRATION NOT REQUIRED FOR SUIT ALLEGING BREACH OF FIDUCIARY DUTY BY ASSOCIATION DIRECTORS (FL)
APRIL 20, 2018
by Michael E. Chapnick
While most garden-variety disputes between unit owners and their condominium associations are mandated by law to go to nonbinding arbitration before going to court, certain types of more complex disagreements are specifically excluded from this requirement and can proceed straight to trial.
The latest ruling over whether a dispute between an owner and a condominium association involving an addition to a common element was required to first go to arbitration before trial came in the case of Palisades Owners’ Association v. Thomas F. Browning before Florida’s First District Court of Appeal.
Dan Phillips and Jamey Phillips, who each own a unit in the Palisades condominium in Panama City, Fla. and serve on the association’s board of directors, added a boat lift to the community’s dock in 2016 for their exclusive use without prior approval from the other unit owners. As a result, unit owner Thomas F. Browning sued the association, which moved to dismiss the suit based on the contention that it must first be submitted to nonbinding arbitration in accordance with The Condominium Act.
Because the complaint included claims of breach of fiduciary duty by the association, the trial court concluded that Browning’s claims were specifically excluded from the class of disagreements required to be submitted to arbitration under the law.
This ruling is important, because it eliminates the requirement for an aggrieved member of an association-governed community to waste time and money on nonbinding arbitration when a breach of fiduciary duty claim is involved.
SANTA FE – A state appeals court rejected the “Chicken Little-esque” notion that “the sky will fall” if backyard hens are allowed in a subdivision just east of Santa Fe, reversing a district court ruling that the community’s covenants outlaw the poultry because they cannot be classified as pets.
That throws the yearslong fight – the Eldorado Community Improvement Association first sued the hen-keepers in 2012 and the fight burbled among residents well before then – back into the laps of community residents and their association.
The ruling filed Monday and written by New Mexico Court of Appeals Judge Jonathan Sutin is based largely on a technical legal argument about whether the wording of Eldorado’s covenant about pets should be interpreted more strictly under contract law or under covenant court rulings that call for vague language to be decided in favor of free use by a property owner.
The Eldorado covenants say, “No animals, birds or poultry shall be kept or maintained on any lot, except recognized household pets.”
Sutin concluded that the Eldorado rule cannot be enforced “to preclude the owners from keeping their hens as recognized household pets.”
He noted that definitions of a pet don’t exclude the possibility that pets can also serve a use.
“For purposes here, hens kept as a source of eggs are poultry, and hens also kept as a source of companionship or pleasure can be a pet,” the ruling states.
HOMEOWNERS ASSOCIATION LAND USE APPROVAL PROCESS IS PROTECTED ACTIVITY UNDER ANTI-SLAPP STATUTE
by Brian Daluiso, April 17, 2018
In California, the courts regard HOA discussions with local government officials regarding new residential development proposals to be “in the public interest.” Therefore, homeowners have First Amendment rights to express opposition to new development near their neighborhood, without fear of retaliation lawsuits by a developer.
CASE LAW UPDATE: ASSOCIATION CLUB DUES PAYMENT COVENANT
HOSPITALITY LAW CHECK-IN
Greenberg Traurig LLP
April 12 2018
In Conleys Creek Ltd. Partnership vs Smoky Mountain Country Club Property Owners Ass’n, a North Carolina Court of Appeals upheld the enforceability of community covenants mandating the homeowners association to collect clubhouse dues from residential unit owners and remit them to the developer that owns a clubhouse in the community. However, the decision also included guidance of how another homeowners association might challenge a different mandatory dues payment covenant in the future. 2017 WL 3860494 (NC Ct. App 2017). The court held that the covenant is enforceable because it was not inconsistent with the North Carolina Planned Community Act. The court also noted that a homeowners association has the power to impose fees and charges for services provided to lot owners, not solely for common areas.
Interesting case that highlights the problem of perpetual developer control of a common amenity, in this case, a Country Club, that requires property owners to pay assessments to the developer-owner of the amenity, even after control of the Association is turned over to the homeowners.
NC law does not specifically prohibit such an arrangement, however, according to this opinion, homeowners can amend governing documents following turnover from the Declarant (developer) to eliminate perpetual assessments, if they can prove that the obligation is “unconscionable.”
FORECLOSURE BY ADVERTISEMENT AND THE FDCPA
By Robert M. Meisner, Esq., Brian Harris, Esq. and Mark Petrie, Legal Assistant
July 25, 2017
In most circumstances, we at The Meisner Law Group have found that the best recommended option to pursue foreclosure on a property for delinquent assessments is a judicial action as opposed to nonjudicial foreclosure by advertisement. Now, there is even more reason to prefer judicial action, as a recent decision concerning the federal Fair Debt Collection Practices Act (FDCPA) has called into question the advisability of hiring a third party to pursue any foreclosure by advertisement in Michigan.
In Salewske, et al. v. Trott & Trott, 2017 WL 2888998, decided on July 7, 2017, the U.S. District Court for the Eastern District of Michigan largely adopted a magistrate’s recommendation, including that the defendant debt collector’s motion to dismiss be denied. The defendant had argued in the motion that the public notices given during the foreclosure by advertisement process could not constitute communication in connection with the collection of a debt under the FDCPA because the notices were required by Michigan law. Indeed, their public notices were standard, and the defendants have been following the same practice along with many other firms performing similar services, for many years.
However, the District Court noted that it must rule in accordance with the federal Sixth Circuit Court’s decision in Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013):
“…mortgage foreclosure is debt collection under the FDCPA… [l]awyers who meet the general definition of a ‘debt collector’ must comply with the FDCPA when engaged in mortgage foreclosure… every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion (i.e., forcing a settlement) or compulsion (i.e., obtaining a judgment of foreclosure, selling the home at auction, and applying the proceeds from the sale to pay down the outstanding debt).”
The District Court found that the public notices given in accordance with foreclosure by advertisement could reasonably be found by a jury to be “animated” by an attempt to induce payment, which would mean the notices are communications subject to the FDCPA.
A recent District Court ruling appears to disfavor nonjudicial “foreclosure by advertisement,” subjecting HOA collections of liens to FDCPA. The court argued that public advertisement of foreclosure does not comply with FDCPA private notice and communication requirements, and that attorneys handling HOA foreclosures are, in fact, debt collectors subject to FDCPA.
The ruling contradicts other U.S. court opinions on the matter of FDCPA, but shows that the legal climate surrounding HOA collections and foreclosure may be in transition.
THE FINE LINE BETWEEN REASONABLE AND CONFISCATORY FINES
Victor M. Metsch in Legal/Financial on April 5, 2018
The Business Judgment Rule is a powerful shield for co-op and condo boards. It precludes the courts from reviewing board actions so long as the board has acted in good faith, within the scope of its authority, and in the best interest of the co-op corporation or the condo association. That’s a broad protection, but it is not a license for boards to do as they please. That lesson came home in a Manhattan condominium where a dispute arose over a fine for a sublet.
This condominium’s bylaws strictly prohibited transient occupancy of apartments – a fancy way of saying that subletting was forbidden. Yet a unit-owner rented out her apartment for 119 days at a daily rate of $700. How does the board penalize this breach of the bylaws? The board decided to fine the unit-owner $1,000 per day – a total of $119,000. Was the fine permissible, as the board argued? Or was it illegal and confiscatory, as the unit-owner alleged? Now things got interesting.
Ultimately, the court agreed that a $1,000 per day fine was confiscatory.
CALIFORNIA APPELLATE COURT BLOCKS SOCAL HOMEOWNERS ASSOCIATION’S SHORT-TERM RENTAL BAN
ALM Media ALM MediaMarch 27, 2018
A California appellate court has found that a Southern California homeowners association’s ban on short-term rentals runs afoul of the state’s coastal access law. In June 2016, the Mandalay Shores Community Association passed a resolution that barred owners of about 1,400 single-family units along the Oxnard coast from renting their dwellings for less than 30 days. The Second District Court of Appeal on Tuesday found the ban on short-term rentals violated the California Coastal Act of 1976, which was passed to “maximize public access” to the beach. “Respondent Mandalay Shores Community Association has not erected a physical barrier to the beach but has erected a monetary barrier to the beach. It has no right to do so,” wrote Justice Kenneth Yegan in the introduction to the unanimous Second District opinion.
Read the opinion here.
The decision to ban or regulate STRs must be made by the City and Coastal Commission, not a homeowner’s association. Respondent’s STR ban affects 1,400 units and cuts across a wide swath of beach properties that have historically been used as short term rentals.
In California, as in other coastal states, the battle over whether or not to allow short term rentals (STRs) is a bitter one. One group of owners wants the right to generate revenue from STRs. The other group of owners and residents wants a peaceful neighborhood that is not overrun with strangers on vacation next door, perhaps partying loudly until the wee hours of the morning.
The Appellate Court wants public access to the beach vs. restricted access or bans imposed by association-governed communities.