By Deborah Goonan, Independent American Communities
December 2018 HOA litigation and case law highlights: business judgment rule, assessment collection following bankruptcy, and HOA foreclosure rights and limitations.
How Is The Business Judgment Rule Applied To Board Actions?
by Husch Blackwell LLP
November 14, 2018
The Business Judgment Rule can be a great protection for condo and HOA boards—but only if the board is following the documents.
Facts. The Declaration for an HOA stated that the Board had the discretion to raise the “maximum annual assessment” without a vote of the homeowners as long as it was “in an amount equal to 150% of the rise, if any, of the [CPI] for the preceding month of July.” Higher increases required the vote of the homeowners. The Association’s Bylaws contained a formula for calculating this “maximum annual assessment” raise, but the formula allowed the Board to accumulate the CPI increases year over year in calculating the maximum assessment. The Board followed the Bylaws formula, and owners sued, contending (1) that the increase to the maximum annual assessment was higher than the Board had authority to do under the Declaration; and (2) that the Bylaws formula conflicted with the Declaration. The HOA Board argued that it exercised good Business Judgment in following the Bylaws formula.
Court Rulings. The Court rejected the HOA’s argument and found that the Business Judgement Rule did not protect the actions of the HOA Board because they acted beyond the Board’s powers. Because the Declaration controls over the Bylaws when there is a conflict in terms, the Court found the Board, in following the Bylaws formula and assessing the owners more than the allowed amount in the Declaration (without an owner vote), acted outside of its authority.
Two important points here. 1) In case of a conflict between Declarations (CC&Rs) and ByLaws, the Declarations rule. And 2) Business Judgment Rule does not protect the HOA board when they act outside their authority. In other words, if the board isn’t granted the power in the Declarations, then they cannot get away with adding additional or greater BOD powers to ByLaws, Articles, or Rules.
Jonathan Goldstein: Facebook Post to Associations – Limit Confidentiality in Your Settlements
BY JONATHAN S. GOLDSTEIN, ESQ – Community associations (condominiums and homeowners’ associations) should always attempt to obtain limitations on confidentiality agreements in settlements that permit the association to share the agreement with its members. These limitations should also insulate the association from responsibility if one of its members disseminates the agreement without the association’s approval. This issue affects many individuals and entities because of the prevalence of community association ownership and litigation.
A recently issued decision by the Florida 3rd District Court of Appeal, in the case of Gulliver Schools Inc. and School Mgmt. Systems Inc. v. Snay, 39 Fla. L. Weekly D457 (Fla. 3d DCA Feb. 26, 2014), illustrates the potential significance of confidentiality provisions in such settlements. The Gulliver Schools Inc. decision dealt with a confidential settlement agreement entered into by a school and one of its former teachers that prohibited the teacher from disclosing, directly or indirectly, the terms or existence of the settlement.
But days after the settlement was entered into, the teacher’s daughter posted an announcement of the settlement on Facebook – to more than 1,200 of her Facebook friends. The appellate court agreed with the school that the teacher should not be entitled to the full award agreed upon in the settlement because the teacher had breached a material term; namely, the confidentiality clause.
Here’s a Florida attorney’s argument against confidentiality clauses in out-of-court settlements between HOAs and residents/owners. Goldstein argues that association members have a right to know the outcome of a legal settlement. Plus, the risk of someone in the homeowners, condo, or co-op association revealing information to a third-party is quite high, exposing the association to liability for breaking the “gag order.”
Can A Court Set Aside A HOA-Lien Foreclosure Sale Because The Sales Price Was Too Low?
by Husch Blackwell LLP
November 7, 2018
When a mortgage company faces having its mortgage interest swept away in a quiet title action following an HOA lien foreclosure, the mortgage company comes up with all sorts of arguments as to why its mortgage should remain intact. This time, the arguments did not carry the day.
Lesson. This case provides some solace for condo associations around the country, because it is a very rare case indeed where the unpaid assessments equal the fair market value of the property. At most lien foreclosure sales, the sales prices are quite low in comparison to the fair market value. Based on this case, mortgage companies cannot seek to invalidate an association’s sheriff’s sale simply because the winning bid is only a small fraction of the unit’s market value.
Case law in Nevada is clear: HOAs have the right to sell homes at foreclosure auction for prices well below the “commercially reasonable” market value of the property. Of course, lenders have a lot to lose when the buyer at HOA auction is able to get a judge to “quiet title,” or essentially eliminate the obligation of the buyer to pay off the first mortgage.
Here’s a clear direction for state, or better yet federal, Legislation. Uniform Commercial Code should apply to property sold at HOA foreclosure sales. The auctioneer must set a commercially reasonable minimum bid, to avoid selling someone’s home for a small fraction of its actual value, thereby creating a windfall for the buyer.
As things currently stand, anyone connected to an association-governed community, who would like to purchase cheap real estate, has a perverse incentive to force as many HOA properties into foreclosure as possible.
July 13, 2018 Important New Case on the Rights of Home Owners in HOAs
In a case brought by two home owners against their home owners association (“HOA”), against the HOA directors, and against a bank that stacked the HOA board with directors which were its employees, the Court of Appeals of Tennessee recently issued an important and insightful opinion in the case of Urbanavage et. al. v. Capital Bank, et. al. Home owners frequently face an uphill battle when trying to assert their rights or when pursued by an HOA. This opinion gives home owners some ammunition. It also reiterates how difficult it can be for a home owner to prevail on claims against directors of an HOA.
Perhaps the most useful part of this case to Tennessee lawyers who handle home owner association cases is the court’s ruling on the HOA’s counterclaim against the Plaintiff Home Owners for unpaid HOA dues. In response to the counterclaim of the HOA, the Plaintiffs asserted the affirmative defense that the HOA had committed the first material breach of the Master Deed by failing to maintain the common areas. In Tennessee, if the party suing for breach of contract committed a material breach of the contract before the party being sued, the suing party cannot hold the other party responsible for its breach. The court of appeals held that the HOA should not have been granted a summary judgment for unpaid dues because the Plaintiffs were entitled to try to prove their first material breach defense at trial.
In this Tennessee lawsuit, the appellate court ruled that, while property owners cannot get away with nonpayment of assessments, they are entitled to the opportunity to prove their claims of HOA breach of contract in court.
May a homeowners’ association (HOA) collect assessments from an owner after the owner files for bankruptcy?
Posted by ft Editorial Staff | Sep 18, 2018 | Distressed Sales, Finance and Mortgages, Latest Articles, Loan Products, Recent Case Decisions
Justia Opinion Summary
The Ninth Circuit reversed the district court’s decision affirming the bankruptcy court’s summary judgment in favor of a condominium association. The panel held that condominium association assessments that become due after a debtor has filed for bankruptcy under Chapter 13 were dischargeable under 11 U.S.C. 1328(a). In this case, debtor’s personal obligation to pay the assessments was not the result of a separate, post-petition transaction but was created when she took title to the condominium unit. Therefore, the debt for the assessments arose pre-petition and was dischargeable under section 1328(a), unless the Bankruptcy Code provided an exception to discharge. The panel held that the personal debt arising from the assessments was not excepted from discharge under section 1328(a). Finally, the Takings Clause was not implicated and equitable arguments did not override the express provisions of the Bankruptcy Code.
Holding: A California court of appeals holds the HOA may not collect money for unpaid assessments due after an owner’s bankruptcy filing since they are an unmatured debt created at the time of the owner’s purchase of the condominium, maturing each time an HOA assessment was due and thus are dischargeable in the owner’s Chapter 13 bankruptcy. [Goudelock v. Sixty-01 Association of Apartment Owners (February 6, 2018)CA5th]
Editor’s note—Only debts incurred prior to a bankruptcy filing are dischargeable.
Association-governed community collections companies and attorneys in California are bound to be unhappy about this recent court ruling in California. It means they won’t be able to collect HOA assessments when the owner files for Chapter 13 bankruptcy.
However, after the bankruptcy is discharged, the owner has an obligation to pay HOA assessments going forward, until the property is sold to a new owner.
RESIDENTS SUE RSF ASSOCIATION OVER ‘UNFAIR’ ASSESSMENTS (California)
By Karen Billing, Rancho Santa Fe Review
October 23, 2018 3:00 PM
A lawsuit has been filed against the Rancho Santa Fe Association by a group of members called the Rancho Santa Fe Covenant Residents for Fair Assessments. The complaint filed on Oct. 5 challenges the Association’s “inequitable” method of assessing its members, creating a gap between what is paid by longtime homeowners and those who have recently purchased, built or remodeled a Covenant property.
“The Association has referred the complaint to counsel and will provide further comment to its members when appropriate,” said RSF Association Manager Christy Whalen in a statement.
The RSF Covenant Residents for Fair Assessments includes a group of more than 50 residents whose goal is to address a “fundamental unfairness in the assessment methodology of the Covenant.”
Currently homeowners are assessed at a rate of $100 per the assessed value of the lot as shown on the San Diego County tax assessor’s roll, not on the property’s fair market value. The plaintiffs argue that the “unfair” assessment method is a result of Proposition 13, which was enacted in 1978, more than 50 years after the Protective Covenant came into existence.
Basis for these California lawsuits: HOA assessments allocations are not fair.
Homeowners argue that California’s Prop 13 should not be the basis for determining HOA assessments. Rather than charging a flat fee per unit to homeowners, some HOAs base their fees on County assessed property values.
In California, those values are inequitable based upon Prop 13.
Prop 13 “rewards” homeowners with lower property taxes the longer they hold onto their homes, so long as they preserve their homes, and make no major improvements.
In other words, Counties reassess homes at higher rates when they are sold or improved. Thus, Prop 13 creates disincentives to modernize, remodel, expand, or move.
South Carolina Court Affirms Lien Foreclosure
Excerpt:In January 2018, seven South Carolina real estate owners in community associations, sued not only their seven associations but also six management companies and four law firms. Each of the seven plaintiffs were subject to lien foreclosure actions at the time of the lawsuit due to unpaid assessments. Plaintiffs argued that South Carolina lacks statutory authority for such liens and equitable foreclosure. CAI submitted an amicus brief to dismiss the case, explaining to the court that the law of real covenants supports the creation of homeowners associations, and lien rights are derived from common law and require no statutory basis in South Carolina.
Fortunately for homeowners associations, the judge recognized the importance of assessment lien foreclosure and dismissed the case in June. The judge agreed with the defendants and CAI, explaining that the filing notice of liens and foreclosing on them in South Carolina is based on restrictive covenants engrained in the common law of the state.
As expected, South Carolina courts ruled in favor of an HOA’s right to foreclose to collect its liens for past due assessments. CAI argues that association-governing boards derive their rights from the covenants and restrictions that obligate property owners with mandatory assessments.
Although state law is not deemed necessary to allow HOAs to foreclose, state law could theoretically be written to prohibit or severely restrict HOA rights to take property by foreclosure.
Court Ruling Complicates Condominium Member Lawsuits
By Roger Slade and Jonathan Goldstein | September 18, 2018 at 09:07 AM
A recent decision from an appellate court in Tallahassee will likely create significant hurdles for condominium unit owners who wish to sue their association and its directors for wrongdoing that affects the entire membership. In Iezzi v Edgewater, the First District Court of Appeal held that members of a not-for-profit condominium association must comply with the pre-suit notice requirements for shareholder’s derivative suits before commencing a lawsuit against the association and its directors.The court recognized an exception for those lawsuits which seek “equitable relief,” such as an injunction, and distinguished the standing of owners to seek relief that would represent and benefit an entire class, also explaining historical standing to seek relief in a “representative capacity” for such things as construction defects related to the association’s common elements.
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Florida courts are moving in the direction of requiring pre-suit mediation for condominium derivative lawsuits.
$7.5M Verdict Against Condo Association Should Have Been Prevented
The recent $7.5 million verdict for a St. Petersburg, Florida, condominium resident to compensate him for the injuries that he sustained in his community’s hot tub is a telling example of the potential ramifications that can result when any defects in the working condition of these amenities are not properly addressed.
By Michael L. Hyman | September 26, 2018 at 09:40 AM
While recreational amenities such as pools and hot tubs significantly add to the appeal of condominium and homeowners association communities, they also come with major liability risks that must be mitigated by the use of effective safety and maintenance measures. The recent $7.5 million verdict for a St. Petersburg, Florida, condominium resident to compensate him for the injuries that he sustained in his community’s hot tub is a telling example of the potential ramifications that can result when any defects in the working condition of these amenities are not properly addressed.
In 2008, Ehab Mina was about to step into the hot tub at the Boca Ciega Resort & Marina Condominium when he became startled to see that it was partially drained. The problem in the hot tub caused the 44-year-old to slip, and he badly injured his right shoulder and spine.
Mina required multiple surgeries, and he was ultimately forced to sell his boat-building business as a result of his injuries. He filed suit against the association and its property management company, Condos by Sirata Inc., alleging that the hot tub should have had a posted warning and adequate lighting in the evening hours.
The attorneys for the condominium association responded by arguing that the half-empty hot tub was an obvious condition, but the jury found the association and its management company to be jointly liable. It awarded a $7.56 million verdict to Mina.
When the association board is more concerned that residents will complain about a temporary closure for repairs and maintenance than safety, accidents are more likely to happen. And chances are high that your homeowners, condo, or co-op association isn’t carrying sufficient insurance to cover a multimillion dollar award.