HOA, condo, & co-op case law and litigation highlights (Feb. 2019)

 

By Deborah Goonan, Independent American Communities

This month: HOA and homeowner rights when making construction defect claims; limited obligations for housing providers under Fair Housing Act; application of FDCPA to HOA fee collections; exceeding liability insurance limits; Free Speech in HOAs.

Illinois: home and condo owners cannot hold subcontractors responsible for defective construction

In a recent Supreme Court ruling, construction industry subcontractors scored a big win, at the expense of home and condo owners in Illinois.

Three years ago, a condo association filed a lawsuit against a developer and various construction companies over leaky aluminum windows. But in December, Illinois SC ruled that homeowners and condo associations cannot sue subcontractors for breach of implied warranty of habitability. The court reasoned that subcontractors do not have a direct contractual relationship with home buyers.

Homeowners must instead pursue developers and general contractors when they discover defective products or construction. Since subcontractors can be sued by a general contractor, where a contractual relationship does exist.

The IL SC ruling reverses 35 years of case law that allowed homeowners to sue all parties involved in construction, including subcontractors.

Construction defect attorneys say the ruling is devastating for homeowners, especially condo owners, because a condo developer’s coporation usually dissolves upon turnover to the condo owners. General contractors generally shift blame down to their subcontractors.

But according to a 2015 study by NAHB, It Takes 22 Subcontractors to Build the Average Home. Foreign-born workers accounted for almost 23% of the home building work force in 2014, according to the Department of Labor.

And, although NAHB states it does not support illegal immigration, its official Labor policy favors limiting its contractor members’ liability for verification of legal worker status for employees of their sub-contractors.

So, according to NAHB, general contractors can freely work with subcontractors who employ unskilled labor, including undocumented foreign-born workers. But what happens when the home or condo buyer ends up with an inferior or defective product?

Unfortunately, it seems that homeowners and their HOAs will have no practical way to force responsible parties to pay for damages and repairs.

Sources:

NAHB Priorities – Labor Shortage

Condo owners lose key remedy for construction problems

A December ruling by the state Supreme Court reversed a consumer protection that had been in place for 35 years.

Crain’s Chicago Business

Excerpt:
When condo boards find defects in construction years after a building is complete, they often can’t sue the original developer to cover the cost, the attorneys said, because developers typically create a limited liability company for each project that shuts down when the project is complete. The general contractor that was hired by the developer “pushes liability down to the subcontractor,” Lewin said, “who are usually the ones who end up paying the loss.”

Read more:Condo owners lose key remedy for construction problems

Buyer Beware: Illinois Supreme Court Protects Subcontractors from Implied Warranty Claims by Homeowners with No Contractual Relationship

Baker Sterchi Cowden & Rice LLC

USA February 12 2019
The Illinois Supreme Court recently overturned 35 years of precedent in holding that a purchaser of a newly constructed home cannot pursue a cause of action for breach of an implied warranty of habitability against a subcontractor where there is no contractual relationship between the two, explicitly overruling Milton v. Richards Group of Chicago Through Mach, 116 Ill. App. 3d 852 (1st Dist. 1983). In a victory for construction subcontractors, the court held that the homeowner’s claim for breach of the implied warranty of habitability is limited to those parties with whom the homeowner has a direct contractual relationship, typically the general contractor. Specifically, a subcontractor hired by the general contractor owes no such implied warranty to the homeowner.

The case of Sienna Court Condominium Association v. Champion Aluminum Corp., et al.arose from claims of water intrusion and other construction defects at a newly constructed 111-unit condominium complex in Evanston, Illinois.

Read more:

Buyer Beware: Illinois Supreme Court Protects Subcontractors from Implied Warranty Claims by Homeowners with No Contractual Relationship


Legal gavel lawsuit
(Pixabay.com free image)

Texas: Condo association cannot sue developer on behalf of unit owners

A condo association sued the developer and contractors, alleging defective, leaky windows. But the court dismissed the association’s lawsuit, because the Declarations (governing documents) state that the association cannot sue on behalf of its unit owners. Additionally, the documents specify that window replacement is the responsibility of each unit owner — in other words, windows are not common elements.

The case illustrates how developers avoid liability for construction defects by writing legal restrictions into the Declarations contract. And since no governing authority reviews real property covenants or restrictions for constitutionality, fair play, or reasonableness, buyers can end up paying out-of-pocket to fix shoddy construction.

Source:

Condominium Developers in Texas Can Protect Themselves from Future Lawsuits Through the Use of Declarations

by Baker Donelson, Jan. 15, 2019

A Texas court recently affirmed the dismissal of construction defect claims by a residential condominium unit owners’ association because it lacked standing to assert claims against the developer, general contractor, and subcontractors of a new high-rise project in Houston. The case involved a high-rise, multi-residential, and retail development with alleged construction defects in the windows and resulting damage from water intrusion into some of its approximately 400 condominium units.

Read more:
Condominium Developers in Texas Can Protect Themselves from Future Lawsuits Through the Use of Declarations


Fair Housing Act does not guarantee the right to a smoking ban in your condo building

Echo Valley Condominium Association had a problem. A resident requested an accommodation under the Fair Housing Act, asking for a ban on smoking in the building. But the condo association could not collect a majority of membership votes to approve the smoking ban, so they had to deny the Fair Housing request.

Ultimately the court found in favor of the condo association.

In general, a housing provider is not required to accommodate a resident’s disability when the request is unreasonable.

Source:

Smoking Ban Was An Unreasonable Request

by Husch Blackwell LLP, Jan. 22, 2019

Davis v. Echo Valley Condominium Association, No. 17-12475 (E.D. Mich. Nov. 7, 2018)

Summary

The Eastern District of Michigan court held that a smoking ban demanded by a disabled owner was an unreasonable accommodation for purposes of the Fair Housing Act since the measure was not approved by the owners, and the Association was powerless to impose a ban without an owner vote.

Read more:

Smoking Ban Was An Unreasonable Request


(Morguefile.com)

Are HOA fee and assessment collections subject to Fair Debt Collection Practices Act? It depends.

In the case cited below, collection of HOA fees was a small percentage of the law firm’s business (less than 2%). Therefore, the federal court ruled that it did not function as a debt collector.

However, the court explained that, if another law firm generates a significant portion of its revenue from HOA assessment collections, the court may rule that it is a debt collector subject to FDCPA.

Put simply, each similar FDCPA lawsuit will be determined on a case-by-case basic.

Source:

Law Firm Not a ‘Debt Collector’ Under FDCPA, says Fifth Circuit

By Mark J. Windham, Alan D. Wingfield & David N. Anthony on January 28, 2019

A law firm not specializing in debt collection activity is not a “debt collector” under the Fair Debt Collection Practices Act because it was not “regularly” engaged in debt collection, according to the U.S. Court of Appeals for the Fifth Circuit.  The case is Reyes v. Steeg Law.

Source: Law Firm Not a ‘Debt Collector’ Under FDCPA, says Fifth Circuit


Illinois: Condominium Association Liability insurance policies have limits

An insurance company for State Parkway Condo Association considered all of Novak’s claims to be connected to the same complaints, notably discrimination on the basis of his hearing impairment.

After years of litigation related to the same issues, General American Insurance Company informed the condo association when its policy limit had been exceeded. The condo association appealed the matter in court, but GAIC prevailed on its assertion of its policy limitations.

It seems that insurance companies are getting wise to HOA board members — and managers — who use Directors & Officers, or Errors & Omissions coverage as their personal “get out of jail free” card for abusive, discriminatory, or incompetent behavior.

Source:

“Related Wrongful Acts” Can Exhaust An Association’s Liability Insurance Policy Limit

by Husch Blackwell LLP

IMPRESSION: The ruling in Great Am. Ins. Co. v. State Parkway Condo. Ass’n, No. 17-cv-3083 (N.D. Ill. Sept. 11, 2018), should serve as a cautionary tale to Condo and HOA boards.

DETAILS: In Chicago, a unit owner of a condominium located at 1445 North State Street filed an Illinois state discrimination claim in 2007 against the State Parkway Condominium Association (“SPCA”) for failure to accommodate his hearing disability during SPCA Board meetings. The SPCA defended the claim under its 2006-2007 Non-Profit Management and Organization Liability Insurance Policy (“policy) issued by Travelers Casualty and Surety Company of America (“Travelers”).

Read more:
Related Wrongful Acts” Can Exhaust An Association’s Liability Insurance Policy Limit


Court law legal books gavel
(Pixabay.com free image)

California: If CC&Rs say so, HOAs must obtain a membership vote before filing construction defect claims

A planned community association made the mistake of not obtaining association members’ approval before filing a lawsuit against the developer. When the HOA learned of the need for a vote of membership in its Declaration of CC&Rs, it collected votes two years later.

An Arbitrator ruled in favor of the developer’s motion to dismiss the lawsuit, because the HOA did not follow the terms of the CC&Rs. The HOA attempted to get the court to vacate the Arbitrator’s decision, but the courts declined to throw out the Arbitrator’s ruling.

Source:

Arbitrator Not Found to Exceed its Powers

Branches Neighborhood Corporation v. CalAtlantic Group, Inc. (2018)

NOVEMBER 6, 2018
Posted by Steven J. Tinnelly, Esq.

It is well settled that an association’s CC&Rs (“Declaration”) establishes and controls, among other things, a board’s authority to govern an association provided that the CC&Rs do not conflict with California law and regulations (i.e., Davis-Stirling Act). In such cases, the plain language of the CC&Rs control. (Franklin v. Marie Antoinette Condominium Owners Assn. (1993) 19 Cal.App.4th 824, 829.) This was the case in Branches Neighborhood Corporation v. CalAtlantic Group, Inc. (2018), where Branches Neighborhood Corporation’s (“Association”) Declaration required the same to obtain a membership vote of fifty-one percent (51%) or more prior to the initiation of its construction defect claim (“Claim”) against CalAtlantic Group., Inc. (“Developer”).

Arbitrator Not Found to Exceed its Powers


California: HOA’s response to homeowner’s anonymous newsletter is protected speech

A homeowner published several anonymous newsletter critical of the HOA board. The board sued the owner for “interference with Association insurance coverage,” prompting yet another anonymous newsletter.

The HOA board responded with its own publication, defending its actions and accusing the homeowner of being “reckless” and “spiteful.” The homeowner sued the HOA for defamation.

However, the court dismissed the homeonwer’s defamation lawsuit, ruling that the HOA’s response was protected under the First Amendment. The court pointed out that, the communication contained both facts and opinions, but no patently false statements.

Source:

Should an Association Respond to Unofficial Publications?

AUGUST 28, 2018
Posted by Steven J. Tinnelly, Esq.

Unpublished Opinion

With increasing frequency, homeowners associations are confronted with members publishing content related to their association and its operations, whether on Facebook, blog posts, or other various online forums. Sometimes these publications are critical of the association board of directors, misrepresent important information and facts, or fraudulently purport to be official association publications. The various potential issues associated with member publications are seemingly endless, but California courts periodically provide clarity regarding issues that can arise in the context of member/association publications. The recent unpublished opinion of Kulick v. Leisure Village Association (2018) arose out of the publication of such member content and provides insight into how courts view and address some of these issues.

Read more:
Should an Association Respond to Unofficial Publications?