Courts review 4 homeowner lawsuits against developer controlled HOAs

  • Homeowners sue declarant-developers for extending their control of community associations (HOAs)
  • Developers accused of increasing HOA fees without justification, breaching fiduciary duties
  • Property owners unsuccessfully challenge covenant amendments made by developer-controlled HOA board

By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com

Updated July 18, 2022, 6:20 PM EDT


Win for homeowners in Texas: court orders removal of 4 developer members from HOA board (April 2022)

In April 2022, a jury found that the developers of La Bota Ranch, a gated community in Laredo, breached their fiduciary duties by appointing a majority of HOA board members, then raising annual HOA fees to more than $2,600. The jury agreed that the HOA board raised membership fees without sufficient justification, and disallowed input from homeowners. Following the jury trial, this month, Webb County Judge Joe Lopez has removed 4 members of the HOA board, banning them from serving on the HOA board in the future, or assuming similar management or advisory positions.

The 4 members removed from the HOA board are Albert Muller, III; Albert Muller, Jr.; Virginia Muller; and Greg Ebe.

Judge Lopez has essentially granted a new HOA board the opportunity to renegotiate all current vendor and maintenance contracts, and set a budget that’s more in line with actual costs, and hopefully, more affordable. Since the HOA still remains under control of the declarant (developers), it’s unclear if the remaining members on the HOA board can successfully appoint 4 new members without influence from the 4 board members who have just been removed.

As a last resort, if La Bota Ranch homeowners cannot obtain the necessary minimum number of board members, the court will appoint a receiver to manage the affairs of the community.

District VII councilmember and La Bota Ranch resident Vanessa Perez was one of the Plaintiffs in the lawsuit against the Muller-affiliated board members. Perez and other homeowners objected to the fact that the developer’s family members have controlled the board of directors and the pursestrings of the HOA since the first homes were built. The developer-controlled board negotiated all contracts and set the annual budget. As La Bota Ranch grew, the board also unilaterally doubled, then tripled HOA dues within a few years, while decreasing maintenance services.

When homeowners were unable to pay much higher HOA fees, the Muller-dominated board would file liens against their homes, leading to foreclosure. While the Plaintiffs have never admitted to a conflict of interest, the Muller family also owns a real estate company that purchases foreclosed properties and resells them at a profit.

The homeowners in the community were represented by attorney Doanh Zone Nguyen.

Sources:

4 removed from La Bota HOA board, banned from similar positions
Christian Alejandro Ocampo, LMTonline.com / Laredo Morning Times
July 11, 2022Updated: July 11, 2022 4:23 p.m.

Laredo councilmember shares thoughts on HOAs in wake of court win
Christian Alejandro Ocampo, LMTonline.com / Laredo Morning Times
April 17, 2022

GUILLERMO CASTRO JR., PETRA § CASTRO, ANDRES PEREZ, VANESSA § PEREZ, PEDRO BALLESTEROS, §
Plaintiffs, § § V. § § ALBERT MULLER III, GREG EBE, § VIRGINIA MULLER, AND ALBERT § MULLER JR., INDIVIDUALLY AND AS § BOARD MEMBERS OF LA BOTA § RANCH OWNERS ASSOCIATION, INC. § AND LA BOTA PROPERTY OWNERS § ASSOCIATION, INC., § Defendants.


Nevada appeals court denies homeowner’s right to challenge the validity of developer’s HOA governing documents amendment (May 2021)

Michael Kosor, Jr. purchased a home in Southern Highlands, a master planned community, in 2014. In 2015, after reviewing HOA financial records, the homeowner concluded that the developer of the community should have already relinquished control of the HOA board to homeowners. According to his calculations, three-quarters of homes had been conveyed to owners not affiliated with the Declarant-developer, which triggers a transfer of HOA board control under Nevada statute. When the HOA ignored his concerns, Kosor filed a complaint with the Nevada Real Estate Division (NRED).

However, when NRED reviewed the complaint, it was discovered that, long before Kosor’s arrival, a VP of Southern Highlands Development Corporation had filed an amendment to the governing documents in 2005. That amendment increased the total allowable number of housing parcels to 10,400. The SHCA argued that, given the higher number of total parcels and housing units, the 75% threshold for turnover of the the HOA to owners had not yet occurred.

Undeterred, Kosor then argued that the 2005 amendment was not validly adopted, because there was no record of a membership vote on the decision to increase the size of the community with 1,400 additional homes. The VP of the developer’s corporation had simply filed the amendment without board or owner input or approval.

In response, however, NRED denied Kosor’s claim as ’time barred’ by the statute of repose. A statute of repose is a provision in law that limits the amount of time that parties to an agreement may challenge an amendment. Nevada state law limits challenges to the validity of HOA-governed community amendments to one year after they are recorded. Since SHDC filed the amendment increase the size of the community in 2005, and no one challenged the change, it became valid in 2006 — nearly 8 years before Kosor purchased his home.

Kosor appealed the matter in civil court, but the court refused to intervene by overruling NRED’s decision. Technically, the court has never considered Kosor’s arguments on the merits of the case, nor to answer the question: which units and lots in SHCA count toward the percentage of units conveyed to parties other than the declarant-developer?

Kosor was disappointed to learn that, in Nevada, as in many other U.S. states, state law severely limits homeowners’ rights to challenge amendments to HOA documents, particularly changes made by, and for the sole benefit of, the Declarant-developer.

Source:

Appeals court, Nevada MICHAEL KOSOR, JR., A NEVADA RESIDENT vs. NEVADA REAL ESTATE DIVISION


South Carolina homeowners call developer’s ‘bluff’ in lawsuit alleging deceptive business practices (April 2022, case pending)

Palmetto Bluff is a luxury resort community in Bluffton. It boasts a golf course, lush country club amenities, and a 5-star hotel, in addition to more than 800 privately owned homes, with at least 400 more homes planned or under construction.

As a resort community, many owners live in their homes part time, while others in designated areas of the master planned community, generate income with short-term rentals. It’s this latter group of owner-investors who are suing Palmetto Bluff’s developers, who are accused of imposing ’a deceptive and costly hoax’ against property owners.

The lawsuit, filed by Ford Wall Thomson, a Charleston law firm, alleges unconscionable HOA governance practices. For example, the private entity, Palmetto Bluff LLC, owns all of the amenities, yet charges mandatory HOA amenity fees and membership fees to all Palmetto Bluff homeowners. Short-term rental owners, in particular, are charged additional fees to allow their guests to use amenities such as the pool and tennis courts.

At the same time, homeowners also complain that Palmetto Bluff’s hotel guests get unlimited access to club amenities, creating crowded conditions that make it difficult for homeowners and their guests to enjoy the amenities for which they pay dearly.

Homeowners cannot refuse to pay HOA amenity fees, or the developer will place a lien on their homes. Once a lien is placed on their property, owners can ultimately lose their properties to foreclosure.

The Plaintiffs draw the conclusion that Palmetto Bluff and its private equity affiliates (South Street Partners and Henderson Park Capital Partners) are merely exploiting homeowners to pay exorbitant HOA fees, in order to offset the developer’s and affiliates’ cost of doing business — all while earning a healthy profit from their hotel business. The lawsuit accuses the developers of planning to ’flip’ the resort community by 2028.

In other words, owners say they are getting a raw deal. They expected the amenities to be common property under management of their HOA. Instead, Palmetto Bluff homeowners pay most of the costs of operating the private club, without any rights to earn a return on their forced investment, in the form of mandatory HOA fees.

The Plaintiffs further claim that the governing documents requiring HOA fees as payment for privately-owned amenities are invalid, The lawsuit claims that particular version of the covenants has not been filed in County court records. The Defendants stand accused of breaching their fiduciary duty as well as outright fraud.

Sources:

Homeowners accuse Palmetto Bluff of ‘deceptive and costly hoax’ in lawsuit
by Lawrence Conneff, Bluffton Today

‘Palmetto Bluff Hoax’? Homeowners Suing Over Crowded Amenities, Plan To ‘Flip’ Resort
Liz Farrell, FITSNews, Published April 19, 2022 (the 87 page lawsuit can be viewed here)


Developer of Delaware’s Bayside community prevails in homeowner lawsuit over timing of turnover of HOA to homeowners (May 2021)

A homeowner of the Bayside community sued its developer, Carl M. Freeman communities. Nancy Green’s claim stated that Bayside is a common interest community, and that, under the Delaware Uniform Common Interest Ownership Act (DUCIOA), Freeman must relinquish control of the HOA when 75% of all lots, parcels, or units have been sold to owners not affiliated with the declarant-developer.

But Freeman’s attorney pointed out the fine print exception to the DUCIOA for ’master planned communities,’ which includes Bayside. A declarant-developer can override the DUCIOA turnover requirement, if creating a ’master planned community,’ defined in Delaware statute as a construction plan covering 400 or more acres, and building 400 or more homes. In the case of a master planned community, the declarant gets to decide when turnover shall occur, as written in the covenants on file with the county recorder.

For Bayside, Freeman’s governing documents state that HOA board control shifts from developer to homeowners, when 90% of all possible living units are sold, or no later than December 31, 2024, whichever comes first.

Unfortunately for Green, a Chancery Court judge, Vice Chancellor Sam Glasscock, agreed that state law and community governing documents allow Bayside HOA to remain under developer control at this time.

Sources:

Judge rules in favor of developer in Bayside suit
Ryan Mavity, Cape Gazette, May 28, 2021

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
NANCY GREEN, Individually and On Behalf of all Others Similarly Situated,Plaintiff, v. No. CARL M. FREEMAN COMMUNITIES L.L.C.,Defendant

Note: this article was updated on July 18, 2022 at 6:20 PM EDT, to edit information regarding the Nevada case of Kosor, Southern Highlands Community Association, and NRED. First, the 2005 amendment was filed by the development corporation’s Vice President. Second, information was added to inform readers that Kosor appealed NRED’s decision in civil court, which refused to intervene or overturn the decision.

Deborah Goonan

is the creator of Independent American Communities (IAC), a Housing Consumer Education blog focusing on HOA governed Common Interest Developments.
IAC documents legal, social, and economic challenges — and explores solutions to problems — in U.S. HOA-governed common interest communities.

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