Gavel and legal books lawsuit court

HOA Lawsuits: Owners challenge powers of HOA boards (Part 1)

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

A review of three recent HOA lawsuits in Colorado, Illinois, and Maryland.
Property owners accuse their HOA boards with abuse of power: the power for foreclose without providing proper notice; the power to negotiate the sale of a condo building without involvement of unit owners; and the power to approve a landscape contract benefitting only some of the unit owners.

Read on to learn about the outcome of each case.

Colorado (April 2022) – Court of Appeals: Owner entitled to due process prior to HOA foreclosure, entitled to keep her home

After nearly three years of legal battles, a Colorado Court of Appeals has affirmed a lower court ruling reversing the HOA foreclosure sale of her home.

The legal battle begin In 2019, after the Amended Windsong HOA of Loveland foreclosed on the home of Martha Hummel, a resident of the community since 1999. The home was purchased by C&C Investments in June of that year for a mere $19,360.

According to the published appeal, in the eight years leading up to the foreclosure sale, Hummel had been suffering from severe depression. During that time, the owner never left her home, and lived on pizza deliveries. When she stopped retrieving her mail, the local post office stopped delivering letters to Hummel’s home.

While she remained isolated at home, Hummel had authorized automatic payments of HOA fees from her bank account. But the HOA changed management companies in 2014, and, because she was mentally incapacitated, Hummel never realized the transition. As a result, her payments were not sent to the correct management agency. And, by time Hummel discovered the error, she had already amassed roughly $7,000 in unpaid, past due HOA fees.

It’s worth noting that Hummel remained current on her mortgage, also by way of automatic electronic payments. According to court papers, the loan was nearly paid off in 2019, and the home was valued at $250,000 to $300,000 at the time of the foreclosure sale.

In 2017 Windsong HOAs board voted to pursue foreclosure, in order to collect its lien of approximately $7,000. The HOA initially sent postal mail notices, but those were returned as undeliverable. The HOA also published a foreclosure notice in a local paper, but since Hummel was not receiving the local newspaper or reading it online, she was never effectively notified of the foreclosure sale. She only discovered what happened when the new owner posted a notice of eviction on her home’s front door.

Needless to say, after the surprise foreclosure, Hummel challenged its validity in court. In 2020, noting the extenuating circumstances of Hummel’s mental illness, District Court Judge Daniel McDonald vacated the default judgment, then ordered Hummel to pay a cure of approximately $20,000 — enough to reimburse the purchaser (C&C) — in order to regain ownership of her home.

Hummel promptly paid the $20,000 in order to regain the deed to her home.

Opposing the court’s order allowing Hummel to regain the deed to her property, C&C appealed. But Hummel fought back with the help of her attorney, Troy Krenning.

In the Court of Appeals, Hummel prevailed on vacating the default judgement and underlying foreclosure sale. The Opinion cites Hummel’s due process rights under the U.S. Constitution, and concludes that the HOA failed to exercise adequate notice of the foreclosure sale.

Notably, Judge Timothy Schutz also ordered that the court vacate Judge McDonald’s order that allowed Hummel to pay a post-sale cure fee of $20,000 to regain ownership of her home. The court notes that, in Colorado, a homeowner cannot ”redeem” a foreclosed property by making a payment after the sheriff’s sale — only prior to a sale. Although C&C prevailed on this point, Hummel still gets to keep her home.

Here are the relevant excerpts from the Schutz Opinion:

Analysis of the Post-Sale Cure Right Granted by the Trial Court 

¶ 30 Colorado’s foreclosure statutes apply to foreclosures processed by a public trustee or by a sheriff and govern all processes by which a sheriff’s sale occurs. § 38-38-701(1), C.R.S. 2021. C & C argues, and we agree, that the trial court was required to comply with section 38-38-104, C.R.S. 2021, when determining whether to allow Hummel to cure. Section 38-38-104 expressly permits an owner to cure, but to exercise that right, an owner must provide notice of intent to cure at least fifteen days prior to the sale, § 38-38-104(1), and the cure sums must be paid by noon on the day before the scheduled sale date, § 38-38-104(2)(b). It is true that Colorado’s foreclosure statutes previously permitted an owner both a pre-sale right to cure and a post-sale right to redeem. § 38-38-302, C.R.S. 1990. But the General Assembly eliminated an owner’s post-sale right to redeem in 2008. Compare Ch. 275, sec. 2, § 38-38-302, 1990 Colo. Sess. Laws 1664-65, with Ch. 305, sec. 21, § 38-38-302, 2006 Colo. Sess. Laws 1467. Thus, when the trial court entered its order, an owner had no statutory right to cure after the foreclosure sale.

…the United States Supreme Court has long held that when foreclosing a lien against an individual’s home, due process requires “notice [that is] reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Id. at 314. Moreover, this is not a generalized “check the box” exercise, but rather “[t]he means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.”


¶ 48 The holdings and rationale of Mullane and Flowers are particularly instructive in the homeowners association setting. Homeowners associations have extraordinary powers and authority under CCIOA. They may record a lien against an individual’s home to recover delinquent assessments and enforce such liens by foreclosure. They are permitted to charge and recover late fees,  interest, and attorney fees related to the nonpayment and enforcement mechanisms. Typically, the lien and foreclosure rights are directed toward an individual’s home. And unlike many larger agencies, an association is typically governed by volunteers who live in the same neighborhood as the property that is the subject of the foreclosure action. Such familiarity can also provide insight into the intangible circumstances of the homeowner who is the subject of the foreclosure action. Given these dynamics, it is not unreasonable to require a homeowners association to make a good faith, rather than a highly technical, effort to effectuate actual notice to a fellow neighbor before foreclosing on their property. 

¶ 49 Applying these principles to the undisputed facts presented on appeal, it is manifest that the HOA did not take reasonable steps calculated to provide Hummel with actual notice of the lawsuit or the resulting sheriff’s sale.

C & C Invs. v. Hummel, 2022 COA 42 (Colo. App. 2022)

The next step, according to Krenning, is going to court to get Martha Hummel’s money back.

Sources:

C & C Invs. v. Hummel


Colorado Court of Appeals affirms ruling in 2019 Loveland foreclosure case, vacates order to pay By AUSTIN FLESKES, Loveland Reporter-Herald, April 18, 2022 at 8:07 p.m.




Illinois (Jan. 2022) – Appellate court opines that a condo board has the right to engage in pre-sale discussions with potential building buyers.


In an order that is not precedent, Justice Mary Mikva, Illinois Appellate Court, First District, has ruled that a condominium association board does not have to obtain a vote of approval from 85% of unit owners before it begins negotiating a potential sale of its building. Justices Daniel Pierce and Sheldon Harris concurred.

The case involves the Private Residences at Ontario Place, in Chicago. The building contains 467 residential units and three commercial units. In 2020, board of the Ontario Place Condominium Association notified owners of its discussion of a possible sale to Strategic Properties of North America. Three owners sued the condo association, citing Illinois statute that requires a vote of approval before a condo building can be sold, resulting in likely termination or deconversion of the condo association.

Mikva wrote that, although the statute requires a vote of owners before a sale can be executed, a condo board has the power to discuss a possible sale agreement with a buyer without getting permission from owners representing 85% of voting interests.

Held:
ORDER
The circuit court properly dismissed condominium unit owners’ complaint against their condominium association and the association’s board of managers. Defendants had no duty under the Condominium Property Act to obtain unit owners’ approval prior to investigating or negotiating a bulk sale of the property and unit owners did not state a claim for breach of fiduciary duty based on an alleged failure to disclose requested documents.

2022 IL App (1st) 210156-U



When unit owners ultimately voted, the association failed to gain an 85% vote of approval, as required by Chicago City Code. Therefore, the sale did not go through.

Sources:

Glazer, Et. al. v. Private Residences ar Ontario Place Condominium Association, Et. Al.


Chicago condo association can negotiate sale of condo building without prior approval of unit owners: IL appeals panel


Maryland (March 2022) — Court of Special Appeals opines that condo HOA board director conflicts of interest outweigh the Business Judgment Rule

Cherington Condominium is a 99-unit community comprised of 87 townhouses and 12 ’garden style’ apartment units. In 2019, all members of the HOA board were townhouse owners.

Court papers describe the differences between townhouse and garden style units as follows:

The townhouse units include their exterior walls and roofs and the unit owners are responsible for maintenance of the entire structure and patios and driveways. They are also separately metered for electricity and water and pay for those utilities directly.
The garden style units include only the interior walls, floor and ceiling. The halls, stairways, building exterior including balconies and roof are limited common elements appurtenant to the units in the building and the Association is responsible to maintain, repair, and replace the limited common elements. . . .

Cherington Condominium v. Heather Kenney
No. 157, Sept. Term, 2021

Heather Kenney is the owner of a garden style unit at Cherington Condominium. Unlike townhouse owners, Kenney has no exclusive use of a yard, classified as a limited common element for townhouse owners in the governing documents for Cherington.

In creating their 2019 annual budget, the condo board decided to work with a new landscape contractor. The new contract provided for additional landscape services to include lawn, tree, and plant maintenance for the front, side, and accessible rear yards of townhouse owners.

To make the budget numbers work, the HOA board decided to raise monthly condo fees for all owners, in part, to include these additional landscape services. According to court papers, Townhouse monthly fees rose from $200 to $247, and Garden Style unit fees rose from $240 to $352. In other words, Garden Style unit owner fees increased by twice as much as townhouse unit fees.

Kenney objected to the fee increase, and filed a complaint with the Maryland Commission on Common Ownership Communities (CCOC), a state administrative agency that conducts hearings on certain HOA disputes. The CCOC dismissed Kenney’s complaint, and stated that the Business Judgment Rule (BJR) gives deference to condo and HOA board decisions, unless the owner filing the complaint can prove that the board engaged in fraud or acted in bad faith.

Kenney then brought forward a lawsuit in Circuit Court of Montgomery County. Kenney argued that the condo directors’ decision to award a new landscape contract amounted to self-dealing, especially since garden style unit owner assessments were increased by 47%, compared to a 23% increase for townhouse owners.

The court found Kenney’s argument compelling, because all of the board members were townhouse owners. One can reasonably draw the conclusion that board members would financially benefit from relatively lower condo fees for lawn maintenance — apparently subsidized by the much higher fees payable by owners of garden style units. The Circuit Court agreed with Kenney, ruling that the directors’ decisions were ’self-interested,’ and calling upon the condo association to show in court why they believed their 2019 budget plan was fair.

Cherington Condo Association appealed the decision. However, the Court of Special Appeals upheld the Circuit Court’s. See the opinion, written by Justice J. Leahy:

When condominium association boards rely on the benefit of the business judgment rule, then under a commonsense application of the law, they must also contend with its limitations, including the interested director transaction rule. To hold otherwise would be contrary to the basic principles of corporate and fiduciary law through which both the business judgment rule and the interested director transaction rules were developed.

Cherington Condominium v. Heather Kenney
No. 157, Sept. Term, 2021

The case has been returned to the CCOC, for a new hearing that acknowledges that the Interested Director Rule outweighs the Business Judgement Rule. If the condo board cannot present convincing arguments as to the fairness of its decision to impose higher fees on garden style units for maintenance that will only benefit townhouse owners, Kenney will likely prevail.

Sources:

Cherington Condominium v. Heather Kenney
No. 157, Sept. Term, 2021


Condominium Director Conflict of Interests and the Business Judgment Rule John Cowherd, Attorney, April 15, 2022