Business judgment rule; understanding the courts

The intent of this title is to highlight the need to carefully read and understand legal documents –  knowing what is said and what is not said in statutes, in court decisions and opinions, and in contracts.  It is human nature for people to hear, see, or read what they want to and miss the real message.

Tutorial

If you seek to analyze, not merely read, a legal document then attentions must be paid to what I refer to as “word games.”  By that I mean the modification and extension of  the traditional meaning of words to support an argument or position; the parsing of sentences involving the effect of punctuations – commas, semi-colons, etc., — on phrases and clauses.

A simple example:

“I saw that she was busy and prepared to leave.
“I saw that she was busy, and prepared to leave.

“Without a comma, the reader is liable to think that “she” was the one who was prepared to leave.”

In the real world, documents can contain mult-line sentences with many commas and semi-colons, where your opponent will argue for one interpretation and you the other. In our example, who is right? The first or the second choice?  With many legal documents written by “writers,” the publicized author may not know at all. This happens often in complex legislative bills.

Business judgment rule (BJR)

(See below for an explanation of BJR).

Applying the above, let’s look at the wording of the WA Supreme Court’s recent opinion in Bangerter v. Hat Island that sidestepped the question of applying the business judgment rule to HOAs. 

At issue was plaintiff’s interpretation of the covenant for assessments that allowed the BOD “to charge and assess its members on an equitable basis.”  Bangerter said “equitable basis” meant at a rate based on home value, like your real estate tax; the BOD interpreted “equitable basis”  to mean the same assessment for all members.  The court held that the BOD’s interpretation was valid, deferring to the BOD as consistent with the BJR.

But here’s how the judges presented their decision:

Whether, and if so to what extent, the business judgment rule applies to homeowners’ associations is a thorny question. Given that we can affirm on any grounds, we decline to resolve that question here and wait for a case that more squarely presents it.

While courts do not owe deference to a homeowners’ association’s interpretation of its governing documents, courts do owe appropriate deference to their reasonable discretionary decisions. . . . Accordingly, there is no cause to consider whether the business judgment rule applies.

The first paragraph is, essentially, a “punt” — not going to deal with the issue.

Yet the first sentence of the second paragraph seems to be a rejection of the BJR.    What is the fine point that the court is making, the “hair splitting”? What is the effect of, the difference, in all practicality  between no “deference . . . [to] interpretations” and “deference to . . . discretionary decisions”?  

But wait! The court upheld the BJR with its deference to BOD decisions without saying so!  WOW! Go figure.

The second sentence is an astonishing declaration that the Court is not talking about the business judgment rule!  No wonder the average homeowner has a problem understanding what goes on in the mind of judges.  Confusing?  You bet!  On purpose, I wonder!

Business judgment rule explanation

The business judgment rule helps to guard a corporation’s board of directors (B of D) against frivolous legal allegations about the way it conducts business. A legal staple in common law countries, the rule states that boards are presumed to act in “good faith”—that is, within the fiduciary standards of loyalty, prudence, and care directors owe to stakeholders. Absent evidence that the board has blatantly violated some rule of conduct, the courts will not review or question its decisions. (Investopedia).

Related reading

If you wish to pursue a more detailed understanding of the pros and cons of BJR, please read   HOAs and the Business Judgment Rule: Bad Law and Reorienting the HOA board: business judgment rule

CAI response to HOA COVID-19 payments

The following is the form letter CAI HQ is urging everyone to send to Congress to oppose a federal bill granting exclusions for HOA assessments.  HOAs “uber alles.”
“I am writing to strongly oppose legislation like H.R. 6423 and S. 3565 that impose a national moratorium on debt collection during the COVID-19 national emergency.
This legislation is too broad and will harm the financial interests of households in homeowners associations, condominium associations, and housing cooperatives (collectively, community associations).
. . . .
“When one homeowner is unable to pay assessments, these costs are passed to other homeowners in the community. This increases housing costs, spreading financial distress to other community households. [Part of the HOA contract is the implication of a joint and severable liability by the homeonwers. Didn’t you know this???]
“Community associations are working with homeowners suffering from the economic impact of the COVID-19 national emergency. A recent survey by Community Associations Institute indicated a 20 percent increase in requests for forbearance or payment plans by homeowners who are unable to pay assessments. Beyond this goodwill, community associations are subject to state laws that require payment plans for delinquent assessments.  [Not clear whether or not HOA honored them].
CAI logo
“I ask that you oppose extreme legislation like H.R. 6423 and S. 3563. Thank you for considering my views and I look forward to your reply.”

HOAS as good corporate citizens & covid-19

David Kahne, a Texas attorney fighting for homeowners who had authored the AARP member Bill of Rights policy statement,[1] is seeking just treatment for homeowners in HOAs with respect to covid-19. Kahne seeks a reduction in assessments like the state and local government are doing, “Kahne believes HOAs should refund homeowners part of their dues.”[2]

covid-19With state mandated closures and loss of income to members just like many other non-HOA persons, what is your HOA doing to be a good corporate citizen? The plea from HOA boards is that they need the money and how can the HOA survive as if it warranted special dispensation. Of course, most members fail to realize that in between all that legalese in their CC&RS or declaration, they have pledged their homes as security for payments to the HOA.

Now what about all those lofty covenants about “in the general interests of the members” and “to provide for the health, safety, and welfare of the members”?   Seems empty to me if they do not act accordingly and reduce assessments like a good government should in a crisis like covid-19.

Notes

[1] A Bill of Rights for Homeowners in Associations, AARP HOA Bill of Rights, David Kahne 2006.

[2] Homeowners want HOA dues refunds for amenities they can’t use”, Beanie, HOA Reform Coalition (May 2, 2020).

Now comes the downside to HOA paradise

It is only natural for a family suffering from the economic affect of the virus to save the mortgage payments first and to not pay their assessments. Members do not understand that the BOD is obligated not to allow this to happen and an increase in foreclosures looms a head. Their friendly, neighborly, smiling BOD directors will turn to foreclosures in an ineffective attempt to stem the tide.

We’re all familiar with the saying “there are no free lunches.” As the current economic crisis becomes more severe hitting the pocketbooks of many families, don’t neglect paying your HOA dues if you can. The survival of the HOA has always been a motivating factor of HOA boards supported by court rulings, and if assessment income drops as a result of decreasing member finances, guess what?

Whatcan the board  do? Stop maintenance, stop events, clubs, shows, etc. to save cash and help their members survive in an act of good neighbors. Hopefully you may have an enlightened, progressive BOD that ignores the advice of their HOA attorneys, who probably will scare them into you’re gonna get sued.

There are no free lunches living in an HOA.

 

 

HOA golf clubs, property values, and increasing financial liability of homeowners

According to the Desert Sun, the question of the relevance of golf clubs in maintaining property values in an HOA was brought before the California courts.[1] A number of homeowners in Rancho Mirage, CA are challenging fees imposed on them to support a golf club that they rejected joining when they bought their homes. The HOA justifies its fees, saying that the golf club helps to maintain property values and home resale prices.

One homeowner was quoted, “Now, no homeowner can be sure about their financial future . . . . You build your economic plan on a certain set of assumptions, and one of those assumptions is, I’m going to be treated fairly.”

“The HOA board argues that a well-maintained club is critical to maintaining the community’s high property values. Club president described the course as ‘the community’s backyard,’ suggesting that although homeowners might not play golf, they benefit from the club’s success.”

The Associa property manager argues that homeowners don’t understand that the biggest part of their home’s value is the golf club, which they have very little control over. The board, in fulfilling is obligations, can either enforce mandatory club membership or raise fees.

The HOA president believes that there is an “inherent flaw in the design.” In my view, it’s not the only one. Many of the “flaws” are buried and hidden within the governing documents and not brought to the attention of prospective buyers.[2]   What is needed to protect and warn buyers, since CAI and others have been insisting as of late that HOAs are business or investments, is a true “red herring” document (“red herrings” is the popular term applied because of the proliferation of bold, capitalized red lettering).

The HOA mandatory state PUD disclosure documents are laughable and come nowhere close to protecting HOA home buyers as do the federal (SEC) stock purchase disclosure documents (red herrings). The mandatory SEC document contains bold lettering and lettering in capitols to highlight important issues. It warns the buyer, among other things, that buying the stock is high risk and that past performance is no indicator of future performance. And there are detailed charts and tables that disclose all that is determined to be material to the decision to buy.

As you well know, this format and none of this detailed disclosure is required by any state mandatory HOA PUD document. For example,

  1. there is no warning that the buyer is actually pledging his home as security for the survival of the HOA, or a golf club;
  2. or that his home and its financial obligations are in the hands of, for all intents and purposes, complete strangers;
  3. or, as in this instance, that his financial obligations can extend beyond his home as decided by the board and stranger-members against his will;
  4. or that the state does not get involved, treating any disputes as a purely private matter;
  5. or that contract law does not apply, including the unenforceability of “agreements to agree.”[3]

And the HOA is not even a public entity with constitutional protections for the homeowner!

BUYER BEWARE!

 

References

[1] “Tension rising as golf clubs, HOAs look to future,” Rosalie Murphy, The Desert Sun, Dec. 28, 2015

(http://www.desertsun.com/story/money/real-estate/2015/12/28/rancho-mirage-morningside-hoa/77045734/).

[2] See in general, HOA Common Sense: rejecting private government.”

[3] Setting aside the question of a valid contractual agreement, “agreements to agree” deals with contract uncertainty where decisions are to be made in the future. The law requires certainty in contracts. Does a validly passed CC&Rs amendment constitute an agreement to agree due to the uncertainty of the amendment content? (Now you must pay golf fees like it or not.) Does a buyer’s consent to be governed by the CC&Rs amendment provision, which does not restrict amendment content satisfy the certainty  test for a valid future agreement? In the public domain there would not be any question as we are dealing with municipality law and doctrine, not contract law. However, HOAs are subject to contract law, not municipality law and that makes a huge difference.