HOA defect: volunteers & boards of directors

There is a serious defect in the HOA model of local governance based on a private contract that requires a board of directors to manage the association through the use of unpaid volunteers. It seems as though the framers ignored the old truism: you get what you paid for. Now don’t get me wrong, there are qualified directors and those with an honest belief in volunteering and pitching in to make their HOA a better place. But the legal structure to often prevents them having any real impact. A topic to be addressed elsewhere at another time.

The framers of the model were well aware that to ask homeowner/members to fork up assessments that included director/officer salaries or compensation would never fly. It would not even fly today. Recourse then was made to the utopian concept, the private commune, where everybody chipped in and did what they were capable for the benefit of the commune. And that required individuals who believed in the model to volunteer their time. Without this above and beyond call for volunteers the mass merchandising of HOAs would have failed.

In order to explain my opinion, I must take members back to 1964 and the framing of The Homes Association Handbook that became the HOA declaration of CC&Rs “bible.”  All HOA declarations flow from this Handbook and constitute the vast boilerplate found in all CC&Rs over the past 58 years.

This topic was addressed in the Handbook. And since the growth in size of HOAs led to incorporation of the associations, the need for a board of directors was mandatory and a solid and necessary requirement. The answer was solved, they thought, by unpaid volunteerism. Further reaching out in order to make the HOA legal scheme work, the demand for involvement in the affairs of the HOA, especially for directors, ran against the national data on citizen involvement in government. (Just check the number of voters in presidential elections as a percent, not of registered voters, but of voter age people, shows on average a 35% turnout.)

As it has become apparent, many HOAs have resorted to “conscripting” members just to sit on the board to meet the statutory and governing document requirements. They are generally YES men, going along with the power clique or president’s wishes. This has led to anyone, qualified or not, to get him on the board.

The how and why of “boss” HOA presidents

This commentary is a follow up on my review of Kelly G. Richardsons’ article (Dictatorial HOA presidents and silent directors are at risk).

With all due respect to Richardson, his discussion of the role of HOA “boss” presidents and silent boards of directors makes no references to the causes of this common defect in the management of HOAs, or the more relevant, in ruling a community.  As an important CAI (Community Associations) lawyer advising and educating BODs on how to rule a community, we should expect not only answers but solutions as well.  His article does neither.

Richardson does  inform his readers about the makeup of good presidents: “Good HOA presidents understand the boundaries . . . . Good presidents are key . . . .”  He closes with the advice, “So, keep the good ones!”  He fails to address the legal structure of an adhesion contract and the CC&Rs that grant the BOD broad powers and authority. As such, the legal structure would not stand up to constitutional judicial scrutiny if the HOA were an arm of the state and not a private, contractual arrangement.

The legal structure prevents active, meaningful, democratic participation by members in board  elections and in amendments to the governing documents as found with public government. For example, members cannot file a petition, equivalent to a public domain initiative, requiring the BOD to hold a vote of the members on an issue, removing the absolute power to do as it pleases when contrary to the will of the  majority. The members would be able to contest the BOD’s position. Ihe absence of constitutional protections promotes the formation of power cliques that function as authoritarian governments. And so, we have “boss” presidents and silent boards of directors.

As a good lawyer, Richardson would probably say that this is the law, this is the way it is, and if you don’t like it change the laws. And who helped create and shape these pro-HOA laws?   For example, CAI has been involved since the beginning in 1964 in creating those Uniform Common Interest Ownership Acts (known as UCIOA) and adopted  with some modifications by a handful of states.

It’s up to YOU, as it has always been.

“It does not  help the sheep to blame the wolf. The sheep must not fall into the clutches of the wolf “ (Mahama Gandhi, fighting the imperialist British Empire).

AZ court holds HOA in a representative role on behalf of the members

If your HOA was involved in a legal action and won  a substantial award, who would get the money? Who should get the money? The HOA is a legal person; its members do not have title or stock; they just have a beneficial interest. (With Condos members own a specified interest and ownership in the condominium assets, as stated in their deed,  in addition to their own unit).

Foothills Reserve[1], an HOA,  is a “first impression” for me as judges would say, having not come across the issues presented in the case before. There are two aspects in this case that warrant discussion that have not been presented in the media. It involves an eminent domain taking of property that the HOA claimed diminished the value of the HOA properties, and the court’s reasoning as to who gets to keep the award money.

Eminent Domain and property values

The State of Arizona acquired Foothills property for a major highway interchange and Foothills received $6.5 million compensation as required under the law. But the HOA

claimed damages [of] alleged diminished value of their homes as a result of factors such as noise, pollution, loss of view, and unsightliness as a result of the South Mountain Freeway., i.e., proximity damages.”

The Court added to the eminent domain’s paid  compensation an additional $12 million depending upon the outcome of the State’s appeal with respect to the “proximity damages” claim. (The brief was filed but at this time I have not been able to obtain a copy). The claim is based on ARS 12-1134(A)

If the existing rights to use, divide, sell or possess private real property are reduced by the enactment or applicability of any land use law . . . and such action reduces the fair market value of the property the owner is entitled to just compensation from this state or the political subdivision of this state that enacted the land use law.”

Court awarded damages

With respect to the treatment and handling of the award monies, the Court gave very specific orders to the HOA and to the HOA’s attorney who was to be the escrow company for the distribution of the $6.5, and if successful the additional $12.5. It held that “the HOA represented [the owners] solely in a representative capacity,” and was ordered to send the award money to its attorney’s “State Bar Trust Account.”  Furthermore,

“Because many of the homes within the Foothills Reserve subdivision have been sold and may be sold pending appeal, this Judgment does not prevent the Court from taking action to” (i) approve a plan for reasonable notice to the 589 Owners (as some of their whereabouts may not be known). Plaintiff [Arizona] will not participate in these actions”

In short, the Court said that the HOA, “pursuant to the provisions of the Covenants, Conditions, Restrictions and Easements governing the Foothills Reserve subdivision,” was required to act in accordance with the CC&Rs — and as I interpret the statement — in the best interest of the members who have beneficial interests in the HOA corporation.

The Court reaffirms, in my view,  that the HOA exists for the benefit of its members and not for the board of directors to do as they please.

Note [1]. Arizona v. Foothills Reserve, CV-2017-010359, Maricopa Superior Court (March 4, 2022).

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

Exposing the HOA’s false ideals and values

In an attempt to provide some feedback to both the BOD and the members in general, I conducted a poll based on member perception of BOD compliance with its stated values. The subject HOA was the same SCG studied in the “mgmt case study” posts. 

In this era of disinformation, of co-opting groups and ideas,  and politicians no longer avoiding the illusion of impropriety but lying straight to your face, facts — undisputable facts — are important.  If we are to succeed in finding the truth, it is necessary to accept the world as it is, and to rise above it.  This poll attempts to discover the truth about SCG in order to rise above the realities as they are.

 “Reliability” refers to getting the same results on repeated polls with different groups.  (That’s basically what “significance” is all about and is determined by statistical methodology).  Appropriate to HOA member attitudes in general, I read studies and polls that 80% love their HOA or 70% believe their BOD is great, etc. Does that mean that all the members or group believe so, or just those who responded?  In other words, as others have raised, “what’s the point” or “it’s meaningless.”

As you can see below, the responses are relatively steady for the 5 checkpoints, with a dip and recovery for questions 2 and 6.

Here’s how my small sample responded to the SCG 6 statements of value.  Surprised?  The strength of the Agree choices varies according to the question, from a low of 43.9%  to a high of 91.4%.  All in all, the average Agree response comes to 63.8%, or let’s say two-thirds.  Congratulations! But, looking at the individual questions,  there is more that can be accomplished with proactive involvement by members not afraid of change and of criticizing the BOD.

In response to concerns of “what’s the point?” and “it’s meaningless,” that depends on member reaction. It is meaningful and provides direction for positive action if the members escape from their apathy, for whatever reason, and make it so. To quote Teddy Roosevelt, “The credit belongs to the man who is actually in the arena . . .  who does actually strive to do the deeds.

With SCG’s obsession with keeping property values up by attracting, new members who would be, for the most part “young-uns,” a more detailed survey is in order.  Using the same Value statements, are there differences between newbies and oldies based on age or years of membership?  However, due to the buying “panic” driving home prices sky high, now would not be a good time for the survey. It does reflect that home prices are still dominated by the marketplace.

Sun City Grand HOA members, you can take the poll anonymously. Click:   SCG values poll.