CC&Rs are a devise for de facto HOA governments to escape constitutional government

This commentary takes a long look at the validity of HOA covenants and the need for judicial enforcement in order to invoke state action with respect to fundamental rights and freedoms.   It informs the reader that such enforcement depends upon the member’s voluntary agreement to be bound by the declaration, and raises issues of the lack of genuine agreement.  The agreement requirement is not analyzed under contract law, but under HOA law that has been designed to protect the HOA and position the declaration as the supreme law of the HOA community.

Long ago in 1994 Professor McKenzie wrote, “HOAs currently engage in many activities that would be prohibited if they were viewed by the courts as the equivalent of local governments.[i]

Two years after Marsh v. Alabama[ii] — the 1946 Supreme Court opinion setting the misguided “public functions” test for a municipality — the Court specifically dealt with the question of the constitutionality of restrictive covenants.  The issue in Shelly v. Kraemer[iii] was “that judicial enforcement of the restrictive agreements in these cases has violated rights guaranteed to petitioners by the Fourteenth Amendment.”

With respect to restrictive covenant enforcement the Shelly court said:  “That the action of state courts and of judicial officers in their official capacities is to be regarded as action of the State [‘state action’] within the meaning of the Fourteenth Amendment, is a proposition which has long been established by decisions of this Court. . . . The federal guaranty of due process extends to state action through its judicial as well as through its legislative, executive, or administrative branch of government.”   The Court held “that in granting judicial enforcement of the restrictive agreements in these cases, the States have denied petitioners the equal protection of the laws and that, therefore, the action of the state courts cannot stand” (my emphasis).

Unfortunately, the Court chose a narrow view of this issue limiting it to that involving racial discrimination.  A more expansive application of the 14th Amendment can easily be applied to any covenant that violates a member’s rights, freedoms or privileges and immunities as a citizen, but that has not been the case.

The 1976 Florida case, Brock v. Watergate Mobile Home,[iv] directly addressed the question of an HOA declaration and its actions under the Declaration.  It used the Marsh “public functions” test and the additional “close nexus” test (HOA action is closely resembles government action). No state action was found.  The HOA was not like a company town and the state’s involvement, as occurred in the limited context of the case, was not a close nexus.

Please understand that CC&RS and covenants are not automatically invalid or unconstitutional.  It requires a court to declare them so, at the expense of a homeowner lawsuit.  

Also, it is important to note that the court question was not about the validity of a restrictive covenant itself, but the court enforcement of that covenant. (This requires a lawsuit in which the court upholds the covenant and a subsequent lawsuit charging a violation of the 14th Amendment.)  The Shelly court’s view was that as the 14th Amendment applied “only to governmental action, as contrasted to action of private individuals, there was no showing that the covenants, which were simply agreements between private property owners, were invalid.”   Furthermore, “[The 14th] Amendment erects no shield against merely private conduct, however discriminatory or wrongful” (my emphasis).  In Arizona, today, the appellate court is to decide whether a CAI attorney amendment to Terravita’s CC&Rs that directly contradicts state law will be held valid.[v]  Behold the power of private contracts!

In view of the above we can ask, what makes a valid agreement?  Fortunately, a condition was attached to this view, which is never ever mentioned by pro-HOA supporters including those renowned CAI attorneys: “So long as the purposes of those agreements are effectuated by voluntary adherence to their terms. Sadly the courts have unquestionably accepted the validity of the CC&Rs as a voluntary agreement and this consent to be bound has become legal doctrine. For example, in Midlake v. Cappuccio the PA appellate court upheld a valid consent to agree by the buyer at time of purchase: “The Cappuccios contractually agreed to abide by the provisions in the Declaration at the time of purchase, thereby relinquishing their freedom of speech concerns regarding placing signs on this property.”[vi]   There have been numerous other cases where the court has upheld a valid consent to agree per se and a waiver/surrender of constitutional rights under said holding.

But, is there a genuine consent to agree?  I have written several commentaries about the lack of a genuine consent to agree as a result of misrepresentation, fraud, half-truths and hidden factors not fully disclosed to homebuyers.[vii]  Certainly not according to contract law 101 with its requirements for full disclosure, a meeting of the minds, and absence of fraud.

Unfortunately, once again, HOA declarations and covenants are seen as a law unto themselves that is based on a cutting and pasting of various laws, including constitutionality law, to provide for the protection and survival of HOAs.  We have pro-HOA statutes in every state and a Restatement of Servitudes[viii] (covenants) that was written to promote and protect HOAs. “Therefore this Restatement is enabling toward private government, so long as there is full disclosure[ix] (my emphasis).

The Restatement advises judges — and is regarded as precedent — that its collection of laws known as HOA law dominates all others.   Section 6.13, comment a, states: “The question whether a servitude unreasonably burdens a fundamental constitutional right is determined as a matter of property law, and not constitutional law”. Section 3.1, comment h, states: “in the event of a conflict between servitudes law and the law applicable to the association form, servitudes law should control.”

And we have CAI, the national HOA lobbying organization, repeatedly making it clear that the HOA is a city-state, an independent principality, and the decisions of the HOA are the supreme law of the community.[x]  It is easily concluded why CAI has vehemently denied and opposed any reference or declaration that HOAs are de facto governments — mini or quasi-governments — and argue that HOAs remain free from constitutional restrictions on government entities.

HOAs have been institutionalized under this state of affairs, this public policy, and unquestionably accepted as this is the way it is.  Nothing will improve the conditions to which HOA residents are subject unless HOA public policy changes. Public policy today rejects constitutional government for HOAs and allows HOAs to operate outside the law of the land.

The policy makers fail to understand that the terms and conditions of the HOA CC&Rs cross over the line between purely property restrictions to establishing unregulated and authoritarian private governments.

 

References

[i] Evan McKenzie, Privatopia: Homeowners Associations and the Rise of Residential Private Governments, Yale Univ. Press, 1994.

[ii] Marsh v. Alabama, 326 U.S. 501 (1946). The holding was that a company town was no different from a municipal town.

[iii] Shelly v. Kraemer, 334 U.S. 1 (1948).

[iv] Brock v. Watergate Mobile Home, 502 So. 2d 1380 (Fla. 4th Dist. App. 1987). This case was a civil rights violations case based on 42 US 1983 as a result of various acts by the HOA.

[v] Brown v. Terravita, 1 CA-CV 14-455. See Will Arizona allow HOA covenants to dominate state laws? and  Does the Constitution support the will of the HOA no matter what?

[vi] Midlake  v. Cappuccio, 673 A.2d 340 (Pa.Super. 1996) (PA appellate court). .

[vii] See “Consent to be governed, No. 4,HOA Common Sense: rejecting private governmentProposed “consent to be governed” statute, the “Truth in HOAs” bill; and court examines consent and surrender of rights in HOA CC&Rs.

[viii] Restatement Third, Property: Servitudes (American Law Institute 2000).

[ix] Id., From the Forward: “Professor Susan French [Reporter (chief editor/contributor) for this Restatement] begins with the assumption . . . that we are willing to pay for private government because we believe it is more efficient than [public] government  . . . . Therefore this Restatement is enabling toward private government, so long as there is full disclosure . . . .”

[x] See CAI: the HOA form of government is independent of the US Constitution;  Misrepresentation: CAI comes with unclean hands and Will the real CAI standup: its contradictory beliefs, pronouncements and goals.

Does the Constitution support the will of the HOA no matter what?

A rogue board is operating at Terravita HOA in Scottsdale, AZ. In short, the HOA attorney saw no problem in adding a restrictive covenant that would allow OAH attorney fees regardless of the law that OAH is not allowed to award attorney fees.[1] It was properly passed by the Terravita members. Since the validity of the covenant was not challenged, the following scenario evolved.

Based on the wording of the covenant, the sole target was a resident, Mr. Brown, the only person who meets this classification in Terravita. Section 17.01, Article XVII, of the Terravita Declaration reads,

[I]n bringing claims against Owners or defending claims brought by Owners in an administrative action or proceeding, including but not limited to, proceedings before an Administrative Law Judge, and any appeal thereof; the Association shall be entitled to recover its attorneys’ fees and costs from the Owner involved in the administrative proceeding if the Association is a prevailing party in such action, and the amount of such attorneys’ fees . . . .

The battle between Brown and the board also involved CAI attorney Ekmark, where there is plenty of history, Brown having filed several suits and won them and publicized the amount of HOA funds spent on minor litigation.

In this instance, Brown was seeking access to board minutes at a meeting alleged to be an executive meeting where the minutes are exempt from disclosure. The problem, according to Brown, was that he was not allowed to present evidence that the meeting was not an executive meeting.  The court simply took Ekmark’s word that it was an executive meeting.

Being the prevailing party, the HOA then claimed attorney fees for the OAH appellate costs, the basis of Brown’s current appeal (CA-CV 14-000455, Division 1). (I avoid the other pertinent legal issues involved in this case and focus on the validity of the covenant.)

The question I raise is that the covenant was invalid, being an unconstitutional deprivation of due process and the equal protection of the law. Once again, like the CC&Rs, can a private organization draft a document or rule that conflicts with state law and yet be held legally binding by the courts? (When does it stop?) And since the covenant was enforced by the courts, there are grounds for filing a deprivation of rights suit under 41 USC 1983[2] (“under color of any statute”) and claiming state action by Terravita.

Understand that, in general, court enforcement of a CC&Rs agreement to abide by the majority decision under a valid amendment procedure alone fails to uphold the principals of our democracy.  The Constitution does not say that the majority is always right.  The 5th and 14th Amendments do not contain exceptions like, “

no person shall be deprived of life, liberty or property, without due process of law (5th & 14th Amendments) . . . nor deny the equal protection of the law (14th Amendment) unless approved by a majority or supermajority vote as contained in the governing documents.

The case before us is another example of judicial populism that holds that the will of the majority shall prevail no matter what.  How far have the courts gone in ignoring the Constitution and allowing unrestricted private individual or group “rewrites” of the Constitution to be binding? 

By such court activism, the America of today not the America of your father or your grandfather.

References

[1] OAH, the Office of Administrative Hearings, is an executive agency obtaining it powers and authorities from the legislature’s enabling act.  The statutes (ARS 41-1092 et seq.; 41-2198 et seq.) and Administrative Code (R2-19-101 et seq.) do not grant the OAH the power to award attorney fees.

[2] 42 USC 1983, Section 1983. Civil action for deprivation of rights

 “Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress, except that in any action brought against a judicial officer for an act or omission taken in such    officer’s judicial capacity, injunctive relief shall not be granted  unless a declaratory decree was violated or declaratory relief was    unavailable.”

The failure of the HOA to protect against obsolescence

Tyler P. Berding, CAI and the Foundation for Community Association Research (CAI affiliate) member, has come to realize that HOAs will become obsolete for a variety of reasons and property values will plunge. His “exit strategy,” as stated in his article, is unclear.  He writes (my emphasis),

The challenge is . . . formulating an appropriate exit strategy that will protect the individual’s investment when the inevitable occurs. At present, no appropriate strategy for preserving individual interests in the face of an obsolete community exists. It should be a legislative priority to find one.

The individual owner is trapped in this cycle. He cannot ‘opt out’ of the system. His only choice is to vote for increased assessments or not, or to sell. If he sells, his successor will be given the same choices. If the community fails, the owner’s interest will be lost. There is no present means by which an owner can salvage his separate interest in a failed community.

To better understand HOA obsolescence, think of your car. You bought it and it depreciates or becomes obsolescent over time.  Most people cannot buy a new car until the sell their old one, or trade it in; but, there are no “home dealers” to make home selling a relatively quick and easy process like car buying. As your home grows old, like the HOA’s common areas, repairs and maintenance demands continuously pop up.  Your property value drops – forget about the HOA’s common areas – your home value drops.  The obsolescence of the common areas does not help your home value. In a non-HOA subdivision, the county pays for the neighborhood maintenance.

Berding does not address what I call your home’s architectural obsolescence; that is, the layout, floor plan, or design of your home, which may no longer be fashionable as people’s tastes change. What the HOA can try to do, which would be a value of HOA living, is to mandate special assessments for repairs and maintenance.  It can do it simply by amending the CC&Rs since there is no protection in the HOA constitution against ex post facto amendments as in the US Constitution.  But, then again, was this part of “the deal” when you bought your home?

What if a homeowner has the cash to remodel his home to make it ‘fashionable’?  Would he get ACC approval? Fat chance!  Would the HOA revise its character of the community and allow homeowners to remodel and create more fashionable homes?  I mean, doesn’t that help maintain property values?  Fat chance!

But wait Berding, what about government intervention to preserve the HOA as quoted above?   What do you think that legislative priority will be, as the state faces a multitude of HOA communities becoming blighted areas?  My guess is that a law will be made mandating the payment of special assessments into reserve accounts to prevent HOAs from becoming obsolete.  Don’t think so?  Have you heard of Obama Care?

In this lengthy article Berding rambles and introduces aspects but fails to tie them all together, like, “It [the HOA] is more than a quasi-governmental agency” and “It is a multidimensional mix of principles” (referring to special or sui generis laws).   Is Berding saying below that the homeowners alone are responsible for the financial condition of the HOA, and individual rights get in the way (my emphasis)?  You know, you’re on your own. Judge for yourself.

In America, individual self-determination usually prevails, and that basic truth illuminates the fundamental flaw in the common interest development concept. In CID living, the success of the group is wholly dependent on the voluntary contribution of capital by each owner.

A community association in trouble cannot simply close the doors and walk away. The ‘village’ [note the reference to public governance terminology] has to pay the utilities, remove the garbage, and maintain the buildings if the owners are to have shelter. This cannot be effectively done without a consensus of the owners, because without owner approval, the association cannot raise sufficient funds to operate.

And in the absence of a consensus?  We know about consensus and member involvement in HOA matters, don’t we?  It seems obvious that the state must intervene, right?

Berding does make the important point that is essential for a healthy community – it’s up to the members to “do right.”   However, the mass merchandising of the HOA concept has worked against members pitching in to maintain property values, because that’s the HOA’s job, that’s why they bought into an HOA – them, not us.  Faulty indeed, but if the financial aspects of a close corporation where financing must come from the limited membership were disclosed, including the joint and severable liability of the members, who would buy an HOA home?  The home would lose all its traditional humanizing, family aspects and become just another dehumanizing material asset.

There’s much more to Berding’s article, which unfortunately gets bogged down in too much irrelevant detail.

 

See, Tyler P. Berding,  “The Uncertain Future of Common Interest Developments,” August 10, 2014.

Would the HOA legal scheme collapse under a democratic form of government?

The HOA legal scheme as a nonprofit form of government chartered under corporation laws cannot be held in the same light as a democratic public government chartered under municipal corporation laws.

We use the term HOA quite loosely as I have in many of my posts.  However, the HOA is 1) the legal governing body of a 2) planned unit development or condominium, which is a real estate ‘package’ of amenities, landscaping, etc.  It is a de facto – it exists and functions – government, but unrecognized by the state as is Cuba.

Can we get rid of the ‘package’?  I don’t think so for reasons that I’ve stated  — too big.  Can we get rid of the oppressive authoritarian governing body known as the ‘association,’ home or property owners associations, etc.? Definitely yes!  Or can we?

Questions for study and thought!  

 1.    Will the ‘package’ collapse if we remove the oppressive authoritarian governing body and substitute a more democratic regime?

2.    Why didn’t the promoters of the current HOA scheme (in their seminal publication, The Homes Association Handbook) present the HOA as a municipal corporation rather than a nonprofit corporation?

In regard to question 2, is it because the promoters knew that the HOA would be subject to the Constitution and restricted by state laws?

A hint is given, even in the Handbook, with the discussion of ‘free riders’ and the need for mandatory membership and compulsory dues.  (A ‘free rider’ is one who benefits from the efforts and money of others as in the case of unions, as would be the case with voluntary HOA memberships.)  The other hint is how does one maintain property values, that huge appeal to the masses, without strict enforcement of many specific rules and regulations? If people were free to do as they please, what is the value of the HOA?

Apparently, local ordinances did not satisfy the promoters of the HOA scheme because they were too broad and didn’t represent the membership, but somehow top-down, take-it–or-leave-it CC&Rs do.  And to be sure, make it an adhesion contract that favors the HOA and prevents the practical and effective voice of the people. Apparently our system of government failed to satisfy the promoters, and their need for a better form of government was sought – one better suited to the goals of the promoters.  A fascist form of government (or if that offends you, a corporate oligarchy where the objective of the state is to satisfy not the people, but the government) did the trick quite well.

The answers will illuminate the fundamental problem with HOA reform and the resistance to substantive reforms.

 

Getting the Feds involved in HOA reforms

As apparent from the Illinois Supreme Court opinion[i] favoring HOAs, the Feds need to get involved. However, the Feds, like state attorney generals, have no specific authority to get involved – HOA/condo states are state laws, except for those federal laws like the American Disabilities Act and Fair Housing.

A broader approach is necessary in order to wake up the Feds, and that can come about by an appellate or US Supreme Court case decision on 1) violations of a homeowner’s constitutional rights, or 2) a violation of the 14th Amendment’s equal protection clause brought under federal law § 42 U.S.C. 1983, Civil action for deprivation of rights. This approach would be similar to the whistle blower law suits of Erin Brockovich or Jeffrey Wigand (tobacco nicotine is addictive).

Read the paper at constitutional rights . . . .

 

[i] See IL Supreme Court holds HOAs “are a creature of statute,” and not contractual.