HOA bankruptcy and member liabilities

This Foxwood Hills HOA (SC)  bankruptcy event is every important for all to understand what’s going on.  I am offering my views based on the article and my knowledge of the bankruptcy procedure, which I have some familiarity.  The article also shows first-hand the liability attached to your HOA membership that comes under the heading of “joint and several liability” (J&S), mentioned several times in my materials.

Basically, the phrase applies to all members of a sued party in  a lawsuit whereby the total monetary damages can be collected from any one or all the members of the party. It’s like  a partnership where the debt can be collected from the partners who can pay to pay for all total debt when others cannot make the payment. 

Here, as I read the article,  we have the HOA unable to collect assessments from its members to cover its budgeted expenses, and so decided to apply a J&S policy and “tax” only the members who have not abandoned  or disowned their property — those who could pay. The plaintiff, Busbee, filed suit and said this isn’t right. Foxwood didn’t amend its CC&Rs to permit such unequal treatment of its members. There is no covenant for the HOA to do this.  In HOA-Land it would require a court order or member approval – yeah, right!

A bankruptcy is usually filed because revenues are less than monetary payouts and the prospect is dim in making the finances balance.  Under Chapter 11, as Foxwood filed, it submits a plan to make payments on its debt and is obviously a give and take negotiations between the creditors and Foxwood as the debtor. Detailed financials are submitted including who are the creditors and what money is owed the HOA, which is essentially the assessments not being paid by the members.

Here, as I see it, the HOA filed bankruptcy in anticipation of the outstanding lawsuit which could require not the payments from the members, but for Foxwood to pay back the alleged excessive dues collected by Foxwood.  The decision by the bankruptcy court rests on the outcome of the lawsuit as it needs a precise and legal statement of Foxwood’s financial status.

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.