Management Case Study #2 –  court HOA receivership; attorney sued; case sealed

“The events of 2008 – 2012 presented here span wrongful acts by an Arizona HOA and its attorney resulting in a court appointed receivership, and leading to the attorney being sued for aidding and abetting, among other things.  The case then disappears from county court public records and the outcome remains unknown.

“‘Defendants have conspired to take over their homeowners association . . . for improper purposes. Defendants have utilized the Association to gain control of as much property in the community as possible, through improper means .’

“[The HOA atorney] was personally sued for: ‘Breach of Ethical Duties: Disgorgement; Aiding and Abetting; Professional Negligence; Breach of Contract; Breach of Fiduciary of  Duty.’ 

“I do not have any additional court filings, either updates or final disposition.  In May 2012, after 1 ½ years of silence,  I looked into the court records only to discover that the case disappeared from public view.”

Read the full 5-page case study here.

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

Will AZ Supreme Court address broad HOA issues of constitutionality?

As we approach an October 5th decision to decide to hear the Tarter v. Bendt defamation case[i] that raises free speech and limited- purpose public figure issues, I am hoping that the Court will address the real-world widespread misinformation regarding conditions and the legal status of homeowner associations statutes. This investigation by the Court is essential for a just and fair decision in the defamation lawsuit by an HOA president and attorney. Questions of failing to act in good faith and an abuse of the law by the plaintiff attorney with respect to filing a strategic lawsuit against public participation (SLAPP) was raised in my amicus brief.

This is not an ordinary defamation lawsuit but one involving the actions and conduct by the plaintiff in his capacity as the HOA president  and in the context of matters of HOA governance. In the recent Nevada Supreme Court opinion in Kosor,[ii] the Court held that “HOAs as public forums and the president as a limited-purpose public figure” and further held that an HOA “is a quasi-government entity ‘paralleling in almost every case the powers, duties, and responsibilities of a municipal government.’”

The decision by the Arizona Court will have widespread repercussions and consequences not only for Arizona, but for HOAs  nationwide affecting  statutes in every state. The legitimacy of a democratic country rests on just and fair laws for the people, as Professor Randy Barnett wrote,

A constitution that lacks adequate procedures to ensure the justice of valid laws is illegitimate even if it was consented to by a majority …. A law may be ‘valid’ because it was produced in accordance with all the procedures required by a particular lawmaking system, [the HOA amendment procedure, for example] but be ‘illegitimate’ because these procedures were inadequate to provide assurances that a law is just.[iii]

Since the context of the lawsuit relates to the legal status  and constitutionality of the HOA model of government, and to the statutes and CC&Rs “constitution” creating private contractual governments, did Bendt receive justice with a $500,000 award for the HOA president’s “pain and suffering? As applied to HOA statutes and Acts, will this Court heed US Supreme Court Justice Sotomayor’s dissent on the failure to uphold the Constitution?[iv]

“Presented with an application to enjoin a flagrantly unconstitutional law engineered to prohibit women from exercising their constitutional rights and evade judicial scrutiny . . . . Because the Court’s failure to act rewards tactics designed to avoid judicial review . . . . 

“To circumvent it [the Constitution], the [Texas] Legislature took the extraordinary step of enlisting private citizens to do what the State could not . . . .  It cannot be the case that a State can evade federal judicial scrutiny by outsourcing the enforcement of unconstitutional laws to its citizenry . . . .”

This case must be remanded to the trial court for consideration of the impact of HOA bias on the decision against Bendt.

Notes


[i] See HOA limited-purpose public directors and officers; The continuing saga of Bendt and public speech in HOAs; Pro Se Bendt amicus brief accepted by AZ Supreme Court.

[ii]  Kosor v. Olympia Companies, NV No, 75669 (Dec. 31, 2020).

[iii]  Randy Barnett, Restoring the Lost Constitution, Princeton Univ. Press, (2004).

[iv]  Whole Woman’s v. Austion Reeve Jackson, 594 U. S. ____ (2021) Sotomayor R, J., dissenting, Supreme Court of the United States, No. 21A24 [September 1, 2021]. (Abortion case).

Business judgment rule not right for sui generis HOAs

This examination of the business judgment rule is a supplement to my amicus curiae brief to the AZ Supreme Court (Taylor v. Bendt, CV-21-0049, awaiting decision to hear case) in which I provided guidance in regard to 1) HOAs are sui generis created by rejecting Constitutional protections and instituting and supporting  separate laws for special organizations, 2) HOA-Land has been under the heavy influence and domination of the national lobbying entity, Community Associations Institute (CAI), and 3) as a result of the above a pro-HOA mindset has crept into our judicial system resulting in bad laws setting  bad precedent.

You can read the complete 30 page treatise (15 pages of argument plus apprendices) here .

Failing to achieve substantive HOA reforms

Is there a way out?  Definitely yes!

It is not by going to state legislatures to be repeatedly rejected, or given token reforms but with no substantive redress of grievances. It is not by repeatedly expecting the courts to do homeowner justice in spite of the strong stare decisis precedent of pro-HOA laws and public policy favoring HOA-Land. It is not by expecting law colleges to provide a balanced educational program in law for students that includes HOA constitutionality.

And it is not by hoping that the media — granted special 1st Amendment protections to inform and educate the citizens on political matters — will measure up and so present the whole HOA truth that has been so long hidden from the public.

As a result of my 21 years of activism and advocacy for HOA constitutionality, and my education and detailed research, I have come to understand the greater social and political forces at work. These forces that have led to the current culture and environment surrounding the HOA legal scheme and structure. They are detailed in my “The HOA-Land Culture.”

Read more at Cult behavior within HOA-Land and Plan to Restructure HOA model.