State supreme court cases favor member rights and freedoms over HOA

I would like to thank Deborah Goonan on her post[1] covering two especially important state supreme court HOA cases, and her excellent reporting and analysis of the issues. My review and comments follow.

WDIS, LLC v. Hi-Country Estates Homeowners Ass’n, Phase II, 2022 UT 17 (Utah 2022)

Raised in this landmark case, but not directly addressed, is the constitutional validity of the CC&Rs that contain implicit waivers and surrenders of fundamental rights and freedoms that are available to and protect all Americans under the Constitution. At issue, as stated by the Utah SC in WDIS,

“More relevant to this case, future owners of parcels or homes within the jurisdiction of any HOA are not required to formally sign onto the restrictive covenants when they are first created. Instead, consumers (be they buyers, heirs, or lenders) are merely entitled to a take-it-or-leave-it option to accept ownership of the property, subject to whatever covenants and restrictions are on file in County records. By taking possession of the property, an owner is presumed to have accepted the restrictions as valid and enforceable.”

The “Landowners” raised the especially prominent issue of freedom of contract, raising the charge of CC&Rs as an unconstitutional contract. The Utah Supreme Court concluded:

“The protective covenants at issue were not contractual” because “they did not involve two parties agreeing to perform acts in relation to each other. We conclude that applying the presumption is appropriate.”

“The freedom to contract is implicated because the question we are resolving is whether parties “of full age and competent understanding” are free either to accept or reject those covenants later on. And there are other reasons, beyond the freedom of contract, to apply the presumption.”  

* * * *

Belmont Ass’n v. Farwig,  No. 214A21, 2022 NCSC 64 (N.C. 2022)

First, with respect to outwardly friendly HOA member legislation let me point out what we see here,  the bill/law usually contains an offsetting exception or exclusion that renders the homeowner benefits questionable or negates them under practical application. Obviously, anybody seeing solar panels on roofs know that they will be seen by the public. How can a court ignore that?

Also, watch out for Rules that cannot be supported by the CC&Rs and are invalid as the SC pointed out regarding an ARC rule. HOAs cannot add restrictions or conditions not specified or prohibited by the CC&Rs without a CC&Rs amendment.

Second, as I’ve repeatedly stated, state legislatures favor the HOA over member rights and constitutional protections. Thank God there are some courts who do seek justice like the NC  Supreme Court in this case that saw, in plain English, the subterfuge of “friendly” HOA member law.

Read the full post here:

  1.  HOA Lawsuits: Property owner challenges to HOA boards (Part 2) – Independent American Communities, Deborah Goonan, Aug. 5, 2022.

AZ SC in Kalway holds CC&Rs as “special contracts”

Author’s note:  I make extensive use of direct quotes in order to avoid my interpretations “leaking” through.

The Arizona Supreme Court in Kalway[i] threw some light on the controversy that HOA covenants and CC&Rs are valid contracts and are held as such.   The Court held that, my emphasis,

“CC&Rs form a contract between individual landowners and all the landowners bound by the restrictions, as a whole. . . . in special types of contracts, we do not enforce ‘unknown terms which are beyond the range of reasonable expectation . . . . CC&Rs are such contracts.  Because covenants originate in contract, the primary purpose of a court when interpreting a covenant is to give effect to the original intent of the parties’ with any doubts resolved against the validity of a restriction.”

With respect to the requirement for very important but ignored homeowner notice, the Court continued, my emphasis,

The notice requirement relies on a homeowner’s reasonable expectations based on the declaration in effect at the time of purchase—in this case, the original declaration.  Under general contract law principles, a majority could impose any new restrictions on the minority because the original declaration provided for amendments by majority vote. But allowing substantial, unforeseen, and unlimited amendments would alter the nature of the covenants to which the homeowners originally agreed. . . . Thus, “[t]he law will not subject a minority of landowners to unlimited and unexpected restrictions on the use of their land merely because the covenant agreement permitted a majority to make changes to existing covenants.”

One of the most egregious injustices that I’ve come across is the failure of the courts to apply the full body of contract law to HOA covenants in CC&Rs.  Opinions and dicta refer to the CC&Rs simply as a contract, or an agreement interpreted as a contract — yet in spite of the above opinion — fail to protect the homeowner under contract law 101.  The Cornell Legal Information Institute lists the basic criteria for a valid contract:

 ‘The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.”

Added to this general description of a legal contract is the Opinion holding that the CC&Rs are special contracts that do not permit “unreasonable  expectations” and that the notice of reasonable expectations is set forth in the CC&Rs “at the time of purchase,” and the law will protect minority owners from any such expectations.   

As I have argued many times,[ii] the boilerplate  amendment process that binds non-agreeing owners solely on the basis of a majority or some super majority renders the original “contract” a meaningless piece of paper. 

Professor Barnett explains,

“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]

Conclusion

It should be evident to all that this constitutional issue of “signed the agreement” and are thereby bound to obey needs further thought. As it stands, homeowners in HOAs are subject to special laws, the numerous state HOA/Condo Acts, for special entities allowed to function as de facto private governments outside the protections of the US Constitution.

Notes


[i] Kalway v. Calbria Ranch, CV-20-o152-PR, ¶ 13 -16  (Ariz. March 22, 2022).

[ii] See HOA consent to agree vs. “the will of the majority”,  Contracts, the Constitution and consent to be governed and HOA Common Sense, No. 4: Consent to be governed.

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

“Private Metropolis” revisited

It is my strong belief that  the HOA legal model of local government played a part  in the demise of democracy in America[i] has been greatly assisted by the recent publication Private Metropolis.[ii]  In my prior post on Private Metropolis,[iii] I was very pleased by the opening Introductory paragraph,

The opening introductory segment encompasses a wide description of special  governmental units. It is loaded with constitutional issues and controversies that says it all quite plainly: “quasi-governments,” “shadow local states,” “the municipality is no longer the privileged seat of governance,” and “special purpose local governments” (including homeowner associations with some 27% of the population — according to CAI — as residents), that “became, in effect, shadow governments.” 

Unfortunately, these highly descriptive political concepts  used in this very broad study of local government failed to appropriately address the form of local government known as HOAs.  Scant attention is given to these associations by the authors. In the 312 pages “homeowner association” is mentioned just once and “CID” twice. But “shadow government” and “quasi-government” and “special districts” are tossed around quite frequently. Readers, having read the very enticing title, will be greatly disappointed by its failure to deal with the most direct affront to the eclipse of local democratic government: the HOA legal model of governance that has been supported by all state legislatures across this country.

HOAs, my generic term for community and homeowners associations, satisfy the fundamental definition of a political government.  Black’s Law Dictionary (7th Ed.) definition separates the men from the boys: “Modern states are territorial; their governments exercise control over persons and things within their frontiers.”  And that is the unique feature of political government that  distinguishes an HOA from  a business, a non-profit charity, a club, a union, etc. I believe that the decision to form HOA governance outside the domain of public government was intentional to avoid constitutional restrictions.[iv]

They are a de facto yet unrecognized form of local government — other forms being mayor-council, council-manager — born and created as private entities, and as such,  have escaped, for the most part, under the common defense prohibiting  any ”law impairing the obligation of contracts.” Although the other forms of public local government are subject and held to the Constitution and the laws of the land. HOAs meet every criteria set forth by the authors as indicated above and epitomize the eclipse of local democratic government. 

The authors appear to admit the failure of the  ivory tower “philosopher kings” (my terms) to actively participate in preventing the fall of local democracy: “Instead, even scholars who study local governments [only recently realized] the degree to which quasi-public institutions are insulated from the democratic process.”  That applies strongly to authoritarian HOA governments. 

Notes


[i] See in general, Whither goest local government? Restrictive HOAs or responsible public government (2009); CAI’s early awareness of HOA constitutionality, public mini-government (2021); HOAs are another form of local government (2021).

[ii] Private Metropolis: the Eclipse of Local Democratic Government,  Dennis R. Judd, Evan McKenzie, Alba Alexander, Global and Community Series, Vol. 32, Univ. of Minneapolis Press (June 22, 2021).

[iii]  Private Metropolis: explaining the demise of local public government.

[iv] CC&Rs are a devise for de facto HOA governments to escape constitutional government.

Reorienting the HOA board: business judgment rule

Mentoring: Reorienting HOA board – business judgment

consulting SIG image1HOAs love business judgment rule (BJR) that can be found in too many court opinions including, as a prime example, the infamous NJ Supreme court opinion in Twin Rivers.

First, the business judgment rule protects members from arbitrary decision-making. . . . Our Appellate Division has uniformly invoked the business judgment rule in cases involving homeowners’ associations.[1]

In CAI’s amicus brief in the above case, argued that “the settled legal principles” of the business judgment rule

permit community association trustees to fulfill their fiduciary duties and to exercise judgment in balancing the needs and obligations of the community as a whole with those of individual homeowners and residents, without undue judicial interference.[2]

As can be noted, the CAI brief equates the HOA interests with the members’ interests and that it is acting in the best interests of the members subject to “the needs and obligations of the community.” Sort of confusing doubletalk me thinks.

Wayne Hyatt is quoted (p. 9) that the business judgment rule

defends the procedure under which the board has acted and the right of the board to be the sole arbiter of the issue involved. The result is that if the procedure is valid, the court will not second guess the substance of a board’s action. Consequently, the court upholds the decision without subjecting the wisdom of the board’s action to judicial scrutiny.[3]

In California’s Lamden v. La Jolla,

[A] hallmark of the business judgment rule is that, when the rule’s requirements are met, a court will not substitute its judgment for that of the corporation’s board of directors. . . . [A]nyone who buys a unit in a common interest development with knowledge of its owners association’s discretionary power accepts ‘the risk that the power may be used in a way that benefits the commonality but harms the individual.’ “[4]

I cannot overstate the profound damaging effect by the courts as they continue to ignore HOAs as de facto governments and treat them as a pure real estate corporation. The School has performed an excellent job in creating a supportive mindset. Their demonstrable ignorance can only stem from the thorough indoctrination by the CAI School of HOA Governance that flows from the HOA “bible,” The Homes Association Handbook (cover page link).[5]

The BJR serves to protect the BOD from member lawsuits where the issues center on the BOD’s broad discretionary powers. Essentially the basis of BJR presumes that the BOD knows better about managing the HOA than the judge and, after all, the members chose the directors. In a cop-out not me attitude the judge simply goes along with the BOD’s position. YOU LOSE!

It is a very effective argument, tactic, because the homeowner and his attorney do not challenge this view that the BOD knows best. There is no rebuttal arguing that the BOD is practicing bad management, or is acting inconsistent with their obligation to act in members best interest – not in the best interest of the HOA. There is the presumption that the members’ interests are totally found in the governing documents and none other exist. It is an attitude in contrast to our Bill of Rights, Amendments 9 (enumeration clause) and 10 (rights delegated to the people).   Under the HOA “constitution,” any non- specified prohibitions or rights belong to the HOA and not its members.

Once again I’m touching upon a defect in the HOA legal scheme. Under corporation law the BOD is responsible to the HOA association. True! But the CC&Rs override that law. Why?  Let’s not forget that we have a PRIVATE contract agreed to by the members requiring the BOD to function in the best interest of the members.[6]  The private contract defense works for the members and not the BOD What’s fair is fair! Right?

In order to move past many of the persistent HOA problems and issues the BOD, as well as the legislators and courts, must adjust their views and mindset with respect to the HOA scheme. To restore equality before the law HOAs must be viewed as another form of local public government. The reorientation of the BOD comes first. There are ample materials, courses, seminars and public education, a substantial precedents and history on how to function as a public government and still protect and retain the private nature HOA community.

Notes

[1] CBTR v. Twin Rivers, 929 A.2d 1060, II, (N.J. 2007).

[2] CAI amicus brief, CBTR v. Twin Rivers (N.J. Super. App. Div. Docket C-121-00 2004).

[3] Id.

[4] Lamden v. La Jolla, 980 P.2d 940, Calif. 1999).

[5] The Homes Association Handbook, MARYJO CORNISH, Editor, Urban Land Institute, TB#50 (1964). Its Foreword omits any concern about the homeowners or constitutional government. See cover pages that provide evidence of lack of local government concern as part of the purpose of TB50. See Analysis of The Homes Association Handbook.

[6] See “HOA contractual mission” in Restructuring HOAs – intents and purposes.

HOA vs public government

Ever wonder what would happen if your town/city council did not have enough public minded citizens to run for office?  You know, like what we see in many HOAs?

While I’m not sure, several scenarios are possible.  A small clique would soon dominate the council and the shortage of councilmen ignored.  Or, the state would be asked to get involved either by citizens unhappy with the ruling click, or vendors concerned about the legitimacy of contracts would seek protection.

In HOA-Land who would be able to step in and restore order and a just government?  Not the state since the HOA is not a state subdivision.   Could be the vendors who are mainly the lawyers and managers.  Not likely. After all, it is they who control the HOAS “council.” They like it just this way, because, as we see in the governing documents and state laws, they are a privileged class. Not the board composed of the clique and perhaps “conscripted” directors – those bodies urged to become a director to satisfy the CC&R and who remain silent and acquiesce to the president’s wishes.

I hope readers begin to realize that the dogmatic cry of “no government interference” got just what they asked for – complete independence and on their own. HOA-Land private government requires a higher degree of public involvement than found in the nation as a whole – an insurmountable barrier.

However, some disgruntled member can file a request to the court to appoint a receiver who will manage the HOA – and get paid for it — as it is quite evident that the members are incapable of governing their HOA. Now, he would have his orders from the court and that would not include the irrational lament promoted by the CAI lawyers and managers that it ain’t fair to the “good” members.  Well, it is fair in terms of the fact that it is the failure of the members to participate that makes them guilty of the failure to manage their HOA.  Oh, you thought you were just buying a home and management of the HOA was someone else’s problem.  SURPRISE!

In my opinion, HOAs as a state entity bring more protection than the private and adhesive CC&Rs “contract.”  Understand that turning to the 42 year-old national educational entity, as several states and towns have, that has failed all these years to fix HOA problems is irresponsible and lunacy pure and simple.  As a state entity you have bodies of statutes and common law, and traditions and precedent that serve to protect citizens as opposed to the Johnny come lately, make new law on the fly by courts. New laws that interpret your “contract” in many unexpected ways that do not serve individual rights and interests because the HOA is a private entity.