CAI’s early awareness of HOA constitutionality, public mini-government

It appears that CAI has adopted a “see no evil, hear no evil, speak no evil” attitude toward HOA constitutionality and public mini-government issues that are still prevalent today.  And it spread to the policy-makers.

Wayne S. Hyatt’s 1975 Emory Law Journal article, Condominium and Home Owners Associations:  Formation and Development, 2 years after the formation of CAI, presents his highly influential view on HOA constitutionality while recognizing that HOAs are mini-governments.

Wayne Hyatt “the most prominent advocate in CAI” serving as a 1975 “homeowners representative” and a former president (1978-79) (Privatopia, p. 219, 138 respectively). Hyatt  devoted his practice to working with developers of condominiums, master planned communities, resorts . . . to create community governance structures and community stewardship organizations.

While actively practicing law, he was also a member of 1) the American Law Institute (that wrote the pro-HOA Restatement of Servitudes, 2) the College of Community Association Lawyers (CAI affiliate) , the Community Associations Institute (CAI, created in 1973 by the National Association of Home Builders [grant of]  $30,000), and  3) ULI – the Urban Land Institute (sponsor of the 1964 “HOA bible,” The Homes Association Handbook) and served as a ULI Trustee.

He also served as an Advisor 1) to the Restatement of the Law (Third) Property: Servitudes, and 2)  to the Special Committees on a Uniform Condominium Act and a Uniform Planned Community Act of the National Conference of Commissioners on Uniform State Laws (Uniform Law Commission, UCIOA and UCA).  Hyatt received several awards from CAI.

Hyatt developed many of the Dell Webb’s master planned and resort/active adult association CC&Rs over the years.

His 1975 Emory Law Journal article gives readers a good idea of constitutionality and local government concerns that seemed to have evaporated over the years as CAI’s influence increased dramatically.  A few important excerpts:

  • “The California Code provides for an association and affords it the powers and duties of the mini-government.” {T]he [Georgia] legislature has in effect provided a large measure of home rule for what is in essence a category of small municipalities, and each has established a system of officers and directors in the nature of a mayor and council to oversee the exercise of this rule.” (At 988). 
  • “‘Has the state permitted, even by inaction, a private party to exercise such power over matters of a high public interest that to render meaningful’ constitutional rights, private action must be public?”(Footnote 33 at 983). [In simple terms, private government HOAs must be subject to local government protections].
  • “The Declaration is not a contract but, as a covenant running with the land, is effectively a constitution establishing a regime to govern property held and enjoyed in common.  It further sets forth procedures to administer, operate, and maintain the property. . . . the declaration and particularly the by-laws create not only a corporate structure but also a governmental authority that requires and deserves competent, experienced persons . . .” (at 990).
  • “The power of ‘levy’ is a distinctive characteristic of the association and removes it from a mere voluntary neighborhood group. . . . The imposition of penalties, whether fines . . . or a denial of use of facilities enforced by injunction, certainly represents quasi-judicial power to affect an individual’s property rights. . . . The possession and exercise of such power has substantial consequences with clear constitutional implications.  The courts have not yet considered a direct constitutional challenge to an association’s action.” (at 983).
  • “[T]he constitutional issue is most acute in rule enforcement; however the association’s established procedures, declaration, and by-laws should insure compliance with at least rudimentary constitutional principles, and there must be a procedure to protect members’ rights.” (at 984).

Nowhere will you find any equivalent discussion of HOA constitutionality, or HOAs as mini-governments or as a form of local public government. Not in its Manifesto, Community Next 2020 and Beyond (2016);  not in its Public Policies: Private Property Protection, Government regulation of Community Associations, and Rights and Responsibilities For Better Communities (July 15, 2021).

And not in any of its anti-constitution amicus briefs: Twin Rivers NJ appellate (2004), Dublirer NJ Supreme Court (2011);  Surowiecki, WA Supreme Court (2021) (business judgment rule overrides judicial review); Turtle Rock AZ appellate (2017); Foreshee WI appellate (2017).

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.

Judicial error regarding HOAs as mini-governments and state actors

Two cases directly dealing with HOAs as mini or quasi governments by means of state actions tests have come to my attention: Brock v. Watergate and Westphal v. Lake Lotawana.[1] (The question of an HOA being a state actor is not raised, but that a specific act of the HOA is a state action. The questions are fundamentally different.) The decisions were based on the public functions (company town) test and one of the US Supreme Court criteria, the “close nexus” test.[2]

Here the question of an HOA being a municipality is linked to showing a comparison with company towns (established by corporations to provide housing for their employees) under the public functions test, which was held to be a municipality. The Court then makes the giant leap to hold that since the HOA was not a company town, and therefore not a municipality, none of its actions can be considered a state action. The Court’s illogical conclusion is that no act of a private entity can be considered a state action, because the entity is not a municipality! This attitude makes a mockery of state action/actors laws that protect citizens from quasi-governments. (Think about this after reading the excerpt below.)

The 1987 Florida Brock opinion, just 4 years after the court quoted Wayne Hyatt’s opposing view in Cohen Hill (see note 2), held that:

A homeowner’s association lacks the municipal character of a company town. In the case of an association, the homeowners own their property and hold title to the common areas pro rata. Moreover, the services provided by a homeowners association, unlike those provided in a company town, are merely a supplement to, rather than a replacement for, those provided by local government. As such, it cannot be said that the homeowners association in this case acts in a sufficiently public manner so as to subject its activities to a state action analysis. Moreover, the association’s maintenance, assessment, and collection activities are not sufficiently connected to the State to warrant a finding of state action. The state cannot be implicated in the association’s activities solely because the association is subject to State law. We conclude that the association in this case does not stand in the position.

(The Court did not realize that most HOA common areas and facilities are not owned by the members, but by the HOA corporation. The members are third-party beneficiaries. The second sentence above is not accurate.)

In further shocking dicta (unsupported legal authority for statements) in the above quote (see To Be in note 2), the Court declared that HOA services are merely a supplement to local government and that as a supplement its acts are insufficiently municipal in nature. Say what?

Well, I got news for the Court. Applying the “common meaning of the word doctrine” shows that “to supplement” means “to complete, add to, or extend by a supplement” and a “supplement” means “something added to complete a thing, supply a deficiency, or reinforce or extend a whole.”  With this definition the HOA would be a part of local government to complete it or supply a deficiency.  The HOA is a municipality!

Sadly, the narrow focus on individual and separate acts and actions to determine the involvement of the state in the functions and activities of the HOA is misguided.  Rather, it is the collection of the numerous acts of the HOA that should be used to determine whether or not the HOA is an arm of the state and stands in place of the state.  Consider for example, does local government supplement state government?  Does town local government stand in the place of state government?

However, based on the irrational argument used in Brock, as quoted above, the Court ruled that the HOA “does not stand in the position of a government.”

 

In the 2003 Missouri Lake Lotawana opinion, the Court reversed the trial court’s ruling, asking for a declaratory judgment, using the irrational opinion in Brock and held that the plaintiff’s allegations “require state action, and that, here, there is no state action because the Association is not a state agent. . . . the trial court is effectively saying that Mr. Westphal can have no claim because the Association is not a state actor.”

On the other issues the plaintiff directly alleged state action, arguing that,

[T]hat the Association’s conduct is state action because the Association is a quasi-governmental entity.  He maintains that the Association ‘operates as a ‘mini-government’ because it raises money through dues, has an elected governing body, enacts rules and regulations, and enforces such rules through the court system. In support of this argument, Mr. Westphal relies on [Chesus and Terre du Lac].[3]

Referring to the two cases, the Court concluded,

While both cases discuss how a homeowner’s association operates as a “quasi-governmental entity,” neither is authority for the concept that an association’s “quasi-governmental” actions are state actions. Mr. Westphal fails to cite any authority to support his argument that the action of a quasi-governmental entity is state action.

First, the Court selectively only used the term “quasi” and ignored “mini” as in stated Chesus. “Mini,” of course, speaks of a small municipality, yet a municipality. Both cases simply, without further ado, quote the same Wayne Hyatt statements as I quoted in To Be (see note 2) that contain both words.

And the Court is technically correct with regard to a lack of a court finding, but taking such a view makes a mockery of the law and is highly illogical. As argued since “quasi” means “like,” then any action of a quasi-government must be, a quasi-state action. The degree of “quasi” must extend to state actions, too. Stop the “word games”!

“Quasi” must be defined, but not in terms of the public functions test or private entity devise. It must be defined in accordance with our constitutional system of government that cannot allow for outlaw governments to stand alongside constitutional local government.

This commentary, somewhat technical at times, demonstrates the failure of the courts to address the fundamental issues that HOAs are mini-governments, and that by the collective functions and actions of HOAs there is clear and convincing evidence to make the case that they are indeed state actors. The whole is greater than the sum of its parts.

(As a reminder, I am not a lawyer and I simply offer my views on HOA-Land.)

Notes

[1] Brock v. Watergate, 502 So.2d 1380 (Fla. 4 Dist. App. (1987); Westphal v. Lake Lotawana, 95 S.W.3d 144 (Mo. App. 2003).

[2] See in general, To be or not to be a mini or quasi government? Hyatt said ‘yes’; Do state HOA Statutes Establish HOAs as State Actors?

[3] Chesus v. Watts, 967 S.W.2d 97 (MO. APP. 1998);  Terre du Lac Assn v. Terre du Lac, Inc., 737 S.W.2d 206 (MO. App. 1987)

To be or not to be a mini or quasi government? Hyatt said ‘yes’

The controversy over whether or not HOAs are mini-governments or quasi-governments needs to be fully understood.  While I have written extensively on this topic,[1] allow me to take another peek into the controversy.

As an eye opener to many, I have extensively quoted Wayne Hyatt’s[2] 1976 statement on HOAs as mini-governments, as cited in the 1983 California case, Cohen v. Kite Hill.[3]  (My emphasis).

 

In a thoughtful article[4] . . . Hyatt and Rhoads note the increasingly “quasi-governmental” nature of the responsibilities of such associations: “The other essential role directly relates to the association’s regulatory powers; and upon analysis of the association’s functions, one clearly sees the association as a quasi-government entity paralleling in almost every case the powers, duties, and responsibilities of a municipal government. As a ‘mini-government,‘ the association provides to its members, in almost every case, utility services, road maintenance, street and common area lighting, and refuse removal. In many cases, it also provides security services and various forms of communication within the community. There is, moreover, a clear analogy to the municipal police and public safety functions. All of these functions are financed through assessments or taxes levied upon the members of the community, with powers vested in the board of directors, council of co-owners, board of managers, or other similar body clearly analogous to the governing body of a municipality. Terminology varies from region to region; however, the duties and responsibilities remain the same.”

“Because each owner automatically becomes a member of the association upon taking title … the association has the power, and in many cases the obligation, to exert tremendous influence on the bundle of rights normally enjoyed as a concomitant part of fee simple ownership of property.”

“With power, of course, comes the potential for abuse. Therefore, the Association must be held to a high standard of responsibility: “The business and governmental aspects of the association and the association’s relationship to its members clearly give rise to a special sense of responsibility upon the officers and directors…. This special responsibility is manifested in the requirements of fiduciary duties and the requirements of due process, equal protection, and fair dealing.” [Sound familiar?]

Yet, this recognized international figure’s statements were ignored and not cited in a number of subsequent decisions. Instead, the courts preferred the antiquated, non-HOA decisions of the 1946 and 1948 “company town,” public functions test decisions in Marsh v. Alabama and Shelly v. Kraemer. These decisions predated the current HOA concept and legalities created in 1964 and were relied on.[5]  Like the “walking dead,” Marsh should be shot in the head and put away for good!

Now, to fully understand the issue we need to play the lawyer game and examine and parse the meanings of words and phrases.  Sorry, we must because that’s what HOA attorneys do — they can’t help it.

What is a mini-government? A quasi-government?  Following the recognized common meaning of words doctrine, “mini” means small and “quasi” means like.”  So, are we talking about small public governments? If so, I think this term answers the question that HOAs are small public governments.

Or are we talking about governments like public governments?  “Like” implies not really, but has the feel, or aura, or legalities of a public government.  If so, to what extent does a government become a public government?  How much “likeliness” is needed?  To what extent should homeowners have “like” constitutional protections?  All of them or some?  Or just some that give the appearance of constitutional rights and freedoms?

It seems that HOAs already have a number of “like” protections, but totally deficient and failing to protect the people.  They treat the HOA members as if they are “like” US citizens, having surrendered their citizenship.  This cannot be tolerated in a nation that prides itself as the ideal democratic country in the world.  Not at all!

It’s time to stop playing the HOA lawyer “word games” and accept the reality that HOAs are outlaw governments and must be held accountable under the Constitutional, as is required of all other governing bodies including those under Home Rule statutes.

References

[1] See in general: Do state HOA Statutes Establish HOAs as State Actors? (2007); The Constitutionality of state protected homeowners associations (2009) (Discussion on Hyatt’s view); HOA Case History: state actors or mini/quasi government (2011).

[2] Wayne Hyatt was a prominent figure in the promotion of HOA-Land as well as an important person in creating CAI in 1973, serving as its second president.

[3] Cohen v. Kite Hill, p. 5-6, 142 Cal App 3d 642 (1983), citing Raven’s Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783, 799 [171 Cal.Rptr. 334]). Cohen has been cited in Terre Du Lac Ass’n, Inc. v. Terre Du Lac, Inc., 737 S.W.2d 206 (Mo. App. 1987); Damon v. Ocean Hills Journalism Club, 85 Cal. App. 4th 468 (2000).

[4] “Concepts of Liability in the Development and Administration of Condominium and Home Owners Associations” 12 Wake Forest Law Review at page 915, (1976).

[5] Brock v. Watergate, 502 So.2d 1380 (Fla. 4 Dist. App. (1987) (close nexus dicta); Midlake v. Cappuccio, 673 A 2d 340 (PA. Super. 1996); S.O.C. v. Mirage Casino-Hotel, 43 P 3rd 243 (Nev. 2001); Westphal v. Lake Lotawana, 95 S.W.3d 144 (Mo. App. 2003) (“Mr. Westphal fails to cite any authority to support his argument that the action of a quasi-governmental entity is state action.”)