Petitioner, Lynne Fisher, owns a home within Turtle Rock III Association (“Association"). Fisher was in violation of several provisions of the Association's Declaration of Covenants, Conditions and Restrictions (“CC&Rs"). Specifically, she was failing to maintain her lot in a clean and attractive condition (including storing items in her front window that prohibited her blinds from closing properly) and failing to maintain the landscaping. The Association sent multiple violation notices beginning in January 2014 through December 2015. Starting in February 2014, fines were imposed for the recurring violations (first, $25, second and third $50 each, and $100). Fisher never objected to the violation notices or the imposition of fines.
On November 4, 2015, the Association filed a lawsuit against Fisher to compel her compliance with an injunction, and to collect the monetary penalties and attorneys' fees. At the trial court level, the court held an evidentiary hearing as a trial on the merits. Fisher failed to attend, but her counsel appeared on her behalf. A Director on the Board testified as to Fisher's violations and the monetary penalties. The Court granted an injunction in favor of the Association and required Fisher to cure her ongoing violations. The Court also awarded a portion of the requested monetary penalties and attorneys' fees and costs. Fisher appealed, and argued that the injunction was invalid, as it controlled the use of the inside of her home, and that the fines were invalid because no written schedule of penalties was introduced in to evidence, and the penalties are unreasonable and inconsistent with Arizona Law (A.R.S. 33-1803(B)). The Court of Appeals reversed the judgment for monetary penalties, reasoning that the lack of a schedule of fines is unreasonable. Further, the court held that even if a fee schedule was in place, the Association had the burden to prove its damages.
The issues in this appeal are issues of both state and national importance. The Court of Appeals' published opinion in this case changes the law for over 9,000 Arizona community associations. This appeal centers on what these associations must do to assess owners monetary penalties for violations of their governing documents.
In summary, the Opinion held that in order to assess fines, an association must first (1) promulgate a fee schedule with fine amounts, and (2) prove damages. The Opinion judicially legislates two new elements into law and overrules over eighty years of Arizona precedent, starting with the Arizona Supreme Court. Since 1931, parties have enforced deed restrictions merely by proving that to tolerate a violation would diminish the protection provided to all owners by the deed restrictions. To that end, Arizona law authorizes fines after notice and an opportunity to be heard. Neither case law or the statute require damages. Enforcement actions are on the rise. Because the Opinion creates two new elements with little to no insight on either, Associations, owners, and the judiciary will have to guess what it all means. It may mean the end of an association's fining power because damages rarely exist. Without this key power, owners will be less motivated to live by the community's requirements. Well-settled blackletter jurisprudence will become null and void.
Brief: PendingPrior Rulings:Brief Author: Scott B. Carpenter, Esq., Brian Morgan, Esq., Lynne Krupnik, Esq., Mark Lines, Esq. CAI Amicus Review Committee: Robert Diamond, Esq. (VA), Chair of Amicus Committee, Karyn Kennedy-Branco, Esq. (NJ), Tom Moriarity, Esq. (MA), Steven Sugarman, Esq. (PA).
A group of property owners entered into a restrictive covenant for a new subdivision that was created on a lake in the City of Hayward, Wisconsin in 1982. Among other things, the covenant prohibited “commercial activity" within the subdivision. In 2015, a new owner began operating one of the properties in the subdivision as a short-term rental, advertising in print and electronic media as a “lodge". This owner purchased the property under an IRS 1031 tax exchange (meaning it must be used for business or active investment purposes). In the first year of use, the property was rented to more than 170 individuals and the owner garnered more than $55,000. Other owners in the subdivision sought an injunction to prohibit these rentals on the grounds that they were “commercial activity."
The circuit court concurred with the Plaintiffs and enjoined the new owner from using his property for short-term rentals. The owner appealed, and the court of appeal reversed the decision, finding that reasonable minds could differ as to whether short-term rentals constituted “commercial activity" because renters used the property for “ordinary living purposes" and because the sales took place online, not on the property itself. Therefore, according to the Court of Appeals, the restrictive covenant was ambiguous and could not be used to enjoin this activity. The original plaintiffs sought a writ of certiorari from the Wisconsin Supreme Court, and the writ was granted on October 10, 2017.
Many legislatures, including in the State of Wisconsin, are overriding local zoning control over short-term rentals. The Wisconsin Legislature just passed a new law prohibiting municipalities from disallowing certain short-term rentals under zoning codes. This means that it is even more important that courts recognize the right of property owners to freely enter into restrictive covenants or association agreements that limit or prohibit such rentals. Many policy makers are viewing the matter of short-term rentals as a home owner rights issue, which it is. But allowing neighbors to contract to disallow this activity is likewise a home owner's right.
If the court of appeals decision stands, then many agreements that were written long before the advent of AirBNB and other such services may be read to not prohibit online rentals of residential property. The Court of Appeals essentially decided that since the restrictive covenant at issue didn't specifically talk about short-term rentals that were arranged online, it was inapplicable and such rentals were allowed. This defeats the purpose of this restrictive covenant and allowing this interpretation to stand means that many other such covenants and association documents can be rendered pointless.
Given the advent of the “gig economy" and the explosion of short-term rental of residential real estate, this issue has national importance. Further, since the Supreme Court of Wisconsin is taking up the case, this court's decision will be looked upon as persuasive precedent for courts throughout the country.
The decisions of both the circuit court and the Court of Appeals are attached. Also attached is a document containing relevant court cases, both from within Wisconsin and nationwide. There are no association documents, and the Restrictive Covenant language is contained within the decisions of both lower courts.
BriefPrior Rulings:Brief Author: CAI Amicus Review Committee: Robert Diamond, Esq. (VA), Chair of Amicus Committee, Jennifer Loheac, Esq. (GA), Jim Strichartz, Esq. (WA), Laurie Poole, Esq. (CA).
The case involves a federal bankruptcy court ruling in the District of New Jersey that has potentially widespread and damaging consequences to community associations.
The ruling centers on the Association's claims for common element construction defects against the Debtor's successor in interest, Madison Crossing at Birch Hill, LLC ("Madison"). Madison claimed these defects represented pre-petition bankruptcy claims discharged by the Debtor's 2007 confirmed Chapter 11 plan. In response, the Association argued that the defects claims were post-petition claims unaffected by the Debtor's Bankruptcy Case. In such case, the Association could pursue these claims against Madison in New Jersey State Superior Court, where the Association could seek recovery against available insurance policies. The Court ultimately rejected the Association's arguments and accepted Madison's.
Specifically, in an Order dated April 20, 2017, the Bankruptcy Court concluded that the Association was aware of the construction defects before the date of the confirmation of the Debtor's plan. The Association thus had authority to hire engineers, attorneys, and a property manager prior to the period of transition in 2013. According to the Court, the Association had fair opportunity to protect their own interest regarding the impact of the Section 363 sale. Accordingly, the Association's construction defect claims had accrued prior to confirmation of the Debtor's bankruptcy plan, and the plan's discharge barred the Association's claims.
In essence, the Court held that the applicable state law deadline to initiate and prosecute construction defect claims was replaced by the date a sponsor/developer debtor confirms a Chapter 11 plan and receives a discharge. Such a decision has potentially devastating consequences to community associations in general.
Brief: PendingBrief Author: Mr. J. David Ramsey, Esq. CAI Amicus Review Committee: Robert Diamond, Esq. (VA), Chair of Amicus Committee, Jim Strichartz, Esq. (WA), Henry Goodman, Esq. (MA), Greg Daddario, Esq. (NH)
The plaintiffs, Gilbert and Daisy Malabe, owned a unit in the Executive Centre condominium project and fell behind on the maintenance fees and their mortgage. The Association proceeded with nonjudicial foreclosure of the unit pursuant to Hawaii Revised Statutes ("HRS") §5148-146 and §667-5. At the time, there were two parts of HRS Chapter 667, Part I and Part II. HRS §667-5 was in Part I. Part II was not used by lenders or community associations because it required that the debtor sign the quit claim deed to complete the foreclosure.
The nonjudicial foreclosure public sale was conducted on December 10, 2010. The sale was subject to the mortgage and the Association submitted the winning bid and a quit claim deed was issued to the Association on January 7, 2011. Mr. and Mrs. Malabe took no action until they filed a lawsuit against the Association on December 13, 2016. The complaint alleged that the Association was only permitted to proceed with a nonjudicial foreclosure under Part II of HRS Chapter 667 and that nonjudicial foreclosure under Part I was illegal.
The Association filed a motion to dismiss on two major grounds. First, it sought to dismiss the complaint on the grounds that the Plaintiff should have raised the Part I argument at the time of the foreclosure by enjoining the auction or setting aside the nonjudicial foreclosure. The Association argued that the case law for judicial foreclosures requires that someone challenging a foreclosure must act with reasonable promptness to set aside the foreclosure. Second, the Association sought to dismiss the complaint on the grounds that the Association was authorized to proceed with nonjudicial foreclosure under Part I of HRS Chapter 667. The court granted the motion. Plaintiff timely filed a notice of appeal on March 9, 2017.
This case is important because the case represents an after the fact challenge to an association's foreclosure years after the foreclosure is completed. The use of nonjudicial foreclosures was and is an important tool for associations particularly when the unit mortgagee whose mortgage is generally superior to the Association's and fails to act timely to foreclose their mortgage. Although associations in Hawaii have a six-month priority, it becomes a lien only after the lender's foreclosure.
Further, the Hawaii Legislative Action Committee supported the amendments to the condominium statute authorizing nonjudicial foreclosure. It provided and continues to provide an important tool for associations when their delinquencies are high and when lenders are not pursuing their own foreclosures. They provided relief to associations faster and with less expense. Associations should not be subject to challenges to nonjudicial foreclosures 6 or more years after they have been completed.
Brief: Pending Brief Authors: Richard S. Ekimoto, Esq. and John A. Morris, Esq.CAI Amicus Review Committee: Robert Diamond, Esq. (VA), Chair of Amicus Committee, Jennifer Loheac, Esq. (GA), Karyn Branco (NJ), Gary Kessler, Esq. (CA).
May 2017 Bourne Valley Court Trust v. Wells Fargo Bank (Nevada)
In a divided decision, the Ninth Circuit held that Nevada's homeowner association lien statute (Nevada Revised Statutes § 116.3116) was facially unconstitutional for lack of a notice provision to lenders in violation of the Fourteenth Amendment's Due Process Clause. The majority erred for two primary reasons: (1) no state action or state actor was involved in the HOA foreclosure sale and (2) even if state action or state actor were involved, the statute expressly incorporates provisions requiring written notice to lenders.
This case is of substantial importance, involving the ability of a community association to maintain common property and deliver essential services. Such services benefit all properties in the community and protect the value of all parties having an interest in the properties, including all lenders with loans in the community. Homeowners rely on their associations to be financially stable and able to carry out their functions; in turn, associations rely on effective means to recover delinquent assessments to achieve financial stability.
Beyond the parties here, this case affects homeowners in all community associations in the 21 states, the District of Columbia and Puerto Rico that have adopted state lien priority statutes similar to the Nevada statute; approximately half of those states have similar notice provisions. This approach to association lien priorities is modeled on the Uniform Condominium Act ("UCA"), Uniform Common Interest Ownership Act ("UCIOA"), and Uniform Planned Community Act ("UPCA"), all drafted by the Uniform Law Commission (formerly known as the National Conference of Commissioners on Uniform State Laws). This ruling may affect approximately 66.7 million Americans because over twenty percent (20%) of the U.S. population resides in a community association.
SCOTUS BriefCircuit Court BriefPrior Rulings: United States Court of Appeals for the Ninth Circuit Brief Author: Jaime Fraser Carr, Esq. and Marvin J. Nodiff, Esq._________________________________________________________________
This appeal arises out of a Bankruptcy Court decision which held that the Anti-Modification Clause did not apply to the lien filed by the Association on the debtors' principal residence. By way of background, the debtors' Chapter 13 plan alleged that the value of the unit was less than the amount of the first mortgage and proposed to pay the Association six months of maintenance fees in full satisfaction of the Association's secured claim.
The Association filed an objection to the plan opposing the debtors' motion to modify its secured claim based upon the fact that a portion of the Association's lien was elevated above the first mortgage by the six-month lien priority of N.J.S.A. 46:8B-21 and was thus attached to equity in the unit. The specific provision of the Association's governing documents providing the basis for a consensual lien was presented to the Court. The Association argued that the Anti-Modification Clause prohibited modification of the Association's secured claim because it was attached to equity in the unit. Moreover, the Association argued that the public policy underlying the bankruptcy code prohibits the Association from being treated worse in this Chapter 13 than it was in the debtors' prior Chapter 7 case, where the lien at issue remained intact.
The debtors argued that the lien is statutory in nature and is therefore subject to modification under 1322(b)(2) and that the New Jersey priority lien statute does not afford the Association priority, but rather a right to payment. Additionally, the debtors argued that the statute bifurcates the lien and creates two separate liens: one with priority and the other subordinate to the first mortgage.
In overruling the Association's objection and supporting confirmation of the debtors' plan, the Court erroneously reasoned that the six-month lien priority created by New Jersey statute creates an entirely separate lien that is statutory in nature and thus outside the purview of the Anti-Modification Clause. In attempting to create the legal fiction of two separate liens where only one lien actually exists, the Court ignored the definition of "statutory lien" 11 U.S.C. 101 (53), which expressly states that the basis of the lien must arise "solely by force of a statute ... and does not include security interest or judicial lien.") (emphasis added). The Court also ignored the obvious fact that the Association could not have taken advantage of the six-month lien priority provision of the Condominium Act if its governing documents had not been recorded first and despite that the Association's governing documents predated the 1996 Amendment to the New Jersey Condominium Act establishing the six-month lien priority
If not overturned, this decision will have extraordinarily adverse effects on the community association industry. The Court appears to have preselected a desired outcome of this case and chose to take whatever meandering or erroneous legal pathway was required to reach that decision.
Brief: PendingPrior Rulings: United States Bankruptcy Court District of New Jersey Memorandum Decision Brief Author: Mr. Timothy Duggan, Esq. CAI Amicus Review Committee: Robert Diamond, Esq., Chair of Amicus Committee; Mr. James Strichartz, Esq., Ms. Laurie Poole, Esq.,Mr. Steven Sugarman, Esq.
The issue presented in this case is whether a "poison pill" inserted in condominium by-laws that requires a Condominium Board to obtain an 80% vote (among other things) of all unit owners prior to commencing litigation against third parties, e.g. the condominium developer: (1) violates the Massachusetts Condominium Act or is overreaching, (2) contravenes public policy, and/or (3) violates the Massachusetts Declaration of Rights.
In 2014, the Condominium Trust filed suit against the Developer, its related management and construction entities and some contractors alleging that there were significant construction defects. Prior to initiating suit, the Condominium Trust and its then counsel and opposing counsel entered into a tolling agreement, which purported to toll all statutes of limitations and repose. Suit was only filed after the tolling agreement was terminated. This is significant because the statute of repose for construction defects claims in Massachusetts is six years.
At the time the suit was filed, more than 6 years after the condominium was constructed, the Developer and/or his affiliates, still owned more than 20% of the units, making compliance with the 80% litigation consent vote impossible. The developer's retention of more than 20% of the units more than 6 years after completion of the condominium, acts a mechanism to effectively allow the developer to run out the clock. As alleged in the Complaint, the Condominium Trust did obtain the permission of more than 50% of the unit owners to proceed with the litigation.
Out of an abundance of caution, the Condominium Trust included a count for declaratory judgment in the Complaint alleging that the anti-litigation provision was unenforceable and void on public policy. To that end, the Condominium Trust affirmatively moved for partial summary judgment to authorize it to proceed with the lawsuit. The Condominium Trust did not attempt to go through the exercise of undertaking a futile vote to convince the developer to authorize itself to be sued.
The Court initially granted the motion, holding that because the Developer owned 20% of the units, all that was required was that the Condominium Trust obtain 80% of the votes of non-developer affiliated units (or non-interested units). However, the Court held that the anti-litigation provision was otherwise enforceable and did not violate public policy. The Condominium Trust moved for reconsideration of that Order and the Court did reconsider the Order, however, not in the way that the Condominium Trust wanted. Instead, the Court decided that the provision was enforceable as written, to wit: that an 80% vote of all unit owners, including developer affiliated and owned units were also required before proceeding with litigation.
The Developer and the other Defendants filed a Motion to Dismiss the case, for failure to comply with the anti-litigation provision. The Court issued an initial decision once again holding that the provision did not violate public policy and issued a Decision dismissing the Condominium Trust's lawsuit and this appeal followed.
The anti-litigation provision and the Decision issued in this case provides an effective roadmap for developers in Massachusetts to avoid liability for construction defects and/or other developer misdeeds. In the construction defect arena, if a developer is patient enough to retain a sufficient block of units (or has the foresight to retain or collect voting proxies) it has the ability to run out the clock (the statute of repose) on construction defect claims. If the Appeals Court or the Massachusetts Supreme Judicial Court do not address this developer practice, condominium associations in Massachusetts will find it increasingly difficult to commence litigation against developers.
BriefPrior Rulings:Superior Court Memorandum of Decision and Order on Defendants' Motion for Reconsideration and Request for a Hearing
Superior Court Memorandum and Order on Defendants' Motions to Dismiss
Superior Court Memorandum and Order on Defendants' Motions to Dismiss - Hearing Postponed
CAI Amicus Review Committee: Robert Diamond, Esq., Chair of Amicus Committee, Gary Kessler, Esq. (CA), Steven Sugarman, Esq. (PA)