Playing with Fire

SHOW ME THE MONEY

Collection fights.  Unfortunately, some types of lawsuits tend to occur more frequently during difficult economic times.  When budgets are tight, assessments are among the first bills to get pushed aside.  Many associations are getting requests to waive late fees and defer collections because of homeowners’ financial problems.

Even though these financial difficulties may be valid, board members should remember their obligation to the association and all its residents.  If some owners are given breaks, others will expect them, and soon the association will be unable to pay its own bills.  Then, the board may be forced to increase assessments for those who do pay or to impose special assessments, increasing the financial difficulties for all members of the association.

Most delinquent homeowners will respond to a demand for payment, making litigation unnecessary.  For those who don’t, however, the association will need to file a lawsuit, and the owner may respond with a countersuit.  Countersuits may allege that an association isn’t providing services, claim that the association’s lien isn’t valid or even challenge the budgeting and assessment process.

Most state statutes and association documents are written to discourage these defenses.  It’s a good idea to review your association’s documents to make certain they do and that the association is entitled to collect all costs incurred in collecting assessments.

The Fair Debt Collection Practices Act is a federal law aimed at discouraging unfair collection practices.  Since its passage, however, it has been interpreted broadly but a number of courts, and now it’s being used as a defense against associations’ collection efforts.  Associations, managers and lawyers are being sued for minor and technical violations of the federal law.  If a court agrees that you violated the law, you can face significant penalties, including legal fees, for the successful debtor who brings a claim.

The law requires that all written and verbal communications with homeowners clearly inform them that the contact is an attempt to collect a debt and any information obtained will be used for that purpose.  It also requires a first notice informing homeowners that they have 30 days to dispute the debt and request verification of the debt.  One Florida law firm got in trouble by telling debtors they would be, rather than might be, responsible for costs and fees.  Recovery of costs and fees by the association is subject to court approval.

While the law doesn’t apply to an association collecting its own debts, it does apply to those collecting debts on behalf of someone else.  So, it applies to community managers if they aren’t employed directly by the association.  In many areas of the country, the law also applies to association lawyers.  The best way to protect your association is to make certain your manager and lawyer are familiar with state and federal consumer practice laws.  A lawsuit against your association attorney or manager can also name the association.

In an economic slump, developers may not make assessment payments on the lots and units they own.  Sometimes they have legitimate reasons for not doing so, but sometimes they don’t.  When developers control associations, they usually won’t pursue collection actions against themselves.  Whether these dues are owed by the developer will be established by state law and the governing documents.  Board members have a fiduciary duty to collect those dues, even if they are owned by the developer.

Special Assessments.  Unfortunately, in both good times and bad, associations and owners don’t always set money aside for future repairs as they should.  If there isn’t enough money for these expenses, a special assessment may be needed.  When homeowners are already worrying about finances, a special assessment – and the board itself – may be challenged.

Governing documents usually require homeowner approval for special assessments, sometimes by a supermajority.  Communication is even more critical than usual when as association faces these obstacles.

However, the courts will usually support board decision to levy special assessments for necessary repairs, even if the documents restrict such assessments to capital improvements.  For example, in 1993 in Richardson Lifestyle Assoc. v. Houston, a Texas appeals court found that the required replacement of roofs was not constrained by a declaration’s limitation on capital improvements.  The court determined that the roof was a replacement specifically authorized by the governing documents, stating “it is immaterial whether the work also was a capital improvement.”  A similar result was reached in Ohio in 1999.  In Behm v. Victory Lane Unit Owners Assn. Inc., the Ohio appeals court rules that foundation repairs to the association’s common areas, while “indisputably a large undertaking…fell squarely within the definition of maintenance as adopted by the trial court….”

Quorum requirements.  A related problem commonly encountered by associations is the liability to obtain quorums at annual meetings, which makes actions taken at the meeting invalid.  If you don’t get the necessary and required vote, an owner may challenge the action in a lawsuit.

A Utah association was sued several years ago by an owner who challenged the validity of a special assessment that was approved by a mail-in vote.   The board chose to get consent by mail because it was unable to obtain the required supermajority at a meeting.  The court held the mail-in process was invalid because the board didn’t get unanimous consent.

The recent trend in drafting governing documents is to reduce the percentage required to obtain a quorum.  To rewrite your documents, however, you may need to gather the higher percentage of homeowner’s required by the existing documents.  If you do that, another amendment should be proposed to reduce the number of votes needed to make future amendments to your governing documents.  You might choose a supermajority of those present rather than a supermajority of all homeowners in the community.  If a supermajority of all is required, the apathetic majority end up controlling the association’s future. 

Another method to obtain a quorum is to aggressively solicit proxies or written ballots.  However, state legislatures have made this more difficult in many jurisdictions.  Maintain careful oversight of the process, following the advice of the association’s attorney.

SLIP AND SUE

Injuries.  Frequently, community associations are sued by people who are injured on association property.  They might trip and fall, contending that an uneven sidewalk or poor lighting contributed to their injury.  They sue the association, alleging that the board or manager should have seen and remedied a defective condition.  A defense to such a premises liability claim may be to have a provision in your declaration that states:

“From the time that the common area, or any portion thereof, is opened and put into use for the enjoyment of parcel owners, owner (developer) shall be and remain wholly free and clear of any and all liability to, or claims by, all parcel owners, and all persons and entities, of whatever kind or character, whether sounding in contract or tort, deriving from the occurrence of any injury or damage to any person or property on, or in respect of the use and operation of, the common area or any of its improvements, fixtures, and facilities; inasmuch as the control, operation, management, use and enjoyment, of the common area shall be within, under, and subject to the association – and not owner (developer).  In this respect, it shall be the affirmative duty and responsibility of each parcel owner and user of the common area facilities to continuously inspect the same for any defects or perils or other unsafe conditions or circumstances, prior to and during such use of enjoyment thereof; and all uses of, and visitors to, the common area and its improvements and facilities shall use, enjoy, and visit, the same at their own risk and peril.”

That language was used successfully by a Georgia association, which was sued by a homeowner who was injured when an association-owned chair collapsed.  The homeowner claimed the association was negligent in allowing use of the defective chair.  The association argued the injured homeowner could have discovered the chair’s defective condition just as easily as the association.  This type of provision may not be enforced in all states because some courts might consider it to be against public policies aimed at protecting individual safety.  But it can’t hurt to include it. 

Even if you include a similar provision, you can reduce the risk of injuries by making regular and frequent inspections of association property – particularly playgrounds, pools and clubhouses – to spot safety hazards.  Document all inspections in writing and make needed repairs quickly.  Make sure you have adequate insurance coverage too.

KIDS ARE PEOPLE TOO

Age-based rules.  Boards also can get into legal trouble by drafting association rules that focus on children.  The federal Fair Housing Act prohibits discrimination against families with children.  But many board members and managers are unaware that this law prohibits more than discouraging families from moving in to their community. 

The U.S. Department of Housing and Urban Development (HUD) issued two rulings in 1992 that specifically restrict associations’ rights to impose rules based on residents’ ages.  These opinions, bolstered by a few court cases and numerous administrative decisions, have resulted in significant fines for associations with rules that prohibit children from using pools and playgrounds without an adult.

HUD officials acknowledge that health and safety reasons may sometimes justify certain restrictions for children, but warn that limitations must be narrowly focused.  HUD officials suggest that parental supervision requirements at pools should be replaced with “less discriminatory alternatives such as revising the policy to require non-swimmers to be accompanied by a responsible swimmer.”  Since that opinion, many regional HUD offices have held age-related restrictions on pools to be discriminatory.  Similarly, clubhouse restrictions based on age have been successfully challenged.

Because of this, association rules shouldn’t make distinctions between what children and adults can and can’t do.  Everyone, and not just children, should be prohibited from skateboarding and playing in parking areas, and everyone who needs diapers – regardless of age – should wear appropriate swimwear or stay out of the pool.

In certain circumstances, associations may attempt to rely on municipal or state requirements in adopting restrictions.   But even that approach may involve risk.  After a bad outbreak last year of the parasite, cryptosporidium, in both public and private pools in Salt Lake City, state and local government agencies banned children under the age of three from the pools.  If an association followed government’s lead in this case, it still could be found in violation of federal law.

Companion Animals.  Associations can also get into hot water if they don’t carefully handle requests for service or companion animals.  The federal Fair Housing Act, as amended in 1998, protects people with disabilities from discrimination.  It requires associations to make reasonable accommodations in their rules to allow disabled residents to use and enjoy their homes and common areas.  While a blind person’s needs for a guide dog is clear, more residents are requesting animals to help them cope with less obvious disabilities such as emotional illness, diabetes or heart disease.  In some cases, these requests require an association to allow an oversized dog or other animal in a community that prohibits pets.

Associations may ask the resident to verify the need for a companion animal.  Questions should be limited to only the information needed.  If a disability is obvious, an inquiry isn’t appropriate.  If it isn’t obvious, the association may require a doctor’s confirmation of the disability and how the animal will help.  A clearly defined policy that applies to all requests will be perceived as more fair and will be easier to defend against discrimination claims.

In 2003 in Prindable v. Association of Apartment Owners of 2987 Kalakua, a U.S. District Court in Hawaii denied a homeowner’s discrimination complaint against an association because the owner was unable to establish that the dog was anything more than an ordinary pet.  But more recent rulings from other areas of the country have made it easier to show an animal is trained to meet the needs of the disabled person.  Because of the law is being interpreted differently by different courts and enforcement agencies, associations who face service animal requests should seek assistance from their attorneys.

Finally, associations and managers should be aware of the semantic distinction between “companion” or “service” animals and “pets”.  These animals may look like pets, but they are appropriately referred to as animals.

Ironically, the best way to avoid litigation may be to spend some money on a lawyer.  To prevent expensive legal battles, you should spend some time reviewing or even amending your governing documents.   That could be money well spend if it prevents or discourages a lawsuit.

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By Lincoln W. Hobbs, ESQ