May 13, 2021
Do Attorney General Lawsuits Actually Help Consumers?
Whenever a legal dispute seems intractable, many people want an agency or official to bring the power of the government to bear on their problem with their adversary. Aggrieved persons often try to exhaust such possibilities before retaining their own attorney. Regulatory enforcement through federal, state or local resources seems more attractive than expending one’s own.
April 28, 2021
Have We Already Agreed to Settle or Merely Agreed to Later Agree?
People usually think of a “litigation settlement” as written, agreed terms signed by the parties. However, parties can become legally bound to oral or electronic settlement terms before the parties get to a formal writing or court order. Generally speaking, a contract to settle a lawsuit or other dispute does not require a signed writing to be binding. When settlement discussions culminate late at night or on the courthouse steps, the parties may be confused as to whether the exchange constitutes a binding agreement or a mere step towards a future agreement. When the parties agree upon a set of settlement terms, the legal work does not end there. Best practices call for the attorneys to properly reduce the agreement to a written agreement, so that its terms may be implemented and avoid the acrimony over what had been agreed to.
There have been recent judicial opinions about what constitutes a settlement agreement. In the 2019 personal injury case Cully v. Smith, the Circuit Court of Fairfax County found that although the parties had not signed a written instrument, they had entered into a binding agreement in the form of email exchanges between their lawyers regarding settlement of a personal injury case by payment of $610,000.00 in exchange for a dismissal. In Cully v. Smith, the insurance defense lawyer representing Todd Smith sent the plaintiff David Cully’s counsel an email stating, “Our last and final offer is $610,000. If not accepted before the settlement deadline of May 7 at noon, that offer is withdrawn and no further settlement will be considered.” Cully’s lawyer responded, “Mr. Cully accepted your below offer of $610,000 in full and final settlement of this case.” Next, the insurance companies sent $610,000.00 to the defense lawyers, who then told the plaintiff they would pay the money if provided with a written release of Smith, Smith’s employer and the insurance companies. Counsel to the Plaintiff Cully responded that the settlement only had two terms: (1) payment of $610,000 and (2) settlement of the civil suit. The insurance defense lawyers argued that the execution of a written release was customary in settlement of personal injury claims and ought to be included in understanding what the parties meant, or alternatively that the agreement was only “in principle” and ought not to be enforced by the court as to only those two terms because it wasn’t fully formed. The wording used in negotiations determines whether it is mere words discussing ideas about settlement or if the exchange constitutes an enforceable contract itself. So, if there is a preliminary settlement agreement, how does one know if it is binding or unenforceable? Some states such as Maryland (in the 2020 case 4900 Park Heights Ave. LLC v. Cromwell Retail 1, LLC) recognize four categories of “settlements in principle” as identified in the treatise, Corbin on Contracts:
- At one extreme, the parties may say specifically that they intend not to be bound until the formal writing is executed, or one of the parties has announced to the other such an intention.
- Next, there are cases in which they clearly point out one or more specific matters on which they must yet agree before negotiations are concluded.
- There are many cases in which the parties express definite agreement on all necessary terms, and say nothing as to other relevant matters that are not essential, but that other people often include in similar contracts.
- At the opposite extreme are cases like those of the third class, with the addition that the parties expressly state that they intend their present expressions to be a binding agreement or contract; such an express statement should be conclusive on the question of their “intention.”
According to this analysis, when an agreement to settle falls into the first or second categories, it is not yet enforceable, and the parties must finalize the terms before it becomes binding. For agreements that fall within the third or fourth categories, they do not require any additional formalization to be legally enforceable. Even if there is already a binding contract, the parties can agree to amend or restate it for whatever reason. While Judge David Oblon does not cite the Maryland case law outlining these categories, the settlement emails in the Cully v. Smith case would appear to fall within the third category. A settlement agreement is a “contract,” formed by “consideration” and “mutual assent.” Consideration is what is bargained for, i.e., a price, property, benefit to the party making the promise or the detriment to whom the promise is made. A promise that does not include anything bargained for in exchange isn’t a contract. Mutual assent is determined by the reasonable meaning of the parties’ expressions actually communicated to the other party. We typically think of this in terms of “offer and acceptance.” When one party communicates something that comes across as a clear, definite take-it-or-leave-it proposition, and that is accepted, then that creates a binding contract. An exchange of emails between lawyers (or the parties themselves) regarding settlement can result in an enforceable contract between the parties (without the necessity of later reducing that to a formal looking written agreement). Not all email exchanges accomplish this, because the wording of the exchanged communications matters. Generally speaking, attorneys have authority to bind their clients in matters dealing with the litigation, such as signing consent orders or submitting responses that may be deemed a party admission. However, in settlement negotiations, attorneys do not have implied authority – there must be express authority from the client to bind him under contract law. However, no authorization letter from the client is necessary. The client’s express authorization of the attorney may be inferred from the words or conduct of the attorney.
In the Cully v. Smith case, there was no apparent issue with the lawyers’ authority to negotiate the settlement. The defense attorney’s email was deemed a contractual “offer” because of how clear and unequivocal it was. His words manifested an intention for the recipient to have the power to accept it, because of the take-it-or-leave-it qualities. Courts are loathe to set aside formed contracts (even if oral or unofficial looking). There is a judicial presumption in favor of finding the contract not to be so indefinite or uncertain as to set it aside. The lawyer’s email included a specific dollar amount. The court observed that the term “settlement” unambiguously refers to ending of a suit or dispute by a compromise including specific compensation. By contrast, a “release” is an immediate relinquishment or discharge of the right of action. Both a release and a settlement preclude further suit regarding the resolved claim. Documents are often styled “Settlement and Release Agreement” or “Settlement Agreement and Release” because the insurers want the release and the claimant views the compensation as essential. Fairfax County Circuit Court ruled that the email exchange was binding and that the plaintiff was not required to provide the written release as an additional requirement to get the $610,000.00. Insurance companies are accustomed to getting things resolved the way they desire because they are the ones paying the money. Its common for plaintiffs, once they get to a certain point in the case and the promise of money is made, to be willing to sign what they are asked to sign when they are okay with the price. It’s not uncommon for the parties and lawyers to agree upon certain terms and then the lawyer for one side prepares a written agreement that fails to properly reflect the agreed upon terms, adds additional language that changes the overall meaning of the settlement or other bait-and-switch tactics. Sometimes the parties agree to terms, and then all the terms have to be re-negotiated in the context of reducing the agreement to a written instrument to be signed.
In his opinion, Judge Oblon discussed a 2001 settlement dispute that went to the Supreme Court of Virginia, Alexakis v. Mallios. In that case, the parties informed the judge that the case had been settled and recited the terms into the court reporter’s transcript at the hearing, indicating that they had resolved all claims. Included in the settlement was sale of a parcel of real estate on documentation identical to those used in a prior transaction. In that case, the Supreme Court observed that the purchaser’s undisclosed interpretation could not defeat the unambiguous, express terms of the settlement. If one side later had concerns arising after the recitation of the terms into the record, they came too late. The Alexakis case illustrates why lawyers should be on their toes should their opponent try to recite settlement terms in open court before a judge so that they are recorded in the court reporter’s transcript as an official evidence of contract, because the terms may not be recited correctly. Also, counsel should be cautious about employing the “read the terms into the record” trick because their opponent may later hold them to precisely those terms, despite the absence of desired items. Once the terms are recited into the court reporter transcript and assented to, either side can move the court to reduce the terms to a written order that can subsequently enforced legally if breached. In the Cromwell Retail 1, LLC opinion, the Maryland Court of Special Appeals partially reversed the judgment because the trial court entered an order that did not accurately reflect the terms of the settlement made by the parties.
In April 2021, the Supreme Court of Virginia decided Bolton v McKinney, reflecting a development of the law in Virginia with respect to litigation settlements. Generally speaking, prevailing litigants in Virginia (and almost all other states) may not, with very limited exception, recover their attorney’s fees against their opponent unless there is a statute or contract that provides for an award of attorney’s fees. This is called the “American Rule.” The issue of attorney’s fees arises in the context of settlement agreements because having to pay a lawyer to defend a lawsuit brought after there has been a settlement and release is contrary to the whole notion of settling in the first place. Attorneys routinely put prevailing party attorneys’ fees provisions into their settlement agreements. Bolton and McKinney made a “Settlement Agreement and Global Mutual Release of Claims.” Later, McKinney sued Bolton three times relating to the same issues in the settlement, causing Bolton to incur lawyer bills in excess of $80,000.00. The Settlement Agreement was silent on the issue of attorney fee awards. The issue of Bolton’s attorney’s fees came up, and the circuit court declined to award them, because they weren’t provided for in the contract or any applicable legislation. The Supreme Court decided that the “American Rule” does not apply in breach of covenants not to sue cases, because the expenditure of attorney time in a direct or consequential result of the breach of the covenant not to sue. The Court observed that without a fee-shifting effect, the covenant not to sue could not be vindicated, because there would not be any practical consequence if a party can repeatedly breach the covenant not to sue and not bear financial consequences. The holding of Bolton v. McKinney is important to understand in cases like Cully v. Smith or Alexakis v. Mallios where there is a covenant not to sue that is agreed upon in emails or in a recorded conversation, and later there is a subsequent suit and the issue of attorneys’ fees arises.
These things may make settlement agreements sound mysterious or scary but they really aren’t. The meaning of words used in settlement negotiations matters. An experienced attorney can help the client when the opponent tries to walk back on terms already agreed. Parties should carefully consider what is being said or not said when engaged in settlement discussions that become exhaustingly protracted or are sprung on you unexpectedly.
Legal Authority:
Cully v. Smith, 102 Va. Cir. 293 (Fairfax Co. Jul. 9, 2019)
Alexakis v. Mallios, 261 Va. 425 (2001)
Bolton v. McKinney, 2021 Va. Lexis 24 (Supr. Ct. Va. Apr. 1, 2021)
4900 Park Heights Ave. LLC v. Cromwell Retail 1, LLC, 246 Md. App. 1 (2020)
April 8, 2021
Resolving HOA Enforcement Through Voluntary Compliance
When a homeowner receives a notice of violation from their HOA or condominium, they must decide if they are going to fight it, comply or file an architectural application to receive formal approval. There are many instances when the homeowner can and ought to keep the installed improvement. However, there are other situations in which it makes more sense to comply with the HOA’s request or to otherwise adjust things to address the violation. Also, HOAs frequently send out notices in error or the homeowner receives them after the violation was cured. However, the story does not always end with the voluntary compliance by the landowner. Often the covenant enforcement process will continue with additional letters or HOA hearings despite the correction. There may be pending litigation. The HOA or neighbor instigating such in or out of court complaints may have some sort of axe to grind and wants to continue the legal action vindictively. This blog post addresses the legal aspects of covenant enforcement when the accused owner has cured or abandoned the complained of structure or activity. I am not saying that the owner’s default response to a HOA letter ought to be to just obey it.
Fairfax County Circuit Court considered such questions in a 2004 decision. Rose Hall HOA filed a complaint with the court seeking an injunction and attorney’s fees against an owner, Charles H. Jelinek, whose architectural application for a black ornamental fence was denied but they installed it anyway. While suit was pending, the Jenlineks removed the complained of fence. The letter opinion of Judge Kathleen MacKay doesn’t say whether they removed the fence because it was not allowed by the language of the covenants or if the owners took it down not because they were in the wrong but to simply avoid continued legal action. The HOA filed discovery requests in an effort to continue fighting in court. The Jelineks filed a motion to have the suit dismissed on the grounds that it was now moot because the fence was removed. The HOA wanted to continue the suit, not because they thought that the fence would be put back up, but only because they wanted to get an award of attorney’s fees as the prevailing party. Did the HOA “prevail” in the litigation because the owner removed the complained of fence after suit was filed? In this suit, the HOA did not seek any damages. The court found that now that the fence is gone, the HOA cannot prevail because an injunction order cannot be entered because the grounds for the injunction is no longer at issue. Where the defendants action sought to be enjoined has been abandoned, the whole grounds for equitable relief no longer exists, and the matter ought to be dismissed. Unlike suits for money damages, cases like injunctions or declaratory judgments are in what’s called “equity jurisdiction,” which requires an actual controversy to be presently existing. This doctrine is commonly referred to as a question of “mootness” (when the alleged violation has ceased) or “ripeness” (when the offense hasn’t happened yet). The court found the case moot and dismissed it in its entirely.
In some cases, the factual context for the mootness question is less clear-cut than a complaint about a fence that has been completely removed. Sometimes suits for injunctions are more about conduct or how improvements or objects on the property are used rather than their mere existence. In cases involve flooding or erosion, the water infiltration may not occur every day, and in fact may be irregular depending upon the weather or how the defendant has configured downspouts that day, or other conditions. In some cases, an injunction may be granted even if the complained of conduct only occurred once. Some cases raises a question as to whether the complained of improvement actually violates a legal obligation owed by the landowner to the association under the governing instruments or if the HOA is overstepping its bounds. The owner may decide to reconfigure the fence, drain or other structure or vegetation to conform to the instruments (and not necessary what the manager is ordering them to do). The opponents may want to pursue the case more aggressively, arguing that the corrective activity somehow functioned as an admission that the HOA or neighbor was right and the owner was wrong. However, that may misconstrue the defendant’s actions or intentions. Also, angry people sometimes want their opponent to cease doing things related things that have always been legal as a kind of punishment.
For reasons such as these, when HOA or neighbor disputes escalate to litigation, sometimes “giving in” on certain points can be a powerful legal defense strategy, but one that must be properly navigated to resolve the dispute while adequately defending the owner’s rights.
Case Discussed:
Rose Hall HOA, Inc. v. Jelinek, et al., 66 Va. Cir. 172 (Fairfax Co. Oct. 28, 2004)(MacKay, J.).
Note that the picture associated with this blog post is a stock image and does not depict anything discussed in this article.
February 17, 2021
Role of Survey Plats in Resolving Property Disputes
When landowners purchase real estate, they get the opportunity to obtain a land survey or to save a few hundred dollars by avoiding it. During the home buying process, purchasers’ financial situation is usually stretched to their utmost limit. The owner may not understand the value of paying $200-$600 for a survey plat when there is no known issue that would be addressed by the boundary survey. But checking out “known unknowns” is an important part of buying real estate. Relinquishing the opportunity to obtain a survey before purchase is often at the buyer’s peril.
A home inspection may reveal defects in the construction or maintenance of the home that could cost hundreds or thousands of dollars to remedy. The title examination process conducted by the settlement company reveals the legal description of the property and any title problems that may exist. However, there are basic questions about what the buyer actually obtains for the purchase price that can only be answered by a land survey that reflects the findings of a title search and proper field work. For example, fences, walls, shrubs and driveways may give misleading impressions of the boundaries. Such impressions may be at odds with the dimensions of the lot as shown in the subdivision plat.
A lot may be encumbered by a pipestem driveway easement serving a lot behind the property and the location of the paved portions, trees and fences around the easement may encroach into the easement or the driveway veers off the easement. Legal disputes frequently arise between the owners of pipestem lots and the properties across which their driveways run. Purchasers are often attracted to lots adjacent to HOA common areas or public parks because many people would rather see a wooded area, pond, or creek behind one’s house, instead of other people’s backyards. However, whether publicly or privately owned, park-like areas are attractive to joggers and hikers in the neighborhood who might find it easier to cut across someone’s lawn rather than exit the woods through an established walkway. Property owners frequently use fences or shrubs to define boundaries, but it may not be apparent where one can place such things without a survey that shows the locations of boundaries and easements.
Surveys are essential to evaluating how local government zoning laws or HOA protective covenants restrict the erection of fences, trees, walls, sheds and play equipment. If a lot is on a corner, it probably has two sides that the county and/or HOA would treat as a second front yard, despite the orientation of the house and driveway on the lot. Whether a yard is deemed front, side or back may makes a big difference in determining options regarding fences and other structures. For example, owners typically cannot place tall privacy fences in yards fronting a road without written permission.
The inclination of many people is to maximize the use of their lot by constructing additions, porches, decks, outdoor living areas, treehouses, storage structures, driveway expansions, and so on to make their property more useful. However, public and private land use rules (zoning laws and HOA standards) typically make it easier to put things behind the house and more difficult to clutter the front yard. A survey can show the location of the boundary lines and the existing distances between the sides of the house to the boundaries.
In working with a surveyor, its important to know how to “shop” for the kind of survey that is most useful to the lot owner. Its easy for a surveyor to take a copy of the subdivision plat and the most recent deed, stop by the house for a few measurements, and reflect the current location of the house on the lot on a new survey. This is typically the cheapest kind of survey because it reflects a minimal effort to update previous surveying work. What is more useful is a boundary survey made that reflects any easements previously recorded. When a survey states on its face that no title report was furnished, that means that there could be an easement that reflects a substantial encumbrance or limitation on the owner’s ability to use the property the way she wants, but the plat doesn’t reflect that. It’s a kind of disclaimer that the survey has limited value. Obtaining a title report and providing it to the surveyor isn’t hard, but it’s a step that usually isn’t taken unless the owner requests it. Even if the buyer doesn’t obtain a proper survey before going to the real estate closing, it’s possible to get a title report and have a survey prepared at any time.
As an attorney representing lot owners in a variety of disputes involving neighbors, co-owners, HOAs or contractors, obtaining a survey is frequently the first “next step” discussed to properly evaluate the legal dispute so that we know where we are going. The survey informs the owner what they actually own subject to defined restrictions such as easements. This means that the owner can make informed decisions when it comes to adding or removing structures and plants to the property. Many people faced with a legal dispute want some answers that do not cost thousands of dollars. Sometimes a title report and survey focus the issues in ways that make it easier to resolve or prevent legal disputes.
February 17, 2021
Delay, Interference, and Acceleration in Construction Contracts
Certain complaints frequently arise in construction disputes. One is that the contractor inexcusably had delayed in completion of the project. Another is that the owner has interfered with the contractors work. This blog post takes a look at common schedule change and delay related issues in construction contracting.
Generally speaking, courts look to the language adopted by the parties in their written contract. Analysis of a construction case starts with careful consideration of how a written agreement may control a particular question.
Parties frequently put clauses in construction agreements that deny awards of damages for delays. Courts in different states have held that “no damages for delay” clauses are generally enforceable. These clauses put a burden on the contractor to ask the owner for an extension of time for a delay that arises due to no fault of the contractor. Such requests shift the focus from whether the delay occurred to whether or not the contractor’s request for additional time is reasonable. Many courts will refuse to award a money judgment for delay where the owner committed fraud, concealment or active interference. The court may find in the contract an express or implied duty by the owner to not interfere. This is because the contract will be enforced as a whole. The request for an extension allows the owner the opportunity to consider and accept or reject the request. If the contractor or subcontractor simply continues work without raising the issue then its possible that the court will find that issue waived, depending on how notice requirements are handled in the agreement.
Some construction contracts allow for the owner to move up the completion date for the contract. If the owner puts such language in its contract, the general contractor will likely add similar language to its subcontract agreements. They may ask for terms in the agreement allowing the completion date to be unilaterally moved up or pushed back to provided necessary flexibility in meeting whatever requirements may exist for the project. Such clauses can put a lot of pressure on contractors because of the financial burden involved in greatly increasing the workforce on a given project if the deadline is shortened. Acceleration issues frequently arise in disputes where delays have already occurred and the owner wants the general contractor (or general contractor wants the subcontractor) to get caught up. If the contractor thinks that the owner caused the delay through interference, and the owner maintains that the contractor caused the delay through inadequate supervision (or some other problem) then a dispute may arise regarding who should bear the financial burden of getting caught up in the construction schedule. Federal courts in Virginia recognize three elements for a claim for damages for acceleration: (1) the contractors delays were excusable, (2) the contractor was ordered to accelerate and (3) the contractor accelerated and incurred additional costs thereby.
Even where the written agreement is clear about rights to change the schedule and the effect of that, it can be difficult for the parties to know how to handle this on the job. The general contractor’s superintendent may know that a subcontractor’s work must move faster, but unsure whether the delays can be blamed on the subcontractor. The managers may not clearly inform the subcontractor that the schedule has been officially changed. A subcontractor may not be obligated to request an extension of time if the general contractor is handling a scheduling issue informally.
When a contractor has a justified claim for an extension of time, but is required to incur additional expenses because the owner refuses to grant the extension and insists upon timely completion, this is called “constructive acceleration.”
Where an owner has a delay claim, the measure of damages is either the rental value of the completed structure for the delay period or a reasonable return for that period on the completed structure treated as an investment. Such damages may be difficult to prove and ordinarily would require use of an appraiser or other expert witness.
Generally speaking, the party who commits the first breach of the contract is not entitled to enforce the contract. This rule is subject to numerous exceptions. For example, it only applies to breaches that are “material” and not those that do not go to the “root of the contract.” Examples of a material breach in construction matters include walking-off of a job, failure to make progress payments to a subcontractor (in a subcontract agreement) or causing a structural defect in the building, or items deemed material in the language of the written agreement.
For an owner of a residential lot negotiating a contract for construction of a custom home, the price can be several hundred thousand dollars or more. Local builders’ contracts are often poorly written, or using forms written for a different type of situation that have been poorly adapted for the owner’s project. Lot owners should seek to have an attorney help them negotiate the written agreement, because the risk of the project not going well outweighs the cost of having the attorney’s help. For purchasers of custom homes, a delay or cost overrun can put incredible strain on the family’s life or the business plan for selling the property. Professional negotiation of the written agreement can help the owner avoid a situation where payment obligations are mounting while the terms of the agreement don’t help resolve various disputes over timing or workmanship.
Subcontractors working on commercial or multifamily projects should carefully consider how to handle delay any acceleration issues when they arise. By timely, written response to the general contractor, the subcontractor can protect itself from future attempts to chargeback for delays that may not be the subcontractor’s fault. The general contractor will be familiar with those portions of its standard subcontractor forms that seem to shift the burden of delays onto the subcontractor. However, courts will likely look at such clauses with skepticism in situations where a delay arose due to no fault of the subcontractor and the subcontractor promptly raised the issue with the general contractor with a request for additional time and money.
Selected Judicial Opinions:
McDevitt & Street Co. v. Marriott Corp., 713 F. Supp. 906 (E.D. Va. 1989) affirmed & reversed in part McDevitt & Street Co. v. Marriott Corp., 911 F.2d 723 (4th Cir. 1990)
Marriott Corp. v. Dasta Const. Co., 26 F. 3d 1057 (11th Cir. 1994)
Shen Valley Masonry, v. S.P. Cahill & Assoc., Inc., 57 Va. Cir. 189 (Charlottesville 2001)
SNC-Lavalin Am., Inc. v. Alliant Techsystems, Inc., 858 F. Supp. 2d 620 (W.D. Va. 2012)
February 3, 2021
What it Means for Ultra Vires HOA Actions to be Void
Wrongful legal actions by community association boards generally fall into two categories. The first are contracts, resolutions or other actions that the board generally has the authority under the declaration to take, but they failed to properly do so pursuant to the bylaws or applicable law. For example, suppose the HOA has the authority to enter into a landscaping contract, but the documents required the contract to be signed by a director and it was only signed by a manager. Or the HOA has the power under the declaration to regulate use of the service elevator, but the rules on the website have not yet been formally adopted by the board, and were only signed by one director. As another example, the declaration allows the board to adopt rules and regulations regarding parking on the common area, and the manager is towing guest cars despite the fact that the board has not adopted a parking permit system. These are the kinds of defects that can be corrected by conducting a proper meeting with a quorum and conducting necessary business according to the governing instruments. For such items, the board’s discretion is probably protected by the business judgment rule, so long as they follow the declaration. When HOA officers take actions informally, sometimes later these actions are “ratified” by formal board action with a quorum in a properly noticed meeting. It can often by difficult for lot owners who are not aligned with the majority to challenge policies on such matters, if the board can later “fix” any procedural defects by a later, properly conducted assembly. This is why HOA boards, managers and attorneys argue for a broad reading of the declaration and other governing instruments. It can be difficult for an owner to challenge a decision or policy such as this if they at one time acted in a way that seemly condoned it or failed to object. Nonetheless, just because an issue lies within the board’s discretion does not give them carte blanche. Ineffectively adopted policies are unenforceable until properly decided according to the statutes and bylaws, and they have to be enforced equitably. For these reasons, the scope of the board’s “mandate” in the development is important to directors and owners alike, but it may not be 100% clear if the governing instruments are ambiguous. Just because a covenant seems ambiguous does not mean that it is devoid of meaning or means whatever the board says. The law of property includes rules on how to interpret conflicting or ambiguous legal documents.
The other, more exciting kind of problems are where the association’s leaders act in a way that is outside the scope of their legal authority. For example, the covenants say nothing about regulation of trees and shrubs, and only talk about architectural standards for garages and sheds. If the board adopts and tries to enforce rules regarding replacement of dead trees that are cut down, such rules may be void from the get-go. As other examples, the board may be dominated by directors who want to undertake the maintenance and repair of property that is not actually a common area. The state laws and governing instruments establish parameters around which a community may regulate or spend money. Where the “line” is may not always seem clear, but the existence of such legal limits on board authority is important. If the association does not have the authority to do something, then the corporate action may be deemed “ultra vires” (Latin for “beyond the powers”). Challenges by individual owners to ultra vires HOA actions often have more “traction” or “legs” than those that concern things properly within the board’s authority. This is because “ultra vires” acts are ordinarily “void ab initio” (void at the outset).
An older, published Virginia case involved an ultra vires contract made by agents of a bank, City of Bristol v. Dominion Nat ‘l Bank, 153 Va. 71 (1929). The Virginia Supreme Court of Appeals observed that, “When the contract is once declared ultra vires, the fact that it is executed does not validate it, nor can it be ratified so as to make it the basis of suit or action, nor does the doctrine of estoppel apply.” Lawyers are always trying to find ways to make things workable despite the lack of authority. The doctrine of estoppel allows for a party to be held responsible for something because they induced another party to rely upon a representation or action that was made. What the Supreme Court was saying in City of Bristol v. Dominion National Bank was that when an action is truly ultra vires, it cannot be rendered valid because people acted as though it was. Colorfully, Justice Henry W. Holt remarked about ultra vires contracts: “As a contract it is wastepaper and as a contract worthless.” Lawyers have nightmares about court’s ruling like that about that things they draft for clients.
Justice Holt observed that an ultra vires contract may nonetheless include a remedy: “But it by no means follows that a claimant is always without remedy. There may be a recovery on an implied assumpsit for benefits conferred and kept.” So, if someone received goods or a service then they might be responsible for paying for them, on a theory of quasi-contract. The doctrine of ultra vires does not necessarily mean that everything becomes “free.”
When homeowners find themselves in legal disputes with HOA or condominium boards and managers, frequently they will be told that the association’s lack of specified authority in the governing instruments does not matter, because the lot owner waited too long to challenge what is being done, or they agreed to pay a fee or assessment, or otherwise knew about what was happening but did not quickly object. However, such arguments ignore longstanding legal principles about what it means to be a “chartered” organization. Community Associations often assert such defenses as estoppel, statutes of limitation, laches, waiver, condonation, and so on. However, if the board’s action was truly ultra vires, then those arguments may not apply.
The discussion about HOAs and ultra vires contracts and resolutions illustrates why association directors and their advisors want to be able to easily amend the governing instruments, and control that amendment process. Older HOAs and condominiums tend to have covenants and bylaws that are more “owner friendly” in terms of allocation of rights between the lot owners and the board. A valid amendment can change the size or shape of the board’s procedural requirements and/or substantive authority, potentially transforming something that would otherwise be ultra vires into legitimately within their mandate. Even the “benign” community associations are one election or one amendment away from a potentially toxic situation. The good news is that the reverse is also true: election of good directors or adoption of an improved declaration can improve the situation in a community association. Sometimes its hard to tell if the person or document being proposed would be good or bad.
(Note that the photograph associated with this blog post is a stock image and does not depict anyone or anything referenced in the article)
February 1, 2021
When a HOAs Entity Status becomes Inactive by Automatic Termination
Under Virginia law, a nonstock corporation must submit annual filings to avoid having its corporate status automatically “terminated” by the State Corporation Commission pursuant to Va. Code § 13.1-914. When people see that a corporation’s status is deemed “inactive” as terminated by a regulatory agency, they wonder if it no longer “exists,” particularly in the HOA context. It is common for HOA boards to neglect their annual registration requirements, because every one or two years a new board is elected that may not be aware of such requirements. Lot owners become interested in the meaning of the “inactive” status because HOAs are frequently demanding that members pay assessments and obey architectural restrictions. Anyone can check the status of a corporation by logging on to the SCC website. As a legal matter, the “automatic termination” of the HOA’s corporate status usually does not mean much. Under Virginia law, “incorporated” status is a feature of statutes that confer certain powers and responsibilities on a business or association that would not otherwise apply. Persons in business or associations are attracted to incorporation because of the liability shield, legal immunities available to the board of directors, and the ability to open a bank account.
Ordinarily, upon termination, the property and business of a corporation pass to the last board of directors as “Trustees in Liquidation” who are responsible for winding up the affairs of the company. Va. Code § 13.1-914. This sounds like a big deal. However, Va. Code § 13.1-916 allows a nonstock corporation to reinstate its active corporate status by filing a form and certain fees within five years of the date of automatic termination. BOOM! The corporation is “active” again. If a HOA corporation has periods of “automatically terminated” status in its history, what does that mean? Does that mean that the actions of the board of directors or officers are voided? Do all debts owed to or duties owed by the HOA vaporize? No. If the automatically terminated corporation is reinstated within the five year period, by Virginia law its as though the “termination” was never in effect:
Upon entry of the order of reinstatement, the corporate existence shall be deemed to have continued from the date of termination as if termination had never occurred, and any liability incurred by the corporation or a director, officer, or other agent after the termination and before the reinstatement is determined as if the termination of the corporation’s existence had never occurred.
Va. Code § 13.1-916.
This statute is not some sort of scheme dreamed up by a HOA industry lobbyist. The statutes for stock (for profit) corporations and limited liability companies are similar. But in any case it can be the cause of confusion. If a nonstock corporation is currently in a state of “automatic termination,” its members may not know whether will ever reinstate. According to the statutes, the last board of directors acts as trustees for the corporation, and can sue or be sued in a fiduciary capacity.
Even if the HOA’s directors or trustees fail to reinstate the corporation’s active status within five years, that does not mean that the association necessarily ceases to exist. Virginia law allows for unincorporated associations, including property owners associations. Of course, an unincorporated association does not enjoy the legal powers of an incorporated association. But that does not mean that it ceases to exist. This is because the incorporated status is a legal characteristic of the group, and not its cause for existing. When HOAs are automatically terminated for over five years, sometimes their leaders decide to re-incorporate. Corporate law includes the notion of a business maintaining continuity that perpetuates beyond the change of business form.
As a side note, some community associations in Virginia are initially organized in a manner that does not contemplate incorporation. Condominium associations are usually not incorporated. Some HOAs are initially organized as unincorporated associations and the covenants may not accommodate future incorporation without amendment. Such associations may need to amend their declaration if they incorporate.
Remember that a property owners’ association is not some sort of local government entity created by a municipal charter coming from the state capital. When a community association law problem arises, the starting point of any legal analysis is the declaration of covenants and any amendments. That is the document that the courts treat as the “contract” between the lot owners and the association.
Update (Feb. 5, 2021):
The 2018 Mendez case in Fairfax Circuit Court is instructive about what can happen with a “lapsed” nonstock HOA corporation. The Huntington Forest HOA negligently allowed their corporate status to lapse for longer than five years, while continuing to function through a board of directors. When the board later realized what had happened, they re-incorporated the homeowners association with the SCC. The Circuit Court observed that the declaration of covenants “survived” the automatic termination of the corporation’s existence. Upon termination, the property of the association is held by the last board of directors as trustees in liquidation. However, the POAA does not require for property to be formally owned by the incorporated HOA entity to endure in its status as a common area. The POAA looks to whether the common areas are designated as such in the declaration, and whether the association is obligated to maintain or operate the common areas. The Circuit Court found the nonstock corporation holding the “new” SCC charter to be in continuity with the original throughout the functioning yet unincorporated period of its organizational history. The Court found that the newly incorporated entity to be the “true” Huntington Forest HOA board, and not the trustees in liquidation of the terminated one. The “new” corporation was not owed legal recognition because it was calling itself the same HOA or was performing the functions as before. The court, in essence, ruled that this is NOT one of those instances where a group of interested neighbors get together and form a nonstock corporation for the purposes of collecting dues and telling people what to do with their land. The subdivision maintained continuity through the declaration of covenants as the principal governing instrument. The outcome of the Mendez case may have been different if the declaration had different language or had been amended in a way that was incompatible with the reincorporation.
Mendez v. Huntington Forest HOA, 99 Va. Cir. 160 (Fairfax Co. Jun. 4, 2018).
January 29, 2021
Can Construction Contracts Require Arbitration Outside of Virginia?
To be useful, contract rights need a reasonably convenient remedy. What is convenient to one party may not be convenient to the other. When parties include an arbitration clause in a contract, such proceedings will have to occur in a “place” such as a lawyer’s conference room, a hotel room or nowadays, perhaps a zoom videoconference. In some construction cases, the builder, owner and property are all in the same state. In others, the contractor and owner, or the subcontractor may be based in different places. No one wants to be forced to litigate or arbitrate far from their home base. Contractors frequently put language in arbitration clauses that designate a mandatory state, city or county where any arbitration proceedings must take place. This can be confusing, because one would naturally expect any dispute over a specific property to take place in the city or county where that property is located. However, federal law includes a public policy in favor of arbitration and the freedom of parties to make agreements in arbitration clauses. However, in Virginia and other states, there are statutes which try to prevent out of state parties from requiring that arbitration be conducted outside the state for construction work done in state. Va. Code § 8.01-262.1 provides that,
The forum for any arbitration proceedings required in such a contract . . . , shall be in this Commonwealth. If the contract provides for arbitration proceedings outside the Commonwealth, such provision is unenforceable and arbitration proceedings shall be in the county or city where the work is to be performed, unless the parties agree to conduct the proceedings elsewhere within the Commonwealth.
How does one reconcile this statute with federal law that tries to honor the language of arbitration agreements? In 1998, the U.S. District Court for the Western District of Virginia considered this question, with Senior Judge Jackson L. Kiser publishing a decision. Gray Company was a general contractor on a project to be performed in Halifax County, located in southern Virginia. Gray brought M.C. Construction Corporation on to this project by two subcontracts. MC sued Gray in Virginia courts. Gray removed the case to the federal district court and sought to force MC to arbitrate the claims in Kentucky (Gray was a Kentucky corporation) pursuant to Kentucky law. The arbitration agreements in the subcontracts authorized Gray (not MC) to decide between Halifax County or Lexington, Kentucky as the forum for any arbitration proceedings. Unsurprisingly, Gray chose Kentucky. MC argued that Va. Code § 8.01-262.1 made the forum selection clause unenforceable. Gray said that the Federal Arbitration Act preempted Virginia’s arbitration forum statute, pursuant to the Supremacy Clause of the U.S. Constitution. The FAA applies to proceedings to enforce arbitration provision of contracts affecting interstate commerce. The U.S. Supreme Court, in numerous decisions, ruled that in enacting the FAA, Congress intended to foreclose or preempt state statutes that would work to undercut the enforceability of the language of arbitration agreements. A contract may be otherwise governed by state law, except for the arbitration clause to which the parties look to federal law. Does it make sense for general wording in the FAA to preempt attempts by states from enacting consumer protection or “home-town” legislation with the idea of promoting procedural fairness in the arbitration context? This is generally the policy of the federal courts. However, the effect of the FAA is to give precedence to the language of the arbitration agreement made by the parties. Each arbitration agreement is construed according to its own terms. Upon efforts by parties to have courts compel or deny arbitration of claims, the FAA requires the court to, “make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” Judge Kiser found that the Virginia statute preempted by the FAA, to the extent that the agreement required arbitration elsewhere. I am not aware of any Supreme Court of Virginia or Fourth Circuit Court of Appeals agreeing or confirming this with regard to that state statute. Any party to a construction contract with a forum selection clause where a legal claim needs to be brought or defendant ought to seek the assistance of an attorney to determine whether or not such a clause is enforceable, because the language and circumstances may be different from those in the MC vs. Gray case.
Many newer HOAs and condominiums have arbitration agreements in their covenants that may apply to some or all disputes arising out of the dealings between the lot owners, developers and/or boards. I have never seen a HOA arbitration clause that required the parties to arbitrate outside of the state where the subdivision was. However, usually the FAA applies to association arbitration agreements. I can imagine a HOA related dispute over the arbitration forum arising in the community association context where the association is in a rural area and the developer or management company are based in a nearby city. Board members don’t want to travel for arbitration hearings any more than owners do.
The MC v. Gray decision came out in 1998, when videoconferences were relatively uncommon and usually only conducted by large companies with significant budgets for such technology. Even before the Coronavirus, it was common for arbitrators to hear motions by teleconference or on briefs submitted by email. Now, in 2021, most Americans have Zoom, FaceTime or some other videoconference app on the laptop or smartphone. Since 2020, internet videoconference has mostly replaced the traditional in person meeting. Many courts are conducting hearings and trials through videoconference. Many HOAs hold their meetings on Zoom or GoToMeeting. Mediations and arbitrations are also now conducted through internet videoconference in light of the coronavirus pandemic. Most arbitration agreements do not mention videoconference as a requirement or option for arbitration, however groups such as the American Arbitration Association are trying to promote that, because it means that more arbitration can move forward. The option of videoconference or teleconference for arbitration ought to be explored or considered when looking at the prospect of arbitration or in negotiating a contract with an arbitration clause.
Arbitration is not necessarily a bad thing, particularly in larger cases where cost and time savings may be had. Because of the greater flexibility of arbitration procedures and the pandemic related backlogs in the courts, arbitration may get a result faster. However, when an arbitration agreement is being negotiated or disputed it is necessary to have an attorney familiar with this area of the law review the language with the client so that decisions can be made on more than an assumption as to what is enforceable. There are no appellate court precedents (yet) specifically interpreting Virginia’s construction arbitration forum statute.
Legal Authority:
M.C. Construction Corp. v. Gray Co., 17 F. Supp. 2d 541 (W.D. Va. 1998)
January 27, 2021
Modernizing HOA Law or Exploiting a Crisis?
“Never let a good crisis go to waste.” -Winston Churchill.
The Virginia General Assembly is currently in session. One interesting bill to Virginia homeowners is 2021 HB1816. This bill seeks to amend the Property Owners Association Act and Virginia Condominium Act regarding the use of “electronic means” for meetings and voting. Making videoconference a larger and better part of HOAs and condominiums is a good thing. But this flawed bill ought to undergo changes necessary to protect Virginia landowners and the integrity of the community association “open meeting” policies in place in Virginia.
I am a practicing attorney who represents lot owners and unit owners in community association matters. Sometimes my clients are in opposition to association boards, and in other cases they are dealing with a dispute with a neighbor where they are aligned on the same side as the board. I am familiar with the essential role of already existing “open meeting” statutes for community association in establishing procedural safeguards. To the extent that state law gives associations substantial power, these open meeting rules must be preserved and strengthened.
As Virginia law currently stands, the statutes require almost all deliberations of boards of directors to be conducted in properly-noticed meetings that owners are able to attend or follow along and participate in contemporaneously. The POAA (and Condo Act) prohibits boards and committees from doing business in informal “work sessions” or email exchanges (with very limited exceptions for executive session). Va. Code § 55.1-1816. This is important, because most HOAs have the power under their governing instruments and the POAA to adopt rules and regulations that can impose limits on how they can use or improve their property. Va. Code § 55.1- 1819. This is significant because the ability to use or improve property is an essential aspect of its value as an investment, and the freedoms we enjoy as Americans have to be exercised somewhere, and the home is the most important place for exercising freedoms of all kinds. The “open meeting” requirements for HOAs and Condos, which are supposed to (supposedly) function as “mini-democracies”, are similar to the open government laws that require local government board members to conduct all business (with very limited exceptions) in noticed meetings.
HB1816 would weaken these protections, and in associations where safeguards are not otherwise enshrined in their governing instruments, facilitate common practices by HOA boards, committees, and managers to circumvent the “open meeting” requirements by making important decisions for the community by text message, email, telephone, or informal social gatherings.
HB1816 , in the amendments to § 55.1-1832(F) and § 55.1-1935(E), would allow any meeting of a HOA or condominium, be it a board meeting, committee meeting, or annual or special meeting of the members to be conducted by “electronic means.” Most Virginians are now familiar with various forms of videoconference, be it Zoom, WebEx, Google Meets, Microsoft Teams, GoToMeeting or other similar programs. The Coronavirus has made these technologies a common practice. I have previously posted about the use of remote meeting technology in my December 2020 article, Presenting to HOA Boards and Committees in Remote Hearings. I use these services and think that they are a great thing. I think that they ought to be used in Condominium and HOAs because they have the power to increase participation by many members who may not otherwise be able to participate because of a disability, mobility concerns, inability to drive, or childcare obligations. This also promotes access to justice because homeowners are more likely to be able to retain an attorney to help them in such hearings because it reduces travel time.
In 2020, the General Assembly passed special, emergency legislation that helped for association boards to meet and conduct business during the coronavirus epidemic. I posted analyses of that in my May 2020 post, Virginia Temporarily Relaxes HOA Open Meeting Statutes for Coronavirus. HB1816 would work to make that permanent and more. It’s the “more” part that is a problem.
The problem with HB1816 is not that it facilitates use of these videoconference programs in HOAs is that it goes well beyond that. In conjunction with other changes, HB1816 seeks to broaden the definition of “electronic means” in Va. Code § 55.1-1800 and § 55.1-1900 to include “teleconference, videoconference, internet exchange, or other electronic methods.” Those statutes incorporate the definitions found in Va. Code § 59.1-480 of the Uniform Electronic Transactions Act. That statute defines “Electronic” as “relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.” But the referenced statute doesn’t define “internet exchange” or “other electronic methods”. The definition as written is broad enough to encompass text message and email correspondence between board members, committee members and/or members. This is a terrible way for HOAs and condominiums to decide important questions such as enactment of million dollar budgets, to change rules to governing the use of land in the subdivision, or to impose penalties against an owner for an alleged rule violation. In many HOAs and condominiums, this would facilitate boards changing the rules on an informal basis, as they see fit. Founding Father John Adams believed that the USA ought to be “a government of laws, not of men.” In other words, everyone has to follow the laws (or the declaration or contract), including the rulers or directors. HB1816 would in many cases cause the POAA to reflect a public policy that the rules and standards in the governing documents simply don’t matter, its whatever the board wants. The is because HB1816 would remove statutory protections requiring HOA boards to follow their own rules and to not change the rules whenever they want to do something different.
HB1816 easily passed the House of Delegates and now sits in the General Laws Committee of the Virginia Senate. I hope that it does not get out of that committee, without changes to the definition of “Electronic Means.” Note that passage of this bill as written would not be “game over” for homeowners dealing with HOA bullies. But failure to fix the language would “bless” all sorts of mischief that needs to be stopped. Boards still need to follow the declaration and bylaws and the other protections of the POAA and common law. But legal reforms ought to make the law better and more clear, not the opposite. It appears to me that certain people are promoting this bill at this time to try to exploit the pandemic before it is over, by use of this bill which is ostensibly to help people do social distancing. For these reasons, I do not support HB1816. I think that the definition of “Electronic Means” needs to be revised, to only include technologies similar to Zoom, WebEx, MS Teams and the like, and to not include text message, chat rooms or emails.
January 28, 2021 Update:
On the evening of January of January 27, 2021, the Virginia Senate General Laws Committee reported out SB 1183 which appears to be a bill originating in the senate that is identical, or nearly so with, HB1816. This legislation has not yet been voted on by the full senate.
February 9, 2021 Update:
Around February 5, 2021, the Virginia Senate postponed further action on HB1816 and SB 1183 to the General Assembly’s “special” 2021 session which is essentially an extension of time for the “general” session.
Close of Special Session Update:
In the General Assembly’s 2020 Special Session 1, HB1816 was passed by both legislative chambers and signed by Governor Northam.
Referenced Legal Authority:
Va. Code § 55.1-1800 (POAA Definitions – Existing Law)
Va. Code § 55.1-1816 (POAA Board Meetings – Existing Law)
Va. Code § 55.1-1832 (POAA Technology – Existing Law)
Va. Code § 55.1-1900 (Condo Act Definitions – Existing Law)
Va. Code § 55.1-1935 (Condo Act Technology – Existing Law)
Va. Code § 55.1-1949 (Condo Act Meetings – Existing Law)
HB1816 (General Assembly Website)
SB1183 (General Assembly Website)
Who Is My Virginia Legislator?
(the photo for this post is a stock image and doesn’t depict anyone having to do with this post)
December 23, 2020
The Negativity Effect in Real Estate Decision-making
Kids, we are counting down the final days to Christmas 2020. Many of my readers are familiar with the 1957 Dr. Seuss book, “The Grinch Who Stole Christmas.” In honor of the Grinch and the Whos, I would like to share a few insights from a 2019 book I recently finished reading, “The Power of Bad: How the Negativity Effect Rules Us and How We Can Rule It” by John Tierney and Roy F. Baumeister. “The Power of Bad” is not a book about property matters per se. That said, I think that the principles of the negativity effect animate much of what is going on in real estate. The authors define the negativity effect as, “the universal tendency for negative events and emotions to affect us more strongly than positive ones.” There are many examples of this. If you visit a restaurant, and the experience is overall positive, but there is one discrete problem, then the customer walks away remembering the negative thing. When people read hotel reviews or other online ratings, they look to the bad reviews and tend to give more weight to descriptive negative reviews even if there are other positive ones for a business. On a larger scale, Anti-Terrorism is a good example. After one tragic, evil event the government makes all sorts of decisions, some warranted, but many unnecessary and harmful. In fact, the threat of terrorism is less of a risk than being struck by lightning. Empirical studies show that it often takes 3-4 good experiences to cancel out the effect of one bad experience on someone’s perceptions of a person, organization, or place. The negativity effect makes people susceptible to manipulation, particularly by media organizations chasing viewership through eye-catching news of the latest problems, a politician or candidate developing a voter base through fear, or merchants selling some product. Of course, there are bad things that people need to know to protect themselves against. The psychological power of bad experiences and associations distorts decision-making by warping perceptions through exaggerating a potential risk or threat.
The book does not go into the topic of real estate, but I can see how policymakers and property owners are particularly susceptible to negativity. Owners are afraid that their homes will become less useful, attractive, or valuable because of something that happens. Threats to one’s home affect people in deeply personal ways. Many fear an external threat to their enjoyment of their home, be it criminals taking over the neighborhood, increased traffic from new development, or a home-based business popping up next door. It is commonplace for people to buy homes subject to restrictive covenants that give power to HOA directors to impose fines for architectural “violations.” In effect, many paying extra each month to have someone tell them what to do with their own property. Why does this happen? The negativity effect convinces many (but not all) landowners that the threat of other people ruining the neighborhood by breaking the architectural restrictions outweighs the risk that the HOA may overstep its authority. However, the architectural violations that HOAs often find with owners’ properties rarely pose any substantial threat to the value or use of neighboring real estate.
The Power of Bad book provides an example of how workplace disciplinary systems can illustrate effects of the negativity bias. This example reminded me of the systems of fines used in many HOA communities. The food company, Frito-Lay discovered that workers in a Texas factory were writing obscene messages on potato chips before bagging them. During investigation, corporate discovered that the factory used a new “progressive discipline” system to deal with tardiness and safety violations. After a first “violation,” the worker’s file was noted and she was given a verbal warning. If there was another violation, the worker would be brought into an office to acknowledge receipt of a written violation notice. At that moment, the worker would feel like they were being forced to admit something without being given a chance to defend themselves. The employee was given another black mark in the file whether they sign the violation notice or not. If there was a third violation, the employee would be given an automatic three-day suspension without pay. The worker would return to the plant even angrier. The subsequent violation notice resulted in termination. Tierney and Baumeister saw this toxic disciplinary system as illustrating the “The floggings will continue until morale improves” management approach. Frito-Lay discovered that the managers hated the disciplinary system as well, because it eroded professional relationships and made them unpopular. Instead of making the disciplinary process more equitable by ratcheting-up punishments evenly, it caused the factory to become more arbitrary. The managers avoided handing out violations until they just could not stand a worker anymore, after which they tried to railroad that problem employee through the stages of the disciplinary system so they would be terminated. Frito-Lay ended up scrapping this progressive disciplinary system in favor of a different design. This “progressive” disciplinary system reminds me of the dysfunctional covenant enforcement and dues collection systems many homeowners or condominium associations use to implement board policies. When owners receive rule violation notices, they frequently observe that the rule is not being enforced in the community, and their property does not really break the rules, but others are. Sometimes the notice states that a hearing was held without the owners knowing that their case was even before the board. Often, the board does not even have the authority to adopt the rule quoted in the violation letter. When owners receive fines for things that do not actually violate any legal obligation they have to the HOA, they lose motivation to maintain their property to keep up the neighborhood. Vindictive and incompetently managed rule violation systems can actually diminish the natural impulses that people often have to work in their yards to keep pace with their neighbors. Some people may become more worried about violation notices than actually yardwork. Sometimes bogus violation notices, fines, and late fees are focused on owners who are particularly unpopular with the board members or managers. Once associations record liens or institute foreclosures, the owner can feel “trapped” in a situation where they have few options other than paying a large monetary demand that includes items the collector is not entitled to, lying low and hoping that a suit or lien does not come, or retaining an attorney to solve the problem. These bad experiences can actually get away with these improper things, leaving them with few outlets other than posting attacks against the board or managers on social media (the contemporary version of scribbling on potato chips). Compounding things, there are people on the internet highlighting all of the “bad” about HOAs, to enhance the public’s attention to these issues, in the hopes that HOAs will become abolished and punish the malefactors (certain directors, managers, attorneys, etc.). This can detract from more useful discussions about how owners can, through education or working with an attorney, develop strategies for solving their own problems with HOAs. Sometimes news articles or social media posts, taken in the aggregate, actually re-enforce the false belief that it is futile to resist HOA bad behavior. But this is not true. It is common for landowners to successfully avoid, prevent, solve, or escape legal difficulties involving their neighbors or community associations. This happens all the time, but the news reports and social media buzz focuses on the hopeless cases because they draw more attention. If an owner has a problem with a homeowner’s association, they should not stop their research at doomsayer articles about other communities where a problem spiraled into a disaster. Those articles may be true, but they are not going to identify solutions that someone can use in their own situation. If an owner already purchased the house in a community association, they cannot wait for their HOA to be abolished in the future, because that is not going to happen. Often, the best thing is for the owner, a board member, neighbor, attorney, or other advisor to try to help the owner to resolve the problem before it becomes a larger financial burden, cause additional property damage, further limit the use of property, or mushroom into a larger interpersonal conflict. In what I have seen, landowners who cultivate positive vibes within themselves and their relationships are the ones that have the resiliency necessary to overcome the injustices they suffer. The Whos of Whoville were thankful and undeterred in the face of the Grinch’s scheming. My favorite chapters in “The Power of Bad” are the ones that talk about how positivity can overcome negativity and the negativity bias can be mitigated. In real life, one cannot count on the Grinch to have a change of heart when you need him to. In real estate matters, quite often overcoming the negativity bias involves refocusing away from vindication and shame to identifying tools (facts, resources, people, laws, etc.) that can be harnessed to solve the problem, which sometimes requires going before a judge, but often can be done in the context of settlement. Sometimes re-framing bad HOA covenants, rules or statutes as the byproduct of the negativity effect can convince decision-makers to interpret them narrowly and decline to enforce them in a particular instance. In HOA matters, often the answer to the problem can be found in a recorded declaration or other instrument that applies to the facts but has been ignored because people commonly think of the HOA as the organization you get rather than what is or is not expressed in the rules.
Note that the photo used for the blog post is just a stock image and does not depict anything referenced in my article.
December 18, 2020
Presenting to HOA Boards and Committees in Remote Hearings
Following enactment of 2020 General Assembly legislation, most HOAs and condominiums in Virginia carry on business through “remote” videoconferencing technology such as Zoom, WebEx and Microsoft Teams. Because of the Coronavirus, Americans of all ages are now more familiar with this technology. In the HOA context, boards and committees use remote hearings to decide matters that significantly impact the lives and property of many people. This presents challenges owners do not ordinarily face when using zoom for other reasons, such as religious services, educational programs, or social gatherings. Zoom allows owners to participate in HOA meetings and hearings that is in some ways more convenient than before. Travel time is unnecessary. The owner may be able to avoid arranging for childcare. On the flipside, the owner will not be able to present their arguments or requests by simply showing up at a meeting location in person with a folder of materials. In this blog post, I would like to identify certain issues that an owner must consider when a HOA schedules an architectural application or notice of violation for decision at a remote hearing.
The Technology Itself. Before the hearing, the owner should become familiar with the software being used. One tech-friendly judge in Fairfax recommends that attorneys practice using WebEx with a friend or family member to make sure they can access a meeting through both the video and audio features. Many people find it easier to use a headset or their cell phone because such devices often have better speakers and microphones than laptops and tablets. WebEx, Zoom, Microsoft Teams and Google Meet are not the same.
The Notice of the Hearing. Procedural “Due process of law” consists of (1) the right to be heard by the judge or official, (2) decision by a neutral tribunal, and (3) adequate advance notice of that hearing and the subject matter at issue. HOAs and condominiums usually give affected owners notice of scheduled meetings and how to access the meeting. However, sometimes an affected owner is not given adequate notice for one reason or another. If an owner submits an application or complaint to the HOA, they ought to monitor their emails and the information available online to see if anything is happening. Sometimes an affected owner can identify themselves as such to the HOA and be notified of hearings before they occur.
Recording the Videoconference or Downloading a Recording. With limited exceptions, HOA boards and committees must conduct business, deliberate, and make decisions in “open” meetings, and that rule also applies when they use remote technology. In Virginia and some other states, owners have a right to record the meeting. Some associations record the meetings themselves and post the videos online after the meeting. However, the owner often cannot rely upon the HOA to make a recording and then make that available. There are several reasons why an owner would want to preserve such information. Sometimes neighbors or board members will say something in a meeting and then later deny that it was said or change their position. The record can lock them in. Also, if the HOA decides that the owner has legal grounds to challenge, whether on appeal within the HOA or in a court of law, the record of what happened in the HOA meeting is valuable to explain what happened and why.
How to Present One’s Position. In these hearings, its common for the “chair” to give owners a certain number of minutes to present their request, opposition or position to the board or committee. Usually, the directors or committee members read the written submissions beforehand, but not always. The owner may be required or well-advised to put things together in a written submission. In the case of architectural approvals, the declaration or guidelines will usually set forth specific information that must be included in the application in order for the committee to hear and approve it. Sometimes HOAs approve applications that are facially incomplete or will impose application requirements not found in the governing instruments. In architectural control matters, the burden is on the applicant to explain what they want and to show why this is proper. An owner supporting or opposing an application, complaint or violation notice ought to be aware of what the guidelines require or forbid. An owner or her attorney can put more information into a written submission than can ordinarily be stated in a limited amount of time. Its common for the written materials to be presented to the viewers. For this reason, visual aids such as photographs, drawings, surveys, and diagrams may present better than an email in 10-point type. Many attorneys organize their presentation into a PowerPoint or PDF slide presentation that they submit to the HOA for review beforehand. Remember that these meetings typically occur in the evening, when directors and committee members are already thinking about dinner, anxious to call it a day or feel fatigued. The owner ought not to overwhelm the HOA with voluminous, repetitive written or emailed submissions.
During the Meeting Itself. The members of the board and committee know each other and the HOA’s management staff. However, the owner or attorney may not be familiar with who is on the board or committee and who the chair or manager is. The board or committee members may not introduce themselves, leaving participants to guess who is a decisionmaker or not. An owner can find out who is on the board of committee before the meeting starts. One wants to know whether someone speaking is on the board or not. One ought to introduce oneself when talking and to again state your name if you speak again, so people know who they are. So, I would start by saying “John Cowherd, attorney for Homer Simpson, neighbor to the applicant Ned Flanders.” If I spoke again, I might say “John Cowherd” again but not repeat the details of my role again each time. Once one is allowed to speak, sometimes they are interrupted by another participant or are forcibly “muted” by a chair or staff person in mid-sentence. This is why I like written submissions. Sometimes boards will use “executive session” to confer with one another and their attorney without the other parties participating. Another bad practice is to tell participants that the portion of the hearing for their matter is concluded, and then after certain owners leave the electronic meeting, they will discuss it again later.
The use of remote videoconference technology has real advantages to lot owners, because they can participate in HOA proceedings from the convenience of their own homes. If used properly, Zoom can increase owner participation and the overall effectiveness of governance. If the hearing is conducted online, the owner can have any qualified, licensed attorney represent them, regardless as to where the attorney lives in the country. If used properly, videoconferences can increase access to justice because its easier to find an attorney to dial in to a remote meeting than show up at a specific place on a weeknight. That said, many HOAs do not like dealing with attorneys. Remote technology can make it easier for the hearing to be recorded. Despite these advantages, technology provides additional practical tools for HOAs to evade open meeting requirements, “mute” objectors, and disregard governing instruments. What will happen to HOA meetings after the Coronavirus Epidemic is over? Some associations may revert to entirely “in-person” meetings and hearings. Others may continue with remove videoconferencing, or adopt a “hybrid” approach, where owners have the option of attending in person or accessing remotely. Overall, I expect videoconference technology to be more widely used for a variety of purposes after the epidemic than before. After everyone can get the vaccine and masks are set aside, we will be dealing with a variety of legal repercussions of the epidemic shutdowns for years to come.
Note that the photo associated with this blog post is a stock image that does not depict anything referenced in the article.
December 4, 2020
The Voluntary Payment Doctrine and HOA Liens
Homeowners disputes with HOAs and condominium associations frequently revolve around disputed demands for payments, large and small. Homeowners often wonder if they have to pay their monthly assessments if their HOA failed to fulfill an obligation. Generally speaking, if the assessments were legitimately determined by the HOA’s board of directors pursuant to its recorded instruments, then lot owners have to pay them. The assessments are made to fund the upkeep of commonly owned property. Ordinarily, the obligation to pay legitimately imposed assessments and the HOA’s obligations to its members are “independent covenants.” The lot owners usual remedy is to compel the HOA’s performance, not to withhold dues. However, under certain circumstances the owner must not voluntarily make a payment in order to preserve a legal challenge to the payment demand. This is because when an owner is in full knowledge of all of the facts, and makes the payment anyway, then it is as though he waived the legal challenge to the payment. Various courts recognize that application of the Voluntary Payment Doctrine can be harsh. Some consumer protection advocates call for its abolition. But as of 2020, it remains the law in Virginia. This rule has a number of important caveats and exceptions. The doctrine is particularly important in the context of the financial realities of community association life.
A 2020 court opinion from Missouri illustrates one way the Voluntary Payment Doctrine may be applied. Michael and Wendy Halliday owned a unit in the Malibu Shores Condominium, located on the Lake of the Ozarks. The Hallidays became delinquent on their assessments. In March 2016, the condominium obtained a $6,156.46 court judgment against them and lien against the condo unit. In May 2016, Randall Koeller and Jeff Haskenhoff purchased the unit at the sheriff’s sale. At that time, Jeff and Randall’s wife Angela were directors on the condominium board. Yes, dear reader, this is shady! It is not uncommon for people with family or business connections with an association board to purchase foreclosures, especially in a waterfront development where many are rentals or second homes. However, such connections may not insulate them from the risks and surprises that can come from investing in foreclosures. In June 2016, Randal and Jeff asked what the amount was of any lien. They were told that it increased to $8,154.00 because of additional months, finance charges, late fees, and attorneys’ fees. In fact, Jeff (who was a board member) assured Randall that this amount was correct. In July 2016, Randall and Jeff signed separate checks, each paying half of the updated demand. Later Randall and Jeff sold the unit to a third party at a profit.
But the story does not end there. Later, Randall and Jeff sued the condominium for allegedly misrepresenting the value and validity of the lien. The trial court found in favor of the association, finding insufficient evidence of misrepresentation, and ruling that by paying the sum, the two men could not later challenge its legality.
The Missouri Court of Appeals focused on the trial court’s application of the Voluntary Payment Doctrine. The Missouri rule is that a person who voluntarily pays money with full knowledge of all of the facts in the case, and in the absence of fraud and duress, cannot recover it back, even though the payment is made without sufficient consideration and under protest. The Missouri Court of Appeals explained the reason behind the rule.
a person who, induced thereto solely by a mistake of law, has conferred a benefit upon another to satisfy in whole or in part an honest claim of the other to the performance given, is not entitled to restitution. The underlying reason for those requirements is that it would be inequitable to give such a person the privilege of selecting his own time and convenience for litigation. . . .
In other words, when all the facts are known to the payor, the time for objecting is when the demand is made, not after the payment is made. In this case, Angela (the widow of Randall) and Jeff both were fully aware of the facts because they were also board members of the same association. This circumstance deprived them of the ability to claim that they were unaware of the facts relevant to their decision to make the payment. For this reason, the court deemed this to be purely a mistake of law, not of fact. In other cases where the association may claim voluntary payment, the homeowner may not be imputed full knowledge. In fact, many associations keep their owners in the dark about many decisions, including those that may affect specific lot owners in unique ways. This illustrates why directors may have legal problems when they do transactions with the association even though the deal may not be forbidden by the covenants or statutes. A purchaser who was less in the know may have been able to challenge the amount of the lien.
The Malibu Shores case concerned unique facts where the payor was imputed full knowledge of the facts because of their unique position as board members, transforming it into a purely legal question. In other cases, the question turns on whether the payment was voluntary or involuntary. For example, in a recent Supreme Court of Virginia case, Rene Williams obtained a money judgment against Kerry Ann Sheehy and recorded it in the land records where Sheehy owned property. After initiating an appeal, Sheehy sold the property, and Williams obtained a payoff check out of the real estate closing. In Virginia, a defendant forfeits her appeal if she voluntarily pays off a judgment. The Supreme Court of Virginia contrasted the voluntariness of a payoff of a lien in a real state closing with payments made by the defendant during post-judgment execution proceedings such as garnishments, levies, or judicial sales. Such post-judgment collection proceedings would constitute coerced payments that do not fit into the definition of a voluntary payment. The Supreme Court of Virginia noted that there may be coercion in the foreclosure context. The Supreme Court remanded the case for the trial court to determine whether the transactional payoff was in fact voluntary.
In D.R. Horton, Inc. v. Board of Supervisors of Warrant County, the Supreme Court of Virginia observed that for purposes of the Voluntary Payment Doctrine, it doesn’t matter if the payor submits a written protest of the legality of the demand at the time payment is made for purposes of determining voluntariness. However, in D.R. Horton, the Court recognized three exceptions to the Voluntary Payment Doctrine: (1) in the event of “an immediate and urgent necessity,” (2) the payment is made to release his person or property from detention and (3) to prevent an immediate seizure of his person or property. As seen by these cases, what constitutes a necessity, detention or seizure is akin to duress or coercion, and not just an inconvenience. Also, the Voluntary Payment Doctrine does not apply where the plaintiff is not suing for return of erroneously sums paid.
The state legislatures granted HOAs and condominium associations substantial legal powers by allowing recordation of a lien without first initiating a civil claim and reducing it to a judgment at trial. In a sense, the legislation blesses, through legal recognition, attempts to coerce owners to pay certain sums to their associations, be they assessments, fines, late fees, attorneys fees, interest. It is common for associations to overstep what they are entitled to charge. Sometimes representatives of an association do not want the owner to climb out of default, for various reasons. For many owners, payment of the lien is seen as less troublesome and more certain than mounting a legal challenge or defense. However, owners do not have to surrender to extortionary or overbearing tactics. How is one to know whether payment would be necessary to prevent further bona fide collections action or if it would constitute a waiver of legitimate claims? Often it may not be clear to the landowner whether making the payment or refusing to pay is the right thing to do. The answer may require review of the governing instruments in light of state law. There is a “big picture” to the HOA-owner relationship that frames the issues raised by a specific demand for payment.
Referenced Legal Authority.
Koeller, et al. v. Malibu Shores Condo. Ass’n, 602 S.W.3d 283 (Mo. Ct. App. May 22, 2020)
Sheehy v. Williams, Nos. 190802 & 191089 (Va. Supreme Ct. Nov. 25, 2020)
D.R. Horton, Inc. v. Warren Co. Bd. of Supervisors, 285 Va. 467 (2013)
NOTE: The photo associated with this blog post does not illustrate anyone specifically referenced in the text of the article.
