July 20, 2017
Are Legal Remedies of Owners and HOAs Equitable?
Supreme Court Justice Anthony Kennedy recently wrote in an opinion that, “Property rights are necessary to preserve freedom, for property ownership empowers persons to shape and to plan their own destiny in a world where governments are always eager to do so for them.” Murr v. Wisconsin, 198 L.Ed.2d 497, 509 (U.S. Jun. 23, 2017). This principle goes beyond the eminent domain issues in Murr v. Wisconsin. Many HOAs and condominiums boards or property managers are eager to make decisions for (or ignore their duties to) owners. In the old days, legal enforcement of restrictive covenants was troublesome and uncertain. In recent decades, state legislatures made new rules favoring restrictive covenants. Sometimes owners seek to do something with their property that violates an unambiguous, recorded covenant. I don’t see that scenario as the main problem. What I dislike more is community associations breaching their specific obligations to owners, as enshrined in governing documents or state law. Is the ability to enforce the covenants or law mutual? Are legal remedies of owners and HOAs equitable?
Why HOAs Wanted the Power to Fine:
Take an example. Imagine a property owner decides that it would be easier to simply dump their garbage in the backyard next to a HOA common area than take it to the landfill. Let’s assume that does not violate a local ordinance. Or substitute any other example where a property owner damages the property rights of others and the problem cannot be solved by a single award of damages. Before legislatures adopted certain statutes, the association would have to bring a lawsuit against the owner, asking the court to grant an injunction against the improper garbage dumping. This requires a demand letter and a lawsuit asking for the injunction. The association would have to serve the owner with the lawsuit. The owner would have an opportunity to respond to the lawsuit and the motion for the injunction. An injunction is a special court remedy that requires special circumstances not available in many cases. The party seeking it must show that they cannot be made whole only by an award of damages. The plaintiff must show that the injunction is necessary and would be effective to solve the problem. The legal standard for an injunction is higher than that for money damages, but it is not unachievably high. Courts grant injunctions all the time. However, the injunction requires the suit to be filed and responded to and the motion must be set for a hearing. Sometimes judges require the plaintiff to file a bond. Injunction cases are quite fact specific. The party filing the lawsuit must decide whether to wait for trial to ask for the injunction (which could be up to one year later) or to seek a “preliminary” or “temporary” injunction immediately. If the judge grants the injunction against the “private landfill,” the defendant may try to appeal to the state supreme court during these pretrial proceedings. These procedures exist because property right protections run both ways. Those seeking to enjoin the improper dumping have a right, if not a duty, to promote health and sanitation. Conversely, the owner would have a due process right to avoid having judges decide where she puts her trash on her own property. If the court grants the injunction, the judge does not personally supervise the cleanup of the dumping himself. If an order is disobeyed, the prevailing party may ask for per diem monetary sanctions pending compliance. That money judgment can attach as a lien or be used for garnishments. These common law rules have the effect of deterring the wrongful behavior. This also deters such lawsuits or motions absent exigent circumstances. Owners best interests are served by both neighbors properly maintaining their own property and not sweating the small stuff.
Giving Due Process of Court Proceedings vs. Sitting as both Prosecutor and Judge:
If association boards had to seek injunctions every time they thought an owner violated a community rule, then the HOAs would be much less likely to enforce the rules. The ease and certainty of enforcement greatly defines the value of the right. Boards and committees do not have the inherent right to sit as judges in their own cases and award themselves money if they determine that an owner violated something. That is a “judicial” power. Some interested people lobbied state capitals for HOAs to have power to issue fines for the violation of their own rules. To really give this some teeth, they also got state legislatures to give them the power to record liens and even foreclose on properties to enforce these fines.
Statutory Freeways Bypass the Country Roads of the Common Law:
Let’s pause for a second and pay attention to what these fine, lien & foreclosure statutes accomplish. The board can skip over this process of litigating up to a year or more over the alleged breach of the covenants or rules. Instead, the board can hold its own hearings and skip ahead to assessing per diem charges for the improper garbage dumping or whatever other alleged infraction. Instead of bearing the burden to plead, prove and persevere, they can fast track to the equivalent of the sanctions portion of an injunction case. Instead of enjoying her common law judicial protections, the owner must plead, file and prove her own lawsuit challenging the board’s use of these statutory remedies. Do you see how this shifts the burden? Of course, the HOA’s rule must meet the criteria of being valid and enforceable. In Virginia, the right to fine must be in the covenants. The statute must be strictly complied with. But the burden falls on the owner to show that the fast track has not been complied with.
Owners’ Options:
Statehouse lobbying and clever legal writing of new covenants has helped the boards and their retinue. Let’s take a moment to see what remedies the owner has. Imagine reversed roles. The board decided that they could save a lot of money if they dumped garbage from the pool house onto the common area next to an owner’s property. The board ignores the owners’ request to clean and maintain that part of the common area. Let’s assume that the governing documents require the board to maintain the common area and do not indemnify them against this kind of wrongful action. The owner can sue for money damages. If the case allows, the owner may pursue an injunction against the board to clean up the land and stop dumping trash. The owner must follow the detail-oriented procedures for seeking an injunction. The owner does not have a fast-track remedy to obtain a lien against any property or bank accounts held by the board.
Fine Statutes Should be Legislatively Repealed:
In my opinion, community association boards and owners should both be subject to the same requirements to enforce restrictive covenants. If state legislatures repealed their fine and foreclosure statutes, the boards would not be left without a remedy. They would not go bankrupt. Chaos would not emerge. They would simply have to get in line at the courthouse and play by the same rules as other property owners seeking to protect their rights under the covenants or common law.
“But Community Association Lawsuits are a Disaster:”
Many of my readers are skeptical of leaving the protection of property rights to the courts. They don’t like people who sue or get sued. They argue that whether you are defending or suing, the process is laborious and expensive. The outcome is not certain. I don’t agree that property owners should surrender their rights to associations or industry-influenced state officials. What if there was a controversy-deciding branch of government that the constitution separates from special-interest influence and the political winds of change? Wouldn’t that be worth supporting? I know that there are legal procedures that drive up the time and expense of the process without adding significant due process value. That does not mean that the courts should be divested of the power to conduct independent review and award remedies not available anywhere else.
Judicial Remedies Are Better Options Than Many Owners Think:
Fortunately, owners have many rights that their boards and managers are not informing them about. Many common law protections have not been overruled. In Virginia, restrictive covenants are disfavored. Any enforcement must have a firm footing in the governing documents, statutes and case law. The statutes adopted by the legislature limiting the common law protections are strictly (narrowly) interpreted by the courts. It is not necessary, and may be counterproductive to run to some elected or appointed bureaucratic official. Under our constitutional structure, the courts have the power to enforce property rights. Many owners cannot wait for the possibility that a future legislative session might repeal the fine statutes. If they are experiencing immediate problems (like improper dumping of garbage or whatever) they need help now. In rare cases law enforcement may be able to help. In most cases working with a qualified attorney to petition the local court for relief is the answer.
Photo Credit: duncan Commit no nuisance via photopin (license)
July 5, 2017
To Whom Should Owners Turn with Contractor Complaints?
Property owners are frustrated when their builder fails to properly complete the agreed upon work for the purchase price. Sometimes these difficulties are relatively minor. Perhaps only a timely warranty claim letter to the builder will get the problems fixed. Not all disputes can be resolved amicably. For relatively simple matters, the owner may be able to sue pro se in small claims court. Many construction disputes require greater commitment of time, know-how and resources to resolve. When the relationship between the contractor and the owner breaks down, it may not be clear to whom should owners turn with contractor complaints. This blog post highlights various options owners may have for obtaining assistance with builder problems.
The Contracting Company’s Leadership:
Owners should first seek to amicably resolve disputes over a contractor’s performance with the company’s representatives. If the concerns can be effectively communicated and negotiated, the owner may avoid having to go to court, arbitrator or governmental agency. Sending a certified letter to the contractor may be necessary under the provisions of a statutory or contractual warranty. Check out my previous post about “Construction Defect Warranty Claims.” Communication can be a useful means of obtaining information. The owner may need to contact the leadership if their inquiries to company employees are ignored.
City or County Government Officials:
In Virginia, the city or county has the legal mandate to enforce the statewide building codes. There are offices staffed with experienced officials who conduct inspections and reviews to determine whether the project meets the building codes. The primary purpose of building code enforcement is to protect public health and safety. The code enforcement process begins long before anyone brings a complaint before the local government. Many projects, especially major renovations and new home construction require drawings to be submitted and a permit granted before work may commence. When presented with a complaint, code enforcement will look at the work on the property and consult the approved drawings and the building codes.
While compliance with the building codes is important, it is not the end of the story. If the contractor only builds to the minimum standard required to pass county inspections, the owner may be disappointed. The concept of a “dream home” includes code compliance, but goes significantly beyond that. Owners have rights not simply to a product that passes code inspection but work that conforms to the contract, warranty and drawings. There are quality control issues that aren’t addressed in most contracts, drawings or building codes. Take caution regarding contractors who talk about “dream homes” before the contract is signed and then only in terms of “code compliance” after getting several payments.
It is important for owners to understand what code enforcement is not. While the officials promote a public function, they do not exist to provide pro bono expert services. They will not provide cost estimates to finish or repair the work. Their job is not to make sure that the owners get what they bargained for in the contract with the builder. In some situations, they may enforce the building code against the owner. If the project is shut down because of code enforcement action, this may cause delays and additional expenses to the owner.
In general, the code enforcement offices do a great job within their specific legal mandate of enforcing the building codes. However, owners must understand that the county or city does not have the broad powers of a court to provide remedies and protections.
If a contractor or owner does not agree with a decision made by code enforcement, there is an appeal process available. However, appeals are rare because of the expenses and delays.
State Board of Contractors:
Contractors must be licensed to engage in the construction services they deliver. The state board performs a useful function in the contracting field. Consumers and the public have good reason to expect the government to protect their health and safety. Also, contractors often take large amounts of money from owners who then expect them to perform on the work. Some people lose motivation once they get the money in their bank account. While we don’t usually categorize contractors as “fiduciaries,” in a sense they are such. The Virginia Board of Contractors deals with the application, issuance and suspension of contractors’ licenses. They also have regulations that can be the basis of a professional disciplinary proceeding if violated. The Contractor’s Recovery Fund provides a means for financial recovery for some consumers in egregious suits where the contractor lacks resources to satisfy a judgment. In a previous post I explored the question, “Should Homeowners Bring Complaints Against Contractors Before Courts or Regulators?” As discussed there in more detail, often there isn’t much benefit to owners to go to the state board until they exhaust remedies elsewhere. However, owners and their attorneys should know what the requirements are for recovery against the state fund so that they can meet those requirements in the lawsuit. The state board will look to the records of the proceedings of the lawsuit in the city or county courts in their investigation. Also, the failure to pay a court judgment is a violation of the licensure regulations. For many aggrieved owners, petitioning the state board only makes sense towards the end of the legal process.
Law Enforcement:
In particularly egregious cases of fraud, embezzlement or other wrongful activities, the contractor may have criminal liability. In most cases, inquiring with law enforcement will not result in charges or restitution order. However, owners should not rule out going to law enforcement entirely. Some cases do rise above civil disputes.
Arbitration Services:
As the years go by, more builders put arbitration clauses in their consumer contracts. In many cases, these arbitration clauses do not help owners. Often, they tend to limit or practically eliminate the consumer’s rights to legal remedies. It can be difficult for owners to navigate the arbitration process without legal counsel because of certain delaying tactics that often occur in arbitration. I recently wrote a blog post about a New Jersey case where a consumer overcame obstructionist use of arbitration provisions. Many property owners do not focus on these provisions when they review the contract during the sales process. When a legal dispute develops, the parties should check the dispute resolution provisions of the contract to see if they mandate arbitration, waive the right to a jury trial or limit the courts where claims may be brought.
Judges & Juries:
Last but not least, owners can bring their complaints against builders before state or federal courts. Under our legal system, the judiciary, i.e. judges, have the legal mandate to interpret contracts and statutes and provide remedies for any breach. In Virginia, if the claim is for $5,000.00 or less it may be brought in the Small Claims Division where the parties do not ordinarily have attorneys. However, any party may bring a case out of small claims by retaining an attorney and filing for removal. Claims for money for $25,000.00 or less (not including court costs, attorney’s fees or interest) may be brought in the General District Court for the city or county where the property is located. The General District Court has the advantage that proceedings there tend to be faster and cheaper for consumers. Claims over $25,000.00 may be brought in the Circuit Court where cases may take up to a year to be resolved. Litigation in the Circuit Court tends to have lots of motions, discovery and other pretrial activities. Some of my readers say that consumers and owners should not go to litigation because it can be expensive and uncertain. In my view, there are reforms that the general assembly or the judiciary could take to reduce the laboriousness of litigation. I do not believe that creating an alternative to the court system within government agencies procedures works for owners or consumers. I explored this in a previous post on this point. That makes it too easy for special interests to gain control over the process through lobbying.
The Bank:
The bank exercises a significant amount of control over the construction process. The builder typically looks to the bank for payment. The bank will send out its own private inspectors to look at the progress on the job site and report to the loan officer whether completion of a phase of construction warrants disbursement of a draw. The purpose of the bank inspector is to protect against fraud and to confirm that the payment would be adequately secured by the bank’s lien on the property. This inspector works for the bank and does not focus on whether the owner would ultimately be happy with the work that is being done. Owners should not impede the bank inspection process and take heed if the loan officer calls to their attention that the inspector raises any questions.
Mechanic’s Lien Agent:
In Virginia and some other states, the law requires that a Mechanic’s Lien Agent be appointed at the beginning of the project. The purpose of the MLA is to accept delivery of notices by subcontractors and material suppliers that they have not been paid so that such issues can be resolved without a mechanic’s lien being filed by anyone working or supplying to the jobsite. The MLA is not there to provide a dispute resolution service regarding any threatened lien but may be a source of information for owners seeking to confirm what is happening with their contractor and its subs.
Conclusion:
To whom should owners turn with contractor complaints? That depends upon the facts of the case. One of the problems with all these separate venues, officials or information sources is that an owner might focus on one and miss a deadline to obtain the remedy they are entitled to from another. This consumer protection landscape is ripe for confusion by the people it is designed to protect. Ideally, the owner will not need to resort to any of these options and can negotiate a good deal and obtain a great result without having to bring grievances before an official, judge or arbitrator. Many owners experience this. However, owners are at a disadvantage. While they have the money that contractors want, they don’t have the technical or legal experience needed to get what they want out of the process. Contractors have experience preparing and negotiating written contracts and change orders. They know what to say to sell their services. They know the officials that work at the county inspection offices. They have their own lawyers. Consumers look to the builder for both the service itself and information about how to shop for the service. For most property owners, a custom home is the largest purchase they will ever make. Getting an attorney or other experienced person to review the contract before signing it can go a long way towards getting the bargain they seek. Owners should not rely upon their adversary to provide them with useful legal counsel. Seeking legal counsel may not require a commitment to a year of litigation. In fact, it may be the best means of avoiding that.
Photo Credit:
Shadowgate Swarovski Museum via photopin (license)
May 31, 2017
Stop Explaining Community Associations Law the Wrong Way
The proponents and critics of HOAs and Condominiums both tend to over-simplify the law and governing documents in a way that ignores many rights of owners (and boards). Some are explaining community associations law the wrong way. This area of the law is confusing, even to law school graduates and real estate professionals. Among the governing documents are declarations, bylaws, rules & regulations, architectural guidelines, articles of incorporation and amendments. Virginia law includes the Condominium Act, Property Owners Association Act, Nonstock Corporation Act, for the state Common Interest Community Board. This is not to mention federal laws such as the Fair Housing Act. On top of this you have the state and federal constitutions and published court opinions. If a legal dispute emerges between a board and an owner, the parties will struggle to determine which, if any of these statutes and documents apply to the situation. If more than one speaks to the problem, how do you reconcile ambiguities or discrepancies. Given the rat’s nest of law and governing documents, it is a challenge for anyone to quickly sort out these things without the assistance of legal counsel.
So how do you begin to explain community associations law? Most people are visual learners. They sort out complex matters faster with cartoons, charts and other graphics. Some lawyers practicing community associations law have tried to do this for association laws and governing documents. For example, an attorney in Washington State created this graphic. I’ve seen similar graphics for other states prepared by others. Charts like this don’t explain the hierarchy of authorities in a way that reduces confusion. I don’t want my readers to think that I’m picking on the author of this chart. Perhaps this is useful for Washington State. I will explain why this approach is unhelpful with respect to Virginia law.
The General Assembly enacts legislation and private parties join covenants and other contracts. The legislature declares what statutes say. The same can be said for private parties and contracts. Under our constitutional system, the judiciary’s mandate is to declare what legislation and contracts mean in the controversies brought in litigation. Sometimes this is easy because the “plain meaning” of a statute or contract is apparent on the face of the document. Often adversaries bring with them conflicting interpretations of documents or laws when they come into the courtroom. The contract or statute may not be clear on what remedies are available for breach of a statute or contract.
Often, the courts enforce claims, defenses and remedies that aren’t memorialized in any constitution, statute, regulation, contract, etc. Someone can read all community association legislative enactments and the association’s governing documents and not identify fundamental legal rights or duties that the owner (or board) may hold. This is because Virginia, like almost all other states, has “common law” legal doctrine enshrined in older case decisions that applies, except where abolished or superseded by statute:
American judges further interpreted the common law in case decisions applying it from 1776 to the present day. The common law includes a highly-developed set of doctrines regarding property rights, covenants, defenses and court remedies. The Supreme Court recently published an opinion in Tvardek v. Powhatan Village HOA discussing how the common law disfavors restrictive covenants. Here is a link to my previous post discussing the Tvardek case. That case is still important even though the General Assembly enacted legislation in 2017 in response. Enactments of the General Assembly that strengthen the enforcement of covenants are narrowly interpreted by Virginia courts because they limit owners’ common law property rights. This means that the statutes are not interpreted to give HOAs broad powers. The authority must be sufficiently articulated. This is why the proponents of community associations are so active in state capitals.
What are these common law rights, defenses and remedies and why do they matter? There are too many to summarize in this blog post. I will provide one example. A declaration of covenants is a type of real estate contract. The Property Owners Association Act makes it easier for covenants to be legally enforced against owners (and associations) that allegedly breach them. But common law defenses to breach of contract are still available to oppose the legal action. For example, if a board is found to have clearly or consistently failed to enforce the architectural guidelines, then an owner may be able to assert common law defenses such as waiver, estoppel, abandonment of the restriction or acquiescence in the alleged violation. Common law defenses like waiver and estoppel don’t need to be in the governing documents or statutes to be asserted by the owner. Where applicable, the owner just needs to understand the definition of the common law defenses and whether they have been abrogated by statute or the covenants themselves. This is just one example of common law defenses. The Washington state community associations law graphic fails to show common law rights, defenses and remedies that are valuable to boards and owners alike.
The common law is a secret treasure trove to property owners defending themselves against board or neighbor overreach. Property owners have legal rights that aren’t described in the statutes or governing documents. These rights don’t require wing-and-prayer appeals to various state officials or convoluted constitutional arguments. They are already there in legal treatises available in law libraries. In the fast-pace of litigation where parties don’t have months or years to sort out the diverse array of legal authorities and governing documents, owners need qualified legal counsel to help them identify and protect their rights.
Referenced Authorities:
Tvardek v. Powhatan Village HOA, 784 S.E.2d 280 (Va. 2016)
Photo Credit:
StevenM_61 Neighborhood in Snowstorm, North Richland Hills, 2008 via photopin (license)
May 16, 2017
Breach of Agreement to Purchase Insurance
Many construction contracts contain provisions requiring one or more parties to purchase insurance to cover certain activities or property related to the project. These provisions put an affirmative duty on a party to go out and obtain insurance to protect themselves, the other party in the contract or for against third party claims. Given the potential for expensive property damage claims or even personal injury, it makes sense for the parties to consider insurance provisions. This can be a great way of protecting against the risks of loss and litigation. If there is damage or loss and it is covered by a policy, this “Plan B” works. But what if in the event of loss the party that agreed in the contract to purchase insurance failed to do so? Is there a “Plan C?” Can they sue for breach of agreement to purchase insurance? In Virginia, the courts often deem the party who failed to fulfill their obligations to purchase insurance responsible for the loss. This seems obvious, but in cases where the opponent also breached the contract, it may not be clear how to sort out the liabilities. Whether an owner, contractor or subcontractor is what lawyers and judges call a “constructive insurer” by failure to buy insurance turns on the specific language in the agreement.
The leading Supreme Court of Virginia case on this is the 1983 decision, Walker v. Vanderpool. Roland and Elizabeth Walker owned a home in Virginia, southwest of Richmond. In 1977, they retained Vanderpool Heating & Air Conditioning Service for purchase and installation of an oil-burning furnace for $2,305. The contract said, “All work to be completed in a workmanlike manner according to standard practices.” The terms also required the Walkers to acquire and maintain fire insurance on the house. After completion, the furnace caught fire and the house burned. The Walkers had not purchased fire insurance. The Walkers alleged that their home burned because Vanderpool negligently connected the new oil furnace to a “non-existent chimney” and then turned it on. The Walkers sued Vanderpool for $45,000.00 in damages.
Vanderpool argued that if a person enters into an agreement to obtain insurance and neglects to fulfil this obligation, that person becomes the insurer and is potentially liable as such to the other party to the contract. The Walkers responded that the insurance provisions do not properly work to protect Vanderpool from liability for their own negligence.
The Supreme Court of Virginia took a “freedom of contract” approach on this case, observing that the Walkers were free to reject the Vanderpool contract unless the insurance provision was removed or modified. The Court agreed with Vanderpool that by their failure to procure the insurance, the Walkers became self-insured on this risk, and could not come after Vanderpool.
It’s easy to see how these parties looked at the contract and saw in it what they wanted. Vanderpool liked the insurance provisions, and the Walkers liked the scope and standard of workmanship provisions. In general, courts will try to harmonize different provisions in a contract so that no sections are effectively removed or rewritten in the judge’s decision.
Owners and contractors often do not focus on the insurance provisions in a contract until after something unfortunate happens. It pays to understand any contract before signing it.
Sometimes a party who fails to purchase required insurance for a project has no means to pay on a claim. A contractor may have no assets except a few pieces of equipment. An owner may have spent all of their extra cash on the project. It is important to obtain certificates of insurance to confirm that there is coverage in place.
These insurance provisions are found in a variety of other real estate related agreements, such as lease agreements, condominium or HOA covenants or mortgage documents. Newer HOA and condominium covenants seek to shift risks off the board and onto individual owners in sections dealing with liability, indemnification and insurance. Sometimes state statutes will impose insurance requirements. For example, in the District of Columbia, the Condominium Act requires owners and the association to purchase insurance. To understand insurance obligations for an owner in a HOA or condominium, it is necessary to also check what statutes, if any may apply should a dispute arise. Owners and contractors usually need the assistance of a qualified attorney to answer questions raised by mumbo jumbo in real estate and construction documents. Individual persons can often protect themselves by purchasing insurance. Being fully insured can save property owners from potential costs, including repairs and related attorney’s fees.
Case Citation:
Walker v. Vanderpool, 225 Va. 266 (1983)
Photo Credit:
May 5, 2017
Community Association Dispute Resolution Procedures in Virginia
When owners have disputes with their condominium or HOA boards, sometimes it is unclear where or how they must go about seeking redress or defending their rights. Owners must understand how association dispute resolution procedures work so that they do not prejudice their own claims or defenses by failure to go to the proper forum or meet deadlines. What options are available will depend upon the facts of the case and the governing documents. Sometimes it can feel like a labyrinth without an aerial view of sorts. The following is a summary overview and is not intended to explain everything:
Litigation:
In the absence of other dispute resolution procedures, owners have the option of filing or defending a lawsuit. The Property Owners Association Act and Condominium Act both provide that owners or associations may bring suit in order to enforce the declaration of covenants. They also provide that the prevailing party shall receive an award of reasonable attorney’s fees. The Supreme Court of Virginia recently made an owner-favorable decision on the issue of attorneys fees. See my post, Condo Owner Prevails on her Request for Attorney Fees.
Some suits where the amount in controversy is $25,000.00 or less can be brought in the General District Court (GDC) for the city or county where the property is located. The advantage of the GDC is that cases go to trial faster and are in most situations less expensive to litigate. Suits over $25,000.00 or where equitable remedies are sought by the owner must be brought in the Circuit Court. The procedures there are more complex. This blog post explains how they usually start, The Beginning of a Virginia Circuit Court Case. Community association cases usually don’t end up in the U.S. District Court. If one of the parties is in bankruptcy, the case may end up in the U.S. Bankruptcy Court. While litigation is more time-consuming and laborious than some other dispute resolutions options, the outcomes tend to be more favorable because of the independence of the judiciary.
Internal Nonjudicial Dispute Resolution:
The most common “venue” for resolution of disputes between owners and boards is internally within the association’s governance structure. Declarations of covenants, bylaws, architectural standards, rules & regulations and articles of incorporation may provide for claims to be brought by owners or the association before the board of directors or the architectural review committee.
The most notorious form of this is where the association issues a notice to an owner that she has violated a covenant, rule or regulation and must appear in a hearing before the board or committee. See, Don’t go it alone on a Notice of Violation. The courts allow this under the statutes, but there must also be provisions in the covenants that allow for the association to assess nonjudicial fines. These procedures are controversial because they allow the association to act as prosecutor, judge, jury and collection agent in their own case.
Sometimes owners have disputes with one another over party walls or boundary fences. Many covenants have provisions that require them to submit disputes over party walls or boundary fences to the board of directors as arbitrator. I don’t like these provisions because board members typically don’t have experience or training as arbitrators. Arbitration is not the same as rules violation hearings. Board members may have a vested interest or bias in the outcome of the party wall arbitration.
Some newer governing documents have internal dispute resolution procedures that seem all-encompassing. For example, an owner may be required to exhaust detailed procedures under the governing documents before acquiring the legal right to bring suit. Rules may require deadlines and procedures for seeking board of directors “appellate” review of decisions adverse to the owner. This may require an owner or their lawyer to compare multiple governing documents and to analyze them under Virginia statutes and case-law to determine whether action is necessary in order to protect one’s property rights. If the owner fails to first exhaust the” internal remedies” before going to court or fails to follow some dispute resolution procedure, they may be prejudiced in their ability to get a judge (or arbitrator) to consider it on its merits.
In general, the world of these internal nonjudicial procedures favors the boards. Not only do they sit as decision makers, they also may have authority to record liens, foreclose or even act as trustee in condominium termination proceedings. That said, owners should not ignore these procedures. If the board fails to follow its own internal rules, then that may position the owner for a favorable outcome in litigation or arbitration. The board has no authority outside of what the covenants and statutes create. See, Do your association’s parking rules pass the small test?
Arbitration:
Virginia law allows community associations to put binding arbitration clauses in their covenants. This means that in the event of a dispute, an owner may find out that they cannot simply bring the case before the judiciary. Arbitration clauses typically designate a company such as the American Arbitration Association as the “venue” that acts in the place of a court. Sometimes, arbitration can be more expensive to the participants than litigation. Significant up-front fees may be required. The covenants may require the case to be arbitrated through an agency that has cozy relationships with real estate industry people and doesn’t have a consumer protection orientation. The arbitration process doesn’t favor the “little guy.” See, Overcoming Delay Tactics in Arbitration.
Office of the Ombudsman of the Common Interest Community Board:
If there weren’t already enough potential venues, the General Assembly created another one. If an owner has a grievance against a board or licensed property manager, they may submit an adverse decision to the state Common Interest Community Board for review. This has been touted by some as a way of having a government regulator review the legality of a board or property manager action without having to court or arbitration. As my previous blog post explains, the Ombudsman does not render decisions adverse to boards where the parties are arguing opposing interpretations of statutes or governing documents. See, Condo Owner Prevails on her Request for Attorney Fees. Since both sides need to take opposing interpretations for a dispute to arise in the first place, this is not a useful process for an owner to pursue when they are concerned about the outcome.
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In my practice, I prefer to help clients to understand and protect their rights without unnecessary legal action. Ideally, boards and owners can negotiate a mutually acceptable outcome without going to court or arbitration. Unfortunately, this is not always possible in many owners’ circumstances. When a HOA or condominium board seems to be taking improper action or failing to fulfill its obligations under the governing documents, owners need to know where they can turn to obtain useful and cost-effective relief. As this survey shows, in Virginia there is a potentially confusing array of procedures and venues. An owner can potentially become focused on one or two and run the risk of having a deadline expire on bringing the claim properly. When owners need some help making sense out of the governing documents, laws and correspondence from the association, they need an attorney who practices community associations law but isn’t allied with the boards or association industry. That’s why I started my little firm where we don’t accept cases where we represent boards.
photo credit: –v Laberint d’Horta via photopin (license)
April 28, 2017
Condo Owner Prevails on Her Request for Attorney Fees
One problem that owners in HOAs and condominiums face is access to justice. Boards enjoy various out-of-court remedies, such as fines, liens and foreclosures. To obtain remedies for the board’s breach of the governing documents, owners must bring a lawsuit. This requires legal counsel familiar with how governing documents, statutes and judicial precedent fit together. When cases go to trial, owners face uncertainty in the amount of attorney’s fees that may be awarded to the prevailing party. What determines whether a condo owner prevails on her request for attorneys fees? Many judges seem reluctant to award a full amount of attorney’s fees. Is seeking the assistance of a state agency a viable alternative to the courts?
I’m happy when I can report news to my readers when owners win and courts set precedents that will help them in the future. On April 13, 2017, condo owner Martha Lambert won a significant victory in the Supreme Court of Virginia against Sea Oats Condominium Association. Her board forced her to hire an attorney go to trial to obtain reimbursement for a $500.00 repair. The governing documents contractually obligated this Virginia Beach association to repair an exterior door jamb to her condo unit. The board failed to make the repair despite her persistent requests. They insisted that the damage was to a limited common element that was her responsibility. Initially, she sought petitioned the Virginia Common Interest Community Ombudsman’s Office to redress the board’s adverse decision. The Ombudsman issued a couple decisions letters indicating that she was unable to help Ms. Lambert. The owner made the repair herself and sued the association in the General District Court of Virginia Beach. When Sea Oats prevailed in G.D.C., Lambert appealed to the Circuit Court. There Sea Oats continued to defend the case, filing a motion and discovery requests. Lambert prevailed in the subsequent trial. The judge awarded a $500 judgment in her favor and against the condominium association. Ms. Lambert’s attorney submitted an affidavit indicating she incurred $8,232.00 in attorney’s fees. Under the Virginia Condominium Act, a prevailing party is entitled to reasonable attorney’s fees. The parties submitted briefs and argued a post-trial motion on the issue of attorney’s fees.
The lawyers for the condominium board opposed the attorney’s fees award. They argued that the owner’s request for attorney’s fees was 16 times the amount of the judgment. Without waiting to read Ms. Lambert’s response, the Judge James C. Lewis awarded her only $375.00 in attorney’s fees. Ms. Lambert’s attorney nonetheless filed a brief, and provided notice that she incurred an additional $2,650 in fees for the post-trial motions activity.
Was court litigation Ms. Lambert’s only means of redress against the condo board’s adverse decision regarding the broken door? Is there some state agency or official who can aid resolution of these disputes? Ms. Lambert tried to take this dispute to the Office of the Common Interest Community Ombudsman. Ombudsman Heather S. Gillespie issued a decision letter on April 17, 2013. Ms. Gillespie observed that her office lacked the legal authority to decide the dispute because the answer lay in the interpretation of the condominium instruments (bylaws, covenants, etc.) as to whose obligation it was to repair the limited common element. In a separate letter dated May 13, 2013, Ms. Gillespie declined to decide against Sea Oats on Ms. Lambert’s claim to inspect the association books and records pursuant to the Condominium Act. Ms. Gillespie observed that the Act was not clear and that sorting out statutory ambiguity was the province of the courts. As you can see from this case study, the Ombudsman’s Office lacks the authority to decide cases where parties present conflicting interpretation of legal documents. Of course, if the parties agreed as to what they meant, there would not be a dispute. Consumers and property owners are better off in court anyway because of the independence of the judiciary from lobbying and the political winds of change.
Ms. Lambert’s only effective means of redress was through the courts so that’s where she went. There are two ways of looking at Ms. Lambert’s case. There is a view that if someone files a civil lawsuit, they must have done something wrong to incur the damage that they suffered or they are otherwise petty or vindictive. In my years of practice both bringing and defending civil suits, I have come to see that there is often an unfair prejudice against plaintiffs.
The other perspective is that Sea Oats drove unnecessary litigation by failing to perform their maintenance obligations and then aggressively defending the suit to exhaust Ms. Lambert’s resources. If the defendant can simply outspend and exhaust their opponent, they don’t need to be in the right. If obstructionist tactics are rewarded in how attorney’s fee awards are determined, then the specific obligations of the HOA or condominium covenants can be made of no effect.
Judge Lewis explained why he only awarded $375 in attorney’s fees. He found that Ms. Lambert’s lawyer did a “magnificent job,” but “I thought $6,000 in attorney’s fees on a case involving a dispute of $500 was not fair to the Defendant [Sea Oats].” Ms. Lambert appealed her case to the Supreme Court of Virginia.
Was it proper for Judge Lewis to find that a prevailing party could be denied almost all the attorney’s fees she incurred because the amount was not “proportional” to the judgment? Lawyers know from experience that, especially in many state courts, judges are reluctant to award a prevailing party $6,000-$9,000 in attorney’s fees on a $500.00 judgment. The practical effect is that owners and their lawyers are reluctant to bring lawsuits where the amount of attorney’s fees is expected to exceed the value of what could be expected in the judgment. Sometimes these circumstances embolden boards to strategically breach the covenants.
On appeal, Ms. Lambert analogized the attorney’s fees provision in the Condominium Act to similar provisions in the Virginia Consumer Protection Act. The Supreme Court previously held that the purpose of the VCPA’s attorney’s fees provisions is to encourage private citizens to enforce the statute through civil litigation. Otherwise, the VCPA’s policies could be made of no effect if the consumer must bear the costs of vindicating the statutory rights. If you listen to the audio recording on the Court’s website, you can hear Lambert’s appellate attorney Kevin Martingayle doing an excellent job arguing the case to the justices.
On appeal, a judge’s determination of an award of attorney’s fees is evaluated on an “abuse of discretion” standard. However, the scope of the judge’s discretion is not absolute. The statutes and contract provisions create a boundary of exercise of discretion. The Supreme Court viewed the trial judge’s “proportionality” requirement as an incorrect legal conclusion misinforming his decision.
The Condominium Act states that the prevailing party in an action to enforce compliance with the condominium covenants and bylaws shall be entitled to recover reasonable attorney’s fees. There is an analogous section in the Property Owners Association Act that applies to most HOA’s in Virginia. These statutes are exceptions to the general rule that each party to a lawsuit must pay their own attorney’s fees. Unless you are in Alaska, courts won’t consider attorneys fee requests unless there is a statute or contract provision that allows for attorney’s fees. The Condominium Act makes an award of reasonable attorney’s fees mandatory when one side prevails, instead of merely an option for the judge.
What factors determine the reasonableness of an award of attorney’s fees? According to the Supreme Court of Virginia, those factors include:
- The time and effort expended by the attorney.
- The nature of the services rendered.
- The complexity of the services.
- The value of the services to the client.
- The results obtained.
- Whether the fees incurred were consistent with those generally charged for similar services
- Whether the services were necessary and appropriate.
Judges are also permitted to consider other factors. In Lambert v. Sea Oats, the Supreme Court found that the amount of damages awarded was a permissible consideration under the “results obtained” factor. However, “merely applying a ratio between the damages actually awarded and damages originally sought will not satisfy the reasonableness inquiry.” This is common sense. In some cases, the non-prevailing party will engage in vigorous litigation tactics that will leave their opponent with the choice of taking necessary action to obtain a result in the case or abandon the claim. Conversely, plaintiffs can also be found to “over-litigate” cases, resulting in defendants incurring attorney fees that may be unnecessary in the case was properly brought. A formulaic ratio may be simply inadequate to do justice. The Supreme Court observed that a trial court may consider any disparity between the amount sought in the lawsuit versus the verdict. If a plaintiff sues for $500,000.00 but only receives $50,000.00 at trial, then this may factor in the attorney’s fee award. The Supreme Court found that Judge Lewis should have compared the $500 sought to the $500 awarded instead of the ratio of the fee request to the award:
[T]he “results obtained” factor does not permit courts to do what the circuit court did here—i.e., to use the amount of damages sought as a limit beyond which no attorney’s fees will be awarded. To do so tells parties that they may not recover the reasonable attorney’s fees they incur simply by sending an attorney through the courthouse door if they prosecute, or defend against, claims in which such fees exceed the amount in controversy. Circuit court litigation comes at a price, sometimes a heavy price. There is an initial pleading, or an answer to one, to research, write, and file. Discovery may be propounded and must be answered. There will be witnesses to prepare for trial. There may be pre-trial motions to research, write, and argue. And then there is the trial itself, if the case makes it that far. If either party invokes its right to a jury, trial could encompass everything from voir dire to jury instructions.
Each of these tasks requires an attorney’s time and, provided the time is reasonable in light of his or her experience and the nature of the case, he or she may expect compensation for that time at a reasonable rate. Undoubtedly, the number of tasks and the time required for them will vary depending on whether the ad damnum is $500 or $5 million, regardless of whether the attorney represents the plaintiff or the defendant. They will likewise vary based on the vigor with which the opposing party responds. But it is the court’s duty to assess the necessity of those tasks, the time spent on them, and the rate charged “under the facts and circumstances of the particular case.” Mullins, 241 Va. at 449, 403 S.E.2d at 335. This does not require the court to pore over pages and pages of billing records to evaluate the reasonableness of each line-item. But the court may neither shirk its duty to assess what amount of attorney’s fees is reasonable in the specific case before it, nor award an amount so low that it fails to reimburse the prevailing party for the costs necessary to effectively litigate the claim that—after all—it prevailed on.
Plaintiffs who come to court believe they have legitimate claims that are being illegitimately denied by the defendant. Defendants who come to court believe their defenses are legitimate. Neither’s position need be frivolous; they may simply disagree. But when each of them comes to court seeking a neutral adjudication of their disagreement, each is there because the opposing side forced him or her to be. When the case is covered by a fee-shifting provision and the court weighs the reasonable amount of attorney’s fees to award, it cannot dismiss out of hand the costs of litigation inflicted on the prevailing party by the losing party’s insistence on its losing argument, based solely on the dollar value of the claim. To do so deprives the parties of the benefit of their bargain if the fee-shifting provision is contractual and contravenes the intent of the General Assembly if the provision is statutory.
We stress that this holding does not mean that courts may not consider the value of the claim, along with other factors, to assess the complexity of the case (and therefore the legal services necessary to represent the client’s interests), or whether those services were necessary and appropriate in light of the claims prosecuted or defended against. It means only that courts may not do what this court did and say that “$6,000 in attorney’s fees on a case involving a dispute of $500” is unreasonable per se, without regard to the necessary costs of effectively litigating a claim.
The Supreme Court’s decision requires the case to go back to the Circuit Court of Virginia Beach to reconsider the award of attorney’s fees in light of the opinion.
Lambert v. Sea Oats is a big victory for owners in condominiums and HOAs. First, it sends a message that the particular circumstances of a case cannot be ignored and replaced by some percentage of the judgment. Second, this discourages HOA and condo boards from stonewalling owners’ rightful claims for what they are entitled under the governing documents. Third, it puts the obligation on the parties to make sound, rational litigation decisions. Fourth, it will help owners in cases that will never actually go to court. Why? Because the association lawyers will counsel their clients regarding this case and it will deter the kind of conduct that gave rise to cases like Ms. Lambert’s.
What I dislike about the trial judge’s approach in awarding only $375 is that it places parties like Ms. Lambert in an impossible position. Without reversals like this appellate decision, in the next case an owner would have to either (a) fix the common area herself and not seek reimbursement, thus making the covenants to no benefit to her, (b) limit the attorney’s activity to one or two hours of work, which could result in the owner losing the case for failure on a procedural technicality, or (c) effectively pay eight or nine thousand dollars to get the door fixed when the board is required to do it for $500.00.
Not all community association lawsuits are about money damages. Sometimes the plaintiff seeks an order that their opponent stop doing something, to take affirmative action required under a contract, or to declare the results of a board election invalid. In a footnote, the Supreme Court states that in those cases there may not be a dollar amount in controversy: “These cases tend to be binary, and the ‘result obtained’ is clear based on whether the relief sought was granted or denied.”
Does this new decision mean that homeowners will always get a disproportional award of attorney’s fees in small dollar cases where they prevail? No. But it does help to level the playing field of litigation. I hope that this case encourages more owners to pursue legal action when they suffer damage and infringement of rights in association matters. This case should also discourage owners and boards alike from bringing cases that should not be brought in the first place.
Update July 20, 2022:
I have a new blog post about Attorney fee awards in HOA and condominium law cases. “Awards of Attorney’s Fees in Community Association Litigation.” This blog post addresses the issue of attorneys fees in these cases more generally, with greater focus on the procedural aspects of such claims.
For Further Reading or Listening:
Lambert v. Sea Oats Condo. Ass’n, 293 Va. 245 (2017)
Lambert v. Sea Oats Condominium, Inc. (Jan. 2017 Va. Supr. Ct. Oral Argument)
Lambert v. Sea Oats Condominium, Inc. (Apr. 17, 2013 Va. CIC Ombudsman Determination)
Lambert v. Sea Oats Condominium, Inc. (May 13, 2013 Va. CIC Ombudsman Determination)
Lambert v. Sea Oats Condominium, Inc. (Jun. 5, 2013 Va. CIC Ombudsman Determination)
Featured Image:
The photograph for this blog post doesn’t depict anything discussed in the article. It’s a row-house in Alexandria, Virginia.
March 23, 2017
Overcoming Delay Tactics in Arbitration
On March 9, 2017, the Supreme Court of New Jersey delivered a significant victory to consumers against an auto dealership attempting to use an arbitration agreement to obstruct claims from being heard. Roach v. BM Motoring, LLC shows a strategy for overcoming delay tactics in arbitration so that consumer protection claims can be considered on the merits. Arbitration clauses appear in all sorts of contracts all over the country, including many real estate and construction matters. BM Motor Cars put a clause in its contracts requiring that disputes be decided under the rules of the American Arbitration Association. The AAA is a commonly used alternative dispute resolution service. After the consumers submitted their cases to the AAA, BM refused to pay its $3,200.00 portion of the arbitration fees required for them to proceed. Consequently, the AAA dismissed the claims. When the consumers filed lawsuits, the court referred the case back to AAA. BM used this revolving door tactic to continuously delay hearing of the consumers claims by a judge or arbitrator. Finally, the Supreme Court of New Jersey short-circuited these tactics, finding that BM breached the arbitration agreement by failing to pay the required fees. The opinion provides insights on how arbitration clauses may expand or restrict a party’s substantive rights under an agreement.
Arbitration clauses find their way into all sorts of contracts these days, in employment, consumer, HOA, condominium and many other matters where industries find themselves in risk of litigation. Many consumer advocates have a low opinion of arbitration clauses, and for good reason. Before diving into an analysis of the BM case, let’s first consider how arbitration differs from litigation.
- Cost to Initiate. To get into court, the consumer may have to pay an attorney but the court fees are low. The operational costs of the judiciary are subsidized by the government. To get a case heard by an arbitrator, someone must also pay the AAA (or another arbitration agency) and the arbitrator. AAA arbitrators are typically experienced attorneys who charge the parties by the hour. If the defendant refuses to pay the fees required by the AAA, the consumer is forced to up-front those costs herself, file a lawsuit in court to compel arbitration or abandon the case.
- Fewer Procedural Rules. In arbitration, there are fewer procedural rules. The overall expense of the process can be lower because of reduced discovery, depositions, motions practice, disclosures, appeals, etc. However, if the consumer or small business finds themselves unable to initiate the proceeding, it does not offer much value. Because arbitration clauses are created by contract, there is potential for creativity in the agreed dispute resolution procedures. However, detailed arbitration clauses tend to work against the interests of the party to the contract most likely to find themselves trying to bring claims. Often, consumers do not understand how arbitration clauses may practically limit their right to a fair hearing.
- Does Arbitration Save Money Overall? Some people say arbitration clauses “save” consumers the cost and trouble of a lawsuit. However, arbitration can also be time consuming and expensive. The claimant or her attorney must prepare a detailed written claim and file it with the arbitration agency and maintain momentum.
- Do Arbitrators Suffer from Bias? The next step is the selection of the arbitrator from a panel of experienced lawyers and retired judges. The AAA will send the parties a list of potential arbitrators narrowed by geographic area and subject matter experience. The risk of bias is mitigated by the opportunity to cross names they don’t like off of the list. There are other arbitration agencies which cater to specific industries. Some providers have arbitrators who never attended law school or passed the bar exam. Parties are wise to consider whether an arbitration company functions as a vendor for their opponent.
- Hearing or Meeting? Once the arbitrator is determined the parties will receive a schedule of deadlines in preparation for the arbitration hearing. In a court trial, there are all sorts of formalities required for parties to make motions, disclosures and objections. In arbitration, there are few rules of evidence. The parties sit in a conference room instead of going into a courtroom. There are no juries.
- Judicial Review Strictly Limited. If the arbitrator makes a monetary award, the prevailing party can then go to court to get the result confirmed as a judgment. Unless there is fraud or other extreme irregularities, there is no judicial review of the merits of the arbitration result.
I believe that parties ought to be able to contract for whatever alternative dispute resolution provisions of their own choosing. However, the devil is in the details of the arbitration clause language and the rules of the arbitration forum. The arbitration process works well for wealthy parties looking to reduce their annual legal expenses and keep their disputes out of the public eye. Consumers are better off with the judiciary, especially with juries or in small claims court.
Consumers often sign arbitration agreements for economic reasons, lack of consumer choice or by ignorance. Because parties often find themselves bound by arbitration clauses, the victory won by Mmes. Jackson & Roach is significant. These women (separately) purchased used cars from BM Motor Cars in Rahway, New Jersey. The Dispute Resolution Agreement provided for arbitration in accordance with the rules of the AAA before a single arbitrator who shall be a retired judge or attorney. The DRA also require that, “Dealership shall advance both party’s (sic) filing, service, administration, arbitrator, hearing or other fees, subject to reimbursement by decision of the arbitrator.” They subsequently submitted demands for arbitration against BM with the AAA. They asserted claims under consumer protection statutes. Ms. Jackson alleged that BM refused to sell the car for the advertised price, overcharged from title and registration and misrepresented the terms of the extended warranty. Ms. Roach also sued under consumer protection legislation. The AAA repeatedly requested that BM pay the arbitration fees required by its rules. The AAA suggested to the consumers that they simply pay BM’s fees and later seek recovery of them from BM in the arbitral award. After BM ignored these requests, the AAA dismissed the consumer’s cases. The AAA became so fed up that it sent BM a letter instructing it to remove the AAA arbitration language from its agreements. Undeterred, the consumers filed lawsuits in court. The judges granted BM’s motions to dismiss the cases and compel arbitration. The court wanted the plaintiffs to go back to AAA and for BM to pay the fees. When the women went back to the AAA, the arbitration company dismissed their claims again because BM failed to pay the fees. As you can see, BM was trying to deny the consumer a decision on the merits of their claims by leading through the revolving door from court to the AAA and back again.
At the Supreme Court of New Jersey, BM Motor Cars argued that the contract did not, “contemplate using AAA as the forum and venue for arbitration” and that it, “consistently not arbitrated disputes with its customers by utilizing AAA . . . because of the excessive filing and administrative fees charged by AAA.” However, BM never asserted this argument before the case reached the Supreme Court. The justices asked some pointed questions to BM’s lawyer about this at the January 3, 2017 oral argument. It sounds like they found BM’s belated objection to AAA as the arbitral forum to be disingenuous. The consumers responded to this by pointing to AAA’s rules which provide that if the contract requires that arbitration be conducted under AAA rules, then the AAA is a proper venue for the case.
The consumers argued that the requirement to advance the fees was a material term of the Dispute Resolution Agreement. By breaching that term, BM Motor Cars precluded itself from the right to force arbitration. BM waived its right to deny the consumers the ability to go to court instead. Roach & Jackson argue that BM should not profit from its own breach of the arbitration agreement’s language. The court rejected BM’s argument, finding that the consumer’s filing with the AAA was consistent with the terms of the arbitration clause.
In its opinion, the Supreme Court of New Jersey mentions that judges have not always been so inclined to enforce arbitration clauses. Under the common law, judges were averse to arbitration. Courts strictly construed these clauses as like they would with restrictive covenants or covenants not to compete. To encourage arbitration, congress and the states enacted legislation to place arbitration agreements upon the same footing as other contracts. Now a court cannot subject an arbitration agreement to more burdensome requirements than ordinary contract law doctrine. But the Supreme Court doesn’t end its analysis by affirming pro-arbitration public policy. Roach v. BM Motor Cars illustrates that ordinary contract law doctrine provides protections against abusive practices. Generally applicable contract law defenses can be applied in proper cases. Ambiguous provisions may be construed against the drafter of the agreement, especially in a take-it-or-leave-it consumer contract. Under contract law, breach of a material term relieves the non-breaching party of its obligations. The court observed that the federal Ninth and Tenth Circuit Courts of Appeal previously held that a party’s failure to pay required fees constitutes a material breach of an arbitration agreement.
The N.J. Supreme Court held that BM’s refusal to comply with the arbitration procedures was a material breach of the Dispute Resolution Agreement. This breach prevents BM from later compelling arbitration if the matter is brought to court before a judge. The case will proceed in the courts. The Supreme Court reversed the previous decisions that the trial judge and intermediate appellate panel made in favor of BM. Consistent with its finding that arbitration clauses are subject to generally-applicable contract law defenses, the Court refrained from setting rules about refusal to pay arbitration fees that could be applied in every case:
Nevertheless, we establish no bright-line rule. The determination of whether refusal to respond to a written arbitration demand within a reasonable time period constitutes a material breach of an arbitration agreement that precludes enforcement by the breaching party must be made on a case-by-case basis after considering the agreement’s terms and the conduct of the parties.
If consumers encounter this obstructionist tactic in the wake of these appellate decisions, they must consider whether it is easier to simply up-front the defendant’s fees or to initiate court motions practice on whether the defendant’s breach waived their right to enforce arbitration. In the wake of these decisions in New Jersey and the federal courts, I expect that parties preparing arbitration clauses will react accordingly. Some will seek to specifically burden the complaining party with the burden of up-fronting the arbitration agency and arbitrator fees. Roach v. BM Motor Cars represents a balanced approach to judicial enforcement of arbitration clauses. Perhaps there are additional contract law doctrines that parties can assert to protect their interests? Often builder contracts or community association restrictive covenants are ambiguous, contradictory or unclear in whether the remedies provided are exclusive. Consumers, property owners and family-owned businesses should not rely upon their opponent or their opponent’s lawyers to give a fair assessment of how a judge or arbitrator would read the agreement. When one’s investment, home or business are on the line, a qualified attorney can help navigate a path to a solution that may not be immediately apparent.
Opinion and Video:
Roach v. BM Motoring, LLC, No. 77125, 2017 N.J. Lexis 239 (N.J. Mar. 9, 2017)
Jan. 1, 2017 Oral Argument Video: http://www.judiciary.state.nj.us/webcast/archive.html
March 15, 2017
Should Homeowners Bring Complaints Against Contractors Before Courts or Regulators?
Property owners frequently have complaints about construction contractors. Some of these complaints involve thousands of dollars in damage or serious infringement upon the use or value of property. These property owners (and their attorneys) want to know who to turn to. Should homeowners bring complaints against contractors before courts or regulators? This question raises issues about how the government ought to enforce its laws and resolve disputes. There is a perspective that regulatory boards ought to be a welcome forum for owners threatened or damaged by alleged contractor misconduct. In this blog post I will explain why I believe that, for all its imperfections, the judicial system is the best venue for vindication of legal rights in consumer disputes.
In 2015, the Court of Appeals of Virginia decided an illustrative case arising out of a complaint of a home purchaser about the seller’s contractor. Around 2002, Mark Holmes purchased an Alexandria, Virginia home, including an addition constructed by Culver Design Build, Inc. Mr. Holmes was unhappy about defective construction of the addition. He went to the city government, whom the General Assembly tasked with enforcing the building code in his locality. The City Code Administration found extensive water damage caused by construction defects and issued a Notice of Violation to Culver. Holmes was not satisfied with Culver regarding corrective work, so he filed a complaint with the Virginia State Board of Contractors. Holmes asked the Board to suspend Culver’s license until it corrected the violation. Culver Design Build, Inc. argued that Holmes did not have legal standing to seek judicial review of the Board’s ruling because this was a license disciplinary proceeding. The Holmes case also includes issues about how deferential the courts should be to a licensing agency’s administrative rulings. This case is unusual in that Mark Holmes represented himself in his appeal to the Court of Appeals of Virginia. Mr. Holmes acknowledged that unlike the seller, he lacked the privity of contract with the contractor which potentially could be used to go to court in breach of contract. The Court of Appeals agreed with Culver and the Board for Contractors.
When homeowners conclude that a state-licensed contractor or tradesperson committed a wrongful act depriving them of their home or damaging its value, it is easy to see why the aggrieved party would want a governmental agency to help them. Most people deal with governmental agencies much more than courthouses or law offices. Lawsuits require significant commitments to pursue or defend. Public resources go to supporting various agencies that have apparent subject-matter authority. This may appear to be a taxpayer-financed legal authority to go after the professional. However, this strategy often does little more than aggravate the licensed professional, the agency officials and the consumer. The Holmes v. Culver case illustrates one key weakness with homeowners pursuing consumer complaints through the professional licensure and disciplinary board process.
When consumers are harmed by unprofessional conduct, usually what they want is to have the defect corrected, an award of money or the transaction voided. These kinds of remedies are conventionally handled in the court system. The professional regulatory boards focus on licensure. They consider whether a business is properly licensed, should the license be suspended or revoked, should fines be assessed, and so on. Prominent members of the industry typically dominate these boards. For example, licensed contractors sit on the Board for Contractors. Initiating a professional licensure proceeding is a clumsy means of advancing the specific interests of the consumer having a transactional relationship with the business. It is the judiciary that can grant money damages or other remedies arising out of the formation and any breach of the contract. Regulators focus on whether disciplinary action is warranted regarding the registration or licensure of the business. In the Culver Design Build, Inc. case, the Board for Contractors and the Court of Appeals for Virginia agreed that Mark Holmes did not have standing to contest a regulatory decision in favor of the contractor. The board had authority to punish Culver for failing to abate a regulatory violation. However, the board had no authority to order the contractor to take any specific action at the job site. The board did not deny Homes any right or impose upon him any duty in its decision, because its authority revolves around Culver’s licensure. It is the State Building Code Technical Review Board that has the authority to review appeals of local building code enforcement decisions, not the Board of Contractors. One of the appeals judges suggested that if Holmes’ contentions were taken to a logical conclusion, the new buyer of the house could have greater leverage over a contractor than the previous owner, whose remedies may be limited by the contract. In his oral argument, Mark Holmes admitted that trying to resolve his complaints through the Board of Contractors complaint process was, “cumbersome and very long lasting.”
Even if the consumer unhappy with an adverse decision made by a regulatory agency in response to a complaint has standing, her appeal to the courts may encounter other obstacles. The licensure dispute is unlikely to starts afresh on appeal. The courts tend to be receptive to the agency’s interpretation of the legislature’s statutes. In Virginia, courts accord deference to an agency’s reasonable interpretation of its own regulations (as adopted by the board pursuant to the statutes). A consumer’s ability to raise new factual issues may be strictly limited in her attempts to get the courts to overturn the board’s decision. Judicial deference to agency rulemaking is not without controversy. Judge Neil Gorsuch, whom President Trump nominated for the U.S. Supreme Court is a high-profile critic of judicial deference to agencies. In his August 23, 2016 concurrence to a federal appeals decision Gutierrez-Brizuela v. Lynch, Judge Gorsuch explained that concentration of both legislative and judicial power in regulatory agencies creates constitutional problems. The constitution protects the public from authoritarianism by separating the government by the type of power, not the subject-matter. Under the constitution, the legislature prescribes new laws of general applicability. Taken to its logical conclusion, doctrine that courts should defer to agencies’ quasi-judicial determinations of what the statutes mean unconstitutionally undercuts the independence of the judiciary. The constitutional problems identified by Judge Gorsuch are illustrated in the arena of housing industry occupational regulation.
Where does this leave an owner when property rights are infringed by regulated professionals? Should everyone should go back to renting? Certainly not! This is what the independent judiciary is there for. Usually owners have privity of contract with the contractor and do not need to go to an agency. They can sue for remedies for breach of contract or deceptive practices. Consumer advocates with an interest in legislation should focus on increasing access to the court system and not promoting an administrative process that may not be a good fit for the homeowner. If you find yourself needing to bring or defend a construction claim, contact my office or a qualified attorney in your jurisdiction.
Case Citations:
Homes v. Culver Design Build, Inc., No. 2091-13-4 (Va. Ct. App. Jan. 27, 2015) (Alston, J.)
HOMES V. CULVER DESIGN BUILD, INC. APPELLATE ORAL ARGUMENT
Gutierrez-Brizuela v. Lynch, No. 14-9585 (U.S. Ct. App. 10th Cir. Aug. 23, 2016) (Gorsuch, J.)
Photo Credit:
ehpien Old Town Alexandria via photopin (license)
February 28, 2017
Little Love Lost in Sedimental Affair
A lawsuit for damage to property must be timely filed to prevail in court. In Virginia, the statute of limitations for property damage is five years from accrual of the claim. When an owner suffers damage caused by a neighboring owner, when does this five year time-period start running towards its expiration date? Does the clock start ticking at the time the trespass or nuisance began or some other moment? On February 16, 2017, the Supreme Court of Virginia issued a new decision finding that when the effect of the offending structure is continuous, the claim accrues when damage began. The distinction between “temporary” and “continuous” is potentially confusing and the stakes are high in real property damage cases. Understanding how Virginia courts apply these rules is essential whenever owners and their attorneys discover what is happening.
Forest Lakes Community Ass’n v. United Land Corp. of America involved property that I have driven by numerous times. I grew up in Orange and Culpeper Counties in Virginia. My family would drive down Route 29 to shop or attend sporting events in Charlottesville. The Charlottesville area prides itself as the home of President Thomas Jefferson and the University of Virginia. Along Route 29 is Hollymead, an artificial lake built from a sediment basin. A sediment basin removes silt or other particles from muddied waterways. Two HOAs, Forest Lake Community Association, Inc. and Hollymead Citizens Association, Inc. jointly own Lake Hollymead.
The defendants included United Land Corp. and other owners and builders of the Hollymead Town Center (“HTC”) upstream from the Plaintiff HOAs’ lake. In 2003-2004, defendant developers constructed three new settlement basins along Powell Creek, the tributary to Lake Hollymead. Owners in the HOAs complained about excessive influx of sediment from the HTC construction into Lake Hollymead. If I bought a home with lake views, I wouldn’t like looking at muddied waters either. The HOAs complained that the defendants caused excessive sedimentation by improperly removing vegetation within the Powell Creek watershed.
If this was a serious problem, how did it get through the county’s permitting process? According to the case opinion, the development complied with state and local regulations regarding retainage of sediment within the three new basins. The county rejected suggestions from downstream owners that upgraded sediment filtration systems be required of HTC. The case doesn’t discuss whether the county’s standards did, or should set a benchmark for the reasonableness of the defendants’ control of sediment. Owners may have a right to sue even when the city or county refuses to intervene in a property damage dispute.
Discussions continued within these HOAs for years. In 2011 they finally filed suit, alleging nuisance and trespass. The HOAs asked for the court to award them money damages and an injunction requiring the defendants to stop the excessive drain of sediment. The HOAs enjoyed standing because they jointly owned Lake Hollymead as a common area. Incursion of sediment into Lake Hollymead began during HTC’s construction. The HOAs argued that intermittent storms caused subsequent separate and distinct sediment incursions, each triggering new causes of action that restarted the five year statute of limitation. This was contradicted by the HOAs’ expert who acknowledged that at least a little sediment incurred continuously. The HOAs also argued that the defendants’ sediment currently sits in Lake Hollymead and will continue to trespass until someone digs it out.
When a case comes to a lawyer for the first time, her initial assessment considers statutes of limitation. Legal claims have a corresponding statute of limitation setting a deadline by which the claim must be brought. Even if the claim is one day late it can be dismissed as time-barred. The HTC defendants sought to have the HOAs’ claims dismissed because they waited over five years after the sediment problem began in the 2003-2004 timeframe. After a day of testimony, Judge Paul M. Peatross found that the statute of limitations barred the claims because they accrued in 2003 and sediment incurred continuously thereafter.
The HOAs sought review by the Supreme Court of Virginia. Their appeal focused on Judge Peatross’ ruling that the claim was barred by the five-year statute of limitation because the continuous damage accrued at construction.
Justice D. Arthur Kelsey explained in the opinion that under Virginia law, a claim for an injury to property accrues when the first measurable damage occurs. Subsequent, compounding or aggravating damage attributable to the original problem does not restart a new limitations period. The court acknowledged that plaintiffs might need to seek a claim for an award for past, present and future damages. This accrual principle applies where the permanent structure causing the injury could be expected to continue indefinitely. I find this confusing, because drainage systems and sediment basins have lifespans. After a number of years, they fail or require repairs. Anything that comes into contact with water is under tremendous pressure. Perhaps what the court means is that the structure causing the injury is “permanent” if it would continue to cause the damage if maintained to continue to function as it did originally. This concept of “permanent structure” implies that its owner will maintain the nuisancing or trespassing feature as it presently exists.
Alternatively, in the facts of a case, a later cause of action might accrue that looks and acts like the earlier one but is a “stand alone” claim that starts a new five year limitations period. This can happen where the structure causes separate, temporary property damage. For example, some dams can be opened or closed. This exception can apply even when the physical structure causing the damage is a permanent fixture.
Justice Kelsey acknowledged the challenges applying these principles to particular cases:
Though easy to restate, these concepts defy any attempts at formulatic applications. Because the underlying issue – determining the boundaries of a cause of action – depends to heaving on the factual context of each case, our jurisprudence has tailored these principles to analogous fact patterns and rights of action.
To resolve these issues, the Supreme Court relied upon the factual finding of the Circuit Court that the three HTC sediment basins discharged into Lake Hollymead on a continuous basis and that the five year statute was not revived by a later, discrete discharge episode.
Ordinarily, on these motions to dismiss a lawsuit, the courts tend to give plaintiffs a benefit of the doubt. Often judges will look to see if the facts are contested so as to warrant a trial. Here, Judge Peatross took a day’s worth of testimony in a pretrial hearing. The HOAs may have appealed on the hope that the Circuit Court short-circuited the case too early and the Supreme Court would rule that they deserved another chance to have their case heard on its merits. This case may embolden more defendants to put on expert testimony in support of a plea of a statute of limitations in the hopes that their cases could be brought to a quick end.
The easiest way to avoid these kinds of statute of limitation problems is to file suit early enough so that either way the court looks at it, it would be deemed timely. Plaintiffs and their lawyers should file early to avoid the necessity of having to litigate such issues in day long evidentiary hearings and on appeal.
Case Citation:
February 6, 2017
The Surface Water Diversion Blame Game
According to the Bible, water is both the fountain of life and a destroyer by flood. Water naturally plots its own course, creating wetlands to store excess storm water. Human development, for better or worse, seeks to maximize the value of property and minimize land set aside for natural wetlands or artificial drainage purposes. The proximity of water can enhance or damage the value of real estate. For example, waterfront properties tend to fetch higher sale values. Sometimes neighbors will improperly channel water off their own land onto that of another in an effort to fend off unwanted surface water diversion. Lawyers and judges describe unwanted surface water as a “common enemy” because both neighbors seek to avoid it. The common law tradition developed a system of rules whereby judges can resolve disputes between neighbors over the reasonableness of surface water diversion.
Sometimes it is not a family or business that owns the uphill parcel that is diverting surface water. A property owner might find herself contending with a governmental or community association neighbor in a surface water diversion dispute. In a recent Southwest Virginia lawsuit, owner Consortium Systems, LLC sued two contractors, Lane Engineering, Inc. & W-L Construction & Paving, Inc. who constructed a sediment pond on a neighboring technology park owned by Scott County Economic Development Authority (“County EDA”). Rural counties like to build technology parks to attract out of town businesses to relocate there. Consortium alleged that the EDA’s contractors built the sediment pond without a proper outlet or outfall.
Owning property beside a public or private common area can be an advantage or a risk. Businesses want to locate themselves near parking, amenities and potential sources of customers or vendors. However, if a dispute arises between an owner and a governmental neighbor, the private party may find themselves facing additional legal obstacles. Sometimes governmental entities enjoy sovereign immunity, shortened lawsuit filing deadlines or additional notice procedures. Consortium tried to sue the contractors for negligence, trespass and negligent surface water diversion. The owner argued that the contractors should be liable to damage to neighboring properties because they faultily constructed the drainage facilities on the County EDA property. In his January 9, 2017 ruling on the contractors’ pretrial motions, Judge John C. Kilgore made findings illustrating an owner’s challenges to sue its neighbor’s contractors:
- Common Enemy Doctrine. Because surface water must go somewhere in developed areas, the common law tradition allows neighboring owners to “fight off” the “common enemy” onto neighboring parcels. Virginia, like many states, has an exception requiring surface water diversion to be done, “reasonably and in good faith and not wantonly, unnecessarily or carelessly.” Virginia courts find improper surface water diversion where the neighbor collects water into an artificial channel and redirects it onto someone else’s land.
- Sovereign Immunity. Virginia counties enjoy the sovereign immunity of the commonwealth. Municipal corporations are also entitled to sovereign immunity when exercising governmental functions. This immunity extends to contractors working for a governmental body. However, sovereign immunity does not protect the negligent performance of the government’s contractor. Judge Kilgore found the Economic Development Authority’s construction of the technology park to enjoy sovereign immunity without discussion in his opinion letter. Consortium’s negligence claims had been previously dismissed.
- Who is Responsible, the Neighbor or their Contractor? Judge Kilgore observed that the two defendants, Lane & W-K were working on behalf of the EDA. Generally speaking, the owner of a neighboring parcel is responsible for the acts of its representatives and contractors. The Court did not find authority for holding the neighbor’s contractor liable for the surface water diversion, in this situation.
The court previously dismissed Consortium’s claims for negligence as not being timely brought. In its January 2017 ruling, Judge Kilgore dismissed Consortium’s other claims, which were for trespass and diversion of surface water as barred by sovereign immunity.
The Consortium Systems, LLC v. Lane Engineering, Inc. case contains several surface water diversion takeaways in addition to the judge’s legal rulings. First, when flooding occurs, the suffering owner should investigate the causes and potential remedies for the drainage problem. Sometimes the answer is not obvious. In serious cases, this may require the assistance of an engineer or other expert. Second, all flooding problems should be addressed promptly before additional damage occurs. If a neighbor is to blame, they should be notified promptly. Third, the law may apply a standard of care that is different from what may appear as ground water diversion best-practices. The flooded owner or her attorney may need to consult HOA documents, covenants, deed restrictions, easements, county storm water management guidelines, state case law and other authorities to determine the parties’ relative rights and responsibilities.
Case Citation:
Consortium Systems, LLC v. Lane Engineering, Inc., 2017 Va. Cir. Lexis 2 (Lee Co., Jan. 9, 2017).
Photo Credit:
KevinsImages New 2016 drainage Juniper rd. via photopin (license)(does not depict any facts discussed in blog post)
January 24, 2017
What’s left of Virginia’s HOA Open Meeting Policy?
Promoters of community associations tout them as “mini-democracies,” reflecting the American tradition of public participation in governmental activity on a local level. One hallmark of “representative government” is that constituents may openly observe and review what their elected officials are doing with the money and property controlled for common benefit. Norman Rockwell enshrined this in his famous illustration of a working-class gentleman standing up to speak during a “town hall” meeting. If a citizen could not review proposed enactments and observe the deliberations of their rulemaking bodies, a fundamental element of democracy and the rule of law would disappear.
Lack of transparency and accountability between the management group and the owners is a widespread problem. With every news report about a condo building collapsing, managers embezzling thousands of dollars or the board awarding lucrative contracts to affiliated vendors, questions arise about how effective oversight could cure these ills. Today, the Washington Post ran an article about a Maryland HOA case where the judge found that the board improperly enforced a resolution requiring all owners to replace their mailboxes with a new $500.00 design. Fair elections, open meeting policies and freedom of information are the supposed safeguards for a resident’s peace of mind. Given Americans’ love affairs with democracy, truth, home ownership and their own pocketbooks, one would expect legislative efforts to strengthen HOA boards’ transparency to their members. Unfortunately, legislation passed by the 2016 Virginia General Assembly and a new bill introduced in the 2017 session trend in the opposite direction. This blog post examines the HOA open meeting principle, legislative and board governance trends limiting transparency, and whether the proposal currently before the General Assembly will promote openness.
According to the “open meeting” requirement, HOA boards and committees may not conduct deliberations and decisions outside of a publicized meeting. One exception to the “open meeting” requirement is the power of the board to meet in “executive session” to discuss certain sensitive matters such as the status of anticipated or pending litigation. The board must exit executive session and make an open resolution about any matter covered behind closed doors. When the election of board members and the open meeting policy work, board members are accountable to owners. When it works, the only way the owner can lose his voice is by avoiding the meetings. Quite often, these rules are simply ignored by directors and managers who either don’t know or care about them. The failure to observe these formalities leaves many attorneys who represent boards concerned that this might have adverse effects on the outcome of owners’ lawsuits challenging the decisions.
Many HOA bylaws and statutes appeared decades ago when people communicated by paper and the telephone and met in-person. In 2017, there are many ways that people can meet through communication technology. In person meetings by groups have mostly been replaced by “staying in touch by group e-mail.” HOA board members are not paid. Most would like to minimize in person meetings to save time. Attorneys and managers like to accommodate their boards’ requests while maintaining regulatory compliance. Owners who attend meetings who are not directors tend to not say much, ask time consuming questions or directly challenge the decisions and practices of the board and management. Management’s motive to limit the “open meeting” duty is obvious. The risks of this to the community are well known. The board is supposed to oversee the property management company and other employees, contractors and agents that take care of things on a day-to-day basis. Without effective board oversight, a HOA can easily devolve into one where the president and/or the property management company is running things without accountability.
On January 11, 2017, Delegates David Bolova & Joseph Lindsey introduced House Bill 1553 into the Virginia General Assembly that addresses this very issue. HB 1553 would amend a section of the Property Owners Association Act, Va. Code § 55-510.1 regarding meetings of the board of directors. HB 1553 proposes how 2016 legislation allowing for nonstock corporation board action by written consent without a public meeting would apply in the HOA context. The General Assembly amended Va. Code § 13.1-865 in 2016 to greater facilitate “action without meeting of board of directors” of a nonstock corporation. Almost all Virginia HOAs are nonstock corporations. Previously, a nonstock corporation board could only act without a meeting where the governing documents didn’t specifically require it and all of the directors signed a written consent to the resolution without the meeting. The 2016 amendments relaxed the onerous unanimous consent requirement. Now, if the articles of incorporation so allow, a board can act by written consent in lieu of a meeting if accepted by a majority of the directors (or by a quorum if larger). The directors may indicate their consent by paper or electronic means. A few sentences in the governing documents can greatly limit the duty to conduct business in open meetings.
The 2016 amendments contain an interesting privilege for directors who do not want the board to act outside of the public meeting. If any director doesn’t like the proposal, she can either abstain from it or submit a written objection within 10 days that forces the board to take up the matter in a future open meeting. This statute allows directors to initiate new proposals outside of the open meetings. If the proponent has enough director consents, the only way that a non-director owner could comment on it would be if one director submits a timely objection. One or more directors who disapprove of the majority’s policies would have to decide if they want to force an open meeting on the subject or simply allow the likely outcome to run its course without a meeting. Where the articles of incorporation allow, this legislative amendment creates a potent exception to the open meeting requirement.
A written consent without a meeting cannot be made casually by a majority hashing things out informally by email. The directors’ entitlement of 10 days’ notice is a practical impediment if the board meets once a month. While powerful, these new procedures are not a free-for-all to the board majority enjoying a favorable set of governing documents.
HB1553 proposes how these 2016 amendments to the Nonstock Corporation Act would apply within the context of the statutory requirements for board meetings. Va. Code § 55-510.1 requires that all board and committee meetings be open to all owners. The statute forbids directors from using “work sessions” or other informal gatherings to circumvent the open meeting requirements. Boards must take and keep written minutes of the director’s meetings. HB1553 would require any written consents without a meeting pursuant to the amendments to the nonstock corporation act to be added to the agenda packet for the next HOA board meeting. Members would be permitted to make comments on these consents, which by that time may already be valid and in force. The board has the authority to rescind any consent made without a meeting. Of course, it is a lot harder for an owner to argue against a resolution once it is already adopted and valid.
I have several questions about how this proposed 2017 legislation would work with the 2016 amendments and the realities of HOA governance:
- How Do Board Open Meeting Requirements Reconcile with Power to Act by Written Consents without a Meeting? The proposed amendment does not eliminate the open meeting requirement, it just clarifies a significant exception for certain written consents executed outside of meetings. Are directors permitted to deliberate and debate the proposed consents outside of meetings, despite the open meeting requirement? Or are they only allowed to accept, decline or object to the proposed consent, with no questions asked or information given? Is the “consent without a meeting” option a narrow exception to the “open meeting” requirement, prohibiting any back-and-forth other than the notice, text, acceptance or objection? Would this drive boards to make ill-informed or erratic decisions without regular meetings? Some dissident directors might feel compelled to exercise their “objection” privilege to force all such proposals into an “open meeting.” This could easily strain tenuous director relationships.
- Could Written Consents without a Meeting Deprive Owners of their Rights to Educate Themselves and Engage their Concerns? None of these statutes require any proposed written consents to be circulated to the owners before consideration by the directors. The legislation doesn’t require the proposal to go before the owners or an open meeting before circulation for approval. The proposal might greatly affect certain owners’ interests. An owner whose rights or interests are infringed by the written consent would later find herself fighting to undo resolutions that have already been adopted. There are many decisions that a board can make that are difficult to reverse once a contract is awarded. This legislative relaxation of requirements for consent without a meeting is ripe for abuse by boards and managers who don’t like people asking questions about what they are doing.
- Are Owners Entitled to Review Electronic Mail Between Directors Related to Written Consents without a Meeting? I’m concerned that that where these practices are adopted, the exception will practically swallow the open meeting requirement whole. If directors exchange emails or text messages with each other regarding a proposed written consent without a meeting, are owners entitled to review those messages as minutes, books and records of the association? As a practical matter, the HOA’s attorney may struggle to explain to the board what types of email communication are permitted and which ones aren’t under these laws.
- What is Left of HOAs as a “Mini-Democracy?” What is left of the “town hall” model in HOAs where the governing documents and state statutes allow board majorities to act outside of the “open meeting” ideal? This trend runs a strong risk of leaving owners with a level of transparency and accountability lower than what they enjoy with their city or county government. With regulatory agencies, the public has minimal “notice and comment” protections in administrative rulemaking. This new consent without an open meeting exception would offer even less protections to owners affected by adverse board decisions.
House Bill 1553 does not go far enough to keep all of the “tentpoles” up on the open meeting policy. I hope that the general assembly improves this bill so that the accountability of managers to boards and boards to members does not stray even further from the “Town Hall” civil ideal.
For Further Reading:
2017 House Bill 1553 to amend Va. Code 55-510.1, Meetings of the Board of Directors
2016 enacted Chapter 382, amending Va. Code 13.1-865, Action without Meeting of Board of Directors
January 13, 2017
Check Your Privilege, HOA
The attorney-client privilege is frequently misunderstood in the community associations context. When many owners request information, sometimes their board, board’s attorney or property manager asserts the attorney-client privilege. This may seem to obstruct their attempts to assess their property rights or how community funds are being spent. I recently had a conversation with a friend about an issue she raised at a HOA meeting. She asked the directors whether certain assessments were valid under the governing documents. The board consulted with their attorney, who answered them by e-mail. My friend suspected that the attorney advised the board that a judge would deem these assessments invalid. When asked, the board and their attorney refused to disclose the email, claiming attorney-client privilege (“ACP”). Since the board answers to the owners and the attorney works for the HOA, are the owners entitled to the attorney’s answering email? Does it make sense for any non-director owners to pursue copies of the attorney’s email?
In Virginia we have a court decision that addresses this issue that I will discuss. But first, let’s cover the basics. Anyone who deals with lawyers must understand how the ACP generally works. If an owner understands the ACP, she can more effectively pursue the information to which she is entitled and side-step unnecessary quarrels over confidentiality. This blog post will focus on the attorney-client privilege as applied by the courts in Virginia. The basic principles are similar in states across the country. Does this doctrine really allow boards to conceal important plans and communications in a shroud of secrecy? Not really, but it is often, baselessly asserted in many disputes, including HOA and condominium matters.
The purpose of the ACP is to encourage clients to communicate with attorneys freely, without fear of disclosure. This way attorneys can give useful legal advice based on the facts and circumstances known to the client. The Supreme Court of Virginia defines the ACP as follows:
Confidential communications between attorney and client made because of that relationship and concerning the subject matter of the attorney’s employment are privileged from disclosure, even for the purpose of administering justice . . . Nevertheless, the privilege is an exception to the general duty to disclose and is an obstacle to the investigation of the truth, and should be strictly construed.
The burden is on the party asserting the attorney-client privilege to show that it is valid and not waived. The privilege can easily be waived by disclosure of the communications to third parties. Waiver may be intentional or negligent, where the disclosing party failed to take reasonable measure to ensure and maintain the document’s confidentiality. Judges will consider waiver of privilege questions on a case by case basis. In general, the courts are reluctant to weaken the privilege by finding waiver in doubtful circumstances.
Contrary to popular belief, the privilege does not apply to every document or communication transmitted between an attorney and client. For example, if the client sends the lawyer corporate or business documents related to the facts of the case, those items would not be protected by the privilege by the mere act of transfer. It is quite possible that only the cover letter would be privileged. Generally, the privilege covers the seeking and delivery of legal advice.
Related to the attorney-client privilege is the “work-product doctrine.” The work product doctrine protects from disclosure the interview notes, office memoranda, internal correspondence, outlines, mental impressions and strategy ideas of the client’s lawyers prepared with an eye towards litigation.
When the client is an incorporated association and not an individual, questions arise as to which people function as the “client” as far as the privilege is concerned. Corporations can only act by means of their human representatives. This will often extend beyond the officers and directors of the corporation. Courts have found the privilege not waived when employees were privy to the communications. While the privilege is sacrosanct, it is narrow in scope and easily waived.
In Batt, et al. v. Manchester Oaks HOA, a group of owners challenged their board’s policy whereby parking spaces were assigned in a community where some townhouses had garages and others didn’t. Parking is a precious commodity. The plaintiff owners sought correspondence between the HOA’s leaders and their attorney. The owners asked the Circuit Court of Fairfax to order Manchester Oaks to produce the documents. They argued that the directors were fiduciaries of the owners and the suit asserted that the board acted inimically to the owner’s interests. In some other states, this is a judicially recognized exception to the ACP in some contexts. Judge Terrence Ney, who was highly respected within the local bar, declined to adopt the “Fiduciary-Beneficiary Exception” because that would “chill” communications between parties and their attorneys for fear the exchanges could be used against them in the future. I think he got this right. Properly understood, this does not infringe upon owners’ rights. Here’s why:
- Owners Need Boards to Act Competently. Owners need their boards to freely share their concerns with their attorney without fear that someone could later obtain the emails and use them against them. Community associations law is complex. For HOAs to work properly, boards need legal counsel to help them accomplish worthy goals while complying with the law and the governing documents. Owners need the HOA’s lawyer to tell the board what they can’t do, so that they can avoid doing bad things.
- The Director’s Fiduciary Duties Are Primarily Defined by the Governing Documents. If a fiduciary-beneficiary exception applies to a communication, that would be shown in the covenants, bylaws or perhaps a statute.
- The Board’s Lawyer is Not the Community’s Judge. When new owners visit HOA meetings and see directors defer to the association’s counsel on legal matters, this may lead to a misconception that the written opinions of the HOA’s lawyer are the “law of the land,” subject only to review by a judge. The opinions of the board’s attorney are simply her advice. Sometimes attorneys are wrong. Trial judges and appeals courts exist to make final determinations on contested legal disputes.
- “What Did the Board’s Attorney Advise” is Not the Best Question. This is really the most important point here. Requesting the HOA to disclose its attorney-client communications is not the best question to ask. Instead, the owner should ask the board to explain its authority to adopt or enforce a resolution. A HOA or condominium’s legal authority is public. It is written in a declaration, covenant, bylaw, statute, etc. The written legal authority and the official policy cannot be privileged. If the owner and board were to end up in litigation, sooner or later this would have to be spelled out in court. Chasing after what the attorney confidentially advised the board is not the direct path to solving the owner’s problem. If the board or its managers object on grounds of privilege when an owner asks them to point to the section in the governing documents that undergirds the policy, then the owner needs a lawyer of her own.
Ultimately the owners challenging the directors’ parking policy in the Manchester Oaks HOA case prevailed in Court, invalidating the board’s parking resolution. They didn’t need the attorney’s advice letter to achieve this. In other cases, owners don’t need to invade the board’s privilege, when it is properly invoked. However, it is very common for corporate parties to try to abuse the attorney client privilege in litigation. When someone invokes the attorney-client privilege in a HOA dispute, that is a good time to retain qualified legal counsel. If a party doesn’t back down when called out on an improper invocation of privilege, the dispute can be put before a judge. This “Check Your Privilege, HOA” blog post is the first in a series about how the attorney-client privilege is used and misused in the community association context. In future installments, I plan on discussing a couple hot topics. Does the Property Manager qualify as the client for purpose of the ACP or is it waived if the manager participates in the discussions with the attorney? Are the HOA’s lawyers’ billing statements protected from disclosure to the owners by the ACP or are they fair game?
For Further Reading:
Batt v. Manchester Oaks Homeowners Ass’n, 80 Va. Cir. 502 (Fairfax Co. 2010)(Ney, J.)(case reversed on appeal on other issues).
Walton v. Mid-Atlantic Spine Specialists, P.C., 280 Va. 113 (2010).
Michael S. Karpoff, “The Ethics of Honoring the Attorney-Client Privilege” (CAL CCAL Seminar Jan. 31, 2009)
Photo Credit:
