November 3, 2016
In many HOA disputes, only one (or a small handful of) owners desire to challenge board actions that negatively impact a larger class of owners in the community. If the court finds that the board action was invalid, then the court decision would materially impact everyone, not just the plaintiff owners and the HOA. Today’s post is about how plaintiffs lawsuits against HOAs potentially benefit other owners. Usually, a plaintiff must name everyone materially impacted by a potential outcome as parties to the lawsuit. Must a homeowner join all owners as plaintiffs or defendants in a lawsuit against a HOA seeking judicial review of a board decision? What flexibility does the law allow for one or more owners to bring a representative claim against the association to benefit themselves and other similarly situated owners? How should attorney fees be handled in cases with “free riders”? The answers to these questions show tools for owners to enjoy greater access to justice in community association disputes.
Mass claims by owners may be brought against community associations in several ways. A group of interested owners can split the cost for one law firm to sue on their behalf. Alternatively, owners may bring separate suits and have the claims consolidated in court. Filing a class action may be a feasible option in many states. Is there any other way that claims can be brought to benefit both the named plaintiffs and other similarly situated owners? Can this somehow make lawsuits against HOAs more affordable?
There are good examples of such representative actions in Virginia. Ellen & Stephen LeBlanc owned a house in Reston, a huge development in Fairfax County, Virginia. Reston is a locally prominent example of where the community association model largely replaces the town or city local government. Most Restonians live under a Master Association and a smaller HOA or condo association. Such owners must pay dues and follow the covenants for both the master and sub association.
The LeBlancs owned non-waterfront property near Reston’s Lake Thoreau. In 1994, the Master Association decided that henceforth, only waterfront owners would be permitted to moor their watercraft directly behind their properties. This would substantially inconvenience the LeBlancs’ boating activities. The LeBlancs’ lawyer Brian Hirsch filed a lawsuit in the Circuit Court of Fairfax County challenging the validity of the master HOA’s decision on both constitutional and state law grounds. The association retained Stephen L. Altman to lead their legal defense.
Roger Novak, Judy Novak, Rex Brown and Dalia Brown all owned waterfront properties on this lake. These families did not want the LeBlancs or other non-waterfront Reston owners mooring their boats behind their houses. I can’t blame them for wanting a tranquil aquatic backyard all to themselves. The Novaks and Browns hired lawyer Raymond Diaz to bring a motion to intervene. The Browns and Novaks became parties to the suit. These intervenors asked the judge to force the LeBlancs to name all the owners in Reston as parties or dismiss the case for lack of necessary parties.
In general, a lawsuit must be dismissed if the plaintiffs fail to name all parties that are necessary for the case to be properly litigated. A suit on a contract or land record usually must include all parties named in the contract or instrument. The Novaks and Browns wanted to block people like the LeBlancs from enjoying mooring privileges on the lake. They wanted the LeBlancs to name all the parties subject to the covenants recorded in the registry of deeds for the Reston Association. If the LeBlancs had to litigate against the hundreds of owners, then the case could quickly become uneconomical, even if most were friendly. The Court denied the intervening parties’ motion, upholding an exception from well-established legal precedents in non-HOA Supreme Court of Virginia opinions:
Necessary parties include all persons, natural or artificial, however numerous, materially interested either legally or beneficially in the subject matter or event of the suit and who must be made parties to it and without whose presence in court no proper decree can be rendered in the cause. This rule is inflexible, yielding only when the allegations of the bill disclose a state of case so extraordinary and exceptional in character that it is practically impossible to make all parties in interest parties to the bill, and, further that others are made parties who have the same interest as have those not brought in and are equally certain to bring forward the entire merits of the controversy as would the absent persons.
The Circuit Court found this exception to apply:
In the case at bar, it is impracticable to join the estimated 400 to 500 homeowners surrounding Reston’s five lakes in this action. Likewise, the interests of these persons are the same as those of the parties to this action, and said parties are certain to bring forward all of the merits of the case as would the absent persons.
Hundreds of other owners are materially impacted by the case’s outcome. But this exception allows the case to proceed without adding them as necessary. Other individual owners are not barred from suing or become party to the LeBlancs’ case. The other owners weren’t necessary for the practical consideration of the sheer number of the affected class. The court found the LeBlancs sufficient to represent the case against the exclusive moorings rule, and the Novaks, Browns and the HOA competent to defend the board’s action favorable to the waterfront owners. The LeBlanc’s case was permitted to proceed without adding hundreds of affected owners. This “virtual representation” procedure is significant because the court’s ruling on the validity of the board’s resolution would affect all owners, not just the parties.
At trial, the Court upheld the Board’s decision to regulate boating activity on Lake Thoreau as a valid exercise of powers granted in the covenants. The LeBlanc’s case was dismissed. The Supreme Court of Virginia declined to reverse the decision. However, the principle that one or more owners can virtually represent the interests of a large class of homeowners in a contest over the validity of HOA rulemaking has not been overturned.
In 1996, the Circuit Court for the City of Alexandria applied the same principles in a homeowner challenge to a condominium election of directors. The Colecroft Station Condo Unit Owners Association Board asked the court to dismiss the judicial review of the election because not all owners were listed as plaintiffs. The judge rebuffed demands that all owners be added as parties, citing the same exception as used in LeBlancs’ case.
This exception that all materially affected parties need not be named as a plaintiff or defendant in the lawsuit is important to homeowners’ rights for several reasons. It gives an individual or small group of owners the ability to proceed with a lawsuit even when their neighbors might be friendly but uninterested in litigating. It gives owners another option when their rights are threatened and are not effectively redressed by board of directors’ elections or initiatives to amend the governing documents. Certain types of claims may be brought where class actions are not permitted or unfeasible. One brave owner could get a court to overturn an invalid board decision infringing upon the rights of many. This “virtual representation” doctrine advances the cause of homeowner access to justice in HOA and condo cases.
One challenge in these “virtual representation” cases is the notion of “free-riders.” The HOA’s attorney’s fees are paid for by the board’s accounts receivable: assessments, fees, loans and/or fines. Representative plaintiffs leading the challenge might find themselves “carrying water” for similarly situated owners who would stand to potentially benefit from the outcome of the case but aren’t paying lawyers. Is it fair for the challenging owners to pay for the legal work undertaken to achieve a benefit to both the plaintiff and the larger class? Are they entitled to an award of attorney’s fees reflecting the benefit conferred on behalf of other interested parties not named as plaintiffs? I will address this question in a future blog post focusing on the doctrine of “common fund” or “common benefit” in attorney fee awards and how this might apply in community association cases.
LeBlanc v. Reston Homeowners’ Ass’n, 38 Va. Cir. 83 (Fairfax Co. 1995)
April 4, 2016
In the contemporary dystopia, property ownership provides ordinary people with space in which to live, work and play in peace, safety, and freedom. Americans also see real estate as an investment. My high school friend Tom was one of my first classmates to purchase a home. Years ago, he explained that the great thing about a home is that it is an investment and you also get to live in it. Unfortunately, there are many predators in the marketplace seeking to capitalize on consumers’ commitment to home ownership. Some loan servicers, debt collectors, and contractors see owners as opportunities. Their trade groups lobby state capitals. Owners have to stick up for themselves in Court and with their elected representatives to protect themselves from becoming someone else’s cash drawer. Sometimes unscrupulous people get what they want by conceptually framing a crisis to shape the perceptions of decision-makers. Fear is one of the easiest emotions to manipulate. Owners should be skeptical of how the housing industry describes the Zombie Foreclosure Apocalypse.
In a recession, financial struggles can render owners unable to make payment obligations to mortgage lenders and HOA’s. In many cases, these personal crises are temporary. Job loss or illness of the owner or a family member can cause a temporary but acute financial crunch. The problems may be fixable by a new job or resuming work after addressing a family member’s needs. Unfortunately, lenders and HOA’s tend to treat all defaults in payment obligations the same. In the past few years, HOA’s have waited for assessment income when banks delayed foreclosing on homeowners. In these so-called “zombie foreclosures,” banks delay completing foreclosures for years because there is little economic incentive to adding the distressed property to their own real estate inventory. If they buy the property, they become responsible for it as the new owner. Usually the owners stop paying their HOA dues around the time they can’t pay their mortgage. The HOA industry sees themselves suffering financial losses at the hands of loan servicers who fail to timely foreclose and put a new owner in the property with the willingness or ability to pay the HOA assessments.
On March 25, 2016, Dawn Bauman posted an article on the Community Associations Institute’s (“CAI”) blog titled, “Clean Up Foreclosures in Your Community.” Ms. Bauman argues that because the banks delay foreclosure, other owners must pick up the tab of the struggling neighbor to support an HOA’s budget. This blog post calls upon neighbors to file citizen complaints with the Consumer Financial Protection Bureau (“CFPB”) when banks delay foreclosing on neighboring homes. The blog post contains links and instructions for submitting complaints. I understand Ms. Bauman’s point that Boards might have to make budget changes if there is a spike in “zombie” foreclosures. These budget decisions might include increasing dues for other owners, slashing budgets or even raiding reserves to pay for major repairs. However, I’m not convinced that a campaign to expedite foreclosures would really advance the interests of other owners. As films and books such as “The Big Short” illustrate, the foreclosure crisis is a complex phenomenon. When a borrower falls into default, wouldn’t the community’s interests be better advanced by helping them get back on track with their existing lender and HOA? There is no guarantee that the CFPB would have the resources, authority and/or will to take regulatory action upon receipt of a complaint submitted through web forms on the internet. This CAI blog post seems to perpetuate the stereotype of debt collection as the common denominator of a HOA community. Yes, communities require accountability, but that should go both ways.
What is happening here? Imagine that a prospective buyer met with a realtor or property manager to discuss a home in an HOA. What if the real estate professional candidly told the prospective buyer that in this community, if you default on your mortgage, your neighbors and HOA will contact regulatory authorities to make sure the bank expedites your eviction. The prospective buyers are expected to also do the same against to their neighbors. The home shoppers innocently ask, “Why is this?” The manager candidly explains that the local government has outsourced its functions to the HOA. That HOA has a big budget. The locality and the HOA have an interest in keeping property assessments high. If the homebuyers are rational, they will walk out of that meeting and never come back to that development. Home owners want neighbors who support each other, or at least leave each other alone. No one wants to live in a community where neighbors are expected to tattle. If that’s necessary, then there is something wrong with the community association model. To sustain themselves, the community associations should seek to advance the interests of their members and not the other way around. The task of creating communities traditionally belonged to local governments, developers and the owners themselves. However, real estate is also a national policy concern because of the roles of Fannie Mae, Freddie Mac, the CFPB and a host of other federal agencies. At a March 29, 2016 town hall meeting, Republican presidential candidate Donald Trump identified “housing, providing great neighborhoods” was one of the top three responsibilities of the federal government. Such statements are easily dismissed as political pandering. However, Mr. Trump, however controversial, seems to have a knack at getting into the minds of many voters.
When an owner falls into a persisting default, usually the lender, HOA, and local government want to start over with a new owner. In fact, the HOA industry and local governments want to work together to eliminate these “zombie foreclosures.” Fairfax County holds an annual “Community and Neighborhood Leaders Conference” to provide face-time between HOA board members and county agencies with authority to enforce laws and ordinances. This alliance puts the elderly and disabled at a particular disadvantage when it comes to complying with local ordinances about how property should be maintained. Owners may find their lenders, HOA’s, and local governments taking action against their property interests.
If owners find themselves in default of their loan and assessment payment obligations, what can they do to protect their financial interests and property rights? Fortunately, there are some strategies that work.
- Avoid Falling into Default in the First Place. If the owner isn’t in default, then the lender or HOA doesn’t have a basis to institute foreclosure or debt collection proceedings. For many owners, the financial crunch of making the payments is less costly than digging themselves out of a persistent default.
- Know Your Rights. Many owners rely upon what bank representatives or HOA board members say in order to determine their rights. However, in court a judge can be expected to apply what the mortgage or HOA documents say to resolve any dispute. Owners should organize and understand the applicable legal documents and not rely on hearsay.
- Have a Plan. The bank representative or property manager is not going to take the lead on how to resolve the payment default. Debt collectors are looking to get paid as much as possible and/or to push the owner out. The owner must determine whether they want to keep or relinquish the property. The circumstances of each case are unique and which strategies to employ is outside of the scope of this post.
- Present Well. If a property appears to be abandoned, then the local government, HOA, and lender will treat it as such and move aggressively. If an owner keeps the property up, they are less likely to be bullied. Likewise, in negotiating with a lender’s or HOA’s representatives, an owner should consider how their actions and works are likely to be interpreted. If the owner has unrealistic expectations or appears to show signs of weakness, then the industry professionals are less likely to take them seriously.
- Have a Team. Board members, property managers, and collection attorneys are working together to maximize the accounts receivable of the HOA and minimize their own hassle. The lenders have account representatives and lawyers to service the loan. Owners should have a team of their own. Allies in a community can look out for each other and guard against bullies. Many state legislators want to take up the cause of property ownership. Lenders and HOA’s have experts and attorneys of their own on call to advance their interests. Out of experience they are able to think two or three steps ahead of consumers. If a lender or HOA behaves in a mysterious manner, it may be that they contemplate future legal action. Many times owners need legal assistance of their own.
An owner who struggles with financial difficulties is not a “zombie.” What is really “undead” is the complex web of loan documents, HOA rules, and public policies putting an owner’s property rights and financial condition at unnecessary risk. Financial challenges do not have to result in intractable crises. When told about the pending Zombie Foreclosure Apocalypse, owners need to understand what is really “undead.” The industry should educate and advocate for owners in these situations in order to keep the HOA model from turning into an unsustainable dead end. Until then, owners must work together and with qualified professionals to protect their rights.
UPDATE: Check out my April 23, 2016 “On the Commons” podcast with HOA attorney Jeremy Moss and Host Shu Bartholomew. We discuss the Zombie Foreclosure phenomenon and what it means for HOAs and owners.