September 21, 2017
Standing to Sue While Sitting on the Board
Standing is a party’s right to make a legal claim in Court. When the judge comes out to sit on the bench, she will read the cases and the parties or their attorneys come forward as called. “Standing” is the right to seek a legal remedy as shown by the facts alleged. Judges ordinarily decide questions of standing without ruling on the merits of the case. That said, a party dismissed for lack of standing cannot win. Standing just means that the case can proceed.
“Standing” has been in the news lately. There was a federal court complaint filed a monkey, Naruto, who in 2011 took a selfie with a camera and later sued David Slater, the owner of the camera for copyright infringement. The monkey and photographer litigated over whether the nonhuman primate has standing to sue under the U.S. Copyright Act. The notoriety of the suit increased the popularity of the photograph, raising the stakes in the case. The case settled this month, so we may never know whether a monkey can have standing. (I am doubtful because monkeys do not have upright posture. They walk on their feet and the knuckles of their hands and do not “stand” like we do.) In most cases, the question of standing is not controversial. If someone is party to a contract, they ordinarily have standing to sue under that contract. If someone runs into my mailbox with their car, I have standing against them because they damaged my property.
The question is not always so clear. For example, in community associations, the declaration of covenants defines legal relationships among the board and owners. If an owner feels that that their rights have been infringed by the actions of others in their community, who do they have standing to sue? There are numerous possibilities:
- The HOA as a corporate entity
- Individual officers or directors
- An architectural review committee
- Individual neighbors
- Local land use officials
- The developer or declarant
This is relevant to whether the owner actually has a case. Because of filing deadlines, expenses and headaches, owners need to avoid “going ape” on the wrong party. If the HOA is not an issue, then the owner would have to look at another theory such as trespass, nuisance, negligence or other type of right that may exist outside of community associations law. When the dispute involves a right or duty imposed by the governing documents of an HOA or powers of the board, then the answer will be found in interpretation of the covenants and other governing documents. The answer may not be apparent from the four corners of the HOA covenants. Owners have rights, duties and potential remedies that exist under statute or common law that may be implied by, but not specifically referenced in, the association documents.
The Court of Appeals of the District of Columbia considered the doctrine of standing in HOA matters earlier this year. Wilfred Welsh owned a townhouse in Washington, D.C. He was a Director and Secretary of the Chaplin Woods Homeowners Association. Welsh was unhappy because Beverly McNeil and Alvin Elliott rented their townhouse to Oxford House. Oxford House organized a small group home for women recovering from alcoholism and substance abuse. Welsh pointed to the fact that persons living in this townhouse were not party to the Oxford House lease. Welsh contended that the Oxford House lease was not approved by the board. A board majority did not share his views so he filed a lawsuit against McNeil and Elliot in his own name. Welsh did not name Chaplin Woods as a party. Chaplin Woods made no effort to formally intervene in the case.
McNeil and Elliot filed a counterclaim against Welsh, asserting that he violated the Fair Housing Act and the D.C. Human Rights Act by his opposition to their request for an accommodation for their tenants. They said that as Secretary, he delayed and obstructed their request for an accommodation by not transmitting Oxford House’s letter to the HOA’s attorney. Welsh insisted that he had standing to sue McNeil and Elliot because the Bylaws granted individual members the same rights as the Association to enforce the governing documents. After he filed suit, the board formally approved the lease agreement to Oxford House. Welsh argued that McNeil and Elliot could not sue him for Fair Housing because he was just a single board member with no power to exercise the HOA’s corporate powers on his own. So Welsh v. McNeil had two juicy HOA law issues: (1) Can an owner individually enforce governing documents after the board waived the right to enforce? and (2) Can a rogue director or officer be sued individually under housing discrimination laws for obstructing a request for a reasonable accommodation for a disability?
For a few years, Oxford House functioned with leases with the owners that were not approved by the Board. Apparently, the occupants simply lived in the townhouse without board action to approve the leases or kick them out. When pressed on this issue, Oxford House formally requested a reasonable accommodation under fair housing laws. Oxford House sought permission for the women to live in the house, which would facilitate their recovery from substance abuse challenges without having their individual names on lease agreements approved by the board. Oxford House wanted the board to approve a lease in its corporate name. The lawyers for the HOA and Oxford House went back and forth on this.
Before the board decided, Mr. Welsh filed a complaint in his own name against McNeil and Elliot. He wanted the Court force them to stop leasing their property in a manner not contemplated by the bylaws. The rules required the leases to be in the names of the occupants. Welsh’s suit was not sanctioned by the board. After the suit was filed, the board met and decided to approve the disability accommodation request. Welsh apparently attended this meeting but did not vote, citing a conflict of interest caused by his pending suit. The President sent McNeil & Elliot a letter saying that the HOA approved the lease. The board did not subsequently walk back on this approval. This threw a “monkey wrench” of sorts into Welsh’s case. Was Welsh’s claim rendered moot by the board’s formal decision to waive the community’s rights to enforce the bylaw?
Both sides moved to dismiss each other’s claims as lacking standing to sue. The judge agreed with both and dismissed both claims. He found that because the board approved the lease, there no longer was a dispute to be litigated. He observed that Welsh did not sue the HOA so he had no way of disputing the board’s decision without suing them directly.
Welsh did have standing to sue when he filed his complaint. An HOA has the primary responsibility for enforcing its covenants, rules and regulations. However, an individual owner also has standing to enforce the governing documents unless they provide otherwise. If the HOA simply takes no action, then ordinarily an owner may bring his own action. The question in Welsh v. McNeil was what happens to the owner’s cause of action if the board “preempts” it by deciding one way or the other? The Court of Appeals interpreted the Bylaws to mean that once the board acted to approve the lease, an individual like Welsh was thereafter deprived of his claim: “Generally speaking, a homeowner’s association has the power to release or compromise any claim it has the right to assert, and to do so over the objection of individual homeowners, who then are bound by the association’s resolution of the claim.” The D.C. Court of Appeals cited the 1985 decision Frantz v. CBI Fairmac Corp., where the Supreme Court of Virginia observed that where a condominium association has the authority to bring a claim against a violation of a common right, it also has the power to compromise that claim and that the individual unit owners would be bound by that compromise.
The D.C. Court of Appeals observed that it would not make sense to give individual owners the power to “override” decisions of the board of directors when it comes to matters of community interest. The Court was careful to recognize that one must distinguish between matters of community concerns and individual property rights. For example, if one owner rents out their property in a manner that violates the rules or fails to abide by architectural appearance rules, then this is something that an individual owner could not legally enforce once the board took it up. On the other hand, the board has no authority to unilaterally compromise the claim of an individual owner against the board itself or another owner.
If an owner’s interests in a claim for enforcement against another owner is no different than any other owner, then it is probably one of common concern that the board can “foreclose” or “preempt” by pursuing, waiving or settling. On the other hand, if the owner’s own property rights were damaged, infringed or invaded, then it may not be something that the board can take away.
Wilfred Welsh did not contend that he was asserting any right other than the same right the association possessed to enforce against McNeil and Elliot for the common interests of the community. This makes sense because Welsh’s interests were not affected by having fellow residents whose names were not written on any deed or lease any differently than any other townhouse owner.
If Welsh was unhappy with the way that the board decided to compromise the claim for himself and everyone, he would not be completely without options. Welsh could have tried to sue the association directly for breaching their contractual duties to him by deciding the issue about the Oxford House as they did. But he did not.
Welsh argued that the HOA’s decision did not moot his claim because the board did not properly approve the lease. He contended that the board did not actually obtain the requisite number of votes to approve the lease. The Court of Appeals decided that whether they did or not, the President sent a letter to McNeil and Elliot did, and the board never retracted that letter. McNeil and Elliot had a right to rely upon the President’s letter.
Many people are attracted to involving themselves in HOA boards and committees because they believe enforcement of the rules will prevent the “wrong” types of people from moving into their community. Many may fear recovering alcoholics or drug addicts living on their street. For many people HOAs seem to carry an aura of exclusivity that they find very attractive. I don’t like these attitudes – what if my neighbors were to decide that they consider me to not be the kind of person they want living near them? HOAs tend to weaken individual property rights and strengthen the notion that someone else can do a better job of deciding how an owner should use their own property. I also believe that societal problems like substance abuse are too complex to be solved by NIMBY initiatives.
This case would have unfolded very differently if a majority on the board agreed with Welsh. That is certainly not unheard of. Housing discrimination cases against HOAs and condo boards are common. The board could have denied the accommodation request outright, attempted to enforce the leasing rules, or allowed Welsh to proceed on his own without ruling one way or the other.
Some of my readers may be wondering how it can be fair for the board to take away rights provided to owners by the governing documents by waiving or settling the violation. Bear in mind that an average homeowner in a HOA does not want every other member of the association to have the authority to sue for alleged violation of the governing documents. It is in the interest of owners to narrow the number of parties who can assert legal claims against them.
The other issue raised in this case is whether a director or officer, acting on his own without the support of a majority of the board can engage in conduct opening himself up to liability under housing discrimination laws. The residents of Oxford House could be found to be disabled persons entitled to accommodation because they seek treatment for drug and alcohol abuse. The D.C. Superior Court ruled that Welsh could not suffer personal liability because as a single board member he could not bind the association. The question was rendered moot because the board ultimately approved the Oxford House lease. However, Welsh did not argue that it was moot because he contended that the approval of the lease was not valid and binding. The Court of Appeals reversed, finding that the fair housing claims against Welsh could proceed. While Welsh had no power to ultimately decide the accommodation requests on his own, as corporate secretary he had an ability to delay board decisions by holding onto written requests and not forwarding them on to the board’s attorney or other representatives. McNeil and Elliot alleged that Welsh substantially contributed to delays to approval of the accommodation. The Court of Appeals observed that delays like this, which go on for considerable lengths of time with no apparent end in sight have the effect of an outright denial. While McNeil and Elliot may not ultimately prevail on their fair housing claim against Welsh, the Court of Appeals ruled that it may proceed through the courts.
In any dispute involving property associations, an owner who has suffered damage or invasion of property rights must carefully consider the party against whom she may have a legal claim. She must also consider whether the association or other owners also have a claim, and whether the association can compromise or waive such claims for everyone. For many owners, it may not make sense to pursue claims against neighbors for the kinds of claims that the board can come along and make moot by a decision at a meeting. Claims like technical violations of architectural conformity standards may not make sense to bring because the commitment required to pursue such legal action might not result in any money or rights upon the claimant. Understanding the difference between “private” claims between owners and “common” claims is important to bringing or defending any case among individual owners in a community association. Qualified legal counsel can help to sort through and interpret the governing documents to provide critical insight into the nature of a claim by an owner, neighbor or association.
Case Citations:
Welsh v. McNeil, 162 A.3d 135 (D.C. 2017)
Frantz v. CBI Fairmac Corp., 331 229 Va. 444 (1985).
photo credit: A. Nothstine LeDroit Park Rowhouses via photopin (license) (Does not depict any property described in article, to my knowledge)
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 5, 2014
They Might Be Mortgage Giants: Fannie & Freddie’s Tax Breaks
On January 3, 2014, the U.S. Consumer Financial Protection Bureau published a request for input from the public about the home mortgage closing process. 79 F.R. 386, Docket CFPB-2013-0036. The CRPB requested information about consumers’ “pain points” associated with the real estate settlement process and possible remedies. The agency asked about what aspects of closings are confusing or overwhelming and how the process could be improved.
The settlement statement is an explanatory document received by the parties at closing. The statement lists taxes along with other charges. The settlement agent sets aside funds for payment of both (a) the county or city’s property ownership taxes and (b) transfer taxes assessed at the land recording office. The property taxes are a part of a homeowner’s “carrying costs.” The recording taxes are part of the “transaction costs.” Typically, neither the buyer nor the seller qualify for a recording tax exemption.
The federal government advances policies designed to increase consumers’ access to affordable home loans. The Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) provide a government-supported secondary market. They purchase some home mortgages from the lenders that originate them. The Federal Housing Finance Agency regulates these chartered corporations. In 2008, FHFA imposed a conservatorship over Fannie Mae & Freddie Mac.
In the years leading up to the crisis of 2008, Fannie and Freddie used their government sponsorship to purchase some of the higher-rated mortgage-backed securities. See Fannie, Freddie and the Financial Crisis: Phil Angelides, Bloomberg.com. As the secondary-market purchaser of these home loans, Fannie and Freddie have foreclosure rights against defaulting borrowers and distressed properties. These corporations participate in the home mortgage process from origination, through purchase post-closing, and, in many cases, subsequent foreclosure-related sales.
Congress exempts Fannie Mae and Freddie Mac from state and local taxes, “except that any real property of [either Fannie Mae or Freddie Mac] shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed.” 12 U.S.C. sections 1723a(c)(2) & 1452(e). Which local real estate taxes does this exception apply to? The ownership tax, transfer tax, or both? The statute does not specifically distinguish between the two. Fannie and Freddie concede that they are not exempt from the tax on property. However, they decline to pay the transfer taxes assessed for recording deeds and mortgage instruments in land records. This is one advantage they have over non-subsidized mortgage investors. Local governmental entities and officials from all over the U.S. challenge Fannie & Freddie’s interpretation of the exemption statute since it represents a substantial loss of tax revenue. This blog post focuses on two recent opinions of appellate courts having jurisdiction over trial courts sitting within the Commonwealth of Virginia.
Virginia:
Jeffrey Small, Clerk of Fredericksburg Circuit Court, attempted to file a class action against Fannie & Freddie in federal court on behalf of all Virginia Clerks of Court. Small v. Federal Nat. Mortg. Ass’n, 286 Va. 119 (2013). Mr. Small challenged their failure to pay the real estate transfer taxes. The Defendants argued that the Clerk lacked standing to bring the suit for collection of the tax. A Virginia Clerk of Court’s authority is limited by the state constitution as defined by statute. In the ordinary course of recording land instruments, the Clerk’s office collects the transfer tax at the time the document is filed. One half of the transfer taxes go to the state, and the other half goes to the local government.
To resolve the issue, the Supreme Court of Virginia found that if the taxes are not collected at the time of recordation, then the state government has the authority to bring suit for its half, and the local government to pursue the other half. The Virginia clerks do not have the statutory authority to bring a collection suit for unpaid transfer tax liability. Because they lack standing, the court dismissed the clerk’s attempted class action against Fannie and Freddie for the transfer taxes.
Maryland & South Carolina:
Montgomery County, Maryland and Registers of Deeds in South Carolina brought similar federal lawsuits challenging Fannie and Freddie’s non-payment of recording taxes. See Montgomery Co., Md. v. Federal Nat. Mortg. Ass’n, Nos. 13-1691 & 13-1752 (4th Cir. Jan. 27, 2014). The Fourth Circuit also hears appeals from federal Courts in Virginia. This case proceeded further than Mr. Small’s. The Appeals Court found that:
- Property taxes levy against the real estate itself. Recording taxes are imposed on the sale activity. The federal statute allows states to tax Fannie and Freddie’s ownership of real property. The statute exempts Fannie and Freddie from the transfer taxes.
- Congress acted within its constitutional powers when it exempted Fannie and Freddie from the transfer taxes, because this may help these mortgage giants to stabilize the interstate secondary mortgage market.
- The exemption does not “commandeer” state officials to record deeds “free of charge,” because the states are free to abandon their title recording systems. By this analysis, the exemption is not a federal unfunded mandate on state governments because the decision to include a land recording system as a feature of property law is not federally mandated.
Some federal courts in other parts of the country have reached analogous conclusions. e.g., Dekalb Co., IL v. FHFA (7th Cir. Dec. 23, 2013)(Posner, J.). This legal battle wages on in the federal court system, but the results so far favor Fannie and Freddie.
Discussion:
Is abandoning the land recording system a realistic option? In Greece and other countries lacking an effective land recording system, property rights are uncertain and frequently brought before the courts for hearing. See Suzanne Daily, Who Owns This Land? In Greece, Who Knows?, New York Times. Like Fannie & Freddie, land recording systems advance the policy interests of stabilizing private home ownership.
Fannie and Freddie aren’t required to pay locally collected recording taxes. Their “share” of the overhead for maintaining the land recording system come from other sources. This includes the recording fees paid by ordinary parties in real estate closings across the country. Does this give the mortgage giants an unfair competitive advantage over other institutional investors in the re-sale of foreclosed homes?
Are these differing tax treatments properly considered in the CFPB’s discussion about the “pain points” in closings? Settlement statements provide clarity regarding the charges listed. The transfer and property taxes assessed in real estate closings are confusing and overwhelming, in part because they represent hidden costs. These hidden costs include the exemptions afforded Fannie Mae and Freddie Mac. The purpose of these institutions is to help mortgage consumers. Should the tax loophole should be closed or the hidden costs be disclosed to consumers? Perhaps one of these change would advance the CFPB’s “Know Before You Owe” initiative.
photo credit: J.D. Thomas via photopin cc. (not particular to any of the cases discussed herein)
