November 15, 2016
In this blog and in my law practice, I focus on practical solutions to clear & present legal dangers to property rights of owners of properties in HOAs, condominiums or cooperatives. Many raise questions about getting attorneys fees awards against HOAs. This is an interesting topic in community associations law, where the outcomes of many disputes have a direct or precedential impact on other owners in the community. In my last blog post, I discussed a couple of 1990’s Virginia court opinions where owners’ counsel used an old English common law doctrine to solve modern HOA litigation problems. The doctrine of “virtual representation” allows individual owners to bring to complaints of general concern without naming every owner in the community as a plaintiff or defendant. Where the actual, named parties to the lawsuit fairly represent the interests of other members who are too numerous to add to the court case, the judge can nonetheless render a decision that binds all impacted parties. For example, a “representative” owner may bring a court case challenging an election or the validity of board resolution and the final order binds all members impacted by the election or board action. The doctrine of “virtual representation” solves a couple obstacles to owners gaining effective access to the legal system.
Today’s post discusses the problem of “free-riders” who may reap a benefit from other owners virtually representing them and footing the bills. In litigation, HOA boards draw upon the benefit of insurance policies, loans or assessment income to finance their legal expenses. The board may protract the dispute in a desire for a precedential effect or to simply wear down the owner. There is a case presently before the Supreme Court of Virginia where an owner accuses her association of the latter. Martha Lambert had a claim for $500.00 for reimbursement for certain repairs she made herself that were the responsibility of Sea Oats Condominium Association, Inc. The board’s lawyers defended the claim with time consuming motions and discovery normally used in cases where the amount in controversy is much larger than $500.00. Ms. Lambert “won” in the Circuit Court of Virginia Beach on what the judge described as a “close call.” The judge told the owner’s lawyer he did a “magnificent job” and reasonably pursued the case. However, the court only awarded $375 in attorney’s fees out of the full $9,568.50 amount Ms. Lambert incurred in the case. The only reason Ms. Lambert didn’t get the full amount was because the trial judge wanted to make an attorney’s fees award smaller than the $500 principal judgment. The Supreme Court accepted the appeal to determine whether the statute allowing for “reasonable” attorney’s fees required the Circuit Court to reduce the award to an amount in a nexus to the principal judgment awarded. Lambert accuses Sea Oats of engaging in “stubborn & obstructionist tactics.” Kevin Martingayle, Counsel for Ms. Lambert describes the trial judge as punishing the homeowner for vindicating her rights and discouraging others from doing the same when necessary. At stake is whether one party can get away with not performing their covenanted obligations because a lawsuit would add insult to injury. Lawyers practicing in the community associations arena around the state will watch to see what the Supreme Court does with this case.
The outcome of Lambert vs. Sea Oats only appears to directly impact the association and Ms. Lambert. In other HOA lawsuits, the rights of other owners are directly impacted by the outcome. What if, hypothetically speaking, a condo association caused injury to an entire floor of condominium units. One owner decides to sue. A plaintiff may find herself shouldering the burdens of similarly situated owners (“free riders”) not joining the suit or otherwise helping to pay for the legal expenses incurred by the plaintiff. Under many HOA governing documents and state statutes, the prevailing party at trial is entitled to an award of reasonable attorney’s fees against their opponent. What about the portion of a prevailing owner’s legal expenses which is attributable to representing the interests of similarly situated fellow members who are not official parties to the lawsuit? Would this provide a separate basis for an award of attorney’s fees reflecting the realities of “virtual representation?”
Since the 19th century, Virginia’s common law tradition of judicial precedents protects representative plaintiffs from the burden of the “free rider” problem. In “virtual representation” cases, the prevailing party may recover in their attorney fee award for legal expenses incurred in achieving the common benefit:
It is a general practice to require, when one creditor, suing for himself and others, who may come in and contribute to the expenses of suit, institutes proceedings for their common benefit, that those who derive a benefit shall bear their proportion of the expense and not throw the whole burden on one. This is equitable and just. But it only applies to those creditors who derive a benefit from the services of counsel in a cause in which they are not specially represented by counsel. If a creditor has his own counsel in a cause, he cannot be required to contribute to the compensation of another. Stovall v. Hardy, 1 Va. Dec. 342 (1879), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
Virginia courts apply this “common fund” doctrine in awarding attorney fee awards in creditor suits, securities lawsuits, civil rights cases, trust & estate litigation and other representative litigation. In 1999, the Circuit Court of Winchester applied it in the context of a dispute among members of a defunct nonstock corporation over the proceeds of liquidated assets. Most community associations in Virginia are incorporated under the Virginia Nonstock Corporation Act.
The Supreme Court of Virginia recognized that the common fund doctrine serves to eliminate “free rides” that would unfairly burden litigants in cases that directly impact a class of represented parties not retaining counsel in the lawsuit:
The essence of the common fund doctrine is that it would be unfair to permit one party to retain counsel, to file suit, to secure a benefit that all will share, yet to leave the full cost of the effort upon the one party who initiated the suit while others who will share the proceeds make no contribution. If others are to sit idly by and reap the benefits of one litigant’s labors, the idle parties should share in the cost of those labors. In short, the common fund doctrine is aimed at preventing “free rides.” See J. P. Dawson, Lawyers and Involuntary Clients: Attorneys’ Fees From Funds, 87 Harv. L. Rev. 1597, 1647 (1974), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
The common fund doctrine extends beyond cases where there is an actual “fund” of money to included cases where there may be some sort of injunctive, declaratory or equitable remedy that does not have a specific dollar amount associated with it.
I am not aware of any published judicial opinions where a judge has considered the “common fund” doctrine in representative plaintiff litigation specifically involving HOAs or condominiums. However, the Property Owners Association Act and the Virginia Condominium Act provide for “prevailing party” attorney’s fees. Is there any reason why the common fund doctrine should not be applied to avoid free riding of representative plaintiff litigation against community associations? I see no obstacle to use of this doctrine for such in a proper case.
Du Pont v. Shackelford, 235 Va. 588 (1988).
Turner v. Yeatras, 49 Va. Cir. 395 (Winchester 1999).
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)