Are Short-Term Rental Restrictions Valid?

Short-term rental restrictions are currently a hot topic. Notwithstanding changes in tax laws providing significant benefits of short-term rentals of second homes, more and more HOAs and condominium associations are attempting to amend their CC&Rs to add short-term rental restrictions. We believe most of these amendments are invalid under Arizona law.

Before we address why short-term rental restrictions are likely invalid and unenforceable, it is first necessary to define the terms we will be using. A "short-term rental restriction" is, generally, any restriction on the length of time that a property can be leased and often refers to restrictions of less than six months though it also can refer to restrictions of less than one-year. For purposes of this article, restrictions of rentals on a daily, weekly, monthly, or biannual basis fall under the "short-term rental restriction" umbrella. "CC&Rs," short-hand for "Declaration of Covenants, Conditions and Restrictions," refers to the recorded document or documents that govern the Association. CC&Rs are not Bylaws or Articles of Incorporation or Organization. 

The following is a common CC&R provision:

Leasing Restrictions. Occupancy of an entire Dwelling Unit on a Lot, but not less than the entire Dwelling Unit, may be granted to a tenant from time to time by the Owner, subject to the provisions of the Master Declaration and the Association Rules. Written leases are required for any Dwelling Unit on a Lot. All leases must restrict occupancy to a Single Family. Before the commencement of each lease term, the Owner of the Lot shall provide the Board with written notice to the Board of the names of the lessee and their family members and the terms of the lease. In addition, if the Board of Directors creates and/or adopts a "rental registration form," the Owner shall submit such form to the Master Association for every rental. Any agreement for the lease of a Dwelling Unit must be expressly subject to the Governing Documents of the Master Association. The lease must contain a provision that any violation of the Governing Documents of the Master Association shall be a default under the lease and is grounds for eviction.

There is nothing in this "Leasing Restriction" prohibiting or restricting rentals to a set term. So the question is whether and under what conditions an Association can amend this Leasing Restriction to prohibit short-term rentals. The CC&Rs also contain a generic amendment provision allowing for amendments based on a Majority of the Members (i.e., 51%).

Notwithstanding such a generic amendment provision, the Dreamland Villa case states that a Majority of the Members generally does not have the right to amend CC&Rs to add new restrictions that "unreasonably alter the nature of the covenants." Dreamland Villa Cmty. Club, Inc. v. Raimey, 224 Ariz. 42, 51, 226 P.3d 411, 420 (App. 2010). In order to determine whether the new proposed restrictions "unreasonably alter the nature of the covenants," courts look at whether the proposed amendment is foreseeable based on the language of the existing CC&Rs. If the existing CC&Rs do not place a purchaser on notice that they might be subject to new restrictions of the nature of the one being proposed, then a majority vote of members is insufficient to pass the amendment and unanimous approval of all members is required.

We recognize that the requirement of unanimous consent might seem unfair to some. There are some who argue that the mere fact that CC&Rs can be amended should be sufficient to put an owner on notice that she or he might be subject to new restrictions. But this superficial analysis ignores that real estate is often the single biggest asset most people will buy and they are entitled to buy in reliance on the existing CC&Rs. An owner who buys property specifically to use as short-term rentals and relies on the absence of such a prohibition in the existing CC&Rs does not reasonably anticipate that the singular purpose for their purchase might be outlawed by 51% of their neighbors.

Accordingly, substantial and unforeseeable limitations on an owners' rights generally require unanimity (100%). Amendments to recorded declarations cannot create new obligations or restrictions where the recorded declaration’s provisions did not alert the homeowners to the possibility that they would be subject to the new restrictions. If a recorded declaration does not contain or at least provide for later adoption of a specific restriction or requirement, it is invalid.

The Arizona Legislature has made this unanimity requirement part of the Condominium Act. A.R.S. § 33-1227 states that "an amendment shall not create or increase special declarant rights, increase the number of units or change the boundaries of any unit, the allocated interests of a unit or the uses to which any unit is restricted, in the absence of unanimous consent of the unit owners." Because short-term rental restrictions change "the uses to which any unit is restricted," the Condominium Act expressly would require "unanimous consent of the unit owners." Although the Planned Condominium Act does not contain a similar provision requiring unanimity, the Dreamland Villa case and other legal authorities recognize that the requirement of "unanimous consent" also applies in planned communities.

There are two final considerations. First, though the determination of whether a rental restriction is "substantial and unforeseeable" would appear to be one that can be made as a matter of law just be looking at the original CC&Rs, several courts have ruled that it is up to a jury to decide whether the new restrictions are "substantial and unforeseeable." Second, the Condominium Act requires that any challenge to the validity of an amendment "shall not be brought more than one year after the amendment is recorded." This means that, out of an abundance of caution, any lawsuit challenging the adoption of a rental restriction should be brought within one year of its adoption.

For more information or to discuss a short-term rental restriction in your association, contact Jonathan Dessaules at jdessaules@dessauleslaw.com or 602-274-2360.

DLG Prevails in Jury Trial in Challenge to Short-Term Rental Ban

Dessaules Law Group attorneys recently prevailed in a jury trial in a lawsuit brought against an HOA challenging the validity of a short-term rental ban. The HOA's Board of Directors obtained the approval of more than 75% of the owners to adopt the ban on rentals of less than six (6) months and recorded the proposed amendment. Five property owners voted against the ban.

The original CC&Rs did not contain any rental restrictions and allowed for amendment if 75% of the owners voted in support of its amendment. DLG argued that, notwithstanding the 75% amendment provision, unanimous consent of all owners (that is, 100%) was necessary because the rental ban was a new and material restriction that was substantial and unforeseeable in the original CC&Rs. The case went to the jury to decide whether rental restrictions prohibiting rentals of less than six (6) months was a substantial and foreseeable change.

The jury, after deliberating just over one hour following a two-day trial, returned a verdict finding that the proposed amendment was invalid because it was new prohibition that was not contemplated in the original CC&Rs.

We believe this was the first case of this nature to be tried to a jury in Arizona.

Post-Judgment Collection of Unawarded Attorneys’ Fees Violates the Fair Debt Collection Practices Act

The United States District Court for the District of Arizona has ruled in a case brought under the Fair Debt Collection Practices Act (“FDCPA”) that a law firm that submits a demand for payment of unawarded post-judgment attorneys’ fees in a judgment-debtor’s refinance violates the FDCPA.

In March 2016, the law firm representing a homeowners’ association obtained a judgment against the debtor for $7,373.57. Although the law firm had included language in the judgment purporting to entitle the judgment-creditor to post-judgment attorneys’ fees and costs, the justice court that entered the judgment specified that any fees and costs would only be awarded “after submission and approval by the court.” In April 2016, less than one month later, the law firm claimed that the amount owed under the judgment was $8,760.09, which included an additional $1,053.88 in post-judgment attorneys’ fees and costs incurred after entry of the judgment. In May 2016, the law firm claimed that the post-judgment fees and costs had grown to $1,655.88 and that the total amount of the judgment was $9,162.26. And in June 2016, the law firm wrote the lender refinancing the debtor’s property (so that the debtor could pay off the judgment) that the balance due was $9,476.21. The law firm collected the full $9,476.21 out of the refinance proceeds, including approximately $2,000.00 in post-judgment attorneys' fees and costs. 

The debtor filed an FDCPA action, claiming that the law firm violated the FDCPA because its representations in collecting the judgment were “false, deceptive, or misleading” and the firm had used “unfair and unconscionable means to collect or attempt to collect [a] debt.” The District Court ruled that the law firm violated the FDCPA by demanding and collecting almost $2,000.00 of post-judgment attorneys’ fees without ever submitting those fees to the court for approval.” The Court explained:

Essentially, [the law firm] saw an opportunity to recover all the fees they wanted without the trouble of justifying the amounts to a court, and they took it. This is precisely the type of exploitative behavior the FDCPA was enacted to prohibit. Therefore, the Court concludes that Defendants violated [the FDCPA] by misrepresenting to Quicken Loans that these feeds were legally due and owing... The Court also concludes that Defendants violated [the FDCPA] by collecting an amount that was not expressly authorized by law because the Judgment specifically required approval by the justice court of additional attorneys’ fees. 

The case is Jason v. Maxwell & Morgan PC. DLG represented the Plaintiff. 

 

Ninth Circuit Concludes HOA Attorneys’ Post-Judgment Debt Collection Practices Were Misleading

The Ninth Circuit Court of Appeals in McNair v. Maxwell & Morgan, P.C., recently held that a law firm that files a judicial foreclosure action to collect unpaid homeowner association assessments is acting as a "debt collector" and engaging in "debt collection" activities subject to the Fair Debt Collection Practices Act ("FDCPA"). 

The FDCPA applies to "debts" and regulates the conduct of "debt collectors." A "debt" is defined in the FDCPA as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” 15 U.S.C. § 1692a(5). A debt collector is any entity or person who "regularly collects or attempts to collect ... debts owed or due ... another.” The district court had concluded that filing a judicial foreclosure action was not "debt collection" activity and the law firm that filed it and a subsequent writ of special execution to conduct the sale of Ms. McNair's home was not engaged in “debt collection” activities. 

The Ninth Circuit rejected this conclusion. In holding that judicial foreclosure actions constitute debt collection activities, the Court distinguished judicial foreclosure actions from non-judicial foreclosure actions. Because the object of the action is "to retake and resell the security," not to collect money, and deficiency judgments following non-judicial foreclosures are prohibited in many states, the Ninth Circuit held that the latter are not debt collection activities subject to the FDCPA. 

Judicial foreclosure actions filed over unpaid homeowner associations, by contrast, principally seek to collect unpaid homeowner association fees. The Ninth Circuit rejected the argument that such fees are not "debts," holding that they constitute obligations "to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes[.]” Thus, the Court found that the record was clear that the law firm and its lawyers "were in fact 'debt collectors' collecting 'debt.'”

Having established that homeowner association assessments were "debts" under the FDCPA and the law firm and its lawyers were "debt collectors" subject to the FDCPA, The Ninth Circuit held that the law firm and its lawyers violated the FDCPA by including $1,597.50 in unawarded post-judgment attorneys' fees in a writ of special execution filed to complete the sale of McNair's property because "no court had yet approved the quantification of the 'accruing' attorneys' fees claims in the Writ." 

The Ninth Circuit held that the law firm "falsely misrepresented the legal status of this debt, by implicitly claiming that the accruing attorneys’ fees of $1,597.50 already had been approved by a court."

The case is McNair v. Maxwell & Morgan, P.C.

 

Court of Appeals Clarifies When and How HOAs Can Collect Fees

The Arizona Court of Appeals, in a recently-published decision, clarified the circumstances under which an HOA was allowed to collect attorneys' fees from a homeowner. In Bocchino v. Fountain Shadows Homeowners Association, the Court of Appeals held that an HOA was not entitled to collect attorneys' fees that it purportedly incurred in obtaining an Injunction Against Harassment against a homeowner when it did not seek an award of attorney fees from the court and no fees were awarded by the court. Dessaules Law Group represented the successful homeowner.

The HOA in Bocchino sought and obtained an ex parte Injunction Against Harassment Against Harassment on behalf of several board members claiming that the homeowner was harassing them. The homeowner did not challenge the Injunction, did not request a hearing, and instead decided to sell her home and move out of the community. The HOA never requested fees from the court issuing the Injunction but simply added fees to the homeowner's account that it collected at closing. Although the HOA never mentioned the Declaration in the Injunction Against Harassment action, it argued that the Declaration allowed it to obtain its fees from the homeowner.

The Superior Court ruled that the HOA was not allowed to collect the fees it incurred. The Court of Appeals affirmed on two grounds. First, it held that a party seeking attorneys' fees relating to an Injunction Against Harassment had to request fees in that action or waived any claim to its fees. Second, the Court of Appeals held that the HOA's Declaration "does not expressly provide that the Association may assess, directly against a homeowner, attorney fees incurred in a judicial proceeding that have not been awarded by a qualified tribunal. "

It is a common practice among HOAs in Arizona to collect attorneys' fees from homeowners without obtaining an award from a court. Once an HOA has obtained a money judgment, for example, it will seek to collect additional attorneys' fees not specifically awarded in the judgment that it incurs post-judgment. Although the Court of Appeals in Bocchino did not expressly address this practice, it made several comments suggesting that this practice is unlawful. For example, the Bocchino court rejected on "sound policy" reasons the Association's argument that judicial approval of an HOA's fees was not necessary because the fee provision in the Declaration allowed the Association to recover “all” the fees incurred.

The Court further observed:

[T]he Association has cited no authority for the proposition that it was permissible to simply charge Bocchino’s Association account for attorney fees it incurred without first receiving an award from the court. Requiring the tribunal that resolves the litigation to evaluate attorney fee claims – as generally required by our statutes and rules – constitutes sound policy. Courts play a significant role in assessing and awarding attorney fees incurred in judicial proceedings. 

Finally, in a footnote, the Court of Appeals observed that "[w]hether the fees the Association incurred were prima facie reasonable (or clearly excessive) was a question for the court that issued the injunction." There is no reason to believe that this "sound policy," however, is limited to Injunctions Against Harassment and there is nothing in the opinion that suggests it should be narrowly construed. 

While we do not believe that the Bocchino opinion will end the practice of HOAs collecting unawarded attorneys' fees without any judicial oversight, Bocchino provides clear direction that the practice is improper and should end.

The case is Bocchino v. Fountain Shadows Homeowners Association.

Nevada Jury Awards $20 Million Against HOA for Failing to Maintain Swingset

The failure to maintain and repair can cost an HOA. In this case, the failure to repair a known faulty swingset will cost an HOA $20,000,000.00.

The swingset in question failed on four previous occasions. Despite spending over $100,000 per year on landscaping, repairs, and maintenance, the HOA refused to pay just $150.00 per month for a monthly inspection and maintenance plan repeatedly recommended by the swingset’s manufacturer. The plaintiff suffered a crushed skull and other permanent injuries.

An HOA's duty to maintain and repair common areas is its central function. 

 https://www.reviewjournal.com/local/jury-awards-20m-in-las-vegas-case-involving-playground-injury/

“What’s the Worst Thing I Can Do if I’m Sued?”

This is a question we hear all the time. And here’s the short answer: “Nothing.”

You get served with or receive a copy of a lawsuit. Maybe it’s a small amount. Or maybe you think they have the wrong party because you’ve read through the complaint and none of it sounds familiar. Or maybe you think, “well, they can’t get blood from a turnip so who cares if they get a judgment aginst me?!” Or here’s a classic line we hear all the time: “But I didn’t do anything wrong, so there’s no way a judge will let them get a judgment against me. Wrong, wrong, wrong, and (in case you didn’t know where I’m going with this)....wrong!

The worst thing you can possibly do is: Nothing. Small judgments have a way of turning into big judgments through interest, attorneys’ fees, costs, or perhaps additional damages added later. Even that $500.00 judgment could come back to haunt you years later as a judgment for thousands of dollars. That complaint you chose to ignore also might have asked for injunctive relief, which can turn into contempt proceedings that include the possibility of fines or even jail time!

Oh, and if you’re banking on the judge acting as the gatekeeper to make sure the claims against you are valid, you’re money is better spent buying a powerball ticket. Judges do not represent you. Without someone there to defend your interests, the odds are very good that you will lose. In a one-horse race, even a lame pony finishes first.

If you do nothing in response to a lawsuit, you generally lose the right to challenge the allegations against you. Yes, as with all things, there are exceptions. But if you have been served with the lawsuit and made the conscious decision not to respond, it will definitely be harder to try to reopen the case months or even years later. 

We get it. Lawyers cost money and lawsuits can be expensive. But the cost of doing nothing could cost you a lot more in the long run! At a minimum, go talk to a lawyer and get a better understanding of your rights, options, and responsibilities. 

 

 

 

What About My Emotional Support Pig (or Chicken, Dog, or Cat)?

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Many people when they think about their homes or families, they think about the family pet or pets. Dogs, cats, birds, hamsters, chickens.... Many people who live in homeowners associations or condominiums, however, are told that they are not allowed to have pets or that they are only allowed to have certain pets or that their pets are only allowed if they fall within certain size and weight restrictions. We recently met with a gentleman whose dog had gained weight and it went from being "allowed" to "not allowed" due to his added girth. "Sorry, Cooper is no longer welcome here at the condominium. We look forward to seeing him back here when he loses the extra five pounds."

The questions we most common encounter with pets is whether an association has the right to ban pets altogether and whether the association has the right to ban a particular pet. 

Generally, if the CC&Rs do not prohibit the right to restrict pets or animals, the HOA is probably barred from attempting to create a new rule without unanimous consent. If a declaration expressly allows pets is silent, a board of directors lacks the power to adopt rules banning them. This is not to say that associations cannot impose reasonable restrictions (they can). Of course, what constitutes reasonable restrictions is, as with beauty, often in the eye of the beholder.

However, associations generally cannot prohibit support animals (such as the emotional support pig shown in the photo above). Both the Arizona and Federal Fair Housing Act require HOAs and condominiums to make reasonable accommodations to ensure that homeowners are afforded equal opportunities to use and enjoy their property and the common areas. An association that refuses a reasonable accommodation can face a lawsuit, damages, and attorneys' fees. Both the state and federal versions of the FHA exist to ensure that individuals with disabilities, whether obvious or not, receive the same rights, benefits, and privileges as their neighbors.

Keep in mind that a homeowner cannot simply declare any animal to be an emotional support animal. You can't just grab any bird out of the air and call it your emotional support pigeon. There are rules and requirements as to what constitutes such an animal and there is usually a certification process that is required.

Associations need to tread lightly when it comes to emotional support animals, in general, and the state and federal Fair Housing Acts, in particular. Please give us a call at 602-274-5400 if you have any questions about your emotional support dogs, pigs, chickens, or other animals.

Are On-Street Parking Bans Valid?

We regularly meet with homeowners whose HOAs threaten to impose fines or even take them to court to enforce on-street parking bans. In one case, the HOA spent more than $40,000.00 unsuccessfully attempting to enforce an on-street parking ban against a family who had five licensed drivers in the family.

Are these bans enforceable? Arizona law says that the HOA has "no authority over and shall not regulate any roadway" if it is a public street. But this law only applies to planned communities whose CC&Rs were recorded since December 31, 2014. So if your HOA is new or if it has recorded an amendment to its CC&Rs since December 31, 2014, the HOA does not have authority to ban you from parking on public streets.

What about those older associations or those that have not yet amended or refiled its CC&Rs? The answer often turns on the precise language used in the CC&Rs. However, it does not make sense for HOAs to be able to regulate public streets. HOAs, after all, are not public entities. Although no Arizona court has had the chance to address this specific issue, one court in New York has ruled that HOAs cannot regulate the use of public streets in this way:

[T]he regulation of public roads is vested exclusively in governmental bodies, usually the municipality in which the road is located. Private persons or organizations such as homeowners associations have no capacity to limit the public’s use of public ways. Hence, a private covenant against overnight parking is not enforceable with respect to public roads.

Gillman v. Pebble Cove Home Owners Ass’n, Inc., 546 N.Y.S.2d 134 (1989). 

Finally, it is important to keep in mind that HOAs cannot enforce parking bans, even if they are valid, if they are doing so in a selective, random, arbitrarily, capricious, unreasonable and/or potentially discriminatory manner. A use restriction that singles out and targets a particular homeowner is unreasonable, arbitrary, capricious, and unenforceable. If all of your neighbors also park on the street and you're the only one getting fines or threatening letters, you may have a good selective enforcement defense.

How to (Properly) Remove Board Members

Always get a lawyer involved early and often. Why? Because if you do it incorrectly you’ll likely make things a lot worse for you and your neighbors. More importantly, a board member generally does not have to face more than one removal petition during his or her term of office. So, an improper removal could prevent your neighbors from doing it correctly.

Assuming your community is not under declarant control (or the declarant has not appointed the board member in question), there are three different numbers that generally determine the success or failure to a removal petition. The first you’ll need to remember is an either-or: 25% or 100. In a community with one thousand or fewer members, a petition for removal of one or more board members must be signed by either at least 25% of the votes or by 100 (whichever is less). If your association has more than one thousand members, however, you only need ten percent. Keep in mind that these are the thresholds. You have to assume that the board, its property managers, and its attorneys are going to scrutinize your petition to try to invalidate it. If you have signatures of exactly 25%, you’re making their job easier for them.

The next number to remember is 20%. This is the percentage of owners necessary to establish quorum for purposes of a special meeting called for the purpose of removing a board member. Submitting a petition was just the first step. You need to mobilize your troops and keep them invested in the process. If you get 40% of the owners to sign a removal petition but only 10% show up at the special meeting, the process is over and you’ve lost. 

You’ve gotten your 25%+ signatures, you’ve submitted a removal petition, and you’ve mustered your allies to show up at the board meeting so you pass the 20% threshold. You’re still not done. For the removal to be effective, a majority of those voting (either in person or by absentee ballot) must vote in favor of removal. So, the third number to remember is 51%. Obviously, if the board members subject to removal show up with more votes, then they will successfully defeat the removal petition.

These are the basics. Removing a board member can often be a complicated process. The statute, for example, imposes rigid timelines to be enforced. The law also says that a petition calling for the removal of a board member “shall not be submitted more than once during each term of office for that member.” It also entitles the prevailing party in any civil action filed regarding a removal to be awarded reasonable attorneys’ fees and costs. 

There are a number of nuances in any removal petition and follow up questions, such as who fills the vacancies if successful? What happens if the board does not honor or challenges the petition? We highly recommend hiring a lawyer to walk you through the process to make sure it is done correctly. We cannot guarantee success in the removal process, but our professionals can guide you to avoid making mistakes that could continue to haunt you for months or even years.

2018 HOA Legislative Update — Not Fixing the Real Problems (and Creating Some Really Bad Ones, too).

The 2018 Arizona Legislative session has gotten off to a fairly unremarkable start for homeowners that potentially promises to make some really bad law for homeowners and fails to fix any of the real problems that homeowners, individuals, and consumers face on a daily basis. 

Let’s start with  a bill so bad that its own sponsor pulled it after less than one week. Senator John Kavanaugh, R-Fountain Hills, proposed amending legislation to HOA laws that would speed up the foreclosure process. Although the current laws allow homeowners associations and condominiums to foreclose if the homeowner is either one year or $1,200.00 past due, Senator Kavanaugh's proposed legislation (SB-1080) would have shortened that period to just six months. Apparently, he tried to package this nonsense as friendly for homeowners. This was literally the only change to the existing law that Senator Kavanaugh proposed. Fortunately, he withdrew the proposed bill just days later. With HOAs already foreclosing thousands of homes in Arizona (yes, I said thousands), do we really need to speed up this process?

But homeowners are not out of danger yet. A new bill seeking to amend the same laws has recently dropped in the House: HB-2609. While this might seem like another feel-good measure that, on its face, might be beneficial homeowners, it is a wolf in sheep's clothing. 

Why? It requires an association, before filing for foreclosure, to first seek and obtain a money judgment against the homeowner.  If the HOA cannot recover "the full amount of the assessments owed by execution or garnishment," then it is free to proceed with foreclosure. Sounds great; right? Homeowners cannot lose their home right away because the HOA or condominium association must first take you to court, get a money judgment, and then try to collect that money judgment. 

So what's the problem with this? Fees, for starters. Those money judgments come at a substantial cost and, you, the homeowner, are the one who is expected to pay for them. All of them. Then there's the ambiguity that the new statute creates. If your HOA gets a money judgment against you for $1,000.00 in assessments and $2,500.00 in fees and costs, that's $3,500.00 that you have to pay. If you don't have $3,500.00, does this mean that the HOA can proceed to foreclosure? 

There's also a problem with the amounts. The lawyers who prepare these money judgments for the HOA often contain "blank check" language purporting to award the HOAs with all future costs and fees incurred collecting the money judgment. This means that the $3,500.00 judgment easily could become $5,000.00 or more. Sadly, this is often done without a court ever looking at any of these additional fees or the HOA even asking for permission to collect them. Quite simply, it becomes impossible to pay off the money judgment.

Then there's the biggest question of all -- what is the amount that you have to pay to avoid foreclosure? Is it the $1,000.00? Is if the $3,500.00? What if you paid $500? What is the new amount you have to pay? You can bet the bank (and you may have to) that the HOA will argue that, to avoid foreclosure, you have to pay not just the $1,000.00 but the entire amount of the prior judgment. They'll wrap the money judgment into the new foreclosure lawsuit.

The bottom line is that this new legislation benefits the HOA lawyers. It gives them the power to charge virtually unlimited fees. At best, this proposed bill creates further ambiguities and problems. At worst, it codifies a system that is already in place designed to run up attorneys' fees on behalf of an HOA to make it difficult, if not impossible, for Arizona homeowners to catch up once they fall behind.

If Legislators wanted to fix the problem, one solution is an easy one -- clarify that homeowners can avoid foreclosure, at any time (before or after a lawsuit is filed), simply by paying the amount of the unpaid assessments. All too often, homeowners are paying thousands of dollars to pay these unpaid assessments only to find that the attorneys representing the HOAs refuse to dismiss the foreclosure lawsuits because the homeowners won't pay the attorneys' fees and costs that have not yet been (and may not be) awarded.

 

Is a Debt Collector Suing You in a "Foreign" Court

The Fair Debt Collection Practices Act ("FDCPA") expressly prohibits a debt collector from bringing a legal action in a "foreign" venue. See 15 U.S.C. § 1692i. "Foreign" does not mean account on another country or even another state. For purposes of the FDCPA, a "foreign" court is any court that is not located in q judicial district in which you reside or in which you signed the contract that is at issue in the lawsuit.

This statute explicitly provides for just two proper forums:

  1. in the case of an action to enforce an interest in real property securing the consumer’s obligation, bring such action only in a judicial district or similar legal entity in which such real property is located; or
  2. in the case of an action not described in paragraph (1), bring such action only in the judicial district or similar legal entity—

(A) in which such consumer signed the contract sued upon; or

(B) In which such consumer resides at the commencement of the action.

A legal action for purposes of this section is not limited to a lawsuit, but it can also include a garnishment action, other types of collection actions, and generally encompasses "all judicial proceedings."

Call us at 602-274-5400 If you have questions whether you're being sued in the correct court. i you are not being sued in the right court, you may be entitled to damages, attorneys' fees, and court costs (even if you owe the debt).

 

HOA Codes of Conduct and Why They Are Unenforceable

Codes of Conduct are all the rage in HOAs and condominium communities. Some associations are even attempting to insert these Codes of Conduct into their bylaws, declarations, and other governing documents. There's just one major flaw with Codes of Conduct -- they are invalid and enforceable. 

Consider what appears to be a fairly innocuous Code of Conduct:

  1. Board Members shall act in the best interests of the Association as a whole. Board Members serve for the benefit of the entire community, and shall, at all times strive to do what is best for the Association as a whole.
  2. No Board member shall willingly misrepresent facts to advance a personal cause or influence the community to advance a personal cause.
  3. Board members shall use their best efforts at all times to make reasonable decisions that are consistent with the Declaration, Bylaws, and other governing documents of the Association, and to be familiar with all such documents.
  4. Board Members shall set high standards for themselves as Association representatives. Board Members shall hold themselves to the highest standards as members of the Association, and shall in all way comply with the provisions of the Association’s governing documents and relevant law.
  5. Board members shall at all times work within the Association’s framework, refrain from unilateral action, and abide by the system of management established by the Association’s governing documents and the Board. The Board shall conduct business in accordance with relevant law and the Association’s governing documents, and shall set upon decisions duly made, and no Board Member shall act unilaterally or contraery to such decisions. 
  6. Board Members shall behave professionally at meetings. Board members shall conduct themselves at all meetings, including Board meetings, annual meetings of the members and committee members, in a professional and businesslike manner. Personal attacks against other Board Members, Association member, residents, officers, management, or guests are not consistent with the best interests of the community and will not be tolerated. Language at meetings shall be kept professional. Though differences of opinion are inevitable, they must be expressed in a professional and businesslike manner.
  7. Board Members shall not defame or disparage any other Board Member, Association member resident, vendor, Association agent or third-party.
  8. Board members shall not harass, threaten or otherwise intimidate aby other Board Member, Association member, resident, vendor, Association agent, or third-party.

So what's wrong with it? Everything. Literally, everything. Notably, the Code of Conduct does not state who gets to decide what constitutes the “best interests of the Association,” what is “best for the Association as a whole,” or what constitutes a "willing misrepresentation" or a “personal cause.” Who gets to decide whether these standards are met? If your answer is "the rest of the board," then you've just identified one of the biggest problems with Codes of Conduct - they are subjectively and arbitrarily enforced by those who hold power to keep dissenting voices or the opposition from speaking up. Who decides what is disparaging? Truthful statements can be disparaging. Who decides whether someone is feeling harassed, threatened, or intimidated?

Also, keep in mind that board members owe fiduciary duties to the associations that they serve. And these fiduciary duties often require board members to review documents, conduct investigations, and ask hard questions. The above Code of Conduct, however, suggests a board members are prohibited from conducting such an investigation if they believe the “system of management” is not functioning properly or that they could violate the Code of Conduct by conducting an investigation if a majority of the board decides there's nothing to investigate? 

When Codes of Conduct are included in bylaws, declarations, or other governing documents, they take on added problems. An association’s governing documents form a contract between the association as a whole and its members. Bylaws, like declarations and the other governing documents, also constitute part of this contract.

Basic rules of contract interpretation, therefore, apply when interpreting them. A fundamental rule of contract construction is that contract provisions cannot be enforced when the terms are too vague or uncertain. Codes of conduct that purport to require individuals to conform behavior to certain subjective standards, such as using “best efforts at all times to make reasonable decisions,” setting “high standards” and “hold themselves to the highest standards as members,” to name but two, are too vague and indefinite because they do not allow individuals, such as Plaintiff, to conform her conduct to the rule or know what conduct would constitute a violation.

Other terms that fall into the “too vague to be enforced” category include similar subjective terms that are “obscure and indefinite in meaning as a matter of law.” A contract provision is not enforceable “[i]f the essential terms are so uncertain that there is no basis for deciding whether the agreement has been kept or broken.”

An objective standard is impossible to employ since the determination of such violations are, by their nature, subjective and impossible to calculate on an objective standard. How does an individual know whether she or he is meeting the standard or what behavior violates it? The fact that the majority apparently gets to make the decision unilaterally further underscores the invalidity and unenforceability of Bylaws disqualifying owners based on subject determination of an individual’s conduct.

Put another way, how does a member possibly confirm his or her behavior to the code of conduct against what objective measure is it to be tested? How does a member know she or he is acting “in the best interests of the Association” or striving “to do what is best for the Association as a whole”? What if a majority of the board believes a board member is not pursuing the “best interests” of the Association because she or he believes that the Association’s best interests diverge with what the majority of the board believes or wants? Also, what is the penalty for violating it and who gets to decide?

Subjective rules might be great for kids on the playground but they have no place in a quasi-governmental association. 

A Practical Guide to the Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (“FDCPA”) was adopted to “eliminate abusive debt collection practices by debt collectors….” 15 U.S.C. § 1692(e). Debt collectors include lawyers and law firms regularly engaged in the collection of debts through litigation constitute debt collectors for purposes of the law. Heintz v. Jenkins, 514 U.S. 291, 299, 115 S.Ct. 1489, 1493, 131 L.Ed.2d 395 (1995).

A debt collector’s behavior is measured according to a “least sophisticated debtor” standard, which “ensure[s] that the FDCPA protects all consumers, the gullible as well as the shrewd… the ignorant, the unthinking, and the credulous.’” McCollough v. Johnson, Rodenburg & Lauinger, LLC, 637 F.3d 939, 952 (quoting Clark v. Capital Credit & Collection Serv., Inc., 460 F.3d 1162, 1171 (9th Cir. 2006)). The FDCPA is a strict liability statute that “makes debt collectors liable for violations that are not knowing or intentional.” Reichert v. National Credit Systems, Inc., 531 F.3d 1002, 1005 (9th Cir. 2008).

Absent evidence of a bona fide error, courts have held that a debt collector violates the Fair Debt Collection Practices Act as a matter of law where it misstates the balance owed, misrepresents the legal status of a debt, pursues a non-existent debt, or collects or garnishes more than the amount owed. 

Although a debt collector can violate the FDCPA in numerous ways, most violations fall into one of the following two categories. We will address additional FDCPA violations in subsequent blog posts.

False and Misleading Misrepresentations.

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. This includes, but is not limited to false representations as to:

(A) the character, amount, or legal status of any debt; or

(B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.

(3) The false representation or implication that any individual is an attorney or that any communication is from an attorney.

It also prohibits debt collectors from representing or implying: that nonpayment of a debt will result in arrest or imprisonment or the seizure, garnishment, attachment, or sale of any property or wages of any person (unless such action is lawful and the debt collector or creditor intends to take such action); threats to take actions that cannot legally be taken or that are not intended rot be taken; false representations or implications that the consumer committed any crime or other conduct in order to disgrace the consumer; and falsifying documents to make it appear they are authorized, issued, or approved by courts, officials, or U.S. or state agencies.

This section of the FDCPA generally prohibits using false representations or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer. 

Unfair or Unconscionable Means.

A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. This includes:

  1. Collecting amounts (including any interest, fee, charge, or expense incidental to the principal obligation) that are not expressly authorized by the agreement creating the debt or permitted by law.
  2. Accepting a check or other payment instrument postdated by more than five days (unless such person is notified in writing of the debt collector's intent to deposit such check or instrument not more than ten nor less than three business days prior to such deposit).
  3. Soliciting postdated checks or other postdated payment instruments for the purpose of threatening or instituting criminal prosecution.
  4. Depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument.
  5. Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if (a) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (b) there is n present intention to take possession of the property; or (c) the property is exempt by law from such dispossession or disablement. 
  6. Communicating with a consumer regarding a debt by post card.

Violations of the FDCPA carry penalties, including statutory and actual damages as well as attorneys' fees and court costs.

 

 

Your HOA's Short-Term Rental Ban May be Illegal

Short-term rental restrictions are popping up in planned communities and condominiums throughout Arizona at an alarming rate. While exactly what constitutes "short-term" may vary from one association to another, with prohibitive periods ranging from 30 days to in some cases one year, the bans are real and they are having a disastrous impact on owners. In some cases, these bans are being adopted by board edict; in others, a large number of homeowners band together. In both cases, it is very likely that new rental restrictions are unlawful regardless of the number of owners who support them.

There are several arguments for why new rental restrictions are invalid even in cases where a majority or super-majority of members votes to enforce the ban. The Arizona Condominium Act, for example, provides that an amendment to a declaration "shall not create or increase special declarant rights, increase the number of units or change the boundaries of any unit, the allocated interests of a unit or the uses to which any unit is restricted, in the absence of unanimous consent of the unit owners.” A rental restriction is the classic type of use restriction that would seemingly require such unanimous consent. 

In addition, the Arizona Court of Appeals in Dreamland Villa v. Raimey held that amendments to declarations must be with unanimous consent if they “unreasonably alter the nature of the covenants" and that “any amendment must be directed at, and is limited by, the scope of restrictions and cannot create new obligations not previously mentioned. Associations cannot “use the Declaration’s amendment provision as a vehicle for imposing a new and different set of covenants, thereby substituting a new obligation for the original bargain of the covenanting parties,” the Dreamland Villa court held that an amendment that “would unreasonably alter the nature of the covenants,” such as those having a “substantial and unforeseeable” impact on owners, must be disallowed because “such servitudes [cannot] be imposed non-consensually under the generic amendment power.”

Such amendments are also often arbitrary and unreasonable. Courts have recognized that associations must act reasonably and cannot enforce restrictions or take acts that are arbitrary, unreasonable, or selective. Their rulemaking powers are limited to the adoption of “reasonable” rules and they do not have the power to adopt rules that “restrict the use or occupancy of, or behavior within, individually owned lots or units.” 

We believe that the law is clear that new rental restrictions cannot be adopted with less than unanimous consent of all members. Associations, however, are coming up with creative ways to try to circumvent this unanimity requirement, passing rules regulating who can and cannot use the common areas such as pools or boat docks (surprise: short term renters are the ones being denied these rights). 

If you are the victim of a rental restriction or have questions, call today for a consultation. In many cases, you have to act swiftly to prevent the new rental restriction from being enforced. If you do not, you could lose the right to do so!

Board Members Can't Exclude the Opposition from Meetings

HOA boards cannot exclude or prohibit board members from executive sessions or other meetings. In McNally v. Sun Lakes Homeowners Association #1, Inc., 241 Ariz. 1, 382 P.3d 1216 (October 13, 2016), the Court of Appeals rejected an association's argument to exclude a board member from all executive sessions, holding that "by passing the motion, the Board prevented [her] from performing her duties and responsibilities as a director."

The Court wrote:

Participating in executive sessions was critical to McNally performing her duties as a director. Pursuant to A.R.S. §§ 33–1804(A)(1)–(5), directors of a homeowners' association are permitted to discuss a wide variety of important matters in executive session, including: legal advice from an attorney; pending or possible future litigation involving the association; personal, health, or financial information about association members, employees, or contractors; and job performance, compensation, health, and complaints regarding association employees. Indeed, during McNally's term, the Board frequently held executive sessions to discuss important matters such as the Association's budget, members' code of conduct, remodeling projects, creation/elimination of staff positions, and hiring a general manager. However, based on the Board's motion, McNally was not allowed to participate in any of these discussions.

When members are elected to serve as board members, "it is contemplated that the corporation shall have the benefit of the judgment, counsel and influence of all of those directors.” Id. (quoting 2 William Meade Fletcher et al., Fletcher Cyclopedia of Law of Corporations § 406 (perm. Ed., rev. vol. 2014)). The Court of Appeals held that a meeting held in the absence of some of the directors and without notice to them is most likely illegal.

A Big Victory for the Little Guy!

The Arizona Court of Appeals recently imposed significant restrictions on homeowners' associations' rights to impose fines and penalties against homeowners. In Turtle Rock III Homeowners Association v. Fisher, 243 Ariz. 294, 406 P.3d 824 (October 26, 2017), Division One of the Arizona Court of Appeals held that homeowners associations are prohibited  from imposing and collecting fines or penalties if the HOA did not have a valid, published written fine penalty policy. The absence of such a policy was per se unreasonable and, as such, the fines were unenforceable.

Arizona law generally allows HOAs to charge reasonable monetary penalties. See, e.g., A.R.S. § 33-1803(B). However, the Court held in a previous case that it was unreasonable to impose late fees based on a retroactively adopted fee schedule. In Turtle Rock III, the Court of Appeals considered whether daily or weekly fines were reasonable or "akin to a punitive damages award." The Turtle Rock homeowner faced "escalating monetary penalties for her failure to cure" certain maintenance violations. 

The Turtle Rock III court rejected the fines on several grounds. First, it held that "[a]d hoc fines," that is fines that are imposed seemingly out of thin air, "are per se unreasonable." This is true "even where the HOA has the authority to levy fines." In addition, any fines must be promulgated pursuant to a prior published schedule of fines. In other words, secret fine policies are just as prohibited as no fine policies at all. The absence of a fine policy in the Turtle Rock case was a significant factor in the Court of Appeals' ruling for the homeowner. "The trial court did not make a finding that a promulgated fee schedule existed."

Finally, and perhaps most significantly, the Court of Appeals held that it was the Association's burden to prove that the fines imposed were reasonable. In Turtle Rock, the fees were $25.00 per day. The homeowner "was not required to present evidence controverting the existence of the fee schedule." That burden fell squarely on the Association suing to collect the fines. The Court of Appeals held that there was "no support in the record for a determination that a fine of $25 per day, for any violation, is reasonable. A stipulated damages provision made in advance of a breach is a penalty, and is generally unenforceable." 

The Court's central holding is worth repeating: 

Although the HOA had the authority under state statutes and the CC&Rs to promulgate a fine schedule for monetary penalties, there is no competent evidence in the record before us that it did so. Without competent evidence of a fee schedule timely promulgated demonstrating the fine amounts and the appropriateness of such amounts, monetary penalties are per se unreasonable. Even if a fee schedule existed, the HOA had the burden to prove its damages. Given our resolution of this matter, we need not address Fisher's due process claim related to the required thirty day notice of a penalty. The trial court's award of monetary penalties is reversed and the attorneys' fees award below is reversed.

The last part of this ruling will continue to resonate: "Even if a fee schedule existed, the HOA had the burden to prove its damages." While an HOA may have the right to impose fees or penalties for CC&R violations, Turtle Rock suggests that any such fines, in addition to being set forth in a published fine policy, must relate to some damage that the HOA might suffer. 

Most HOAs that have fine policies charge a minimum of $25.00 for an initial violation. These fines often escalate quickly. $25.00 becomes $50.00, which becomes $100.00, and so on. But if these fines bear no relation to any actual damages that an HOA actually suffers, it raises serious questions whether the HOA can even enforce such fines in the first place.

Have you been fined? Did you pay the fines or are you contesting them? 

CALL US TODAY TO DISCUSS YOU LEGAL RIGHTS.

Second Mortgages and Lines of Credit

Arizona law prohibits a lender from filing a lawsuit to collect on a home loan where the loan represents “purchase money,” that is, money used to purchase the property. This includes purchase money loans that are technically denominated as “home equity lines of credit” taken out at the time of the original purchase of the home. It also includes first, second, and even third mortgages where the money was borrowed as part of the purchase of the property.

Consider the following illustration: You buy a $300,000.00 house. It is structured as two loans in what is common called an “80-20” transaction, meaning that the first loan is 80% of the purchase price, or $240,000.00, and the second loan is 20% of the purchase price, or $60,000. Because both of these loans are considered purchase money loans, the lenders cannot sue the borrower to recover the money in the event the borrower defaults. This is true even if the borrower has refinanced the original loan to get a better interest rate or other terms (note: the same may not be true, however, if the borrower has refinanced in order to withdraw some equity). This is also true even if the lender calls the second loan a “home equity line of credit.”

A common scenario in today’s real estate market is that the first mortgage forecloses. Ordinarily, this leaves the second lender without any remedy because they cannot file a lawsuit seeking to recover the difference. A number of lenders, however, are either unaware of, or deliberately ignoring, this prohibition by filing improper lawsuits. In many cases, the original loan has been sold to a different bank and the new bank fails to do its due diligence to determine whether the loan is a purchase money loan before filing a lawsuit. Because borrowers are unaware of the rules, in many cases they do nothing and let the lenders obtain substantial default judgments against them. Judgments to which the lenders otherwise would not be entitled except the borrower has forfeited his or her right to defend the lawsuit! In many cases, you may be entitled to recover your attorneys’ fees and costs if you are forced to defend such a lawsuit.

Don’t become a victim of predatory collection practices on the part of unscrupulous or unknowledgeable banks. If a bank has sued you on a second loan, we strongly advise you to consult with a lawyer to determine your legal rights. Contact the lawyers at the Dessaules Law Group today at 602-274-5400 to schedule a consultation.

What happens after the bankruptcy discharge: An emerging (and disturbing) trend in foreclosure, bankruptcy, and HOA law

The prevalence of foreclosures in the real estate market has had several unexpected repercussions to distressed homeowners who have made the decision to walk-away from their home.  Banks appear to be unable, incapable, or unwilling to handle the volume of foreclosures, so a distressed homeowner may continue to own his or her home for months, and occasionally even years, after receiving a Notice of Trustee’s Sale (rather than the 90-days stated in the Notice).