Why Following Statutes that Govern Community Associations is a Good Idea
Arizona has some curious HOA and condo laws. But one of the most perplexing aspects of our condominium and planned community acts is that some of the statutory prohibitions or obligations have no corresponding penalty or sanction for non-compliance. This drives community managers, board members and homeowners a bit bonkers at times. A savvy board member looking for a loop-hole will often ask, “If there’s no penalty for holding closed board meetings, then why do we have to worry about compliance with the law?”
Technically, the board member is right about the law, but blind to all of the consequences of non-compliance. Just because a statute is without a corresponding statutory penalty (like a fine or voiding a board’s wrongful action), the decision to violate the law is not without serious consequences, legal or otherwise. We know that boards do ignore our advice and the statutes and therefore ignore the requirements of the statutes (like open meetings and annual financial reviews). But these decisions can and do cause serious problems for communities. It is important to understand that many board decisions are measured against duties of ordinary care and prudence. But whatever discretion a board enjoys in much of its decision-making, violating a state statute is not the stuff of sound business judgment. Here are just a few examples of very real consequences we see when boards ignore the law.
Consequence #1 – Your Association Can Be Sued
We often forget that homeowners need not have suffered a monetary loss to file a lawsuit. The violation of a statute is alone the basis for an owner to file a complaint. That complaint could allege damages or it could allege non-monetary relief. In either case, the Association has no good defenses when ignoring Arizona statute and the likelihood of homeowner success is high. It also means that should the homeowner win the claim that the Association violated the open meeting statute, the homeowner may be entitled to an award of his or her attorneys’ fees and costs.
Consequence #2–Homeowner Defenses
In our current economic climate, owner delinquencies are on the rise. Boards are taking action to collect those delinquencies and sometimes that means associations file lawsuits against homeowners. Most collection lawsuits are straightforward in both process and in their single aim—to collect money owed the association. But these lawsuits are also occasions for owners to air whatever other grievance or issue they have with the association. Violation of the statute regarding an annual financial compilation is not a defense to a collection action, but if an owner raises the board’s willful violation of statute, this can color a judge’s thinking on the entire case. What should be a simple case resulting in a judgment for unpaid assessments against an owner becomes a contested dispute about whether the board is holding “illegal” meetings. Compliance with statutes gives the Association a stronger and more credible position in all of its dealings with homeowners.
Consequence #3–Owner Suspicion
Homeowner suspicion and innuendo about board activity is a virus in community associations. Boards that violate the open meeting law should not be surprised when a homeowner requests records of the association. Boards that ignore a homeowner’s requests for records should again not be shocked by vicious accusations. One homeowner’s scrutiny then leads to challenging meetings and finally these suspicions then lead to outright revolt. In our experience, the slippery slope of cutting corners on statutory compliance gives birth to board recall meetings and possibly litigation.
Consequence#4–Insurance Protection
Associations can be sued for many reasons. Insurance protects the association and its directors in those situations. HOA directors and officers’ insurance policies routinely contain exclusions for intentional violations of the law. This policy exclusion means that when a board knows the law and ignores it (because the board fears no statutory penalty) and gets sued over the issue, the insurance company can deny covering the claim. This consequence then becomes financial. The association may be made responsible for paying attorneys’ fees to defend the claim and perhaps may be required to pay the homeowner damages. This is essentially a double payment—the association has paid premiums, but has been denied coverage and then has to pay its own way in the dispute itself.
These are but a few of the legal, financial and political consequences an association can face when there is an intentional violation of state statute. There are others. But no matter the ignored statute or the resulting consequence, the legal, financial and political consequences come at a great cost to the association, the board and all of the homeowners. It is almost always true that the consequences are far more serious and burdensome to the community than the small cost of statutory compliance the board avoided. In weighing penalties (or the lack there of) and the possible consequences, we always think statutory compliance is the best idea.
Very nice article.. Thanks for sharing..
D & O insurance is definitely not a shield of protection for abusive actions. We sued our HOA for violating governing docs, but did not ask for damages, so insurance could not be used, and thus we were able to force the board to assess all homeowners for the legal bills. Everyone had to pay $2500 to a lawyer well-known for seeing HOA’s as ATM machines. The members learned their lesson, and will never underestimate us again. The lesson we learned was that HOA’s are a fundamentally flawed model and will someday go the way of the dodo bird. Can’t happen soon enough.
JT – Thanks for the comment. Insurance is a bit tricky and the insurance contract was never executed to protect Associations and board members from actions taken in violation of statute. Insurance protection is most helpful when the Association membership disagrees with a decision or the decision costs the Association or a member some money. I also don’t know if your case is always the rule – many Association insurance policies will provide a defense for a board/association even if the claim does not allege money damages.
I don’t necessarily agree with your ideas about putting HOAs on the endangered species list, but on that we can agree to disagree.
Roger, You’re a CAI member as well as a lawyer, correct? The HOA system of private governments has been very lucrative for your profession and the management companies. Also correct? I just don’t think it’s been such a bonanza for plain old homeowners. If we’ve tried to act through the board, and rallying other owners, most of whom are pretty apathetic until their own ox is being gored, then our only recourse is to hire a lawyer. In real governments, you have agencies looking out for your interests. If my town breaks the law I don’t need to hire a lawyer to challenge their action. I’m a Planning Commission chair, by the way, and see how easy it is for citizens to freely challenge their representative governments. Not so in an HOA. There is no agency looking out for me. The Secretary of State has no interest in getting into this area, so complaints go unaddressed. CAI fights vociferously against any kind of state homeowner ombudsman.
Another aside…we, unlike many, read the governing docs 3 times before making an offer on our lot. The rules on wetland protection were very clearly spelled out, so we assumed the neighborhood was as protective of that environment as we are. We found out the hard way that the only rules enforced are those that affect aesthetics or raising dues. Most people don’t get involved for anything else.
I guess my bottom line is that any system where a citizen must hire a lawyer to assert rights is a flawed system. Our lives have been changed by this system, and not in a good way.
Anyway, thanks for reading.