HOA BOARDS BEWARE: CALIFORNIA COURTS REQUIRE STRICT STATUTORY COMPLIANCE TO LIEN AND FORECLOSE

Across the Line

Published in the Washoe County Bar Association’s The Writ

By: Brian Hanley of Porter Simon

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While Nevada homeowners’ associations (“HOAs”) must comply with the Uniform Common-Interest Ownership Act, which is enacted in Nevada[1] and several other states with the stated purpose of making “uniform the law with respect to [its] subject [matter] among states enacting it,”[2] California HOAs (and their largely volunteer directors) must navigate the virtual maze of procedures and special requirements of California’s one-of-a-kind Davis-Stirling Common Interest Development Act (the “Act”) in performing their duties.[3]

Like Nevada, the California Legislature has granted HOAs powerful collection remedies – lien and foreclosure rights – in the Act. However, the Act imposes various procedural, notice and due process-type requirements on HOAs before they may pursue these remedies.

According to two recent decisions of the California Court of Appeal, failure to comply with each and every statutory requirement – no matter how duplicative, time-consuming or seemingly inconsequential – can have serious consequences for California HOAs, including invalidating liens, preventing foreclosure and subjecting HOAs to claims for damages and attorneys’ fees by the delinquent property owners themselves.

The Diamond Case: The Act Means What It Says

In Diamond v. Superior Court (2013) 217 Cal.App.4th 1172 (Diamond), the HOA Board voted to replace all the roofs in the development and to engage in other repair projects. Because the HOA’s reserves were insufficient to pay for the projects,[4] the Board approved a special assessment of $9,750 against each unit to fund the deficiency. Dr. Diamond, who purchased her unit in 1978, was unable to pay the special assessment by its May 2007 due date, and instead attempted to enter a payment plan with the HOA for $1,000 down and $100 per month “until her financial situation improved.”[5] Although Diamond believed the HOA had agreed to her proposed payment plan, and made initial payments to the HOA under her proposed plan (which payments the HOA initially accepted), the HOA soon entered into a hyper-aggressive collection posture – sending her a pre-lien letter in June 2007 and then recording a lien against her property in July 2007. The HOA sent Diamond a copy of the recorded lien twenty-eight days later.

By October 2007, Diamond hired an attorney and requested that (i) the HOA meet and confer with her and, (ii) if the matter was not resolved in the meet and confer session, engage in alternative dispute resolution. The HOA refused her requests, stating that the HOA had already met and conferred with her and was not obligated to both meet and confer and participate in alternative dispute resolution.

In November 2007, less than six months after the initial special assessment became due, the HOA met in executive session and voted to foreclose on Diamond’s property. The HOA did not record its vote in the minutes of the next meeting.

Although non-judicial foreclosure is authorized by the Act, the HOA instead filed a lawsuit for judicial foreclosure against Diamond in November 2007, seeking foreclosure of Diamond’s unit and the recovery of $10,064.88. Diamond struck back and struck hard, filing a Motion for Summary Judgment asserting that the Association’s lien and foreclosure lawsuit were invalid because the HOA had failed to comply with each-and-every requirement under the Act, specifically: (1) the HOA failed to send Diamond a copy of the recorded lien by certified mail within 10 days of recording;[6] (2) the HOA failed to give Diamond a pre-foreclosure notice of her right to demand alternative dispute resolution;[7] (3) the HOA failed to record the Board’s executive session vote to initiate foreclosure proceedings on her property in the minutes of the next meeting of the Board open to all members;[8] and (4) the HOA failed to personally serve her with the notice of the Board’s vote to foreclose prior to commencement of the foreclosure process.[9]

Diamond argued that the HOA must strictly comply with the Act because the “Legislature intended . . . to protect homeowners from abuse of the foreclosure process by homeowners’ associations.”[10] The HOA defended itself on the grounds that it had substantially complied with the notice and procedural requirements of the Act,[11] and that Diamond was not prejudiced by these alleged defects because she had received actual notice and failed to allege any harm arising from these issues.[12]

The Diamond court soundly rejected the HOA’s arguments, finding that HOAs must strictly comply with each and every requirement of the Act[13] in recording liens and pursuing foreclosure. In reaching its conclusion, the court engaged in the traditional tools of statutory interpretation, noting that the Act used the word “shall,” which is traditionally interpreted to impose mandatory obligations.[14] Further, examining the legislative history of the Act’s notice/due process-type requirements, the court found that their “public purpose” was to “protect the interest of a homeowner who has failed to timely pay an assessment.”[15] Further, various legislative sources also indicated that the Legislature intended these requirements to be mandatory.[16] Since the Association admitted that it failed to send Diamond a copy of the lien within ten calendar days, the court found the lien to be invalid and incapable of being enforced by judicial foreclosure.[17]

As to the claim that the HOA failed to provide Diamond with notice of her right to alternative dispute resolution, statutory interpretation was again critical to the court, with the word “or” proving dispositive and detrimental to the HOA. Critically, the HOA’s pre-foreclosure letter stated that Diamond had the right to meet and confer or to participate in alternative dispute resolution with the HOA. However, the Act does not use the word “or” in describing these two separate requirements, and the court read the Act liberally to require the HOA offer both procedures.[18] Not surprisingly given the analysis above, the Diamond court held that the HOA failed to properly offer Diamond alternative dispute resolution under the Act because it only offered one procedure or the other by using the word “or” in its pre-lien letter, which was enough to invalidate the lien and the subsequent foreclosure proceeding.[19]

The Diamond court also ruled against the HOA for failing to record its foreclosure vote in its minutes of the next meeting, and failing to serve notice of its foreclosure vote on Diamond prior to initiating foreclosure proceedings. Summarizing its holdings, the Diamond court stated that the notice requirements of the Act “must be strictly construed, pursuant to the plain language of the statutes and their legislative history.”[20]

The HOA certainly did not help its case in its pre-foreclosure conduct by failing to meet and confer, rejecting alternative dispute resolution, failing to negotiate a reasonable payment plan (including possibly disavowing a payment plan) rushing to court, and attempting to foreclose on a long-time community resident with limited financial means over an inability to pay a large, unanticipated special assessment.  Although bad facts can often lead to bad law, the HOA’s conduct did not appear to be relevant to the court’s decision as the court relied on traditional tools of statutory interpretation — plain language and legislative history.  The lesson for California HOAs – other than to be a bit more circumspect and reasonable in working with its owners on payments plans — is to closely follow the Act in exercising its lien and foreclosure remedies.

The Miner Case: HOAs Must Accept Partial Payments

Although unrelated to the notice and due process-type procedural issues raised in Diamond, the recent Huntington Continental Townhouse Ass’n, Inc. v. Miner (Oct. 14, 2014) 230 Cal.App.4th 590 (Miner) case shares a common thread with Diamond by reinforcing that courts will hold the HOA to strict compliance with the Act. In Miner, the facts were less sympathetic to the owner/member than Diamond because Miner, the owner, appeared to be unwilling to commit to a written payment plan. (Note: Mr. Miner contacted me and stated his position that he had sent full payment to the HOA President; regardless, the import of the court’s ruling favors the member’s rights to make partial payment.)  Nevertheless, the court still reached a similar result in favor of the owner and against the HOA.

Miner became delinquent on his assessments in April 2009. Thereafter, the HOA and Miner engaged in a back-and-forth dialogue over the delinquency for two years; eventually, the HOA placed a lien on Miner’s unit. In April 2011, the HOA filed a lawsuit against Miner to foreclose under the lien.

Thereafter, Miner attempted to negotiate a payment plan with the HOA, but he refused to sign a written payment plan agreement to memorialize the plan. Miner made some payments under the plan, but failed to make other payments. On December 29, 2011, and during the judicial foreclosure action, Miner mailed a $3,500 check to the HOA, which rejected it as an improper partial payment of the $5,658.13 balance.

While the trial court entered a judgment in favor of the HOA after the foreclosure trial, the appellate division of the Superior Court and then the Fourth District Court of Appeal both held that the HOA was compelled to accept the partial payment under the Act. The court found that the Act contemplated partial payments because it regulated how partial payments would be applied (first to assessments owed and then to fees and costs of collection, attorneys’ fees, late charges and interest).[21] The court reasoned that the Act did not impose an option for the partial payment to be “accepted” by the Association and, therefore, the Association was required to apply (again using the word “shall”) partial payments in a particular manner. Because HOAs are required to apply payments in a certain manner, the court reasoned that the Association must accept all partial payments.[22] Analyzing the legislative history, the court also found that requiring acceptance of partial payments would be consistent with the legislative intent to “protect owners’ equity in their homes when they fail to pay relatively small assessments to their common interest development association.”[23]

Further, because the Act prevents an HOA from foreclosing if the balance owing is under $1,800 (unless the charges are over 12 months old) and Miner’s balance would have dropped to under $1,800 had the HOA accepted the partial payment, the court found that the HOA could not foreclose even if a member appeared to be making partial payments to strategically fall below the $1,800 limit and avoid the foreclosure. The Act requires an HOA to accept partial payments.

Take Home Points

Collecting assessments is a vital function to fund the HOA’s activities. It is unfair for some owners to avoid paying their fair share, and to have the other owners shoulder their burden. Recognizing this, the Legislature has granted California HOAs the powerful tools to lien and foreclose under the Act. However, with those powerful tools comes the obligation to closely comply with each and every requirement of the Act. Although the cases discussed above focused solely on the Act, it is implicit that HOAs must also closely follow their own governing documents (CC&Rs, Bylaws, rules and policies), including adopting and following collection policies, in pursuing collection activities authorized under the Act.

Because of the technical nature of the Act and the courts’ apparent deference to err in favor of due process protections for HOA owners (not too dissimilar from the protections typically afforded to California tenants in unlawful detainer proceedings), the Act is fertile ground for mistakes. These recent cases make clear that even minor or technical violations can invalidate the lien and foreclosure process, and add delay and additional expense to the collection process. For example, although the Diamond opinion is silent on the issue, it is likely that the HOA will have to pay Diamond’s attorneys’ fees as well as its own attorneys’ fees (a sum that likely dwarfs the original $9,750 assessment) as a result of its invalid lien and foreclosure.

Compliance with the Act will likely require the ongoing oversight of a knowledgeable HOA attorney, property manager and/or collection company to help guide the Board in assessment collection activities, the reasonable costs of which can ultimately be added to the lien. Failure to do so could result in significant cost and delay to the HOA, and exacerbation of the very problem the collection activity was designed to address – replenishing the HOA’s coffers.

This article is for informational purposes only and not for the purpose of providing legal advice. This article contains the personal views and opinions of the author only as to California law, and does not necessarily reflect those of the Washoe County Bar Association or the Porter Simon law firm.  The author makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of this article and expressly disclaims liability for any errors and omissions in this publication.     

Brian C. Hanley is an attorney practicing in California and Nevada, and is a principal in the Porter Simon law firm located in Truckee, with offices in Reno and Tahoe City. He practices primarily in the areas of real estate, business, estate planning and homeowners’ association law. Brian may be reached at hanley@portersimon.com or at the firm’s web site www.portersimon.com.

© 2015

 

[1] Nevada adopted the Uniform Common Interest Ownership Act of 1982, § 3–116, 7 U.L.A., part II 121–24 (2009) (amended 1994, 2008) (UCIOA in 1991, 1991 Nev. Stat., ch. 245, § 1–128, at 535–79, and codified as NRS Chapter 116. (See NRS 116.001; SFR Investments Pool 1 v. U.S. Bank, 130 Nev. Adv. Op. 75, 334 P.3d 408, 410 (2014), reh’g denied (Oct. 16, 2014).)

[2] NRS 116.1109(2).

[3] Effective as of January 1, 2014, the Act has been relocated from California Civil Code sections 1350 et seq. to Civil Code sections 4000 et seq. The general purpose of the recodification of the law was to (i) group related provisions together in a logical order; (ii) clarify ambiguous language without changing the substantive effect; (iii) divide excessively long sections into shorter sections; (iv) standardize terminology; and (v) implement non-controversial substantive improvements. (See Barnett, Jeffrey, 36 Real Property Law Reporter (September 2013), Davis-Stirling Common Interest Development Act, 2014 – A Brief Overview at p. 96.) Both cases discussed in this article were decided under the old Act, though the same requirements exist in the new Act. For ease of reference and use, all citations in this article are to the new Act.

[4] Although not discussed by the court and not directly at issue in the case, HOA Boards have statutory duties to study and maintain adequate reserves. (Civil Code § 5550 et seq.) The special assessment at issue in the case apparently arose from inadequate reserve funding, which could implicate mismanagement by the Board.

[5] Diamond, supra, 217 Cal.App.4th at 1177.

[6] Civil Code § 5675(e).

[7] Civil Code §§5670, 5705(b).

[8] Civil Code § 5705(c).

[9] Civil Code § 5705(d).

[10] Diamond, supra, 217 Cal.App.4th at 1187.

[11] For example, the HOA served Diamond with its decision to foreclose concurrently with service of the judicial foreclosure lawsuit.

[12] Id.

[13] Or at least those requirements raised by Diamond.

[14] Id. at 1190.

[15] Id. at 1190-91.

[16] Id. at 1191 [discussing the Senate Judiciary Committee’s bill analysis and the Senate Floor Analysis].

[17] Id. at 1193.

[18] Civil Code § 5660(e) and (f).

[19] Diamond, supra, 217 Cal.App.4th at 1194.

[20]Id. at 1197.

[21] Civil Code § 5665(a).

[22] Miner, supra, 230 Cal.App.4th at 602.

[23] Id. at 604.