How Broad Is Your Association's Entitlement to Attorney Fee Awards?

An unpublished opinion by the Washington Court of Appeals earlier this month dealt with a homeowners association’s attempt to enforce a restrictive covenant limiting tree height. The trial and appellate courts both ruled in favor of the association. However, the trial court refused to award the association its attorney fees, and the appellate court upheld that decision. The reasons why these courts reached those conclusions are too complicated to adequately address here, but one important lesson (associations might not recover their attorney fees even if they prevail in litigation) is much easier to explain.

In a lawsuit concerning a violation of the Washington Homeowners' Associations Act or the Washington Condominium Act, the court "may" award “reasonable” attorney fees to the prevailing party "in an appropriate case". The quoted portions of the last sentence give judges discretion to award less than all (and perhaps none) of the attorney fees that associations incur during lawsuits that they eventually win. While it may be true that judges often award prevailing parties all of their attorney fees pursuant to these laws, it is unwise for board members to view this as a guarantee.

Some condominium and homeowners associations have additional rights to collect attorney fees built into their governing documents. Such provisions typically state that the prevailing party in a lawsuit concerning the governing documents or collection of delinquent assessments is entitled to an award of its “reasonable” attorney fees. This is broader protection for victorious litigants, but it still leaves the door open for partial awards if judges decide that attorney fee requests are too large.

When Homeowners Associations Attack

"HOA Sues Former Board for $70 Million" is a headline that gets your attention. An Illinois homeowners association recently filed such a lawsuit against its former developer-controlled board (among others), claiming that past board members misused common funds and mismanaged the association's financial affairs. One portion of the lawsuit alleges that board members engaged in self-dealing by using their own or related companies to perform work for the association rather than competitively bidding the work. Another portion of the complaint contends that the association has insufficient reserve funds because dues were kept too low. It remains to be seen how this lawsuit will end.

Board members must always remember that they are obligated to exercise reasonable care in making decisions and must never use their positions to obtain personal benefits. Conducting a thorough investigation, complying with the governing documents and applicable state law, and seeking professional advice when appropriate are three ways that board members can ensure that their decisions are beyond reproach. The guiding principle is always the good of the community.

Use It or Lose It - The Three-Year Limitation on Collecting Delinquent Condominium Assessments

The Washington Condominium Act states in part as follows: "A lien for unpaid assessments and the personal liability for payment of assessments is extinguished unless proceedings to enforce the lien or collect the debt are instituted within three years after the amount of the assessments sought to be recovered becomes due." This basically means that a Washington condominium association does not have the right to collect assessments that are more than three years old unless a lawsuit seeking payment or foreclosure is already pending. This law applies to condominiums created before July 1, 1990 as well as newer condominiums.

The three-year limitation on collecting delinquent assessments obligates condominium boards to monitor the length of delinquencies and take legal action to collect them before it is too late. Beginning a personal lawsuit against the owner in small claims or superior court within the three year period will preserve the owner’s obligation to pay the full debt. Beginning a foreclosure lawsuit against the unit within the three year period will preserve the association’s full lien rights. Being proactive in this manner will help to maximize the association’s ability to collect the money it is owed.

Is Chinese Drywall Hazardous to Homeowners' Health?

American construction companies used large quantities of Chinese-made drywall over the last five years because it was abundant and cheap. Now many homeowners are complaining that Chinese drywall gives off fumes that corrode metals and sicken people. State and federal authorities are currently investigating whether Chinese drywall poses a direct health risk to people.

More than 500 million pounds of Chinese drywall was imported into the United States between 2004 and 2008. Most of it came into the country in 2006. Washington State has imported nearly 2.5 million pounds of Chinese drywall since January 1, 2006. Complaints about Chinese drywall appear to be concentrated in the Southeast at this time. Chinese drywall has been reported to be present in 21 states thus far, including Washington State.

There are several signs that your home may contain Chinese drywall. You may detect a sulphur, rotten egg, or acid type of smell. The electrical wires connected to outlets may be corroding too rapidly. Air conditioning coils or other HVAC components may be failing too frequently. Silver jewelry and flatware may be tarnishing too quickly. You may be able to locate a “Made in China” stamp on exposed drywall in places like your attic or basement.

If Washington condominium and homeowners associations and owners have been adversely affected by Chinese drywall, they may need to consider filing lawsuits against the manufacturer and distributor of the Chinese drywall and/or against the developer and contractors that constructed their buildings. Those entities may have assets to pay for any damages caused by Chinese drywall or may have purchased insurance policies that cover any damages caused by this product. Participation in class action lawsuits is another option, but those lawsuits usually take much longer to complete than individual lawsuits.

Collection of Delinquent Assessments - Understanding Your Options

Martial arts students are taught to hope that they will never need to use their skills to harm others. However, they are also instructed to use those skills quickly and decisively when the situation calls for it. So it is with the collection of delinquent assessments in condominium and homeowners associations. Boards should understand the nature of the collection powers contained in their associations’ governing documents and provided by Washington law, and should use those powers to address delinquencies before they get out of hand.

A foreclosure action against the property is a collection option that is almost always available to community associations. This method can take two forms – judicial and non-judicial. In judicial foreclosure, the association files a lawsuit against the owner and entities that hold liens on the property that seeks a court order that the property must be sold by the county sheriff to satisfy the owner’s debt to the association. Most community associations have the ability to pursue judicial foreclosure. In non-judicial foreclosure, the association directs a trustee to sell the property after providing notice to the owner and to entities that hold liens on the property. Community associations do not have the right to pursue non-judicial foreclosure unless their governing documents specify that they have this power.

A personal lawsuit against the owner is another collection option that is usually available to community associations. This method can be pursued in small claims court (which allows a board member to present the case) or in superior court. If a judgment is obtained against the owner, the association will then need to attempt to garnish the owner’s wages or assets to satisfy the debt.

Terminating the utilities that serve a property following the provision of proper notice is a third collection option that is sometimes available to community associations. However, this method is only available to a condominium association if the condominium was created before July 1, 1990 and if the condominium’s declaration specifies that the association has this power. Condominium associations can not terminate utilities to a unit due to a delinquency if the condominium was created after July 1, 1990. The Washington law governing homeowners associations does not mention termination of utilities in response to past due assessments, and those associations’ governing documents typically do not provide for the use of that power.

Intercepting rent from an owner’s tenant is a fourth collection option that is sometimes available to community associations. The Washington laws governing condominium associations states that they are entitled to the appointment of a receiver to collect rent during foreclosure actions. Many condominium declarations also give the association the authority to demand that tenants submit their rent payments directly to the association when owners are delinquent without taking additional legal action, and in some cases those declarations state that the association may take legal action to evict tenants that fail to submit rent payments as directed. The Washington law governing homeowners associations does not mention rent interception or the appointment of a receiver to collect rent, and those associations’ governing documents are usually silent with regard to those matters as well. Homeowners associations may be able to use the Washington law governing receiverships to collect rent from tenants during foreclosure actions.

Every community association board needs to understand what tools are at its disposal to extract funds from delinquent owners. If the board examines the association’s governing documents and is disappointed that one or more of the options discussed above is not present, then it should consider an attempt to amend those documents to provide for broader collection powers.

Rules Enforcement - Litigation or Exception?

In 2003, the River Watch Homeowners Association in Tarpon Springs, Florida imposed a $1,000 fine on an owner because her husband insisted on walking their black Labrador Cole through the community without a leash in defiance of an Association rule after repeated warnings. The Board President admitted that Cole was a pleasant dog that never caused any problems, but said that making an exception for him would mean that the board would have to permit all owners to walk their dogs without a leash. The owner and her husband refused to pay the fine, so the Association recorded a lien against her lot and began a foreclosure action. In 2007, a judge ordered the owner and her husband to pay the fine, interest, attorney fees, and costs, which meant that they owed the Association over $40,000 at that point. The owner and her husband say that they have already paid their own attorney over $100,000. They are now appealing the judge’s decision.

The “hard-line litigation approach” adopted by the River Watch HOA may be the only appropriate course of action in some instances. Most owners are not going to be willing or able to spent large amounts of time and money fighting over a rule and will grudgingly pay the fine and begin complying with the rule once they realize that it is in their financial best interest to do so. Many of those owners will back down after they speak with several lawyers because those individuals will likely warn the owners that litigation is expensive and risky. That being said, boards should likewise make sure that they are standing on firm legal ground before they file lawsuits that could in rare instances take years to resolve and cost tens of thousands of dollars.

The Washington laws that govern condominium and homeowners associations only permit them to impose and collect “reasonable” fines and attorney fees. This is of course an “eye of the beholder” standard to some extent, and it introduces an element of risk to any legal action to collect fines. Fines may be considered invalid by courts if associations do not follow the procedures required by law (distribute a fine schedule in advance and impose fines only after giving owners notice and an opportunity to be heard) and the governing documents. Courts may also refuse to order owners to pay fines if there is evidence that owners are being singled out for harsher treatment under the rules.

The “reassessment of the rule” approach should also be considered by boards at an early stage of disputes over rules. Boards should first evaluate whether the rule at issue is consistent with the prevailing standard of conduct in the community and still serves a useful purpose. If the rule at issue should be preserved in its current form, then boards should assess whether the particular circumstances justify making a specific exception to the rule. Community association boards have the discretion to make those types of decisions. Well-defined exceptions to rules that are documented in the meeting minutes will not render those rules unenforceable. If boards are concerned that making exceptions will cause other owners to stop following the rule at issue, they can explain the basis of the relevant exception at the next owners meeting and through written notifications such as meeting minutes and newsletters.