Thursday, June 30, 2011

Klinow Case Part II: An Unsuccessful Procedural Attack on Amendments.

Previously in this blog we were discussing the case of Klinow vs. Island Court at Boca West Property Owners' Association, Inc, a 4th DCA case where a couple sued their association for amending the governing documents in support of a beautification project for the community.

The Florida Supreme Court ruled in 2002 in the case of Woodside v. Jahren that an owner who buys into a condominium does so with the knowledge that his or her rights under the Declaration of Condominium are subject to change by amendment. This same logic has been applied to those living in homeowners' associations. Despite this well-settled law, some owners continue to be dismayed when they find themselves on the losing side of a membership vote.

While Mr. and Mrs. Klinow substantively attacked the wisdom behind giving the association newfound discretion over sidewalks and driveways despite a 2/3 membership endorsement to do so, they also attacked the validity of the amendments themselves.

First the owners claimed that "contingency votes" were used at the special meeting to vote on the amendments. The association's rebuttal was that three owners changed their minds and resubmitted different votes after reconsidering the amendment language. The Court did not find the owners' argument convincing especially in light of the fact that a second vote on the amendments at the association's annual meeting had no such owner wavering occur and the amendments clearly passed with ease.

Second, the owners claimed that since voting certificates were not used, all votes from lots with multiple owners should be discarded. Mr. Klinow produced a voting certificate from a past vote as proof that they had been used at one time.

However, the 4th DCA relied upon the following input from the DBPR: "Voting certificate requirements are allowable devices to avoid confusion from possible conflicting votes from a single unit. They wil not be rigidly enforced to interfere with the statutory right to vote of recognized owners of condominium units, unless the association demonstrates good cause to do so. When an association has not consistently enforced provisions regarding voting certificates, failure to comply with technical requirements of such provisions will not be accepted as grounds to reject votes of unit owners of the condominium."

The court held that Mr. Klinow producing a lone past voting certificate did not show that they were regularly used and thus, the failure to use voting certificates in this particular vote did not defeat the measure.

There have been gross cases of voting abuse over the years in connection with membership votes to, among other items, amend documents, obtain material alteration approval and to use reserve funds for non-reserve purposes. It is the job of counsel to determine which procedural irregularities rise to a level that will sustain a challenge and which will not.

Sometimes You Are on the Losing End of a Vote

On September 21, 1987, Saul and Edythe Klinow purchased a home in Island Court at Boca West Property Owners Association. On December 13, 2007, the association held a special meeting to discuss a beautification project to replace the driveways and sidewalks on the individual lots in the community at each owner's expense. The project was approved by a 2/3 vote of the membership at that meeting.

Later at its annual meeting, the association sought clarification and expansion of the language and once again the amendment was passed by the 2/3 threshold. The amendments authorizing the project were recorded in the Public Records on May 21, 2008.

In April of 2008, Mr. and Mrs. Klinow filed a complaint against the association seeking a temporary and permanent injunction to prevent the project from moving forward. The trial court ordered the parties to mediation and mediation failed. The parties went back to court and the trial court found in favor of the Island Court association on all 6 counts.

Not satisfied with that result, Saul and Edythe appealed the decision to the 4th DCA and the outcome of that appeal was recently published at 36 FLW D1404b. The 4th District Court of Appeal relied upon earlier caselaw which held that "in determining the enforceability of an amendment to restrictive covenants, the test is one of reasonableness." The Appellate Court noted that the original Island Court Declaration allowed the association to paint, repair, replace and care for garage doors, fences and certain exterior building surfaces; extending that oversight to include driveways and sidewalks was not a stretch and did not, in the Court's estimation, constitute a radical change which would create an "inconsistent scheme" in the development. In fact, the Court noted that the beautification project would further unify the community and upgrade property values.

Tomorrow we will discuss the Klinows' unsuccessful procedural attacks on the amendment process but the moral of this story is that sometimes an owner finds himself or herself on the losing end of a community vote but that does not, in itself, create the ability to successfully challenge what the majority desired.

Sunday, June 26, 2011

Bill and Susan Raphan leave the Florida Condominium Ombudsman's Office after 7 years of service!

Most of you reading this blog already know the names Bill and Susan Raphan and the mark they made on the Florida Condominium Ombudsman’s Office during their 7-year tenure.

For those of you who don’t know about this dynamic couple, here is their story. When Florida’s first Condominium Ombudsman, Virgil Rizzo, was appointed back in 2004, there was no money to staff the local South Florida Office. Bill and Susan were his first volunteers. They had been having problems in their own condominium and wanted to help others in similar situations. They worked for seven (7) months as volunteers, often returning calls from over a hundred people a day asking for help with their association-related issues, before the money was found in the State budget to finally pay them.

During their seven years with the Condominium Ombudsman’s Office they spoke with thousands of association members, directors, association managers, attorneys and legislators about the common and not-so-common issues that crop up when people live in close quarters and decisions are made by an elected body. One caller wanted to know if Bill and Susan could help her collect alimony from her husband and another sent them an envelope containing the actual fleas from her unit that were allegedly coming from a neighbor’s dog.

While some of the problems they confronted were not within their authority to address, others were successfully resolved as a result of their intervention. A patient set of ears, knowledge regarding the Statutes, Administrative Code and practices of the DBPR along with common sense and a dash of humor often helped put both board members and owners with complaints on the right path. Was every problem solved? Absolutely not. Were many problems that could have resulted in costly litigation successfully defused? Absolutely yes.

Bill and Susan had run a successful catering business for many years and, as a result, applied many of those same business principles to organizing the Ombudsman’s Office in an efficient manner especially given the shoestring budget under which they were forced to operate. They began an extensive education program at Broward and Palm Beach College as well as in Community Centers and Condominiums throughout the State. They facilitated the appointment of election monitors for approximately 90 condominium elections per year and educated almost 6,000 people last year!

However, last Session’s HB 5005 which almost ripped the rug out from under the entire community association industry was a wake-up call. The uncertainty of continued funding for the Ombudsman’s Office as well as the habitual raiding of the Condominium Trust Fund left Bill and Susan wondering if they could continue pursuing their passion to educate community association residents throughout the State in their current capacity.

Saturday, June 25, 2011

What does the dissolution of the DCA mean for older HOAs?

When Governor Scott signed the 838-page SB 2156 last week, he ended the 42-year history of the Department of Community Affairs (DCA) in Florida. Primarily, the DCA was charged with preventing sprawl and congestion by monitoring housing and commercial development but from a community association perspective, the DCA played a significant role in allowing older homeowners' associations in our State to reinstate their covenants which had been extinguished by the Marketable Record Title Act (MRTA).

The DCA currently employs about 220 people, 150 of whom are expected to retain their jobs when some of the DCA's previous functions are merged into the new Department of Economic Opportunity which will officially be created on October 1st.

What does all this mean for older HOA's who have failed to preserve their covenants within the thirty-year time period allotted under MRTA?

In 2004, the Department of Community Affairs was charged with the responsibility to oversee the reinstatement process for communities looking to reinstate their covenants. Under Section 720.403, et. seq. of the HOA Act, at least a majority of the members must approve a revised declaration and adhere to the following statutory procedures when submitting same to the DCA for its approval:

720.404 Eligible residential communities; requirements for revival of declaration.—Parcel owners in a community are eligible to seek approval from the Department of Community Affairs to revive a declaration of covenants under this act if all of the following requirements are met:

(1) All parcels to be governed by the revived declaration must have been once governed by a previous declaration that has ceased to govern some or all of the parcels in the community;
(2) The revived declaration must be approved in the manner provided in s. 720.405(6); and
(3) The revived declaration may not contain covenants that are more restrictive on the parcel owners than the covenants contained in the previous declaration, except that the declaration may:
(a) Have an effective term of longer duration than the term of the previous declaration;
(b) Omit restrictions contained in the previous declaration;
(c) Govern fewer than all of the parcels governed by the previous declaration;
(d) Provide for amendments to the declaration and other governing documents; and
(e) Contain provisions required by this chapter for new declarations that were not contained in the previous declaration.

I worked on the first HOA reinstatement in Florida and my Firm has now successfully reinstated dozens of older HOA documents since then. Absent a successful reinstatment, older homeowners' associations find themselves unable to collect assesments, enforce use restrictions and basically continue operating as a mandatory, private residential community.

Two questions come to mind as a result of the passage of SB 2156: will the new Department of Economic Opportunity or perhaps the DEP take up the DCA's role pertaining to HOA reinstatements and/or do the provisions in Chapter 720 outlining the DCA's role need to be amended next year to reflect the correct agency now handling these functions?

Stay tuned for more information. If you have a proposed or pending covenant reinstatement, please speak to your association attorney immediately.

Tuesday, June 21, 2011

What are the Traits of a Highly Functioning Board? Part III: The Award Winning Board!

In Part III of our series on the traits of a highly functioning board we at last come to our ideal board; the vision of what a community association board can and should be doing.

For those of you who have actually never met one of these boards or had the fortune to serve on one, here is what they look like:

-This board operates at the highest level of transparency possible without compromising privileged information. The membership and board meetings for this kind of community are held on a timely basis, are properly noticed and tend to run smoothly. Unfortunately, the meetings run by the highly functioning board are usually not well attended since most owners feel the board "knows what they're doing";

-This board has a working knowledge of its governing documents as well as the pertinent statutes but on issues that could subject the association to potential liability they reinforce that knowledge with a legal opinion;

-This board takes a proactive approach before a potential issue becomes a real problem. For example, the highly functioning board will have rules in place outlining owner inspection of books and records and owner participation at meetings well BEFORE such requests are made. This board will also have a hurricane shutter rule in place and, if it is a condominium association, will have an updated Question and Answer Sheet on hand;

-This board routinely reviews its governing documents to ensure that they have kept pace with the changes in the Statute and are amended/updated to both comply with statutory changes as well as to address the changing needs of the community;

-This board has clearly defined expectations of its manager/management company and has a system of checks and balances in place to ensure that neither the manager nor any one board member becomes comfortable with making unilateral decisions on behalf of the association;

-This board utilizes technology and various forms of communication to reach out to the community members and conveys not only what has been done and is being done on their behalf but also to take the community's pulse in terms of long-range planning and goals. This can be done via an association website, newsletters, a community-wide cable channel and regular "townhall" style meetings;

-This board realizes that it must follow all statutory and documentary guidelines when dealing with the association's finances including seeking proper membership approval as needed, when waiving or partially funding reserve funds, using reserve funds for non-specified purposes, and when reducing the financial reporting requirement level;

-The highly functioning board of directors realizes that part of its role is to enforce the terms and provisions of the governing documents. At times, this will require that enforcement action or collection efforts be commenced against a neighbor. This board is fair but tough;

-This board knows its limitations and does not pretend to be an expert in every area that impacts the community whether it be filing an insurance claim or overseeing a capital improvement project. The highly functioning board employs the proper experts needed to lend a guiding a hand; and/or

-This board avails itself of all available educational resource materials to ensure that it knows about the changes in the law which impact the manner in which it operates and administers the community.

If every community was tended to by a highly functioning board, we would undoubtedly see an increase in real property values and a huge decrease in the number of complaints filed with the Division of Florida Land Sales each year. Whether you find yourself serving on a board or living in a community operated by a poorly functioning board or even a functioning board, there is always the ability to encourage your board members to take their level of participation up a notch in order to become a highly functioning board. Highly functioning board members endorse a "best practices" policy and always seek to fulfill their responsibilities to the membership who put elected them for the job.

Monday, June 20, 2011

What are the Traits of a Highly Functioning Board? Part II: the Functioning Board

Now let's turn our attention to the Functioning Board. This board takes the steps necessary to comply with the requirements of both the Statute by which it is governed as well as the terms and provisions of its governing documents. This board functions but may not have the foresight necessary to allow the community to achieve its most lofty goals.

-This kind of community typically has professional management but the Board may not be familiar with its manager's duties and may not even have a copy of the management agreement in its possession. Often, this kind of board will discover at some point that too much decision-making authority has been abdicated to the manager.

-This board may be take on projects and commit association resources to such projects without first gauging the community's sentiments. An example would be when the Board hires an engineer to draw up plans for an improvement project which requires membership approval before being assured that such approval will be forthcoming. A straw vote of the community either through the association's website, newsletter or other mailing can often help boards to determine whether or not to head down a certain path before association funds are spent.

-The common areas are maintained and repaired but this board may be reluctant to embark on any sort of upgrades for fear of community reprisals. This kind of board may also be reluctant to enourage the members to fully fund reserves and may, in fact, be reluctant to make some tough decisions required by their position as board members. These decisions can include pursuing delinquencies, enforcing architectural standards and other use restrictions, etc.

The functioning board does not play favorites, it just fails to strictly and uniformly enforce the covenants and resists making unpopular but necessary decisions.

Tomorrow in Part III of this blog series, we will at last discuss the attributes of that sometimes rare entity: the highly functioning board.

What are the Traits of a Highly Functioning Board of Directors? Part I: the Dysfunctional Board

Some time ago I wrote an article comparing and contrasting the traits and habits of the following types of boards: dysfunctional; functional and highly functional. I will be breaking that article into three separate blogs starting with a discussion of what constitutes a poorly functioning board.

Whether you serve on behalf of a condominium, cooperative or homeowners' association, there are several traits (good and bad) that these volunteer boards share. It is important to remember that boards of directors for common interest housing communities in Florida are made up of your neighbors who take time away from jobs, families and hobbies to serve their communities. The experience level of any given board is typically varied and can run the gamut from school teachers, tradesmen, former CEO's of Fortune 500 companies to stay-at-home parents.

The vast majority of these folks volunteered to serve on their board in order to safeguard their largest asset, their home. Despite scattered media reports on directors treating the association coffers as their personal piggybank or generally acting as despots, most directors conscientiously undertake the duties and responsibilities attached to board membership. It is important to remember that board members are held to a "reasonable businessman" standard (also known as the business judgment rule); they are not held to a level of absolute perfection.

Board members should not be expected to act as quasi-accountants, engineers, attorneys, etc. They should know and understand that certain elements of the association operations will be beyond their level of expertise and, at that point, they should seek counsel from experts to guide them in the decisions they make on behalf of the association. Some boards seem to know both their responsibilities and inherent limitations from the outset and others have to learn it the hard way. Let' take a look at the traits which make up three different types of boards: the poorly functioning (aka dysfunctional) board;the functioning board and the highly functioning board.

The Poorly Functioning Board: These boards are not hard to spot and woe to the persons living in a community served by this kind of board as well as to the board members who know better who find themselves sharing duties with directors who do not.

-Board meetings are held sporadically and without proper notice. Actions which would typically require a fourteen (14) day advance meeting notice (such as for special assessments or changes to rules) are passed with only forty-eight (48) hours or less notice since they are always "an emergency";

-When board meetings are held unit owners are not allowed to participate and, in some cases, even attend. As a result, these meetings often deteriorate into chaos and are quickly adjourned. There is little to no transparency in terms of association operations;

-Owner requests to inspect the books and other requests or inquiries may be ignored or made more difficult than necessary;

-Architectural control guidelines may be applied selectively depending on the whims of the board or a particular member of the board;

-The annual corporate report is not timely filled out and the corporate entity has been dissolved at some point which not only exposes the association members to potential individual liability but requires costly reinstatement fees;

-Contracts requiring payments in excess of 5% of the total annual budget (including reserves) for condominiums and in excess of 10% of the total annual budget (including reserves) for HOA's are entered into and signed without first complying with the competitive bid requirements of Section 718.3026(1) and Section 720.3055 (1) respectively;

-Contracts are given to companies with whom board members may be connected either directly or indirectly and these contracts are not reviewed by counsel prior to execution. Typically, these contracts are written for the benefit of the contractor/vendor and, among other problems, fail to provide any protection to the association in the form of payment and performance bonds or the use of liquidated damages to discourage lengthy delays. Sufficient warranty language may be missing altogether. Some contracts are signed unilaterally by only one board member without a board resolution and occasionally without the knowledge of the full board;

-Maintenance assessments are not collected in accordance with the provisions of the Declaration (either on a square footage or pro-rata basis) and delinquencies are allowed to go beyond the three month or two quarter mark with no attempts to collect;

-The common areas are not properly maintained, repaired, replaced and insured as needed and as required by both the Statutes and the community's governing documents;

-The Board (if it is a condominium association) does not pass a budget with full reserves each year. If reserves are in place, the board (either a condominium or HOA) uses reserve money for purposes other than that for which it was collected without a membership vote;

-Important decisions regarding new tenant or potential purchaser approvals, disability accommodations and covenant enforcement violations are made without regard to the board's statutory and documentary authority and without legal consultation as to the association's ability to obtain a successful outcome; and/or

-This Board may have no idea what amendments to the governing documents have been passed over the years and may be using an unrecorded set of documents which provide little or no guidance.

Now that we've seen where a board can go very wrong, our next blog will discuss those functioning boards who get the job done but aren't scoring A's on anyone's report card.

See also:

Traits of a Highly Functioning Board? Part II: the Functioning Board

Traits of a Highly Functioning Board? Part III: The Award Winning Board!

This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.

What can we reasonably expect in terms of community association legislation?

We have only a 60-day Regular Legislative Session in the State of Florida which means much of the work that goes into passing bills each year takes place well before the actual start of Session. Each legislator has six (6) bill slots and I have never met a legislator yet who did not want to finish each Session with at least one or two of their sponsored bills successfully passed to bring back to his or her constituents. Have you ever wondered why we get what we get each year?

Why does it seem that only one community association bill passes each year?

There has been a trend for some time now in Tallahassee to “move” only one community association bill each Session. Some say that it is because most legislators see community association bills as controversial and a “headache” so they can only handle one at a time. Each year there are many proposals that come out of the starting gate that impact community association members but the proposals that survive do so because they are amended on to the one bill that has the best chance of passing.

Who comes up with ideas for new legislation?

Proposals come through a variety of channels including calls and emails to a legislator from a constituent with a problem (the grandfathering of rental rights in condominiums came about this way), legislators who have experienced their own issues living in a community association and want to address those issues legislatively (Representative Kottkamp’s architectural control changes in HOA’s was created this way) and lobbyists who are paid to seek legislative changes.

Who actually drafts the proposals?

Again, the sources vary: constituents, Legislative Aides, some legislators, many lobbyists, attorneys and other industry professionals , of course, Senate and House Bill Drafting have the final say on what emerges.

Why is the language so hard to understand in most of these association bills?

What you tend to wind up with are 100+ page bills that are a patchwork of obviously different goals and styles. Unlike a novel which tends to have only one author, many of these omnibus bills are pieced together as a result of compromises made throughout the moving bill’s stops in the committee process. Every year we hear about a “glitch bill” being proposed to fix the glitches in the previous year’s bill. It would be nice to pass a “glitch free bill” some time but until bill drafting is approached more carefully, that day isn’t likely to come any time soon.

What should we expect in the 2012 Session?

Not much. Since this is a redistricting year, it is unlikely that many substantive changes will pass during the 2012 Session in terms of community association legislation. There might be a few technical tweaks here and there but most folks in the know say 2012 is not the year to swing for the fences in terms of big association changes.

This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.

Sunday, June 12, 2011

Recent Florida Supreme Court Case on Director Indemnity

What does an association director typically do when sued for his or her actions while performing (or not performing as the case may be) necessary corporate duties? Seek indemnification from the association for those same actions naturally.

Indemnity is generally defined as "the right of an injured person to claim reimbursement for its loss, damage or liability from a person who has such a duty." Most if not all association governing documents require the association to indemnify its directors and officers but typically as it relates to those directors being sued by a third party. Is a director entitled to such indemnification if he or she is being sued by the association?

The Supreme Court of Florida addressed this very issue recently in its opinion dated June 9, 2011, in the case of Donald Wendt, et al, vs. La Costa Beach Resort Condominium Association, Inc. Donald Wendt, Kenneth Wendt and Clarke Warne were directors of the La Costa Beach Club, a timeshare condominium in Pompano Beach. In July, 2003, the association sued these directors for breach of fiduciary duty. After the association's successful verdict, the directors moved for a new trial and brought an indemnification action against the association for expenses associated with defending themselves.

The trial court dismissed the directors' indemnification action with prejudice on various grounds. The Fourth DCA affirmed the trial court's decision and held that because there is no statutory right to indemnification in actions between a corporation and its own directors, the directors did not state a cause of action. In making this decision, the 4th DCA did acknowledge and certify its conflict with a decision by the 1st DCA in the Turkey Creek case, 766 So. 2d at 1247, which stated that Section 607.0850 of the Florida Statutes does provide for indemnification in cases in which a corporation has sued its own agent.

Section 607.0850 of the Florida Statutes authorizes corporate directors to seek indemnification from the corporation for actions brought against the directors by the corporation itself. However, there are restrictions in the statute as to when such indemnification is proper. For example, the person seeking indemnification must have "acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful."

The Florida Supreme Court quashed the 4th DCA's decision and approved the 1st DCA's reasoning by holding that Section 607.0850 of the Florida Statutes does authorize corporate directors to seek indemnification from the corporation for actions brought against the directors by the corporation itself. This is a boon for directors who might not otherwise be protected under the association's insurance coverage or any indemnification clause in the governing documents. Still, directors seeking same must be able to prove that they acted in good faith and under the reasonable belief that their actions would be in the association's best interests.

This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.

Sunday, June 5, 2011

Class Action Suit Filed Against 500+ Associations for Collection Fees!

A recently filed Nevada class action is aimed at more than 500 associations who used collection agencies that, in the plaintiffs' words, "are making improper, inaccurate and/or excessive demands, through themselves or by their agents...for claimed collection fees and costs which (the HOA's) did not actually incur nor were liable for at the time of the lien or demand, and for claimed lien amounts which have been extinguished by the covenants, conditions and restrictions, or are otherwise unlawful or improper."

Every week I am asked by an association about some new pitch by a collection agency or a creative collection entity that promises "risk free" or contingency collections for the association. How does this typically work? The collection agency promises that the association will owe nothing because all fees and costs are loaded up on the delinquent owner's ledger. If they cannot collect from the owner, they won't collect from the association.

What happens, however, if the owner's ledger contains amounts that cannot properly be included on the association's lien? For starters, it can result in an action against the association and the lawyer who recorded the lien and proceeded to foreclose on same. Here is the link to the Nevada story:

Are there lawyers out there that will work with collection agencies that are loading up these kinds of "out of the box" fees on delinquent owners? There sure are. Are there other law firms and lawyers that tell those same associations that they simply cannot proceed with collection files that have questionable charges? You betcha.

Quite simply, there is usually some sort of a legal bill at the end of the road for most associations who are pursuing foreclosures against owners of properties with no equity. It is the cost of doing business for associations in today's market but hopefully it is a cost that can be recouped via renting out the property.

Remember, if it sounds too good to be true, it's probably not. The occasional Hail Mary Pass is very exciting but there is no substitute for old-fashioned blocking and tackling.

This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.