Thursday, February 27, 2014

"A Man Cannot Serve Two Masters"-Directors and Breach of Fiduciary Duty

This past weekend, I visited my daughter who is a freshman at Washington University in St. Louis. I had asked if I could possibly attend a law school class at some point during my visit since my daughter had her own undergraduate classes to attend throughout the day.

I knew ahead of time that I would be sitting in on a Corporations Law class but other than that, the topic for that evening's class was a mystery. When the professor reached the lectern, the first words he uttered were "A man cannot serve two masters". He then launched into a two- hour class on fiduciary duty.

Having represented directors in all types of shared ownership communities for many years, I was particularly interested in the topic. After all, volunteer directors don't always have the easiest time when it comes to operating and administering their communities. Professor T discussed the seminal 1944 U.S. Supreme Court case of Bayer v. Beran. He questioned his students as to whether a person can be honest and still breach his or her duty of loyalty to the corporation. In the Bayer case, Mr. Dreyfus, the Chairman of the Board of Celanese Corporation of America, decided that a radio advertising campaign would be great for the company and his wife just happened to be one of the singers on the program in which Celanese would be advertising. While Celanese hired an advertising agency to produce the ad and the advertising commitments were subject to cancellation at any time, some of the company shareholders were still concerned that it was not a fair transaction as they felt that the decision was made simply to advance the spouse's career. A shareholder's derivative action ensued wherein Mr. Dreyfus's loyalty to the company was challenged.

Professor T explained to his class that if a director's actions are challenged, then the burden is on the director to not only prove the good faith of the transaction but also to show the inherent fairness from the viewpoint of both the corporation and those interested therein.

How many times has a director who also owns a business which serves community associations believed that his or her company would do the best job cutting the lawn, cleaning the pool, managing the community, etc.? When questioned about the potential conflict, the director usually says something along the lines of "Well I know my company will do the best job because I live here and will observe the work and will give the best price." Now, this may very well be true and the director's company may be the very best fit for his or her community but it is still up to the other disinterested directors and not the conflicted director to make that decision.

This logic was articulated in the Bayer case which remains good law to this day. The Supreme Court found that the Chairman's wife was actually a very competent singer who had a reasonable rate of pay which made the entire board's decision to advertise on the program reasonable.

Overall, the decision to hire a particular person or company must be fair and in the best interests of the association and not just in the best interest of the director with the connection. Of course, just like Mr. Dreyfus, an association director with this kind of conflict should be prepared to live with the possibility of scrutiny at best and a public relations nightmare at worst.

Sunday, February 16, 2014

Pro Se Appellant Wins Big Against Bank

Another blow to banks was dealt recently by the Florida Fourth District Court of Appeal when it ruled in favor of a pro se appellant, Linda Zimmerman, who sought to have her bank foreclosure reversed. For those of you not well versed in legal jargon, "pro se" means Ms. Zimmerman was not represented by an attorney when she achieved this legal victory.

The 4th DCA agreed with this homeowner that JPMorgan Chase Bank had failed to establish that it had possession of the promissory note before filing its foreclosure complaint in 2009 against the Lake Worth home.

The case is not over yet as it was remanded to the lower court which now means that Chase must prove it was the holder of the promissory note on the date it filed its foreclosure complaint. If Chase fails to prove possession on the date it filed, it will not have standing to pursue its foreclosure against Ms. Zimmerman and the case will be dismissed. If Chase's original action is dismissed, it may then have a statute of limitations problem when it comes to refiling.

So what does all this mean for community associations? Unlike bank foreclosures, associations are not saddled with the same burdens as lenders. Naturally, an association must prove that the amounts being demanded are actually owed and that all statuorily-required protocol was followed. However, association members do not have the various holes to poke that they do when it comes to fighting a bank foreclosure. Remember that big stack of papers you signed when you obtained a mortgage? Well, if there were problems with the Truth in Lending Statement or the RESPA Disclosure, those can become defenses to your bank foreclosure as well as the bank's failure to have possession of your promissory note.

For association members who may be struggling financially, the message is clear. Pay your association whether or not you plan to fight your bank foreclosure. Association assessments are typically a lot smaller than your mortgage payment and the association can proceed to foreclose a lot quicker and with fewer hurdles. Paying your association assessments allows you to stay in your property at a price that is normally less than what it would cost you to rent elsewhere. For association directors, the message is also clear. If you are still waiting around for banks to foreclose on the delinquent properties in your community there are no guarantees that is going to happen any time soon or any time at all!

Sunday, February 9, 2014

Are developers starting to build consistently with community association trends?

Sun Sentinel reporter, Paul Owers, recently reported on two new "smoke-free condo projects" both of which are being built in Fort Lauderdale.

While the Florida Clean Indoor Air Act prohibits smoking in public buildings and that ban extends to an association's common areas, this law does not prohibit smoking inside individual units.

So what exactly does it mean to be a "smoke-free building"?  According to the developers of these two new luxury buildings, it means that smoking inside the units will be strictly prohibited with any violators subject to fines and further legal action.

Typically, developers like to keep their pool of eligible purchasers as wide as possible for all the obvious reasons. So why are the developers of these two new projects telling smokers that this is not the community for them?

Well, there has been a growing trend over the last few years whereby more and more residents in shared ownership communities complaining that their neighbors' excessive secondhand smoke is impacting the quality of their lives. Clearly, the developers of these Broward County projects have been tracking that trend and are building these communities as a result.

While it is encouraging to see that the developers of these two smoke-free buildings are willing to create specific housing choices for the people seeking them out, I am still not convinced that most developers are engaged enough in tracking what their target audience really wants. If you follow various Social Media circles devoted to community association dialogue, you quickly realize that there is a hue and cry for change in the type and number of housing choices currently available.

Some people want more restrictive communities which clearly prohibit smoking, pets and rentals from inception while others want housing choices located outside the confines of a mandatory association setting altogether. I am surprised that there rarely seem to be developers or developers' counsel joining in on the dialogue in these forums.  After all, developers want to sell their inventory so for developers who have been in business for decades in particular, why not do some research on the changing consumer perspectives out there? Relying on decades-old uniform covenants no longer seems as cost-effective as it once did.

Sunday, February 2, 2014

When your home is also your office: dealing with single family use restrictions

Without exception, every set of association governing documents I have reviewed over the last two decades has contained a restriction which states that the property is to be used for "single family residential usage" or words to that effect.

While many of these documents were written decades ago, even newer association covenants continue to reflect this time warp when it comes to the concept of what kind of work is done in the home these days.

So just what kind of commercial uses have I seen over the years in all types of communities?  Well, the typical work from home situations include folks who earn a living through the use of their computers or phones such as telemarketers, graphic artists, IT technicians and financial advisors.  Moreover, many types of companies have embraced the concept of telecommuting for some employees as it cuts down on expenses for both the employer and the employee.

In some of the more unusual situations I have encountered, an HOA owner had turned her garage into a very well equipped hair and nail salon while a high-rise condominium owner was filming pornographic movies in his unit and, unfortunately, out on the balcony.

How do most of these "single family residential use" violations come to light? Usually the activity is found due to open and obvious commercial activity on the property-delivery trucks or customers arriving on a routine basis or noises and smells may be the tip-off. Sometimes the suspicions are confirmed because someone sees the residential property listed as the business address either in corporate records or in local advertising.

This brings us to the main reason that association documents limit the use of the property to residential usage and that is to prevent the property from being used for a purpose which creates a nuisance for others.

Certainly, having daily customers and deliveries arriving at one's home could create both security and logistical problems when it comes to guest parking, noise and the potential for things to go awry. Naturally, running any type of a commercial venture out of a residence which involves flammable materials and other practices best suited to a commercial location provides ample reason to enforce the residential use restriction.

It is not illogical to assume that there are association members and residents in almost every community who are, indeed, engaging in commercial activities inside their properties. Does an association's failure to enforce the single family use restriction set it up for a selective enforcement problem in the future? Well, it can if a future commercial usage is more egregious than the ones being overlooked.

Boards would be well advised to review their residential use restriction with their attorney and see if it can be modified to bring it up to speed with the way we live in 2014 while not losing any of the protections needed to prohibit inappropriate commercial activities inside condominium/cooperative units as well as single family homes.

A telecommuter is not likely to have any impact on his or her neighbors but the porno producer next door? Let's hope you never have to find out.