1	Anatomy of a Homeowners Association – Part 2 (Advanced Topics for Board Members)
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3	Agenda Basis of authority Texas Property Code Five ways to work things out Anatomy of a lawsuit Foreclosure Bankruptcy
4	Basis of authority Governing documents for the Association Articles of incorporation & bylaws Govern the operation of the community association Covenants, conditions & restrictions (the “deed restrictions”) Govern the use of the land by its owners Architectural & deed restriction guidelines Internal interpretation of deed restrictions for uniform enforcement Policies, procedures, rules & regulations Internal rules of operation for the community association
5	Basis of authority (continued) Related laws at affect the Association Federal laws Fair Debt Collection Practices Act Telecommunications Act Americans with Disabilities Act and other discrimination laws State laws Texas Property Code Uniform Condominium Act Local government ordinances Buildings (zoning, building codes, fire safety) Health & safety (animal control, pools, grass, rodents) Annoyances (noise, lighting, signage, barking dogs) Appearance (junk vehicles, grass heights)
6	Texas Property Code Title 11, Chapters 201 thru 211– Restrictive Covenants Expands, limits, supplements authority of Associations A summary of the keys points of each chapter follows Most of the chapters are “bracketed”, sometimes in a complicated way, to apply to areas – for example, Chapter 201 applies to: cities with populations over 100,000 including their ETJ unincorporated areas in counties with population over 2,400,000 unincorporated areas in counties with population over 30,000 if they are adjacent to counties with a population over 2,400,000 cities with population over 30,000 if they are adjacent to counties with a population over 2,400,000
7	Texas Property Code (continued) Chapter 201 (adopted 1985) Provides a procedure for extending, renewing, creating, modifying or adding to restrictions by a petition of owners Allows certain owners to “opt out” Chapter 202 (adopted 1987/1999) Restrictions shall be liberally construed to give effect to its purpose and intents An exercise in discretionary authority by the Association shall be presumed reasonable unless a Court rules by a preponderance of the evidence that it was arbitrary, capricious or discriminatory Dedicatory instruments must be filed in the public records of each County where the community is located (added 1999)
8	Texas Property Code (continued) Chapter 203 (adopted 1987) Authorizes county attorney to enforce restrictive covenants Chapter 204 (adopted 1995) Provides easier petition process for extending, adding to or modifying existing restrictions than Chapter 201 – sets approval requirement at 75% – no “opt out” option Provides broad powers for Associations if not specifically provided in governing documents (bylaws amendments, supplemental assessments, late fees, chargeback of legal fees, cumulative assessments, etc.) Continuation of ACC authority despite defective document wording
9	Texas Property Code (continued) Chapter 205 (adopted 1995/1997) Authorizes Board to amend governing documents to comply with HUD or VA guaranteed mortgage loan requirements Chapter 206 (adopted 1997) Provided a method for Clear Lake City and Clear Lake Forest to continue to charge assessments Chapter 207 (adopted 1999) Requires Associations to provide resale certificates to owners upon request and for a reasonable fee Chapter 208 (adopted 1999) Defines historic preservation neighborhoods and provides ability to amend or terminate common scheme for preservation
10	Texas Property Code (continued) Chapter 209 (adopted 2001) Requires filing of management certificates in public records Clarifies owner access to records and exemption of attorney files Provides owner with right to a hearing before the Board prior to certain enforcement action suspension of right to use common areas file a lawsuit for matter other than assessment collections charge an owner for property damage levy a fine for DR violation or rules infraction Requires owner payments received by attorneys to be deposited into Association bank account (and not an attorney trust account) Limits legal fees in non-judicial foreclosures
11	Texas Property Code (continued) Chapter 209 (adopted 2001) (continued) Prohibits foreclosure on only attorney fees or fines Provides a 180 right of redemption to former owner after an Association foreclosure sale Provides notification and document filing procedures after an Association foreclosure sale Chapter 210 (adopted 2005) A highly bracketed bill to provide two rural communities with a procedure to extend their restrictions by a petition of owners (Greater Lake Palestine Council in Chandler, Texas) Chapter 211 (adopted 2005) A highly bracketed bill to provide one rural community with a procedure to extend their restrictions by a petition of owners (Blue Lake Estates in Llano County composed of nine tracts of land)
12	Five ways to work things out Appeal of decision to the Board Board review of a decision by committee or management company TPC hearing in front of the Board Formal hearing offered under state law to attempt resolution Mediation Use of an independent party to encourage a compromise solution Arbitration Both parties agree to be bound by decision of independent party Civil justice system A lawsuit is filed and a judge or jury decides
13	Appeal of decision to the board The Board is the ultimate authority and an owner can always request the review of a decision made by a lower authority ACC disapproval or conditional approval Management company DR enforcement criteria Pool company disciplinary action Unless defined in governing documents, there is no required response time or appeal procedure, however Appeal should be made in writing and be complete Appeal should be heard at next Board meeting Owner should be invited but not required to attend Appeal should be in Executive Session with time limit Response should be in writing
14	Appeal of decision to the board (continued) Examples: ACC disapproved free-standing trellis in side yard but owner feels decision it should be allowed under the guidelines Management company sent a DR letter asking owner to repaint house but owner feels his rough cedar siding is supposed to look that way. The lifeguards revoked pool use privileges for a 13 year old boy after repeated disciplinary actions in the first month of the pool season; the parents would like pool use privileges restored to their son.
15	TPC hearing in front of the Board Provided under TPC 209.007 before enforcement action for: suspension of right to use common areas file a lawsuit for matter other than assessment collections charge an owner for property damage levy a fine for DR violation or rules infraction The owner must be notified of right to a hearing by certified mail and be given 30 days to request a hearing. If no hearing is properly requested within 30 days, the Association has completed its obligation under the law and can proceed. The owner must make the request in writing. The Association must hold the hearing within 30 days and notify the owner at least 10 days in advance. Either party can request an automatic 10 day postponement. Further postponements are by mutual consent.
16	TPC hearing in front of the Board (continued) The purpose is “to discuss and verify facts and resolve the matter in issue”. If nothing else, we want to ensue the owner completely understands the problem and the requested resolution. A frequent side benefit is that a resolution surfaces once everyone gets in the same room and talks. If the owner does not appear, the Board should announce the hearing and record it in the minutes – all requirements under the TPC will have been fulfilled. The hearing should be held in Executive Session. There is no obligation under the TPC to respond in writing to the owner regarding the discussion or decisions from the hearing, however, in many cases a follow-up letter is appropriate.
17	TPC hearing in front of the Board (continued) Sample of a deed restrictions 2^nd letter that includes the TPC 209 right to a hearing language:
18	TPC hearing in front of the Board (continued) Suggested language for presiding officer to begin the hearing: As provided for in chapter 209.007 of the Texas Property Code, this hearing has been requested by {owner name} who owns the property at {property address} to discuss and verify facts regarding certain deed restriction issues that have been raised by the Association. The format for the hearing is as follows. First, the community manager will give a summary of the issues at hand. Each Board member has received and reviewed background information including any letters from the owner. Next, the property owner will be given the floor to present his/her case. Finally, Board members will be given an opportunity to ask the community manager and the property owner questions. At the end of the meeting in Executive Session, the Board will discuss the hearing and make any necessary decisions. A written response will be sent to the homeowner with any Board decisions. I would ask for everyone’s courtesy in not interrupting while someone is speaking. We have set aside 20 minutes for this hearing.
19	TPC hearing in front of the Board (continued) Sample hearing scenario Owner has received a TPC letter regarding deteriorated fence Owner doesn’t believe the fence is in violation
20	Mediation Can be done at any point in a dispute – before or after a lawsuit is filed. Many courts require a mediation step before the judge will set a hearing on a lawsuit. Mediation is available through various Dispute Resolution Centers, the Better Business Bureau and through most courts. The costs are very reasonable and sometimes free. Mediation is not binding and the parties may not be able to reach an agreed settlement. Two reasons mediation often succeeds are (1) that the parties are forced to talk to each other and (2) that the mediator acts as an impartial 3^rd party to show each party the weaknesses in their arguments and possible impact of not settling.
21	Mediation (continued) Sample mediation scenario Owner refused to pay several forced mowing fees on acreage lot Owner filed lawsuit against Association in JP court; Association filed counter suit and received a judgment; owner appealed to District court. Owner made small partial payments before and after lawsuit; claims to have made additional payments not recorded by Association but has lost evidence in a fire. Owner claims a contractor was hired to do the mowing for them but has lost evidence in a fire. One of the forced mowings was done outside of the notice period. Owner is foreign-born, has difficulty with language and represents self in Court.
22	Arbitration Not common for Association disputes but may arise in some contracts or insurance policies. The dispute is heard by a 3^rd party arbitrator – the process is not part of the judicial system (although the arbitrator generally has legal training). The arbitrator’s decision is final and may not be appealed. Costs shared by both parties. Generally more expensive than a successful mediation but much less expensive than a trial and possible appeals.
23	Civil justice system Community association lawsuits can be filed in various courts: Justice of the Peace (JP) court Small claims court County court State district court Each court varies with regard to Filing fees (JP low, District high) Backlog affect on scheduling of trial (JP fast, District slow) Formality of proceedings (JP informal, District formal) Need for attorney (JP optional, District recommended) Limitation on authority of court (no injunctive relief in JP) Appeal options (JP trial de novo, District to Court of Appeals)
24	Anatomy of a lawsuit
25	Anatomy of a lawsuit (continued)
26	Anatomy of a lawsuit (continued)
27	Anatomy of a lawsuit (continued)
28	Foreclosure By mortgage company Mortgage companies have the right to use non-judicial foreclosure through the Deed of Trust signed by homeowner Except in rare circumstances, Association lien is subordinate to mortgage company and pre-foreclosure amounts are not collectible from the mortgage company Former owner continues to be personally liable for the pre-foreclosure amounts but collections is impractical By taxing authority Same as above except tax lawsuits are required before a foreclosure – the Association is typically named in that lawsuit as a party with interest in the property Owner has a two year right of redemption under state law
29	Foreclosure (continued) By homeowners association Foreclosure rights defined in deed restrictions and confirmed by key Texas Supreme Court decision in Inwood North vs Harris (1987). The deed restrictions will specify if non-judicial foreclosure is allowed; if available, use only in limited, unique circumstances. Procedures and limitations on foreclosures are provided in TPC chapter 209: Cannot foreclose over attorney fees or fines alone Legal fees are limited if a non-judicial foreclosure is used Former owners have a 180 right of redemption Significant notifications and document filings are required HOA foreclosure is a last resort and an infrequent occurrence. Buyer receives a Constable’s deed subject to all encumbrances on the property (mortgages, taxes, liens, etc.).
30	Foreclosure (continued) Sample foreclosure sale Judgment value on date of sale is $2,500 including court costs and post-judgment interest. Constable fees for posting and conducting the sale are $500. Scenarios: No bidders – Association not present (no sale) No bidders – Association present and wants property (price $500) 3^rd party bidders present but little interest (final bid $2,000) 3^rd party bidders bidding aggressively (final bid $15,000)
31	Bankruptcy Types of bankruptcy Chapter 7 – liquidation for individuals Chapter 13 – repayment for individuals Chapter 11 – reorganization for corporations Cast of characters Debtor is the property owner Creditors are those owed money including the Association Debtor’s attorney is the attorney preparing the bankruptcy petition on behalf of the debtor Bankruptcy trustee is the attorney assigned by the bankruptcy court to administer the plan Bankruptcy judge is the federal judge who approves the plan
32	Bankruptcy (continued) All creditors must submit a “Proof of Claim” to have their claim considered. Types of creditors Priority creditors are paid first – includes the bankruptcy trustee Secured creditors include anyone with a lien or judgment against the debtor – includes the Association, the mortgage company, banks that hold any car loans, etc. Unsecured creditors include everyone else such as credit card companies, hospitals, cell phone companies, etc.
33	Bankruptcy (continued) Once the bankruptcy plan is approved by the court, the debtor must make monthly payments to the trustee. The trustee distributes the funds to the creditors per the plan. The trustee monitors the plan and may dismiss a bankruptcy if the debtor does not comply with the plan – follow-up does not generally occur until creditors complain about lack of payments. While an owner is in bankruptcy, the Association may not proceed with delinquent collections the Association may not pursue deed restriction violations beyond the initial letters from the management company the Association may not withhold any rights from the owner (voting, use of common areas, inspection of records, etc.)
34	Bankruptcy (continued) What can be done if the situation is intolerable? The options are limited and expensive. If Debtor does not pay post-petition assessments, the Debtor’s attorney can be contacted – if that doesn’t work, a complaint can be filed with the bankruptcy court. If Debtor does not make payments to Trustee for disbursement to Creditors, a petition can be filed to dismiss the bankruptcy. If Debtor has major DR violations, a Motion for Relief from Stay can be filed with the bankruptcy court to obtain permission to pursue the violations against the Debtor in local civil courts. Bankruptcy judges are not generally interested in dealing with DR violations unless they are serious problem to the community or affect the value of the bankruptcy estate.
35	Questions & Answers