Director’s Lawsuit Avoidance

Whenever major disputes arise between groups of residents in Associations, it is incumbent for both parties to step back, to fully assess the situation, to objectively discuss the issue(s) and try to reach an equitable agreement that is best for the community as a whole. A lawsuit should be the last resort. For those who have experienced litigation, it is truly a costly and human nightmare.

A practical way to avoid lawsuits is to take steps to reduce tension in the community. This is a Board responsibility. Residents are less likely to sue an association if they look at it as a body made up of neighbors who listen to their problems, and not a cold, distant entity that is prone to disregarding their concerns. Holding meetings where residents can discuss issues and air their grievances is one option. Even neighborhood informal get-togethers that allow people to interact with board members as other human beings can do wonders for improving the relationship between residents and their HOA.

A former HOA President commented about lawsuits:

You may want to sugar coat it with “I am right” but when you sue your HOA you are suing yourself and your neighbors. The result usually is higher dues and/or special assessments, less ability for residents to sell/refinance their home, and living with angry neighbors upset with having to pay the bill.

An attorney commented:

I am of the opinion that many HOA’s are over lawyered. That happens because of the lack of education and the inability of many volunteer boards to understand what they are doing. It the natural answer for many who suddenly find themselves on the HOA board “Let’s consult the Lawyer”. It is good intentioned for an HOA to have a lawyer but too much dependency can easily develop. The truth is that 95 percent of the issues in an HOA are resolvable INTERNALLY without a lawyer.

And yet one HOA Manager tells residents in a newsletter publication:

If a Director is contacted by a Member or resident on Association Business, the Director will inform the person that he/she must communicate with the Board as a whole through the general manager This communication can be at a Board meeting, by request to be put on the agenda, or in writing.  In an earlier conversation with a resident, the Manager advised that person her job was ‘to protect the board’.

Board members are the elected representatives of the community homeowners.  As such, their actions should reflect the positions of the majority of homeowners.

Arizona case law states:

They (the Board) cannot rightly manipulate the affairs of the Corporation primarily with the design of securing benefits of the Corporation to one particular member or group of members, or of excluding another group from the exercise of its rights. Hatch v. Emery 1 Ariz.App. 142, 146; 400 P.2d 349, 353 (App. 1965)

Agree to Disagree

Using compromise to settle a conflict or dispute requires the parties involved to be consciously aware that the outcome might be less than they had originally hoped for. The final decision may be one that is acceptable but not optimal. There can be reluctance or resistance to using compromise as an approach to conflict resolution when the result seems like a loss. However if the focus is on what is achieved, rather than on what has been given up, there is a greater likelihood that the parties will leave with feelings of satisfaction and acceptance. Compromise is more successful when the parties have a range of tangible outcomes that are open for consideration such that the final decision is one that remains “within the box” for both parties.

With a lawsuit, one party wins and the other party loses… and the community as a whole  remains divided.

Melissa (former HOA President) said:
There are several effects that could happen in a HOA due to lawsuits. I am going to post just a few off the top of my head to get started. I am sure other posters on here have had the experience on what happened after it happened to their HOA and will post it. The question came up referencing mortgages… A HOA typically does not have any mortgages. The owners/members do. However, there is an effect on your ability to refinance or new owners to get loans. There is a HUD form that is filled out that works much like a HOA appraisal form. It is used by the mortgage lenders to gauge the health of the HOA. On that form there is a place for asking if the HOA is currently or has been involved in a lawsuit. The details of which must be provided. This information then is used by most likely the big three federally backed loan lenders. FHA, Freddie Mac, and Fannie Mae. Those are the MOST popular loan lenders that most people use in buying houses. However, they may be denied the loan and have to find another lender. A lender that will have higher rates or more stringent approval rules. Which means it will be harder to get approved buyers for the houses/condos in your HOA. This will also go into refinancing areas. The rates of which will most likely go up due to the higher risks and costs of your HOA. The HOA will most likely have to raise dues or have a special assessment to cover the costs of the lawsuit or lawsuits. The bank has to factor in HOA dues much like utilities bills. So when they do a debt load ratio on you for approval your debt load just went up. Which then in turns pushes your rate up or denial of refinancing. A claim also effects the HOA’s credit rating. Yes, HOA’s do have some kind of “credit rating”. It’s not exactly like your personal one. However, what it can do for a HOA is make it pay more for insurance and loans. A HOA can apply for loans if needed. It is kind of rare but it does happen. A claim can affect that and make the loan a higher rate or denied. So the HOA can’t really borrow money to help pay for their lawsuit pay outs if their credit rating bites it. The most obvious result is losing your HOA’s insurance altogether. They will cancel your insurance and can do so legally. The insurance company can also raise rates to the point the HOA can not afford it. It is extremely difficult to find new HOA insurance companies. There are only a few nationwide that even offer such insurance. So if you got an insurer it’s best to do the best you can to keep them. The effect out of your pocket as a member? The HOA may have to raise dues or have a special assessment of course. The insurance only covers a certain amount of the award. A 1 Million policy does NOT pay out 1 million dollars. It roughly pays out about 80K if you read your policy. So if the court awards 100K then the owners would have to pick up the 20K difference. Keep in mind the lawsuit is against ALL of the members not just the board. There is also some trickyness with the special assessment. Your HOA is going to have issues with people refusing to pay the special assessment. They didn’t want to be part of the suit or were part of the suit. It doesn’t exclude them from paying the special assessment. If they don’t then your HOA will have to put a lien on their property to collect. A lien can be filed for not paying a special assessment. Which then means more money the HOA has to spend out to collect the money owed. As you can see this is the real effect a lawsuit has on a HOA. You may want to sugar coat it with “I am right” but the reality is no matter how “right” you are, these are the results…Suing your HOA is suing yourself and your neighbors…Enjoy the higher dues, less ability to sell/refinance your home, and living with angry neighbors upset with having to pay the bill…

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