Legal Fund?

Hi All,

Most everyone has read my previous posts regarding my HOA - 189 single family homes, voluntary HOA, mandatory CCRs.

We’ve made some progress over the last three months:
- Board now has purchased D&C and Liability insurance
- Board formed omitted calls for in CCRs and Bylaws
- Begun rewriting Bylaws due to loss of all records
- Begun notification to community of meetings and ongoing activities
- Set up trial website to judge utility and interest
- Obtained about 50% dues participation
- Developed formal policies and procedures for CCR enforcement
- Provided notice to the community of intention to more systematically enforce CCRs

So, some progress. But, to the CCR enf cement - I think some form of court action will be necessary to make the point that CCRs will be completely enforced. To this likely end, does it make sense to start building a legal fund to show the community, in advance, that the Board intends to more completely enforce? Given the size of the neighborhood, what level of funding would be appropriate?

If you think that enforcement is going to cost the HOA a lot of money, you need to reconsider how you are going to enforce the CC&Rs. There should not be great costs to the HOA.

It may not be your intent but building a legal warchest makes it look like you are willing to enforce the CC&Rs at all costs. That would be fine if you were spending your own money but, since it is the HOAs money, you need to weigh the costs of enforcement against the violation as well as consider the likelihood that you would win a court case, which means consulting with an attorney first.

The mission of the HOA is to maintain the common property. In all likelihood, the board is authorized to set an operating budget based on historical expenses and justifiable, documentable anticipated costs sufficient to operate the common property. It is NOT primarily charged with policing private property restrictions and setting up enforcement budgets. It "may" enforce restrictions the same as any other person who is a member. The difference is the size of the cash cow available to the board compared to the owner. This power imbalance is exacerbated by a board setting aside a legal fund in anticipation of legally intimidating owners with their own contributions to obey the HOA rules. Best practices is to elicit compliance and that costs time, not money.

Personally, I am offended by the characterization of "showing" the members that the board intends to spend more of my money on legal fees to strongarm my neighbors. Having the money there "approved in advance" encourages boards to access it to justify continuing the expense and the underlying behaviors giving rise to the need. This is a self-perpetuating practice that can quickly get out of control due to greed and ego motives and owner apathy until it's too late and the train is barrelling down the tracks.

I would budget for the legal expenses related to the establishment of the policies of enforcement and assume the best-maybe $5K. Budgeting ahead in anticipation of trouble is unnecessary and subtly threatening.

Whatever actually happens in the future, owners must pay necessary legal fees but IMO, it should be by a special assessment if there is a judgement or a lawsuit brought by an owner or vendor. That would be an intense financial event to get owners' attention and discussion of the association's actions culminating in the expense.

Indeed, I would go one step further and amend the Bylaws to require 3/4 of the total membership to consent to filing a complaint against a homeowner or vendor. Admittedly, my perception comes from a recent history of my HOA spending nearly quarter million on legal fees where the board launched the lawsuit. After the HOA lost its hissyfit lawsuit "recommended" by the HOA attorney, our HOA lost its insurance carrier and now has a surplus line carrier that is extremely expensive and requires a HUGE deductible. There are unanticipated consequences to wielding the legal bullystick.

As a casual practice, inflating an Operating Budget in advance of a need is unnecessary, can be provocative and numbs owner-conscious participation in association matters.

My concerns are not about individual owner behavior-it is about corporate behavior which is only as good as the voluntary board du jour.

The point about 3/4 owner approval of HOA-initiated lawsuits is not about percentages; it is about owner inclusiveness and going into a potentially devastating legal entanglement with disastrous financial repercussions their eyes wide open! If my HOA had had such a Bylaw requiring owner approval of the quarter million dollar lawsuit, the HOA would be a quarter million dollars richer today and the covenant violation would have self-resolved or simply tolerated/ignored. More importantly, the social fabric of a once-amicable community would not have been destroyed by the divisiveness of a lawsuit that dragged on for years. In retrospect, such a lawsuit action would not have been approved by the members. The Members were not being represented-the Board and Management company were posturing for control, encouraged by the greedy HOA attorney. Members paid the tab and got NOTHING for it. Property values plummeted during the lawsuit! And now, insurance carriers don't want our business.

Consider that recently, an HOA was fined $20 million in punitive damages for a personal injury lawsuit that the BOARD insisted go to trial. The injured person had initially offered to settle the claim for the maximum insured amount of $2 million but the Board wanted to roll the dice and go to trial. The homeowners were potentially going to lose their homes to pay the judgement and were outraged--especially when they learned that the injured plaintiff had offered to settle for 2 million to be paid by the insurance company and the board refused!

Most municipalities have codes and compliance officers to deal with tall grass and abandoned vehicles.

The mantra of "protecting values" is tired and not based on anything objective. Certainly, as a buyer I would move on if presented with a house with tall grass and trailers in the adjacent yard. As a seller, I would be filing a complaint with city/county. If trying to sell my home in such an environment, I might even offer to go over and offer to cut the lawn and to drag out the vehicle if that would help "preserve my value" and sell the house. I would not be looking to my voluntary HOA to fix the problem and involve itself in legal disputes that might peripherally affect me and my property value. Recall that in Florida, an HOA real estate sales contract MUST disclose any lawsuit that is imminent or actual. Now THERE's a property value downer!

As a voluntary HOA, I would think that even MORE caution would be advisable in keeping the assessment costs down. If homeowners actually appreciated the true nature and potential liability owning a home in an HOA, they probably would not buy in one.

You live in an alternate universe bud. A HOA is not to protect value and status of a neighborhood, it is to run a business, pure and simple.

The HOA is a sales tool for the Developer to sell it's property. It's set up to keep a certain appearance and enforcement of keeping up appearances to keep the property ATTRACTIVE to potential buyers. Again actual Property VALUE is determined by REAL numbers. It's tactile. It's what the homes in a certain radius of similar size/beds/bath sold/foreclosed for in a 6 month period. You have a lot of foreclosures in the last 6 months you can expect your home value when you put it up for sale to be effected. You have homes selling consistently with no foreclosures, then you can expect your home to keep it's asking price.

People get this confused all the time in a HOA. A HOA never keeps a home value. If it did, then you could sue for that. Which is complicated since one would have to sell their home to prove making them no longer a member of the HOA. Plus have to prove other buyers turned buying the house due directly to the HOA and not because they hated the wallpaper.

So no your HOA is set up to keep homes ATTRACTIVE to potential buyers to keep wanting to buy. Fines work like speeding tickets for your HOA. It takes money to get money. So no need to set up a "legal fund" separately to collect dues. If you file a lien, that money is part of the lien process of what one gets back when it's paid. Foreclosures stop the bleeding. Fines are corrective/punitive actions. They usually can't be the basis of a lien or foreclosure.

There are other ways of enforcing the rules of the HOA outside of going to court. I rarely recommend going to court to enforce a violation. It's not necessary and a fining schedule or reading what your CC&R's allow.

ADDITION

In SC we cannot foreclose for fines, only past dues.

I agree. I buy the neighborhood as much as I do the home. One time when looking at homes with a realtor, we drove into a neighborhood to look at a home. As we drove in I said we can ship this neighborhood. She said you have not even seen the home. It ticks all your boxes. I said this is not a neighborhood I care to live in no matter the house.

Yes shipping the neighborhood is a factor in deciding to buy a home. However, that is NOT a "Home VALUE". It is an Attribute that encourages you to purchase the home. There are different definitions for "Value". A house having a "pool" is a value to some. Others a pool is a nuisance and is of no value at all.

So you can't assign what you find attractive or enticing to purchase as a "Home Value". It is actual numbers the bank/mortgage companies use to decide the value of a home. The home's assessment. If you ever have refinanced a house, then you know you have to pay someone to come to your house to evaluate it. What they decide your house is worth, is then what they tell the bank to refinance for. They do factor things in like condition of the home, what other homes around it sell for, and general appearance of the neighborhood.

Gwen,

Thanks. I’ll assume we’re in different worlds.

I would point out, again, the purpose of the funding line is not to go to court, but to be prepared to do so. And, that our process to get to that point is long ...friendly letters, four stages of formal letters, and a final attorney letter - all prior to court. But, we will be prepared.

And it is likely that even if awarded attorney fees and costs, the owner could not or would not pay. A Final Judgement of attorney fees/costs begins another round of legal action to discover, file and execute the sale of non-exempt assets to recover the judgement debt. It is not a debt that can be collected from a homestead property (exempt) by placing a lien.

So let me get this straight ... you are a voluntary HOA and have only around 50% of owners voluntarily paying dues. So you want to potentially charge those 50% volunteers more, so you can set up a legal fund to file lawsuits against potentially individuals who are not volunteering to contribute?

IMO ... when that lawsuit costs you more than the money your volunteers are contributing ... who will get stuck with the bill? Also, how many of those volunteers do you think are going to become MIA when it comes to future volunteering of money because you guys maybe got yourself into a financial mess.

You are a voluntary HOA, so I would count my lucky chickens I have already in place and not get greedy and abuse them.

I think making this a line item is where your problem lies. You don't need to make this a line item. Legal fees just kind of happen. It's kind of like your indicating your going to have a separate account set aside just for legal expenses. Most legal expenses aren't paid out of any separate account or savings. A HOA is typically a non-profit. So it should spend as much as it collects. We all know it takes money to make money. That is why the legal process of collecting be it a lawsuit, lien, or foreclosure is that money spent to file is part of what is reimbursed. The court ONLY makes one "Whole" and NOT a profit. Hence why liens/foreclosures are the process as they collect back money that is owed. A lawsuit on the other hand fall more along the lines of punitive. Money isn't owed but wanting to be collected to correct a violation.

So no I would not have a separate line item for legal costs. It should come out of the overall budget like other expenses.

UNREAL, ordinary budgets SHOULD have line items, and if you do use legal, then it should be a line item, whether you use it all or not.