Filing a Lawsuit against an HOA?


Homeowners' Associations (HOAs) can be marvelous ways for members to benefit from shared common expenses. They were designed for this purpose. But, in order to function for the benefit of every member, the governing documents must be strictly enforced on both the members and the member-elected Board of Directors. No one really thinks about the fact that the Board can usurp its powers for self-serving reasons; and this rarely happens if the terms of office on the Board are staggered so that no one serves on the Board for more than a few years. But, the usual reason that a Board deviates from its normal managerial and administrative responsibilities is that the governing documents may be subject to one or more different interpretations.

If a member files a lawsuit against an HOA about a grievance that cannot be solved amicably, the HOA has the distinct advantage of unlimited legal funding that can outlast most members’ resources unless the grievance is based on physical damages to the members' properties. Speaking as an economist, I do not think that physical damages should be the only criteria because certain features associated with the market value of a member’s property are an intangible asset that a Board's actions can impair. Nevertheless, if the Court in your State is not disposed to consider anything but physical damages, then homeowners should be very conscious of a Board’s actions in order to protect the market value of their properties.

Since I am not an attorney, I can say that it is always best to try and work out issues with the Board by trying any amicable approach that is available to you.

However, if a member does decide to file a lawsuit against its HOA, a few of the arguments that an HOA’s attorney can use in defense of a Board’s actions are not always foolproof. Reliance on the Business Judgment Rule is the most common defense, especially if the Board has overstepped its managerial and administrative responsibilities, and the another common defense is the Doctrine of Waiver that can only be used if certain conditions are satisfied.

1. The Business Judgment Rule (BJR) originated in order protect Boards of Directors of for-profit corporations from being sued if their decisions, made in good faith, turned out badly. However, the BJR is now used as a frequent defense for the decisions of non-profits, including HOAs. Different states have their own interpretations of this Rule. For example,in order to rely on the BJR as a defensive argument in the State of Washington, the Board must establish that it made a decision that any reasonable person would have made in like position. The decision cannot be self-serving or an Act of Bad Faith. The latter is defined as “an intentional dishonest act by not fulfilling legal or contractual obligations, misleading another, entering into an agreement without the intention or means to fulfill it, or violating basic standards of honesty in dealing with others”.(source: dictionary.law.com).

An HOA’s governing documents represent a “special type” of contract because the terms of the contract can be changed by following an amendment process that typically requires member approval by a certain percentage that is stated in these documents, unless the members have agreed to waive their rights to other parties such as the HOA’s Board of Directors. Therefore, ordinarily, any changes to an HOA's governing documents that are achieved by ignoring a required amendment process is an Act of Bad Faith by the parties that changed the contract; and this could invalidate the BJR defense unless it is backed up by a valid Doctrine of Waiver.

2. The Doctrine of Waiver- Black’s Law Dictionary defines Waiver as “the voluntary relinquishment or abandonment (express or implied) of a legal right or advantage. This and other sources also state that the party alleged to have waived a right must have had both knowledge of the existing right and the intention of forgoing it”. (Source: ww.desikanoon.co.in/2014/05/constitutional-law-doctrine-of-waiver). Therefore, an HOA's Board of Directors can change the governing documents, without following the amendment process, and be able to rely on the BJR if the members have waived their voting rights.

However, there are two types of Waivers: (1) an Express Waiver involves sending each member a form that a member may choose to sign in order transfer the member’s voting rights to the Board of Directors. I assume that a required percentage must be the same required percentage that allows the members to amend the governing documents which is typically a super majority; and (2) an Implied Waiver must be proven by the acts and conduct of the parties from which an intention to waive reasonably may be inferred. A waiver is implied whenever it may be reasonably and fairly inferred from the act, omission or silence of the party who has the power of waiving. [Roumage v. Mechanics Fire Ins. Co., 13 N.J.L. 110, 124 (Sup. Ct. 1832)].

In other words, a party's “silence" can only be inferred following the party’s awareness of what that party will be waiving”. “To be valid, a waiver must be a clear expression made with a full knowledge of the facts. For example, it is settled law in California that a purported “waiver" of a statutory right is not legally effective unless it appears that the party executing it had been fully informed of the existence of that right, its meaning, the effect of the “waiver" presented to him, and his full understanding of the explanation. In fact, no one can be held to have waived a right, benefit, or advantage, where he acted under a misinterpretation of the facts, especially where he had been put off his guard or misled by the conduct of the other party”.

Simplifying this point, which confused me for some time, a valid Implied Waiver could refer two parties that have a specific contract or arrangement. Party 1 agrees to deliver Apples and Oranges to Party 2 in exchange for $10 and certain services that Party 2 would pay and perform, respectively prior to the delivery of the produce. Party 1 delivers the Apples and Oranges to Party 2 without receiving the promised services from Party 2 but Party 2 pays $10 to Party 1. In this situation, since Party 2 paid the $10, knowing that the services had not been performed, Party 2 could argue that Party 1's silence was an implicit waiver of Party 1's right to Party 2's promised services.

Therefore, defense of a Board's actions that is based on the BJR and an Implied Waiver of members' voting rights is an invalid use of the Doctrine of Waiver if the HOA Board’s decision to amend the governing documents did not include disclosing its actions to all members prior to making its decision because the members' silence was not based on any knowledge of the Board's intentions.

3. Specific to the State of Washington, effective July 1, 2018, SB6175 will amend RCW64.38 that governs HOAs. The added laws stated in SB6175 are worth reading because it covers many standard rights of members that a Board may have violated due to members' unawareness or silence which the Board can assume was an implied waiver of members' rights. For example, based on the provisions of SB6175, RCW64.38 now includes a provision that requires the disclosure of all disbursements from an HOA's Reserve Funds at an annual Homeowners' meeting as part of the annual budget approval process. Therefore, Boards that collect contributions to these Funds that are supposed to be used for member approved repairs must be disclosed to members or a new annual budget that differs from the previous budget will not be approved.

A new provision to the State of Washington's RCW 64.38 guards against the possibility that a Board will adopt self-serving amendments without members' approval hoping that their actions will be unnoticed. Effective July 1, 2018, if any amendment will benefit a subset of members, which could be the case if the Board's members represented a subset or part of an HOA's subset of members, the adoption of this amendment will require a 90 percent vote of approval of the members. The rationale for a super-super voting requirement is based in part on the likelihood that the added amendment for certain subset of members could add significantly to the HOA's expenses that 100 percent of the members could be required to pay, unless the amendment clarifies otherwise.

Summarizing, until a member has actually filed a lawsuit against an HOA, it is impossible to appreciate how complicated and expensive it can be to obtain justice under the law because a defense attorney for an HOA can come up with many more defensive arguments than are described above; and it may take years to resolve an issue to members' satisfaction. Therefore, members should try to solve their disputes amicably with their Boards in an effort to avoid a lawsuit. Moreover, members should be vocal about their rights in order to avoid losing them because Boards may assume that the members' silence reflects their implied waivers.