Many homeowner associations do not currently enjoy the protections afforded to nonprofit corporations. Some came into existence prior to the current statutory requirements and others were subject to a developer’s "opt out" election. Regardless, it is usually advisable for all homeowner associations to be incorporated.

A nonprofit corporation allows people to conduct not-for-profit business with limited personal liability. The nonprofit corporation can also continue indefinitely with a succession of different members under one name. For example, in Oregon, incorporating an association involves filing Articles of Incorporation with the Secretary of State's office and adopting bylaws if the association has not previously done so. These procedures vary from state to state so consult with your attorney. The principal benefits of incorporation for community associations are:

Limited Liability. This means the member's personal assets are usually protected from claims against the incorporated association. There are exceptions: Board members must make informed, reasonable business decisions they believe to be in the best interests of the association. If decisions are made for personal gain or uniformed decisions made to the detriment of the association, limited liability status may be challenged. While limited liability is important for all associations and boards regardless of size, it is especially important for associations with substantial common areas or recreational facilities which are often associated with liability claims.

Ballot Meetings. Most state statutes to conduct regular and special meetings by mail-in ballot, rather than by holding an actual meeting (verify with your attorney). Incorporated associations that consistently experience low voter turnout at meetings may increase owner participation by conducting meetings by this method.

Indemnity. Some (but not all) associations' documents require the association to indemnify (protect and defend) board members who are sued personally if the directors' behavior meets certain standards of good faith. The Non-Profit Corporation Act not only includes similar provisions, but goes one step further. The Act states that board members have no personal liability for official acts if their conduct meets the standards outlined in the Act.

Other Powers Granted. Although the Oregon Condominium Act and the Planned Community Act spell out certain powers and duties of an association and its board members, not all associations are governed by these statutory provisions. The Nonprofit Corporation Act sets forth many of the powers that an association needs to operate effectively, including making contracts, borrowing money, buying and selling property, setting standards for board member conduct, and more.

Property Ownership. Of particular concern to planned unit developments is assuring that title to common areas is held in the association's name. Unincorporated associations may be refused title insurance because of the title insurance company's uncertainty regarding the nature, rights, and powers of an unincorporated association. Incorporated associations enjoy the benefits of the Nonprofit Corporation Act's provisions confirming the power to buy, own, and sell real property, thus facilitating transactions involving the granting or receipt of easements, purchases and sales of common area parcels, etc.

Other Benefits. Banks, lenders, utilities, and government entities often require a homeowner association to be incorporated to transact business. Many government programs available to associations like small business loans and energy conservation grants require the recipient to be incorporated.

Here are considerations of the incorporation process:
1. Involve your attorney in the decision making and document drafting process. It’s fairly straight forward and the legal costs are modest. 

2. A filing fee is charged by the Secretary of State for the Articles of Incorporation.

3. The association must file an annual report with the Secretary of State confirming the corporation's name, mailing address, address of registered agent, names of the president and secretary and the federal ID#.

4. To maintain its corporate status, the association must follow certain procedural rules including:

• Hold annual owner meetings
• Prepare meeting minutes
• Keep a member list, and
• Keep good accounting records

To protect the interests and assets of the association and its members, incorporating is critical. Get the facts today from your attorney. By Karna R. Gustafson of Landye Bennett Blumstein  BACK

Resale Disclosure: Lifting the Veil
In real estate sales, sellers are required to disclose any material fact that any prudent buyer would want to know before completing a purchase. Property located over a toxic waste dump would be an obvious example of disclosure and the need for it. There are less catastrophic issues, like roof condition or a leaking crawlspace but the idea is the same.

Anything that could negatively impact the value or marketability of the property needs to be divulged before closing. While there are usually statutory disclosure requirements of single family house sellers, these same disclosures are generally not required of homeowner association home sellers. This is a huge problem and here’s why:

Homeowner associations obligate their members to substantial financial obligations to the association and each other. So, while a buyer may purchase a condo in great condition and needing no repairs, that same buyer is also obligated to share the cost of certain repairs to all the condos, which may be in very bad condition. Since there is no specific legal requirements in most states to disclose these obligations, the buyer often finds out after closing when presented with a special assessment that can amount to many thousands of dollars.

Here’s the key to uncloaking this problem: The Board of Directors controls the quality and quantity of disclosure information. The responsible Board treats the association like the business that it is and keeps certain basic information available such as:

• Governing Documents Includes the Declaration, Bylaws, Rules & Regulations, Resolutions which are the specific obligations each member has to the association and other residents.

• Newsletters Reveal events (renovation, litigation, etc) that could indicate a possible special assessment.

• Meeting Minutes Same as newsletter but with more specifics.

• Annual Budgets for Last 3 Years Could reveal expense trends and failure to adjust for inflation.

• Financial Reports Monthly reports comparing actual expenses to budget should be available to track income and expenses.

• Collection Activity How much of the assessments are overdue 30, 60 or 90 days? If some don’t pay, guess who gets to?

• Litigation Activity Are there any pending lawsuits that could trigger a special assessment?

• Reserve Study A 30 year plan for association maintained components like roofs, painting, paving, etc. This is the biggest time bomb in the many homeowner associations that lack one. Failure to plan for predictable long range expenses often mirrors a lack of ongoing maintenance which causes spiraling property values.

• Key Contact Information  How to contact the Board of Directors and manager.

• Parking, Pets and Limiting Rentals Rules are particularly important to investigate

This list of items is the same information that any informed buyer would want. It’s the Board’s responsibility to make it available to owners so they, in turn, can provide proper disclosure to their buyers. If buyers are informed of their responsibilities, they will make better neighbors. Does the association really want members that don’t care how association business is handled? Is your Board prepared to lift the veil o’ mystery on disclosure?  BACK

Economic Loss Rule
A case originating from Kennewick, Washington (Carlson v. Sharp, 994 P.2d 851, Wash App 2000) recently upheld the "economic loss rule" which limits the kind of damages that parties can recover from each other when they do not have a contract between them.

The Carlsons were homeowners and Sharp was a soil engineer hired by a developer. The Carlson's home was settling because of inadequate soil conditions. The Carlsons had a contract with the developer for the purchase of their home, but the developer went bankrupt. The Carlsons did not have a The court held that Sharp was not liable to the Carlsons because there was no contract between them. The court referred to the 1994 Berschauer/Phillips Construction case which held that a general contractor could not recover economic losses from an architect or engineer where the contractor had no direct contract with those parties. The court's holding was based on the economic loss rule which serves to ensure that the allocation of risk is based on what the parties bargained for in their contracts. The court concluded "In the construction industry we see most clearly the importance of the precise allocation of risk as secured by contract. The fees charged by architects, engineers, contractors, developers and so on are founded on their expected liability exposure as bargained and provided for in the contract."

Oregon adopted the economic loss rule in the 1994 Onita Pacific case which involved a negligent misrepresentation claim against real estate agents. There have not been any Oregon cases applying the economic loss rule in the construction setting. However, with construction defect litigation which has followed the development boom of the 1990's, the economic loss rule is needed in our legal system to keep the price of development within reason.   By Jack Levy, Esq.  BACK

Implied Warranties
The outcome of construction defect claims often depends on the warranties that courts "imply by law" into the relationships between the property owner, design professionals and general contractor. Implied warranties are based on the court's sense of fairness. They serve as "ground rules" for the resolution of disputes and often reflect construction industry standards. There are two basic implied warranties on a construction project: Owner's Warranty of Adequate Specifications, and the General Contractor's Warranty of Workmanlike Performance.

Warranty of Adequate Specifications
On most projects, the owner hires architects and/or engineers to provide plans and specifications for the work and then hires a general contractor to build it. When construction defects are discovered, the parties often argue whether the defects were caused by faulty workmanship or by an inadequate design. Under this scenario, the owner is deemed responsible for any design defects. This is known as the Spearin Doctrine and comes from a 1918 United States Supreme Court case.

Under the Spearin Doctrine, the general contractor has a safe harbor from legal liability if he follows the plans and specifications. Since the warranty is "implied by law", it is not superceded by general contract provisions which require the general contractor to visit the site, review plans or to assume responsibility for the work until completion and acceptance.

The Spearin Doctrine was adopted by the Oregon Supreme Court in the 1967 Barbour & Son case and by the Washington Supreme Court in the 1957 Bignold case. It is a powerful defense against construction defect claims. However, this is not to say that the general contractor can turn a blind eye when faced with plans and specifications that appear to be defective. The other warranty that comes into play is known as the General Contractor's Warranty of Workmanlike Performance.

Warranty of Workmanlike Performance
Oregon adopted the workmanlike performance warranty in the 1977 Chandler case and Washington, adopted it in the 1969 House case. Workmanlike performance does not mean that the work has to be perfect. It means the work is to be constructed in a skillful manner.

Some courts have held this warranty to also mean that the general contractor has a duty to inform the owner or design professional of defects in the plans or specifications that are either obvious or reasonably discoverable. In the 1973 Dobler case from North Dakota, the court held that the general contractor had a duty to warn the homeowners that their decision to change roofing material from wood shingles to cement tile might cause the roof joists to fail. In the 1975 Lewis case from Alaska, the court held that the general contractor had a duty to notify the owner of problems in the owner's design of a roadway.

The lessons learned here are that a general contractors has a solid defense if defects were caused by bad design. However, this defense can't be used if the contractor knew of the design flaws and simply ignored them.   By Jack Levy of Smith, Freed, Chock & Eberhard - Attorneys at Law.    BACK

Dog Gone Ruling
In reviewing the actions of a homeowner association board, courts often apply the Business Judgment Rule. That states that a court will not overturn or otherwise disrupt the decisions of a board, provided the action is authorized by statute or the association’s governing documents, and the action taken is not fraudulent, unscrupulous or self-dealing. Some courts have added that the actions must be reasonable and taken in good faith.

In Sterling Arms Condominium vs. Croasdale, an appellate court was called upon to consider whether a board’s refusal to grant an exception to a pet prohibition policy was a violation of the Business Judgment Rule and, secondly, whether the dispute was subject to the alternative dispute resolution procedures mandated by statute.

Sterling Arms’ governing documents provided that no animals were permitted to be raised, bred, or kept in any unit except declawed and neutered cats and such other animals as might be authorized by the board. Without prior approval, Croasdale brought a dog into his unit and, after being discovered, requested an exception because "the dog is crucial to [his] mental health in coping with his mother’s [death]." Croasdale also provided a letter from his doctor that urged an exception to the pet prohibition.

The board sympathized with Croasdale, but denied his request. The board argued that dogs potentially added to problems related to cleaning up the common elements and were more likely than cats to be a noise problem because of their barking.

The court considered whether the board had the authority to grant Croasdale an exception. It concluded that, under the plain language of the restriction, it did. Secondly, it noted that Croasdale alleged no fraud or self-dealing or unscrupulous conduct.

The only remaining inquiry of the court was to determine whether the board’s actions were reasonable and taken in good faith. It concluded that the board’s reasons for denying Croasdale’s request were both rational and sensible, and therefore, upheld the decision.

In connection with Croasdale’s claim that the association failed to provide the required alternative dispute resolution, the court reviewed the statute and quickly dispatched his claim holding that "defendant’s argument misses the mark as there is no factual "dispute" for resolution in the case. The governing documents say No Dogs - defendant has a dog on the premises."

Furthermore, the court found that a letter from the association’s attorney to Croasdale’s attorney, offering a meeting between Croasdale, his counsel, and the board, to which Croasdale failed to respond, constituted an adequate offer of an alternative dispute resolution mechanism. The court affirmed the decision of the trial court that Croasdale must remove his dog from the premises.

Comment: The decision of the court on the Business Judgment Rule breaks no new ground. It is useful, however, for boards to understand the scope of the rule and the requirement that their decisions have a rational basis, comply with the governing documents, and be taken in good faith.

Here, the court took pains to note that the board had carefully reviewed Croasdale’s doctor’s note, considered Croasdale’s arguments, and had a reasonable basis for denying his request. Courts are much more likely to uphold a board’s decision when it is the result of a clearly deliberative process where the board acted only after given due consideration to the arguments advanced by the owner, and, if rejecting those arguments, clearly stating the basis for rejection. Autocratic responses by a board will likely not be treated so respectfully by a reviewing court. By J. David Ramsey    BACK

Debts Not Right
US District Court for Minnesota has held that a property management company is not subject to the Fair Debt Collection Practices Act (FDCPA). In Alexander v. Omega Management, Inc., a delinquent unit owner filed an action against the association’s management company for failing to comply with the provisions of FDCPA. This Act requires "debt collectors" to provide certain statutory warnings and rights to debtors when they are seeking to collect a "debt." 

During the past several years, the courts have expanded the definition of "debt collector" to include various persons involved in seeking payment from a tenant or unit owner. For example, one court held that a law firm seeking to evict a residential tenant could be considered a "debt collector." Debt collectors under the Act must provide the debtor with the right to dispute the debt and various notices.

In this case, the Court found that the management company is not a "debt collector" since the collection of delinquent accounts is not its principal purpose. The company spends most of its resources managing the physical structure of the complex. The Court also found that a management company’s collection of assessments comes within an exception to the Act since it was responsible for this account before it became in default. While this decision has no legal precedence in other circuits, it provides some insight into how Courts may view the issue.

The case does spark the issue of reasonable and consistent debt collection practices. Homeowner associations should, in fairness to their members, adopt a comprehensive Collection Policy to ensure timely payment, enforcement and appeal process. Having such a policy helps remove arbitrary handling of collections, favoritism and conflict of interest. While courts may rule in favor of the association or manager, why not avoid the avoidable by providing a fair process to begin with?     BACK

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