Put Executive Sessions in their (Proper) Place

Executive Sessions can be effective management tools when used judiciously by the Board of Directors; on the other hand, when misused or even abused, executive sessions can lead to trouble for the Board.

Executive Sessions can be used to foster conversation amongst the community association leadership without fear of any reprisal by the non-directors in attendance at a meeting. This confidential aspect to the executive session allows for directors to discuss more sensitive issues before presenting a unified stance to the membership and without infringing on any one individual's privacy rights or giving the appearance that the Board is not acting in unison with its directives.

Executive Sessions can also be improperly deployed, often resulting in the perception that the Board has no accountability to the membership, thereby fueling distrust, dissension, or other anti-Board sentiments by the membership or other non-director association personnel.

So how does the Board avoid these negative distinctions by using the executive session as a positive tool for community governance? Follow these simple guidelines and your Board should reap the benefits of executive sessions while avoiding the pitfalls that improperly-managed executive sessions can engender.

1. Don't overuse the executive session and be judicious. The executive session should be purpose-driven. Focus on the objective or agenda item to be dealt with and do not use this session to isolate or intimidate factional leadership and/or manipulate the results of a vote that the membership should be privy to.

2. Create an environment for sharing ideas. The Executive Session should be used to foster the free exchange of ideas and discussion on sometimes difficult topics. Don't hinder this process with heavy-handed tactics; instead, encourage board members to offer opinions, ideas, experiences and solutions to the issues being dealt with at the executive session.

3. Communicate to the membership. Don't mask the executive session in a shroud of secrecy. Instead, let members know why, when and for what purpose they are being excused from the executive portion of the meeting.

4. Don't hide the vote - take action in meetings, not executive session. Because the Board's actions are memorialized in the meeting's minutes, make sure that formal votes occur in the regular meeting, and not in the executive session.

*thanks to BoardSource, and its white paper, Executive Sessions: How to Use Them Regularly and Wisely, http://www.boardsource.org/Spotlight.asp?ID=14.337, copyright 2006 BoardSource.

If you're going to buy Foreclosure Properties, don't forget that there's a RIGHT OF REDEMPTION

I'm writing this article because of a recent run-in with a prospector of real estate after this prospector purchased a property at a local county constable's sale. This property belonged to a homeowner who had fallen several years behind on the maintenance assessments to the community association, and simply could not come up with the necessary funds to rescue the home from the clutches of foreclosure.

Now I am not decrying the business of buying and selling foreclosure properties -- this is America after all, and the foreclosure mechanism is just another animal by which wealth is redistributed to those who can afford it from those who cannot. It really makes for a rather efficient transfer of property in most cases; however, Texas Property Code section 209.001, et seq., does recognize a homeowner's absolute right to redeem such a foreclosed property within 180 days after the foreclosure sale commenced if a property owner's association lien is the instrument being foreclosed upon. It's called the Texas Residential Property Owners Protection Act and it is very much alive and well.

In fact, Section 209.011 of the Texas Property Code states that "[t]o redeem property purchased at the foreclosure sale by a person other than the property owners association, the owner must pay to the purchaser of the property:

(a) any assessments levied against the property by the association after the date of the foreclosure sale and paid by the purchaser;
(b) the purchase price paid by the purchaser at the foreclosure sale;
(c) the amount of the deed recording fee;
(d) the amount paid by the purchaser as ad valorem taxes, penalties, and interest on the property after the date of foreclosure sale; and
(e) taxable costs incurred in a proceeding brought under Subsection (a)."

Tex. Prop. Code § 209.011(e)(2). Thus, if a homeowner has the funds necessary to comply with those sums listed in the above provision, and that homeowner tenders said amounts to the purchaser of the foreclosed property, then the purchaser must allow the homeowner to redeem the property. It's that simple.

I have attended some constable's foreclosure sales in the past and I cannot tell you how many uninformed, ill-advised, uninitiated prospectors I've seen purchase property after property without having the faintest clue that the property is subject to purchase money liens, government tax liens, etc. These buyers lack the understanding of priority lien concepts, assumption of mortgages, and other pitfalls that come along with foreclosure sale prospecting. Instead, these people buy the property in hopes of turning a quick buck, ignorant of the laws under which they purchase, then trample the rights of those people who would attempt to redeem when such a situation becomes tenable. Now back to the original prospector I was speaking about.

In this case, the homeowner obtained the necessary amounts to redeem under section 209.011 of the Texas Property Code, tried to redeem the property from the purchaser, but the purchaser refused the redemption offer. The purchaser demanded all sorts of outlandish sums for property management, attorney's fees, and "research costs" for prospecting the property. It was obvious that the prospector was conducting a "money grab" -- attempting to attach all manner of ethereal charges to the property -- so that the profit margins could be artificially boosted on the purchase if the homeowner ever tried to redeem. The homeowner, distraught and not knowing where to turn to, actually asked the community association for help.

The homeowner may have the last laugh here because the right to redeem goes hand in hand with the foreclosure sale and is not to be ignored if such a remedy is sought. Texas Property Code section 209.011(f) states that “[i]f a purchaser fails to comply with this section, the lot owner may file a cause of action against the purchaser and may recover reasonable attorney’s fees from the purchaser.” So now, the homeowner may seek recovery of all attorney's fees incurred in the fight to redeem the property. The law is clear in this case, the homeowner can redeem if it complies with the statutory provisions of the Texas Residential Property Owners Protection Act. All the homeowner needs to do is tender those amounts listed under Section 209.011. In turn , the purchaser of the property must tender a deed back to the homeowner or suffer civil penalty.

Ultimately, I hope that the purchaser at least learns a valuable lesson from all of this legal wrangling: the homeowner's right of redemption is absolute under the Texas Property Code when a property owner's association forecloses its lien. Don't be an uninformed prospector; instead know the law regarding foreclosure sales before you buy.

Timing Isn't Everything

"Timing, degree and conviction are the three wise men in this life."
-- R.I. Fitzhenry

I don't usually write about condominium issues, but I thought that the following article may be beneficial to those readers who are living in condos now, or are contemplating doing so in the near future. This is a cautionary tale about: (1) being careful when making assumptions regarding the validity of an association's corporate charter as it relates to the association's ability to enforce a condominium "regime"; and (2) understanding the distinctions that can be made under the Uniform Condominium Act (the "UCA") between the condominium and the condominium's association -- they are TWO separate issues. If you ever decide to challenge the authority that an association possesses to enforce a condominium regime, when an association is formed may not matter depending on the circumstances surrounding the condominium's formation.

Let's set the table. I was perusing the appellate court cases relating to Community Associations last week (thank you CAI for your timely bulletins) and I came across a case out of Plano where a plaintiff sued a builder/developer challenging the validity of a condominium regime (the "Condominium") because the plaintiff was deeded property in the Condominium before the Condominium's association (the "Association") was incorporated by the developer/builder. The plaintiff tried to argue that because the property was conveyed prior to the Association's incorporation, then the association did not have the requisite authority to enforce the Condominium's declaration against the plaintiff or any other Condominium owners.

However, the developer/builder had previously filed the declaration for the Condominium (the "Declaration") in September 2003. The developer/builder then conveyed three lots to the plaintiff in November 2003, January 2004, and April 2004. The developer/builder incorporated the Association in August 2004. After incorporation, multiple disputes arose between the plaintiff and the Association. As a result, the plaintiff initiated a declaratory judgment action against the Association seeking determinations that the Association was not a legal entity and could therefore not enforce the Declaration against the plaintiff. The plaintiff did succeed at the trial court level and won its declaratory judgment against the Association based on the Association's lack of standing as a legal entity to enforce the Declaration.

Enter the Texas Court of Appeals.

The Texas Court of Appeals aptly pointed out that the UCA defines "condominium" as "a form of real property with portions of the real property designated for separate ownership or occupancy, and the remainder of the real property designated for common ownership or occupancy solely by the owners of those portions." The Court continued by stating that "a condominium is created 'only by recording a declaration' that contains a description of the property, the number of units, and the name of the owners association (emphasis added). The Court found that the Declaration had been filed prior to any conveyance of property, thus the Condominium was properly formed and the plaintiff (now appellee) was still subject to its provisions, regardless of which entity actually administered those provisions.

In addition, the Court cited relevant provisions of Texas Property Code which suggested that there were no mandatory consequences for conveyances of property prior to incorporation. To wit:

A unit owners' association must be organized as a profit or nonprofit corporation. The declarant may not convey a unit until the Secretary of State has issued a certificate of incorporation ...

Tex. Prop. Code § 82.101 (emphasis added). The Court interpreted the "may not convey" language as directory versus mandatory. The Court summarized that the UCA and its commentary establish that the "defining event" in the creation of a condominium is the filing of a declaration, and not the incorporation of the association which governs it. Thus, the plaintiff was ultimately not excused from obeying the Declaration governing its properties within the Condominium and the Court reversed the Trial Court's ruling.

Bottom line: Timing isn't everything. If you are going to challenge the validity of your condominium association's actions based on the legitimacy of that association's corporate charter, better do some research regarding the timing of your condominium's declaration filing. As the above-case demonstrates, the declaration filing date seems to be the operative controlling factor, not the date whereupon the association was incorporated. You just might save yourself some time, money and unnecessary grief.

The Tax Code Giveth and the Tax Code Taketh Away...

One of our clients recently suffered the misfortune of having to pay delinquent property taxes on a reserve of land that was essentially gift-deeded to them by a former developer of the Subdivision many years back. This Association had no idea that the property given to them by the former developer still had unpaid assessments on it -- to the tune of SEVEN years' worth of taxes, penalties and interest -- until the taxing authority, in this case, the County, filed suit against the unsuspecting Association in district court. Our client paid all annual taxes due and owing each year that it owned the reserve since 2000, but never received notice of the delinquency for tax years 1998 through 2000 until our client was served with the tax suit. What makes this an even more galling story for our client, and for other potentially liable Associations out there, is this: under the Texas Tax Code (the "Tax Code") there is literally NO remedy for an Association seeking recovery of these delinquent taxes, penalties and interest if there was no mistake or omission made by the taxing authority which led to the delinquency and/or failure to pay by the Association EVEN IF THE FAILURE TO PAY WAS DUE TO A LACK OF NOTICE BY THE TAXING AUTHORITY or the former developer, in most cases.

Section 33.011 of the Tax Code states in part as follows:

§ 33.011. WAIVER OF PENALTIES AND INTEREST.
SUBCHAPTER A. GENERAL PROVISIONS
(a) The governing body of a taxing unit:
(1) shall waive penalties and may provide for the waiver of interest on a delinquent tax if an act or omission of an officer, employee, or agent of the taxing unit or the appraisal district in which the taxing unit participates caused or resulted in the taxpayer's failure to pay the tax before delinquency and if the tax is paid not later than the 21st day after the date the taxpayer knows or should know of the delinquency; (emphasis added).

Nowhere in the above provision does lack of notice by the taxing authority (or by the conveying party) factor into the legislators' calculus of when a taxpayer can seek recovery of delinquent tax payments. Notice is covered in other sections of the Tax Code, like Section 33.04:

§ 33.04. NOTICE OF DELINQUENCY.
SUBCHAPTER A. GENERAL PROVISIONS
At least once each year the collector for a taxing unit shall deliver a notice of delinquency to each person whose name appears on the current delinquent tax roll. However, the notice need not be delivered if:
(1) a bill for the tax was not mailed under Section 31.01(f); or
(2) the collector does not know and by exercising reasonable diligence cannot determine the delinquent taxpayer's name and address.

This statutory provision is significant because it used to provide a remedy for taxpayers who failed to receive notice from the taxing authority. Prior to the 2001 amendment to this tax code section, delinquent taxes, penalties and interest were waived if the taxing authority failed to provide certain notices under Section 33.04. In our client's case, this excised language would have saved the Association several thousand dollars in delinquent tax payments to the County. However, as the statute now reads, there is simply no recourse against the taxing authority if this notice is not provided, because Section 31.01 of the Tax Code provides an "out" for same:

§ 31.01. TAX BILLS.
SUBTITLE E. COLLECTIONS AND DELINQUENCY
(a) ...
(g) Except as provided by Subsection (f) of this section, failure to send or receive the tax bill required by this section does not affect the validity of the tax, penalty, or interest, the due date, the existence of a tax lien, or any procedure instituted to collect a tax (emphasis added).

Reading the above provisions together renders the following outcome: if the Association finds itself saddled with a delinquent tax bill and wishes to challenge it, then the Association must first pay the delinquent taxes within 21 days of notice of the delinquent taxes (by suit or otherwise) even though they are disputed, and then seek a review by the taxing authority (Commissioner's Court or other administrative procedure) to assert an error or omission by that taxing entity. If after an administrative hearing is granted and the taxing authority can demonstrate that it sent notice to the delinquent taxpayer (notice is presumed proper under the Tax Code!) or that there was no apparent error or omission committed by same, then the taxing authority is absolved of any wrongdoing.

In the case of our unfortunate client, it lost its appeal at the administrative hearing (the County vouched that all requisite notices and tax bills were sent to the proper address, presumed and otherwise, and there was no error admitted to) and so there will be no refund of payment for those delinquent taxes, penalties and interest. Instead, our client must now seek redress from the former developer who conveyed the reserve to the Association -- a developer who may or may not have known that such liabilities were due and owing at the time of conveyance. In the end, the Association is only left with a legal avenue to pursue monetary recovery from a private party while the taxing authority is insulated from further investigation.

As Section 33.04 of the Tax Code illustrates, the Tax Code giveth (pre-2001) and the Tax Code taketh away. If your Association suspects that it may owe any amount of delinquent taxes, be proactive and inquire about same with your taxing authorit(ies) each year, even if you have received your annual tax statement. Taxing authorities are NOT REQUIRED to list delinquent tax amounts on your current tax bills, so do not let that omission comfort you. That phone call or letter to the County tax office or other taxing entity could end up saving your Association big money in the long run.

*A special "thanks" is extended to the 2001 Texas Legislature for eliminating what little protection taxpayers enjoyed under the Tax Code and for reducing certain notice provisions into mere "window dressing" to the chagrin of unsuspecting taxpayers statewide.

When in Doubt... PUT IT IN WRITING!

Seasons' Greetings dear readers! A few moons have passed since my last blog entry -- partly due to a chronic malady known as the "human condition" -- it seems that as long as people are people, a lawyer's work is never done. Although life can get hectic at times, the holiday season always provides a measure of respite to reflect on the year that was and, also to catch up on my journal reading (so that I can impart any wisdom gleaned from such articles to my loyal readership). Be that as it may, the following cautionary tale comes to us from our friends to the southeast in Galveston, from a Texas Court of Appeals case, Indian Beach Property Owners' Association v. Linden, No. 01-05-01116-CV (March 22, 2007).

In this case, a homeowner (Linden) endeavored to erect a chain-link fence, that most gaudiest of deed restriction "of-fences," on the perimeter of his non-commercial, residential property. Like all good homeowners should, Linden submitted an ACC application for review and was summarily denied. However, one of the Board members intervened and orally told the Lindens that their denial was due in part to a setback provision that the Lindens thought was inapplicable to their property. The Board member also orally asserted to the Lindens that a letter explaining the inapplicability of the setback would be sufficient as a reapplication to the ACC for reconsideration. Thus, the Lindens followed suit and submitted a letter explaining the setback and didn't hear anything from the ACC during the subsequent 45-day reapplication period. The ACC didn't consider this letter a proper reapplication and therefore didn't issue a reply. Unfortunately, the Indian Beach POA's deed restrictions contained a "silent affirmation" provision (as do most Associations) that deems approval for any ACC application not acted upon by the ACC within the prescribed approval period (provided that the improvement sought conforms with the harmony and general aesthetic of the Subdivision). At trial, the Court found that the letter did constitute a legitimate reapplication based on principles of reliance and notice to the ACC attributable to the Board member's intervention in the application process. Hence, the Lindens got their fence and the Association lost twice in court (once at trial and once on appeal).

The real lesson here is not to be wary of board member intervention in the ACC process (which ultimately led to the Lindens' success) but to put ACC decisions in WRITING. I understand the purpose of these "silent affirmation" clauses is to promote efficiency by the ACC, so that those overworked and underpaid (read: UNPAID) ACC committee members can perform their duties without the hassle of so much paperwork if the improvement is to be approved. However, these provisions are double-edged swords: if the ACC fails to express its decision in writing, good or bad, then that decision is automatically ratified as approved for the homeowner and will most likely be upheld in a court of law, as it did in the Indian Beach case. Better to err on the side of caution and address all correspondence received by the ACC with some type of written response. The ACC can generate a form library of sorts that can deal with certain repeatable issues, like "Linden letters" that may or may not conform to the standards of a formal ACC application. These simple form responses, while marginally more expensive than doing nothing, could provide insulation from a bigger Association expense down the road: litigation over unwanted improvements in the Subdivision. Don't leave it in the hands of the courts, put it in writing next time.

Intrinsic Threat: Who's Minding the HOA "Store"? PART TWO

This week's article concludes what I started last week -- talking about how associations can guard against "embezzlement schemes, financial scamming by trusted fiduciaries, and even outright theft by vendors and/or board members." Part Two of the "Intrinsic Threat" covers items 6 through 10 on the association's checklist of conduct to be wary of or actions to take to minimize the risk of directors'/vendors' unscrupulous actions.

6. Choose a bank that fits your security needs. Safeguards like requiring dual signatures on every check or prohibiting electronic funds transfer between accounts under different Fed ID numbers should be demanded of your banking services provider.

7. Be informed on association insurance coverage(s). Have the association's insurance agent(s) attend a monthly meeting of the board and review the association's coverage(s), plans, and other specifics. The board should keep copies of the polic(ies) readily available for review or consultation by any director.

8. Insure association funds as you would its property. Don't forget that you can also insure the association's funds by obtaining fidelity coverage that meets or exceeds the association's funds. Some D&O insurance coverage provides a measure of this protection, however, it may not be adequate. Check with your insurance agent to verify this. Make sure that property management companies dealing with the association also follow suit.

9. When in Rome, ... If the association utilizes an independent property management company, then require that these safeguards against theft and embezzlement be applied to the property manager's business practices as well. Two lines of protection is better than one, or none, in this regard.

10. An Auditor can be the association's best friend. Even if an annual audit of the association's books and records is cost-prohibitive, an audit should be performed every few years nevertheless. Bank balances should be independently reviewed annually for verification.

None of the above measures will guarantee that your association won't fall victim to the actions of a rogue director or some other sort of fiduciary bad actor. But by implementing these strategies, you can at least afford some protection against these threats and create an environment where checks and balances exist to improve the moral and operational efficiency of the association's leadership.

*Special Thanks to Darcy Mehling Good, Esq., "Whodunit?", Common Grounds, July/August 2007 from which excerpts of this article are attributed to.

Intrinsic Threat: Who's Minding the HOA "Store?"

I recently came across an article in a national community association magazine that was germane to a current client matter that I'm dealing with -- regarding board members misbehaving in their roles as fiduciary to the association under which they serve. I felt that the message was an important one that all of the readership would appreciate and use as a reminder that, even though people may have the best intentions, they are still fallible, and so we must guard against that weakness when protecting the association's coffers.

There has been a rash of recent cases where homeowner associations have been victimized by embezzlement schemes, financial scamming by trusted fiduciaries, and even outright theft by vendors and/or board members. What can an association do to protect itself from these dangers? Remembering the 10-item checklist below may keep your association from becoming a target of these ne'er-do-wells.

1. Know the association's federal tax ID. Use the tax ID to periodically verify the existence of all listed bank/financial accounts held by the association. Make sure that this number is distributed to all members of the board so that no one member can exercise complete control over those accounts. Accountability by each board member to all other board members ensures a checks-and-balance approach to "minding the store" when nobody's looking.

In one particularly messy embezzlement case, the treasurer of the board was the only person to have knowledge of the bank accounts and amounts deposited to them, so the board could not independently verify what deposits and payments were or were not occurring until it was too late and the past-due notices were piling up from various vendors.

2. DON'T SIGN BLANK CHECKS. Common sense and practicality not only demand this, but also, a person is not acting as a fiduciary to the membership if it signs a check without knowing what its purpose is. Require dual signatures for all checks issued by the association and demand a monthly statement of accounts from your financial institutions and/or management company. Also consider using a lockbox so that homeowner payments are transferred directly to the association's bank accounts while reducing the risk of wrongful deposit of these payments elsewhere.

3. Safeguard the association's reserves. As an association builds up reserve funds in its accounts, ensure that these reserves are tied up in longer-term "non-liquid" instruments such as certificates of deposit. This measure will help deter any temptation by a wayward member or manager from converting these assets to cash for personal benefit. Reserves should be under the control of one or more board members (or have access if managed by a third-party) so that no one person can control the purse strings for these funds.

4. Sign up for duplicate monthly bank statements and/or online/email statements. Get more "eyes on the board" viewing these monthly statements and you reduce the chance that any one member tries to procure any monies for personal benefit. Again, nobody is accusing anybody else here, but what you are doing is eliminating the temptation and reducing risk.

5. Reconcile accounts payable with invoices and credit card receipts. This one is self-explanatory. Be sure and review credit card statements and vendor invoices to ensure that outgoing association payments match them. Question any unfamiliar payments and/or vendors (we had one instance where a client found out that a board member was fabricating vendors to make payments to, but magically, these funds ended up in the hands of the board member!) and be vigilant for any "funny accounting." Math is math and incoming demands for payment should match outgoing monies for payment.

Well, that's all for now. Stay tuned for Part 2 of this article which concludes next week as we review items 6-10 of the anti-scammers checklist.

*Special Thanks to Darcy Mehling Good, Esq., "Whodunit?", Common Grounds, July/August 2007 from which excerpts of this article are attributed to.