Community Association Update

Community Association Update: Issue # 40

U.S. Supreme Court Holds Debt Collection Firms that Solely Practice Non-Judicial Foreclosure Exempt from FDCPA*
Association Hazard Insurance Policies Benefit not only the Association but also all Condo Owners (their tenants) and Mortgagees
Recent California Court of Appeals Ruling Demonstrates Broad Reach of Ban of Nuisances
Court of Appeal Upholds Pre-Litigation Arbitration Clause

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Sincerely,

Steven Tinnelly, Esq.
Tinnelly Law Group

U.S. Supreme Court Holds Debt Collection Firms that Soley Practice Non-Judicial Foreclosure Exempt from FDCPA*

*New Case Law

It is no secret that homeowners' associations ("HOA") are run and managed through the funds of monthly HOA assessments ("Fees"), and more often than not, HOA's hire and retain debt collection firms to collect on past due Fees from delinquent members of the community. Sometimes, this leads HOA's to lose large amounts of money in collection costs and write-offs (of "bad debt") due to homeowner challenges under the Federal Debt Collection Practices Act ("FDCPA" or "Act"). The FDCPA provides protection to consumers (e.g., homeowners) from abusive debt collection practices by placing a myriad of procedures and limitations of which all debt collection firms must abide by, unless said firm solely recoups debt via non-judicial foreclosure, in which case the firm will only be subject to FDCPA § 1692f(6). This was the U.S. Supreme Court's holding in Dennis Obduskey v. McCarthy & Holthus LLP , No. 17-CV-1307, 2019 WL 1264579 (March 20, 2019).

In Obduskey, the homeowner defaulted on his mortgage payment, causing the lender to retain McCarthy & Holthus LLP ("Firm") - a debt collection firm that solely recoups debt via non-judicial foreclosure - to foreclose on the home. The homeowner, Dennis Obduskey, brought an action against the Firm to challenge the foreclosure on the basis of alleged violations under the Act; in particular, Section 1692g(b) which mandates a debt collector to cease all collection efforts and verify the debt it is attempting to collect if a debtor challenges/disputes the debt.

The Court, in agreement with the lower courts, ruled in favor of the Firm and dismissed the case against same on the basis that the Act did not apply to the Firm as it was not a "debt collector" under the Act's primary definition.

The Court found that Section 1692f(6) of the Act was the only section applicable to the Firm as it fell under the "limited purpose definition" of "debt collector" as its sole method of recouping debt was by enforcing security interests held in personal/real property through non-judicial means (e.g., non-judicial foreclosure), exempting the Firm from the rest of the Act.

Association Hazard Insurance Policies Benefit not only the Association but also all Condo Owners (their tenants) and Mortgagees

*New Case Law

Both Commercial and Residential Condominium CC&Rs frequently contain insurance language requiring the Association to obtain hazard (fire) insurance and prohibiting Owners from obtaining such coverage. Condominium Owners on the other hand are limited to obtaining liability insurance. Similar language was found in the CC&Rs of the condominium association in Western Heritage Insurance Company v. Frances Todd, Inc. No. A152428 (Cal. Ct. App. Mar. 4, 2019).

Defendant, Frances Todd, Inc. was a furniture manufacturer; and a tenant leasing a condominium unit in a commercial condominium complex. The Defendant (tenant) was negligent in causing the fire which destroyed the unit and surrounding units. Western Heritage Insurance sued the tenant for indemnity to recover all amounts it paid the Association on the Association's fire damage claim on a theory of the tenant's underlying negligence. The court looked at both the CC&Rs and the lease between the Owner and tenant and concluded the Association's fire insurance policy also benefited the tenant.

Even though the CC&Rs did not specifically state that tenants were to be named as insureds, the Court reasoned that such a conclusion was implied based upon its review of the CC&Rs and the lease between the Owner and the tenant. The court also noted that the Owner pays for insurance through his or her dues and the tenant contributes to those dues by his/her rent and there is no requirement that a specific amount of dues or rent be allocated for the fire insurance policy. Therefore, the tenant like an Owner was a beneficiary under the Association's insurance policy and could not be sued for negligently causing the fire by the Association's insurance.

Recent California Court of Appeals Ruling Demonstrates Broad Reach of Ban on Nuisances

*Unpublished Opinion

The Court of Appeals recently rendered an unpublished opinion in Harbour Island Condominium Owners Association, Inc. v. Alexander (2019), which provides some clarity regarding a tenant's right to attend board meetings and the ban on noxious activities within the community.

The Harbour Island Condominium Owners Association ("HOA") sought a restraining order (known as a preliminary injunction) against two tenants and their landlord to abate the tenants' noxious behavior. The HOA relied on the provision in the CC&R's, which stated that residents cannot disturb the neighborhood or occupants of a neighboring property or create a nuisance.

The Court held that the nuisance provision bans acoustic nuisances that interfere with a neighbor's right to quiet enjoyment. In this case, the nuisance claims were supported by credible witness testimony that the tenants' noise was excessive.

Lastly, the Court of Appeals disagreed with the tenants that their due process rights had been violated since the tenants were not permitted to challenge the violation notices at hearings. The Court held that only Owners with vested property rights are Members of the HOA. As such, only Members may participate in HOA meetings.

Court of Appeal Upholds Pre-Litigation Arbitration Clause

*Unpublished Opinion

We recently blogged about the importance of the the plain language of an association's Declaration when following pre-litigation requirements to a construction defect claim. On March 18, 2019, the California Court of Appeal ruled that trial courts should not deny a homeowner of his right to submit a case to arbitration pursuant to the CC&Rs when there is a disagreement about whether the homeowner complied with the pre-litigation requirements. Instead, the dispute should be submitted to an arbitrator to make the final decision on whether the conditions precedent to arbitration have been satisfied.

In the case of Baldwin v. Woodside 05s, LP, several homeowners filed a lawsuit against a developer on construction defect claims. According to the development's CC&Rs, homeowners were required to satisfy certain pre-litigation conditions before they were permitted to initiate lawsuits against the developers.

In the Baldwin case, the homeowners did not satisfy the pre-litigation requirements. The homeowners filed a lawsuit against the developer, without providing notice or an opportunity to inspect, and then tried to compel arbitration and judicial reference through motions to the court. In response, the trial court denied both of the homeowners' motions, and the homeowners appealed.

The Court of Appeal found that the decision to grant or deny a judicial reference does not involve the merits of a case. Therefore, the homeowners had no right to appeal and lost their opportunity to submit the matter to a judicial reference.

However, the Court of Appeal found that the trial court erred when it denied the homeowners' motion to compel arbitration. The Court held that while trial courts should determine whether parties agreed to be bound by an arbitration clause in the first place only arbitrators should rule on procedural questions, like whether a condition precedent to arbitration has been fulfilled.

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