LEGAL/LEGISLATIVE UPDATE – OCTOBER 2, 2018

Published on: October 2, 2018

STEPPING UP

Federal Open Market Committee

Citing continuing job gains, a low unemployment rate and strong spending by businesses and consumers, the Federal Reserve increased interest rates for the third time this year, pushing its target rate up by another quarter-of a point to 2.25 percent. The unanimous vote by the Federal Open Market Committee (FOMC), the Fed’s policy-making arm, indicated that the board remains on its current course, which calls for gradually increasing rates to prevent a growing economy from igniting an inflation surge.

The FOMC statement issued after the September meeting said: “The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced,” the statement added.

Economists had generally expected the September rate hike, the eighth since 2015, but they differed on just how confident the Fed is – or should be – about the economic outlook. Some analysts think continued tightening is justified and necessary to hold inflation in check; others say higher rates risk undercutting a recovery already threatened by the Trump Administration’s tariffs and political uncertainty.

In his post-meeting press conference, Fed Chairman Jerome Powell suggested that while future rate hikes are still written in the Fed’s playbook, they are not cemented there. Explaining the balance that policy makers are trying to achieve, he noted: “The question we are answering is, how do we provide the economy just the right amount of support – not too much, not too little – to sustain the recovery and achieve our statutory goals” of full employment and 2 percent inflation. We don’t want to suggest either that we have this precise understanding of where accommodative stops or suggest that’s a really important point in our thinking,” he added. “What we’re going to be doing … is carefully monitoring incoming data.”

“MANAGEABLE’ LOSSES

Insurance industry executives say the losses from Hurricane Florence will be “manageable.” That assessment is good news for the insurers but the reason is bad news for homeowners: The losses are “manageable” because most of the damage resulted from flooding, which standard policies don’t cover; relatively few homeowners have flood insurance, which would cover water-related damage resulting from the record-breaking rainfall and storm surge Florence produced.

CoreLogic estimates that 85 percent of residential flood losses in North and South Carolina and Virginia will be uninsured, representing losses of between $13 billion and $18.5 billion that homeowners will have to absorb. The National Flood Insurance Program will cover between $2 billion and $5 billion in losses in the affected areas, according to industry estimates.

Compounding the problem for owners struggling to rebuild damaged homes, construction costs are rising. Builders are reporting that the tariffs the Trump Administration has imposed have increased the cost of Canadian softwood lumber by 20 percent.

“The people who will get hurt the worst are the ones who are least able to afford rebuilding,” Skip Greene, a North Carolina contractor, told the New York Times. “They’re blue collar, they tend to live in lower-lying areas and are less likely to have insurance. It breaks your heart.”

WHAT’S UP? IT’S NOT HOUSING

“What’s the matter with the housing market?” Industry analysts are asking that question, even though housing starts and new home sales appeared to be climbing out of a month’s long funk in August. Starts increased by more than 9 percent after taking a nose dive in July, and sales rebounded as well, increasing by 3.5 percent over the July total and by 12.7 percent year over year. The problem: Both statistics came with asterisks.

Most of the increase in starts was in the multifamily sector; single family starts increased by less than 2 percent, offering “no relief to the inventory-starved home buying market,” and possibly “exacerbating the trend of renting becoming more affordable than owning,” Danielle Hale, chief economist for Realtor.com, noted.

New home sales reached an annual pace of 629,000 in August, 3.5 percent ahead of the July pace and 12.7 percent higher than the year-ago level. But August sales were the weakest since October of last year, extending what Zillow Senior Economist Aaron Terrazas termed “a very sluggish” performance for this year. “Historically, in the face of rising prices, home builders have been quick to ram up the pace of new construction,” he noted, “but their response has been notably more muted this recovery,” contributing to the inventory shortage that has been a constant drag on both new and existing home sales.

Existing home sales were flat in August, while pending sales, an indicator of future activity, posted their eighth consecutive year-over-year decline. The spring and summer home buying and selling season ultimately ended up being a letdown, despite a faster growing economy and healthy demand for buying a home,” Freddie Mac Chief Economist Sam Khater said in a recent report. “Unfortunately, too many would-be buyers continue to be tripped up by not enough affordable supply and the one-two punch of much higher home prices and mortgage rates.”

While the economy is expected to grow at an annual rate of around 5 percent next year, Freddie predicts that home sales will fall below the 2018 pace. The National Association of Realtors (NAR) is also predicting a small decline in sales next year, as strong economic growth offsets the negative impact of rising interest rates. “This should keep future home sales fairly neutral,” Lawrence Yun, the NAR’s chief economist, predicts.

RENT RELIEF

The torrid rental housing market may be cooling off. Rents, which have been increasing steadily for the past six years, flattened in August at a national average of $1,440, unchanged from the year-ago level. Median rents fell year-over year in 19 of the nation’s 35 largest markets, according to a Zillow report.

“The feverish housing crunch of the past few years seems to be cracking,” Zillow Senior Economist Aaron Terrazas said in a press statement. “Slower rent growth means that renters may feel less urgency to buy. While home values continue to grow at double their historic pace,” he added, “the speed of appreciation is down sharply from its spring highs,”

Reporting the results of a separate study, Terrazas noted that the rental demand “surge” that persisted over the past decade has begun to ebb. This analysis, based on a review of Census data, found that renters accounted for all the new households formed in the U.S. between the fourth quarter of 2006 and the second quarter of 2016; the number of owner households declined by 1.76 million during that time period, while the number of renter households increased by 9.72 million.

Over the past two years, however, that trend has reversed, Terrazas reported, with renter households declining by 754,000 while the owner household population increased by 3.13 million.

Those trends notwithstanding, Terrazas notes, the high cost of housing – both rental and ownership – is creating serious affordability problems for a large segment of the population. More than 31 percent of Americans spend more than 30 percent of their income on housing, and of that group, 15 percent qualify as “severely” cost-burdened, with housing costs absorbing more than 50 percent of their income.

READY, AIM….

The Department of Homeland Security (DHS) is seeking authority to track drones and shoot down those deemed to pose a “credible threat” to a ‘covered facility or asset.” That language is included in legislation reauthorizing funding for the Federal Aviation Administration (FAA) awaiting action in the House of Representatives.

DHS Secretary Kirstjen Nielsen says the department needs the ability to deal with what she termed “a real threat. Commercially available drones can be employed by terrorists and criminals to drop explosive payloads, deliver harmful substances, disrupt communications, and conduct illicit surveillance,” she noted in a letter to Rep. Michael McCaul, (R-TX), chairman of the House Homeland Security Committee. But under current law, she said, the department’s “hands are tied.” Agents who shoot down a drone they think poses a threat “risk criminal liability for simply doing their jobs to protect the public,” she said.

Under the proposed legislation, Nielsen, Attorney General Jeff Sessions, and Transportation Secretary Elaine Chao would define the “credible threats” that would justify the tracking and downing of a drone.

Critics object that the legislation, would undercut existing laws restricting surveillance activities, because it would allow officials to intercept communications transmissions controlling the drones without obtaining a court-approved warrant.
“These provisions give the government virtually carte blanche to surveil, seize, or even shoot a drone out of the sky — whether owned by journalists or commercial entities — with no oversight or due process. They grant new powers to the Justice Department and the Department of Homeland Security to spy on Americans without a warrant,” according to the American Civil Liberties Union, which opposes the measure.

IN CASE YOU MISSED THIS

Of the more than 10,000 measures introduced in Congress this year, only 115 were related to housing, and none of them have been enacted.

The National Association of Home Builders estimates that approximately 10 percent of the 6,000 products targeted in the latest round of tariffs are related to new home construction – -adding an estimated $1 billion to the overall cost of producing new homes and apartments.

Officials in Vancouver have removed 2,400 Airbnb listings that failed to meet the city’s new regulations for short-term rentals, while property owners have voluntarily removed another 660 listings because of the registration rules.

More homebuyers are lying on their mortgage applications, according to CoreLogic, which reports a 22.1percent increase in various forms of mortgage fraud this year.

Investor confidence has declined over the last year, according to a recent survey. Lack of “political leadership”” in Washington and the escalating trade war are their major concerns.

LEGAL BRIEF

STANDING TO SUE AND BE SUED

Dissident board members who go their own way create tension within and headaches for association boards. Dissidents may also incur personal liability for their actions, based on this ruling (Wilfred Welsh v. Beverly McNeil and Alvin Elliott) by the District of Columbia Court of Appeals.

The litigation stemmed from a rental arrangement in a residential community governed by a homeowners association (Chaplin Woods). Beverly McNeil and Alvin Elliott (collectively the McNeils) rented a townhouse they owned to “Oxford House,” an entity consisting of seven people recovering from substance abuse. The McNeils signed two consecutive two-year leases with Oxford House, neither of which complied with an association rule requiring that leases name the individual tenants occupying the residence. Shortly before the second lease expired in May 2013, the HOA president notified the McNeils they would have to submit a lease that complied with that rule.

The attorney for Oxford House responded with a letter to the association board requesting a waiver of this rule as an accommodation under the Fair Housing Act. Welsh, the secretary of the board, received the letter but apparently never shared it with the board. The McNeils signed another lease and submitted it to the board, which rejected it. Oxford’s attorney responded that this decision violated the FHA; the Chaplin Woods attorney, who received this response, said he was unaware of the accommodation request, agreed that it should be approved, and advised the board to meet and reconsider its decision.

Before that meeting, Welsh, acting on his own initiative and without the approval of the board, sought an injunction barring the McNeils from proceeding with what he said was an illegal rental arrangement. The board subsequently voted 2-1 ─ with Welsh abstaining because of his pending litigation ─ to approve the lease.

Responding to Welsh’s suit, the McNeils countersued, charging him with violating the Fair Housing Act by refusing to grant an appropriate accommodation and by impeding the board’s consideration of their request.

A key issue in both the suit and countersuit was standing, which both parties contended the other lacked. The trial court ruled that neither side had standing and dismissed both motions for summary judgment on that basis. Both parties appealed. The Appeals Court agreed that Welsh lacked standing but ruled that the McNeils had standing to pursue their Fair Housing claims against Welsh.

In its analysis, the Appeals Court noted that the Constitutional test for standing requires that claimants have a personal stake in the outcome of a dispute. An additional procedural test requires that they maintain standing throughout the litigation. “An action becomes moot, and the plaintiff thereby loses his standing to continue to maintain it,” the court said, “when the issues presented are no longer ‘live‘ or the parties lack ‘a legally cognizable interest in the outcome.’”
The trial court ruled and the Appeals Court agreed that once the board approved the lease, Welsh’s action became moot because “a dispute no longer existed for the court to resolve.”

The Appeals Court rejected Welsh’s argument that he was acting properly in his capacity as an owner, with the same right as the association to enforce the association’s bylaws. This “shared power” arrangement is standard in association bylaws, the court agreed, but it typically arises when the board has failed to act. “It is one thing for a homeowner to enforce the bylaws when the association is unable, unwilling, or too busy to expend the time and effort to do so itself,” the court noted. “It is quite another thing when the association, representing all its members, does act and opts to resolve the dispute differently, without enforcement of the bylaws. Generally speaking, a homeowners association has the power to release or compromise any claim it has the right to assert, and to do so over the objections of individual homeowners, who then are bound by the association‘s resolution of the claim,” the court stated.

The wording of the association’s bylaw supports this interpretation, the court said, pointing to a clause stating that owners seeking to enforce an association rule may seek legal relief “if appropriate.” According to the court, this suggests that the association “can foreclose such a lawsuit by resolving the claim itself. If the Association has waived its right to enforce a Bylaw, a homeowner who has only the same rights as the Association, has no right to enforce it either,” the court argued, adding, “the Bylaw does not give individual homeowners superior or additional enforcement rights. It would be unreasonable,” the court continued, “to read the provision as empowering a Member to enforce a Bylaw that the Association has waived, for a Member‘s exercise of such an override power would interfere with the Association‘s ability to manage its affairs and represent the common interests of its Members, and it would threaten the reasonable expectations and legal rights of parties dealing with the Association and relying on its decisions.”

The wording “if appropriate” also suggests a limit on an individual member’s authority to pursue a legal remedy, the court said, noting that “at least one court has understood similar words… to mean that an association‘s decision to surrender a claim held in common by all its members precludes an individual member from pursuing the claim directly against the alleged violator.”

Welsh could have asserted personal standing to pursue his claim, the court said, had he provided “evidence of a personal injury for which a court could award him monetary relief. [But] he did not do so.”

Pursuing a different avenue, Welsh argued that the board’s 2-1 vote to approve the lease was invalid, because board rules require a majority of those attending a meeting to approve an action. With four members attending this meeting, Welsh contended, three affirmative votes were required for approval. But the court said the validity of the vote was irrelevant, because the board president had notified the McNeils that their lease had been approved.

“Like any corporation, the Association …is bound by the acts of its officers so long as they act with either actual or apparent authority,” the court noted. “In the present case, even if the President was mistaken about the meaning and validity of the Board‘s vote (a matter on which we do not opine), he acted in his official capacity and within the ordinary scope of his duties under the Bylaws as the chief executive officer and presiding Director of the Association in communicating with the McNeils about the Board‘s decision….If the President did not have actual authority to declare the McNeils‘ lease approved,” the court reasoned, “he had apparent authority to do so based on his official position, the surrounding circumstances, and the Bylaws.” The board’s failure to join in Welsh’s suit or to otherwise repudiate the approval of the lease “amounted to an implicit ratification of the President‘s letter,” the court said.

The trial court had also dismissed the McNeils’ suit against Welsh, ruling that he could not be sued for violating the Fair Housing Act because, as a member of a five-member board, he lacked the individual authority to approve the accommodation the McNeils requested. The Appeals Court disagreed. The lower court’s reasoning failed, the court said, because “it confuses the question of the McNeils‘ standing with the question of the merits of their fair housing claims.”

The standard basis for establishing standing – proof of individual harm – does not apply to claims under the Fair Housing Act, which, the court noted, are “not restricted to the direct targets or victims” of discriminatory actions. “Others who suffer or are threatened with ‘a distinct and palpable injury’ from such practices also fall within the category of aggrieved persons’ with standing to sue,” according to the court, which noted that “both economic and noneconomic injuries may suffice to provide standing…. Thus, it is well-settled that landlords have standing…to sue those who would prevent them from renting their property to tenants with disabilities,” and the McNeils, the court noted, meet that definition. “They sustained or were imminently threatened with injury sufficient to support standing when the accommodation they requested in order to rent their townhouse in compliance with the Bylaws was withheld, their lease was disapproved, they were directed to cease and desist renting their townhouse to the Oxford House [residents].”

Unlike Welsh’s claim, which was rendered moot by the board’s approval of the lease, the Appeals Court found that the McNeils’ claim survived that decision. “For a case to be rendered moot through the defendant‘s voluntary cessation of a challenged practice” the court explained, “it must be ‘absolutely clear’ that the allegedly wrongful behavior could not reasonably be expected to recur. Welsh, of course, has not asserted mootness on this (or any other) ground,” the court noted, “and he is in no position to do so given that he has disputed the validity of the Association‘s approval of the McNeils‘ lease and has continued to pursue his complaint against the McNeils for violating the Bylaws.”

The key question raised by the McNeils’ countersuit, the court said, is not standing, but whether they could prevail on the merits of their case. The trial court concluded that Welsh could not be found liable for violating the Fair Housing Act because he lacked the authority as an individual board member to approve the McNeils’ accommodation request. But the Appeals Court concluded that he might be found liable for discrimination under both the federal Fair Housing law and the state Human Rights Act.

The board’s subsequent approval of the request does not alter that conclusion, the court said, because “the Act is violated when a reasonable accommodation is first denied, regardless of remedial steps that may be taken later. That Welsh was only a single member of the Board of Directors does not mean he cannot be held individually liable if, in that capacity or otherwise, he personally committed or contributed to a violation of the Fair Housing Act or the Human Rights Act,” the court concluded. The court also found that Welsh’s pursuit of his suit against the McNeils after the board had approved their lease might support a claim of illegal retaliation under both the federal and state laws.

The court emphasized that it was not addressing the merits of the McNeils’ discrimination and retaliation claims. Acknowledging that Welsh “may have meritorious factual or legal defenses” to them, the court said: “We perceive that there may remain genuine disputes of material fact to be resolved, which would preclude an award of summary judgment on those claims to either side. But such questions are not before us at this stage and we express no views on them.” This decision, the court said, addresses only whether the trial court had correctly dismissed the McNeils’ claims and granted summary judgment to Welsh. The answer to that question, the court concluded: The arguments on which the lower court relied in granting summary judgment “do not support it.”

WORTH QUOTING

“This is a committee that is less confident about the outlook in 2020 than we previously believed.” ─ Mark Cabana, analyst at Bank of America Merrill Lynch, analyzing the Federal Reserve’s recent decision to hike interest rates again.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.