Legal/Legislative Update –September 1, 2014

Published on: August 31, 2014

PET FRIENDLY.   Renters are finding more pet-friendly apartments ― a good thing for them, since nearly half of all households own at least one dog or one cat. Nearly three-quarters (72 percent) of renters responding to a recent survey said they are pet owners. That’s down slightly from 75 percent in 2013, but still way ahead of the 43 percent responding positively in 2012. This doesn’t mean that pet restrictions have disappeared, however. Only 20 percent of the respondents said their buildings have no restrictions on the types or sizes of pets allowed, compared with 30 percent reporting that measure of flexibility in 2013. “While it is good news that most renters seem to enjoy living in pet-friendly apartment communities, the past two years have shown us the majority of pet-owning renters faced some difficulty finding an apartment that allows pets,” Brad Long, president of Apartments.com, told Real Estate Economy Watch. Long predicts increasing demand for multi-family properties offering flexible pet policies and pet-related amenities, especially, since, he noted, “nine out of ten renters have told us pet policies played a deciding role when choosing where to live.”

HAPPY BIRTHDAY, FHA.    This wasn’t exactly a birthday greeting. As the FHA celebrated its 80th anniversary, Jamie Dimon, CEO of JP Morgan Chase, said he was seriously considering ending his bank’s involvement with the program because of the agency’s aggressive stance on buybacks of flawed loans. “Until they come up with a safe harbor or something, we are going to be very, very cautious in that line of business,” Dimon said during a recent press call. “The real question for me is should we be in the FHA business at all,” he added. “We want to help there but we can’t do it at great risk to JPMorgan.”

RISK REDUCTION?     Think the new Qualified Mortgage rules, and tighter underwriting standards generally have reduced default risks? Think again. A Default Risk Index created by University Financial Associates estimates that mortgages originated today are 13 percent riskier today than they were a decade ago, largely because of higher inflation predictions.

BIG NUMBERS.     A Russian criminal gang has stolen 1.2 billion user names and passwords and more than 500 million e-mail addresses from hundreds of Web sites, “the largest known collection of stolen Internet credentials,” according to the New York Times. Confirming what we already know a Pew Research Center study found that 21 percent of adults using the internet reported personal data breaches this year, up from 11 percent a year ago. At this rate, it will soon be easier to tally the number of people whose personal information has not been compromised by a data breach.

UNABLE TO MOVE.     Gridlock is at least partly to blame for the stunted housing recovery, according to Zillow, which calculates that nearly 43 percent of Gen-Xers (between 35 and 49) are underwater, owing more on their home mortgages than their homes are currently worth. They can’t sell their homes – depriving Baby Boomers of the buyers they need to sell their homes, and depriving first-time buyers (“millenials”) of the starter homes they could afford. Breaking the logjam will require “creative” solutions that will enable millenials to afford the higher prices Gen-xers need for their homes, Zillow Chief Economist Stan Humphries says. “The reality is, negative equity is part of the new normal,” he told DS News. “Finding creative solutions to keep homes affordable, available, and accessible to [millennials] will be critical going forward.”

DON’T HOLD YOUR BREATH.     That’s excellent advice for anyone waiting for a strong uptick in home sales, according to Fannie Mae’s chief economist, Doug Duncan, who is predicting that year-over-year sales will decline this year for the first time since 2010. In a press statement, Duncan termed current housing market data “worrisome,” but said he expects condition to return to “normal” ─ “sometime in late 2016.”

 

LEGAL BRIEFS

FIDUCIARY DUTY: TWO VIEWS. The fiduciary duty board members owe the community associations they govern is undisputed, but not always well understood by board members or owners. Decisions by courts in two jurisdictions illustrate how some owners interpret the obligations of board members too expansively, and (in the second case) how some board members either interpret their duty too narrowly or attempt to skirt it entirely.

In Davis v. Innwood Condominium Property Owners Association, Inc., the owner of a unit in a Kentucky condominium community failed to persuade a trial court and an appeals court that the board had breached its fiduciary duty by failing to maintain the common elements consistently with the high standards the owner said the governing documents required.

Over a period of several years, the board had spent nearly $100,000 on necessary upgrades and repairs, including the repair of eight units that had been damaged in a fire. Insurance and reserves covered most of the costs, but the board approved a special assessment to replenish the reserves. The plaintiff, Rex Rey, contended that the board’s efforts were inadequate because some necessary maintenance and repair work was not undertaken – one example of the breach of fiduciary duty Rey claimed. The failure to enforce several association rules constituted additional breaches that Rey said caused a decline in the value of his unit.

A trial court dismissed his suit, concluding that the board members were protected by the business judgment rule, having demonstrated a good faith effort to act in the best interests of the community. Rey appealed, arguing in part that the court should have addressed issues of material fact before concluding that the business judgment rule applied.

The board agreed that it had not addressed all the concerns Rey identified, mainly because of a lack of necessary funding, but argued that it had made reasonable attempts, given the financial restrictions, to deal with them — efforts that the board said were still ongoing. The board also contended that it had appropriately considered the impact of special assessments on the primarily low-income residents of the community.

The appeals court agreed, stating, “This court is not persuaded that by considering the economic standing of its residents and the problems at issue, the Board breached any fiduciary duty.”

An Illinois appeals court considering another breach of fiduciary duty suit found no evidence to support a board’s contention that it had acted in the best interests of the community or in accordance with its governing documents or applicable laws.

The plaintiff in this case (Palm v. 2800 Lake Shore Drive Condominium Association) complained that the board had improperly failed to let him review association records, violated requirements for open meetings and failed to adhere to follow procedures for managing the community’s finances. One of the major complaints centered on the board’s propensity for conducting business in private “working sessions” permitted, board members argued, as long as they held their votes in open meetings.

The appeals court read the statute differently. “The plain language of this section leads to the conclusion that, not only must all board voting occur at meetings open to unit owners, so must all board discussion or consideration of association matters,” with exceptions only for personnel matters, pending or ongoing litigation, and collection or rule violation issues involving individual owners. “Nothing [in the legislation] suggests that [lawmakers] intended to limit the definition of “meeting” to mean only those gatherings where a board votes on business matters,” the court said.

The court was equally unsympathetic to the board’s assertion that it had properly delegated responsibility for approving vendor contracts to the management company, subject to the approval of three members of the board. The court agreed that the board was responsible for approving contracts and had the authority to delegate that task to the management company – but it did not have the authority to allow only some board members to review and approve the manager’s contract decisions.

“The board can either (1) delegate the power to enter contracts without board approval or (2) delegate the power to enter contracts with full board approval,” the court said. “There is no authority for the board to delegate the power to enter contracts with approval by less than the entire board.”

The board also objected to the trial court’s conclusion that transferring surplus income to the reserve account instead of crediting it against future owners’ assessments, as the declaration required, constituted “gross negligence.” The business judgment rule should apply, the board argued, because there was no evidence intent to defraud and because the board had relied on the advice of any attorney.

The court rejected both arguments. The attorney’s advice apparently referred to the board’s memory that an attorney had told a prior board more than a decade ago that the transfer of funds was permissible.
“Standing alone, this evidence is entirely inadequate to show that the board received the requisite legal advice and relied on it,” the court said.

The court agreed that there was no allegation of fraud, but it disagreed that this eliminated the board’s potential liability to owners for the breach of fiduciary duty. The board’s action’s met the definition of gross negligence, the court said, “in that they intentionally failed to act in the face of a known duty, demonstrating a conscious disregard for their duties.”

WORTH QUOTING

“The housing sector was at the epicenter of the U.S. financial crisis and recession and it continues to weigh on the recovery.” — Stanley Fischer, deputy Federal Reserve chairman.