Wednesday, March 27, 2013

What is S.B. 1062 about?

I testified at the Maryland State Senate hearing yesterday in support of S.B. 1062. The hearing was long and emotional at times, as unit owners told how they have been subjected to foreclosure actions by association lawyers seeking up to $70,000 in fees on top of fines in the hundreds of dollars.  The current draft of the bill was done in haste because of legislative scheduling issues, and it will be redrafted.  As written, it doesn't clearly explain what is intended.

Senator Muse is the sponsor.  The work to date has been done by attorney Larry Holzman, who represents Brian Hanrahan, a unit owner who has been through an incredible experience with his association and who testified at the hearing about his case.

Here it is in plain language, the way I understand it.

1.  Association governing documents usually contain fee-shifting provisions that allow the association to recover its attorney fees from unit owners if the association prevails in an action to enforce the governing documents.

2.  This would happen in two kinds of cases--either assessment collection, or enforcement of non-monetary provisions of the documents (pets, parking, architectural review, etc.)

3.  Existing statutes and rules in Maryland already authorize judges to do a "reasonableness" review of these claims, but only concerning the amount of the fees. In other words, judges already have the power to refuse to shift the association's fees to the owner, if the fees are excessive. This is what the court did in the recent case of Monmouth Meadows Homeowners Association, Inc., v. Tiffany Hamilton, 416 Md. 325 (2010).

4.  But what if the association lawyer is able to document that the amount of fees is reasonable, in the limited sense of satisfying the existing criteria--skill, hours billed, rate, and so forth--but the issue is whether the legal expenses are grossly disproportionate to the alleged offense?  For example, the association runs up $70,000 in fees over a $250 charge for a (bogus) parking violation  (as happened to Brian and Judith Hanrahan--Brian testified at the hearing; and see also Farran v. Olde Belhaven Townhome Association, where a political sign led to gazillions in fees).

5.  As I understand it, the point of S.B. 1062 is to give judges the power to deny or reduce attorney fees to association lawyers who manage to win a case that never should  have been brought in the first place.  The court would assess not just the reasonableness of the amount of the fee, but the reasonableness of the action itself, when you compare the incredible cost to the nonexistent or trivial alleged benefit.

6.  The focus of this bill is not assessment collection, but covenant enforcement cases.  The language in the bill about a rebuttable presumption of reasonableness is not (as I understand it) going to be in the next version (the Judicial Council opposed the bill because they think it tinkers with existing law on how courts review attorney fees, and this issue needs to be addressed). But the bill will still treat the two kinds of cases differently.   This is because associations need their assessment stream in order to remain solvent. If they have to hire lawyers to collect assessments, they should be able to recover their collection costs and fees, but judges need to scrutinize the amount of the fees to make sure the lawyers aren't churning and the costs and fees are reasonable.  Judges already have that power in Maryland (see Monmouth Meadows for the way they do that in Maryland).  [note: I realize that some people who read this blog want to wreck all associations financially, so they think association shouldn't be able to collect fees in court, but I think that position is irresponsible and morally objectionable and I won't argue it with you.] But associations don't need the money they get from fines. They don't become insolvent because somebody doesn't pay a $50 fine for painting their mailbox the wrong shade of beige.  And when a lawyer seizes on a case like this and runs up thousands of dollars in fees in the course of suing the owner, a judge should be able to say, "OK, you win on the paint job, but the association has to pay its own attorney."  Why?  Because fee shifting is an exception to the general rule that parties pay their own lawyers, and it should be allowed only when there is a real purpose to shifting the fee. Making lawyers wealthy isn't a good enough reason to shift the fees. As the court said in Monmouth Meadows, quoting the United States Supreme Court, “fee shifting statutes…are not intended as ‘a form of economic relief to improve the financial lot of attorneys[.]’”  [416 Md. 336]

7.  This would discourage associations from intimidating or persecuting unit owners, it would keep ridiculous cases that only enrich lawyers out of the courts, and it would force association boards to think for themselves and exercise some independent judgment instead of suing every time their lawyer tells them to, influenced by the promise that the association won't have to pay for it.

8.  Predictably, CAI showed up and opposed the bill. They send a non-lawyer from the Maryland legislative action committee who claimed that she didn't know about any abusive cases, boards are responsible, CAI wants to be involved in the conversation, and so forth. The usual fare. It was not an effective performance, but you can expect them to roll in the big guns (i.e., the lawyers who have gotten rich using fee-shifting provisions) if this bill goes forward.

So that's the general idea. I think this is a good bill that focuses attention on a problem that I have been writing about for decades.


Tyler Berding said...

There is certainly evidence that enforcement of covenants and restrictions (as opposed to assessments) has resulted in some fee awards that dwarf the issue litigated. But as long as there are recorded covenants dealing with such things as the color you can paint your mailbox, the size of political lawn signs, and the noise your dog can make, boards of directors will take responsibility for enforcing them.

One way of dealing with that issue is to reduce the number of rules. Many of those rules are unnecessary, especially in detached home neighborhoods, and if they are not wanted by enough owners, they can be amended out of the governing documents leaving nothing to enforce. But where they remain, there is often no practical reason why boards of directors have to enforce them all the way to the courthouse. Lesser measures may suffice--notices, or small fines.

Where the utility of enforcing a rule in a particular case would be greatly exceeded by the cost of its enforcement, boards should be free to abandon the quest without fear of breaching their duty to the other owners. This can be accomplished by making it clear in the governing documents that boards have the unfettered discretion to not pursue enforcement if it were in the best interests of the association to refrain.

Also it should be made clear in the governing documents that certain neighbor on neighbor disputes, i.e. those that impact only one or two other owners, can be left to those individual owners to resolve among themselves and relieve the board of the responsibility of being the neighborhood cop.

Eliminating unnecessary rules and clearly allowing boards of directors to recuse themselves from litigating every enforcement case to the bitter end, will avoid a lot of association litigation and the fees and costs that result.

Evan McKenzie said...

Tyler, I agree with you. People should be able to reduce the number of rules in their communities if they want to. Boards should be free to decline enforcement in certain situations and use discretion, without fear of consequences. When neighbors try to use the board as a club to go after people they don't like, boards should be able to decline. I think these are good ideas that would fit well with giving judges the power to decline fee awards in ridiculous cases.