Northwest Condo & HOA Law Blog

SHB 2657 re LLC Dissolution Passes Both Houses

Marlyn Hawkins — Thu, 11 Mar 2010 14:38:15 -0800

As a quick update to our Feb 19. article, SHB 2657, the bill proposed by Representative Jamie Pedersen, has passed both houses as amended in the Senate Judiciary Committee. It was delivered to Governor Gregoire for signature today. Updates can be found here.

Communal Living Q&A on KUOW

Marlyn Hawkins — Thu, 11 Mar 2010 14:31:24 -0800

Blog contributer, Dan Zimberoff with Barker Martin, P.S., appeared on the KUOW radio show, "The Conversation" with Ross Reynolds today. Click here to check out the conversation and listener Q&A.

DELRAP vs HRAP for FHA Condominium Certification

Daniel Zimberoff — Mon, 08 Mar 2010 05:29:36 -0800

The last unanswered question I had regarding the new FHA guidelines involved the difference between the Direct Endorsed Lender Review Approval Process (DELRAP) and the HUD Review Approval Process (HRAP). In reviewing and analyzing the provisions promulgated in HUD Mortgagee Letter 2009-46B, the guidelines explained in detail the DELRAP process, but did not describe the precise submission process for HRAP. The attachments to the letter, including the “Lender Certification,” only referenced DELRAP, so, my colleagues and I were unsure exactly who could submit a HRAP package. Under the old “spot approval” process, essentially anyone acting on behalf of an association or owner could.

When we first raised the question with the regional supervisor in Southern California, he stated they were still interpreting the proposed guidelines and were waiting on further information from DC. But now that the guidelines are in effect, and having spoken directly with the regional manager, we have our answer.

Similar to the former guidelines, there is no specific limitation as to who can file a HRAP package. The HRAP submission no longer requires an attorney opinion letter, but must comply with the strict guidelines contained within Mortgagee Letter 2009-46B.

We still recommend an attorney or other person with expertise in the FHA condominium certification process handle HRAP packages. If you have any questions on the process or would like an attorney from Barker Martin, PS to spearhead a package for your Oregon or Washington condominium association, select the “Contact” tab at the top of this blog page.

Legislature Working on a Fix to the LLC Abatement Problem

Marlyn Hawkins — Fri, 19 Feb 2010 12:24:31 -0800

This session, Representative Jamie Pedersen of the 43rd Legislative District has prime sponsored SHB 2657, which would fix the rather large loophole identified by the Washington Supreme Court in its May 2009 decision in Chadwick Farms Owners Association v. FHC, LLC, 166 Wn.2d 178, 207 P.3d 1251 (2009).

In Chadwick Farms, the court held that any and all legal claims against LLCs abated -- essentially disappeared -- when an LLC's certification of formation was "cancelled." The court explained that under the LLC statute as written, cancellation signalled the end of the LLC's existence and therefore, it could neither sue or be sued. As a result, a company formed as an LLC could avoid liability -- even if a lawsuit had already been filed against it -- simply by filing a certificate of cancellation. Since many condominium and HOA developers are formed as LLCs, homeowners in Washington stood to lose quite a bit if the loophole was not fixed. But the court's holding is not limited to construction defect or homeowner lawsuits - any LLC could avoid liability simply by cancelling.

With the support of WSCAI and the LLC section of the Washington State Bar Association, Rep. Pedersen's bill does away with the concept of cancellation and makes the LLC statutes (found in RCW Chapter 25.15) more consistent with existing law for corporations. The most recent striking amendment to the bill ensures that claims will survive against dissolved LLCs unless a sometimes-optional "certificate of dissolution" is filed and three years has run since the filing of the certificate. WSCAI and the homeowners we represent thank Rep. Pedersen, the Bar Association Section and the Judiciary Committees in both the House and Senate for their efforts to pass this bill.

The bill was passed by the House and is scheduled for executive session in the Senate Committee on Judiciary on Feb. 19. The bill is expected to pass out of committee and be forwarded to the Rules Committee for review. Click here for an update on the bill's status.

FHA Announces Important Underwriting Policy Changes

Daniel Zimberoff — Thu, 21 Jan 2010 12:10:44 -0800

Because I have received so many inquiries and questions regarding my recent posts on the new HUD/FHA Condominium Guidelines, I thought I would keep our readers apprised on the latest developments over at FHA.

A number of important changes were announced yesterday by the FHA to reduce risk and improve its finances:

The upfront mortgage insurance premium (MIP) will be raised from 1.75 percent to 2.25 percent.
The minimum down payment will climb from 3.5% to 10% for applicants whose Fico score is below 580.
Allowable seller concessions will be reduced from 6% to 3%.
The FHA also plans to request legislative authority to increase the maximum annual mortgage insurance premium so it can reduce upfront costs for prospective home buyers.

The complete FHA announcement can be found here.

The proposed changes, which apply to all FHA loans, are expected to go into effect in either spring or summer 2010.

Additionally, the agency will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.

Lastly, based on anecdotal information provided by industry persons, I have reported that up to 40-50% of single-family residence loans will be FHA insured in the near future. I read this week in several blogs (but have not been able to confirm through the FHA) that in 2009, 30% of mortgages and 20% of refinances were FHA backed. So my initial estimates may not be too far off.

Supreme Court of Washington to Condominium Owners: A Lump of Coal for Christmas

Marlyn Hawkins — Thu, 14 Jan 2010 10:40:26 -0800

In a 6-3 decision issued on Christmas Eve, the Washington Supreme Court sided with condominium developers in upholding arbitration clauses incorporated into condominium purchase and sale agreements.

In the consolidated case of Satomi Owners Association v. Satomi, LLC, this firm argued on behalf of two of its condominium association clients (Satomi Owners Association and Pier at Leschi Owners Association) that arbitration clauses contained within “Limited Warranty” packages were unenforceable. The Associations argued that the Washington Condominium Act’s provision for judicial enforcement or the arbitration provisions of RCW 64.55, which were drafted through a compromise of industry professionals and specifically designed for construction defect cases in Washington, trumped arbitration provisions contained within these so-called warranties.

The developers’ attorneys argued that the Federal Arbitration Act (“FAA”), which provides for enforcement of arbitration agreements in contracts, trumped the Washington Condo Act and the related arbitration provisions as a matter of constitutional preemption law. But the FAA only applies where there the transaction being sued over affects interstate commerce. The developers argued that the FAA applied because materials that make up the condominiums (such as lumber and siding) travelled in interstate commerce. At the court of appeals, we successfully argued that the fact that the materials used in constructing the condominiums travelled in interstate commerce was insufficient and irrelevant because the associations did not contract for the building of the physical condominium building, they merely purchased a finished condominium – a type of real estate that is intangible and specific to Washington law.

Unfortunately, the 6-member majority held that because the arbitration clauses were referenced in the purchase and sale agreements, the fact that physical pieces of the condo travelled in interstate commerce was enough for the FAA to apply. The Court also cited the fact that some unit purchasers came from out of state or borrowed out-of-state funds.

The Court declined to decide the “gateway disputes” of whether Associations were bound when it is unclear whether all original purchasers signed an agreement including the arbitration clause.

As a result, developers in Washington may be able to enforce terms of the arbitration clauses instead of following the carefully crafted arbitration provisions of RCW 64.55.

This does not mean, however, that every part of the arbitration clause or the “limited warranties” in which they are found will be enforceable. While declining to decide whether the arbitration clause in the Blakeley Village case was unconscionable because of procedural irregularities, the majority confirmed that that issues of whether the contracts containing the arbitration clauses are unconscionable remain for the trial court to decide.

Another good summary of the case appears on the Supreme Court's blog.

Dealing With "the Crazies" Within a Homeowner Association

Daniel Zimberoff — Sun, 10 Jan 2010 17:47:55 -0800

Yesterday, I was co-presenting at a Washington Community Association Institute (CAI) seminar on community building and annual meetings. When discussing owner engagement in association matters, an attendee asked how a board should respond to "the crazies," and went on to describe a protracted dispute between several renegade homeowners and her board of directors.

As soon as the board member finished asking her question, several other attendees' hands shot up, wanting to share similar experiences within their homeowner communities. The co-presenter and I ended up discussing the issue for several minutes before getting back to the main points of the presentation.

When I was driving home, I realized how often I have heard similar complaints from board members and association managers, with specific mention of "the crazies" within a community. As I thought further, I came up with the following suggestions:

If you are a board member or manager, keep in mind:

Not every complaint needs to be addressed.
Not every issue must be resolved by the board or manager.
Not every email needs an immediate reply.
Not every phone call or in-person exchange at the mail kiosk or elevator requires an "official" response.

Just because a homeowner raises a community issue, it does not mean action has to be taken by the board or manager. There are some issues that simply do not rise to the level of formal association action, no matter how strongly a homeowner protests, cajoles or threatens.

If a legitimate question or issue is raised by a homeowner during a chance meeting onsite or via email or phone call, a board member or association manager can respond by stating the issue will be discussed at the next board meeting. When you get down to it, very few issues are truly emergencies requiring immediate action. In reality, how much is ordinary business that can or should be conducted during formal association activity (i.e., board meeting)? Think how refreshing it would be to let go of a significant percentage of email traffic by simply printing off the email, placing the issue raised on the agenda for the next board meeting, and discussing it then.

If you are an "association crazy" or potential "crazy," keep in mind:

Board members live within the same community (or own units/homes there) and pay the same assessments as you.
Board members are volunteer (unpaid) lay persons without formal education or training in association and corporate governance.
Board members are subject to the same governing documents as every other homeowner.
Contrary to claims by some, board members are not out to rule the world or get kick-backs from each contractor and the management company.
Threats to sue the board and association are usually counter-productive and result in added legal expenses and assessments to the association, to which you are a member.

The key to reducing disputes between the "crazies" (and also rationale) homeowners and boards and managers is to rely strictly upon governing documents, set reasonable expectations and pursue enforcement actions consistently and uniformly. If at the end of the day the homeowner(s) are still acting irrational, try following the suggestions described in an earlier post entitled "Dealing With Problematic Homeowners."

Good luck within your own communities and let me know if you have additional suggestions I can add to my toolbox.

Enforcing CC&Rs Through Electronic Surveillance

Daniel Zimberoff — Mon, 14 Dec 2009 08:19:37 -0800

Homeowner association boards often struggle with enforcing certain rules, such as improper parking, failing to pick up after pets, littering and similar conduct. It is not that the violations are unimportant or do not affect the character of the community; rather, the cost and effort required to catch violators often exceeds the resources available to non-profit homeowner associations.

However, there is a relatively inexpensive, yet highly effective, tool available to associations to combat this behavior: electronic surveillance. As shown in this KOMONEWS.com video story, one apartment tenant using a camcorder and YouTube is deterring illegal activity near his apartment complex.

Some associations may not wish to post on the Internet video of illegal conduct within or adjacent to their neighborhood, for fear of stigmatizing their community and possibly adversely effecting sales. However, an association can still record the activity and forward it to the police. To deter Covenants, Conditions and Restrictions (CC&R) violations, an association can record a common area where pet owners routinely fail to pick up after their dogs, or visitor parking spaces where unit owners park, or other locations of common violations.

An association can obtain a wireless web camera for well under $100. The camera can be installed inside a common area (such as a clubhouse, office or other enclosed area) or even within an owner's unit. A day's worth of digitized video can be reviewed by a board member or committee member in fast-forward time in only a few minutes. If conduct that violates a rule or covenant is found on the video, then the board has compelling evidence to pursue an enforcement action.

Electronic surveillance can be a highly effective and cost-efficient tool for homeowner associations to use in enforcing their CC&Rs.

Changes to Revised FHA Condo Guidelines Announced

Daniel Zimberoff — Wed, 18 Nov 2009 20:24:44 -0800

On November 6th, the Federal Housing Administration (FHA) finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium associations. The original guideline revisions were first proposed back in June (under Mortgagee Letter 2009-19). The new guidelines go into effect on December 7, 2009; however, some of the requirements are phased in through January 31, 2010.

If you have been a reader of this Blog over the past couple of months, you are aware of the controversy and uncertainty involving HUD/FHA's proposed requirements for obtaining FHA mortgage insurance for condominiums. The newest guideline revisions are in response to the strong reaction from condo owners and industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.

The latest guidelines are described in two separate HUD/FHA documents: (i) Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects); and (ii) Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).

In short, Mortgagee Letter 2009-46B replaces Letter 2009-19. The temporary guidance (Letter 46B) acts as a buffer to ease transition from the old to the new regs.

Under the Temporary Guidance:

The "Spot Loan" approval process will continue through January 31, 2010; and
The 30-percent cap on FHA loans per condo project will be expanded to 50 percent temporarily (Letter 46A does not state the termination date of this extension), with concentrations increased to 100 percent if certain additional conditions are met (as enumerated in the Letter).

I believe the most noteworthy changes to the New Guidelines are as follows:

Condominium project approval is not required for condominiums that are comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
Reserve funding: From the previous requirement of at least 60% of the fully funded reserves to a new requirement consisting of at least 10% of the association's annual budget (see next bullet below).
Budget review: The review must determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
The 1-year waiting period for conversion condominiums is eliminated.

Transition Strategy:

FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
Projects that received approval between October 1, 2008 and December 7, 2009, will be "grandfathered" and will have to follow the new guidelines' recertification process (recertification required every two years).

Summary:

Because the Administration is extending the "Spot Approval" process through January 31, 2009, we highly recommend any association that was contemplating obtaining FHA certification to act without delay before the comprehensive certification process is enacted. Any Oregon or Washington condominium association that desires assistance in this endeavor can contact one of our attorneys by selecting the "Contact" tab at the top-right of this page.

Barker Martin will offer a Webinar on this topic in the near future (we will post on our website homepage the date/time of the upcoming seminar).

Reserve Funding

Daniel Zimberoff — Sun, 15 Nov 2009 16:47:22 -0800

In the past several weeks as I have been speaking on the new HUD/FHA guidelines, many persons have asked me whether HUD/FHA will require the "straight line," "cash flow" or some other methodology for determining percentage of reserve funding. The short answer is, "we do not know."

What we do know is that in order to obtain FHA certification for a condominium project, reserve funding must be at 60% for established projects, and 100% for new projects. Also, a reserve study must have been conducted within the past 12 months. [To review our previous postings on the new proposed HUD/FHA guidelines, type in FHA in the search window]

In attempting to answer the question on funding methodology, I first spoke with the HUD regional office in Santa Ana, California. The regional manager stated he did not know how the new guidelines would be interpreted regarding this issue. I then spoke with Reserve Study consultant Jim Talaga from Association Reserves, Inc., who referred me to an article his partner recently wrote on the subject.

To read an informative article on the difference between "straight line" and "cash flow" reserve funding analysis written by Robert Nordland from Association Reserves, click here.

We'll find out in time whether HUD/FHA will mandate a particular type of reserve funding. In the interim, as the experts at Association Reserves suggest, the use of a particular funding method does not dictate a particular result. What's most important is funding results. Thus “cash flow" or straight line?” is the wrong question to ask. It is much more informative to ask if the association is pursuing a conservative ““Fully Funded” objective, an aggressive “Baseline Funded” objective, or a “Threshold Funding” level somewhere in-between. Whatever methodology is used, HUD/FHA will insist on either a 60% or 100% funded number to qualify for FHA certification.

FHA Condominium Certification Changes Pushed to December

Daniel Zimberoff — Mon, 26 Oct 2009 20:27:46 -0800

FHA/HUD's revised condominium certification regulations originally slated to take effect on October 1, 2009 and pushed back to November 2nd, are now scheduled to be implemented on December 7, 2009. The onerous new regs, as described in HUD's Mortgagee Letter 2009-19 (published on June 12, 2009), were met with controversy due to the potentially chilling impact on the ability of a condominium project to obtain FHA certification.

As a result of public outrage, in mid-September, FHA/HUD announced postponement of implementation of the new regs. On October 21st, FHA stated in an email:

Implementation of FHA’s new policy guidance for condominium project approval and condo unit financing will be delayed until December 7^th 2009. The new guidance, to be issued within the next two weeks, will: 1) offer additional leniencies to address the difficult market conditions and 2) augment some portions of FHA Mortgagee Letter 2009-19, providing additional information and clarification.

Until the new guidance takes effect on December 7^th, 2009 lenders may continue to use the Spot Loan Approval guidance issued in Mortgagee Letter 1996-41. Further, the site condo and manufactured housing condo project changes that have already been implemented are not affected by this delay.

Looks like FHA/HUD took notice of the public's comments (led in great part by lobbying from Community Association Institute (CAI), National Home Builders Association, National Association of Realtors and the Mortgage Bankers Association).

We should know within a couple weeks how the final regs will play out. Stay tuned for further information on this important topic.

Washington Condominium Association Wins Slip-and-Fall Lawsuit

Daniel Zimberoff — Mon, 31 Aug 2009 09:36:33 -0800

In Garron v. Pier Point Condominiums Association, Division One of the Washington Court of Appeals affirmed the trial court’s summary judgment dismissal of a personal injury lawsuit by a housecleaner against the condominium association. While cleaning one of the condominium units, the plaintiff slipped and fell on a wet tiled walkway in the common area of the condo. The court agreed with the association that there was no evidence the association knew or should have known about the slippery and dangerous walkway.

The Pier Point Condominium is a small eight-unit condo in Oak Harbor. The plaintiff had cleaned a unit at the condo every week for several years, so she was familiar with the complex. She was aware that when it rained, the walkway tiles became wet and slippery. The unit owner who employed the plaintiff testified he believed the walkway was dangerous when it rained, but had failed to inform the association of his concern. The appellate court concluded, as had the trial court, that there was no evidence the association knew or should have known about the alleged danger created by wet tiles on the walkway.

The appellate court also denied the plaintiff’s attempt to amend her complaint to sue the individual condominium unit owners. The court relied upon a specific provision of the Washington Condominium Act that states “an action alleging a wrong done by the association must be brought against the association and not against any unit owner or any officer or director of the association.” See RCW 64.34.344.

This case turned on the specific testimony of the parties. The plaintiff herself testified that she was aware that the steps got wet when it rained. Although there was some testimony about puddling of water on the walkway tiles, the plaintiff testified there were no puddles the day she slipped and was injured.

Although the plaintiff was unsuccessful in this particular case, associations should be vigilant and act as soon as reasonably possible to eliminate dangerous conditions.

For more information on this case, or to answer any related questions involving association liability, select the “Contact” tab at the top of this blog page to reach one of our attorneys.

Major HUD / FHA Condo Lending Changes Effective October 1st

Daniel Zimberoff — Fri, 21 Aug 2009 11:28:44 -0800

Under revised guidelines effective October 1, 2009, the FHA is implementing a new approval process for condominiums to be eligible for FHA / HUD financing. Under the new guidelines, the spot approval process will no longer be available, and approvals expire every two years. Click here to see a copy of the HUD Notice.

- Historically, to utilize HUD / FHA financing, a condominium could, under certain circumstances, receive “spot approval” for lending with HUD / FHA, or the association was required prepare and submit a comprehensive package of materials for consideration for “permanent” approval.

- Under the October 1, 2009 guidelines, FHA will allow lenders to determine project eligibility, review project documentation, and certify compliance with the National Housing Act requirements. We expect lenders will approach association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with certain legal requirements.

- If a condominium is not on the FHA-approved list, or has lost its approval because it underwent repairs or litigation, or for some other reason, the board of directors may wish to consider applying for approval (or re-approval).

The attorneys and staff at Barker Martin, P.S. are ready to help your association adjust to these changes. Just select the “Contact” tab at the top of this blog page to reach one of our attorneys.

Rental Caps and Hardship Exceptions

Daniel Zimberoff — Mon, 10 Aug 2009 10:19:39 -0800

With the economic crisis continuing and foreclosure rates still increasing, I have heard a lot of talk recently regarding rental cap hardship exceptions. Many condominium and homeowner association boards of directors whose associations have rental ceilings are feeling the pinch between following their CC&Rs and facing unprecedented levels of claims of hardship.

A typical rental ceiling Hardship Exception leaves much discretion to the board:

Hardship Exception. Where, on written application from a homeowner, the Board determines that a hardship exists whereby, due to circumstances beyond the control of the owner, that owner would suffer serious harm by virtue of the limitation on renting contained in this Section 4.6, and where the Board further determines that a variance from the policies contained therein would not detrimentally affect the other homeowners or secondary mortgage market financing, lender approval or VA or FHA approval, the Board may, in its discretion, grant an owner a waiver of the Rental Ceiling for a temporary period not to exceed twelve (12) months.

So what can/should a board do in these trying economic trying times when balancing an individual owner's financial difficulty with the interests of the remaining homeowners? Although each association should be considered on a case-by-case basis, I would not be averse to recommending boards exercise a bit more leeway by exercising a fairly liberal approach to granting rental cap hardship exceptions.

Perhaps granting a six-month lease, in lieu of a full year, may be the most appropriate compromise for boards whose associations have reached their rental caps, yet have owners who are experiencing severe financial strain.

If a board decides to grant a hardship exception, it should ensure it documents the basis with specific grounds, to make sure it does not open itself to claims by other homeowners of selective enforcement.

For more details on rental restrictions, rental caps or hardship exceptions, do not hesitate to contact Barker Martin, P.S. by selecting the “Contact” tab at the top of this blog page.

What can/should a board do in these trying economic times when balancing an individual owner's financial difficulty with the interests of the remaining homeowners? Although each association should be considered on a case-by-case basis, boards may exercise more leeway by exercising a conservative approach to granting rental cap hardship exceptions.

Update on FHA Approved Condominiums

Daniel Zimberoff — Thu, 09 Jul 2009 20:29:04 -0800

[Associate David Silver conducted research and assisted me with this post--thanks, Dave!.]

In recent months, I have posted several articles discussing various aspects of condominium and HOA mortgage lending in the wake of the present housing and financial crisis. In early April, I blogged about Congress’ attempts to pass a mortgage modification bill, and, later that month, discussed the effect Fannie Mae’s rules regarding pre-sale of condominium units have had on local markets. Lately, we have received a number of questions on a related topic: condominium projects and FHA-approved status.

Although only a hunch, we attribute this heightened interest in FHA-approved status to the fact that until mid- to late-2008, there were a wide variety of non-FHA, non-conforming mortgage alternatives available (e.g. Alt-A, Non-Income Verified, No-Doc, 100% purchase-money second loans, etc.) to condominium unit buyers. Plus, following the evaporation of those creative mortgage products, the housing market has been generally slow. Consequently, when there were a slew of other mortgage options, potential purchasers did not have to rely so heavily on mortgages underwritten and approved by FHA. Now, however, with most of the “portfolio,” or “non-conforming” mortgage programs discontinued (and transactions picking up, if ever so slightly), FHA underwritten financing has become increasingly attractive—and may be a purchaser’s only option.

If a condominium is not on the FHA-approved list, or has lost its approval because it underwent repairs or litigation, or for some other reason, the board of directors should consider applying for approval (or re-approval, whatever the case may be). You can look to see whether a condominium is approved on the HUD Homes & Communities website located here.

Keep in mind that in some situations, limited “spot-approval” may be obtained by certain buyers for condominiums not otherwise approved.

Currently, HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Moreover, the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions.

For further information on FHA approval requirements, or other issues related to condominium associations, feel free to contact Barker Martin, P.S. by selecting the “Contact” tab at the top of this blog page.

Chadwick Farms lets Dissolved LLCs off the Hook at Possible Expense of the LLC's Members

Marlyn Hawkins — Mon, 22 Jun 2009 11:02:36 -0800

On May 14, 2009, the Washington Supreme Court published its opinion in Chadwick Farms v. FHC, LLC, 2009 WL 1333004 (May 14, 2009). The issue in Chadwick Farms was the capacity of LLCs to sue or be sued after cancellation of the LLC pursuant to the Washington LLC Act (Chapter 25.15). Without much analysis, the court first held that administratively dissolved LLCs are actually cancelled by operation of law two years later if the LLC has not reinstated the LLC.

Based on RCW 25.15.290, the court then held that claims against LLCs abate once the LLC is cancelled. In other words, once the LLC is cancelled, it ceases to exist and cannot prosecute or defend claims against it, even if the LLC is currently involved in a lawsuit in which it has been sued or has sued others.

The court said that the new statute regarding a 3-years statute of limitations after dissolution, RCW 25.15.303, did not change the result because of its “inartful” use of the term dissolution rather than cancellation.

As if to balance the seemingly disastrous result, the court reminded everyone of the existing rule that where an LLC is cancelled, there may be personal liability for LLC members who allow their LLC to get cancelled if they failed to properly wind up and “make provision” for “known” liabilities. Thus, at least where an LLC has a known liability (like a lawsuit against it), members of LLCs might want to ensure that the LLC is not cancelled in order to avoid personal liability.

H.R. 1106 Dies in the Senate

Daniel Zimberoff — Sun, 10 May 2009 09:58:20 -0800

Earlier this year, I wrote Blog postings on proposed federal legislation that could adversely impact the ability of homeowner associations to recover past-due assessments. Specifically, H.R. 1106: "Helping Families Save Their Homes Act of 2009," would have given bankruptcy judges the ability to ‘cram down’ the principal balance and monthly payments, wiping out tens or even hundreds of thousands of dollars of money owed. In addition to allowing courts to rewrite private mortgages, the proposed law also would have allowed the courts to bypass state assessment lien and priority lien statutes, thereby eliminating the already limited ability for a community association to collect past due assessments from these properties.

On April 30, 2009, the United States Senate voted 45 to 51 on a rewritten version of the House Bill, thus effectively killing the Bill. I believe the proposed law was defeated in large part due to the high number of homeowners who contacted their Congressmen and women in voicing their concerns over the Bill.

As housing and foreclosure issues are likely to linger until a sustained economic recovery takes place, the attorneys at Barker Martin, P.S., will continue to monitor prospective legislation affecting homeowners and homeowner associations.

Due Diligence When Buying a Condo or HOA home

Daniel Zimberoff — Sun, 03 May 2009 20:47:07 -0800

Kevin Lisota wrote an informative posting Friday (5/1) on the Smart Real Estate Blog Site regarding due diligence a prospective condominium purchaser should conduct prior to purchasing a unit. Click here to view the article.

Lisota lists the following steps:

Conduct a visual inspection;
Review meeting minutes;
Review the operating budget;
Review the current reserve study;
Review the association's rules and regulations;
Review the association's insurance policy.

I have provided similar suggestions in seminars and presentations. First, though, I'd like to add a couple of comments to the foregoing list. It is not enough to 'review" the operating budget. I recommend scrutinizing each line item of the current budget, and comparing it with the previous two years' budgets to identify trends and accuracy. With respect to reserve study, if you do not have any construction or building maintenance experience, pass the report to a friend or family member who may have knowledge and can provide valuable assessment. Also, make sure to review the reserve account, in addition to the actual reserve study. Regarding rules and regulations, I would also highly recommend reviewing the association's declaration and bylaws. You do not have to be a lawyer to identify gaps and potential problems. When reviewing insurance, make sure to look at policy limits, deductibles, Directors and Officers coverage and endorsements specific to multi-family residences, such as sewer back-up, code compliance and demolition coverage, to name just a few. There is no substitute for review by a professional insurance agent or consultant.

I would also add the following to the due diligence list:

When conducting the visual inspection, stop and speak with a few homeowners and ask them the strengths and weaknesses of the community. You may be surprised at what you uncover, both positively and adversely.
Call the association manager and ask them the same question. They do not get paid for such calls, but may provide you with a quick summary of the community.
In these times of economic crisis, make sure to scrutinize not only the operating budget, but also the bad debt and collections/foreclosure rates.

Lastly, I believe the foregoing steps are not limited to condominiums; rather, apply to Planned Unit Developments ("PUDs"), as well.

Buying a condo can be more complex than buying a single-family home. For a successful purchase, make sure to perform your proper due diligence.

Fannie Mae Rules Push Out Condo Buyers

Daniel Zimberoff — Thu, 23 Apr 2009 12:47:52 -0800

There was an article in last week's Stranger reporting that new Fannie Mae regulations established in March have blocked condominium developers from closing unit sales if the developer has sold fewer than 70 percent of the units in a building. Many of the large condo towers currently being built in Seattle and Portland are below the 70-percent threshold; consequently, hundreds of buyers who've already put down deposits may have to live elsewhere even after the buildings are completed. These circumstances are a direct result of the economic crisis and real estate market slow down.

As Dominic Holden writes in the Stranger article:

If developers can't presell 70 percent of a building's condos before opening—a steep expectation even in a strong market—market forces may push developers to convert their buildings into apartments or drastically reduce prices.

As prices on unsold condos drop, some buyers may choose to walk away from earnest money deposits rather than hang on to units that have lost much of their original value. In an ever spiraling situation, as more buyers walk away--increasing the gap between actual sales and the 70 percent required under the new Fannie Mae regulations--developers may have to decrease unit prices even further.

Click here for a listing of several Fannie Mae regulations affecting condominium lending requirements.

For further information on Fannie Mae lending requirements, or other issues related to condominium associations, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.

Legislative Update

Daniel Zimberoff — Sun, 19 Apr 2009 10:02:53 -0800

We've been writing about several Bills on this Blog lately because there is a lot of prospective legislation (both locally and nationally) affecting homeowner associations and individual homeowners. The level of legislative activity in this area appears to have increased probably in part as fallout from the economic crisis.

As an update, H.R. 1106 "Helping Families Save Their Homes Act of 2009" remains stalled in the U.S. Senate, with no scheduled date for a vote (click here to keep track of the Bill). In Washington, ESSB 1393, "Addressing residential real property construction improvements through consumer education, warranty protections, contractor registration requirements, and worker certification standards," is similarly stalled in the state Senate. An earlier version of the Bill passed in the House, but is undergoing major rewrites in the Senate. One of the latest versions, Striker 1393-S2.E AMS WM S2889.2, can be found here. I believe the Striker version is wholly impractical and inefficient. For example, the Striker establishes a 7-person "Home Construction Board" to resolve construction disputes. The Board would be comprised of four construction professionals of varying experience, a governmental building inspector and two members "of the general public." The board members would be appointed by the governor and meet at least four times per year. Doesn't sound to me like an effective or efficient way to resolve hundreds, if not thousands, of construction disputes filed in our state each year. To keep track of ESSB 1393, click here.

The Oregon legislature is also debating several Bills that affect homeowners and homeowner associations, including SB 811 and SB 963. SB 811 modifies provisions relating to enforcement of liens for association assessments in planned communities and condominiums, including establishment of a "super lien priority" for associations. SB 963 includes several technical changes regarding governance for planned communities and condominiums in Oregon. For specific information on the Bills and to track their progress, click here.

Several Barker Martin, P.S. attorneys remain highly active in the Washington and Oregon legislative process, including serving on legislative committees for homeowner association industry groups. On occasion, we also are asked to review and help draft prospective legislation. Keep checking this Blog to obtain the latest legislative developments affecting homeowners.