LETTER OF LAW
August 19, 2005
Dear Clients and Affiliates:
As a courtesy to our clients, we feel it is important to update you with changes in the law and issues of community concern. This is the first of our “Letter of Law” correspondences to you. With these periodic letters, we hope to keep you abreast of recent changes and matters of importance to you and the community association industry.
As a matter of general interest and information, please note that there is currently a State “Task Force” formed to study Common Interest Associations and the issues and problems these associations face. Should you desire further information on this matter or information concerning who and how to contact the Task Force members, please call our office.
Below you will find a summary of some of the current issues and topics which our firm believes will be of interest to you. Part I deals with changes in federal and state law. Part II deals with localized legal activity.
PART I: CHANGES IN FEDERAL AND STATE LAW
CHANGES IN BANKRUPTCY LAW
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act) passed the U.S. House of Representatives on April 14, 2005, and President Bush signed the bill into law on April 20, 2005. It becomes effective October 17, 2005. Individuals seeking to discharge consumer debt will feel the most dramatic changes; however, several significant changes will also affect Condominium, Community and Homeowner Associations.
Under the new law, consumers who are thinking about filing bankruptcy will be
required to get credit counseling from an approved credit-counseling agency for up to six months before filing for bankruptcy. Debtors will also be required to take a financial-education course within 18 months after filing bankruptcy before their debt can be discharged. Another major change brought about by this Act, is the “means” test for Chapter 7 eligibility. Any debtor whose income equals the state’s median income and who can pay $100 per month over five years is NOT eligible to file under Chapter 7 of the Bankruptcy Code. The alternative in that case is either not to file for bankruptcy protection at all, or to file bankruptcy under Chapter 13 , resulting in court-ordered repayment plans.
A major change that will greatly benefit our Condominium and Homeowner association clients is that under the new law, Condominium and Homeowner association members are required to pay their regular fees as long as they own or possess the property, even if they have filed for bankruptcy relief. Prior to this, if the condominium owner abandoned the property, he or she was no longer responsible to pay the post petition assessments even though the property was still owned by the debtor. This resulted in situations wherein condominiums suffered through long periods of time with no reasonable source from which to obtain the assessments for an abandoned unit. The bankruptcy reform law adds homeowner associations, time-share condominiums, and commercial condominiums to the list of covered entities under Bankruptcy Laws and it closes the collection loophole that had frustrated many associations, by linking the obligation to pay post-petition fees to ownership rather than occupancy of the unit. The new language states that the liability for payments continues, “for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest” in the unit.
Most of the changes mandated by the bankruptcy reform statute will take effect
October 17, 2005, i.e. 180 days after the President signed the law. But some provisions became effective immediately. One that may affect community associations in states other than Maryland is the new cap on the “homestead exemption,” allowing homeowners to protect a portion of the equity in a primary residence from the claims of creditors. Maryland has no “homestead exemption” per se, however, the debtors may avail themselves of the exemptions provided under §11-504 of the Maryland Cts. & Jud. Proc. Code Ann. Different states set different limits on the amount of protection provided, and a few states provide unlimited protection. The bankruptcy law aims to prevent debtors from shielding their assets by buying expensive homes in those no-cap states.
The changes in the bankruptcy law will benefit condominium and community associations and we thank the tireless efforts of the Community Associations Institute (“CAI”) and others for lobbying on the industry’s behalf to make sure the new law included direct benefits for these associations.
CHANGES IN CONSUMER CREDIT LAWS
The Fair and Accurate Credit Transaction Act (FACTA) is a new federal law designed to reduce the risk of consumer fraud and identity theft. The FACTA disposal rule requires the destruction of consumer information before it is discarded.
According to the FACTA disposal rule, "any person who maintains or otherwise possesses consumer information" must take "reasonable measures" to prevent unauthorized use of the discarded information. The types of consumer information that must be destroyed includes “any record about an individual, whether in paper, electronic, or other form, that is a consumer report or is derived from a consumer report.” The Rule does not cover information unless it mentions specific consumers and contains personal identifiers, such as Social Security numbers. The rule also applies to “compilations” of consumer information. Credit reports, credit scores, employment background, residence history and check-writing history are the kind of information covered by the new disposal rule.
It is important to note that the disposal rule does not apply to how information is stored; the key issue is what happens when you dispose of data. The disposal rule became effective on
June 1, 2005. Federal and state authorities may bring legal enforcement actions for each violation of the rule.
We caution those who retain and use consumer information such as the type mentioned above to take care when the information/data is discarded. Paper, tapes, and computer disks must be burned, shredded or otherwise destroyed.
Our office has purchased several shredders that will shred paper and disks alike and we have instituted a policy for proper disposal of all records.
CHANGES IN TRANSPORTATION LAW
The U.S. House of Representatives recently passed bill H.R.3 which has been titled: “Transportation Equity Act: A Legacy for Users.” The bill contains language that permits limited state regulation of tow truck operators.
The “Cox-Moran predatory towing amendment” as it is known, gives States two new tools to crack down on rogue towing operators. The amendment gives States the right to require that tow truck operators receive written permission from the property owner or an agent of the property owner before making a non-consensual or “trespass” tow off of the owner’s property. It also permits States to require property owners requesting a “trespass” tow to be present or have an agent of the owner present at the time the offending vehicle is towed.
Congressman James Moran (D-Va.) and Congressman Christopher Cox (R-Calif.) joined together on this initiative after it was reported that a tow truck operator in California towed away a car with a baby still inside the vehicle. The two towing measures included in H.R. 3 are laws currently on the books in California that have been contested in court. By including this provision in H.R. 3, current California law will be protected from court challenge and it will also allow other States to employ these measures without penalty in order to protect themselves against unscrupulous tow truck drivers.
The above-described requirements for towing would present numerous problems for community owners. It imposes on them an obligation to authorize and become directly involved in towing activity, and requiring permission for towing is too time consuming and inconvenient, especially late at night. Further, the requirement needlessly puts individuals in harm's way because people get angry when their cars are towed. Currently, there is no Maryland State law on this which affects Condominium or Homeowner Associations. There may be local law, i.e. County or Municipal Code, that affects your area.
ATTORNEY-CLIENT PRIVILEGE, CONFIDENTIALITY,
AND COMMUNITY ASSOCIATIONS
The attorney-client privilege is defined as: “a rule that keeps communications between an attorney and his/her client confidential and bars it from being used as evidence in a trial, or even being seen by the opposing party during discovery.” An important issue that comes up for a lawyer, therefore, is exactly who the holder of the attorney-client privilege is in the context of community and homeowner associations and what information is considered privileged.
The attorney-client privilege is an important aspect of confidentiality. In general, communications between a lawyer and a client are protected from third party discovery under the law. The attorney-client privilege may be asserted against attempts to compel testimony, which would reveal confidential communications seeking or giving legal advice. The privilege is created by Maryland statute and federal common law. The ethical duty of confidentiality, created by Rule 1.6, Maryland Rules of Professional Conduct, requires attorneys to keep confidential (subject to certain exceptions) both privileged communications and other confidential information whose disclosure is likely to be detrimental to the client.
An attorney representing a community or homeowner association owes a fiduciary duty to the association itself, not to the individual homeowners because the Association is the attorney’s client. The Board of Directors of an Association are delegated special responsibilities to act on behalf of the Association and are therefore, representatives or agents of the Association. Accordingly, communications between an attorney and the Association (entity) made with the board of directors are privileged and non-board members/agents are not entitled to see or have access to this privileged communication despite having access to other information relevant to the Association under Maryland law.
There is conflicting and competing law with regard to disclosure of such information. For Condominium Associations, the Real Property Article of Maryland, § 11-116, provides that the council of unit owners shall “keep books and records in accordance with good accounting practices on a consistent basis” and “on the request of the unit owners of at least 5 percent of the units, the council of unit owners shall cause an audit of the books and records to be made by an independent certified public accountant, provided an audit shall be made not more than once in any consecutive 12-month period.” § 11-116 goes on to say, “Books and records kept by or on behalf of a council of unit owners may be withheld from public inspection to the extent that they concern the written advice of legal counsel.” Previously, the availability of such records varied depending on the type of community association. Homeowner Associations have similar rules regarding books and records and contain the same language as the provisions for Community Associations. These are found in the Real Property Article of Maryland, § 11B-111(4) and 11B - 112(2)(v). As mentioned above, while home and unit owners have access to all these books and records, materials that are protected by the attorney-client privileged, are not accessible to them.
We advise all of our clients and their managing agents (if that is where the records of the Association are kept) to keep any Attorney-Client Privileged communication in a separate folder/location from any other business records of the Association so as not to accidently divulge the communication to anyone other than the Client (Association and its Board of Directors/agents).
PART II: LOCAL LEGAL ACTIVITY
CHARLES COUNTY SIGNS HOMEOWNER’S TASK FORCE BILL
The Charles County Commissioners recently created a Homeowners’ Association Dispute Review Board (the “Board”), by the adoption of Bill 2004-05. The Board was created to hear and resolve disputes between a homeowners’ association and a homeowner regarding the enforcement of recorded covenants or restrictions of the homeowners’ association. The bill contains language to the effect, however, that a party must not file a dispute with the Board until the party makes a good faith attempt to exhaust all procedures or remedies provided in the Association documents.
The Commissioners have been seeking seven County residents to serve on the new Board. Board membership is to include: two residents of self-managed or professionally managed homeowners’ associations within the County, which may include members or former members of governing boards, one resident involved in housing development and real estate sales, two residents who are members of professions associated with common ownership communities (such as attorneys who represent associations, developers, housing management, or tenants), or investor-owners of units in common ownership communities, including at least one person who is a professional community association manager; and two residents from the County at-large.
Board members will receive no compensation and will serve three-year terms. Of the first members appointed, two will serve 1-year terms, two will serve two-year terms, and three will serve three-year terms. Candidates interested in serving on this board, should contact Linda Rollins, Clerk to the County Commissioners, at voice phone number (301) 645-0554 or (301) 870-3000, ext. 2554, or by e-mail at RollinsL@charlescounty.org to obtain an application form. Also, the form may be downloaded from the County Government web site at: http://www.charlescounty.org/boards/application.pdf .
BALTIMORE COUNTY HOMEOWNER ASSOCIATION
SUES BUILDER, DEVELOPER FOR $5M
The Council of Unit Owners of Stoneridge Condominium in Owings Mills, Maryland filed a $5 million suit in Baltimore County Circuit Court against the condominium’s developer and builder, Stoneridge Associates and Domain Builders this past May.
The owners’ complaint alleges dozens of construction and design flaws resulting in “water and moisture penetration, deterioration of building components and elements, structural insufficiency, instability, increased cleaning and janitorial expenses, repair and replacement of both common elements and elements within individual units above and beyond normal wear and tear, decreased property values, and other serious damage.” The owners allege these problems have been ongoing since the development was built ten years ago.
In their complaint, the owners allege that they filed suit after the builder and developer promised to make repairs but did not do so. The owners have spent a considerable amount of their own money to make repairs the builder should have paid for, but have done so in order to maintain livable conditions.
Notably, the owners’ complaint states that Stoneridge Associates and Domain Builders agreed to toll the statute of limitations as of April 2000. According to Eliot Wagonheim, who is representing the owners, this is common practice in cases involving complex construction projects, where it may take time to figure out if a given flaw is in fact a construction defect so parties toll to prevent one or the other from filing suit just to beat the statute of limitations. If your association is having construction defect issues, you need to investigate, document and proceed to notify the Association’s attorney as soon as you note the problem.
RETRO-FITTING SPRINKLERS IN MONTGOMERY COUNTY
According to published reports, County Council member Phil Andrews (D-Gaithersburg), the chairman of the Public Safety Committee in Montgomery County has proposed legislation to require all older high-rise buildings, including condominium structures, to be fitted with sprinklers. Mr. Andrews believes condominium structures should also be included in the retrofitting because “We can’t condone different standards for fire safety among residents who are similarly situated and equally at risk.”
His efforts are reportedly in response to deadly high-rise fires, which have occurred throughout Montgomery County. Requiring that all older high-rise apartment buildings in the county be equipped with sprinkler systems is a measure that Andrews believes would help prevent fires and unnecessary deaths as well as protect firefighters in the county. Currently, state law requires high-rise buildings constructed after 1990 to have sprinklers, while local officials determine whether older buildings should be updated.