This paper addresses the consideration of common interest development (CID) law being undertaken by the California Law Revision Commission (CLRC).

A. PRELIMINARY CONSIDERATIONS:

In order to understand why this revision of the law is even needed, it is essential to have some understanding why CID’s arose in the first place. The following remarks are necessarily made with a broad brush.


1. CIDs have existed in the U.S. for approximately 100 years. They were located primarily on the East Coast. They were few in number, inhabited by upper income Americans, and were generally designed to be exclusive in nature, racially, socially and economically.

2. CIDs as a mass phenomenon did not emerge until after World War 2. Three central forces drove this movement.

a. The pent up demand for new housing caused by returning G.I.’s and the resulting baby boom

b. Increased post-war prosperity. The U.S. economy was virtually the only economy not shattered by the war.

c. The application of mass production techniques to the housing market and the consequent dramatic rise in profits. At Levittown, they built on average 2 houses a day.

3. Developers recognized that, in order to attract buyers to their new product, they had to build not only bigger and better equipped homes, but to offer features that would – at least initially – dazzle the eye and tempt the pocketbook. As the new homes were generally in suburban areas, inconveniently far from the traditional amenities of the city, developers decided that they had to include such items as swimming pools, club houses, golfing facilities and park areas.

4. In order to manage these facilities after they departed from the scene, developers realized that they had to create some on-going structure. Thus homeowner associations were formed. This necessitated the imposition of assessments to pay for the upkeep of the facilities, provisions to collect the assessments from those who did not pay – including such enforcement mechanisms as non-judicial foreclosure. Gradually, other provisions were added to take care of alleged aesthetic blight. Soon, homeowners found themselves swaddled with a host of restrictions.

5. Municipalities, always claiming that they were short of cash, realized that they could shift the tax burden from their coffers, to the pocketbooks of homeowners. The cost of installing and maintaining streets, lighting and sewers could now be transferred to private mini-governments. Many cities made it mandatory to build new developments as CIDs. Of course, this was not the only avenue open to cities, but the temptation to shed some of their responsibility apparently proved too much.

6. CIDs received a powerful boost when other interests realized that there was a lot of money to be made from CIDs.

a. The legal industry recognized that where there is complexity of regulation and deep pockets (CIDs became flush with cash from all the assessments), they could make a lot of money. They also realized that the more they became involved, the more indispensable they could make themselves, and as a consequence, they could make more money. Hence, they often frightened the lay volunteer board members with all the legal complexities in running an association, and the consequent necessity of having a lawyer to handle them. Lawyers got themselves on state bar committees dealing with homeowner associations and legislative task forces both to craft more laws in order that their claim of the necessity of associations be further validated, and also to ensure that laws were passed which protected and advanced their economic interests. As one simple example of this, lawyers here in California got a bill passed to allow the reserve monies of homeowners to be used for their fees in litigation. Hence, the result was that lawyers by and large took over homeowner associations.

b. Other vendors, such as management companies, CPA’s, gardening companies, plumbing companies and many more, saw that homeowner associations were rich resources to be abundantly mined. They saw that the preservation of homeowner associations was to their clear economic interest, and they saw that buttering up to boards of directors was one of the best ways to do it – even if the rights of a homeowner were trampled on.

c. These vendors – lawyers, management companies etc. – quickly realized that there was great strength in organizing a trade group. The granddaddy of these is Community Associations Institute (CAI), founded in 1973 in Virginia. Its name was to set a strategy for all future trade groups – make it sound like an educational institution and consumer friendly – in order to mask its true nature as a self-serving trade group. (In 1993, part of its true nature was exposed when it entered into a consent decree with the FTC – it agreed that CAI management companies would cease practices which maintained the high prices of their services. CAI management companies had agreed among themselves not to solicit business from an association which was being managed by another CAI management company.)

d. In the past 25 years, CAI and other trade groups such as CLAC and ECHO here in California, have exercised their considerable financial muscle to advance legislation which furthers their own interests. For example, when Dan Hauser was chairperson of the Assembly Housing Committee, CAI and CLAC would wine and dine him the night before and then present him with awards. The following day during hearings, Hauser would steer legislation their way. Hence, this Commission should exercise more than ordinary scrutiny when it receives suggestions from vendor spokespersons such as Curtis Sproul and Tyler Berding.


B. FUNDAMENTAL CONSIDERATIONS:

1. The task before this Commission is incredibly profound, daunting and challenging because it deals with one of the fundamentals of a person’s life – his home. A home is not just a commodity, a collection of concrete, wood and stucco. A home is where a citizen breathes, lives and has his being. It is a place which is uniquely his. It is a place where a citizen lives with those most dear to him, his family. It is a place where he dreams his fondest thoughts and shares his most precious moments. The photographs which he puts on the walls, the flowers which he plants, are an extension of who he most truly is.

Hence, when a home becomes surrounded by a thicket of laws and regulations, when it becomes a target of intrusive fingers which seek to penetrate its sacred space, it touches a profound nerve which extends to the center of a person’s being. Human beings strike back when they are so threatened. The letters attached to the Memorandum of Nathaniel Sterling (Memo. 2001 – 19) poignantly and eloquently testify to the truth of this statement. When Alisa Ross testifies to the profound horror which she has had to endure and states that "I will never, ever give up" (p. 80), this should send to you, the members of this commission, a message that will ring in your ears and haunt you down the nights and days.

What you are dealing with in this revision of CID legislation is nothing less than the fundamental fate and nature of a nation. If one wants a nation of citizens who are strong, proud, free, creative and caring, then fashion legislation that fosters that, not destroys it. Fashion legislation that does not cabin, crib and confine, but legislation that ennobles, uplifts the human spirit and sets it free. The ideals of this country are not to create servile denizens who are crimped at every turn.

The ideals of those who shaped our constitution (flawed though it may have been in its implementation) should be the same ideals which fashion the housing environment of the citizens of the 21st. century. The goal should be the maximum of freedom consistent with living in an organized society. Would the framers of the constitution even have considered CIDs if they were alive today – or would they have rejected this mountain of rules and regulations as incompatible with the goals of a free nation?

Interestingly, and significantly, Tyler Berding in his letter to this Commission on page 93, lists some of the various facets of CIDs ( he describes as them as "hodgepodge entities".) Only at the very end does he list them as "people’s homes". I believe it is seriously unacceptable to place last on the list that CIDs are people’s homes. Before and above anything else, we are dealing with people’s homes. It is the profound failure to recognize and appreciate this simple but compelling fact that lies at the heart of the deeply flawed legal structure that strangles CIDs.

2. The second fundamental fact about CIDs is that people did not ask for CIDs. CIDs were foisted on them. They were presented with glowing images until they bought the home, and then they were handed the heavy tome of rules, regulations and restrictions.

It has been argued that as over 40 million Americans currently live in homeowner associations, they must have wanted them. The fallacy of this argument is clearly seen in the following analogy. Nobody wants to buy a smog producing car, but if that is all you are offered, you have no choice.

Susan French in her article THE CONSTITUTION OF A PRIVATE RESIDENTIAL GOVERNMENT SHOULD INCLUDE A BILL OF RIGHTS (27 Wake Forest L. Rev. 345) states:

"Increasingly, Americans have been willing to give up some degree of freedom to secure the advantages of ownership in common interest communities."

Ms. French provides no empirical data for this claim. My interviews with homeowners lead me to conclude that purchasers of CID homes primarily and predominantly focus on the house, and simply accept the rest as an adjunct which they cannot avoid, because there are few, if any, alternative non-CID houses.

In parts of this state, - for example, south Orange County - over 80% of homes are in homeowner associations. In San Clemente, as Cara Black in her letter to this Commission points out, over 5,500 new homes are being built and all are in homeowner associations (p.47). The hard reality is that today most home buyers cannot literally buy anything which is not in an association.

Hence, if government is going to impose a legislative scheme on association homeowners, it has a solemn obligation to ensure that it is completely and unequivocally for the benefit of these homeowners. The interests of vendors – lawyers, management companies, accountants etc. – can never be considered when the interests of homeowners are at stake.

This has not been the history of legislation in this state. In fact, the opposite has been the case. Time and time again, homeowners have unearthed the existence of powerful economic forces behind anti-homeowner legislation. In fact, this disease is prevalent throughout the entire system. When I served on the Homeowner Association Task Force for the Department of Real Estate – and I was the only non-industry representative on it – I repeatedly pointed out that the CC&R’s of an association should be provided to a potential purchaser at the beginning of escrow, not a few seconds before closing. The Department of Real Estate – whose mandate is consumer protection – refused to enact this provision on the grounds "that it would hurt sales".

In light of the above, this Commission faces a profound, painful and crucial choice. Should it determine that CIDs are a legislative Frankenstein of Orwellian proportions for which the only remedy is abolition? Cosmetic tinkering may improve their face, but does not fundamentally change their heart.

This is a choice that cannot be lightly dismissed. Of course, the transition to a non-CID state, especially for associations consisting only of single family homes (condominiums may require modified treatment) will not be easy, but it is possible, and the proclamation of individual liberty may send a powerful message to all citizens that our society is serious about freedom, and not just pay it lip service and knife it in the back. As California prides itself on being on the cutting edge, other states may re-think their own legislative schemes. This decision, of course, is not a light one to make.

In the event that the Commission chooses to take a middle of the road position (remembering that when you travel in the middle of the road, you can be hit by cars coming in both directions), I would like to address specific recommendations.

C. SPECIFIC CONSIDERATIONS:

As other letter writers have made abundant suggestions for the welfare and protection of homeowners with which I agree, I do not wish to cover the same ground, but in the interests of the economy of time to focus on other key issues.

1. Ms. French in her background study suggests that consideration be given to the

" - - extension of law to developments where lots or units are subject to an obligation to fund enforcement of CC&R’s even if there is no common area" (Memo. Page 6.)

This type of idea is fundamentally at odds with both the letter and spirit of the constitution. It is a taking of property pure and simple. Owners are entitled to settled expectations when they purchase a property. Retroactive applications of new laws which alter property rights is one of those pernicious laws which raise the ire of citizens. As the CAI lawsuit industry wants to extend CIDs to every piece of property in the land, homeowners wonder whether Ms. French is in reality a CAI spokesperson. If 100% of the affected property owners voted for it, it would be a different matter, but forced CIDization is unconstitutional and unethical.

In Corona del Mar ( Newport Beach-California) an eighty two year old homeowner has spent years and over $35,000 trying to stop CAI attorney, Richard Fiori, from forcing his association under the Davis Stirling act. Many homeowners, who have lived there for many years, fought the forced CIDization and claim the court ruled in their favor, however, amended CCRs , possibly invalid ones are being given to new buyers. The latter gives the pro-Davis-Stirling board members the power they need to bring about CIDization.

Two industry lawyers (Glenn Youngling, p. 48, and Curtis Sproul, p.91) advocate that when a majority of owners in a non-CID development wish to come under Davis Stirling, they should be allowed to compel everybody to do so. This is ironic and interesting, because it was CAI lawyers who convinced the California legislature to require a 100% vote to disband a CID association. Once again, the clear bias of industry interests is at work.

2. The fiction that CIDs are private contracts should be finally laid to rest in any new legislative scheme. For years, the CID industry has shuttled back and forth when it suits them between the claim that CID’s are private contracts and therefore government should not intervene, and then, with no compunction, the same industry lobbies its favorite legislators to pass laws which benefit them. When I joined my association in 1983, the CC&R’s stated that assessments could not be raised by more than 5% a year. Before I knew it, CAI lobbyists got a law passed raising the limit to 20%.

Any new legislation should unequivocally state that associations are a form of government, and that they are subject to the appropriate government codes, for example, the election code. This is imperative for the protection of homeowners. In my association, the CC&R’s clearly require that elections be conducted by secret ballot. They never have been. At the last election, I raised the same objection, and a member of the board – a judge no less – contemptuously waved his hand.

3. Over the years in California, CID industry lobbyists have got the legislature to require associations to purchase large amounts of insurance – including D&O insurance for board members. This has turned into a double-edged sword for homeowners.

a. One insurance company, Chubb Insurance, has gained a national monopoly on this market, approximately 80%. They have done so by promising to defend board members no matter what, and by bribing them with $100,000 in A & D insurance for $100 a year. Furthermore, Chubb has changed management companies into their sales agent as they promise to cover the management company for a nominal extra sum, - paid for by the association members. Hence, members are paying to defend the management company even when the management company is doing wrong against the very same homeowners.

b. Board members are now protected by the insurance equivalent of the missile defense shield. If a homeowner sues the board, the board simply calls Chubb. The board can sit back while a squadron of highly paid industry defense lawyers go on a savage attack against the homeowner. Such is legal heaven.

Once again, a person’s home becomes a pawn in the clutch of powerful economic interests. But a citizen does not buy a home in the expectation of getting a lawsuit. Revised legislation should require that insurance companies in the CID context owe a fiduciary duty to homeowners as well. Homeowners pay the premiums, and this is not a commercial context. Contrary to some assertions in the letters presented to this Commission, CIDs are not primarily businesses. They are places where people live, play and raise their families. Consideration should also be given to requiring insurance companies to offer homeowners insurance coverage for suits against them by the association.

4. Regulatory Oversight. CID’s are now so massive, so invasive of a citizen’s right to privacy, so caught up in an incredibly tangled web of laws, rules and regulations, that the citizen is essentially helpless in the midst of these superstructures. Homeowners urgently need the protection of a government agency which is truly dedicated to their protection.

The Department of Real Estate is definitely not the agency to accomplish this task. Its appointed officials are all from the real estate industry, and over the years, they have demonstrated a clear bias for that industry. The appointed DRE commissioners in the past 15 years have lobbied legislators against proposed legislation that would have extended protections to homeowners.

Homeowners strongly prefer a separate elected agency that focuses on the unique needs of homeowner associations. It should be funded by a small charge on each homeowner. It needs a forceful dispute resolution department with the regulatory power to nip abuses in the bud and keep errant boards in line. If there is an advisory board, homeowners should be in the clear majority. Florida has a special agency for homeowner associations. While I do not know how it is functioning in any great detail, I have heard generally positive reports.

5. Boards of directors should not have the power to fine homeowners. They cannot equitably be prosecutor, judge, jury and executioner. There should be independent mechanisms to accomplish this. Homeowners should also be able to use these independent mechanisms when board members and vendors violate the CC&R’s in specified circumstances. Appropriate fines for board members and vendors such as lawyers and management companies will be a powerful incentive for them not to overstep their bounds.

Lawyers and management companies quite often become politically involved. For example, the CAI law firm of Peters and Freedman actively sought the ouster of a director when that director questioned some of the activities of fellow board members. Richard Fiori, another CAI attorney, did the same in another association. Management companies have been known to run out the door with a ballot box when the election tally was questioned. There should be a complete ban on all such activity, and stiff penalties levied when it does happen.

As the granting of immunity breeds corruption, immunities should not be allowed for board members. It has been argued that this will discourage homeowners from running for the board. No empirical data has been presented to support this argument. On the contrary, there are many documented instances where a board clique moves mountains to prevent homeowners who challenge their running of the board, from being elected. It is probably more true to say that the absence of immunity will not deter those of good conscience, but will deter those of a different conscience. If so, that is a desirable result. The law should always err on the side of openness and accountability. It is cockroaches that like the dark.

6. As the CC&R’s represent a restraint on property, and as the settled law of this country is that such restraints have to be strictly interpreted, failure by the association to follow its own required procedures in this regard should mean that the homeowner is freed of those restraints. The scales have to be tipped in favor of freedom, and those who seek to restrain part of that freedom must be held to the rigorous obligation of complying with all applicable procedures. For example, if the association is required to have a certain number of people on its architectural review committee and the association fails to do so, then a homeowner should not be under any compulsion to submit plans.

7. Associations should not be allowed to foreclose on homes for unpaid assessments any earlier than counties can for unpaid taxes. The vast majority of homeowners dutifully pay their assessments, and only a very, very small percentage are dead beats. However, every homeowner is subject to the vicissitudes of life – sickness, loss of employment, a catastrophe. They should not have the trauma of losing their home within 90 days as well. Because an association, especially a small one, may not have the same financial clout as a county to withstand loss of revenue for a lengthy period, small claims actions should be open to them. An association should have the legal right to exercise compassion in appropriate circumstances. Express foreclosures for unpaid assessments are cash registers for CAI lawyers. One bragged in an L.A. Times article that he handled 250 foreclosures a month.

Mr. Sproul currently finds himself in a position of attempting to foreclose on a man on the basis of a law which he himself helped to write. The man is fighting for his life. He has had 30 pints of blood transfusions in the past 2 months. The man owns a simple cabin and would be homeless if it were foreclosed on. He has not been able to pay about $1,400 in back assessments. Fortunately, at the urging of many homeowners from around the state, Mr. Sproul said recently that the foreclosure would be stayed pending a resolution.

8. There should be caps on attorney fees. Association lawyers mushroom legal fees over the most trivial of matters. All disputes should go through a rigorous alternate process. With wisdom and fairness as a guide, most disputes can be resolved without resort to all out war.

9. As part of their contracts with service personnel, especially lawyers, associations should require them to agree that they will not make any campaign contribution to any legislator if they are lobbying for a particular bill dealing with CIDs. The contract should specify that violators will be required to pay the association an amount double of the campaign contribution.

In California, the bribing of politicians is blatant. Of course, it is called a campaign contribution, but in reality, everybody knows what goes on. Recently, homeowner advocates were puzzled when a legislator reneged on a promise to introduce a pro-homeowner bill, and instead said that she were contemplating a bill for a pro-industry source. The puzzle was solved when it was discovered that the industry source had made a campaign contribution to the legislator.

Politicians have sold out the rights of California homeowners to the CID industry. The Davis Stirling act is largely a product of the CID industry. The only effective way to eliminate this sell-out is to eliminate the payments. Homeowners have consistently resisted the urging by many that they hire a lobbyist in Sacramento. Homeowners believe in democracy, not lobbyocracy. They believe that they have already paid for lobbyists – the representatives whom they elect and whose salary they pay. They do not believe that they should pay twice.

Homeowners are incessantly dismayed at the level of control that the CID industry has achieved at all levels of government in Sacramento. The "Davis" of Davis Stirling Act is Governor Gray Davis. His current housing consultant is former assembly woman, Julie Bornstein. She was the author of a CAI sponsored bill, AB 1545, which sought to place homeowner association assessment liens even before first trust deed liens. Homeowners successfully fought that bill, but they shuddered at the temerity and audacity which lay behind its introduction.

Homeowners on the political level have felt that their pleas have generally fallen on deaf and unsympathetic ears. In one case, it was tragic. Jim Trautman, homeowner and board member in the Loma Vista homeowner association located in San Juan Capistrano, approached then assemblyman, Bill Morrow, for help in fighting corruption and the illegal use of homeowner money. He received no help, and as the hounding by the other board members reached fever pitch – he was being sued by them right, left and center – he cracked one day and committed suicide. I knew him as a person who had a simple, deep-seated love of his country and the freedom for which he believed it stood. He could not fathom how an American’s home could have become the prisoner of venal special interests. We hope that his faith and belief in his country will not be wasted on the desert air.

10. If any legislative scheme is enacted for CIDs, it has above anything else to embody an ironclad Bill of Rights to protect homeowners. This Bill of Rights has to go far beyond the minimum proposal of Susan French in her above referenced article. Homeowners need to be protected from the arbitrary and malicious exercise of power by power-hungry boards. They need to have the ability to quickly and decisively bring deviant boards into line. They need to be able to live the American dream of freedom, peace and security. The official website of the American Homeowners Resource Center (www.ahrc.com) lists many suggestions from homeowners around the country.

11. Finally, but not least, serious consideration has to be given to providing reparations to those homeowners who have lost homes and life savings because of the unjust application of CID laws. Losing a home under any circumstances is a wrenching experience. Losing it unjustly is one of the most profound blows to the human spirit. This Commission can be provided with witnesses who have gone through that.

D. CONCLUSION

The above suggestions are not intended to be exhaustive, but to hit some of the highlights. In a way, they also highlight one of the fundamental dilemmas of CIDs. As a free society, we should live with a minimum of restrictions. In order to defend homeowners in CIDs however, it seems necessary to erect a complex regulatory scheme. These two goals seem to be contradictory.

In addition, considerable time, energy, effort and money is being spent to handle CIDs. This hearing is an example of how taxpayer money is being used because of CIDs. As Mr. Sterling anticipates that the entire process may take several years, the taxpayer bill mounts. The many efforts to pass legislation on CIDs consumes further resources.

CIDs are thus an expensive proposition to society at large. As the prospect of finding a satisfactory legislative solution is not very bright, this raises further questions about the validity of CIDs.

In 1990, the California Assembly appointed a Select Committee on Common Interest Developments. In its final report, it quoted Richard Louv, America II:

"Sometime during this decade, the shelter revolution will be complete. It will have happened quietly. No shot will have been fired, but the American notions of private property, privacy, local government – and that part of the American dream symbolized by the single-family suburban home – will have been permanently altered."

The Report goes on to state:

"The "shelter revolution" refers to the rapid proliferation of common interest developments (CIDs) and the implications for the ways in which people house and conduct themselves at the neighborhood level. These private, quasi-democratic governments wield the kind of control over people’s personal lives and tastes heretofore unknown in California or the nation. The danger is that current problems will escalate, that homeowners will throw up their hands in frustration at their inability or unwillingness to cope with the imposed behavioral, financial and social responsibilities of community associations, and that CIDs will become little more than failed ghost towns." (pages 2 – 3)

That decade has come and gone, and contrary to prediction, shots were fired and 3 people were killed in Arizona allegedly by a homeowner who had had enough from his association. More shots were fired in Michigan.

The problems which the Report identified have not been solved – if anything, they have been made significantly worse. This should be a sobering reality for this Commission.

A nation defines itself in significant part in the way that it addresses its housing and the value that it gives to the sanctity of its homes. Many third world countries may have more freedom in their homes than do Americans who live in homeowner associations. As one such person said to me recently, "In my country, your home is your home and nobody tells you what to do. I cannot understand what you are doing in America."

These words should haunt everybody who engages in this legislative task. If wisdom does not inform these deliberations, the consequences could be monumental.

Thank you for your attention.