Federal Courts Apply "Fair Debt Collection Practices Act" to Homeowners’ Associations

The following cases may be of use to homeowners seeking to defend themselves from unfair practices used in connection with the collection of HOA dues. This is a preliminary summary of cases provided to me by a third party. I have not attempted to conduct independent research to determine what other cases have been decided on this subject, nor have I yet checked to see whether any of these cases has been reversed, questioned, or modified. Please consider this a beginning point of research.

Thies v. Wyman, 969 F. Supp. 604 (S.D. Calf. 1997): The HOA was obligated by covenant to improve and maintain common areas within the development. When it failed to do so, the homeowners withheld dues for two months. In August 1996, they resumed payment. In September 1996, they also paid the dues previously withheld, together with a late fee ($176). The HOA’s law firm notified them by letter that they owed $186 plus legal fees of $30, and threatened to record a lien against their home. In October 1996, the homeowners paid that month’s dues plus a late charge. That same month, the HOA’s law firm returned the September 1996 check for $176 on the ground that it was not payment in full. For the next five months, the homeowners continued to send checks for the amount due, less attorneys’ fees, and the HOA law firm continued to return them. The HOA then obtained a default judgment against the homeowners in state court for $1,314.88. In response, the homeowners sued the HOA in federal court under the Fair Debt Collection Practices Act, 15 U.S.C. section 1691 et seq. ("FDCPA"), seeking damages and attorneys’ fees. The HOA sought to dismiss on the ground that HOA dues are not "consumer debt" arising out of a "transaction" under the FDCPA. Held: in the Ninth Circuit, FDCPA "debt" is not limited to credit extensions. (The court acknowledged possibly contrary authority in Zimmerman v. H.B.O. Affiliate Group, 834 F.2d 1153 (3d Cir. 1987) (tort liability to pay for pirated cable signal is not consumer debt).) Also held: because the services provided by the HOA in exchange for dues are primarily for personal, family, or household purposes, the HOA dues constitute "consumer debt." The court found unpersuasive all of the following precedents: (1) A Virginia court ruled that an assessment for maintenance of a private road did not create consumer debt (Nance v. Petty, Livingston, Dawson & Devening, 881 F. Supp. 223, 225 (W.D. Va. 1994)); (2) a Florida court found that condominium fees were not consumer debt since there was no evidence of exchange for value (Azar v. Hayter, 874 F. Supp. 1314, 1318 (N.D. Fla.), aff’d, 55 F.3d 342 (11th Cir. 1995) (analogizing to per capita taxes that finance governmental functions that only secondarily benefit individual residents)); and (3) an Illinois court found that condominium fees are not consumer debt because they provide communal goods and services with only an indirect benefit to the individual, Riter v. Moss & Bloomberg, Ltd., 932 F. Supp. 210, 211 (N.D. Ill. 1996)). The court noted that Riter had been overturned by the Seventh Circuit in Newman v. Boehm, Pearlstein & Bright, Ltd., 119 F.3d 477 (7th Cir. 1997) (past-due condominium fees are a debt under the FDCPA because assessments used to improve or maintain commonly-owned areas qualify as personal, family, or household uses and confer a direct benefit on residents). The court held that the fact that many households may use or benefit from a common area does not logically diminish the primary nature of the service. The court analogized to a consumer debt owed to a health club, whose facilities are jointly used by many.

Newman v. Boehm, Pearlstein & Bright, Ltd., 119 F.3d 477 (7th Cir. 1997) (past-due condominium fees are a debt under the FDCPA because assessments used to improve or maintain commonly-owned areas qualify as personal, family, or household uses and confer a direct benefit on residents). Community Associations Institute ("CAI") filed an unsuccessful amicus curiae brief via counsel from Chicago, Denver, and Braintree, Massachusetts, arguing that the FDCPA should not be applied to HOA’s. In 1996, homeowner and condominium owners filed two separate FDPCA actions in the Northern District of Illinois against two law firms representing two HOA’s. The suit complained of technical violations in connection with the collection of HOA assessments in the amount of between $400 and $500 each, including the following: (1) the HOA’s failed to include in their collection letters the "validation notice" required by section 1692g of the FDCPA, (2) the letters did not expressly disclose that the law firms were attempting to collect a debt and that any information obtained would be used for that purpose, as required by section 1692e(11), and (3) one of the law firms falsely implied that legal proceedings on the alleged debt had already been initiated. The homeowners sought damages and attorneys’ fees and asked to be appointed as class representatives. The law firms sought dismissal of the action on the ground that the assessments were not "debt" under the FDCPA. The law firms particularly relied on the argument that a "debt" for this statutory purpose requires an extension of credit, which is not present in the case of an HOA, because the dues typically are paid before the services are provided. However, in Bass v. Stolper, Kiritzinsky, Brewster & Neider, S.C., 111 F.2d 1322, 1326 (7th Cir. 1997), the Seventh Circuit ruled that FDCPA debt need not involve an extension of credit. All that is required is a transaction creating an obligation to pay (e.g., a dishonored check). The court held that the purchase of the homes was the underlying "transaction," even if the precise amount and timing of future dues had not yet been determined. The court also held that the subject of the transaction, as well as the intended use of the dues, satisfied the "personal, family, or household purpose" requirement, even if the dues were used to improve or maintain commonly-owned areas and more than a single household stood to benefit. The HOA’s argued that the dues were more like taxes, which are not considered "debts" under the FDCPA because they generally are used for communal rather than personal, family, or household purposes. The court held, however, that the dues here had a more specific household purpose than taxes collected by a governmental entity because they served to improve and maintain commonly-owned areas used by each unit owner.

Newman v. Boehm, Pearlstein & Bright, Ltd., 2000 LEXIS 14470 (7th Cir., September 27, 2000): on remand, the class was certified and the court awarded most of the $200,000 in attorneys’ fees and expenses sought by class counsel in pursuing the FDCPA action. The HOA law firms attacked the amount of legal fees on a number of grounds that may be helpful in litigating cases where HOA’s seek to recover their own fees from homeowners, such as that the fees were allegedly duplicative, excessive, and unnecessary.

Ladick v. Gemert, 146 F.3d 1205 (10th Cir. 1998): A homeowner sued an HOA law firm over demand letters for condominium fees that allegedly failed to include the "validation notice" required by section 1692g of the FDCPA, and failed to disclose that the law firms were attempting to collect a debt and that any information obtained would be used for that purpose, as required by section 1692e(11). The law firm argued that the condo fee was more like a tax than a debt, because the HOA was similar to a municipality. The court noted that in Snow v. Riddle, 143 F.2d 1350 (10th Cir. 1998), the Tenth Circuit had followed the Seventh Circuit and several other courts in ruling that FDCPA debt did not require an extension of credit. (See also Duffy v. Landberg, 133 F.3d 1120, 1123-24 (8th Cir. 1998); Charles v. Lundgren & Assoc., P.C., 119 F.3d 739, 742 (9th Cir. 1997); Brown v. Budget Rent-A-Car Sys., Inc., 119 F.3d 922, 924 (11th Cir. 1997).) The court also held that the dues arose out of a "transaction," rejecting the HOA’s argument that the homeowner’s condo purchase agreement was a transaction or agreement with the previous homeowner rather than with the HOA itself. Following the Seventh Circuit’s reasoning in Newman and the Virginia district court’s reasoning in Thies, the court held that the obligation to pay condo assessments arises in connection with the purpose of the condo itself. The court also followed the reasoning of Newman and Thies in concluding that the assessment has a primarily personal, family, or household purpose despite its communal aspects.

Taylor v. Mount Oak Manor Homeowners Association, Inc., 11 F. Supp. 2d 753 (D. Md. 1998): An HOA assessed quarterly fees for services including snow removal and common area maintenance. After the HOA’s law firm sought to collect past-due assessments, the homeowners filed suit under the FDCPA on specific grounds not described in the decision. The court distinguished the reasoning of a case holding that child support payments do not qualify as debts under the FDCPA because the underlying obligation was not incurred to receive consumer goods or services. The court rejected the reasoning of Nance and Azer (see above) and instead adopted the reasoning of Bass and Newman (see above) in holding that a "credit transaction" was not required in order to trigger the FDCPA. The court then remanded for further discovery to determine whether the law firm acted as a debt collector for the HOA, and left open the possibility that the HOA could be liable for the law firm’s actions because it knew or should have know that its tactics were illegal.

Davis Lake Community Association, Inc. v. Feldmann, 530 S.E.2d 865 (N.C. Ct. App. 2000): Homeowners fell behind in four consecutive quarterly assessments in the amount of approximately $200. When they attempted to tender a check for the full amount, it was returned on the ground that it did not include payment for legal fees. The HOA then filed suit in state court to collection the $200 plus almost $2,400 in legal fees. The homeowners countersued under the FDCPA and a similar North Carolina statute, and sought to join the HOA’s counsel as additional parties. The court ruled that attorneys engaged in debt collection on behalf of their clients are exempt from the state statute. Creditors engaged in collecting their own debts are exempt from the federal statute. However, the state statute applies to creditors engaged in collecting their own debts. The homeowners therefore were allowed to proceed with their claims that the HOA deceived them by intentionally misrepresenting the amount of money needed to satisfy their outstanding obligation, since under North Carolina law attorneys’ fees are limited to 15% of the outstanding debt. The court held that HOA dues are "consumer debt" for the purpose of the statute, and that representing that the homeowners owed more than 15% of the debt in legal fees was a deceptive act. The court also held that one of the HOA’s regular, daily activities was collecting dues and assessments, and the unfair acts were directly connected with these dues-collecting activities; consequently, the debt-collection practices were business activities in or affecting commerce, as required by the statute. The statutory "injury" requirement was met by the allegation that the HOA’s actions injured the homeowners’ credit ratings and inflicted emotional distress. However, the court emphasized that an actions of counsel, even if cloaked in terms of a principal-agent relationship, are exempt. The court did note that North Carolina law requires a demand warning of the imminent charging of attorneys’ fees and giving the debtor five days to pay before the attorneys’ fees are imposed.

Caron v. Maxwell, 48 F. Supp. 2d 932 (D. Ariz. 1999): A homeowner sued under the FDCPA, alleging that the HOA’s lawyer was a debt collector who (1) falsely represented that he would be entitled to collect legal fees under the terms of a judgment obtained by the HOA, (2) threatened to take action that cannot legally be taken, and (3) sent a letter stating that if the homeowner did not respond with ten days, the HOA would exhaust all of its legal remedies against her, including a Sheriff’s execution sale of her personal or real property. The homeowner also sought to hold the HOA vicariously liable for the lawyer’s actions, and included state-law causes of action for intentional infliction of emotional distress. The HOA argued that HOA dues were not "debt" under the FDCPA, because the dues are more like tax obligations that collectively benefit the whole community. Following the reasoning of Newman, Ladick, and Thies, the court rejected this argument. The court also followed Thies in holding that no extension of credit is required. The court rejected the HOA’s argument that no "transaction" occurred because the homeowner acquired the home as a gift from her parents. The court also noted that the client of an attorney working as a debt collector is liable for his lawyer’s violations only if both the attorney and the client are debt collectors. The court held open the possibility that the HOA could be sued under FDCPA if it were found to be a debt collector or to have acted in concert with the lawyer.

I am not a lawyer, these notes are provided for information only. This information was forwarded to me for my information, and I make it available as a courtesy.