The ever-growing legal fees take on a life of their own and drains home equity directly into coffers of HOA law firms

September 01, 2000

By Wendy K. Laubach
Copyright ahrc.com

I recently handled a pro bono case in which a homeowner lost his homestead to foreclosure over $600 in HOA dues and more than $4,600 in legal fees to collect them. The homeowner managed to pay the dues but collapsed under the strain of attempting to pay the ever-growing legal fees, which took on a life of their own.

Description of Case.

The homeowner lives with his wife and two young children in a house in Southwood Place near Fondren and W. Bellfort, not to be confused with the more prosperous Southside Place subdivision inside the Loop.

In 1995, the homeowner underwent extensive treatment and recuperation for a brain tumor. When he returned to his home in June 1995 after many months of absence, he found a three-month-old lawsuit nailed to his door.

The HOA had sued him for almost $600 in dues and a complaint about his house needing paint. The friend he had asked to pay his bills while he was sick and absent had tried to pay the dues, but the friend sent the check to an outdated management company address. Residents on his block say they never got notice of the change to the new management company.

The old company neither forwarded nor returned the check, so it was not until the homeowner found the lawsuit that he discovered the mistake. By then several hundred dollars in legal fees had been run up by the HOA.

The homeowner met with the HOA board and its management company the next month, in July 1995. He explained his financial and medical situation -- which they were unaware of, not having attempted to talk to any of his neighbors about why he wasn't responding to letters. He agreed to pay the dues over time at $40/month. He also managed to get his house painted in September 1995, and that has not been a recurring source of controversy. Nevertheless, here is where the process went most horribly wrong.

In July 1995, when the HOA accepted his offer to bring the dues current over time, the homeowner asked that the HOA waive the legal fees accrued to date.

The HOA refused, and instead instructed its lawyers to keep the lawsuit going fees. The homeowner, who was employed off and on while recovering from his illness, represented himself pro se with the occasional help of pro bono lawyers. The HOA took depositions (despite the absence of controversy over the amount of dues owing) and file not just one but two motions for summary judgment, both of which were denied and therefore failed to advance the case or benefit anyone - but all these actions ran up considerable legal fees.

Consequently, when the homeowners finished paying the $600 in dues at $40/month, the HOA insisted that he still owed much more in legal. The HOA demanded $700 in fees as a compromise; the homeowner tried to persuade them to accept $300. During this stalemate, fees continued to accrue.


In 1998, after the case had landed on three different judges' benches and had been dismissed once but reopened, the matter went to trial. Unable to afford legal counsel, the homeowner attempted to represent himself, with disastrous consequences. The HOA obtained a judgment for $3,000 in legal fees from a visiting judge who was encountering the case for the first time. The $3,000 judgment was, of course, secured by the homestead.

The homeowner then began trying to pay off the $3,000 judgment. He paid $1,500 on one occasion to avert foreclosure, but the attempted foreclosure itself caused more fees to accrue. He paid $800 on another occasion to avert another threatened foreclosure, but again additional fees accrued in connection with the foreclosure attempt. Finally, on August 1, 2000, the

HOA made good its threat to foreclose on the remaining balance: $2,300, that being the balance of the original $3,000, minus $2,300 paid, plus $1,600 in additional interest and legal fees accrued. The house, whose market value according to HCAD is $55,000, with a paid-off mortgage and no other liens on it, was sold at foreclosure for $17,000 while the homeowner was sitting in the HOA's lawyer's office on the phone with the management company still trying to work out a deal to pay the fees over time.

I learned of the case and took it on the next day. Under the pressure of the prospect of awful publicity, and a crisis of conscience, the HOA agreed to join me in a motion to set aside the foreclosure sale on the ground of the last-minute failure of communication over whether there was a deal to avert the foreclosure. So the homeowner got his house back, but he still had to pay the $2,300 in legal fees that the HOA was foreclosing over -which means he paid a total of $4,600 in connection with $600 in delinquent dues resulting from serious illness.

At least he didn't have to pay for the additional $718 in foreclosure costs, as he would have done if the last-minute deal had been truly struck. And at least he didn1t lose his home equity, because he was lucky enough to find pro bono counsel just in time. Not many homeowners would be this lucky.

What Went Wrong

The Fees Were Out of Proportion to the Problem or the Possible Benefit to Be Achieved. I believe this case highlights the need to ensure that legal fees secured by a homestead not be disproportionate to the amount an HOA is suing to collect. The original $600 in late dues resulted in the homeowner's having to pay $4,600 in legal fees.

This was not a case of a homeowner brazenly refusing to pay dues and daring the HOA to take him to court. It was a case of a man struggling with overwhelming medical and financial problems who was trying to pay his obligations over time, who paid the underlying dues in full, but who could not keep pace with the legal fees that continued to accrue.

I think we have to ask ourselves: what essential services was the HOA providing that this kind of result should be tolerated as its cost?

Southwood Place has a community swimming pool but no other obligations to provide essential services; it gets its utilities, police,
and fire protection from the City of Houston. How did this neighborhood benefit from the HOA's decision to run up the huge fees in this case?

Is it so important to make an example of this homeowner for the in terrorem effect on other homeowners who might get behind in their dues? Should HOA counsel be allowed to run up legal fees on its own legal fees, without limit, long after the underlying dues have been paid? Isn't this just a mechanism for draining home equity directly into the coffers of a law firm that specializes in HOA work?

The Important Protection of Homesteads in Texas Is Being Eroded. We jealously guard homestead rights in Texas. You can't lose your homestead even to pay a million-dollar wrongful-death judgment.

Why should an HOA have been given this special status without an amendment to the Texas Constitution? It took a constitutional amendment to permit homeowners to enter into voluntary home-equity loans secured by second liens, and the required disclosure protections are impressive.

Most Texas voters don't even seem to realize that HOA's have the power to foreclose on their homesteads. Many won't believe it when told. Something went wrong in the lobbying process here.

Proposed Solutions

Limit Attorney's Fees Secured by the Homestead. So what's to be done?

An HOA's legal fees shouldn't be secured by home equity in the first place. If that part of the law can't be changed, then the fees should be limited by statute so that they can't exceed some fraction of the amount in dispute - at most, 100% of the amount, and even 100% seems a lot. The response, of course, is that an HOA may not be able to afford to hire a lawyer for $600 to chase $600 in dues. Maybe the answer to that is that a rational HOA that was spending its own money WOULDN'T spend $600 in fees to chase $600 in dues.

So why should it get to spend someone else's money that irrationally? Also, remember that the homeowner is in the same bind. He can't defend himself in a matter involving $600 because it costs too much to hire a lawyer -- and besides, he'll end up having to pay the HOA lawyer to boot.

Mandate Mediation.

Some people favor mandatory mediation as a precondition to legal process. Representative Scott Hochberg wrote me: "I . . . would
put mediation clauses in every deed restriction that I was writing, but I have been generally unsuccessful in getting HOAs to listen to my recommendation to do so, since their attorneys recommend against it . . . ."


Of course their lawyers recommend against it. They want the strongest possible enforcement powers with the greatest possibility of shifting the burden of legal fees back onto the homeowner's equity. Otherwise, it would be more difficult for them to persuade HOA's to hire them to do all this expensive legal work. The fact is, though, that the HOA shouldn't be relying on the lawyers for this expensive hourly work.

The HOA should be trying to resolve the disputes informally without running up such high fees, particularly when small amounts are in dispute. I think mediation would be better than nothing, at least if the HOA were prohibited from bringing its lawyers to mediation and charging the homeowner's equity with the legal cost. Pre-mediation would have gone a long way to fixing my client1s problem, I think, back before it got out of hand.

Mandate Use of JP Court.

Scott Hochberg also e-mailed me:

"I've continued to work for a balance on this - for example, by giving JP courts jurisdiction to supervise mediation on deed restriction issues, I had hoped to cut court costs and encourage resolution, and it works where HOAs and their attorneys choose to use the option.

Unfortunately, some attorneys discourage HOAs from doing so, and also discourage HOAs from including ADR clauses in their restrictions. Perhaps we should require ADR [alternative dispute resolution]. . . . It seems to me that many HOAs enforce to the max because of a fear that they will lose their right to enforce at all if they don't. While the courts will certainly not uphold selective enforcement, perhaps there is a way to carve out some discretion that would survive future challenges."

The Southwood Place HOA's lawyer, responding to this message, explained,

"Many years ago (before the Inwood North case [Texas Supreme Court 1988 case upholding foreclosure rights of HOA's]) our clients used to go through JP court to obtain judgements against delinquent homeowners. As I mentioned on the phone during our telephone conversation, however, the associations could paper their walls with the judgements because most homeowners were exempt from levy. Many associations literally were bankrupt due to their inability to collect from homeowners, hence the subdivisions that had their street lights turned off and pools closed."

My answer is this:

Discussions about HOA's always bog down on this point. How do you get effective enforcement powers that are not unreasonably
dangerous? The assumption seems to be that if the HOA doesn't have foreclosure power, it can't generate enough revenues to function, and it can't make people take seriously its threats to enforce deed restrictions.

The assumption also is that the HOA is achieving something irreplaceable that can't be achieved by other means, and that its achievements are so valuable that they outweigh the cost of the steadily mounting list of cases of abuse. I question these assumptions.

Yes, if HOA's foreclosure powers are curtailed they will have a somewhat more difficult time enforcing their will. That will not always be a bad thing. There are other ways of enforcing deed restrictions.

Neighborhoods have access to help through the City's deed restriction department. That's a great service the City provides. Even that service is open to abuse, viz. the Meadowbrook problem that developed recently, where a SE Houston community tried to prevent the City enforcement arm from shutting down businesses that were supported by the community, in ostensible reliance on that community's own deed restrictions. But at least when abuse happens in a City department you may have some means of fixing it, some well-established procedural rights.

I view HOA's as a privatization of a government function, but not a good form of privatization. The protections and controls that should come along with the pseudo-governmental powers didn't get privatized along with the powers. It's taxation without governmental accountability.

It was a great idea to allow deed restriction disputes to be heard in JPcourt. That allows voluntary civic clubs to enforce violations in an affordable forum without resorting to lawyers or forming an HOA in
desperation. The ability of ordinary citizen/residents and voluntary clubs to use JP court in these matters is one reason it's not so critical to ensure that HOA's have bullet-proof enforcement powers. But if HOA's are required to use JP court, they won't use it -- precisely because they can't attack a homestead via that route.

But again, why should be be able toattack the homestead? All other creditors take their chances on collection without having access to the homestead. Why shouldn1t HOA's, like other creditors (your credit card company, for example), be limited to other assets, such as bank accounts?

Right of Redemption. Counsel for the HOA in my pro bono case said that he favors allowing a right of redemption in these cases. Scott Hochberg also favors that approach. A right of redemption does a lot to protect a homeowner against the inevitable danger that the house will be bought at foreclosure for a song (as in this case). However, it still requires him to come up with the unreasonably high legal fees in cash in order to redeem his house. So it addresses part but not all of the problem.

Neighborhood Ratification.

Perhaps any decision to sue or foreclose on a homeowner should require ratification by neighborhood vote after disclosure of the circumstances. Would the neighborhood have voted to victimize a man in my client's circumstances back in 1995? Or would it have voted to waive the legal fees accrued to that date (which, bear in mind, at that time consisted of the cost of prosecuting a lawsuit they hadn't even yet properly served on the homeowner). This HOA didn't even know he was ill when it sued him. It didn't know anything about him. It didn't check with his neighbors to see what the situation was. Why not?

I asked, how could you sue him without even finding out why he wasn't returning your letters? Why didn't you know he was in the hospital? Their answer was, how could we possibly be expected to take the time the effort necessary to inform ourselves of the condition of all of our neighbors? Three-quarters of the residents of thisHOA don't respond to their mail.

Well, then, I say something's really wrong. If the answer is"too much trouble and not enough time," this is not a community-oriented organization that should be given so much power. If a community organization is worth protecting, preserving, and buttressing with extraordinary legal powers, it should be of the sort that identifies and helps people in my client1s circumstances, not puts guns to their heads.

If it doesn't, no amount of unproven "protection of property values" can justify its tactics.