Case Alert: Emailed Notices of Foreclosure Under In Re Ackah

This was our response when we first read
the N.C. Court of Appeals' opinion in
the new case of In re Ackah

In re Ackah: Must Planned Communities Now Serve Notices of Foreclosure Hearing Via Email?

The North Carolina Court of Appeals issued an opinion on September 5, 2017, that appears to add an additional requirement for foreclosure trustees regarding the due diligence necessary to properly serve the homeowner in an HOA foreclosure proceeding.  The case, "In re: Ackah," is a Wake County case where he HOA foreclosed on Ms. Ackah’s home and a third-party bidder bought the home at the foreclosure sale.  The lower court held that the foreclosure was invalid because the trustee should have emailed the debtor, and also that the deed to the third-party bidder could be invalidated, returning ownership to Ms. Ackah.

The relevant facts are that Ms. Ackah, the owner of the property, rented the property out when she moved to Africa in 2012.  She provided no notice to the HOA that she had moved or rented the property, although she presented evidence that in the past the property management company had emailed her at various times when it sent out community-wide notices.  There was no evidence that Ms. Ackah ever used the email address to respond to any of the notices.  

Ms. Ackah became delinquent in her HOA assessments in 2014 and a lien was filed.  At various times, the HOA or the trustee mailed letters to the addresses it had for Ms. Ackah’s mother and uncle in South Carolina, where she had had her mail forwarded.  Ms. Ackah’s uncle received the letters, but apparently never informed Ms. Ackah.  When the HOA decided to commence foreclosure proceedings to recover the delinquent assessments, it mailed notice to the property and to Ms. Ackah at her mother’s address and her uncle's address.  Notices were mailed both certified and regular mail, and the evidence was that the uncle, at least, received the mail, but failed to realize its importance or forward it on to Ms. Ackah.

Importantly, the notice of hearing was also posted on the front door of the property by the sheriff’s office, although the tenant failed to inform Ms. Ackah of this.  The law allows a foreclosure notice to be served by posting on the front door if the homeowner does not respond to mailed notices.  No foreclosure notice was ever emailed to Ms. Ackah.  

A foreclosure hearing was held and the property was subsequently sold to a third party bidder, the Joneses.  Ms. Ackah sued to invalidate the foreclosure, arguing that she first learned of the proceeding when her tenants received a notice to vacate the property following the foreclosure sale.  At issue was whether the foreclosure trustee had exercised due diligence when attempting to serve Ms. Ackah with the hearing notice since the HOA had her email address but failed to use it to notify her of the impending foreclosure.

All lawsuits, including foreclosures, must be “served” on the adverse party for the court system to have jurisdiction over the parties and to render a binding judgment.  Without proper service, no lawsuit can move forward, and no judgment rendered is effective upon any party not properly served.  Service is generally effectuated by the sheriff, or by certified or overnight mail with a signature receipt.  Foreclosures can also be served by posting on the property itself if the homeowner does not sign for service via mail or overnight delivery. 

The Court of Appeals reviewed the notice requirements set forth in Section 3-116 of the North Carolina Planned Community Act, and in Rule 4 of the North Carolina Rules of the Civil Procedure, which is the service rule.  The Court stated, without citing any real authority, that Rule 4 requires the exercise of "due diligence" when serving a homeowner with a foreclosure notice, and that since the HOA had Ms. Ackah’s emails address but failed to use it to notify her of the impending foreclosure, the HOA had failed to exercise due diligence before resorting to posting the notice on the property.  Therefore, the posting was ineffective to constitute proper service of the lawsuit, and the foreclosure was deemed to be invalid, at least as it pertained to Ms. Ackah.  

Specifically, the Court stated, “[w]hen the notice letters came back ‘unclaimed,’ Rule 4 due diligence required that the HOA at least attempt to notify Ms. Ackah directly through the email address it had for her rather than simply resorting to posting a notice on the Property.” 

The second part of the opinion dealt with an analysis of what to do about the Joneses, the third party bidder who purchased the home at the foreclosure sale and who had no way of knowing that Ms. Ackah was not properly notified.  There is a state statute which says that a bona fide purchaser (i.e. an innocent buyer without reason to know of any procedural or legal defects) is protected against an invalidation of its purchase at a foreclosure sale. Therefore, the Court ruled that the Joneses could keep the property, and that Ms. Ackah could get financial restitution from the HOA, but could not get the home back.

The takeaway from Ackah is that HOAs, their management companies and their attorneys now (at least until the Supreme Court considers and hopefully overrules this case) have an additional inquiry to make when conducting a foreclosure when attempts to serve a defendant (other than by posting) prove ineffective.  Our advice is that if an HOA or a management company knows of an email address used by an owner, then it needs to be provided to the foreclosing trustee prior to commencement of the foreclosure.  The trustee is obligated to determine whether the notice of hearing must also be sent to the email address.  This necessarily requires that email addresses with owners be kept up-to-date, but this is something that most management companies and HOAs do already. If they don’t, they need to start.  

Some attorneys have stated that the Ackah case appears to require that all communications preceding the foreclosure must also be sent via email, which is creating a lot of angst among management companies and HOAs alike.  Although a court or the legislature may one day require all pre-foreclosure communications to be sent by email, Ackah does not specifically require this and we do not recommend it at this time.  We are of the opinion that Ackah addresses only the trustee’s efforts at the foreclosure stage when mailed or personal service is ineffective, and that its ruling should be limited to that situation only.  

The bottom line:  Many HOA attorneys are distressed at this holding by the Court of Appeals.  In fact, Rule 4 of the North Carolina Rules of the Civil Procedure says nothing about due diligence, except for in one particular subsection, not applicable here, which addresses the rare instance of serving someone by publishing a notice in the newspaper rather than personally or by mail.  The Court completely invents this requirement.  It does cite an earlier 2015 case in which a plaintiff failed to use due diligence in notifying his ex-wife, whom he knew to be in New York City, before “serving” her via publication in Charlotte with a divorce lawsuit.  The case said nothing about email except in passing in a footnote.  Therefore, our opinion is that the case is poorly reasoned and should be strictly limited in its application.  We hope the N.C. Supreme Court will take up the case, which we understand has been further appealed, and will reverse the Court of Appeals’ unfortunate decision.

Unfortunately, Ackah is North Carolina law at this time unless overturned by the Supreme Court or the General Assembly. If an HOA or management company has any sort of email addresses for an owner, it should provide them to the attorney handling the foreclosure.  As foreclosure trustee, if other attempts to serve the owner with the foreclosure fail, the Ackah case requires that notification via email must also be attempted before service by posting can be effective.  Thus, this adds an extra step for the notification process for a trustee when foreclosing on an HOA claim of lien.  This case does not require emails to be used in any other scenario. 

Here's a link to the opinion itself: https://appellate.nccourts.org/opinions/?c=2&pdf=35255

Here's a link to Rule 4 of the North Carolina Rules of Civil Procedure: http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/BySection/Chapter_1A/GS_1A-1,_Rule_4.html

As always, if you have questions regarding this case or other areas of HOA law, please contact us.

Unhappy Property (Manager) Loses in South Carolina

“If you think hiring a professional is expensive, try hiring an amateur.” - Anonymous
In South Carolina, as in most states, there exist various consumer protection and licensing laws, intended to protect the public from the unauthorized practice of law (or “UPL”, as it is often referred).  Of course, only lawyers licensed in the state in question can practice law in that state, but the question sometimes arises as to what actually constitutes “practicing law”. Community Management Group, which manages HOAs in the coastal, lowcountry part of South Carolina in and around Charleston County, was the subject of a recent South Carolina Supreme Court case. CMG was found to be in violation of the UPL laws in the recent case of Rogers Townsend & Thomas v. Peck, et al.
CMG represented its HOA clients in magistrate’s court where it prepared the lawsuit and went to court on behalf of its HOA clients to collect outstanding assessments.  When it obtained a judgment, CMG would then file the judgment with the circuit court, thereby making the judgment a circuit court judgment against the debtor.
Additionally, CMG would prepare and record liens against debtors, and in its own words, intended the lien to “put a cloud on the title”, rendering the property unsaleable until the lien was paid.
Finally, CMG advertised itself as capable of “hand[ling] collections, lien filing and Small Claims Court actions in house.”
The South Carolina Supreme Court determined that all of the foregoing acts by CMG were, in fact, the unauthorized practice of law which required representation by an attorney.  Underlying the court’s ruling is longstanding law that defines the practice of law to include the preparation of court documents, the management of proceedings on behalf of clients before courts, and the preparation and recording of legal instruments.
The court was requested to hold that CMG’s practice of interpreting declarations of restrictive covenants, “addressing disputes” (we are not exactly sure what this phrase means) between HOAs and owners, and advising HOAs on remedies to collect unpaid assessments, also constituted the unauthorized practice of law.  The court declined to opine as to whether these acts were UPL because it had no specific evidence in front of it.
The case is not groundbreaking, but it is a stark reminder that the courts in South Carolina, and in most other states, strictly regulate what is, and is not, the practice law within the state and those who exceed the bounds are asking for trouble.  When in doubt, it’s best to leave court filings and, always, court appearances, to licensed attorneys. To read the case, click here.

Please give us a call or drop us an email if our HOA law team can assist your HOA or management company with manager loses, or if we can be of assistance in any other way regarding legal issues facing your community. Please be aware that we represent HOAs only – we do not represent homeowners in disputes against their HOAs. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Video: Pool Rules - How to Do it Right

Pool season is here! Watch this short video with  Moretz & Skufca HOA Ninja Chris Gelwicks and Key Community Management's Cyndi Sullivan for all you need to know about instituting proper rules and regulations for your homeowners association's or condominium's pool: Pool Rules: What You Need to Know

How to Handle HOA/Condo Board Member Resignations

By Chris Gelwicks, Esq.

From time to time we receive questions regarding the resignation of directors, term expiration and what to do in the event of a mass resignation by the existing board.  The North Carolina Planning Community Act, Condominium Act, and the Non-Profit Corporation Act address certain issues with regard to directors’ terms and how to fill vacancies.  Generally, the remaining board members appoint a replacement to serve out a resigning director’s term. But what happens when directors resign and do not appoint their successors, or when there are not enough remaining directors left to appoint replacements? 

Section 55A-08-05(d) of the North Carolina Non-Profit Corporations Act provides that when the term of a director expires, that director continues to serve until his or her successor is appointed or elected and takes office.  This seems to be in contrast with Section 55A-08-07 which indicates that a director’s resignation is effective upon communication of that resignation to the board (unless the resignation sets forth another effective date).  The key difference between the two statutes are the terms “expire” and “resign”.  Normally, in either case, the remaining directors would appoint someone to fill the empty seat unless the bylaws indicate differently. The board could also choose to hold an election for the empty seat(s).

Where we run into problems is where an entire board resigns at once and no successors are appointed.  Pursuant to Section 55A-08-30, directors on boards have a duty to act in good faith, with reasonable care, and in a manner that is in the best interest of the association.  Such fiduciary duties include that directors enforce the declaration of covenants, collect assessments, and ensure that the association is run and continues to be run effectively.  It is a reasonable conclusion that if an entire board resigns at once and appoints no successors to fill vacancies, then the association cannot be effectively run.  Those directors who resigned en masse potentially subject themselves to liability by not finding and appointing replacements; those directors, by basically abandoning their posts, could be construed to have violated their fiduciary duties.

The same could also apply if so many directors resign that the board can no longer reach a quorum to make a decision on appointing replacement directors.  Keep in mind that the bylaws of your homeowners association ultimately control and can provide a different procedure than these North Carolina state statutes.  If you are reading this and are on the board of your association, you may wish to review your bylaws to determine what they say in these situations and whether changes might be necessary to provide better procedures, such as stating that even board members who resign also continue to serve until their successors take office.

The bottom line is this: Resignations, vacancies and the like are not to be taken lightly.  Directors who resign should always find a successor if at all possible and submit those names to the remaining board members.  If an entire board intends to resign – which is an extremely bad idea to begin with and should be avoided at all costs – they should do so in a manner that allows successors to be appointed and the association to continue to function.  For example, the resignations may be staged over time to allow replacements to come aboard.  And remember that, at least in North Carolina, board members whose terms expire continue to serve, and continue to have fiduciary duties to the association and the members, until their replacements take office.

Failure to appoint successors in a way that results in a dysfunctional board can result in personal liability to the resigning directors for breach of fiduciary duty.  As always, don’t hesitate to contact us to discuss strategies, procedures and potential liabilities when dealing with board matters.

Click here for another of our blog posts regarding board of directors matters.

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The immigration ban case - a primer for nonlawyers

I read the full Ninth Circuit Court of Appeals opinion on the immigration ban and thought it might be helpful to provide a little background for those of you who are not lawyers or haven't read it. This is an explanation as of February 11, 2017; if you're reading this much after that date, then the case has probably proceeded along since then and this explanation may no longer be as helpful. This is not a political post, just explaining where the case is right now. Bottom line, the substantive issues involved have not even been heard by the trial court yet – all that has happened so far is that the trial court and the court of appeals imposed a stay on enforcing the immigration ban until the substantive legal issues can be fully argued at the trial court level.  The Court of Appeals opinion is easily found online should you wish to read it yourself, although it will be a bit of a slog for nonlawyers.

The lawsuit filed by the states to try to stop the immigration ban has not been heard by the Federal District Court. All the District Court has done so far is to place an injunction on the enforcement of the ban until a full trial is held on the legality of the ban. To grant the injunction, the District Court had to make the threshold determination that irreparable harm would occur if the executive orders were allowed to go forward prior to a full trial, and that the states challenging the ban are more likely than not to win their challenge at the full trial. Again, no hearing or trial has actually been held yet on the substantive issues involved.

The Trump administration appealed the injunction, arguing that the executive order should remain in place and be enforceable pending the full trial. Remember, all an appeals court does is review what the trial court did and determine if there was a proper legal basis for the trial court's determination. An appeals court does not re-hear the factual issues in the case or make any factual determinations. In fact, an appeals court does not hear testimony or really weigh evidence at all, it only looks at what was done at the trial court below and listens to the arguments of the attorneys as to whether or not what the trial court did was proper. The appeals court generally defers to the factual determinations of the trial court since the trial court judge actually heard all the evidence and testimony and the appeals court does not.

In this case, the Ninth Circuit Court of Appeals looked at the injunction put in place by the trial court and declined to reverse the trial court's conclusion that an injunction was proper in this case until a full trial on the substantive issues could be held.

I cannot take great offense at these rulings and they are not out of the mainstream with regard to how court cases generally proceed. The trial court basically said that there is no great emergency requiring the immigration ban to take effect immediately and that it made sense to keep the status quo as it existed prior to the ban until the legality of the ban can be fully determined. Personally I believe there are parts of the ban that are perfectly enforceable and there are parts of it that obviously are not.  I would have preferred for the trial court to have enjoined the parts that were not enforceable and to let the other parts proceed, but it chose not to do that and the Court of Appeals really does not have the authority to delve into that level of detail at this point in the case. The case will proceed at the District Court level presumably and I believe ultimately parts of the ban will be upheld and parts of it will not be. But I think it is important to understand that the substantive legal issues have not even been fully heard at this point. I hope this explanation was helpful.