Dist. Ct. Rules HOA Action to Collect Fine is Not Violation of Fed & State Debt Collection Laws

U.S. District Court, Northern California District, decision (November 21, 2014).

An HOA imposed fines against the owners of a separate interest in the homeowners association for their violation of the HOA’s governing documents that prohibit the renting of the subject property. The homeowners brought suit against the HOA and its attorneys based on claims that they violated the federal Fair Debt Collection Practices Act (“FDCPA”) and California’s Rosenthal Fair Debt Collection Practices Act (“Rosenthal Act”). The homeowners contended that the disputed obligations owed to the HOA were consumer debts that were covered by the FDCPA and the Rosenthal Act. In response, the HOA and their attorneys alleged that the underlying financial obligations to pay the fines imposed by the HOA were not debts that are covered by the FDCPA and the Rosenthal Act.

The court ruled in favor of the HOA and its attorneys in finding that the FDCPA is limited to obligations to pay which arise out of a consensual transaction between parties for consumer goods or services. The facts of the case demonstrated that the fines imposed by the HOA arose from the homeowners’ breach of the HOA’s restrictive covenants and not from their agreement to abide by the covenants entered into when they purchased the subject property. This is not the same as an ongoing obligation to pay assessments to a homeowners association, which does constitute a consumer debt under the FDCPA. The court found that the owners’ promise to pay assessments that arose when they purchased the property was not an obligation to pay fines, but rather an obligation not to rent the property. When the owners breached that obligation, the HOA imposed fines for the violation. Thus, the court concluded that the fines that were imposed were a unilateral penalty imposed for renting the property in violation of the HOA’s governing documents against the owners and did not arise out of a “consensual obligation or business dealing” that is required for application of the FDCPA or the Rosenthal Act. Such nonconsensual coercive sanctions are more akin to tort awards than regular assessments that a homeowner agrees to pay when the property is purchased. Accordingly, the fines are not the type of a money obligation that is contemplated by the FDCPA and the Rosenthal Act.

See case decision: Mlnarik_v._Smith,_Gardner,_S