The Legacy of the Davis-Stirling Act

May 22, 2004

By Dan Ackroyd

Nobody will ever know the full extent and depth of the damage that the Davis-Stirling Act has inflicted on the citizens of California in the last 19 years. The stolen homes, the homeowners thrown out on the street, the millions sucked from peoples' bank accounts by CAI lawyers, the emotional turmoil and anguish that racked homeowners' nights and haunted their days. None of this can ever be fully calculated

Over the years, a number of organizations and individuals have researched various aspects of the impact of non-judicial foreclosure on homeowners. AHRC investigated Marquis Management in the early 2000. Sentinel Fair Housing has been doing research in Alameda County, Janice Wolf in Orange County. When Melissa Colburn woke up one sunny San Diego morning and found out that the condo that she was living in had been sold at a foreclosure sale about 8 months before, she started to do research in San Diego County.

It was the Davis Stirling Act that made non-judicial foreclosure possible.

In 1984, Willie Brown, the all-powerful speaker of the Assembly, wanted to reward Larry Stirling, a Republican member, for supporting him on a piece of legislation. Brown offered Stirling a 'Select Committee' of his choosing. After several suggestions, Brown hit upon the idea of doing homeowner associations.

This necessitated that the bill would eventually go through the Assembly Housing Committee. Gray Davis was its chair. Thus, the Davis Stirling Act was born.

Over the coming months, as homeowners mowed their lawns and kept the noses of their children clean, a small group of lawyers was secretly closeted with Katherine Rosenberry, plotting the legal and financial takeover of peoples' homes. They knew that this was an unprecedented, golden opportunity to take hold of the goose that would lay them the golden eggs.

And Katherine Rosenberry was the perfect choice to lead them into that golden future.

She had been the national president of Community Associations Institute - CAI. This high-sounding name masked a much more down to earth purpose - money, and lots of it. It was akin to appointing the head of Phillip Morris to be in charge of drawing up an anti-smoking campaign.

She and her fellow CAI lawyers went to work with a vengeance. They gave homeowner associations the awesome power of being able to put a lien on a home and then foreclosing on it without ever going near a court of law. Homeowner associations were authorized to fine homeowners for breaking the rules - and the CAI lawyers made sure that there were plenty of rules that a homeowner could trip up on.

Rosenberry and the CAI lawyers made sure that the homeowner was hemmed in on every side, and that the only recourse available to a homeowner for aberrant boards was filing a lawsuit - where, of course, the homeowner would need a lawyer again. The prospect of filing a suit was made even more daunting by including an attorney fee provision in the Davis Stirling Act. The losing party would have to pay the attorney fees of the winning party. Not only did this send shivers up the spine of any homeowner who thought of suing his association, but it ensured the association attorney that he would be paid whether he won or lost the case. If he lost, he knew that the association would be paying his fees. If he won, he knew that he had the homeowner in a vise. If the homeowner did not pay, the attorney would foreclose on his home without ever having to go to court.

Rosenberry and the CAI lawyers knew that a silent revolution in housing was taking place. In California, when Proposition 13 passed (it placed a cap on property taxes), they knew that cities and counties would be drained of revenue. Requiring new homes to be built in homeowner associations would ease - if not solve - the revenue crunch. Homeowner associations would take care of their own streets and lighting, provide recreational areas and take care of acres of common ground. Today, 8 million Californians live in 36,000 homeowner associations. In some areas like south Orange County, it is almost impossible to find a home that is homeowner association-free.

Gray Davis and Larry Stirling got the bill passed into law. They had done a sterling job for the CAI laywers, who made sure to leave a little loose change in their campaign coffers. (Stirling, who was termed out of the legislature for longevity, did a stint as a judge in San Diego, and is now running for the legislature again this year.)

The stories of homeowners who lost their homes in foreclosure for infinitesimal sums began to slowly seep out in the late 1980's and early 1990's. One single lady lost her home for a mere $300. Another became homeless for a similar amount and was forced to sleep in the back seat of her car for several weeks. Another homeowner ended up with lawyer fees of over $50,000 over a parking space for his RV.

The early victims believed that they were alone in their plight - and thus made more vulnerable. But as the American Homeowners Resource Center began to piece together the seemingly disparate parts of the jigsaw puzzle, and publish the stories of homeowners, the victims began to see the broader picture and realize that they were not alone.

And homeowners began to fight back.

Melissa Colburn, for example, not only fought to get her condo back, but she started to spend long hours combing public records for information on homeowner association foreclosures in general, and on Peters and Freedman in particular - the law firm who foreclosed on her home. The results paint a very clear picture as to the devastating effect of the Davis Stirling Act on homeowners, and the rewarding effect on CAI lawyers.

In the years 2000, 2001 and 2002, there were 156 Notices of Trustee Sale by homeowner associations posted in San Diego County - almost one a week. 22 homes were actually sold. Almost half the notices were posted by Peters and Freedman - more than 100% higher than their nearest rival. 6 of the sales were conducted by Peters and Freedman, half of which went to one man, Carlos Sosa.

The average amount of the debt for the homes handled by Peters and Freedman was in the $2,000 range. The lowest was $987.08, the highest $10,938.08.

Typically, the bulk of the debt was for lawyers' fees, dwarfing the amount of the unpaid assessment. Indeed, many homeowners caught in these situations complained that it was not the unpaid assessment that they had difficulty paying, but the lawyer's fees that were tacked on. The financial cart was put before the horse.

Homeowners complained that this was the very purpose. The CAI lawyers had set up the Davis Stirling Act precisely for this reason. It is estimated that Peters and Freedman earned at least $150,000 for filing these 75 Notices of Trustee Sale.

Ms. Colburn noticed another curious feature about Peters and Freedman. They acted as lawyers for the foreclosing association and also as the trustee conducting the sale. All other major law firms used a neutral third party because of this conflict of interest. The homeowner association only sought to obtain the amount of the debt. The trustee has an obligation to sell to the highest bidder.

Trustees can also play games to sell to favored buyers. They can postpone the sale at the last minute, thereby discouraging bona fide buyers from coming again, leaving the field to the favored buyers. Ms. Colburn said that she is investigating the relationship betwen Carlos Sosa and Peters and Freedman.

Ms. Colburn's research may mean that the 75 homeowners who paid thousands to get Peters and Freedman off their backs are entitled to a refund. Civil Code Section 2924(f) requires that the trustee publish the Notice of Trustee Sale for 3 consecutive weeks in a newspaper of general circulation. Peters and Freedman used the Uptown Examiner - a newspaper with about a 165 circulation. However, they only published the required notice of trustee sale 3 times in 2 weeks. If true, they would have violated the statute, rendering the Notice of Sale invalid.

The foreclosure business is just one aspect of a homeowner association law firm.

A law firm can stir the litigation pot in a homeowner association and drag it out in order to garner more fees. In one case, Peters and Freedman dragged out a lawsuit until the insurance company caved in and paid the $25,000 in lawyer's fees that Peters and Freedman demanded. The insurance company had already hired an attorney to defend the association. Peters and Freedman, the association lawyer, muscled in and refused to sign a settlement agreement unless they got their $25,000.

Peters and Freedman are currently locked in many association lawsuits. They have already run up over $40,000 in lawyer's fee in the Sonni Bass case over the propriety of a light over a sport court. In the Desert Crest case near Palm Spring, they enabled a developer to change the CCR's so that membership in a golf club became mandatory. Some of the homeowners who are in their 80's and 90's said that they could not physically play golf, and, as they lived off Social Security, could not afford the increased dues. Some may lose their homes over this issue.

Some day, when the definitive history of homeowner associations is written, more of these tragic stories will come to light. The Davis Stirling period in California history represents one of its darkest moments. Homeowners ever since have been struggling to extricate themselves from its industry dominated tentacles.

SB 1682 (Ducheny) has given them a ray of hope. It would forbid non-judicial foreclosure for unpaid assessments less than $2,500. Lawyers' fees are not included in that amount. It passed the California Senate and is waiting action in the Assembly. If the law had been in effect in 2000, there probably would not have been any Notices of Trustee Sale recorded in that year or subsequent years.

The Davis Stirling Act unleashed lawyers on California homes like a hoard of locusts, devouring everything in their path. It created an atmosphere of submissiveness and subservience in homeowner associations. Nobody wanted to get in "trouble" with the board, and everybody knew that the the association's legal dobermans were ready to attack.

The path back has still a long way to go where those in homeowner associations can enjoy their homes in the same way as those outside the guard gates. The path, however, might not be as long as it once was, thanks to the valiant efforts of a host of homeowners across the state - and the country. Hubris has a way of undermining itself - and a lot of homeowner association lawyers have had a lot of hubris. The day of reckoning is getting closer.