politics | Rembaum's Association Roundup

March 3, 2024May 14, 2024

Revised | Corporate Transparency Act Found Unconstitutional

THE CORPORATE TRANSPARENCY ACT FOUND UNCONSTITUTIONAL

In the case titled, National Small Business United, d/b/a the National Small Business Association, et al v. Janet Yellen, in her official capacity as Secretary of the Treasury, et al., Case No. 5:22-cv-1448-LCB, United States District Court, Northern District of Alabama, Northeastern Division entered on March 1, 2024, the court found the CTA to be unconstitutional but, at least for the time being, for the Plaintiffs, only.

By way of background, in 2021, Congress passed the 1500-page National Defense Authorization Act (the “NDAA”) and included within it, the 21-page Corporate Transparency Act (the “CTA”). In brief, the CTA would have required just about every entity registered with the Secretary of State, in each state, which includes community associations, to provide certain information about its “beneficial owners.” In the case of community associations, the beneficial owners are the board members and officers (and possibly managers, too) would need to include the name, date of birth, current address, and an identification number from a driver’s license, state ID card, or passport, and a copy of such document. The purpose of the CTA was aimed to prevent financial crimes, money laundering, tax evasion, and even the funding of terrorism. While there are limited exemptions, community associations were not included in these exemptions, notwithstanding lobbying efforts of the Community Association Institute lobbyists. Failure to comply with the CTA can lead to expensive civil financial penalties and significant time in federal prison.

In finding the CTA unconstitutional, the Northern District of the Northeastern Division Alabama appellate court noted that “Congress sometimes enacts smart laws that violate the [United States] Constitution…this court’s job is to consider whether the CTA follows the [United States] Constitution, not whether it is good policy.” The wise court asks, “does Congress have authority under the Commerce Clause [of the United States Constitution] to regulate non-commercial, intrastate activity, when certain entities which have availed themselves of the state’s incorporation laws, use channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce? The Supreme Court’s Commerce Clause decisions all point to the same conclusion: “No.”

The written opinion in this case makes for great reading most especially for those interested in Constitutional law analysis. At the end of the day, the drafters of the CTA and the lawyers for the Secretary of the Treasury defending the CTA failed to take into account that the CTA does not regulate economic or commercial activity on its face, which is generally required if one wants to rely on the Commerce Clause of the United States Constitution to justify the constitutionality of certain laws. The court even gently points out how the CTA could have been made constitutional through better drafting, rather than “inartful drafting” and even points out, relying on a prior Supreme Court case “that it is beyond this Court’s province to rescue Congress from its drafting errors, and to provide for what we might think is the preferred result.” Lamie v. U.S. Tr., 540 U.S. 526 (2004).

While this is just the beginning of the CTA appellate fight, and no doubt the government will appeal to the United States Court of Appeals for the Eleventh Circuit, which will most likely lead to the loser of that challenge appealing to the United States Supreme Court, at least for now the CTA’s registration requirements due by December 31, 2024, are dead on arrival but only as to the Plaintiffs in the aforesaid case, only. Whether the holding will be later broadened to include all other corporate entities is unknown at this time.

With all of this in mind, community associations remain caught up in the snare of the CTA and will need to comply with its registration requirements.

(Written by Jeffrey Rembaum (Kaye Bender Rebaum) and reprinted with permission from the January 2024 edition of the “Florida Community Association Journal“.)

January 4, 2024January 4, 2024

The Transparency Act and Community Associations

THE FEDERAL CORPORATE TRANSPARENCY ACT REQUIREMENTS AFFECTING ALL COMMUNITY ASSOCIATIONS

What Every Board Member and Manager Must Know

In January 2021 the Corporate Transparency Act (CTA) was enacted by Congress. In 2024 its far-reaching requirements are planned to go into effect. The CTA was adopted by Congress to provide additional transparency in entity structures and ownership in an effort to combat tax fraud, money, laundering, and other illicit activities. It is designed to capture more information about the ownership of specific entities operating in or accessing the United States marketplace. A recent Small Business Administration reports over 27 million small businesses that are considered non-employer firms and thus have no employees. Learning of the beneficial ownership of these entities, Congress hopes to crack down on their misuse. The CTA is particularly targeted to these types of small businesses operating as so called “shell companies.”

By the time you are finished reading this article, each reader should be familiar with some new terms, such as, “FinCen,” and “beneficial owner,” to name just a couple. While the practical enforcement procedures of the CTA are currently unknown, the reason why you must be familiar with the registration and continuing reporting requirements of the CTA is because failure to comply with requirements of the CTA can lead to fines from $500–$10,000 per violation and jail time of up to two years.

While there is little doubt that community associations do not pose a threat for terrorist activity, tax evasion, money laundering, and other illegal activity that is the target of the CTA, sadly, community associations are not currently exempt from the initial registration and continual updating requirements of the CTA. While the CTA requirements for compliance are not particularly difficult, they are onerous and will reveal certain personal information about board members and possibly managers, too. Also, at the present time there does not appear to be any type of exemption from the requirements of the CTA for law enforcement personnel and others who may have gone to extra lengths to keep certain personal information private. However, the CTA does require that this information remains confidential and only used for its intended purposes.

The CTA, amongst its other requirements, requires domestic reporting companies such as corporations, limited liability partnerships, and any other entity, created by the filing of a document with the secretary of state, or any similar office under the laws of the state, to comply with its reporting requirements. This includes community associations as they are organized as a business entity (i.e., a not-for-profit corporation). In addition to providing the information regarding the entity (meaning the association), the CTA requires certain information regarding the association’s “beneficial owners.” A “beneficial owner” is defined, in part, as a person who exercises substantial control of the reporting entity.

Therefore, minimally, according to the CTA, the president and vice president are deemed to “exercise substantial control over the entity” thereby seemingly requiring certain personal information to be provided to the federal “Financial Crimes Enforcement Network” or “FinCen” for short. These beneficial owners must report their name, date of birth, address, unique identifier number, such as a Social Security number, possibly a driver’s license number or passport number, and a photocopy of the non-expired document that evidences such information, too. Whether other officers and directors will be required to similarly provide personal information remains to be seen but it is likely.

Those filing the requisite documents to assist an entity with its compliance with the CTA must provide similar information too. Those qualified to file such documents for corporate entities with FinCen are as follows either:

i) the individual who directly files the document that creates the entity (this could be the attorney that files the articles of incorporation with the state to create the community association corporation); or,

ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another (this prong could refer to the authorized individual as directed by the board of directors, such as the attorney, accountant, or management company personnel to file the necessary documentation with FinCen to comply with the CTA).

In addition to the initial compliance requirements, which must be accomplished within 2024 for already existing corporations, reports must also be updated within 30 days of a change to the beneficial ownership, or within 30 days after becoming aware of or having reason to know of inaccurate information previously filed. Under a strict reading of these provisions, this means that every time there is a change in board members and officers, a report of the change must be made to FinCen within 30 days of the event. As mentioned above, failure to comply with requirements of the CTA can lead to fines from $500–$10,000 per violation and jail time of up to two years.

There are procedures set out in the CTA for information sharing among the federal governmental agencies when in relation to terrorist activity and money laundering as well as requirements for compliance with FinCen when it seeks additional information in regard to such matters. The Internal Revenue Service, the Customs and Border Protection agency, and FinCen can all issue summons for purposes of civil enforcement of the CTA. There are even rewards for persons who report on another that lead to recovery of a criminal fine, civil penalty, or forfeiture that exceeds $50,000 where the payment of the reward is limited to 25 percent of the net amount of the fine or $150,000, whichever is less.

Federal community association lobbyists are seeking an amendment to the CTA so that community associations are expressly made exempt and not caught in its web. But, unless that happens, compliance with the CTA is required for Florida’s community associations. Whether such compliance will be performed by the community association‘s attorney, accountant, or manager remains to be seen, and hopefully additional guidance will be provided by the appropriate federal government agencies in the near future. Should you have the opportunity, please reach out to your federal legislators in regard to the need for an exception for community association compliance with the requirements of the CTA.

For those that would like to read up on the CTA, the starting point for the Act itself can be found at 31 U.S.C 5336. This is the CTA-enabling legislation passed by the United States Congress and signed into law by the President that provides lawful authority to executive departments and agencies of the federal government to both adopt and enact, after public notice and hearings, their own laws that have the same force and effect, as if our Congress enacted them. (As an aside in case you ever wondered how our country ended up with so many laws, it is because of this particular process.) Once 31 U.S.C 5336 was enacted into law, the requisite executive departments and agencies of the federal government went to work adopting all sorts of laws to carry out the intent of the enabling legislation. These laws are published in the Code of Federal Regulations (CFR). The CTA is set out in section 1010 FCR 380 and is actually called “Reports of Beneficial Ownership Information;” however, its nickname is the “Corporate Transparency Act,” which has a better ring to it. The CTA can be cited to more fully as Part 1010 of the Code of Federal Regulations (CFR) Subpart C, section 380. It is a sub-part of CFR Title 31 titled “Money and Finance,” Subtitle B “Regulations Relating to Finance and Money,” Chapter X “Financial Crimes Enforcement Network Department of the Treasury.”

Due to the far reaching aspects of the CTA and its many nuances that could lead to many traps for the unwary, consultation with the association’s attorney and certified public accounting firm should be considered regarding any questions you may have in regard to the CTA, along with its registration and compliance requirements, too.

(Written by Jeffrey Rembaum (Kaye Bender Rebaum) and reprinted with permission from the January 2024 edition of the “Florida Community Association Journal“.)

December 4, 2023December 4, 2023

Political Yard Signs & Political Events

Political Yard Signs and Political Events

PROBHIBITING POLITICAL YARD SIGNS

Unless you share similar political views, your neighbor’s front yard sign supporting a favorite political candidate may be upsetting. Can a Florida community association demand the sign’s removal? A well-crafted and properly adopted board rule prohibiting all signs, as compared to just prohibiting political signs, is likely enforceable with this caveat.

Section 720.304 of the Florida Homeowners’ Association Act provides that any parcel owner may display a sign of reasonable size provided by a contractor for security services within 10 feet of any entrance to the home. In examining an association’s “no-sign” rule, let us first address the argument heard most often, “This is America! The First Amendment protects the right of all homeowners to display political signs in their front yard!”

This is simply not true, and wishing this to be true will not help. In fact, the First Amendment concepts of freedom of speech and freedom of expression certainly apply to governmental settings. But the First Amendment protections generally do not apply where there is no nexus to the federal or state government, and community associations do not have such a nexus.

In 1987 the Florida Supreme Court held, in Quail Creek POA v. Hunter, 538 So. 2d 1288 (Fla. 2d DCA 1989), that neither a homeowners association’s recording of its covenants in the public records, nor the enforcement of its covenants in state court, created a sufficient nexus to evidence “state action” such that the First and Fourteenth Amendment would apply. In 2014 the United States District Court, in Murphree v. The Tides Condominium at Sweetwater, 2014 WL 1293863 (U.S.D.C. MD, Florida, 2014), and citing to Quail Creek POA, held that homeowners’ associations existing under the laws of the State of Florida are not state actors. With that in mind, any homeowner would be hard pressed to argue otherwise.

The 1987 case of Brock v. The Watergate Mobile Home Park Association, Inc., 502 So.2d 1380 (4th DCA 1987) provides the necessary guidance to determine whether there is a sufficient nexus to the government such that the First Amendment would apply. There are two primary tests: the public function test and the state involvement test.

Under the public function test, state action will be found where the functions of a private individual or group are so impregnated with a governmental character as to appear municipal in nature… under the state involvement test, there must be a sufficiently close nexus between the state and the challenged activity such that the activity may be fairly treated as that of the state itself.

Should an association adopt a rule prohibiting one type of sign but allowing other types of signs, then notwithstanding the arguments that the First Amendment does not apply to community associations, this could create an argument that the association is regulating the type and manner of speech, and thus, might inadvertently be leaving room for a First Amendment-type argument to be used against the association.

Courts have long since held that owners give up certain liberties when living in a community association. In 2002 the Florida Supreme Court held in Woodside Village v. Jahren, 806 So. 2d 452 (Fla. 2002), that certain individual rights must be compromised when one chooses to live in an association. With that as our backdrop, any “no-sign” rule should be artfully drafted to help ensure enforceability. There is no margin for error. The dispositive court cases regarding rule enforceability make clear that a sign restriction must be “clear and unambiguous” to be enforceable against an owner. Remember, a basic principle of contract interpretation is that ambiguous terms are held against the drafting party. As a practical matter, in plain English this means that in the event the rule is even slightly confusing, the homeowner will receive the benefit of the doubt. Also, any covenant or rule must be applied fairly to avoid selective enforcement rebuttals; so, if Dorothy the Democrat is told to remove her lawn sign, so, too, must Roger the Republican be similarly told. Remember, too, that as a general rule, courts favor covenants adopted by the membership over rules adopted by the board; meaning, the former serves to increase the association’s chances of prevailing in the event of an owner’s legal challenge.

That rules prohibiting signs must be artfully drafted was a point made very clear to the homeowners’ association in Shields v. Andros Isle Property Owners Association, Inc., 872 So. 2d 1003 (Fla. 4th DCA 2004), in which the Fourth District Court of Appeal of Florida decided in favor of the homeowner who displayed a sign in her car window despite the association’s sign prohibition. The association’s rules prohibited the display of signs “on any lot,” except a “for sale” sign of a certain size, and prohibited signs on a vehicle. The Court, using the definition of a “lot” in the association’s declaration, interpreted these rules to mean that no sign, except a “for sale” sign, may be on the land or on the exterior of a vehicle. However, there was no prohibition for signs displayed from within a vehicle. When ambiguity exists, courts will rule in favor of the non-drafting party. In this instance the association is deemed the drafter of the rule, so therefore the ambiguity was held against the association, which worked to the owner’s benefit.

Consider, too, election season is short. By the time a lawsuit for an injunction to enforce the “no-sign” covenant is fully resolved, it might be time to consider the next presidential candidate! Also, it is important to take into account the holdings and principles that result from Alorda v. Sutton Place Homeowners Association, Inc., 82 So. 3d 1077 (Fla. 2d DCA 2012) and Mauriello v. The Property Owners Association of Lake Parker Estates, Inc., Case No. 2D21-500 (Fla. 2d DCA 2022) where it becomes quite clear that, if the association has a permissive right to self-help, that such self-help must be exercised, or at least attempted to be exercised, prior to seeking an injunction from the court. This is because all legal remedies must be exhausted before seeking an equitable remedy. Recall that the declaration of covenants is a legally binding contract. The fact that it includes language such as, “the association may, but is not obligated to enter an owner’s lot to cure a violation” is interpreted by the courts to mean that the association must exercise its self-help option before seeking an injunction. Please be sure to consult with your association’s attorney when considering enforcing rules and regulations.

Prohibiting Use of Common Areas and Clubhouse for Political Events

Can a Florida community association adopt rules prohibiting the use of the common areas and clubhouse for political events? Generally speaking, the board can adopt such a rule; but there are statutory exceptions which provide for the right of the members to peaceably assemble, and which allow for the invitation of public officers and candidates for public office to speak in common areas. More specifically, Section 720.304(1), Florida Statutes (i.e., the Florida Homeowners’ Association Act), provides the following:

All common areas and recreational facilities serving any homeowners’ association shall be available to parcel owners in the homeowners’ association served thereby and their invited guests for the use intended for such common areas and recreational facilities. The entity or entities responsible for the operation of the common areas and recreational facilities may adopt reasonable rules and regulations pertaining to the use of such common areas and recreational facilities. No entity or entities shall unreasonably restrict any parcel owner’s right to peaceably assemble or right to invite public officers or candidates for public office to appear and speak in common areas and recreational facilities.

(Note that similar provisions exist in both the Condominium and Cooperative Acts in §718.123 and §719.109, Fla. Stat., respectively.)

With these statutory rights in mind, should an association member invite a candidate for political office to speak, the association must allow use of the clubhouse or other common area for the candidate to address the members. If members peaceably assemble and discuss today’s political events, that, too, seems to be a statutory protected right. However, if a political group requests use of the clubhouse to host an event in support of a candidate or political party, then it likely could be prohibited except that the candidate would still be permitted to speak, and every association member would be allowed to attend, even those who may desire to protest.

If a rule adopted by the association prohibits the use of the clubhouse for political events and if legally challenged by an upset member, while it is difficult to predict the outcome, the court will need to balance the reasonableness of the board’s adopted rule as compared against the statutory protection. It should also be kept in mind that if your association was created prior to the legislation protecting a political candidate’s right to speak, and the declaration does not contain a provision adopting the legislation through “Kaufman”-type language (meaning it’s as if the legislation was adopted into the declaration), then such an association has an argument that such substantive legislation does not apply. (These rights came into existence on the following dates: October 1, 1977, for condominiums and cooperatives and April 1, 1992, for homeowners’ associations.) When crafting such rules, consultation with the association’s legal counsel is strongly recommended.

(Written by Jeffrey Rembaum (Kaye Bender Rebaum) and reprinted with permission from the December 2023 edition of the “Florida Community Association Journal“.)