Legislator alleges HOA snake oil

The scene was like a Southern church revival, with preachers whipping into a frenzy those in the audience, who held onto every word as gospel.

But this was no church function. And there was no praying, only preying, according to one state lawmaker who attended the homeowners association meeting for a Green Valley condominium complex.

Attorneys representing the homeowners association urged residents to approve a construction defect lawsuit against the contractor. Then their hand-picked architects showed photos of shattered tiles and damaged sewer lines. Two women planted in the audience gasped at each slide.

"It's all part of this tent revival show," recalled state Sen. Mike Schneider, D-Las Vegas, about the meeting roughly five years ago. "This could be on the Strip, it's so good. To homeowners, this is the biggest investment of their lives, and they are preying on them. The general public believes whatever they say is gospel because they are attorneys."

Meetings of this sort set the stage for lucrative construction defect lawsuits, a multi-billion dollar cottage industry that brings a windfall of cash to attorneys and experts, but rarely results in all the defects being repaired, the state senator said.

"There is so much money in construction defect lawsuits, billions of dollars," Schneider said.

"It's not regulated; it's not watched by anyone."

He contends that a lack of oversight combined with flawed laws led to the recent federal probe into a conspiracy involving homeowners association board members and a select collection of construction defect lawyers, experts and construction companies hired to fix the structural mistakes.

Law enforcement sources believe individuals planted on association boards steered business related to construction defects to attorneys and companies.

Last month, authorities executed search warrants at the business of at least one developer, Leon Benzer, who owns Silver Lining Construction. They searched the office of construction defect attorney and television talk show host Nancy Quon. They also searched the offices of Platinum Community Services, a property management company. In addition, agents are poring over ballot envelopes related to homeowners association board elections believed to be corrupt.

After learning of the probe, dozens of homeowners contacted the Review-Journal about their suspicions that their board elections were rigged. Armed with significant evidence such as duplicate ballots, they filed complaints years ago with the Nevada Real Estate Division's ombudsman's office, they said. Nothing was done.

The ombudsman's office did not return phone calls seeking comment.

Schneider also suspected wrongdoing; even the state senator was dissatisfied with the response he received from the ombudsman's office.

"It's pretty ineffective," Schneider said of the state agency. "I've complained to the ombudsman for years about this. 'Why don't you do something?' All I hear is there is no teeth in the law. I tell them: 'Tell me what you need and I'll do something about it.'"

With or without the agency's input, Schneider said he plans to rework construction defect laws during the 2009 session.

His priority is changing a 1995 bill designed to help homeowners file construction defect lawsuits by establishing a structure for the process. The law requires homeowners to detail the structural flaws and the contractor to then inspect them. Mediation is to take place before litigation.

Opponents of the law argue that mediation fails because the parties are polarized the minute a complaint is lodged against the contractor. As a result, opponents claim, mediation fails and the homeowner or association brings in an attorney who in turn hires an expert. The expert often adds minor non-threatening defects to the list, and the case ends up in court.

In an article published on the State Bar's Web site, Reno-based attorney John Boyden stated the 1995 bill "constitutes a 'golden goose' for lawyers and experts."

"The chapter is flawed and actually it makes it too easy to do what these folks have done," Schneider said, referring to those under investigation. "It makes it too easy to sue."

The state senator noted that attorneys fees amount to 40 percent of the settlement if the case is litigated.

"Even if they settle on the courthouse steps, they were in litigation," Schneider said.

Add costs -- Schneider said some attorneys put their cost for copying paperwork at $100,000 for a case -- and the lawyers receive more than half the settlement.

So how do homeowners cover the cost to repair the defects?

"They don't. They're just not repaired, and those are the homes with legitimate defects," Schneider said.

Boyden, who represents subcontractors often targeted by construction defect lawsuits, said the rewards are so high for homeowners' attorneys and their experts that there is no interest in mediation.

"The pendulum has swung too far. There needs to be some happy medium and we're just not there," he said Thursday. "It's gotten out of hand. We pay some outrageous costs and fees in these cases."

Boyden suggested that a cap be placed on attorneys fees, but acknowledged there has been little appetite in Carson City to enact such restrictions.

"If you start to cap attorneys fees, you will not see this at all," Boyden said, referring to the alleged scheme in Las Vegas. "No way. It will shut it down."

Schneider said construction defect cases are so common and so lucrative for homeowners' attorneys that even law firms across the state boundary are trying to join the frenzy in Nevada.

One collection of lawyers based in Walnut Creek, Calif., flew up property managers from Las Vegas for an all-expenses-paid trip that included five-star hotels and gourmet meals. Others arranged trips to Hawaii or Mexico in an attempt to land the opportunity to represent a property management company.

"They wined and dined them until they said yes," Schneider said of the Bay Area law firm. "That's before they (attorneys) started planting board members."

Schneider also questioned why the State Bar has not looked into the actions of construction defect attorneys, who the state senator is convinced accept kickbacks from property management groups and homeowners associations. He intends to question State Bar representatives during the next legislative session.

"They should not have a financial interest in construction defect lawsuits," he said. "If they do, they're not giving unbiased advice."

Search warrants issued by the FBI say the government is interested in "any and all documentation, correspondence and notes" related to 43 individuals, including construction defect attorneys Quon and Scott Canepa. Simply because their names are listed on the warrant does not mean they are under investigation. In an unusual move, the FBI issued a statement saying that Canepa and his law office are not "subjects of this pending investigation."

Phil Pattee, assistant counsel to the State Bar, said no complaints have been lodged against the attorneys or a handful of other lawyers who represent homeowners associations.

"There is absolutely nothing in our office," Pattee said Wednesday.

Homeowners associations were not always a feeding ground for attorneys. The first to be created in the Las Vegas Valley was in the early 1940s at Bonanza Village, a neighborhood near Martin Luther King Boulevard and Vegas Drive, said Schneider, who has worked on homeowners association issues for decades.

"The deed restrictions were basically that black people could only enter through the back gate," he said. "It was a different type of association that more reflected those times."

Times have changed. According to the Department of Business and Industry, 2,962 homeowners associations exist in Nevada.

Local governments contributed to the increase in the late 1990s and early 2000s when they realized the self-governed gated communities could increase tax revenue without raising taxes, Schneider said. City councils and the Clark County Commission were more willing to change zoning to accommodate residential developments if the developers agreed to establish homeowners associations.

Residents within the communities pay homeowners dues to the association, but they also continue to pay the same government taxes as any other Las Vegas Valley resident. The government collects taxes but saves money because it is not responsible for the upkeep of the community's private streets and sidewalks.

Residents have battled their associations over seemingly silly violations such as a dying tree in the front yard or a basketball hoop in the street. Schneider said he recently received a call from a panicked elderly woman who was fined $1,000 for having a commode as a planter on her front porch.

In the mid-1990s, construction defect lawsuits began pouring in and association boards started to conspire with attorneys, Schneider believes. He said those involved in the conspiracies took advantage of a state law that does not require a board member to own the property within the community.

The state senator said the law was designed to allow tenants at Lake Tahoe properties to have a say in what happens in their neighborhood. It also allowed contractors to place representatives on a board to give the community direction until an election is held.

But according to law enforcement sources, a key to funneling business to attorneys and contractors was to plant board members. Some individuals served on a handful of different association boards.

"I don't want to take tenants' voices away, but I guess we'll look at that," Schneider said.

According to Boyden, the surge in construction defect lawsuits was spawned in part by lesser qualified contractors under money constraints who wanted a piece of the boom in growth. Other defects, according to Schneider, are rigged by the "experts" brought in to examine properties.

Schneider said he has seen more than one presentation that showed staged problems. For example, he has seen several incidents where experts showed pictures of rocks in sewer pipes or even photos of beer cans sitting on the framing when walls are opened.

"They say, 'That's why your house was so bad; you had alcoholics and drug addicts building it,'" Schneider said, referring to comments he has heard from experts. "Well, how can you have a beer can in your bathroom wall every time?"

Contact reporter Adrienne Packer at apacker @reviewjournal.com or 702-384-8710.