May 2005
In This Issue:
Law Reporter v2.0
Umbrella Association Must Impose Assessments in Keeping Under Equitable Methods
Owner Cannot Park Car or Install Basketball Goal in Front Yard
Addition to Mobile Home Violates Setback Restriction
Association Is Not Subject to Arbitration Clause in Construction Contract
Contemporaneous Filing of Lien and Sending a Letter of Demand Does Not Violate Fair Debt Collections Act
Collection Letter Is Cause for Class-Action Suit
Association Can Enforce Parking Restrictions on Public Streets
Insurance Company Does Not Have to Reimburse Unit Owner for Special Assessment
Garage Window Violates Architectural Standards
Assessments Against Minority Share Property Owner Upheld
Owner Must Prove Windows in Unit Are Encompassed in Common Area Definition
Owner Cannot Build Deck and Hot Tub on Neighbor’s Side Yard Easement
Association That Performs Municipal Functions Is Not Automatically Deemed ‘Quasi-Municipality’
An Association Is Not Authorized to Exercise Architectural Control Authority
Construction Defect Claim Subject to 10-Year Statute of Limitations
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Law Reporter v2.0
Introducing a brand-new format for the same great content

 

Maybe you’ve noticed something different about this issue of Community Association Law Reporter. For starters, it didn’t arrive in your postal mailbox. Instead, it was e-mailed to you. Also, it’s bigger--about twice as long as a typical issue of Law Reporter. That’s our way of celebrating our dynamic new electronic format, and introducing it with a bang.

 

Otherwise, this is exactly like every other issue of Law Reporter you’ve ever read. It was written and edited by Wayne S. Hyatt, Esq., and his staff. It was reviewed by a few more editors at CAI. And it is full of the insightful, timely articles you’ve come to expect from Law Reporter. None of that has changed, and none of it will change. Come the December 2005 issue, you’ll even find the Law Reporter Annual Index delivered right to you, same as ever.

 

If you find yourself missing the print version of Law Reporter, just scroll down the column of links on the left-hand side of the page and click on “printer friendly.” You’ll be rewarded with a smooth, seamless, and easily printed version of this issue, suitable for hole-punching and filing. Or, you can let us do all the archiving, and browse back issues of Law Reporter--via the “View Archives” link--as you need to.

 

We hope you’re as excited by Law Reporter’s flexible, accessible new format as we are. If you have any questions, comments, or concerns, please feel free to send them to Wayne Hyatt or to Director of Periodicals Christopher Durso. And, as always, enjoy your newsletter.

Umbrella Association Must Impose Assessments in Keeping Under Equitable Methods
Brandon Farms Property Owners Association, Inc. v. Brandon Farms Condominium Association, Inc., 180 N.J. 361, 852 A.2d 132 (2004)

Assessments: An umbrella association may not impose disproportionate assessments on owners of similarly situated units with similar privileges.

 

 

Brandon Farms is a large master-planned community made up of detached single-family homes, townhouses, and condominiums. Under the terms of the Declaration of Covenants and Restrictions for Brandon Farms (“declaration”), the common area within the community is maintained by the Brandon Farms Property Owners Association (“POA”). The POA is an umbrella organization that maintains and manages all of the common property for all homeowners within the community. Common elements of the condominiums, however, are the responsibility of the applicable condominium associations.

 

Every owner within the community is a member of the POA, and membership is divided into three classes: Class A (owners of detached single-family homes or certain parcels), Class B (owners of single-family homes and Twin Pines condominium owners), and Class C (owners of condominium units in the condominium association). Therefore, Class C owners are members of both the condominium association and the POA. In exchange for the use of the community swimming pool and clubhouse, Class A and Class C members pay a recreational limited-common-expense assessment to the POA. Class B members can elect to pay a recreational facilities fee to use the pool and clubhouse, but are not required to pay the limited common expense as the Class A and Class C members are.

 

Under the terms of the declaration, the POA has the authority to collect and disburse assessments and charges to fulfill its duties; thus, the POA also levies against all members a general common-expense assessment. While Class A and Class B members pay their assessments directly to the POA, the condominium association is responsible for collecting assessments paid by Class C members.

 

The Class C condominiums contain affordable-housing units, and the owners of such units pay reduced assessments in the amounts of 70 percent of the general common-expense assessment, and 50 percent of the recreational limited-common-expense assessment. The resulting shortfall of the reduced assessments is equally apportioned among the Class A and non-affordable-housing Class C members. Section 7.21 of the declaration provides:

 

Despite anything to the contrary herein, the primary responsibility for the payment to [the POA] of all Assessments, other than Miscellaneous Assessments, assessed against Class C Members, shall be that of the Condominium Association rather than that of the individual Class C Members. Therefore, the [POA] shall levy an aggregate assessment against the Condominium Association to cover all of the individual Assessments for Class C Members, which Condominium Association shall be responsible for payment of the entire aggregate Assessment when due, together with all appropriate late fees, fines, penalties and charges and [sic] regardless of whether all of the individual Class C Members pay the Condominium Association or not.

 

Although the developer complied with Section 7.21, once control transitioned from the developer, the condominium association refused to comply with its obligations to collect assessments from Class C members. On Sept. 11, 2001, the POA filed a complaint alleging the condominium association had breached Section 7.21 of the declaration. The demand by the POA included payment of outstanding assessments, late fees, fines, penalties, and charges. The condominium association denied any wrongdoing. The parties stipulated to the following facts: (a) Class C units accounted for 43 percent of delinquent units; (b) condominium association members owed $14,266.65; and (c) Class C members had to contribute to the defaults of Class A and Class B members, but not vice versa.

 

The trial court held that Section 7.21 of the declaration was void and unenforceable because it violated the New Jersey Condominium Act (“Act”) by requiring Class C members to be solely responsible for Class C deficiencies while permitting all members to be responsible for Class A and Class B deficiencies: “The letter and spirit of the Condominium Act are undermined by this provision.” The court ordered the POA to collect assessments from each individual owner and “spread any deficiencies thereafter evenly among all the classes and members of the [POA].”

 

The POA appealed the trial court’s decision, and the appellate court reversed, noting that Section 7.21 was enforceable and did not violate the Act because Section 7.21 rendered the assessments “common expenses” of the condominium units. The appellate court also stated that the developer had a reasonable basis for implementing Section 7.21.

 

The Supreme Court of New Jersey reversed the judgment of the appellate court and reinstated the trial court’s judgment. On appeal, the condominium association asserted that it was inequitable to make it responsible for the full assessment imposed by the POA, because the condominium association is not a member of the POA. The condominium association also asserted that Section 7.21 was drafted to insulate Class A and Class B members from nonpayment of assessments by owners of affordable-housing units, causing a violation of public policy.

 

The POA claimed that Section 7.21 must be upheld because it is part of the lawfully recorded declaration. With respect to the fairness issue, the POA asserted that without Section 7.21, Class C members would unfairly burden Class A and Class B members. Because the assessments constitute a common expense under the Act, the POA contended that the section was not a violation.

 

Under the terms of the Act, each unit owner is responsible for his or her proportionate share of common expenses. Common expenses include, among other things, administrative, maintenance, repair, and replacement of common elements. Failure to pay common expenses results in a lien on such owner’s unit. Under the Act, condominium associations are responsible for the administration and management of condominiums and condominium property, including activities of common interest to the owners. The association maintains the common elements and levies assessments for payment thereof.

 

The Act does not prohibit the creation of an umbrella association such as the POA. However, the Supreme Court previously held that while an umbrella association could be useful in controlling common elements shared by multiple associations, there was no intent by the legislature “to diminish the statutory power of condominium unit owners to control their common elements.” Therefore, umbrella associations that hold irrevocable control over all common elements “plainly violate” the letter and spirit of the Act.

 

Section 7.21 of the declaration requires the condominium association, rather than individual unit owners, to collect and pay all POA assessments. The condominium association may act only through its board of directors (“board”). Because the board never expressly agreed to undertake responsibility for collection and payment of POA assessments owed by Class C members, the Supreme Court held that the condominium association was not required to fulfill such duties under Section 7.21. The Supreme Court also upheld the trial court’s decision that requiring only Class C members to bear the load of deficiencies by Class A and Class B members was inequitable and a violation of public policy:

     

Section 7.21 puts the developer’s interests ahead of unit owners’ interests. By insulating single-family homeowners in Class A and Class B from the perceived risk of default by affordable-housing unit owners and other Class C members, the developer made the single-family dwellings in Class A and Class B more attractive. Thus, [S]ection 7.21 violates the public policy set forth in the Act by putting the developer’s interest in selling Class A and Class B homes ahead of the [c]ondominium [a]ssociation’s interests.

 

The court held that in order to comply with the Act, assessments imposed under an umbrella association should be “proportionate to similarly situated unit members of a development.” Because the assessments by the POA resulted in disproportionate assessments for affordable-housing unit owners and Class C members receiving the same benefits as Class A members, there was a violation of the Act’s letter and spirit. Accordingly, the Supreme Court reversed the holding of the appellate court and reinstated the trial court’s decision.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

 

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Owner Cannot Park Car or Install Basketball Goal in Front Yard
Campbell v. Lake Hallowell Homeowners Association, Inc., 157 Md. App. 504, 852 A.2d 1029 (2004)

Covenants Enforcement/Use Restrictions/Architectural Control: A declaration prohibited the owner of a townhouse from parking a car or installing a basketball goal in his front yard.

 

 

In 1990, Brian Campbell purchased a townhouse in Lake Hallowell, a planned community in Olney, Maryland. By virtue of the purchase, he became a member of Lake Hallowell Homeowners Association, Inc. (“association”). While Campbell lived in the community, a dispute arose between him and the association as to where he was permitted to park his car. When it learned that Campbell was parking his car in an overflow parking lot within the community that was designated for visitors, the association informed him that he was not permitted to park there. To comply with the association’s directive, Campbell began to park his car in a space in front of his townhouse that was designated as a “fire lane.” The association then advised him that his new choice was not acceptable. The association sent Campbell a letter requesting that he park his car on his property. Campbell then parked his car on his front lawn.

 

Subsequently, Campbell placed a basketball goal on his front lawn. The association informed him that the goal violated the community’s architectural guidelines, which prohibited the installation of basketball hoops in front of townhouses, and demanded that he remove both his car and the basketball hoop from his front yard. Campbell refused to comply with the association’s demands.

 

On Sept. 11, 2001, Campbell filed a complaint against the association with the Montgomery County Commission on Common Ownership Communities (“commission”). The details of the complaint were not disclosed, but the commissioner’s order listed the following four issues addressed by the commission: (1) whether the Fire Lane Establishment Order prohibited Campbell from parking his car on the street in front of his townhouse; (2) whether the association could prohibit Campbell from parking his car in the overflow spaces reserved for visitors; (3) whether the association’s declaration and/or architectural-control guidelines prohibited Campbell from maintaining the removable, collapsible basketball goal in his front yard; and (4) whether the association improperly denied or limited Campbell’s right to inspect the association’s records.

 

The commission found that the declaration prohibited Campbell from installing a basketball goal in his front yard, and that the association had properly prohibited him from parking his car in the fire lane. It determined, however, that nothing in the association’s rules, regulations, or guidelines prohibited him from parking his car in the overflow visitors’ parking spaces. The commission found that the association, by charging a prohibitive fee to inspect its records, improperly denied him access to those records, and the commission instructed the association to permit Campbell to inspect its records, subject to his payment of reasonable copying fees and costs.

 

One day after Campbell filed his complaint with the commission, the association sued him, seeking to enjoin him from parking his car on his front lawn and maintaining the basketball hoop in front of his townhouse, and requesting an award of attorney’s fees. At trial, the association’s agent admitted that Campbell would not have been prohibited from parking his car in the visitors’ parking area if he moved his car at least once a week. He testified that the association did not advise Campbell of this until two weeks before trial. Campbell testified that the association had discriminated against him because he had two young children, and most of the owners in the subdivision were childless. He claimed the association “bent” the rules for other homeowners but strictly applied them to him and his family.

 

The trial court ruled in the association’s favor, determining that even though the wording of the covenants and architectural guidelines was not specific, the clear intent of the documents was to prohibit homeowners from parking their cars or putting up basketball hoops in their front yards. The court dismissed Campbell’s claims that the association had discriminated against him and his family as “bizarre,” and ordered Campbell to pay $12,500 to the association in attorney’s fees. Campbell appealed the decision but moved out of the Lake Hallowell community before the appeal was argued. The appeals court ruled that Campbell’s relocation rendered his appeal moot except for the issue of the trial court’s award of attorney’s fees to the association.

 

In that appeal, the association argued that the award of attorney’s fees was lawful because an association resolution authorized the recovery of attorney’s fees in actions brought to enforce the community covenants. The appeals court disagreed, noting that the association had never voted on the resolution, and the resolution had not been recorded in the Montgomery County land records as the association’s declaration required.

 

The court also noted that under Maryland law, costs and expenses of litigation, other than usual and ordinary court costs, are not recoverable in an action for compensatory damages, but attorney’s fees may be awarded where a statute allows for the imposition of those fees and where parties to a contract have an agreement regarding attorney’s fees. The court determined that the trial court’s award of attorney’s fees to the association was not authorized by statute or agreement between the parties, and vacated the trial court’s award.

 

While the administrative hearing before the commission and the hearing for injunction before the trial court were pending, Phillip Peters, the association’s president, sued Campbell to prohibit Campbell from further contact with him or his family, alleging that Campbell was stalking and harassing them. The court granted Peters’ request for a temporary peace order, directing Campbell to refrain from having any contact with Peters or his family and directing Campbell to stay away from Peters’ residence, place of employment, and his children’s school (which Campbell’s children also attended). After a hearing on the petition, the court’s final order incorporated most of the restrictions contained in the temporary order. It did permit Campbell to go to his children’s school as long as he had no contact with Peters’ children, but required him to participate in anger-management and psychiatric counseling. Campbell appealed the order.

 

Finding that no evidence was presented to support Peters’ allegations of stalking and harassment, the circuit court vacated the peace order. Campbell then moved for sanctions against Peters, claiming that Peters filed the petition for the peace order in bad faith and without substantial justification. Campbell requested that the court award him attorney’s fees and costs. The court denied his motion, stating that it did not find that Peters acted in bad faith with a lack of substantial justification in pursuing the action for a protective order, adding that sanctions were not appropriate in a matter that was heard in both district and circuit courts, as judges in those courts had reached opposite conclusions. On this basis alone, the court determined that Peters’ claim was reasonable.

 

In his latest appeal, Campbell sued Peters, the association, and its board of directors on three counts: (1) that the attorney’s fees incurred by the association in its pursuit of an injunction against him were detrimental to the association, and that it was futile for him to make a demand on the board to correct the expenditures (the derivative action); (2) that Peters obtained the peace order to prevent Campbell from attending association meetings, presenting his position at the meetings, and otherwise exercising his rights at the meetings; and (3) that Peters maliciously sought the peace order without probable cause to do so, damaging Campbell as a result. Peters, the association, and the board asked the court to dismiss the complaint or, alternatively, to grant summary judgment on all counts in their favor. The court dismissed Campbell’s claim of abuse of process against Peters, but granted him the opportunity to amend his complaint as to that count. Campbell amended the complaint, but the court again dismissed it.

 

Campbell then filed a motion to compel discovery, requesting that the court compel the association to make certain records available to him that the commission had ordered the association to produce. Because Campbell failed to comply with applicable rules of procedure, the court denied his motion. At trial, Peters and the association again moved for summary judgment on the remaining two counts, and the court granted their motion and ruled in their favor.

 

Campbell appealed, arguing that the trial court erred in dismissing the abuse-of-process claim against Peters and granting summary judgment to the association on the derivative action and to Peters on the malicious-use-of-process claim.

 

The trial court granted summary judgment in the association’s favor on the grounds that the action was barred by collateral estoppel. The appeals court noted that, regardless of the driving force behind the battery of litigation among the parties, the appeal presented important questions as to the applicability of the collateral estoppel doctrine where an appeal is pending or where an appeal is subsequently dismissed as moot—questions that had not been previously addressed by Maryland’s appellate courts.

 

The court established: “When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the doctrine of collateral estoppel renders that determination conclusive in a subsequent action between the parties, whether on the same or a different claim.”

 

The court cited an exchange between Campbell and the trial court in which Campbell conceded that his claims rested on the same issues previously litigated in the injunctive action. The court found that there was no question that the issue was a “critical and necessary part of the decision” in that action, and that Campbell had an opportunity to litigate the issue in that action. The remaining question was whether the finality of the judgment rendered in that action was vitiated by either the filing of the appeal or the dismissal of that appeal as moot.

 

In its review of this case, the appeals court agreed with a broad consensus that a pending appeal should not suspend the operation of a judgment for purposes of res judicata and collateral estoppel. The court felt that despite the risks of resting on a judgment that is being appealed, the consequences of the alternative (retrying the claims, defenses, or issues) would be worse. The court cited legal commentary published in Federal Practice and Procedure that all the values served by res judicata would be threatened or destroyed by the burdens of retrial, the potential for inconsistent results, and the problems that may arise in reaching repose and finality of disposition. The court further stated that stripping a judgment of its preclusive effect because an appeal is pending would undermine the whole purpose of the res judicata doctrine—i.e., to avoid the trouble and expense of multiple lawsuits, conserve judicial resources, and foster reliance on judicial action by minimizing inconsistent decisions.

 

Campbell argued that the association was precluded from asserting the defense of collateral estoppel because it failed to raise the defense in its initial answer or in any amendment to its answer. Acknowledging that under Maryland law, a defendant’s failure to include an affirmative defense in its original answer or amended answer bars the defendant from relying on the defense to obtain a favorable judgment, the court nevertheless found that the association’s failure to raise the defense in its initial answer was understandable because its answer was filed two weeks before the court rendered a decision in the injunction action and, thus, the defense was not available to the association at the time it filed its answer in the derivative action. However, the court noted that that did not justify the association’s failure to raise the defense in an amended answer. Nonetheless, the court concluded that the trial court did not err in granting summary judgment in favor of the association on that ground because, to avoid judicial waste, the United States Supreme Court has held that “if a court has decided the issue presented, the court may dismiss the action, even though the defense has not been raised.”

 

The court found that Campbell’s complaint that the association discriminated against him in enforcing the declaration and rules was fully litigated and decided by the trial court. To permit Campbell to relitigate the issue or to remand the case for the purpose of permitting the association to raise the collateral estoppel defense would constitute an unacceptable waste of judicial resources, particularly when Campbell was not prejudiced by the association’s belated assertion of the defense. The court determined that the trial court did not err by granting summary judgment to the association.

 

The court disagreed with Campbell’s arguments that the trial court erroneously dismissed his charges of abuse of process and malicious use of process. The court explained that the abuse of process occurs if a defendant willfully uses process after it has issued in a manner not contemplated by law to satisfy an ulterior motive, and damages result from the defendant’s use of the perverted process. A plaintiff must establish that his arrest or seizure of his property resulted from the abuse of process. The court found that Campbell failed to allege either of these improprieties.

 

Finally, the court explained that suits for malicious use of process are frowned upon by Maryland law and are to be carefully guarded against. Unlike the abuse-of-process tort, which is concerned with improper use of civil or criminal process in a manner not contemplated by law after it has been issued, the malicious-use-of-process tort is concerned with maliciously causing criminal or civil process to issue for its ostensible purpose, but without probable cause. A malicious-use-of-process claim has five elements: (1) The defendant must have instituted a prior civil proceeding, (2) the proceeding must have been instituted without probable cause, (3) the defendant must have instituted the proceeding with malice, (4) the proceedings must have terminated in favor of the plaintiff, and (5) the plaintiff must establish that he sustained damages as a result of arrest or imprisonment, seizure of property, or by other special injury that would not necessarily result in suits prosecuted to recover for a like cause of action. The court found that Campbell did not establish that the proceeding was instituted without probable cause or that he sustained damages by arrest, imprisonment, seizure of property, or other special injury.

 

The court dismissed Campbell’s motion to compel discovery, finding it was without merit because he failed to present and argue the point in his initial brief. The court also affirmed the trial court’s judgment and ordered Campbell to pay all costs.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Addition to Mobile Home Violates Setback Restriction
Gem Estates Mobile Home Village Association, Inc. v. Bluhm, 885 So. 2d 435 (Fla. Dist. Ct. App. 2004)

Covenants Enforcement/Architectural Control: A homeowner is prohibited from adding a porch to her mobile home that violates declaration's setback requirement.

 

 

Gem Estates Mobile Home Village Association, Inc. (“association”) is the association of mobile homeowners in Gem Estates, Florida. The association sued owner Vicki Bluhm to bar the addition of an attached, screened porch to her mobile home that violated the 50-foot setback restriction in the mobile home park’s declaration.

 

The restriction provides for a 50-foot setback from the center line of the street the home faces. Both Bluhm and the association stipulated in their pleadings that Bluhm’s porch caused her mobile home to extend only 37 feet from the center line of the street. Bluhm also admitted that she knew about the 50-foot setback requirement when she added her porch.

 

After a brief hearing, the trial court denied relief to the association, relying on the definition of “mobile home” from Florida law, which defines the term as “a residential structure, transportable in one or more sections.” Because the porch affixed to Bluhm’s mobile home at the roof was not transportable, the trial court determined that it did not meet the definition of a mobile home and, thus, was not subject to the 50-foot setback restriction. The association appealed.

 

The appeals court found that the trial court erred in failing to recognize that when a porch is added to the structure of a mobile home, it becomes part of the mobile home. The court stated that, under the trial court’s interpretation, “any mobile home owner in Gem Estates could totally subvert and nullify the effect of the setback requirement by making an addition to a mobile home.” It explained that restrictive covenants should never be construed so as to defeat a restriction’s plain and obvious purpose and intent.

 

The appeals court’s interpretation was that if a home originally within the setback requirement constructed an addition that caused the structure to violate the setback requirement, the requirement is enforceable with respect to that structure. The court also noted that the trial court’s reliance on the statutory definition of mobile home was entirely misplaced because the definition had no relevance to the interpretation of the restrictions. The court, therefore, set aside the trial court’s judgment and remanded the case with directions to enter an order in favor of the association, order that the porch be removed, and award attorney’s fees to the association as provided in its recorded bylaws.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Is Not Subject to Arbitration Clause in Construction Contract
R.J. Griffin & Co. v. Beach Club II Homeowners Association, Inc., 384 F.3d 157 (4th Cir. 2004)

Contracts/Developer Liability: Construction-defects lawsuit by a homeowner association against the general contractor of the developer is not subject to the arbitration clause of the construction contract.

 

 

The Beach Club II Homeowners Association, Inc. (“association”), the association for The Beach Club II at Windy Hill (“Beach Club”), sued R.J. Griffin & Company (“Griffin”), the general contractor of the condominium building, for negligence and breach of implied warranty of good workmanship stemming from several construction defects that became apparent after the building was conveyed to the association. Griffin, in turn, sued the association in federal court under the Federal Arbitration Act, claiming that the association was bound by arbitration clauses contained in the general construction contract and the master deed filed against the condominium property. The U.S. District Court denied Griffin’s motion to compel arbitration, and Griffin appealed.

 

Finding that the association was not a party to the general contract and that it did not seek a direct benefit from the contract, the appeals court upheld the District Court’s decision. Furthermore, the appeals court ruled that Griffin was not a third-party beneficiary under the master deed. Griffin appealed a second time.

 

Underlying Griffin’s mandatory arbitration argument was the construction contract between Drake Development Corporation IV (“Drake”), the owner/developer of the Beach Club, and Griffin for the construction of the building. The contract provided that all claims between Griffin and Drake that arose out of or related to the contract documents or the breach of the contract were to be decided by arbitration. After construction was complete, Drake recorded a master deed that obligated Drake, the association, and individual owners of the units to maintain the common elements of the Beach Club. Included in the master deed is a clause requiring that any dispute arising out of use, ownership, or occupancy of the common elements, as well as any complaint against Drake, be subjected to arbitration.

 

Based on these provisions, Griffin alleged that the association was subject to mandatory arbitration on the theory of equitable estoppel and, as a third-party beneficiary, it had authority to compel arbitration under the master deed. Rejecting these theories, the appeals court determined that the association was not bound to the contract’s arbitration clause and that Griffin was not a third-party beneficiary under the master deed.

 

Although generally a party cannot be required to submit to arbitration, it is well established that a party can agree to submit to arbitration without personally signing a contract that contains an arbitration clause. Citing International Paper Company v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411 (4th Cir. 2000), the court noted that it previously ruled that a nonsignatory must comply with an arbitration clause when it seeks or receives a direct benefit from a contract containing the arbitration clause.

 

Although the association asserted claims for negligence in construction, the association did not seek to enforce any rights under the construction contract and, therefore, did not seek a direct benefit under the contract. Under South Carolina law, a cause of action for negligence is available if a builder breached a legal duty such as violating building codes. In the court’s view, “[t]he Association’s negligence claim is that Griffin violated its legal duties…by constructing separation walls, installing studs, and using combustible materials in a manner that violated the Standard Building Code.” The association’s negligence claim was not based on the construction contract and was independent of any contractual obligation Griffin had. Likewise, the association’s claim for breach of implied warranty was also an independent claim under South Carolina law. South Carolina law provides that a contractor who constructs a dwelling “impliedly warrants that the work will be performed in a careful, diligent, workmanlike manner.” The warranty arises from a contractor’s role as a builder, not from the construction contract to which the builder is a party.

 

Denying Griffin’s equitable estoppel claim, the court determined that although Griffin’s assumption of the duties benefited the association, the benefit flowed from South Carolina law, not from the general contract.

 

In the alternative, Griffin asked the court to compel arbitration under the master deed, but the court said that Griffin was not a signatory to the master deed, which is binding only upon Drake, as the grantor, and anyone who becomes a unit owner. The court could not read words into the construction contract that impart intent that was not expressed, and the contract did not refer to Griffin, either directly or indirectly. For this reason, the court upheld the district court’s finding that the master deed did not indicate that the parties intended to provide Griffin with a direct benefit.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Contemporaneous Filing of Lien and Sending a Letter of Demand Does Not Violate Fair Debt Collections Act
Shimek v. Forbes, 374 F.3d 1011 (11th Cir. 2004)

Federal Law and Legislation: The Fair Debt Collection Practices Act does not prohibit the contemporaneous filing of a lien against the property and the mailing of a demand letter for payment of the fees constituting the lien.

 

 

Paul Shimek is a member of a homeowner association that hired a law firm to collect past-due assessments and fees. In attempting to collect $260 from Shimek, the law firm filed a lien with the state court clerk and, on the same day, mailed Shimek a demand letter notifying him of the debt and of the fact that the firm had mailed a lien to the state court clerk. In addition, the letter notified Shimek that he had 30 days to dispute the debt.

 

In response to the filing of the lien, Shimek sued the law firm, claiming the contemporaneous filing of the lien and the mailing of the demand letter violated the Fair Debt Collection Practices Act (“Act”). The law firm filed a motion for summary judgment, which the district court granted after determining that the law firm did not engage in deceptive or unfair collection practices in violation of the Act. Shimek appealed.

 

In a case of first impression in the 11th Circuit, the appeals court found that filing a lien with the court at the same time a demand letter was sent did not violate the Act. Relying on Georgia law, the court found that a lien filed by a creditor is a necessary step for securing payment of a debt. Furthermore, nothing under the Act extinguishes a debtor’s right to secure a debt under state law. Instead, the court noted that the Act merely prohibits deceptive collection techniques. In the court’s view, nothing prohibits a debt collector from filing a lien prior to a request for verification of the debt, and Georgia law permits filing a lien in order to secure it.

 

Shimek contended that the law firm should have taken steps to prevent the filing of the lien in the first place. However, the court noted that the Act does not require a law firm “to take ‘positive action’ and interfere, even if it was able to, with the Court Clerk’s duty to record liens.” While it is general law that a debt collector may not send a lien after a verification of the debt, in this case the law firm took no steps after it received the request for verification.

 

In addition to Shimek’s claim regarding the contemporaneous filing issue, he asserted that the law firm violated the Act by failing to take action to prevent the court clerk from recording the lien after Shimek disputed the debt and requested verification pursuant to the 30-day period set forth in the Act.

 

Shimek claimed the law firm violated the Act through its delay on the lien cancellation. Shimek satisfied the debt on May 28, 2002; however, the law firm did not file the lien cancellation until July 12, 2002. Although Shimek made this claim, he did not show why it took the law firm more than six weeks to send the clerk its notifications of lien cancellation. Therefore, the court had no evidence that delay would violate the Act, or that Shimek was harmed by the delay.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Collection Letter Is Cause for Class-Action Suit
Tyrell v. Robert Kaye & Associates, P.A., 223 F.R.D. 686 (2004)

Association Operations/Federal Law and Legislation: A U.S. District Court certified a class-action suit alleging that letters sent on behalf of homeowner associations to collect unpaid assessments violated federal law by failing to specify that the owners had 30 days from receipt of the letters to dispute the debt.

 

 

On or about Aug. 27, 2002, Robert Kaye & Associates, P.A. (“Kaye”) sent a form letter to Juliet and Olga Tyrell to collect unpaid assessments owed to Blueberry Hill Condominium Association, Inc. (“association”). The Tyrells alleged that the letter failed to provide proper validation notice, as required under federal law, because it did not specify that the owners had 30 days from receipt of the letter to dispute the debt or request documentation supporting the debt. They also alleged that Kaye used false and deceptive means to collect the debt by seeking improperly to charge them for attorney’s fees and costs.

 

The Tyrells sued the association, seeking declaratory relief and statutory damages. Pursuant to Rule 23 of the Federal Rules of Civil Procedure, they asked the court to certify a class consisting of all persons in Florida who received collection letters substantially similar to the one sent to them within one year of their filing suit.

 

In determining the appropriateness of certifying a case as a class action, courts have broad discretion. For a class to be certified, it must satisfy Rule 23(a) of the Federal Rules of Civil Procedure and at least one alternative requirement of Rule 23(b). Rule 23(a) provides that a class may be certified if it meets the following requirements: (1) the class is so numerous that joinder of all members is impracticable; (2) questions of law and fact are common to the class; (3) the representatives of the class present claims or defenses that are typical of the class; and (4) the representatives of the class will fairly and adequately protect the interests of the class. The court denied the motion for class certification with regard to the claim for use of false and deceptive means because individualized questions existed concerning the recovery of attorney’s fees and costs under the various declarations.

 

Kaye acknowledged that it used form letters substantially similar to the one sent to the Tyrells to collect debts for assessments owed to other condominium associations during the relevant time period, thus meeting the numerosity requirement of Rule 23(a). Since all the potential class members received the same letter containing the same problematic language, the question of whether the collection letters failed to provide validation notice is common to all class members. The court also noted that the Tyrells sought statutory damages, not actual damages, which would have required a case-by-case analysis.

 

The court granted the Tyrells’ motion, certifying a class pursuant to Rule 23(b)(2) consisting of consumers who (a) had a Florida address, (b) were sent a letter in a form materially and substantially similar to the one sent to the Tyrells, and (c) received the letter within one year prior to the time this suit was filed.

 

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Association Can Enforce Parking Restrictions on Public Streets
Verna v. The Links at Valleybrook Neighborhood Association, Inc., 371 N.J. Super. 77, 852 A.2d 202 (2004)

Association Operations/Use Restrictions: An association has the ability to enforce parking regulations on public streets, but cannot publish violations of those regulations in a candidate audit questioning a candidate’s ability to hold an office on the board of directors.

 

 

Joseph and Wendy Verna own a townhome in the Links in Gloucester Township, New Jersey. The Valleybrook Neighborhood Association, Inc. (“association”) manages the project. Joseph Verna, an electrician by trade, uses a commercial van to conduct his business, and frequently parked the van in his driveway in violation of the association’s governing documents. After several discussions with the association, Verna no longer parked in the driveway but occasionally parked the van on the street in front of his townhome. The Vernas’ townhome is situated on a street within the development that was dedicated to and accepted by Gloucester Township. However, despite the fact that the streets were public, the association’s governing documents prohibit parked commercial vehicles on the lots and streets within the Links.

 

During the discussion regarding Verna’s parking on the streets within the development, Verna decided to run for the association’s board of directors. Shortly after he declared his candidacy, the association fined Verna for parking the van on the street. Subsequently, the association notified Verna that he was not in good standing and was not eligible to vote in the impending election. That same day, the association distributed a “candidate audit,” informing association members of the candidates’ past or current violations and whether those violations had been resolved. The audit also stated that Verna was not in good standing and was not entitled to vote. At the election, Verna came in fifth out of six candidates.

 

Verna sued the association, claiming that it was not authorized to issue the candidate audit. Statements contained in the audit were the basis of his defamation suit. In addition, Verna claimed that the association lacked the authority to impose parking regulations on a public street. The trial court determined that the association had the power to issue the candidate audit. In addition, the court stated that the parking regulations were valid actions of the association, and permanently enjoined Verna from parking his vehicle on association property. Verna appealed.

 

The appeals court upheld the association’s ability to enforce its parking regulations on public streets in the development. The court viewed the association and the township as having a coextensive right to regulate parking even though the roads in the Link were part of the township’s public roads. New Jersey law expressly prevents an association from enforcing moving violations, but it does not prohibit an association from regulating the streets in other ways. However, the appeals court overturned the permanent injunction against Verna regarding parking the van on association property, because the association had not proved that there was a continuing violation or that there had been irreparable injury to the association or its members.

 

While the association had the ability to regulate parking at the Links, in the court’s view, the governing documents did not require or allow the board to issue a candidate audit. Even though the board was authorized to conduct elections, the court did not find any specific authority, or any extension of any general authority, for the board to disseminate its opinions about a candidate’s merit by using the candidate audit. Although the governing documents specifically empowered the association “to do all things incidental and necessary to the accomplishment of its…powers,” such powers were limited to conducting the election and counting the votes. In the court’s view, that power does not equate to the association’s unsolicited opining that was intended to affect the elections of the candidates. The association’s rights were limited to conducting the election process.

 

Even though the association lacked the authority to issue the candidate audit, the court ruled in the association’s favor regarding Verna’s defamation suit. The court determined that Verna thrust himself into the spotlight when he declared his candidacy, and that justified viewing him as a public figure for the purpose of his candidacy.

 

As a public figure, Verna was required to show that the association published a “knowing, calculated falsehood” in order to prove defamation. In the court’s view, the application of this stricter “actual malice standard” is warranted, so residents of the community have the opportunity to debate issues and candidates for the board freely. Because Verna was unable to meet the actual malice standard, the court upheld the trial court’s denial of Verna’s defamation suit.

 

Editor’s Observation: Thanks to William Eaton, Esq., of Korona, Beides, & Eaton, LLC, in Atlantic Highlands, New Jersey, and Doug Kleine, CAE, executive director of the National Association of Housing Cooperatives, in Washington, D.C., for contributing this case.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Insurance Company Does Not Have to Reimburse Unit Owner for Special Assessment
White v. Allstate Insurance Company, 98 P.3d 496 (Wash. App. 2004)

Construction Defect: Unit owners who purchased a unit and insurance for that unit could not make a claim against their policy for the amount of a special assessment to cover a shortfall in funds to repair a construction defect.

 

 

Shortly after the Seattle Heights Condominium complex was completed, unit owners noticed water leakage. The Seattle Heights Condominium Association (“association”) sued the developer and general contractor for the water damage and construction defects. The association and the developer settled for $12.5 million.

 

Michael and Elizabeth White purchased a unit in Seattle Heights in October 1999, and simultaneously purchased a condominium owners policy from Allstate Insurance Company (“Allstate”). Although the association expected the lawsuit settlement to cover the cost of repairs and litigation, it did not, and the association levied a special assessment of more than $5 million against unit owners, the Whites’ share of which was $24,478.65. When the Whites submitted a claim to Allstate for reimbursement of their share of the special assessment, Allstate denied the claim, stating that the “loss” occurred before the policy was in place.

 

The Whites then sued Allstate, asking the court to rule that Allstate breached its contract with them and violated the Consumer Protection Act. The trial court ruled in favor of the Whites and determined that although the damage at the condominium occurred before they purchased their insurance policy, it did not preclude coverage. Allstate appealed.

 

In its review, the appeals court first looked to whether the trial court erred in finding that the special assessment constituted a loss under the Whites’ policy. The policy stated that Allstate would pay the Whites their share of any special assessment, up to the limit of liability shown on the policy declarations, if there was a “sudden and direct physical loss” to the condominium’s common area or if injury or property damage had occurred that was covered under another section of the policy. Additionally, the policy noted that Allstate’s coverage on the Whites’ unit was over and above any payout under the association’s insurance.

 

Allstate argued that the special assessment was the result of water damage that occurred prior to effective date of the Whites’ policy, and that the trial court erred by equating the word “loss” with the assessment that arose from the loss. Conversely, the Whites contended that, for the purpose of coverage, “loss” meant an event that imposed a financial detriment. The court noted that while the Whites’ argument hinged on the dictionary’s definition of loss, their understanding of the word was contrary to the context of the word in the policy, which was unambiguous. The policy clearly distinguished between “assessment” and “loss.” The special assessment was not a loss under the policy.

 

Because the Whites did not dispute that the damage to the condominium occurred prior to the effective date of the policy, the court determined that the special assessment was not covered by the policy. The court reversed the trial court’s decision and remanded the case for entry of summary judgment in Allstate’s favor.

 

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Garage Window Violates Architectural Standards
Sweis v. Sequoyah Heights Homeowners Association, No. A103416, Ca. App. Ct., September 23, 2004

Covenants Enforcement/Architectural Control: In an unpublished opinion, a California appeals court determined that a homeowner association was not unreasonable in enforcing a restriction barring a garage window and balcony constructed in violation of the subdivision’s architectural standards.

 

 

Edward George owned a home in Sequoyah Heights Subdivision, a planned-unit development in Oakland, California, that is governed by the Sequoyah Heights Homeowners Association (“association”). He converted his garage into three rooms, including a bedroom and a kitchen, so that he and his wife could live in the unit. He leased the remainder of the house to Frank Sweis. Oakland city ordinances require bedrooms to have a window; however, the Sequoyah Heights architectural standards prohibit windows in garages. The city did not consider the subdivision’s restrictive covenants when it issued the building permits. George’s initial request for approval of the conversion was denied, so George constructed the conversion without a permit and did not install a window in the conversion.

 

In 1993, Sweis contracted to purchase George’s home in a transaction to be closed in 2000. George disclosed to Sweis that the garage apartment was constructed without a permit and did not comply with city building codes. In 1994, George applied to the association for approval of the garage window and for a balcony to be constructed outside the family room. This application was also denied. Notwithstanding the denials, Sweis installed a window in the garage bedroom and began construction of the family-room balcony. He completed the requirements necessary to comply with the city zoning ordinances.

 

In 2000, the association’s board became aware that a window had been constructed in the garage of Sweis’ residence. Two board members went to Sweis’ house to view the window. They informed Sweis that the window violated the architectural standards and advised him to cease the installation. In July 2000, Sweis received notice from the association addressed to George. He forwarded the notice to George because escrow had not closed on his purchase of the property. Sweis notified the board at a meeting in August 2000 that he was the “contract owner” of the property, and the board granted him an extension of time to obtain title to the property and bring it into compliance with the architectural standards.

 

The board later learned that Sweis was constructing the balcony. The board then sent Sweis a letter explaining that the architectural standards also prohibited balconies. He agreed to convert the balcony to the standard design patio cover. Although the association granted approval to construct the standard design patio cover, the installed patio cover did not conform to the standard. In March 2001, the association notified Sweis of the nonconformance and described the necessary changes. Sweis did not bring the patio cover into compliance.

 

On August 1, 2001, Sweis sued the association, alleging trespass and nuisance stemming from the visit of the board members on July 15, 2000. On Jan. 9, 2002, the association countersued, alleging nuisance and violation of the restrictive covenants. The court determined before trial that Sweis’ trespass action was barred by a one-year statute of limitations, but granted Sweis’ motion for judgment on the nuisance cause of action. It then considered the association’s cross-complaint.

 

The court ruled in favor of the association on its cross-complaint, finding that Sweis was aware the unit was illegal when he purchased the property and knew architectural alterations were subject to association approval. The court found that the evidence showed the association had enforced its rules in a reasonable manner. Sweis appealed the ruling.

 

On appeal, he argued that the court erred in dismissing his action for trespass because the applicable statute of limitations was three years instead of one. He contended that the judgment on the second cause of action was in error because the evidence established interference with the use and enjoyment of his property. He also claimed that the judgment on the cross-complaint was in error, arguing at length in his reply brief that the declaration and architectural standards are arbitrary and unreasonable in that they prohibit acts that are authorized by the city’s building codes. The court agreed that the first cause of action in Sweis’ appeal stated a claim of trespass but rejected his other contentions.

 

The association successfully argued that the first cause of action alleged personal injury and trauma, which is subject to the one-year statute of limitations. Sweis argued that he pled a cause of action for trespass, which is subject to a three-year statute of limitations. The court agreed with Sweis that the three-year statute for trespass applied, but noted that he would have difficulty proving that any more than nominal damages resulted from the alleged trespass. The court stated that the distinction between personal and property rights applied to the choice between the one-year and three-year statutes of limitation at issue.

 

Sweis alleged that the board members forced their way into his residence, thereby committing trespass, and that he was severely traumatized by the trespass. The court found that while the emotional trauma alleged by Sweis was an element of damages caused by the trespass, the nature of the right allegedly infringed upon was a property right. The court determined that the case relied upon by the association in its argument was not applicable to this case. The court concluded, therefore, that the trial court erred by dismissing Sweis’ first cause of action based on the one-year statute of limitations.

 

The court agreed with the association, however, that the evidence did not support Sweis’ nuisance cause of action because the association did not inflict substantial or significant harm on Sweis. Sweis argued that the association wrongfully threatened and fined him, filed a lien on his property, excluded him from participating in association meetings, and refused to stop its wrongful conduct.

 

The court stated that the association’s letters and conduct were consistent with the relationship between the parties, as it would be in any other subdivision controlled by restrictive covenants. The court did not note substantial or unreasonable interference with Sweis’ property interest or his use and enjoyment of his property. His claims were not supported by the evidence available to the court, and in some cases were refuted by the evidence presented there. The court rejected Sweis’ arguments and upheld the trial court’s ruling on the association’s cross-complaint.

 

Specifically addressing Sweis’ argument that the declaration was unfair, arbitrary, and unreasonable, the court found that the restrictions were reasonable, uniformly applied, and served the policies expressed in the declaration. It stated that restrictive covenants specifically provide for the adoption and enforcement of the governing documents, including architectural standards. Because the Sequoyah Heights declaration contained limitations on garage use and certain interior remodeling, the court found that the language in the declaration amply supported the restriction on garage windows. Because the declaration specifically states an intent to “protect, enhance, and maintain the single-family residential atmosphere which exists within [the property],” the court found nothing unusual or arbitrary about the policy. The court also found that the goals and restrictions were typical of restrictive covenants governing subdivisions, and that they bore a rational connection to the policy of protecting the attractiveness and single-family character of the subdivision.

 

To Sweis’ argument that the declaration was unfair because it put an owner in the position of having to choose whether to comply with the declaration or with city building codes, the court responded that owners in Sequoyah Heights were required to comply with both the governing documents and city building codes. If the proposed construction plan violates either, the homeowner may not undertake the construction.

 

Finally, Sweis’ contention that the association arbitrarily enforced the rules regarding patio covers because there were many similar patio covers in the subdivision was explained by the fact that the nonconforming patio covers predated the architectural standards adopted in 1994 and were allowed to remain until the units were sold, at which time they had to be brought into compliance. Sweis’ patio cover was constructed after the standards were adopted.

 

All the evidence presented supported the trial court’s findings that the restrictions were reasonable and applied fairly and in good faith. The court reversed the trial court’s ruling on Sweis’ first cause of action and remanded it for further handling. It affirmed the trial court’s rulings in all other respects.

 

Editor’s Observation: Thanks to Paul W. Windust, Esq., of Berding & Weil LLP, in Alamo, California, for contributing this case.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Assessments Against Minority Share Property Owner Upheld
McDonald Industrial Park Property Owners Association Inc. v. American Industrial Renovation, Inc., No. 2003-T-0075, Ohio App. Ct, June 30, 2004

Assessments: A property owner is liable for the payment of assessments regardless of the percentage of ownership or benefit derived from the service.

 

 

American Industrial Renovation, Inc. (“AIR”) purchased property within the McDonald Industrial Park, which is managed by the McDonald Industrial Park Property Owners Association (“association”). The association has a managing board composed of property owners within the industrial park, and voting rights within the association are determined “by the percentage of property ownership” within the industrial park. Due to this percentage ownership, AIR was the minority member of the association and McDonald Steel Corporation was the majority member.

 

As part of its duties, the association collected assessments to cover the common maintenance costs for the industrial park. Included in this charge were fees for the provision of security services for the property. After AIR failed to pay the monthly assessments for 28 out of the 31 months from May 1999 to October 2001, the association sued AIR to recover the unpaid assessments. Following a bench trial in front of a magistrate, the magistrate recommended a judgment in favor of the association. AIR filed objections to the recommendation, but the trial court overruled the objections and adopted the magistrate’s recommendation in favor of the association.

 

AIR appealed the judgment of the trial court, claiming that the decision was prejudicial because it allowed the association to assess charges and that it was unfair that it had to pay assessments for a guard service that only benefited McDonald Steel Corporation.

 

Upon reviewing the record established by the association in the trial court, the appeals court upheld the trial court’s decision authorizing the assessment of the maintenance charges. The appeals court determined that AIR was well aware of the assessments when it purchased the property, and the restrictions and covenants creating the assessment right were recorded in the public records.

 

Furthermore, the appeals court ruled that AIR had waived its argument that the assessments were improper because they only benefited McDonald Steel Corporation. AIR was fully aware of the assessments and the guard service at the time it purchased the property, and AIR failed to assert any breach of fiduciary duty against McDonald Steel Corporation. More importantly, AIR never sued McDonald Steel Corporation. Without having McDonald Steel Corporation as a party to the action, AIR had no ability to raise this defense.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Owner Must Prove Windows in Unit Are Encompassed in Common Area Definition
Corey v. Laurels Condominium Association, Inc., No. CV020469807S, Conn. Super. Ct., June 14, 2004

Contracts: A condominium unit owner alleging breach of contract under the governing documents must offer such documents into evidence to establish whether they are part of the common area.

 

 

Mildred Corey owned a unit in the Laurels Condominium. Beginning in 2000, Corey leased her condominium unit to Dale Little, who received Section 8 housing supplements that paid a large portion of her monthly rent. In 2001 and 2002, Corey notified Paul Pontillo, the on-site representative of Laurel Condominiums Association, Inc. (“association”), of several maintenance requests relating to leaking windows in Corey’s unit. The association directed Pontillo to hire a contractor. Pontillo hired a contractor who began the work but did not complete it, asserting that he had difficulty gaining access to the unit. Pontillo then hired another contractor to complete the work, and new windows were installed in August 2002. Corey sued the association in October 2002, then requested installation of additional new windows. That work was completed in January 2003.

 

Corey contended that the association was responsible to her under a breach-of-contract claim for the cost of installing the windows, as well as costs associated with additional interior work necessary because of the leaking windows. She also asserted lost income as a result of the housing authority’s not paying the full amount of Little’s Section 8 supplement and Little’s subsequent eviction due to the deteriorating condition of the unit.

 

Corey maintained that the windows were part of the exterior of her unit, which the association is obligated to maintain under its bylaws and declaration. However, because she did not offer the declaration or bylaws into evidence, the court determined that Corey did not prove that the windows were part of the common elements (and therefore the association’s responsibility) or that the association breached any contractual duty arising out of the declaration or bylaws. Because Corey failed to prove her allegation that the windows in her unit were part of the common area, the association was not liable under a contractual obligation created by her monthly payment of assessments.

 

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Owner Cannot Build Deck and Hot Tub on Neighbor’s Side Yard Easement
Woodridge Escondido Property Owners Association v. Superior Court of San Diego County, No. D043860, Cal. App. Ct., April 26, 2004

Use Restrictions: In an unpublished decision, a California appeals court ruled that an association could prevent a resident from constructing a hot tub and deck in violation of the declaration’s use provisions.

 

 

Woodridge Escondido community is comprised of zero-lot-line homes. One wall of each home is built on the side yard line of the lot on which the home is situated. For access and landscaping purposes, each owner of a zero-lot-line home is granted an easement over the side yard that the homes abuts. The side-yard easement is to be used only for landscaping, access, and recreational purposes. Owners are not allowed to construct or maintain any permanent structure on the side yard.

 

Paul Nielsen built a 17-by-21-foot deck and hot tub on his neighbor’s side-yard easement. The Woodridge Escondido Property Owners Association (“association”) sued Nielsen to enforce the terms of the easement. The court ruled that the association failed to state a real property claim, because a judgment in favor of the association would affect Nielsen’s personal property rather than any real property. The association challenged the court’s ruling, asserting that the definition of “real property claim” includes the use of an easement.

 

The appeals court agreed with the association, noting that whether the deck was labeled personal property or something else, the issue in the association’s claim against Nielsen was his misuse of the side-yard easement. Under those circumstances, the association was entitled to relief. The court ordered the trial court to vacate its ruling and awarded attorney’s fees to the association.

 

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Association That Performs Municipal Functions Is Not Automatically Deemed ‘Quasi-Municipality’
Committee for a Better Twin Rivers v. Twin Rivers Homeowners’ Association, No. C-121-00, N.J. Super. Ct., February 17, 2004

Municipal Relations/Powers of the Association/Covenants Enforcement: A New Jersey trial court ruled that a homeowner association that performed various municipal functions was not a “quasi-municipality.”

 

 

Twin Rivers is a planned-unit development containing condominiums, townhouses, single family homes, apartments, and commercial buildings. All property owners in Twin Rivers are members of the Twin Rivers Homeowners’ Association (“association”). The plaintiffs in the case were residents of Twin Rivers, and all but one were members of an unincorporated association, the Committee for a Better Twin Rivers (“CBTR”), which sought to change the way Twin Rivers is administered. The plaintiffs in the case challenged several aspects of the operation and rules of the association.

 

The court first addressed three main issues before turning to the individual counts in the complaint: (a) whether Twin Rivers had “quasi-municipal” status; (b) whether the Planned Real Estate Development Full Disclosure Act (“PREDFDA”) applied to Twin Rivers; and (c) whether CBTR had standing to sue on behalf of the association.

 

On the issue of whether Twin Rivers had quasi-municipal status, the court examined whether the association had replaced the role of the municipality in governance of Twin Rivers. The plaintiffs argued that the association had quasi-municipal status, and that, as such, the association should have the same constitutional boundaries required of any municipality. For example, the plaintiffs asserted that imposition of fines as penalties was a delegation of police powers belonging to the government. The association, on the other hand, asserted that the business-judgment rule applied to the decisions of the board of trustees of a nonprofit corporation.

 

The court noted that there is no precedent for giving a homeowner association quasi-municipal status. While New Jersey law does not define “quasi-municipal,” the term has been used to refer to entities created by a municipal body to perform a function that is typically the responsibility of the municipality. Thus, the authority is usually given to a “quasi-municipality” by the municipality itself. In this case, East Windsor Township, the municipality in which Twin Rivers is located, did not create or delegate any authority to the association. The court articulated that while some services provided by the association, such as trash collection and snow removal, may normally be provided by a municipality, such services do not create a quasi-municipality. On the contrary, the court pointed out that such services are commonly provided by similar communities in New Jersey.

 

On the issue of police powers, the court came to a similar conclusion. Whether the association’s imposition of fines was protected by the business-judgment rule depended on whether New Jersey law, and the association’s bylaws, permit fines. The New Jersey Condominium Act (“Act”) permits associations to collect assessments and damages and to impose fines in limited circumstances. Thus, because both the Act and the association’s bylaws provided that fines can be imposed, the question of fines was subject to the business-judgment rule and was not a delegation of police power. The court found that when owners purchased a home in Twin Rivers, they became subject to the terms of Twin Rivers’ governing documents. Essentially, they agreed to the burdens that accompany the benefits of living in a planned-unit development. The court stated: “The community of Twin Rivers remains subject to the governance of East Windsor Township and all the laws of the State of New Jersey. It is no more a municipality than a mall.” Although the association was subject to New Jersey laws just as any other private organization is, it was not a state actor or an arm of the municipal government. As a result, the association was not subject to constitutional limitations in the same way that a government entity would be.

 

The court next addressed whether the association was subject to PREDFDA. To make its determination, the court first looked to the plain language of PREDFDA, which exempts from PREDFDA any portion of a planned real-estate development already holding building permits or municipal approvals prior to 1977. The association maintained that because Twin Rivers was formed in 1973, it was exempt from application of PREDFDA to its bylaws. The plaintiffs contended that PREDFDA applied to the association because amendments to PREDFDA were made in 1993, and that the amendments were intended to apply to all planned real-estate developments in New Jersey.

 

The court agreed with the plaintiffs, noting that a literal interpretation would not be applied where doing so would distort the clear intent of the legislature. A literal interpretation of PREDFDA would give residents of older communities fewer rights with respect to community maintenance and administration than residents of newer communities. The legislature’s intent in passing PREDFDA was to create a consistency of management methods and to safeguard the interests of homeowners in planned real-estate developments. Adopting the legislature’s intent, the court determined that any portion of the association’s bylaws and resolutions that was not in compliance with PREDFDA violated the statute.

 

The final issue the court decided before addressing the individual counts in the complaint was whether CBTR had standing. New Jersey law requires that unincorporated organizations have a name and have at least seven persons involved in order to have standing. The association asserted that CBTR did not have standing because CBTR had not had seven or more members since the complaint was filed. The association also asserted that CBTR was not a charitable corporation because its only purpose was to represent the private interests of homeowners. The plaintiffs argued that CBTR had standing because there was no formal membership in CBTR and because CBTR had more than seven supporters, who made up a “mini class” of interested parties, but the court disagreed.

 

The court then addressed the plaintiffs’ individual counts:

 

Count one: signage. Twin Rivers’ governing documents prohibited placement of signs anywhere without the approval of the association’s board. The board was also authorized to remove unauthorized signs and charge the offending party with the cost of the removal. The governing documents restricted signs to one per lawn and one per window. In addition, no signs were permitted on utility poles or natural features in the community. The association asserted that the restrictions were in place because it wanted to avoid clutter, maintain the aesthetic appeal of Twin Rivers, and allow for lawn maintenance. The association looked to the business-judgment rule to assess the reasonableness of the restrictions. The plaintiffs argued that the restrictions were unreasonable and violated their right to free speech, and that the right to free speech cannot be waived by buying property subject to deed restrictions.

 

The court determined that the restriction against placing signs on property was a real covenant that runs with the land, and as such, would be enforced unless it was unreasonable. The court ruled in favor of the association, stating that the signage restrictions were valid and enforceable under New Jersey law and that such restrictions did not interfere with public interests.

 

Count two: use of the community room. The plaintiffs next challenged the association’s rules regarding the community room for Twin Rivers. The community room was available to residents, clubs, organizations, and committees that wanted to rent the room for parties or events and that were approved by the association. The rental fee was $165, the security deposit was $250, and renters were required to prove that their homeowners insurance covered the event. The association reserved the right to refuse rental of the room for any reason. The plaintiffs contended that the fees associated with renting the room were excessive and not related to the actual costs the association incurred to maintain the room. PREDFDA permits associations to have rules regarding common elements, and while New Jersey law does not permit an association to generate revenue through fees and assessments, the court was satisfied with the association’s breakdown of actual costs incurred in renting out the community room. The court also stated that while obtaining a certificate of insurance requires making a telephone call to the insurance company, it does not impose a great burden on any person who desired to rent the community room.

 

Because the public was invited to use the community room, however, the court stated that the public interest must be further examined. Citing State v. Schmid, 84 N.J. 535 (1980), the court applied the reasonableness standard regarding the regulation of speech: (a) the standards governing the exercise of the freedom of speech; (b) the standards for granting or denying permission; and (c) time, place, and manner standards. Because there were no standards regarding granting or withholding permission to rent the community room, the court ruled that although the rental fees and obligations imposed were valid, the regulations regarding use of the room were too vague. The court granted summary judgment for the plaintiffs and directed the association to provide clear standards regarding permission to use the community room.

 

Count three: the newsletter. The association created a monthly newsletter, Twin Rivers Today, which was intended to inform residents of news of importance to the community, and the newsletter published all letters to the editor that did not contain libelous comments. The plaintiffs asserted that despite the editorial policy, they were denied equal access to the newsletter because the president of the association used the newsletter to advance his own views. They specifically mentioned that their letters were not as prominently placed on the page and that their letters were often accompanied with rebuttals from the association. The facts demonstrated, however, that all of the plaintiffs’ letters had been published. The association maintained that editorial decisions regarding the publication of letters fell within the business-judgment rule.

 

Noting that a homeowner association newsletter has not been defined as “press” by New Jersey courts, the court supported the fiduciary relationship between the board and association members. While the association had a duty to represent in the newsletter the views of the plaintiffs in this case because the plaintiffs were association members, the association was not required to represent such views to the same extent as it may represent the association’s views. The policy and guidelines for submitting letters to the editor were clearly printed and frequently published in the editorial section of the newsletter. The court ruled that the association’s guidelines allowed the plaintiffs to express their views freely by submitting an article or letter to the editor. Once an article or letter was submitted, the court noted that the association had the right to defend its point of view or clarify points that may have been raised in the article or letter. Because the association did not inappropriately censor or deny members their right to express opposing views, the court granted summary judgment to the association on this charge.

 

Count four: document request policy. The plaintiffs next challenged the association’s policy regarding document requests. In October 2000, Haim Bar-Akiva, an owner, requested all of the association’s original books and records for fiscal year 1995 to the date of the request. The association refused his request based on the association’s document request policy. The resolution regarding the document request policy required the board to consider four factors in response to any document request: (a) whether the purpose of the request was in the association’s best interest or constituted an unwarranted invasion of privacy; (b) whether the request would impose an unreasonable administrative burden or expense; (c) advice of counsel; and (d) other relevant matters.

 

The court upheld the validity of the resolution regarding document requests and stated that the business-judgment rules applied in determining whether the association was reasonable in denying the plaintiff’s request. The court determined that the association acted reasonably in its refusal because the request would have been extremely burdensome and costly in order for the association to comply. The court pointed out that the association had a fiduciary duty to the entire membership of the association, and that as such, the association must determine how to best utilize the association’s resources for the benefit of all of its members.

 

Count five: confidential information. The association adopted a policy regarding confidential matters; according to the policy, the association had the right to sanction a board member for breach of confidentiality or fiduciary duty. One of the plaintiffs was charged with having breached her fiduciary duties and was censured by the board. The plaintiffs specifically challenged the broad scope of the matters that were deemed to be confidential. The association argued that its decisions regarding what information was confidential should have been evaluated by the business-judgment rule. The court disagreed.

 

The New Jersey legislature appointed the Department of Community Affairs (“DCA”) as the administrative agency for PREDFDA and charged the DCA with ensuring compliance with PREDFDA. The DCA evaluated the association’s confidentiality resolution in 2000 in a separate case, and recommended that the board revise the resolution because it unduly expanded the board’s right to deem any matter confidential. Because the court had already determined that PREDFDA applied to Twin Rivers, the court elected to defer to the DCA’s finding. The court noted that while the board had the discretion to impose rules regarding confidentiality, those rules could not be expanded arbitrarily. The court determined that rules that were vague and arbitrary could not be enforced under the business-judgment rule. For these reasons, the court ruled in favor of the plaintiffs on this charge.

 

Count six: access to voting members list. The association required that residents and owners who requested a list of voting members sign a confidentiality agreement. If the list was released or misused, the owner or resident responsible was required to pay $1,000 in liquidated damages. The plaintiffs contended that they should not have been required to sign a confidentiality agreement to obtain a list of voting members for a proper purpose. The association supported its policy by stating that because personal information, including property values, was contained on such list, it was important to maintain the privacy of the information.

 

The court determined that while the association may have required residents or members to sign a confidentiality agreement in order to obtain such a list, the liquidated-damages clause was unreasonable. New Jersey courts will enforce liquidated-damages provisions only if they are a reasonable forecast of the damage done in the event of breach. The court stated that $1,000 in liquidated damages was a penalty, and the association was unable to demonstrate that the $1,000 was reasonably related to the harm that would have resulted from disclosure of the confidential information. Because the liquidated-damages provision was a penalty for breach of contract, the penalty clause rendered the entire contract regarding the requests for lists unenforceable, and the court ruled in favor of the plaintiffs on this charge.

 

Count seven: alternative dispute resolution. An association rule provided for alternative dispute resolution (“ADR”) for all disputes arising between unit owners, or between unit owners and the association, except for the following types of disputes, which were exempt from ADR: (a) payment or nonpayment of assessments, (b) election issues, and (c) noncompliance with the governing documents or applicable law. Any party that requested ADR was required to submit a $150 deposit along with its request, although the parties would split the costs equally. The plaintiffs asserted that the high cost and limited availability of ADR were unfair, inefficient, and not in compliance with PREDFDA. The association maintained that PREDFDA did not apply to the ADR provisions, and that the provisions should instead be judged by the business-judgment rule.

 

Because the court decided that PREDFDA applies to Twin Rivers, it reviewed the scope of the statute in question. New Jersey law provides that associations must provide a fair and efficient procedure to resolve disputes between individual unit owners and the association, and that that procedure be available as an alternative to litigation. The court based its decision on the plain meaning of the statute. ADR provisions are to apply to cases and controversies that could otherwise be litigated by the parties.

 

As the court pointed out, the statute plainly reads that arbitration is an alternative to litigation. Under New Jersey law, individual unit owners cannot dispute a duly enacted fine or assessment. Therefore, payment or nonpayment of assessments cannot be litigated, and such matters were properly excluded from ADR. Because voting rights in the association are limited only due to nonpayment of assessments, election issues were also properly excluded on the same basis. Because the association’s ADR policy did not withhold ADR from any claim that may be legitimately litigated, the court determined that the policy did not violate PREDFDA. The court also noted that the $150 deposit was not unreasonable. If an individual unit owner was unable to afford the deposit, nothing prevented the owner from filing a complaint with the court. For these reasons, the court granted summary judgment to the association on this charge.

 

Count eight: weighted voting system. The association’s voting policy granted each member one vote, which was weighted according to the value of the member’s property in Twin Rivers. The plaintiffs charged that the weighted voting system excluded a large percentage of residents in Twin Rivers, including those who were tenants in the apartments in the community. According to the plaintiffs, the voting policy conflicted with the association’s goal of administering the common elements to the benefit of all residents. Because of the association’s power, and the municipal character of Twin Rivers, the plaintiffs argued that the residents’ voting rights were as important as voting rights in public elections and, as such, should be subject to constitutional provisions regarding voting. The association contended that weighted voting was permissible under the New Jersey Nonprofit Corporations Act and that the voting system was clearly set forth in the community’s governing documents.

 

Under the Non Profit Corporations Act, members are entitled to one vote, but governing documents may limit, enlarge, or deny voting rights. The court also pointed out that New Jersey law likens the governing documents of a corporation to a contract between a corporation and its stockholders. A stockholder’s voting right is based on the amount of stock he or she owns. Because the governing documents set out members’ voting rights, an owner’s agreement to be bound by the governing documents by purchasing property in Twin Rivers included the owner’s agreement to be bound by the voting provisions contained in the governing documents, including the withdrawal of voting rights for unpaid fines and assessments. The association’s decision regarding voting rights was subject to the business-judgment rule, and the plaintiffs did not claim that the decisions regarding voting rights were made in bad faith or through fraud or self-dealing. The court further determined that tenants who did not own property within Twin Rivers were not members of the association, had no standing to sue the association, and were not entitled to have voting rights. Because the voting scheme passed the business-judgment rule and because tenants were not entitled to be association members, the court ruled in favor of the association regarding the weighted voting system.

 

Editor’s Observation: Thanks to E. Richard Kennedy, Esq., of Kennedy, Wronko, Kennedy, in Sea Girt, New Jersey, for contributing this case.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

 

 

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An Association Is Not Authorized to Exercise Architectural Control Authority
Anderson v. The New Property Owners’ Association of Newport, Inc., 122 S.W.3d 378 (Tex. App. 2003)

Powers of the Association: A Texas court of appeals reversed a trial court’s decision that an association had the authority to enforce deed restrictions, reject an owner’s driveway plans, and order the owner to remove the driveway and restore the property.

 

 

The Newport Subdivision was established in Texas in the 1970s. The developer filed deed restrictions (“declaration”) applicable to all lots in 1979. The declaration created Newport Section Eight Property Owners, Inc., and gave it the power to collect dues and assessments. The declaration also created an architectural control committee (“ACC”) that had the right to disapprove any plans for construction or other improvements. In 2001, an amendment to the declaration was recorded that gave management authority over Section Eight to the New Property Owners’ Association of Newport (“association”), an organization created by homeowners to give control and operation to owners and residents.

 

In 1997, the developer that owned the remaining undeveloped lots declared bankruptcy. The association had been involved in litigation with this developer, and its claims were settled as part of the bankruptcy. The bankruptcy court ordered that the remaining property be sold to Rampart Properties, Inc. (“Rampart”), and Rampart agreed to assign to the association certain rights with respect to the property.

 

In 1991, Mary Lee Anderson (“Anderson”), a property owner in Newport, applied to the Newport Section Eight Property Owners for permission to build a driveway. The ACC approved the plans, but construction was delayed. In 2000, Anderson filed a second application for the driveway, this time with the New Property Owners’ Association of Newport, which claimed that it rejected her application. Anderson argued that she never received notice of denial, and so assumed that her plans were deemed approved based on Article III of the declaration, which provided a 30-day period for the ACC to respond. Anderson began construction of the driveway in March 2001; later that month, the association’s attorney sent her a letter directing her to stop construction immediately as she lacked approval from the ACC. Anderson submitted a second request for approval that day and was denied, with no explanation.

 

Anderson resumed construction despite the denial, the association filed suit, and the trial court ordered Anderson to remove the driveway and restore the property. Anderson argued that (1) the association did not have standing to file suit, (2) the association did not have the capacity to sue, and (3) the association did not have the authority to reject her construction plans.

 

The court ruled that an association has standing to sue based on a three-part test. (See Texas Association of Business, 852 S.W.2d at 447.) First, the members of the association must have standing to sue as individuals. Second, the interests at issue must be related to the organization’s purpose. Third, the individual members of the association must not be required to participate in the claim asserted or the relief requested.

 

According to the court’s analysis, any person entitled to benefit under a covenant may enforce it; therefore, the association’s members, as property owners, had standing to sue to enforce deed restrictions. The association met the second part of the test because the stated purpose of the association was aligned with its members, according to the statement of purpose in the articles of incorporation. The court interpreted this purpose statement to include protection of the property owners’ interests in maintaining architectural-control guidelines. The association met the third requirement of the test because its claim and requested relief did not require the participation of individual members. Because it met the elements of the test, the association had standing to bring suit against Anderson.

 

The second issue for the court was whether the association had the capacity to sue Anderson. The court reasoned that, despite the fact that Newport Section Eight Property Owners did not designate the association as its property owners association until October 2001, the property owners could appoint the association as a representative association under the Texas Property Code. Specifically, Section 202.004(b) provides that a property owners association or other representative designated by an owner of real property may initiate litigation to enforce a restrictive covenant. Here, Rampart, a property owner, designated the association to sue on its behalf. Based on this analysis, the court determined that the association could sue in its representative capacity in March 2001.

 

While the association had both standing and capacity to sue, the court determined that the association did not have authority to approve or reject owners’ plans for improvements, either as a property owners association or as an ACC. The court reasoned that neither the assignment from Rampart nor the Texas Property Code conferred any rights to the association to review applications for improvements. Because Anderson’s driveway construction did not violate the decision of a valid, active ACC authorized to act, she did not violate any deed restrictions.

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Construction Defect Claim Subject to 10-Year Statute of Limitations
Lantzy v. Centex Homes, 31 Cal. 4th 363, 2 Cal. Rptr. 3d 655, 73 P.3d 517 (2003)

State and Local Legislation and Regulations: A California statute requiring latent construction-defect claims to be brought within 10 years after substantial completion of the construction project is not subject to equitable tolling.

 

 

In 1999, Henry Lantzy and a group of homeowners in the Eagle Ridge subdivision sued Centex Homes (“Centex”), the builder, claiming that there were defects in the windows and window systems in their homes. Although the trial court ruled (in Centex’s favor) that the lawsuit was not valid because the owners had filed it after the 10-year statute of limitations on construction defects had run out, the appeals court overturned the dismissal of the case (CALR, September 2001).

 

Lantzy and the other owners appealed to the California Supreme Court, and the court found that the California Code of Civil Procedure provision on which the owners relied is not subject to equitable tolling. The court noted that the law imposed an absolute requirement that a suit for damages for latent construction defects be brought within 10 years of the date that construction is substantially complete. The date of discovery of the defect has no bearing. The court also determined that the 10-year statute of limitations is not subject to tolling while the builder promises to repair or attempts to repair the defect.

 

In addition, although the owners claimed in their initial suit that Centex made repeated promises to repair their homes, the court said that the owners’ claim was not sufficient. The court noted that the owners’ complaint did not indicate that Centex’s repeated promises actually and reasonably induced the owners not to sue Centex within the 10-year statute of limitations period. The court also noted that there was no suggestion that had the repairs been made they would have been successful and would have obviated the need to sue Centex.

 

In the conclusion to its opinion, the court disapproved other California cases where courts concluded that equitable tolling does not apply to the 10-year statute of limitations, including Cascade Gardens Homeowners Association v. McKellar & Associates, 194 Cal. App. 3d 1252, 240 Cal. Rptr. 113 (1987) (CALR, June 1988).

 

In a dissenting opinion, Justice Werdegar stated that he would affirm the appeals court’s decision to allow equitable tolling. Citing a unanimous opinion of the supreme court, Addison v. State of California, 21 Cal. 3d 313, 146 Cal. Rptr. 224, 578 P.2d 941 (1978), Justice Werdegar noted that the court’s unanimous decision in that case fosters California’s policy to favor “avoiding forfeitures and allowing good faith litigants their day in court.”

 

©2005 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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