April 2007
In This Issue:
Suit for Breach of Contract and Foreclosure for Failure to Pay Assessments Constitute Malicious Prosecution
Association May Not Levy New Assessment for Previously Incurred Obligation
Liability Insurance Carrier Is Not Obligated to Indemnify Association
Termination and Partition Requires Total or Substantial Destruction, Deterioration, or Obsolescence of Property
Association May Not File Probate Action Against Bankrupt Unit Owner Without First Requesting Relief From the Stay
Board's Action Is Subject to Business Judgment Rule
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Suit for Breach of Contract and Foreclosure for Failure to Pay Assessments Constitute Malicious Prosecution

Silver Lakes Association v. Dunn, No. E036892, Cal. App. Ct., Nov. 30, 2005

Assessments/Covenants Enforcement/State and Local Legislation and Regulations: In an unpublished decision, a California appeals court upheld a trial court's opinion that an association's action for breach of contract and foreclosure for failure to pay assessments constituted malicious prosecution.

In 1999, Charlinda Dunn and 16 other elderly investors (collectively, "Dunn") purchased, as an investment, Lot 288, a 36-acre lot in the Silver Lakes subdivision, near Victorville, California. The lot was collateral on a loan from Dunn to Evergreen Golf Course Estates L.P. ("Evergreen"). Evergreen defaulted on the loan, and Dunn foreclosed on the property. Dunn intended to liquidate the property to recover the investment but was unsuccessful because of ongoing litigation with Silver Lakes Association ("association") and its attorneys.
When a dispute arose between Evergreen and the association about whether Lot 288 should be assessed as a single-family residential lot or a multiple-family residential lot, the dispute was submitted to binding arbitration, which included the parties and their successors and assigns.
After Dunn acquired the property, the association demanded that Dunn pay multiple-family residential-lot assessments despite the arbitration decision between Evergreen and the association. Dunn sued the association, asking the court for a declaratory ruling as to the correct assessments to be imposed on Lot 288. Dunn argued that when the association discovered she had found a buyer for the property, it drastically increased assessments. The association claimed that because Dunn was marketing the property to be subdivided, it should be assessed as a multiple-family residential property. When the association raised assessments, Dunn's prospective buyer backed out of the sale. The association sued for breach of contract and sought to foreclose on the property because of Dunn's failure to pay outstanding assessments. The trial court ruled in Dunn's favor, and the association appealed.
After Dunn prevailed in the action, she renewed her efforts to sell the property to a third-party developer. The association then sued Dunn on the basis that Lot 288 could not be subdivided. Dunn filed a cross-complaint, accusing the association of malicious prosecution. Dunn argued that the association prosecuted its cross-complaint in the first action with full knowledge that it had no merit because the dispute over assessments had previously been decided by the binding arbitration decision between Evergreen and the association. The association and its attorneys responded by filing anti-Strategic Litigation Against Public Participation (SLAPP) motions.
California's anti-SLAPP statute provides for a special motion to strike actions if they're brought primarily to discourage the valid exercise of constitutional First Amendment rights. It's intended to weed out unsubstantiated causes of action so that a plaintiff need only rebut the presumption of an intent to create a bar to protected activity.  
To apply the anti-SLAPP statute to strike a pleading, the plaintiff must show that the pleading arose from protected activity, and the defendant must show that the plaintiff has a "reasonable probability" of prevailing on the merits of its complaint. The appeals court reviewed the association's anti-SLAP motions de novo to determine whether the complaint arose out of the exercise of valid rights to free speech and petition, and, if so, whether Dunn established a reasonable probability of prevailing on its complaint.
In determining whether the association had probable cause to bring its cross-complaint in the first action, the court considered the pleadings and supporting documents. The court explained that a trial court cannot weigh the moving party's evidence but must address the facts and legal issues as it would in ruling on a motion for summary judgment. If the opposing party fails to make the requisite showing, the motion must be granted.
Under the anti-SLAPP statute, Dunn was required to establish a prima facie case of malicious prosecution. The association asserted that Dunn had refused to do so. The judge denied both parties' requests for judicial notice of evidence not presented at trial. However, two documents among those presented by Dunn, but not judicially noticed, particularly troubled the court: (1) a Supplemental Declaration to the Covenants and Restrictions for Silver Lakes, recorded in 1974; and (2) an amended Supplemental Declaration, which specifically excluded Lot 288 from the association's covenants and restrictions. The court was disturbed by the fact that the supplemental declarations were not produced in prior litigation, as they established that Lot 288 was never subject to the covenants and restrictions for Silver Lakes. Nevertheless, because the documents did not surface earlier, the court could not consider them on appeal. 
The association argued that most of the evidence proffered by Dunn was inadmissible and reasserted the same evidentiary objections that were argued in the trial court.  The association objected to a document named the "Faccinto declaration," which consisted primarily of statements summarizing the litigation between Evergreen and the association, in which Faccinto participated as Evergreen's attorney. In his declaration, Faccinto explained the initial litigation that commenced with the association's demand for increased assessments based on its claim that Lot 288 was a multiple-family residential lot. He recounted the events leading to and including the binding arbitration, in which the arbitrator found in favor of Evergreen and declared that Lot 288 was to be assessed as a single-family residential lot.
The court then considered two letters, not judicially noticed but admissible, dated Nov. 2 and Nov. 10, 2000, from the association to Dunn. The Nov. 2 letter demanded that Dunn pay $84,494.90 in assessments accrued for the year, and the Nov. 10 letter enclosed a recorded notice of delinquent assessments and claim of lien. The appeals court determined that the letters were relevant in establishing malice on the part of the association by showing that the association demanded Dunn pay the multiple-family residential-lot assessments and then proceeded to tie up title to Lot 288 by attempting to foreclose on the property. 
The association argued that the trial court erred in denying its anti-SLAPP motion because Dunn failed to meet its burden of establishing a probability of prevailing on its claim of malicious prosecution. The appeals court limited its consideration of evidence to facts and circumstances the association was aware of when it filed its cross-complaint in the first action. That evidence showed that after Dunn acquired Lot 288 from Evergreen, the association initially assessed the lot as a single-family residential property in accordance with the binding arbitration decision. However, after Dunn found a buyer for the property, the association began assessing the lot as a multiple-family residential property, in direct contravention of the decision. 
Also contrary to the decision, the association cross-complained that Dunn was required to pay multiple-family residential-lot assessments, and attempted to foreclose the property for Dunn's failure to do so.  The appeals court agreed with the trial court that the association's cross-complaint had no merit and was brought without probable cause. Further, the appeals court found that the association acted without probable cause in clouding title to Lot 288 by initiating the foreclosure proceedings.
The court found sufficient evidence that the association knew, or should have known, based on the prior decision reached in the arbitration proceeding, that its cross-complaint was groundless. The court also found sufficient evidence to support that the association's attorneys knew that the association was bound by the arbitration decision yet tried to convince Dunn to set the decision aside.
In addition, the court determined that there was sufficient evidence that the association's cross-complaint was brought with malice. The court noted that Dunn rejected the association's offer to purchase the lot, which is located in the center of the Silver Lakes subdivision and the golf course. The association's offer contained multiple references to expanding its golf course. Dunn testified that the association attempted to pressure her into selling it for less than market value by demanding outrageously high assessments and instigating a flood of litigation, including the suit for breach of contract and foreclosure. The association impeded Dunn's efforts to sell the land to developers by increasing the assessments from $100 to $6,480 a month, causing a potential buyer to back out of the sale.
The court felt that there was ample circumstantial evidence to support Dunn's claim that the association maliciously impeded the sale of Lot 288 in order to coerce Dunn into selling the lot to the association for less than market value, or, alternatively, to acquire the property at foreclosure. The court stated that "because a defendant in a malicious prosecution action rarely admits an improper motive, malice may be, and often is, proven by circumstantial evidence and inferences drawn from the evidence...and goes to the defendant's subjective intent." The court determined that the association tried to circumvent the binding arbitration decision by requesting that Dunn sign an agreement setting it aside as it pertained to successors-in-interest. 
The association argued that Dunn's malicious-prosecution cross-complaint was barred by the doctrines of compulsive cross-complaints and res judicata. The court visited these arguments and noted that Dunn could not bring the malicious-prosecution claim in the first action because she first had to prevail on the association's cross-complaint. Further, it concluded that malicious prosecution was subject to neither doctrine. Likewise, the court found that the association's argument for judicial estoppel had no merit.
On Sept. 22, 2004, about a week after the trial court denied the association's anti-SLAPP motion, the appeals court denied the association's anti-SLAPP motion on the ground that Dunn had shown a probability of prevailing on its malicious-prosecution claim. The court found that the association's res judicata argument lacked merit. The association argued that Dunn's malicious-prosecution action was barred because the claim was within the scope of the subject matter litigated in the prior action. 

However, as the court previously stated, Dunn's action was not litigated in the first action, nor was it encompassed by the subject matter litigated in the first action. Therefore, Dunn's claim could not have been raised in the prior action, because the association's cross-complaint first had to be resolved favorably to Dunn. Finally, the association argued, for the first time, that Dunn was judicially estopped from changing its theories of recovery from those asserted in the first action. The court found this argument to be without merit as well. 
In considering the appeal of the association's attorneys, the court, despite additional evidence and argument presented at the association's appeal, concluded that Dunn met the burden of proof in establishing a probability of prevailing on the malicious-prosecution claim. Because the issue of whether there was probable cause to bring this claim was a factual matter rather than a question of law, the argument was waived on appeal.
The association requested attorney's fees in the event the court reversed the trial court's ruling. Because the ruling was affirmed, the request was denied. Dunn also requested attorney's fees under Section 425.16 of the anti-SLAPP statute, which provides that the prevailing defendant in a SLAPP motion to strike "shall be entitled to recover his or her attorney's fees and costs." Although Dunn prevailed on both anti-SLAPP motions, she did not request attorney's fees and costs under the statute in the lower court, nor did she petition the trial court to determine that the motions to strike were frivolous or intended to cause delay, so the court never made such a finding. The appeals court denied Dunn's request and, for the same reason, denied the request for attorney's fees and costs of the appeal.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Association May Not Levy New Assessment for Previously Incurred Obligation

Swan Creek Village Homeowners Association v. Warne, 134 P.3d 122 (Utah 2006)

Powers of the Association: An association did not have the power to levy a new assessment for previously incurred obligations on property purchased at a tax sale because the declaration did not give the association the power to selectively reimpose assessments that were extinguished by a tax sale.

Swan Creek Village, in Rich County, Utah, was originally designed as a 500-home development to be completed in several phases. The Swan Creek Village Homeowners Association ("association") was incorporated in 1979 and, soon after, filed bankruptcy. After filing bankruptcy, the association failed to file its annual report or pay its filing fee in a timely manner, and was dissolved by Utah's Secretary of State on March 31, 1986. One of the lot owners made an effort to incorporate a new homeowner association using the identical name and articles of incorporation as used by the original association. Shortly thereafter, the owner called a meeting that was attended by more than 100 people, representing almost half of the lot owners, and a board of directors was established for the new association.
This case arises from the actions of Alicia Warne, who later disputed whether there were sufficient votes at the meeting to authorize the association and whether those voting truly understood that a new entity was being created. The reason for her appeal stems from a special assessment of $5,900 that the board voted to levy against each lot to cover the cost of improvements that had been made to Swan Creek Village. 
Jeff Warne had originally purchased four lots in 1994 at a tax sale on behalf of his daughter, Alicia. Shortly thereafter, the association sent letters to Jeff Warne and other lot owners, demanding payment of a 1989 assessment. Warne and several of the lot owners who purchased property at the 1994 tax sale argued that the tax sale extinguished the 1989 assessment and relieved them of any obligation to pay. As a result, the association levied a new assessment for $5,900 in 1996. After Jeff Warne refused to pay, the association sued him, seeking to collect the assessment. 

Jeff Warne responded by filing a motion for summary judgment alleging he was not the real party-in-interest but, instead, his daughter, Alicia, was because she owned the lot. The court allowed the names to be substituted but required Jeff Warne to serve as the general guardian in the case for his young daughter. After the association moved for summary judgment, the district court ruled in its favor, finding that, although the association was a new entity, it was properly incorporated and acted within its power as such power was granted in the declaration in levying and collecting the 1996 assessment. Alicia Warne appealed the ruling to the Utah Supreme Court.
Upon review, the Supreme Court ruled that sufficient notice (i.e., proper written notice of the assessments) was given, that the statute of limitations did not bar the association's claim because it did not begin running until 1996, and that the association had assessment authority over lot owners in the subdivision. However, citing The Restatement (Third) of Property, the court stated that although the tax sale extinguished the 1989 assessment, it did not extinguish the association's authority to levy new assessments on property at the sale. The critical issue was whether an association could levy a new assessment for previously incurred obligations on property purchased at such a sale.
The court reasoned that because the association was a valid association operating pursuant to a duly recorded declaration, those who had purchased property in Swan Creek Village were obligated to its terms. The problem, however, was that the declaration failed explicitly to authorize the association to revive assessments extinguished by tax sale. As a result, the court vacated the summary judgment in favor of the association and ruled in favor of Alicia Warne. The court noted, however, that the association could have prevented all this by foreclosing on its lien prior to the tax sale, or by appearing at the tax sale and bidding on the lots. Additionally, the court presumed that any revenue shortfall resulting in unpaid assessments would contribute to common expenses of the association. Therefore, the court determined that it remained within the association's authority to impose a new assessment on all lots (including ones owned by Alicia Warne) requiring all lot owners to pay their pro rata share of those expenses.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Liability Insurance Carrier Is Not Obligated to Indemnify Association

Prime Insurance Syndicate v. Association of Property Owners of Hideout Inc., No. 3:05cv1692, U.S. Dist. Ct., Middle Dist. of Pa., Dec. 19, 2006

Risks and Liabilities: A liability insurance provider was not required to defend an association because the terms of the insurance policy were not unconscionable and, when interpreted as terms in a contract, the policy language was clear and unambiguous.

The Hideout is a large planned community in Lake Arial, Pennsylvania, with a number of recreational areas, including a golf course, artificially created beach, and swimming pool, all owned by the Association of Property Owners of Hideout Inc. ("association"). Kevin Sinclair was in the area of the swimming pool and the beach with his family when a number of uninvited people came into the area. When a security guard attempted to evict the intruders, the security guard was verbally abused by the intruders, who, Sinclair said, seemed about to attack the guard.
Sinclair, an off-duty New York City police officer, went to the aid of the guard. Sinclair was severely beaten by several of the individuals. After the beating, Sinclair had permanent nerve, ligament, spinal, and head injuries. In June 2005, Sinclair sued the association for negligent supervision and training. The association notified Prime Insurance Syndicate ("Prime") of Sinclair's complaint and sought coverage under its policy on July 22, 2005. Prime asked the court for declaratory judgment, claiming it was not obligated under the policy to defend or indemnify the association.
The court noted that an insurance carrier's duty to defend and indemnify an insured in a suit brought by a third party depends on whether the third party's complaint triggers coverage. In determining whether coverage is triggered, the court must use a two-step process. First, the court must determine the scope of the policy's coverage. Then the court must examine the complaint and the underlying action to determine whether that action would trigger coverage. If so, the insurer has a duty to defend until such time that the claim is confirmed to a recovery the policy does not cover.
The court also noted that where an insurer asserts an exclusion as a defense to a claim, it asserts an affirmative defense and then bears the burden of proving such defense. When interpreting an insurance contract, courts will give effect to the language of that contract when it is clear and unambiguous. If the contract language is ambiguous, the policy provision will be construed in favor of the insured and against the insurer. If the language of the policy can be understood in more than one sense, it will be construed as ambiguous.
In seeking its motion for summary judgment, Prime argued that the claim did not fall within the policy because the underlying action was not an accident, that the association failed to provide proper notice of the potential claim, and that the claim did not fall within the coverage period. In reviewing the language of the policy in question, the court found the policy coverage to include coverage "for claims that (1) are first made against the insured during the policy period; (2) arise from an accident that occurred during the policy period; and (3) are reported in writing to the insurer during the policy period."
The court found the underlying incident that resulted in the claim was an assault, an intentional act, which, based on the clear and unambiguous language of the policy, was excluded from coverage. The policy language excluding assault is clear and unambiguous and not susceptible to two equally plausible readings. As such, the court read the policy as it was written. The policy defines an accident as "an incident, event, or circumstance that is unexpected and unintended from the standpoint of any insured." Sinclair's injuries all arose from the beating, which were intentional acts. 

Prime also pointed out other provisions in the policy with clear and unambiguous language that excluded coverage and indicated that Prime had no duty to defend claims of negligent hiring or supervision of security personnel. Under the clear and unambiguous language of the policy, the court found that the association was required to notify Prime of the potential for a claim or loss within 14 days of an incident. The court found that this language, while onerous, was not susceptible to more than one interpretation. The policy required notice when a potential claim arose.
The court determined that the policy provided in clear and unambiguous language that for a claim to be covered it must "first [be] made against the insured during the policy period...[and be] reported in writing to the insurer during the policy period." The incident involving Sinclair occurred in August 2004, and the policy ended in December of that year. The association reported the claim to Prime in July 2005, seven months after the policy ended. The claim was never reported to Prime in writing as required by the policy, and the claim fell outside of Prime's coverage period. Therefore, the court determined that Prime had no duty to defend against that suit.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Termination and Partition Requires Total or Substantial Destruction, Deterioration, or Obsolescence of Property

Robinson v. Evans, No. 1051344, Ala. Supreme Ct., Dec. 8, 2006

State and Local Legislation and Regulations: Owners may not terminate a condominium and partition the property because they did not prove that there was total destruction of the condominium improvements or substantial destruction, deterioration, or obsolescence of the condominium property.

Charles and Jacqueline Robinson and others own units in Sunrise Village Condominium, on the Gulf Shores of Alabama. On Sept. 16, 2004, Hurricane Ivan hit the Gulf Shores as a Category 3 hurricane and damaged the condominium. The board of the Sunrise Village Condominium Association ("association") sent notice to all unit owners, informing them that a special meeting would be held and that the purpose of the meeting was to discuss and vote on options available to owners of units at Sunrise Village Condominium.
At the meeting, a motion to repair the condominium failed, and members voted on whether to terminate the condominium, thus removing it from the provisions of the Alabama Condominium Ownership Act ("Act"). Twenty owners voted to terminate the condominium, 11 voted against termination, and four abstained from voting on the ground that the vote was improper because notice of the meeting was inadequate.
The Act requires a unanimous vote to remove a condominium from its provisions, with two exceptions:  (1) when there is total destruction of all improvements of the condominium property and no agreement is reached to rebuild such improvements within a reasonable time, or such rebuilding has not been completed within a reasonable time; or (2) when there is substantial destruction, deterioration, or obsolescence of the condominium property and no agreement is reached to repair, reconstruct, or rebuild such property within a reasonable time, or rebuilding has not been completed within a reasonable time, and at least a majority of votes of unit owners are cast in favor of such removal. If either of these situations occurs, a court may grant the petition of any unit owner for removal of the condominium property from the provisions of the Act and partition. 
Because the termination vote was not unanimous, the Robinsons, other unit owners, and some holders of security interests in one or more units (collectively, "Robinsons") relied on Section 35-8-20(b) of the Act in filing their complaint for termination of the condominium and partition in the trial court. The court subsequently denied the Robinsons' claims. The Robinsons appealed to the Alabama Supreme Court.
The Robinsons argued that, because the cost to repair the condominium exceeded the fair-market value of the improvements of the condominium property, there was a "total destruction of improvements of the condominium property" sufficient to trigger their ability to terminate the condominium under Section 35-8-20(b)(1) of the Act. 
However, the court refused to consider this definition because the Robinsons failed to cite any Alabama case law supporting their proposition. Instead, the court looked to Black's Law Dictionary, which defines "total loss" as "the complete destruction of insured property so that nothing of value remains and the subject matter no longer exists in its original form. Generally, a loss is total if, after the damage occurs, no substantial remnant remains standing that a reasonably prudent uninsured owner, desiring to rebuild, would use as a basis to restore the property to its original condition." The court argued that what the Robinsons were describing was in fact "constructive total loss," and that if the legislature had intended to define "total destruction of all improvements of the condominium property" in terms broader than the plain meaning, it could have used words that embraced the definition of "constructive total loss." Because the Robinsons' evidence did not support a finding of "total loss," the court denied the use of Section 35-8-20(b)(1) to terminate the condominium.
Alternatively, the Robinsons relied on Section 35-8-20(b)(2) of the Act, which provides that in the event of "substantial destruction, deterioration, or obsolescence of the condominium property," the condominium may be removed from the provisions of the Act by a majority vote of the unit owners. Relying on the Alabama Law Institute's report to the Counsel of the Advisory Committee, the Robinsons contended that the term "condominium property" did not include the real property on which condominium improvements were made. However, the court refused to rely on this evidence because it was not adopted by the legislature. The court instead focused on the plain-meaning definition of "property" in the Act.
Based on the Act's definition, the court ruled that "property" in the Sunrise Village Condominium Declaration included: (1) the land on which the buildings and other improvements are located; (2) grounds, yards, gardens, recreation and community facilities, laundry facilities, service areas, service facilities, parking spaces and areas, as well as driveways and driveway areas; and (3) all other parts of the condominium property and all facilities, and installations for common use or necessary or convenient to the existence of safety of the condominium. Because the definition of "property" in the Act included both real property and improvements thereon, the court ruled that the Robinsons failed to meet their burden to prove that the condominium property was substantially destroyed or deteriorated, or had undergone obsolescence. Therefore, the court affirmed the lower court's rejection of Section 35-8-20(b)(2) and Section 35-8-20(b)(1) as bases for termination of the condominium.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association May Not File Probate Action Against Bankrupt Unit Owner Without First Requesting Relief From the Stay

Alfred Vail Mutual Association v. Steward, No 06-1572 (FLW), U.S. Dist. of N.J., Dec. 20, 2006

Assessments: An association may not attempt to collect assessments from a debtor owner who has filed for bankruptcy and is protected by a stay without first requesting relief from the stay. If the association goes forward with a probate action to collect assessments, the association is liable for attorney's fees and costs associated with the debtor's enforcement of the stay because such an action is considered a willful violation of the stay. In addition, the association may not shut off utility service or deny access to the unit for nonpayment of assessments.

Alfred Vail Mutual Association is a residential community in Shrewsbury Township, New Jersey, consisting of 265 units. In October 1990, Patricia Steward bought a membership certificate to a unit in the community. Her brother, Wayne Steward, resided with her from the time of her purchase until she died in April 2003. After Patricia Steward died, Wayne Steward was named executor and sole heir to her estate. 

Wayne Steward continued to reside in the unit after his sister's death. On Feb. 2, 2005, Wayne Steward ("debtor") filed a bankruptcy petition under Chapter 13 of the U.S. Bankruptcy Code ("Code"). He also filed an application to compel the Alfred Vail Mutual Association ("association") to restore utilities and access to the unit after the association shut off utility service based on nonpayment of monthly assessments. The bankruptcy court granted the debtor's request to restore utilities, rejecting the association's argument that the debtor did not own the unit. The debtor's first bankruptcy case was dismissed for failure to make the required pre-confirmation payments, but on Oct. 3, 2005, he filed a second petition for bankruptcy. 
On Oct. 28, 2005, the association filed a probate action seeking removal of the debtor as executor of Patricia Steward's estate based on his failure to administer the estate. Steward then demanded that the association withdraw the pending probate action because it was a violation of the automatic stay and co-debtor stay and further advised that if the probate action was not withdrawn, he would move to request sanctions against the association. When the association advised Steward that it intended to proceed with the probate action, he filed a motion to enforce the automatic stay and co-debtor stay, and requested sanctions. The bankruptcy court issued a written decision on Feb. 24, 2006, to grant Steward's application to enforce the automatic stay and to advise the association against proceeding with its probate application, scheduled for the following day. The association appealed.
On appeal, the association contended that the automatic stay did not apply to the probate proceeding seeking the removal of Steward as executor of his sister's estate because of the Rooker-Feldman doctrine, which precludes a federal court from having subject-matter jurisdiction if the relief requested would effectively reverse a state-court decision or void its ruling. After determining that the probate court made no determination as to the inapplicability of the automatic stay, the court held that the Rooker-Feldman doctrine did not apply because the probate court never addressed the issue of whether the automatic stay applied, and, therefore, a federal court could not reverse the probate court or void its ruling on the matter.
Next, the court considered the association's argument that the bankruptcy court erred in finding that the probate proceeding against Patricia Steward's estate violated the automatic stay. The association argued that the automatic stay was inapplicable to the probate proceeding because an automatic stay applies only to actions against debtors and not to non-debtor third parties. To determine if the association's assertion was correct, the district court relied on In re:  Panayotoff, 140 B.R. 509 (Minn. 1993), which involved similar facts. The Panayotoff court ruled that the scope of the automatic stay is not limited to actions for monetary recovery against the debtor, nor is it limited to actions or proceedings brought against the debtor in personal capacity or status as obligor in a debtor-creditor relationship. It concluded that the Code "stays judicial proceedings brought against a debtor solely in the debtor's capacity as personal representative of a probate estate." The district court agreed with the Panayotoff court and determined that in this case, the automatic stay applied to the association's probate proceeding.  
Finally, the court considered the association's contention on appeal that its conduct, and that of its attorneys, did not constitute a willful violation of the automatic stay. The court once again disagreed with the association's assertions. The court explained that a willful violation does not require specific intent to violate an automatic stay. Rather, it argued, the statute provides for damages upon a finding that the association knew of the automatic stay and that its actions, which violated the stay, were intentional.  
Because the district court affirmed the bankruptcy court's conclusion that the probate proceeding was indeed subject to the automatic stay, the association was required to request relief from the stay prior to instituting any action against Steward, including a probate action. Because it did not request relief before instituting the probate action, the district court ruled that the association's actions were a willful violation of the stay and affirmed the bankruptcy court's award of fees and costs in favor of Steward.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Board's Action Is Subject to Business Judgment Rule

Walden Woods Homeowners' Association v. Friedman, 828 N.Y.S.2d 188 (2007)

Powers of the Association: When an association's board rescinded its approval for a unit owner to build a storage shed, a trial court ruled, and an appeals court affirmed, that the board's action was subject to review under the business judgment rule.

After the Walden Woods Homeowners' Association ("association") rescinded its approval of David Friedman's plans to build a storage shed on his unit in Walden Woods, a trial court ruled in favor of the association on its motion for summary judgment for a permanent injunction. Although Friedman argued otherwise, the appeals court ruled that the association's action to rescind the approval was subject to review under the business judgment rule. Citing Levandusky v. One Fifth Avenue Apartment Corporation, 75 N.Y.2d 530, 553 N.E.2d 1317, 554 N.Y.S.2d 807 (1990) (CALR April 1991), and other cases based in the state of New York, the court noted that the association's determination was authorized, made in good faith, and in furtherance of the association's legitimate interest. The court also noted that Friedman did not raise "a triable issue of fact with respect to fraud, self-dealing, or other misconduct" by the association that would trigger additional judicial inquiry.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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