October 2007
In This Issue:
Duty of Care for Injured Depends on Condominium Statutes
Restrictive Covenant Requires Owners to Use Common Areas at Own Risk, Association not Liable for Personal Injury
Association's Secured Lien Disallowed in Chapter 13 Bankruptcy After Deadline Missed
Architectural Control Committee Approval Not Required to Be Written
Restrictive Covenants Enforceable without Architectural Control
Association Ratification Makes Articles Valid Even When Not Filed with State
Property Management Indemnity Clause Falls Short of Complete Protection
Statute Restricting Who May Serve on Board Does Not Apply Retroactively
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Duty of Care for Injured Depends on Condominium Statutes

Dudek v. Milford Professional Condominium Association, Inc., No. AANCV055000285, Conn. Super. Ct., February 20, 2007

State and Legal Legislation and Regulations: In an unpublished opinion, a Connecticut superior court ruled that the duty of care owed to an invitee to the premises who is injured on the common element depends on when the condominium was created. If the condominium was created on or before December 31, 1984 the Condominium Act of 1976 applies; if the condominium was created on or after January 1, 1985, the Common Interest Ownership Act applies.

Edward Dudek was injured when he slipped and fell on an icy, unsanded section of the parking lot at Milford Condominium. Dudek sued the Milford Professional Condominium Association, Inc. ("association") and Charles Crape, a unit owner. Crape filed a motion for summary judgment based on the fact that he did not own or control the common area where Dudek fell.

Crape argued that as a unit owner he did not have control or possession of any common element. He maintained that pursuant to the association's bylaws the walkway and parking lot are common areas under the exclusive control and possession of the association. The association relied on Tarzia v. Great Atlantic and Pacific Tea Company, 52 Conn. App. 136, 727 A.2d 219 (1999) in contending that Crape, as a unit owner, owed Dudek a duty of reasonable care to protect him from dangers that might reasonably be anticipated to arise from the conditions of the parking lot. In addition, the association argued that, pursuant to a Connecticut Statute, condominium unit owners are responsible for damages resulting from injuries in common elements to his or her percentage held in common.

The trial court found that the dispositive factor in determining the duty of care owed by Crape depended on when the condominium was created. Connecticut has two distinctive statutory schemes governing condominiums. The Condominium Act of 1976 ("Act") applies to condominiums created on or before December 31, 1984, and the Common Interest Ownership Act ("CIOA"), applies to condominiums created on or after January 1, 1985. Under both statutes, a unit owner's liability that arises in connection with injuries in the common elements is limited. Under the Act, the limitation of liability for an injury in a common element is based on a unit owner's percentage of ownership interest in the common elements. Pursuant to CIOA, a unit owner is not liable for injury or damage arising out of the condition or use of the common elements merely because he or she is a unit owner. The court determined that because the evidence in the case did not clearly indicate the date Milford Condominium was created, there was a genuine issue of material fact, making it improper to grant Crape's motion for summary judgment.

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

Restrictive Covenant Requires Owners to Use Common Areas at Own Risk, Association not Liable for Personal Injury

Hayes v. Lakeside Village Owners Association, Inc., 282 Ga. App. 866, 640 S.E. 2d 373 (2006)

Risks and Liabilities/Use Restrictions: A Georgia appeals court upheld a ruling that an association was not liable for a parcel owner's injury because a restrictive deed covenant provides that owners have the responsibility to inspect common area facilities for safety.

In September 2004, William and Ruth Hayes owned property in Lakeside Village when a chair located on the subdivision's recreational common area collapsed beneath William Hayes, injuring him. The Hayeses sued Lakeside Village Owners Association, Inc. ("association") for $5,800,000, alleging the association failed to properly maintain the chair. The association asked the court for summary judgment, arguing that the Hayeses were bound by a restrictive deed covenant that imposed a duty on the association's members continuously to inspect the subdivision common areas and use them at their own risk. The trial court granted the association's motion. The Hayeses appealed the ruling, contending that the trial court erred on five counts.

The restrictive deed covenant reads as follows:

From the time that the common area, or any portion thereof, is opened and put into use for the enjoyment of parcel owners, owner [developer] shall be and remain wholly free and clear of any and all liability to, or claims by, all parcel owners, and all persons and entities, of whatever kind or character, whether sounding in contract or tort, deriving from the occurrence of any injury or damage to any person or property on, or in respect of the use and operation of, the common area or any of its improvements, fixtures, and facilities; inasmuch as the control, operation, management, use and enjoyment, of the common area shall be within, under, and subject to the Association – and not owner [developer].  In this respect, it shall be the affirmative duty and responsibility of each parcel owner, and user of the common area facilities to continuously inspect the same for any defects or perils or other unsafe conditions or circumstances, prior to and during such use or enjoyment thereof; and all users of, and visitors to, the common area and its improvements and facilities shall use, enjoy, and visit, the same at their own risk and peril.


In the first count of the appeal, the Hayeses argued that they were not bound by the covenant because it was a collateral covenant that did not run with the land.

Citing a ruling by the Georgia Supreme Court, the appeals court noted that there was a growing tendency to incorporate equitable doctrines with common-law rules and that covenants relating to the land are frequently enforced against subsequent grantees with notice, whether named in the granting instrument or not. In such cases, it is immaterial whether the covenant runs with the land, the general rule being that it will be enforced according to the intention of the parties. It is only necessary that the covenant concerns the land or its use and that the subsequent grantee has notice of it.

It was undisputed that the Hayeses had notice of the covenant through a reference in their deed and recording of the covenant. By its terms, the covenant required owners to pay fees in exchange for their use of common areas and outlined conditions under which the common areas could be used. Therefore, the appeals court found that the trial court did not err in its finding.

Second, the Hayeses argued that the trial court erred in construing the covenant to relieve the association of its duty to inspect the common area and maintain it in a safe condition. They maintained that their allegation that the association was grossly negligent raised an issue of fact that precluded a grant of summary judgment. They argued that, if anything, the covenant created a duty on their part but that the covenant did not absolve the association of its duty to inspect the common areas and keep them safe. The court disagreed. The plain meaning of a provision that parcel owners shall use common areas "at their own risk" indicated an intention on the part of the developer to shift the duty to keep the premises safe entirely to the parcel owner using the common area.

In their third count, the Hayeses contended that if they had a duty to inspect the chair, summary judgment would be prevented by issues of fact as to whether they properly carried it out because any defect in the chair was latent. The court disagreed, citing City of Douglasville v. Queen, 270 Ga. 770, 514 S.E.2d 195 (1999), which provides that to state a cause of action for negligence in Georgia there must be four things: a legal duty to conform to a standard of conduct for the protection of others against unreasonable risk of harm; a breach of that standard; a legally-attributable, causal connection between the conduct and the resulting injury; and some loss or damage flowing to the plaintiff's legally protected interest as a result of the alleged breach of the legal duty. The appeals court found that because the restrictive covenant relieved the association of its duty to inspect the chair and assigned the risk of using the chair to the parcel owners, the Hayeses had not identified any duty owed to them by the association that had been breached.

Next, the court noted that the Hayeses incorrectly contended that the covenant was not enforceable against them without their signatures. Because the case involved a covenant rather than a contract and a covenant is not required to be signed by the party to be bound, there was no factual dispute as to the terms of the provision. The court found that argument to be without merit.

Finally, the Hayeses argued that the covenant was unenforceable because it violates Georgia public policy. The court noted that provisions very similar to the one contained in the Hayeses' restrictive deed covenant had been found not to violate Georgia public policy. In My Fair Lady of Ga. v. Harris, 185 Ga. App. 459 364 S.E.2d 580 (1987), a restrictive covenant relieved an association of its duty to inspect common areas and assigned the risk of using the common areas to the owners who used them. The exculpatory nature of the restriction was found not to be a per se violation of Georgia public policy.

Finally, the Hayeses cited a section in the Georgia Property Owners' Association Act ("Act") that provides, "No lot owner shall be precluded from bringing an action against the association by virtue of his membership in the association." Even though they conceded that the provision was not binding because the covenant was recorded before the Act became effective and was not amended to submit the association to the Act, the Hayeses argued that the Act reflects Georgia public policy.

The court noted that because the Act applies where a recorded declaration affirmatively states, or is amended to state, that association members chose to be governed by it. In this case, because the covenant at issue was not subject to the Act, it did not violate the policy. Moreover, the court determined that the covenant would not violate the Act even if that section of the Act applied. Therefore, the court affirmed the trial court's ruling.

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

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Association's Secured Lien Disallowed in Chapter 13 Bankruptcy After Deadline Missed

In re: Nwonwu, 948 So. 2d 809 (Fla. Dist. Ct. App. 2007)

Assessments: A bankruptcy court ruled that in a Chapter 13 bankruptcy case a condominium association that is a secured lien holder and that did not receive notice of such bankruptcy filing could not file a proof of claim of that lien after the date set as the deadline for creditors to file a proof of claim had passed.

In May 2006, Cordelia Nwonwu filed a voluntary petition for adjustment of her debts under Chapter 13 of the U.S. Bankruptcy Code ("Act"). Nwonwu owned a house in Irongate, a community whose association, Irongate Community Association ("association"), was not notified of the bankruptcy petition. The association held a secured lien against the property owned by Nwonwu in the amount of $ 2,237.93. The association was not listed as a creditor and, as such, did not attend the creditors meeting held on May 30, 2006. Pursuant to the bankruptcy code, the deadline for filing a Chapter 13 claim is 90 days after the first date set for the meeting of creditors, except for a governmental unit, which has until 180 days after the filing of the petition. As such, the date for non-governmental creditors to file claims was August 28, 2006. The association did not learn of Nwonwu's bankruptcy filing until December 2006 and filed a proof of claim as a secured creditor January 9, 2007. The association subsequently filed a motion with the bankruptcy court to allow a late-filed secured claim.

No provision of the Act extends the proof of claims bar date simply because a creditor had no notice of the case. The proof of claims bar date may not be extended under a court's general power to extend deadlines except as specifically provided in the Act. A court may extend the time for filing a proof of claim only for instances involving an infant, an incompetent, the United States, a state, or a creditor whose claim is derived from an avoidance judgment or from rejection of a lease or executory contract. The Act does not contemplate extending the deadline to file a proof of claim with the court merely because a creditor had no notice of the case.

Because the language in the Act is somewhat ambiguous, courts have come to a consensus related to this matter. While an argument can be made for allowing and disallowing creditors claims filed after the deadline, the court in this case found that the preponderance of decisions in Chapter 13 cases disallowed a claim filed after the date of the claims bar. The court specifically cited the Matter of Greenig, 152 F.3d 631 (7th Cir. 1998) where the court ruled that failure to file a claim within the time period specified by rules is an "absolute bar" unless a specific exception applies.

The Greenig court ruled that a bankruptcy court "cannot use its equitable power to circumvent the law." The court reasoned that a trustee in a Chapter 13 case must know early in the case who to pay and how much to pay them. The court provided additional reasoning for its decision: this circumstance would cause turmoil as the trustee could not determine which creditor was to be paid and how much; predict future claim filings and perhaps to set aside funds for distribution to such secured creditors who file if and when they are so inclined; late-filing creditors to recapture payments already distributed to other creditors; creditors who filed within the deadline would be penalized by permitting late-filing creditors to reduce or delay the dividend available for distributions on their claims; modification of the plan would also be necessary each time a secured creditor filed a claim at variance with the plan.

However, the court explained that a secured creditor has a remedy. Courts have determined that while creditors who miss the deadline to file a proof of claim may not share in the distribution from the estate, such secured creditors may enforce their claims after the conclusion of the case or, if they obtain relief from the automatic stay, even while the case is pending. A secured creditor stands in a good position as its lien is not extinguished merely because the timely proof of claim was not filed prior to the deadline for filing such claim. The court also noted that unless the creditor obtains relief from the automatic stay, enforcement of such lien is stayed until the conclusion of the case.

Finally, the court noted that a claims bar is not self-executing in that a claim filed after the deadline for filing proof of claims is not stripped of its character as a claim, but is merely disallowed.

For these reasons, the court denied the association's motion.

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

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Architectural Control Committee Approval Not Required to Be Written

Indian Beach Property Owners' Association v. Linden, No. 01-05-01116-CV Tex. App. Ct. March 22, 2007

Architectural Control: If deed restrictions allow for presumed approval after a certain number of days, such approval is not required to be expressly in writing.

Mary and B.J. Linden owned a lot in the Indian Beach subdivision on Galveston Island, Texas that was subject to certain covenants and restrictions contained in a deed. The Indian Beach Property Owners' Association ("association") was the entity responsible for enforcing deed restrictions in Indian Beach. The deed restrictions on the Lindens' property stated, among other things, that "no building, fence, wall…permanent facility or structure…shall be commenced, erected, or maintained upon any lot in the subdivision…until the plans and specifications showing the nature, kind, shape, height, materials and location of the same shall have been submitted to and approved in writing by the Architectural Control Committee…”

On February 25, 2004, the Lindens submitted a formal application to the architectural control committee for approval to construct a chain-link fence around the perimeter of their property. On March 15, 2004, the Lindens were informed that the committee had denied their application. The Lindens thought that the committee had improperly denied the application because Susan Gonzales, who had informed them of the denial, referenced as a reason for the denial, a setback provision in the deed restrictions that was not applicable to the Lindens' property. Gonzales suggested that the Lindens reapply for permission to build a chain-link fence and express their opinions on the setback provisions to the committee. According to the Lindens, Gonzales told them that a letter explaining their position would be a sufficient reapplication. During her discussion with the Lindens, Gonzales explained that the committee had another 45 days to act on a new application.

The Lindens submitted their reapplication on March 15, 2004, and Gonzales received it the same day. Neither the association nor the committee took action on the Lindens' application within the next 45 days. On May 5, 2004, the Lindens sent a letter to the association advising it that, according to the deed restrictions, the committee was presumed to have approved the Lindens' chain-link fence by not acting within the requisite 45-day period and that construction of the fence would commence immediately. The Lindens completed construction of the fence before the end of May 2004 and were subsequently sued by the association.

The association asserted that the Lindens violated the deed restrictions by building a fence without the committee's approval, sought to permanently enjoin the Lindens from maintaining a chain-link fence on their property, and asked the court to order the Lindens to remove the existing fence as well as pay its attorney's fees. The Lindens contended that they had not violated the deed restrictions and counterclaimed, seeking a declaratory judgment that construction of their fence complied with the deed restrictions. They also sued to recoup their attorney's fees. At trial, the issues were expanded to include a determination of whether the deed restrictions prohibited chain-link as a fence material and whether the fence on the Lindens' property was in harmony with the existing structures in the subdivision. A jury returned a verdict in favor of the Lindens, and the association appealed.

The association contended in its appeal that the trial court erred in finding that the Lindens' May 5, 2004 letter was a reapplication for approval of a chain-link fence and also erred in finding that a second 45-day default period commenced as a result of the Lindens' May 5th letter. According to the appellate court, there was enough evidence at trial to come to the conclusion that the letter was a reapplication and that a second 45-day default period commenced as a result of the Linden's May 5th letter. The appellate court based its decision, in part, on the fact that at trial, B.J. Linden testified that Gonzales told him that the Lindens could resubmit their application to build a chain-link fence by sending a letter to the architectural control committee. B.J. also testified that Gonzales said the committee would have another 45 days to grant or deny the application. While B.J.'s testimony supported the reapplication notion, Gonzales countered B.J.'s assertion by testifying that the letter did not constitute a reapplication and that she did not regard it as such. While there was evidence both supporting and contradicting the finding that the letter constituted a reapplication and commenced another 45-day default period, the court held that the jury's findings were not so contrary to the weight of the evidence as to be clearly wrong and unjust. Therefore, the appellate court did not overturn the jury's decision.

In addition to the trial testimony, the appellate court considered the deed restrictions to determine if the Lindens' May 5th letter constituted a reapplication and commencement of another 45-day default period. The court stated that, while the association assumed the only way that the Lindens could have complied with the deed restrictions was to receive written approval from the association, the deed restrictions allowed for presumed approval because the restrictions stated that, "in the event the committee fails to approve or disapprove the plans within 45 days after the plans have been submitted, approval will be presumed…" Considering the trial testimony and the language of the deed restrictions, the appellate court held that the jury's findings were not as contrary to the weight of the evidence as to be clearly wrong and unjust. Therefore, they refused to overturn the jury's finding that the letter constituted a reapplication and commenced a second 45-day default period. Further, the appellate court held that the evidence was factually sufficient to support the jury's finding that the Lindens' construction of the fence was not a wrongful act and summarily overruled the association's complaints on these issues and affirmed the trial court's judgment.

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

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Restrictive Covenants Enforceable without Architectural Control

Kleinhans v. Kunsmans, No. C053268, Cal. App. Ct., March 13, 2007

Covenants Enforcement/Architectural Control: In an unpublished opinion, a California appeals court ruled that complaining neighbors could enforce restrictive covenants against a neighbor who intended to build a 5,000-square foot detached garage that violated restrictive covenants because the neighbors had not waived their right to enforce the declaration or acquiesced in the violation, even in the absence of an architectural control committee.

In 1958, Alpine Acres, a residential subdivision, was created on the outskirts of Portola, California. Consisting of 18 lots, Alpine Acres was also subject to a declaration of lot restrictions setting forth various restrictions, covenants, and conditions relating to use of the lots. Harold and Norma Kunsman acquired a lot in June 2002 and moved to Alpine Acres in August 2004. In July 2004, the Kunsmans took delivery of 16 telephone poles on their lot in preparation for constructing a pole barn on the property to store vintage race cars, motorcycles, a trailer, a go cart, and potentially an RV. Two neighbors confronted Harold Kunsman regarding the planned structure and informed him of the existence of the declaration.

In September 2004, the Kunsmans decided to build a steel structure instead of a pole barn and posted and mailed to their neighbors a notice of intent to remove some trees from their lot for the purpose of building a detached garage. In October 2004, the Kunsmans applied for a building permit from Plumas County to build a 50x100-foot garage located toward the northwest corner of the lot (near the street). The county approved the application and issued a building permit in November 2004 that specified the required setbacks for the garage as 20 feet from the front of the lot and five feet from the side.

After the permit was issued and digging began, the contractor ran into granite boulders that required the building to be moved five feet further away from the side lot line, leaving the Kunsmans with a front setback of 25 feet and a side yard setback of 15 feet (five feet less than required by the declaration). The 5,000-square foot concrete slab was poured in November, and by late February the Kunsmans had erected a steel frame for the building. Dieter and Ursula Kleinhans and other neighbors of the Kunsmans contacted the county and appealed to its board of supervisors to reevaluate the planning commission's issuance of the building permit. The board rejected the appeal.

In March 2005, the Kleinhans and the other neighbors sued the Kunsmans for injunctive and declaratory relief and damages, alleging that the building setbacks and size violated the declaration's restrictions. The complaint also alleged that the building constituted a nuisance that should be abated. The trial court entered a temporary restraining order prohibiting the Kunsmans from continuing construction. In their answer, the Kunsmans claimed that the declaration's restrictions were unenforceable because they had been waived, excused, or otherwise not acted upon after being recorded in 1958 and that the neighbors were guilty of laches because they had failed to act until after the Kunsmans had invested a significant amount of money in the project.

The trial court denied virtually all relief to the neighbors. Although finding that the restrictions were reasonable equitable servitudes of which the Kunsmans had constructive notice and that the partially completed structure was not in compliance with the declaration's requirements, the court determined that it would be unfair to enforce the restrictions. The court noted that the neighbors had either waived enforcement of the declaration or unreasonably delayed seeking enforcement. The court also pointed out that there was insufficient evidence to conclude that an architectural control committee had ever been formed or operated, that any of the subdivision's buildings were constructed in compliance with the declaration, and that there was a complete lack of uniformity in the development of the subdivision. Because the court found that the Kleinhans and the other neighbors themselves failed to comply with the declaration they had waived and even acquiesced to violations of the declaration. Furthermore, on the issue of laches, the court found that the neighbors unreasonably delayed in seeking enforcement of the declaration, but even this lapse of time was not as significant as the almost 50 years that had passed during which the owners in the subdivision had failed to establish an architectural control committee to implement and enforce the restrictive covenants in the declaration. The Kleinhans and the other neighbors appealed.

The appeals court stated that waiver of the right to enforce a lot restriction in a subdivision may be found where a plaintiff has acquiesced to violations of the same or similar restrictions by other landowners. According to the court, the trial court concluded that the Kunsmans' neighbors had waived their right to enforce the setback and size restrictions violated by the Kunsmans' building because they had acquiesced in the lack of implementation or enforcement of the restrictive conditions at other times. Such instances included the neighbors' failure to comply with certain restrictive conditions and also the general failure to implement and enforce restrictions over the past 50 years as evidenced by the failure to form and operate an architectural control committee and the lack of uniformity in development.

The court agreed with the contention that there was some evidence of the existence and operation of an architectural control committee but declared that the trial court could have reasonably found that the committee never actually operated. Furthermore, even though the fact that the committee may never have operated was not a necessary indication that the declaration had failed to be implemented or that the restrictive conditions had been abandoned. However, the court noted that the trial court's finding that the committee never actually operated supported the finding that there was, in effect, a wholesale abandonment of the requirement that no building could be erected without the committee's approval.

The court also declared that the lack of uniformity in development was immaterial for purposes of the Kunsmans' defense of waiver because the lack of uniformity would be relevant only to the extent it might reasonably have induced the Kunsmans to believe that restrictions in the declaration were no longer in effect. The court disagreed with the trial court's finding that a reasonable observer could have concluded from the lack of uniformity that there was no architectural control committee in the subdivision or whether the restrictions in the declaration were being implemented.

The court also found that no evidence was introduced to establish that the other neighbors' violations of the restrictions supported the trial court's determination that the declaration was never implemented and that the Kleinhans and the other neighbors had violated or acquiesced in violation of garage size or setback restrictions. Furthermore, there was no evidence of the widespread knowledge of any activities or violations that would have been necessary for acquiescence in these violations. The court noted that even if the owners in Alpine Acres could have been deemed to have acquiesced in the violations, such acquiescence still would not have given the Kunsmans reason to believe they could build an oversized garage on their property.

Finally, the court determined that the trial court's finding of laches did not have substantial support in the evidence because the failure to operate an architectural control committee could not be deemed a delay in seeking enforcement of the conditions sought to be enforced by the neighbors, because in any event the committee's role was not to implement and enforce those conditions. Because there was no reasonable basis for the trial court's conclusion that it would be inequitable to enforce the restrictions violated by the Kunsmans' building, the court reversed the trial court's judgment and awarded costs to the Kleinhans and the other neighbors.

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

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Association Ratification Makes Articles Valid Even When Not Filed with State

Picard v. Sugar Valley Homes Association, 151 P.3d 850 (Kan. App. 2007)

Documents/Powers of the Association: Even if an amendment to articles of incorporation is not filed with the secretary of state, it can be valid if ratified by the association. Also, the association can insist that members be current on their assessments in order to vote in an election of directors.

Sugar Valley Lakes Homes Association ("association") was incorporated in November 1973. In 1974, Hidden Valley Lakes Association ("Hidden Valley") merged with Sugar Valley, and a merger agreement was filed with the Kansas Secretary of State. Subsequently, at a special meeting of the association on July 8, 1978, the members of the association approved a change in the association's bylaws. The changes reflected the merger with Hidden Valley by increasing the number of members on the association's board of directors from three to five. Three of the directors on the five-member board were to be selected from members owning property in Sugar Valley, and two of the directors were to be selected from members owning property in Hidden Valley.

At the association's annual meeting in 1996, the association's bylaws were changed to read, "The rights of membership are subject to the payment of annual and special assessments levied by the association." On January 24, 2004, the association held its annual meeting, at which the board determined there was a quorum. In calculating the quorum number, the board deducted the number of association-owned lots and lots with past due assessments. Robert Lowe was a candidate for one of the board positions to be elected at that meeting.

Proxies were mailed to all members, and the ballots used in the election stated that only votes of members who were in good standing or who were current on assessments would be counted. On May 19, 2004, Londa Picard, Joseph Price, Robert Province, and Robert Lowe sued the association, alleging violations of various Kansas statutes and requesting that the 2004 election be declared invalid and set aside. The trial court addressed two main issues: (a) whether the association correctly determined a quorum for its 2004 annual meeting; and (b) what governing documents were in effect for the association during that 2004 meeting, since the articles of the incorporation were not amended and filed to reflect the changes agreed to by the board during the 1974 meeting.

The trial court ruled in favor of the association, determining that the association correctly met the quorum requirements for its annual meeting in 2004 after subtracting lots that were exempt from assessments and lots that were delinquent regarding assessments. The court also determined that the amended and restated bylaws dated January 13, 1996, which had been continuously used by the association for 10 years, were valid. The court determined that the members' voting rights were controlled by the articles of incorporation and the bylaws and concluded: (a) it was unfair to allow members who did not pay assessments to vote for board members; (b) the failure to amend the articles of incorporation to reflect the changes in the number of board members from three to five was a technicality that was overcome by many years of ratification by the members; (c) no member had been harmed by the association's failure to amend the articles of incorporation; and (d) failure to pay assessments does not result in loss of membership but results in a loss or suspension of a membership right, (in this case, the right to vote). Picard and the other owners subsequently appealed.

The appeals court upheld the trial court's decision, citing Kansas case law that supports the legal tenant that "the power to take action includes the right to ratify." The court further explained that the trial court correctly concluded that association members ratified the election of five board members by electing five board members for nearly 30 years. The articles of incorporation were correctly ratified and thus valid despite the fact that they were not timely amended. The court alluded to the fact that there might have been a different outcome had Picard and the other owners demonstrated harm or prejudice to association members regarding the board's failure to amend the articles of incorporation.

After addressing the ratification issue, the court looked at whether the association could prohibit members from voting if they are behind in paying their assessments. The court stated that it agreed with the trial court on this issue as well. The court ruled that the limitation on membership rights based upon payment of association dues or assessments had been in the bylaws since the association's inception. The court noted that common sense dictates that to participate in the election of the governing body voters can be required to be current on their assessments. According to the court, there is a distinction between conditions of membership and rights of membership. Failing to pay assessments does not result in loss of membership, merely loss or suspension of a membership right, which is valid under Kansas law and also valid under the governing documents. Therefore, the court affirmed the trial court's decision.

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

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Property Management Indemnity Clause Falls Short of Complete Protection

Queen Villas Homeowners Association v. TCB Property Management, No. G037019 Cal. App. Ct., February 28, 2007

Risks and Liabilities: In an unreported case, a California appeals court ruled that a property management group ineffectively relied on an indemnity clause for protection against a director who took funds in exchange for overseeing ongoing litigation without proper approval.

Jacqueline Wilburn, a member of the board of directors of the Queen Villas Homeowners Association in Inglewood, California, suggested to the association's board that she was the director best suited to manage ongoing construction defect litigation. Wilburn agreed to provide services to facilitate the litigation, including selecting and communicating with counsel and coordinating the litigation on the association's side. Wilburn was paid for her services from the association's checking account. TCB Property Management ("TCB") managed the association's checking account and therefore had some understanding that the association was paying Wilburn.

A dispute arose as to whether Wilburn was properly paid or whether TCB had a duty to stop the self-dealing. The association sued TCB, stating that it breached at least two of its contractual duties to the association: (1) requiring two signatures on all association expense checks; and (2) furnishing a monthly financial report to the board that included expense statements and check registers. As a result, the association claimed that Wilburn embezzled $134,000 of association money.

The trial court ruled in favor of TCB based on an indemnity clause in the management agreement. The clause allowed "passive" negligence and also stated that the damages sustained by the association were not solely TCB's fault.

The association appealed the decision, arguing that the indemnification agreement was a direct, two-party exculpatory clause. The appeals court noted that the management contract fixed specific duties upon TCB regarding management of the association's checking account. In addition, the court pointed out that there were no references in the language of the indemnity clause to the specific risk associated with the checkbook management services. The reference in the indemnity clause to "sole negligence" underscored the purpose of the indemnity agreement as a classic third party indemnity agreement. As a result, the appeals court reversed the trial court's decision and allowed the association to recover its costs on appeal.

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Statute Restricting Who May Serve on Board Does Not Apply Retroactively

Taniguchi v. Association of Apartment Owners of King Manor, Inc., No. 27500, Supreme Court of Hawaii, April 12, 2007

State and Local Legislation and Regulations: A Hawaii statute that restricts resident condominium managers from serving on an association's board of directors did not apply because the statute establishing the law did not apply retroactively.

The Association of Apartment Owners of King Manor, Inc. ("association") was established on September 9, 1968 when a declaration of horizontal property regime was filed with the Hawaii Bureau of Conveyances. The association's original bylaws were also recorded on that date. The original bylaws did not restrict a resident manager of the condominium from serving on the board of directors.

On June 9, 1976, the Hawaii Legislature adopted Act 239 (the "Act"), which stated that association bylaws should provide that resident managers of condominiums are not permitted to serve on the board of directors. The legislature also specified that the Act should "not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun before June 9, 1976." On October 7, 1985, the association recorded a first amendment to its bylaws. On January 16, 2001, the board resolved to restate its bylaws ("first restated bylaws"), which organized into one document all existing provisions of the original bylaws as well as the provisions of the October 1985 amendment. In addition, the first restated bylaws added the following language in order to comply with the Act: "No resident manager shall serve on the Board of Directors." On February 21, 2001, all then-existing members of the association were mailed a copy of the first restated bylaws.

On September 16, 2001, after the association experienced problems with several of its resident managers, the board hired two of its existing members, William King and Ruby Clairmont, to share the job of resident manager. As compensation, King was permitted to occupy the apartment provided for the resident manager, and Clairmont received the salary of the resident manager. While working as resident managers of the condominium, King and Clairmont continued to serve as members of the board, with King continuing in his capacity as president.

Shortly thereafter, Glenn Taniguchi, an attorney and member of the association, challenged the board regarding whether the arrangement with King and Clairmont violated the first restated bylaws. John Morris, the association's attorney concluded that a resident manager of a condominium project could serve on the board because the Act only applied prospectively, and therefore did not apply to the association. He contended that since the Act did not apply to the association, its provisions did not need to be included in the first restated bylaws, as that was not required by law.

On September 17, 2002, Taniguchi sent a letter to the board that stated that in his opinion the board should present the members of the association with the first restated bylaws for approval or disapproval at the next association meeting. On October 3, 2002, the board mailed a letter to the members of the association. The letter stated:

           
Several apartment owners have asked that the owners be allowed to vote at the upcoming annual meeting to approve the first restated bylaws. The board has agreed to that request. The restated bylaws were completed by the [A]ssociation's prior attorney in 2001, approved by the board, and recorded….A problem has now arisen because of certain changes which were made to the restated bylaws. The law permits the board to restate the declaration and bylaws, without owner approval, but only to include: (i) all changes already approved by the owners; and (ii) any changes required by law. Any other changes must be approved by the owners.

            Unfortunately, the restated bylaws for King Manor include provisions from the condominium law which are not required by law and were not approved by the owners. Therefore, those provisions should not have been included in the restatement.

            Nevertheless, 65 percent of the owners can vote to include those provisions in the restated bylaws. Since and [sic] several owners have asked that the owners be allowed to vote on those provisions at the annual meeting, and since the board has agreed to that request, the issue will be presented for a vote at the upcoming annual seminar,… so the owners can decide.

            For your information, the following provisions are included in the restated bylaws but are not required by law (but can be approved by 65 percent of the owners).

           
….Stating that no resident manager can serve on the board…

           
Please review those sections and be ready to vote for or against them at the annual meeting.


At the annual meeting on October 15, 2002, the membership voted against including the provisions from the Act in the first restated bylaws. On November 4, 2003, the board resolved to restate the bylaws a second time ("second restated bylaws"). The Second Restated bylaws removed from the bylaws the ban regarding a resident manager serving on the board at the center of this controversy and other provisions from the Act that were enacted into the statute after King Manor was established in 1968. On March 3, 2004, Taniguchi sued the association and several board members asking the court for declaratory and injunctive relief related to several issues.

Taniguchi first asked the court to rule that the association's first restated bylaws were the legal and valid bylaws that govern the association and its membership and that the section of the first restated bylaws restricting a resident manager from serving on the board was legally valid and subject to enforcement.

Second, Taniguchi asked the court to declare that King, as president of the association, president of the board, and former board member, and Clairmont, as a board member, had no authority to assume the position of resident manager unless the bylaws permitted managers to serve on the board.

He also asked the court to rule that that board failed to satisfy the fiduciary standards imposed by Hawaii law in carrying out its duties, to order King and Clairmont to vacate their seats on the board, and to require the association to hold a new election to fill the vacancies.

Finally, Taniguchi asked the court to declare that King and Clairmont violated Hawaii law when they solicited proxies prior to the October 2002 annual meeting and to declare that all except one of the nominations to the board at that meeting were null and void.

On March 11, 2004, the association recorded the second restated bylaws, and on March 29, 2004, Taniguchi added another count to his complaint, which asked the court to invalidate the second restated bylaws.

The association asked the court to grant it summary judgment for all counts of Taniguchi's complaint. The trial court ruled in favor of the association on all counts. As to count one, the court determined that the law did not require or authorize the board to include the provisions of the Act in a restatement of the bylaws. As to count two, the court ruled that the law did not prohibit a director of the association from serving on the board because the project was not subject to the Act, and therefore, the board did not violate the law by allowing King and Clairmont to serve on the board.

As to count three, the court denied Taniguchi summary judgment because the board members did not act in bad faith or violate their fiduciary duties when, at the October 2002 annual meeting, they asked association members to ratify the first restated bylaws. Regarding counts four and five, the court ruled against Taniguchi because he did not prove that King solicited and voted proxies at the October 2002 annual meeting of the association and because the owners voted at that meeting not to include the language of the Act in the restatement of the bylaws. The court also based its opinion as to count five on the fact that the board approved a second restatement of the bylaws to implement its decision, and the law did not require the language of the Act to be included in the restated bylaws. Taniguchi appealed.

In its opinion, the Hawaii Supreme Court affirmed the trial court's decision and stated that it is a well-settled tenant of law that statutes are to be construed as being prospective unless the legislature intended expressly to make them retrospective or they are retrospective as implied from the language used. Since the legislature did not expressly declare or necessarily imply that the Act would be retroactively applied, the bylaw requirements of the Act do not apply to the association. The Supreme Court also rejected Taniguchi's other arguments on technical grounds, including mootness and failure to demonstrate genuine issues of material fact, and affirmed the trail court's decision.

 

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