November 2007
In This Issue:
Rules and Regulations Donít Violate Residents' Rights of Free Speech and Assembly
Jury Must Decide if Parking Accommodations for Handicapped Resident Reasonable
Amendment Valid Because Owners Paid Assessments and were Involved in Association
Deference Given to Good Faith Efforts of Association Boards
Unit Owners Defraud Association by Using Insurance Proceeds for Living Expenses, Attorney Fees
Board Members Required Only to Act in Good Faith
Constitutionality of North Carolina Planned Community Act Upheld
Smoking Not a Constitutional Right
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Rules and Regulations Donít Violate Residents' Rights of Free Speech and Assembly

Committee for a Better Twin Rivers v. Twin Rivers Homeowners' Association, 192 N.J. Super. 344, 929 A.2d 1060 (2007)

State and Local Legislation and Regulations/Covenants Enforcement/Association Operations:  Rules and regulations enacted by a homeowners association that govern posting of signs, access to the community newspaper, and restrictions on the use of a community room do not violate New Jersey's constitutional guarantees of free expression.

Twin Rivers is a planned unit development consisting of privately owned condominium duplexes, townhouses, single-family homes, apartments, and commercial buildings located in East Windsor, New Jersey. The community is located on approximately one square mile of land occupied by approximately 10,000 residents.

Twin Rivers Community Trust ("Trust") is a private corporation that owns the common property and facilities. Twin Rivers Homeowners' Association ("association") is a private corporation that serves as trustee of the Trust. The association is authorized by the Trust to make rules and regulations for the conduct of its members while occupying the land owned or controlled by the Trust, to provide services to its members, and to maintain common lands and facilities in Twin Rivers. The association maintains the private residential roads, provides street lights and snow removal, assigns parking spaces, and collects trash in the community. Each person who purchases property in Twin Rivers automatically becomes a member of the association and is subject to its articles of incorporation and bylaws. The association is governed by a board of directors that is elected by the members. The board is responsible for making and enforcing the rules and for providing services to members financed through assessments levied pursuant to an annual budget adopted by the board.

Several residents of Twin Rivers formed a committee known as the Committee for a Better Twin Rivers ("Committee") in order to change the way Twin Rivers was governed. The Committee sued the association and its president, seeking to invalidate various rules and regulations. The Committee asserted that the association had effectively replaced the role of the municipality in the lives of the residents and that the association's rules and regulations should be subject to the free speech and free association clauses of the New Jersey State Constitution.

The Committee first sought to invalidate the association's policy that limited signs to one per lawn and one per window and prohibited the posting of signs on utility poles and natural features within the community. It asked the trial court for an injunction to permit reasonable regulation of posting of political signs on the community common elements, arguing that the association's current policy was unconstitutional.

The Committee also sought temporary and permanent injunctions that would allow residents to use the community room in the same manner as other similarly situated amenities. The community room is open to residents of Twin Rivers and clubs, organizations, and committees approved by the Trust who want to rent the room for parties and other events. Persons who rent the room are charged a rental fee and are required to provide a certificate of insurance naming the association as the insured. The Committee asserted that the fees were excessive and not related to actual rental costs and that the association's policy denied them equal protection of the laws and unreasonably and unconstitutionally violated their rights to access the community room on a fair and equitable basis.

In the third count of their suit, the Committee asked the court to enjoin the association's president from using the newspaper "as his own personal political trumpet." The Committee alleged that it was denied equal access to the association's monthly newspaper. The newspaper provides news and information to residents concerning Twin Rivers, and the content of the newspaper is selected by its editorial committee. The paper is delivered to all residents of Twin Rivers but not to the general public. The Committee sought a declaration that all Twin Rivers residents should have equal access to the newspaper.

The association filed a motion for summary judgment, and the Committee filed a cross-motion. Because the material facts of the case were not disputed, the trial court granted the association's motion for summary judgment on the signs claims and the newspaper claims. It also granted partial relief to the Committee on its claims concerning the community room, finding that the rules and regulations governing its use were vague.

The trial court based its determinations on the fact that Twin Rivers is not a quasi-municipality and, therefore, was not subject to the New Jersey Constitution's free speech and association clauses. The trial court noted that although the association exerted considerable influence over the lives of Twin Rivers residents, the impact was a function of a contractual relationship that residents entered into when they elected to purchase property in the community. The court applied the traditional test for evaluating the reasonableness of the Twin Rivers restrictive covenants and found that the covenant relating to the posting of signs was reasonable and enforceable but directed the association to modify the regulations governing use of the community room to provide clear standards for granting or withholding permission to use the room.

The Committee appealed. In a published opinion, the appeals court reversed the trial court, finding that the association was subject to state constitutional standards with respect to its internal rules and regulations. The appeals court's opinion stated that, "in balancing the interests of the parties. . . ," the Committee's "rights to engage in expressive exercises must take precedence over the association's private property interests." The association petitioned the New Jersey Supreme Court for certification on whether the New Jersey Constitution applies to its internal rules and regulations.

The association argued that the test set forth in State v. Schmid, 84 N.J. 535, 423 A.2d 615 (1980) controls the disposition of its appeal and contends that under that test, it was erroneous to impose constitutional obligations on its private property. The association urged the court to follow the vast majority of other jurisdictions that have refused to impose constitutional obligations on internal membership rule of private homeowners associations. In support of its view, the association asserted that it does not invite public use of its property, and its members participate in the decision-making process of the association. Its members are afforded extensive statutory protections, and the business judgment rule protects members from arbitrary decision-making. Further, the association argued that the relationship with its members is a contractual one, set forth in reasonable and lawful covenants that appear in all deeds.

The Committee asked the Supreme Court to uphold the judgment of the appeals court that the New Jersey Constitution limits the manner in which the association may interact with its members. It argued that political speech is entitled to heightened protection and that residents should have the right to post political signs beyond the association's restricted sign policy. Additionally, it argued that the excessive fees charged for the use of the community room are not related to the actual costs incurred by the association and that the New Jersey Constitution requires that the association publish the Committee's views on an equal basis with which the association's views are published in the community newspaper.

The Supreme Court applied the multifaceted standard set forth in State v. Schmid and in New Jersey Coalition Against War in the Middle East v. J.M.B. Realty Corp, 138 N.J. 326, A.2d 757 (1994) cert. denied, 516 U.S. 812, 116 S.Ct. 62, 133 L.Ed. 2d 25 (1995), a case where the court not only relied on the three-pronged test in Schmid, but also on the general balancing of expressional rights and private interests in addressing the distribution of leaflets in shopping malls. In applying the principles of Schmid and New Jersey Coalition, the court explained that balancing the rights of citizens to speak and assemble against private property rights required the court to consider the nature and importance of the affected right and the need for retaining the restriction.

Citing another New Jersey case, the court agreed with an opinion that emphasized that the more important the constitutional right sought to be exercised, the greater the need to justify interference with that right. Weighing these considerations, the court determined that the association's policies, as they are set out in its rules and regulations, do not violate New Jersey's constitutional guarantees of free expression.

The court stated that New Jersey law differs from federal law in that there need not be "state action" to enforce constitutional rights against private entities. In Schmid, the New Jersey Supreme Court ruled that under certain circumstances, rights of free speech and assembly under the New Jersey Constitution are secure from interference by the owner of private property. The test crafted by the court to ascertain the parameters of the rights of speech and assembly on the privately owned property and the extent to which such property reasonably can be restricted to accommodate those rights, includes the following criteria: (1) the nature, purposes, and primary use of such private property, generally, its "normal" use; (2) the extent and nature of the public's invitation to use that property; and (3) the purpose of the expressional activity undertaken on such property in relation to both the private and public use of the property. In assessing the reasonableness of any restrictions, the court would consider whether there exist convenient and feasible alternative means to individuals to engage in substantially the same expressional activity.

The court acknowledged that the vast majority of jurisdictions other than New Jersey have interpreted state constitutional provisions with similar language to require "state action" as a precondition to imposing constitutional obligations on private property owners. In the absence of state action, a court must determine whether the acts of the association violate its members' free speech and association rights in the setting of the private community. The court found that this case involved restrictions on conduct both on the association's property and on the homeowners' properties.

As to the first factor set forth in Schmid, the court found that the nature, purposes and primary use of the Twin Rivers property is for private purposes and did not violate the Committee's constitutional rights. As to the second factor, the court found that the limited nature of the public's invitation to use the property did not support a finding that the Committee's constitutional rights were violated. As to the third factor, the court found that the Committee's expressional activities were not unreasonably restricted.

The association and the homeowners had a contractual relationship that was formalized in covenants that appeared in all deeds to property in the community. The mutual benefit and reciprocal nature of the rules and regulations and their enforcement is essential to the fundamental nature of the communal living arrangement that the residents enjoy.

Whether the merits of the Committee's arguments were weighed singly or in combination, those arguments did not satisfy the Schmid/New Jersey Coalition test. Balancing the Committee's expressional rights against the association's private property interest, the court found that the association's policies did not violate the free speech and right of assembly clauses of the New Jersey Constitution.

The court recognized the Committee's concerns that bore on the extent and exercise of its constitutional rights in Twin Rivers and in other common interest communities. The court stated that, at a minimum, restrictions on the exercise of rights by associations governing common interest communities must be reasonable as to time, place, and manner. The court stated that its decision did not suggest that residents of homeowners associations may never successfully seek constitutional redress against a governing association that unreasonably infringes their free speech rights. Finding, however, that other protections were available to the Committee, including the business judgment rule and those statutes that set forth the powers and duties of homeowners associations, the court reversed the decision of the appeals court and reinstated the trial court's ruling.

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

Jury Must Decide if Parking Accommodations for Handicapped Resident Reasonable

Estate of Nicolas v. Ocean Plaza Condominium Association, Inc., 388 N.J. Super. 571, 909 A.2d 1144 (2006)

Federal Law and Legislation/State and Local Legislation and Regulations: After determining that a unit owner, acting on behalf of his mother's estate, had a cause of action for disability discrimination by a condominium association, a New Jersey appeals court remanded the case for a jury to determine whether the association had offered reasonable accommodation related to parking spaces.

After Stratus Nicolas retired and became his mother's caretaker, he purchased a unit in Ocean Plaza Condominium that was located on the first floor of the six-floor condominium. All parking spaces for the unit owners were located on the same level, with about two spaces for each unit. When he bought the unit, Nicolas told the sales agent that the sale was contingent on a first-floor, ramp-accessible unit being available, along with a parking space near the elevator. His mother, Vaciliki Nicolas, was blind, partially deaf, and wheelchair bound. When the Nicolases moved into the unit in 1992, Stratus Nicolas used a parking space next to the elevator, but when someone purchased a unit that corresponded to the parking space he was using, the sales agents for the condominium asked him to park in the space assigned to his unit. That space was in the center of the parking area, and through 1995 Nicolas complained to the association about its not accommodating his request for a parking space near the elevator.

In 1996, the association pled guilty to a charge by the state that it failed to provide accessible handicapped parking spaces. In 1998, the association designated several parking spaces as handicapped, although none of those spaces was near the elevator. The association offered Nicolas one of those spaces. The space was closer to the elevator than the one assigned to his unit, but it was still 75 feet away. Nicolas declined the offer, stating that the designated handicapped spaces did not give disabled people a clear view before they entered the path of traffic.

In 2000, Nicolas, individually and as his mother's guardian, sued the association, claiming handicapped discrimination under the Fair Housing Amendments Act and New Jersey's Law Against Discrimination ("Act"). Nicolas wanted money damages and equitable relief, but the federal district court ruled in favor of the association, stating that Nicolas's claims were time-barred. Nicolas appealed, and the appeals court remanded the case because there was a question about whether the claim on behalf of Vaciliki Nicolas should be considered time-barred because of her mental condition. On remand, the trial court dismissed Vaciliki Nicolas's claim.

In 2003, Nicolas sued the association in state court, with the association responding by asking the court for summary judgment. The trial court granted the association's motion for summary judgment, noting that Nicolas did show that his mother was insane and that insanity was a legitimate basis to toll the statute of limitations. The court also noted that Nicolas failed to prove that the unavailability of the one parking space close to the elevator was a violation of the Act. Nicolas appealed, and the appeals court considered whether the claim was time-barred and whether the association was entitled to summary judgment because Nicolas had not established that the association had discriminated against his mother on the basis of insanity.

Citing a New Jersey statute, the court determined that the statute of limitations for Nicolas's claim could have been tolled if it was shown that Vaciliki Nicolas was insane. Therefore, the court examined whether there was a genuine issue of material fact as to her insanity. The association argued that Nicolas failed to prove his mother's insanity because no expert reported that she was insane. The court disagreed and pointed out that insanity can be established through the testimony of laypersons. Because Nicolas supplemented his own testimony as to his mother's limitations with deposition testimonies of two doctors, the court concluded that there was a genuine issue of material fact as to whether Vaciliki Nicolas's mental state prevented her from understanding her legal rights and suing the association.

In addressing Nicolas's claim that the lawsuit should not have been dismissed, the court was convinced that Nicolas had a cause of action under a state administrative regulation when a condominium association fails to provide reasonable accommodation. Specifically, the court noted that New Jersey's Department of Community Affairs adopted a regulation in 1986 that provides:

Any owner of a multiple dwelling with five or more dwelling units which provides parking to the occupants thereof, and in which a handicapped person resides, shall provide parking spaces for occupants who are handicapped located at the closest possible proximity to the principal accesses of the multiple dwelling.

Citing Gittleman v. Woodhaven Condominium Association, 972 F. Supp. 894 (Dist. N.J. 1997), the court determined that a condominium association, as manager of the common elements, had a duty to make decisions that were consistent with the provisions of the Fair Housing Amendments Act. In Gittleman, that meant assigning a parking spot close to the home of a handicapped owner. Based on federal and state case law, the court ruled that Nicolas had a cause of action against the association and remanded the case, acknowledging that a jury should decide whether the accommodations offered by the association were reasonable.

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

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Amendment Valid Because Owners Paid Assessments and were Involved in Association

Ebel v. Fairwood Park II Homeowners' Association, 136 Wn. App. 787, 150 P. 3d 1163 (2007)

Documents: Where property owners had ratified an amendment to a declaration establishing a homeowners' association by paying dues and otherwise participating in the association, they were estopped from challenging the authority of the association and the amendment establishing the association.

Walter and Linda Ebel and several other people owned homes in the Fairwood Park II subdivision ("Fairwood II"), the second phase of the Fairwood Park ("Fairwood I") subdivision, which was developed in the 1960's. The Declaration of Covenants, Conditions, and Restrictions for Fairwood I was recorded in 1967 and provided for a homeowners association. In 1969, the plat for Fairwood II was recorded and referred to a homeowners association, but no association documents were filed. The declaration for Fairwood II was recorded in 1972 and addressed architectural control, business and commercial uses, temporary structures, animals, signs, fences, and other restrictions but did not establish a homeowners association.

The declaration for Fairwood II also had an amendment procedure, and in 1998 the Fairwood II property owners adopted an amendment establishing the Fairwood Park II Homeowners' Association ("association"). None of the owners in this case signed the document, but they all paid dues and participated in the association to varying degrees. In 2004, the Ebels and other owners sued the association, asking the court to rule that the association did not have authority to act and claimed that the 1998 amendment to the declaration was invalid. When the court ruled in favor of the association and dismissed the case, the owners appealed.

The appeals court determined that the 1998 amendments, which created the association, simply changed how violations of the 1972 declaration for Fairwood II would be addressed and placed quarterly assessments on the property. Because the 1998 amendments did not significantly change the 1969 plat dedication for Fairwood II, which referred to a homeowners' association, or restrictions on property owners in Fairwood II, the court ruled that the 1998 amendment creating the association was proper. Furthermore, the court determined that because the owners ratified the 1998 amendments by remaining silent regarding any issues they may have had with the amendments, paying dues for over three years, serving on the board or on committees, submitting requests for property improvements to the association for approval, attending meetings in person or by proxy, and otherwise accepting benefits from the association, they were estopped from challenging the 1998 amendments and claiming that the association lacked authority. The court thus 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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Deference Given to Good Faith Efforts of Association Boards

Smolker v. Pacific Villas Homeowners Association, No. B138229, Cal. App. Ct., March 19, 2007

Association Operations: In an unpublished opinion, a California appeals court ruled that judicial deference is given to good faith efforts of association boards and enforcement of covenants and restrictions that are not wholly arbitrary.

Gary Smolker and his wife, Alice Graham, own a condominium unit in the Pacific Villas, a six-unit condominium complex in Playa del Rey, California. The property consists of a multi-story building with a common hallway that provides the only access from each unit to the front door and the mailboxes. All unit owners own undivided equal interests in the common areas of the condominium complex. Pacific Villas Homeowners Association ("association"), a nonprofit unincorporated association comprised of all homeowners in the complex, controls and manages the common areas.

Unit owners are required to pay assessments used to fund maintenance and repairs of the common areas and operating expenses of the association, and each unit has one vote in the association. As provided in Park Villas' covenants, conditions, and restrictions and in the association's bylaws, an elected, volunteer board directs the association.

In 1996, Pacific Villas required certain repairs, including termite extermination. Graham, the association's treasurer at the time, communicated with, obtained a brochure from, presented information on, and cast a vote for Smolker's unit in favor of retaining the services of Home Saving Termite Control. The association duly authorized the hiring of the exterminator to treat the complex for termite infestation using amorphous silica aerogel, a pesticide dust used to dehydrate and permanently eradicate termites.

In October 1996, the exterminator injected Syloid 244, a trade name for silica aerogel dust, through drilled holes in the common area, garage, and walls of the units. During the course of the extermination and in the subsequent remodel of his kitchen, Matthew Fredericks, then the president of the association, observed that the pesticide dust escaped into units through some unsealed drill holes, phone jacks, light sockets, cracks, and electrical outlets, and settled in electrical boxes and a dumb waiter. Fredericks arranged for the exterminator and a handyman to repair any unsealed holes.

Within a few months, Smolker complained to the association that he, Graham, and their children suffered adverse health effects, which they attributed to the pesticide, including dry mouths, lips and skin, sore throats, and headaches. Smolker also informed the association that, in December 1996, the Los Angeles County Agricultural Commissioner issued a violation notice to the exterminator to cease and desist from using Syloid 244 on all job sites because it was an unregistered poison. Fredericks conveyed Smolker's complaint to the exterminator, who conceded that although Syloid 244 did not have a registered trade name, it was 100% amorphous silica gel and posed no health or environmental hazard. Amorphous silica gel is approved by the FDA for the eradication of termites. The exterminator announced it would use silica gel under another registered trade name.

In 1997, otorhinolaryngologist Eugene Freed diagnosed Smolker, who was otherwise healthy, with irritation by chemicals encountered in his condominium from the termite treatment and prescribed a course of potassium iodine drops. In 1998, dermatologist Letantia Bussell assessed Smolker with "contact dermatitis by history-possibly secondary to pest repellant" and prescribed a lotion. In 1998, toxicologist Nachman Brautbar concluded that Smolker has airway hyperactivity to chemicals. Although Brautbar believed Smolker's dry skin was likely due to exposure to the silica gel, he was unable to ascertain whether Smolker's airway hyperactivity and dizziness arose from exposure to cleaning solutions and smoke at his office building or to the pesticide at his condominium unit.

In 1997, following an emergency meeting of the association to discuss Smolker's concerns, Fredericks contacted the chief inspector for the Los Angeles County Fire Department's Hazardous Materials Section for an investigation. Thereafter, an industrial hygienist with the Los Angeles County Health Department conducted a visual inspection of the premises and concluded that there was no reason for any health concerns with respect to the way the pesticide was applied. The hygienist advised Fredericks that one would have to breathe in a cloud of Syloid 244 to cause a problem. The health department further declined to authorize testing of the exposure levels, finding it to be unnecessary. Fredericks then attempted to obtain private testing of the pesticide. AAA Superior Air Systems responded and collected the dust samples but ultimately declined to test the material because of interference by Smolker and fear that he would sue the business.

Throughout 1997, Smolker demanded that the association, the other unit owners, the exterminator, all their respective insurance carriers, the Smolkers' own insurance carriers, and others pay to tear down his interior walls, seal the pesticide in the walls, install and paint new interior walls, remove air handling equipment, provide and operate a filtering system to remove any pesticide dust in the unit while Smolker lived elsewhere, and remove and replace all personal property exposed to the pesticide dust, including all carpeting, soft furniture, and soft toys.

At the 1999 association annual meeting, the members in attendance discussed the need to re-roof the building. The association voted to assess each unit to fund replacement of the roof. In April 1999, Smolker alerted the association and his fellow condominium owners that the roof was leaking from the common area into his unit. Fredericks advised Smolker to repair the leak. Smolker retained A-1 Roofing, which recommended a new roof. Meanwhile, A-1 Roofing patched a portion of the roof directly over Smolker's unit. Smolker submitted the $500 invoice for his roof repair to the association, which deducted the cost from his assessment payment so that Smolker would not have to pay for a common area repair.

In March 1999, water from a broken pipe leaked onto the carpet in the southern portion of the common area hallway near James and Julie Holland's unit. Smolker's unit is located at the northern end of the common hallway and separated from the site of the leak by a fire door. The association obtained the services of a plumber to repair the leak and submitted the claim to its insurance carrier, Truck Insurance Exchange of TIG Insurance Company (TIG). In October 1999, TIG notified the association that mold was present in the common area hallway in the vicinity of the leak. TIG settled the claim by paying $2,572.79, which was deposited into the association's account in November 1999.

In February 2000, the association contacted Alliance Environmental, an asbestos and mold remediation contractor, to abate the mold in the common area hallway. In March 2000, Alliance Environmental sealed off the hallway, scraped the ceiling, removed the carpet, and cut away the dry wall one foot up from the floor around the perimeter of the hallway. Afterwards, industrial hygienist Enrioncheck, Inc. cleared Pacific Villas for occupancy based on acceptable findings on tape-lift and air samples. By July 2000, the common area hallway was restored with new carpet, drywall, and a new coat of paint.

In 1997, TIG sued Smolker in connection with its denial of coverage of Smolker's claims under his individual insurance policies. In October 1997, Smolker filed a cross-complaint against the exterminator and other parties for negligence and strict liability. In November 1997, Smolker amended the cross-complaint to add parties, including the homeowners association, fellow unit owners, their insurers, and executives of the business that manufactured Syloid 244 for bodily injury and property damage related to the termite extermination and other home repairs on his condominium unit. In November 1999, the trial court dismissed all his complaints, and Smolker appealed.

The appeals court affirmed the trial court's decision. In support of the trial court's grant of summary judgment for the association, the court agreed that Smolker did not raise triable issues of fact sufficient to defeat the rule of deference to the decisions of homeowners associations articulated in Lamden v. La Jolla Shores Clubdominium Homeowners Association, 21 Cal. 4th 249 (1999) (CALR Nov. 1999). In Lamden, the plaintiff brought an action for an injunction and declaratory relief against a homeowners association based on the association's decision to spot treat for termites rather than fumigate entire units.

The Lamden court held that "where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants, and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise." The Lamden court relied on its previous decision in Nahrstedt v. Lakeside Village Condominium Association, 8 Cal.4th 361 (1994) (CALR Oct. 1994), which required judicial deference to good faith efforts of the boards and enforcement of covenants that are not wholly arbitrary. The court in Lamden stressed that its ruling did not immunize the boards from unreasonable actions taken without good faith.

In Smolker, the court explained that the trial evidence demonstrated good faith attempts by Fredericks, as president of the association, to monitor the two-day extermination process, hold meetings, keep the owners apprised of developments, seek out inspectors and an industrial hygienist, and make repairs to contain any potential escape of the silica gel and mold into the units and common areas. Thus, Fredericks demonstrated good faith and an effort to act in the best interests of the community.

Pursuant to its decision in Lamden, the court looked to Pacific Villas' covenants and bylaws for evidence that the board acted appropriately. The court explained that the association's covenants and bylaws provide that the board of directors have the duty and power to maintain and otherwise manage all of the common areas and facilities at Pacific Villas. According to the court, the trial evidence demonstrated that the board acted in good faith by holding meetings for all unit owners to consider plans for the termite extermination, roof repair, water damage, and mold abatement. Since the association complied with the standard set forth in Lamden and exercised a good faith effort in enforcing the covenants, the court upheld the trial court's decision and dismissed all complaints.

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

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Unit Owners Defraud Association by Using Insurance Proceeds for Living Expenses, Attorney Fees

In re: Savage, No. 07-3067 Section "T," U.S. Dist. Ct., E. Dist. of Louisiana, June 29, 2007

Association Operations: Debt owed by a debtor to a creditor is nondischargeable where a creditor entrusts property to the debtor, the debtor appropriates the property for a use other than that for which the property is entrusted, and the circumstances indicate fraud.

Kenneth and Sharon Savage were homeowners in Port Louis, a community that was managed by the Port Louis Owners Association ("association"). On January 29, 2004, an electrical fire broke out in a common wall of the Savages' condominium, which was insured by an insurance policy with Scottsdale Insurance Company the association had acquired to insure against fire damage. The Savages were informed that the insurance policy covered only the damages sustained by the condominium structure and not all damages, meaning that the Savages would not be compensated for the loss of use of their uninhabitable unit.

The Savages were allowed to manage the reconstruction of their unit and the neighboring unit through a special checking account consisting of funds from the insurance proceeds and funds separately deposited by the association. The association also gave the Savages authority to negotiate the insurance claims of the association against the insurance company.

The Savages received a total of $176,546.16 from insurance proceeds and the association as amounts owed under the policy deductible. Payments made toward reconstruction totaled $116,252.50. Additional amounts from the special checking account were further expended, distributed among attorney's fees, living expenses for the Savages and their neighbor, interior restoration expenses, service charges, chargebacks and storage.

On March 13, 2006, the Savages filed for voluntary bankruptcy, and the association filed an adversary proceeding shortly thereafter, claiming unliquidated damages for fraud and embezzlement. The association objected to the use of funds expended by the Savages for living expenses, attorney's fees, funds made payable to cash, and in payment of checks written to the Savages' neighbor and signed by the Savages, alleging that these uses amounted to false pretenses, false representations, actual fraud and theft. The bankruptcy court found that the Savages owed $56,866.39, the total additional expenditures less the service charges and chargebacks, as nondischargeable debt for embezzling proceeds entrusted to them. The Savages appealed.

Noting that a discharge in bankruptcy does not discharge an individual debtor from any debt incurred as a result of embezzlement, the U.S. appeals court stated that the issue was whether the bankruptcy court erred in concluding that the debt owed by the Savages to the association was nondischargeable as a result of a finding of embezzlement. A finding of embezzlement requires that a creditor prove the following: (1) he entrusted property to the debtor; (2) the debtor appropriated the property for a use other than that for which it was entrusted; and (3) the circumstances indicate fraud. Because the association entrusted property (the insurance proceeds) that was essentially owned by the association as the holder of the insurance policy to the Savages, and such funds were not used for the purposes for which they were appropriated (repairing the structure of the Savages' condominium), together with the intent to defraud indicated by the Savages' intentional use of the funds for personal purposes, the court affirmed the bankruptcy 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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Board Members Required Only to Act in Good Faith

Murrell v. Crocker, No. B190152, Cal. App. Ct. (June 28, 2007)

Association Operations: In an unpublished opinion, a California appeals court ruled that any unexpressed position on the part of a homeowner does not create a triable issue of fact pertaining to a board member's good faith compliance with his duties as a board member.

The Murrells and the Fullers are neighbors on adjacent lots in the City of Rolling Hills, California. All are members of the Rolling Hills Community Association ("association"), a nonprofit cooperative corporation governed by a five-member board of directors that includes Donald Crocker. A declaration containing covenants, conditions, and restrictions sets out the rights and obligations between the association and its members. According to the declaration, the association has the authority to cut back or trim trees and shrubs on a member's property in order to preserve the views from adjoining lots.

Additionally, the association has a 10-foot wide easement along the boundary of each lot. This easement provides the association the right to remove trees or shrubs. However, according to the association's attorney, the association does not have the right to remove trees from any member's property not encumbered by the easement without that member's consent.

In 1997, the association passed a resolution establishing procedures for implementing its authority to maintain and improve views. At the same time, the Fullers demanded that the Murrells remove foliage on their property to create a view for the Fullers. To avoid a dispute, the Murrells removed and trimmed some trees and shrubs on their property. In 2000, the Fullers complained to the association about their blocked view, and the association submitted the matter to its View Preservation Committee ("committee"). The committee recommended the removal of 12 trees from the Murrells' property. During 2001, the association removed five trees and trimmed or topped an additional 12 trees on the Murrell's property.

In 2002, the board of directors adopted another resolution, which contained more detailed guidelines and procedures to implement the association's authority to maintain and improve views. In June 2003, the Fullers submitted a second compliant to the association. The committee recommended that two of the Murrells' trees be trimmed, and in late 2003, the Murrells trimmed the trees. The Fullers complained that the trees were not trimmed enough, and in July 2004, the board ordered that a pine tree in the association's easement over the Murrells' property be removed and that other trees not on the easement be severely trimmed. Subsequently, the Murrells sued the association and Crocker for breach of fiduciary duty and declaratory relief based on their conduct in handling the complaints. Before answering the Murrells' complaint, Crocker asked the court for summary judgment on the ground that there was no basis for factual claims against him. The trial court granted summary judgment to Crocker, and the Murrells subsequently appealed.

On appeal, they raised two main issues: (1) whether the trial court erred in sustaining Crocker's evidentiary objections and (2) whether triable issues of fact on the claim for breach of fiduciary duty precluded summary judgment in favor of Crocker. The appeals court quickly dispensed with the Murrells' evidentiary argument by stating that the argument that Crocker's evidentiary objections should have been overruled was insufficient to meet the burden of establishing error or abuse of discretion by the trial court. Since the Murrells failed to establish that the trial court's evidentiary rulings were erroneous or were an abuse of discretion, the court allowed the trial court's rulings on this issue to stand.

In addressing the Murrells' second issue on appeal, the court looked to the standard for directors' actions that was articulated in Frances T. v. Village Green Owners Association, 42 Cal. App. 3d 490, 229 Cal. Rptr. 456, 723 P.2d 573 (1986) (CALR, October 1986), which stated that directors of homeowners associations are fiduciaries who must exercise their powers in accordance with the duties imposed by corporate statutes. The court also noted that a director fulfills his or her duty to an association member by strictly enforcing the provisions of the declaration but that the director has no fiduciary duty to exercise his discretion one way or the other with regard to a member, so long as the director's conduct conforms to the standard set out in the California Corporations Code.

That standard provides that a director must perform his or her duties (1) in good faith, (2) in a manner the director believes to be in the best interests of the corporation, and (3) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use in similar circumstances. In performing such duties, a director may rely on information, opinions, reports, etc. from (1) one or more of the corporation's officers or employees whom the director believes to be reliable and competent in the matters presented; (2) counsel; or (3) a committee of the board upon which the director does not serve so long as the director acts in good faith, after reasonable inquiry when the need therefore is indicated by the circumstances, and without knowledge that would cause such reliance to be unwarranted.

According to the court, Crocker established that he performed his duties in connection with both of the Fullers' complaints in good faith and with due care within the meaning of the corporate statute because his involvement with the Murrells or the Fullers had been in open association meetings or in officially sanctioned trips to their property attended by board members, the Murrells, and the Fullers. Additionally, he had no personal relationship with either the Murrells or the Fullers and had no personal interest in the outcome of their dispute. The court also noted that Crocker was not the primary driving force behind the alleged improper treatment of the Murrells. He was only one of five board members, and the votes were unanimous in all board actions regarding the Murrells and the Fullers. Finally, the court concluded that he did not knowingly or with reckless disregard for the truth, take any action or encourage any other board member to take any action inconsistent with a board member's fiduciary duties under the declaration.

The court then addressed the Murrells' argument that Crocker shirked his fiduciary duties as a board member by not correcting their mistaken belief that the association had authority to remove trees not located in the easement and that he withheld this legal information from them. The court disagreed with the implication that Crocker's failure to inform the Murrells about the association's scope of legal authority deceived them into consenting to the removal of their trees. Evidence established that the Murrells engaged in conduct leading the Fullers and Crocker, among others, to the conclusion that the Murrells had consented to removal of some trees not located in the easement as part of an agreement to resolve the first view compliant.

With regard to the Fullers' second complaint, the court noted that George Murrell admitted that he "play[ed] along with the concept that some agreement had been reached" to keep the trees trimmed to the 2001 levels. The court also noted that the Murrells were represented by an attorney when the board considered the second complaint and made its decision thereon in July 2004, something that would lead Crocker and the other directors to believe that the Murrells were aware of their legal rights. According to the court, the Murrells admitted that they engaged in conduct leading Crocker and the association to believe that the Fullers and Murrells had come to agreements involving the removal and trimming of the trees. Since there was no reason for Crocker to suspect that the Murrells were laboring under any mistake as to their legal rights, there was no duty for him to make any disclosures on the point. According to the court, any unexpressed position on the part of the Murrells concerning the complaints did not create a triable issue of fact pertaining to Crocker's good faith compliance with his duties as a board member. The court therefore concluded that Crocker was entitled to summary judgment in his favor and affirmed the judgment of the trial court.

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

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Constitutionality of North Carolina Planned Community Act Upheld

Reidy v. Whitehart Association, Inc., 648 S.E. 2d 265 (N.C. App. 2007)

Covenants Enforcement: The North Carolina Court of Appeals upheld the constitutionality of the North Carolina Planned Community Act with regard to pre-1999 communities and dismissed a homeowner's argument that the Act violated the contracts clause of the U.S. Constitution and arguments that fines violated the homeowner's rights to substantive and procedural due process.

This case concerns a dispute between a homeowner in a North Carolina subdivision that was denied permission to build a structural addition to his property. John and Terri Reidy specifically requested approval to add a door and a staircase to the rear exterior of their detached garage in order to provide access to the upstairs storage area above the garage. The architectural committee cited that the addition would not be consistent with the neighborhood. Despite this, the Reidys constructed the staircase five months after their request was denied. The board of directors then held a hearing and decided to impose a $25/day fine for the violation. The Reidys sued Whitehart Association, Inc. ("association"), claiming that the North Carolina Planned Community Act ("Act") and the subdivision's declaration of covenants, conditions and restrictions did not apply to their property because the Act was unconstitutional.

The court opined that the homeowner was not allowed to argue that the association was improperly formed under a quasi-estoppel theory. Estoppel provides that where a party accepts a transaction or instrument, and then accepts benefits under it, the party may be estopped from later taking a position inconsistent with the prior acceptance of that same transaction or instrument. In this case, the court reasoned that nothing in the record illustrated that plaintiffs had ever contested the validity of the association between the date the association filed its Articles of Incorporation and the date the architectural committee denied plaintiffs' request. The homeowners paid their annual assessments consistently and complained to a property manager about a neighbor damaging common property. As a result, the court determined that they were now estopped from contesting the validity of the association.

The Act was important in this case because it provided a basis for the association to fine the homeowners. The Reidys argued that the Act did not apply to this case because the association is not an association within the meaning of the Act. The Reidys also argued that the Act violated the contracts clause, substantive due process and procedural due process. The court disagreed.

The Reidys' main argument was that the association was incorporated after the conveyance of the first lot, in violation of the Act, which requires an owners association to be incorporated no later than the date the first lot in the planned community is conveyed. The court disagreed and stated that despite the fact that the association was incorporated after the conveyance of the first lot in the subdivision, the association still constituted a lot owners association under the Act. In addition, the court noted that unless a statute "clearly, positively and unmistakably appears" to be unconstitutional, then it is to be upheld.

The court also disagreed with the Reidys' assertion that retroactive application of the Act did not violate the contract clause of the United States Constitution. Any law that disturbs a vested right, impairs a binding contract, or creates a new obligation is a violation of the contracts clause. In this case, the Reidys ineffectually argued that by allowing an association to impose reasonable fines or suspend privileges or services it provided, then the contract between the parties has undergone substantial changes and is a violation of the contracts clause. Instead, the court ruled that the provision of the Act in question only provided an additional remedy for enforcement of a declaration and did not impair the contract.

The court also ruled that the Act did not violate the Reidys' substantive or procedural due process rights. Regarding the issue of substantive due process rights, the court reasoned that the purpose of the Act was to provide a statutory framework for dealing with modern real estate developments and that no substantive due process was being taken away from the homeowner. Regarding procedural due process, the court reasoned that even if the creation of the statute were considered state action, the association complied with requirements that the Reidys be heard at a meeting, had the opportunity to present evidence, and received notice of the associations' decision.

As a result, the court affirmed the constitutionality of the Act as it applies to pre-1999 communities the year the Act became effective. Additionally, the court dismissed the Reidys' arguments that they had been denied both substantive and procedural due process rights and that the association had violated the contracts clause of the Constitution.

Editor's Observation: Special thanks go to Brian S. Edlin, of Jordan, Price, Wall, Gray, Jones & Carlton, PLLC, for contributing this case.

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

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Smoking Not a Constitutional Right

Suave v. Heritage Hills 1 Condominium Owners Association, No. 06CV1256, Colo. Dist. Court, November 7, 2006

Powers of the Association: An association's action to ban smoking through an amendment to the declaration is valid as long as it is not unreasonable, made in bad faith, arbitrary, or capricious.

Coleen Christensen Suave and Roger Suave live in a multilevel condominium unit with split entries. The building in which the Suaves' unit is located is subdivided into four units, which share common walls. Colleen is the owner of Unit 2, which shares common walls with Units 1 and 3. As the owner of a unit in Heritage Hills, the Suaves are subject to the decisions of the Heritage Hills #1 Condominium Owners Association ("association").

The condominium's declaration of covenants, conditions, and restrictions was recorded on September 13, 2000. The declaration includes provisions regarding use restrictions and provisions regarding amendments to the declaration, which can only be made if agreed to by 75 percent of the owners of units.

The declaration also prohibits activities that violate applicable statutes, rules, ordinances, regulations, permits, or other requirements validly imposed by any governmental body. Nuisances and practices that are sources of annoyance to residents or that interfere with the peaceful possession and proper use of other residents' property are also prohibited. On March 30, 2006, the Suaves sued the association for alleged wrongs stemming from the passage of an amendment to the declaration that banned smoking within the boundaries of the condominium project. The amendment was passed as a result of smoke seeping into other condominium units from the Suaves' unit. The Suaves asked the court to rule that the amendment to the declaration was void because it was an unreasonable restriction upon their fee simple and tenancy in common property interests, to enjoin the association from enforcing the amendment, and to require the association to take all actions necessary to revoke the amendment.

In considering the case, the trial court first looked to the Colorado Condominium Ownership Act, which requires that the bylaws and amendments to a declaration be supplied purchasers at or before the closing of the condominium sale. Each unit owner in Heritage Hills received a copy of the declaration at or before closing. The court noted, however, that the use restriction at issue on the individual condominium units and common elements was not in place when the declaration was originally written but were added as an amendment to the original declaration.

While some courts do not give the same deference to amendments or rules made after the original declaration is in place, the trial court recognized that "anyone who buys a unit in a common interest development with knowledge of its owners association's discretionary power accepts the risk that power may be used in a way that benefits the commonality, but harms the individual." The court also stated that it had no doubt that the legislature anticipated the possibility that condominium declarations could be amended to change unit usage restrictions if a sufficient majority of the unit owners agree.

After discussing the weight of the amendments, the court shifted to a discussion of the specific provisions of the declaration. The Suaves contended that, with the exception of prohibiting violations of law in an individual unit, the "prohibitions" section of the declaration only applied to prohibition with the common areas. According to their argument, the declaration could be amended only to restrict uses or activities in those same common areas. However, the court disagreed with the Suaves. It stated, "When read as whole, the section does not support the Suaves' interpretation. Each line containing a prohibition in the section is tied to a specific term in article one of the declaration. The prohibitions are specifically applied to any unit, the common elements, the project, or the property." On this issue, the court ruled that "property" includes the building housing the four individual condominium units, and thus, the amendment provisions of the declaration applied to individual units as well as common areas.

Next, the court considered whether seepage of second-hand smoke or its odor constitutes a nuisance. The court defined nuisance as an activity that arises from "unreasonable, unwarranted, or unlawful use by a person of his own property, working obstruction or injury to right of another, or to the public, and producing such material annoyance, inconvenience and discomfort that law will presume resulting damage."

According to the court, the smoky odor that permeated the units adjoining the Suaves' unit constituted a nuisance under the circumstances because complaints were made about smoke or the smell of smoke migrating from the Suaves' unit into adjoining units at the very first homeowners meeting, and despite the Suaves' contentions that the amendment to the declaration was taken simply to appease one tenant, testimony by several witnesses supported the fact that the odor was a longstanding problem. The court noted that the issue of whether there was actual smoke or simply a smoky odor was irrelevant because testimony substantiated an almost constant odor of cigarette smoke, which was the source of multiple complaints.

The court then considered the Suaves' contention that the smoking ban was an unreasonable reaction to the problem presented and their argument that the smoking ban was passed in an arbitrary and capricious manner after tempers were raised at a very volatile meeting. While the court agreed that the November 2005 meeting at which the amendment was suggested was an extremely fractious meeting, the court determined that the decision to make the units smoke-free was not undertaken in an arbitrary and capricious manner, since the testimony was replete with various occupants' attempts to minimize or prevent the smoke odor.

In addition, the court noted that testimony indicated that an effort to reach a consensus with the Suaves about only smoking outside the units was rebuffed. According to the court, the smoking ban was reasonably investigated, drafted, and passed by three out of four owners after years of trying to address the problem by other means.  Thus, the court found that the passage of the smoking ban was not arbitrary, capricious, or done in bad faith.

Finally, the court considered whether the smoking ban violated any public policy or fundamental rights of any of the owners. The court gave this argument short shrift, stating that courts have not specifically extended the protections of the Fourteenth Amendment to a fundamental right to smoke, especially when the Suaves' private activities are negatively impacting the others in the community they chose to join. Because the amendment was proper, reasonable, made in good faith, and not arbitrary or capricious and because the amendment did not violate public policy or otherwise abrogate a constitutional right, the court ruled in favor of the association and denied the Suaves' requested injunctive and declaratory relief.


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

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