May 2008
In This Issue:
Condominium Doesn’t Have to Repair or Replace Units after Casualty Loss
Former Board Member Sues Association, but Statute of Limitations Expire
Roads Depicted on Recorded Subdivision Plat Are Dedicated to the Public
An Express Easement Can Be Extinguished by Adverse Possession
Amendment to Covenants Doesn’t Restrict Neighboring Subdivision
Contracts with Government Entities Contain Implied Provision Reserving Powers of Modification
Association Can Affirm Contract and Recover Damages for Insurance Company Fraud
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Condominium Doesn’t Have to Repair or Replace Units after Casualty Loss

Anderson v. Council of Unit Owners of The Gables on Tuckerman Condominium, No. 99, Md. App. Ct., April 15, 2008

Risks and Liabilities/State and Local Legislation and Regulation:
The Maryland Condominium Act does not require a condominium association to repair or replace property of an owner after a casualty loss. 


The proceeding consists of two separate underlying cases that were consolidated by the appeals court because they presented the same legal issue.


The Gables on Tuckerman Condominium is located in Rockville, Md. The Council of Owners of The Gables on Tuckerman ("Gables association") is the unincorporated association of all owners established by the condominium's bylaws. Dianne Anderson owned a town home in The Gables.  The Gables association carried a master condominium insurance policy on the condominium property with a $10,000-per-occurence deductible. Anderson was insured by a condominium owner's policy issued by Erie Insurance Exchange (" Erie").


In July 2004, the water heater on the upper level of Anderson's unit leaked into her kitchen, causing severe water damage. No other unit was affected. Anderson requested that the Gables association repair or provide proceeds to repair the damage. The Gables association declined, and Erie paid for the repairs. Anderson and Erie subsequently sued the Gables association to recover the repair costs. 


They alleged that the Gables association breached its duty under the Maryland Condominium Act to purchase property insurance on all common elements and units and in case there was a deductible, apportion the deductible as a common expense. They also alleged that the Gables association breached its fiduciary duty by refusing to repair the damage. They later amended the complaint to allege that the Gables association "negligently" breached its duty to carry property insurance and asked the court for partial summary judgment. The trial court ruled in favor of the Gables association. Anderson appealed in January 2007.


In a separate case, Erie Insurance Exchange sued The Council of Unit Owners of Bridgeport Condominium. 


The Bridgeport Condominium is located in Laurel, Md. The Council of Owners of Bridgeport Condominium (" Bridgeport association") is the unincorporated association of all owners that was established by the condominium's bylaws. Charles and Cindy O'Carroll owned a home in The Bridgeport Condominium that they rented to Velma Kiawu. The O'Carrolls were also insured by a condominium owner's policy issued by Erie. The Bridgeport association also carried a master insurance policy with a $25,000-per occurrence deductible. In March 2003, a grease fire in the O'Carroll's unit caused the ceiling sprinkler system to engage, causing smoke, fire and water damage to the unit. The O'Carrolls asked the Bridgeport association to repair or replace the damage, and the Bridgeport association declined. Subsequently, Erie paid for the repairs. Erie then sued the Bridgeport association, making the same allegations as those filed in the Anderson case. The court ruled in favor of the Bridgeport association, and Erie appealed. In September 2007, the appeals were joined.


The appeals court considered whether the Maryland Condominium Act ("Act") requires a condominium association to repair or replace damaged portions of individual units following a casualty loss. It reviewed the records in a light most favorable to the non-moving parties, and its primary goal in interpreting the statute was to discern the legislative intent. 


The court found that ambiguity arose from comparison of the statutory language involving the coverage of a master policy held by the association with the duty of the association to repair the condominium. Under section 11-114(a)(1) of the Act, the association is required to maintain insurance on the entire condominium property, "the common elements and units, exclusive of improvements and betterments installed in units by unit owners," but under subsection (g), the association is responsible for repairing or replacing "any portion of the condominium damaged or destroyed." In the court's opinion, the word "unit" in (a)(1) creates the ambiguity upon which the case rested. 


The court stated that a condominium is "an estate in real property" that "typically involves an apartment building or other structure consisting of two or more separate apartments or units." It is a "communal form of estate in property consisting of individually owned units which are supported by collectively held facilities and areas." The court determined that the owner of a condominium unit, therefore, possesses two distinct separate property interests: a fee interest comprising the right to use and occupy the unit and an undivided percentage interest, as a tenant-in-common, with other owners, in the common elements. The Act defines "common elements" as all of the condominium except the units.

In 1977, the Governor's Commission to Study the Laws Governing Condominiums ("Commission") was created by a Joint Resolution of the General Assembly. In 1979 and 1980, the Commission conducted meetings throughout the State to further explore problems. In 1981, the Commission proposed modification of the Act in order to abate concerns regarding apartment conversions and operations. The General Assembly then enacted legislation to define rights, duties, responsibilities, and liabilities of developers, lenders, unit owners, and other persons having interests in condominiums. Among the changes to the Act was the addition of a provision defining maintenance, repair, and replacement responsibilities of owners and the association. The amendment charged the association with responsibility for maintenance, repair, and replacement of the common elements unless otherwise stated in the declaration. In response to multi-story apartment building condominium conversion concerns about aging buildings and economics of repair, the legislation required the association to obtain and maintain insurance on the entire condominium property, i.e., "the common elements and units, exclusive of improvements and betterments installed in units by unit owners."


The owners argued that the Act requires the association to provide insurance coverage for and be responsible for the repair and replacement of property in an individual condominium unit after a casualty loss. They also maintained that the Act only requires that owners perform ordinary maintenance, so that their individual policies are irrelevant when a casualty loss is implicated. Essentially, the owners argued that ordinary maintenance, repair, and replacement are the responsibility of the owner, while repair or replacement following a casualty loss is the obligation of the association and must be covered by the master insurance policy.


The associations argued that individual owners are responsible for maintenance, repair, and replacement of the damaged contents of their own units. They contended that the owners' reliance on the master policy was misplaced because only the common elements and condominium structure were covered under the master policy.


Examining the entire context of the Act, the court determined that it was clear that the master insurance policy was intended to cover only damage sustained to the common elements or the structure of a condominium. The Act defines "insured person" as each unit owner "with respect to liability arising out of his ownership of an undivided interest in the common elements or membership in the council of unit owners . . ." The court found that each owner is not an insured person with respect to his or her individual interest in his or her own property, but rather, is insured as to his or her collective undivided interest in the entire condominium property. Thus, the court concluded that the master policy is not meant to insure each owner's property or individual unit but to protect the common interests of all owners as co-owners of the entire condominium.


Additionally, section 11.108.1 of the Act states, "Except to the extent otherwise provided by the declaration or bylaws, the council of unit owners is responsible for maintenance, repair and replacement of the common elements, and each unit owner is responsible for maintenance, repair and replacement of his unit."


The court disagreed with the owners' argument that section 11-108.1 is inapplicable because it only pertains to ordinary maintenance, while section 11-114 prescribes that the association has the duty to repair and replace a unit in the event of a casualty loss. The court stated that if the Maryland Legislature intended to limit section 11-108.1 as the owners suggested, it would have drafted the statutory language accordingly.


The court supported its conclusion with both the Act's legislative history and Erie's own "Condocover" insurance policies, which provide:


We will pay on your behalf the loss assessment charged by the condominium association for direct loss by a peril insured against in your basic policy. Anyone we protect and the other unit-owners must have an undivided interest in the damaged property.


Under Dwelling Protection – section 1, the assessment must result from a direct loss to property, owned by all the property owners collectively, caused by any of the Perils We Insure Against."


The court found that the owners' interpretation of the statute would also lead to illogical and absurd results by giving associations greater responsibility for losses within units than a landlord has on the property of a tenant. The court concluded that the Act does not require associations to repair or replace property of an owner in an individual condominium unit after a casualty loss.


The court affirmed the judgments of the trial courts and assessed costs equally between Erie and Anderson.


©2008 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Former Board Member Sues Association, but Statute of Limitations Expire

Chang v. Rockridge Manor Condominium, No. C-07-4005 EMC, U.S.D.C., Dist. N. Calif., February 13, 2008

Association Operations:
Citing the statute of limitations, the plaintiffs' failure to state a plausible claim for conspiracy, and no evidence of a violation of constitutional rights, a U.S. District Court dismissed a former board member's case against an association.


Christine Chang and her son Eric Sun lived in Rockridge Manor Condominium from 1991, when Sun was 11 years old, to 2003. During that period, Chang served on the board of directors of Rockridge Manor Homeowners Association ("association") and realized that the association's manager and the board were embezzling from and extorting the association.


Subsequently, Chang and Sun sued the association, alleging that they were treated poorly by the other board members, that the manager and the board persecuted her and her son in retaliation for Chang's stepping down from the board in April 2000, that the manager had Sun locked up in a psychiatric institution while Chang was away on vacation, and that one of the board members caused an owner to assault and batter Chang and Sun. Chang also claimed that the manager, the association, and the board corrupted five different attorneys who represented Chang and Sun in a complaint against the manager, the board, and the association and that the judge presiding over the trial conspired with one of those attorneys to ensure that Chang and Sun would not prevail.        


Based on these events, Chang and Sun asserted the following causes of action in this case: (1) violation of their constitutional rights protected by the Fourth, Fifth, Sixth, Seventh, and Fourteenth amendments, (2) malicious persecution/abuse of process, (3) negligence, (4) fraud, and (5) conspiracy to defraud them and violate their constitutional rights.


In response to Chang's and Sun's claims, the association asked the court to dismiss the case or alternatively, to grant the association summary judgment. The court agreed with the association that summary judgment was warranted, stating that there was no genuine dispute of material fact that Chang's and Sun's claims were barred by the release and covenant not to sue that they signed with the association in February 2005. The court noted that any unilateral mistake on the part of Chang and Sun in signing that release did not render the release voidable unless the association had reason to know of the mistake or unless the effect of the mistake would make the contract unenforceable.


The court also agreed that the association's motion to dismiss the case was proper as well, concluding that all the claims asserted by Chang and Sun, except for the fraud claims, were barred by the two-year statute of limitations for personal injury actions as the allegedly wrongful conduct by the association would have had to occur by August 2005 in order to be actionable. The complaint demonstrated, however, that the allegedly wrongful conduct occurred prior to August 2005. 


The court addressed the fraud claims as well, declaring that even if the fraud claims were not barred by the three-year statute of limitations for fraud, they should nevertheless be dismissed for failure to comply with the principle that the allegations of fraud must be specific enough to provide notice of the particular misconduct alleged to constitute the fraud charged. The court concluded that Chang's and Sun's complaint lacked the specificity to give the association notice of the specific misconduct alleged to constitute the fraud.


The court also ruled that in asserting that a massive conspiracy existed to deprive them of their right to a fair trial that involved the association, its insurer, the five attorneys retained by Chang and Sun, a university and its employees and a superior court judge, Chang and Sun failed to state a plausible claim for conspiracy. The court labeled it "a far reaching fantastic conspiracy" that was "hardly plausible on its face," calling the conspiracy allegation "patently fanciful and insubstantial." The court further determined that none of the alleged misconduct constituted a violation of any of the constitutional amendments and consequently granted all motions to dismiss the case.

©2008 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Roads Depicted on Recorded Subdivision Plat Are Dedicated to the Public

Harper v. Coats, No. 1050145, Ala. Supreme Ct., January 18, 2008

State and Local Legislation and Regulations:
The Alabama Supreme Court upheld a ruling that roads in a subdivision outside the city limits or police jurisdiction of a municipality are dedicated to the public when they are shown on a properly recorded plat.


Blue Ridge Subdivision is located in Monroe County, outside the city limits of Monroeville, Ala.  William Harper created the subdivision by recording a plat in the office of the Monroe County Probate Court. Sun Ridge Valley Road and Blue Ridge Drive, identified on the recorded subdivision plat, run through and next to the subdivision.


Charles and Ginger Coats own property outside the subdivision, abutting both Sun Ridge Valley Road and Blue Ridge Drive. William Harper erected a fence to prevent the Coats from using the roads for ingress and egress to their property, claiming that the roads were not for public use. The Coats sued Harper regarding the roads and regarding a dispute about whether the water line that serves the subdivision could serve their property as well. The trial court entered summary judgment in favor of the Coats, declaring that the roads were public roads and that the water line serving the subdivision was a public utility that could be used to provide water to the Coats' property. Harper appealed.


The appeals court reviewed the judgment by the same standard as that of the trial court to determine whether the evidence presented raised any genuine issue of material fact. It determined that the parties presented no factual disputes and based their arguments entirely on statutory interpretation.


Alabama law requires persons wishing to subdivide their land to have it surveyed and platted, giving the bearings, length, width and name of each street. The acknowledgment and recording of the plat is held to be a fee simple conveyance of the portions of the land platted as marked or noted on the plat as donated to the public, and areas indicated as streets are to be held in trust for uses and purposes set forth on the plat.


A road can be made public in one of three ways: (1) a regular proceeding for that purpose; (2) a dedication by the owner of the land it crosses, with acceptance by the proper authorities; or (3) use by the public for 20 years. The court noted that for Sun Ridge Valley Road and Blue Ridge Drive to be public roads, it must be shown that there was a dedication of the roads with acceptance by the property authorities.


The Coats argued that Harper's having prepared and recorded the subdivision plat was deemed to have made a conveyance in fee simple of all areas granted or dedicated to the public. Harper argued that recordation of a plat, standing alone, does not constitute a completed dedication of the streets to the public and that acceptance by the proper governmental authority is also required. He contended that because the Coats failed to show any acceptance of the dedication by governmental authority in addition to recordation, they should not have prevailed in their motion for summary judgment.


The court relied on the rule adopted in Blair v. Fuller, 583 So. 2d 1307 (Ala. 1991) that even if other provisions of the Alabama Code require acceptance by county authorities similar to the municipal acceptance noted below, they, "do not repeal the specific provision of section 35-2-51(b) by virtue of which recordation of a plat constitutes a dedication of the roads therein with no requirement of acceptance by any county governing authority." The court found this conclusion was further supported by Ala. Code 1975, section 35-2-52, which states:


"It shall be the duty of every probate judge in this state to decline to receive for record in his office any map or plat upon which any lands lying within the corporate limits or police jurisdiction of any city of this state having a population of more than 10,000 inhabitants are platted or mapped as streets, alleys or other public ways, unless such map or plat shall have noted thereon the approval of the governing body or city engineer of such city."


Since no similar provision exits for plats or maps outside the "corporate limits or police jurisdiction of any city of this state . . . ," the court relied upon the canon of statutory construction expresio unious est exclusion alterius (i.e., the expression of one thing implies the exclusion of the other) to conclude that the acceptance requirement set forth in the statute excludes plats of property outside the city limits or police jurisdiction of Monroeville. Because neither party alleged that the subdivision was within the police jurisdiction of the city, the court treated the property as outside the police jurisdiction, as well as outside the municipal limits of Monroeville.


The appeals court ruled that Harper dedicated the roads to the public and that no acceptance of the roads by any governmental agency beyond recordation of the plat was necessary for the roads to be dedicated for public use, and that the Coats, as members of the general public, were entitled to use the roads without interference.


Because Harper failed to provide any legal authority or argument supporting his position that he owned the water line, the court refused to address this issue. The trial court's judgment was affirmed.


©2008 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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An Express Easement Can Be Extinguished by Adverse Possession

Meadow Lake Estates Homeowners Association, Inc. v. Shoemaker, 341 Mont. 345, 178 P.3d 81 (2008)

Covenants Enforcement:
In Montana, a servient estate may extinguish an express easement if the holder of the servient estate acts openly, notoriously, exclusively, adversely, continuously and uninterruptedly to exclude access and use of the easement by the holder of the dominate estate for a statutorily-established five years.


The Meadows Community Association ("association") was created in 1979 at the time restrictions were recorded with the Ravalli County, Mont., clerk and recorder. Among other things, the restrictions reserved easements on all the roads within the subdivision for "reasonable general use." In 1984, Daniel and Jane Shoemaker bought three tracts of land in the subdivision. One of the tracts was encumbered by a road easement (across Jacks Creek Access Road) at the time of the Shoemakers' purchase. Subsequent to their purchase, the Shoemakers erected a gate across the road at the point where the road intersected with their property.             


Over a 17-year period, the association made various requests and demands that the Shoemakers remove or unlock the gate as it interfered with association members' access to the public lands beyond the Shoemakers' property. In each instance, the Shoemakers refused to remove the gate and indicated that legal action would be required to resolve the issue. However, over time a number of association members made use of the easement by going around the gate or climbing over it.


In November 2001, the association sued the Shoemakers, seeking an injunction to have all obstructions removed that blocked association members from using the road. Among the defenses the Shoemakers raised was the contention that the easement was extinguished by adverse possession. Citing Montana case law, the Shoemakers noted that the owner of a servient estate "extinguishes an easement through adverse use in the same manner as acquisition of title by adverse possession and acquisition of an easement by prescription: open, notorious, exclusive, adverse, continuous and uninterrupted use for the five-year statutory period." The trial court found that in order for the Shoemakers to extinguish the association's express easement they had to prove each element of prescriptive right by clear and convincing evidence. The association appealed, and the Montana Supreme Court affirmed the trial court's decision.


The Montana Supreme Court focused on the "exclusive" and "uninterrupted" elements of adverse possession. In pretrial depositions and interrogatories, both parties agreed that while the gate blocked access to the Jacks Creek Access Road, the easement continued to be used by association members without the Shoemakers' permission. Use of the easement by association members interrupted the Shoemakers attempted adverse possession of the easement. In addition, the Shoemakers' indication that they occasionally left the gate open or unlocked and the fact that the association maintained Jacks Creek Access Road on the easement in question were actions that constituted "sufficient inconsistency" to assert adverse possession.


The Montana Supreme Court agreed with the trial court that the Shoemakers did not demonstrate by offering clear and convincing evidence that they consistently acted in a manner that met each element of adverse possession and, as such, their defense failed.


©2008 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Amendment to Covenants Doesn’t Restrict Neighboring Subdivision

Rice v. Bowman, No. 274968, Michigan App. Ct., January, 2008

Covenants Enforcement: An amendment to a covenant in one subdivision did not restrict the actions of a neighboring homeowner across a canal, despite his interest in land stretching into the restricted community.


Michael and Susanna Rice, Michael and Mary Beck, and James Senstock ("plaintiffs") all reside and own lots in Venice Shores Subdivision No. 3 which borders several man-made canals on Lake St. Clair in Michigan. One particular canal was dug into a 50-foot easement along the eastern border of Venice Shores. On the eastern side of the canal is a 3.5-foot strip of land, which was platted as being within Venice Shores. To the east of this strip are lots and homes entirely within the Belvidere Subdivision. The problem started when some of the Venice Shores homeowners on the west side of the canal were conveyed 50 feet of the canal and the 3.5-foot strip. Other Venice Shores lots were split, and the eastern 25 feet of the canal and the 3.5 foot strip were conveyed to the owner of the adjoining Belvidere lot.


Kit Bowman owns a lot in the Belvidere subdivision and portions of Venice Shores lots that extend 25 feet into the canal. The plaintiffs sued Bowman, claiming that he violated the Venice Shores deed restrictions by mooring a boat that extended beyond his property line into the canal. The trial court reviewed two relevant documents containing subdivision covenants and restrictions. The first, "Subdivision Restrictions Covering Subdivisions 2 and 3 Venice Shores Subdvisions" was recorded November 30, 1961. It stated that the covenants and restrictions ran with the land and were binding on all the parties to the document and their successors in interest for 25 years. After that time period, the covenants automatically renewed for successive 10-year periods unless amended by the majority of homeowners. The second document, an amendment to the covenants, was recorded November 26, 1986. The second document provided that "nothing shall extend into the canals as platted from any property at any time, e.g. watercraft, seawalls, piers, pilings, catwalks, etc."


The trial court ruled in favor of Bowman, stating that although his predecessors in interest were partial owners of two Venice Shores lots and although the 1986 amendment referenced all of the title holders of Venice Shores Subdivision No. 3, Bowman's predecessors in interest were not included as potential signatories to the amendment. Moreover, the Belvidere homeowners had never been members of the Venice Shores Property Owners Association ("association"). As a result, the court found no question of fact that the restrictions were not intended to bind Bowman's property. The plaintiffs appealed.


The appeals court affirmed the trial court's decision, stating that it was apparent from the face of the amendment that Bowman's predecessors in interest, and therefore Bowman, were not among the parties to the document. The court agreed with the plaintiffs' argument that where a deed restriction allows a majority of owners within a particular subdivision to change, modify, or alter given restrictions, "others are bound by properly passed and recorded changes in the same manner as those contained in any original grant and restriction."


In this case, however, Bowman's predecessors were not "owners" within the meaning of the amendment. Instead, owners were those listed on the amendment and members of the association. In response, the plaintiffs argued that whether Bowman was a member of the association or not was irrelevant because "membership is mandatory." The court disagreed and gave more weight to the fact that Bowman's predecessors in interest were not listed among the property owners. The court also noted that Bowman did not pay dues, was never asked to pay dues, never attended or been invited to attend meetings, and never had the opportunity to vote on any subdivision matter.


Finally, plaintiffs argued that Bowman had constructive notice of the deed restrictions because his deed stated that the property was "subject to easements and restrictions of record" and the 1986 amendment was recorded. Even with constructive notice, the court noted that the amendment cannot be said to have been "voluntary and fairly made" to the extent that it purported to bind the Belvidere homeowners use of their property without allowing them any consideration or input in the development of the restrictions.


©2008 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Contracts with Government Entities Contain Implied Provision Reserving Powers of Modification

Richeson v. Helal, 158 Cal. App. 4th 268, 70 Cal. Rptr. 3d 18 (2008)

A California appeals court ruled that contracts with government entities must be read as containing an implied provision reserving a city's power to modify its zoning regulations and conditional use permits.


Fair Market is a neighborhood market built in 1928 in Santa Monica, Calif., that has operated as a market since then. In 1946, the city rezoned the property where the market is located as "residential," making the operation of the market a nonconforming use. Subsequent to the zoning of the property for residential use, the city issued a series of conditional use permits allowing the market to continue in business. In 1985, the city approved a conditional use permit (CUP 381) that allowed the market to remain in business through October 23, 2000, the maximum length of time the city's ordinance allowed for nonconforming markets in residential districts.


In 1987, the market's owner sought to build two condominiums at the rear of the market's property. The city allowed the condominiums to be constructed but required that the market building be designated as common area and that the condominium declaration list the market as a limited common area of one of the condominiums. The city also required that when the market ceased to be used as a retail market the market building be destroyed and the land upon which it stood become unrestricted common area. The city and the then owner reduced this agreement to writing in an agreement imposing restrictions ("AIR"). The AIR and the condominium declaration each contemplated the conditional use permit to expire. In April 2000, the market's owner filed an application with the city, asking it to authorize the continuation of the operation of the market beyond the October 2000 closure date. The city's planning commission granted approval for the application in 2003. In granting approval and in adopting an ordinance on July 22, 2003, the commission approved the continuation of nonconforming neighborhood markets that have served surrounding neighborhoods for a long period of time and that are located in areas of the city that have an insufficient number of grocery markets, thereby reducing traffic.


In August 2004, Juanita Richeson (who owned one of the condominiums that shared the property with the market) sued Haque Helal (who leased the market in 1995 and purchased the condominium unit that included the market as limited common area). Richeson asked the court to close the market and remove the building pursuant to the AIR and the condominium declaration. The trial court ruled in favor of Richeson and ordered the market to cease operations and the building to be removed. Helal appealed.


The appeals court found that California's constitution gives broad and flexible power to promote the public welfare. This power allows a government to protect "the lives, health, morals, comfort, and general welfare of the people," and a city's power under the constitution is as broad as that of the state Legislature. The AIR and declaration did not exclude the city's prerogative to change the permitted use of the market. The AIR was an agreement between the city and the market's owner that allowed a conditional use. Even though the AIR contemplated a date for the nonconforming use to end, it did not prohibit the city from enacting future permits to extend the nonconforming use. The declaration did not contain a termination date for the market and expressly anticipated that the city could approve subsequent permits for the market.


Finally, the court noted that had the AIR and the declaration been construed to prohibit the city from changing the market's permitted use, the AIR and the declaration would have been an invalid attempt by the city to surrender its future right to modify its zoning regulations and exercise its police power under the constitution.


The court noted that when the documents are subject to a contract analysis, neither the AIR nor the declaration prohibit the city from amending its zoning or land use policy. Based on its findings, the appeals court reversed the trial court's decision.


©2008 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Can Affirm Contract and Recover Damages for Insurance Company Fraud

Village Northridge Homeowners Association v. State Farm Fire and Casualty Company, 157 Cal. App. 4th 1416, 69 Cal. Rptr. 551 (2007)

A homeowners association that settled a claim with its insurer and later sued the insurer for breach of contract and then discovered that the insurer had misrepresented the policy limits could properly sue the insurer and keep the proceeds from the original settlement.


After the 1994 Northridge, Calif., earthquake, the Village Northridge Homeowners Association ("association") and its insurer, State Farm Fire and Casualty Company ("State Farm"), settled disputed claims arising from the earthquake. State Farm paid the association $1.5 million, and the association released State Farm from all claims or causes of action it had or might have in the future. In 2001, after the California Legislature revived insurance claims otherwise barred by the statute of limitations, the association sued State Farm, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The association also claimed that State Farm had improperly undervalued the association's loss, inducing the association to forego proper repairs and payment of amounts properly owed under the association's insurance policy.


State Farm filed a motion for summary judgment, asserting that the association's release of the claim barred its lawsuit and that the association could not pursue its claim unless it rescinded the settlement agreement and returned the $1.5 million payment. In response, the association contended that State Farm had misrepresented the limits of the insurance policy to the association in the course of adjusting the claim and inducing the execution of the release and that the $1.5 million offer from State Farm had been made on a "take it or leave it" basis without negotiation. The trial court granted summary judgment in favor of State Farm, ruling that the association did not demonstrate that the release was a product of undue influence or fraud and that the agreement was binding on both parties. The association appealed.


The appeals court reversed the trial court's decision, concluding that material issues of fact existed concerning the limits of the earthquake policy and whether State Farm misrepresented the policy limits during the adjustment process. In permitting the association to affirm the settlement and also to recover damages for the fraud, the court cited the principle that if a defrauded party is induced by false representations to execute a contract, that party has the option of (1) rescinding the contract and restoring any consideration received under it, or (2) affirming the contract and recovering damages for the fraud. 


The court disagreed with State Farm's argument that a plaintiff could not avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as consideration for the release. According to the court, that argument applied to personal injury claims and not to a contract for the settlement and release of insurance claims. Rather, the court determined that a defrauded party should have the option to choose between rescinding the contract or affirming it and recovering damages for the fraud. Therefore, the court reversed the trial court's decision.


©2008 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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