July 2008
In This Issue:
Use Restrictions May Be Included in Bylaws
Owner Required to Pay Fees, Costs Related to Unpaid Common Charges
Association Entitled to Unassigned Parking Spaces as Dictated By Covenants
Association Owes Damages After Failing to Properly Terminate Management Contract
Golf Club Had No Authority to Assess Service Fee Against Unit Owner
Insurance Policy's Exclusion on Repairing Water Damage Applied
Lender Does Not Have To Be Institutional Mortgagee
Original Developer's Lien Invalid
Association Decisions Must Be Reasonable
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Use Restrictions May Be Included in Bylaws

Apple Valley Gardens Assn, Inc. v. MacHutta, 743 N.W.2d 483 (Wisc. App. 2007)

Use Restrictions: Wisconsin law does not prohibit use restrictions from being placed in an association's bylaws rather than in the declaration.

In 1979, Apple Valley Gardens condominium and the Apple Valley Gardens Owner's Association, Inc. ("association") were established. Steven MacHutta developed the condominium and incorporated the association. MacHutta and his wife, Gloria, owned 15 units, which they leased to tenants. The association grew concerned about the number of units that were leased and that the MacHuttas had disproportionate voting control because of the number of units they owned. In 1988, the association and the MacHuttas entered into a settlement agreement ("the 1988 agreement") to resolve a previous action by the association that sought to compel the MacHuttas to sell the units. According to the agreement, Steven MacHutta was to make diligent efforts to promote sales of the units and could not retain more than four of the 15 units. The language of the agreement stated that Steven MacHutta was not to rent or lease any of the units on or after September 1, 1991. At the time of the 1988 agreement, Gloria MacHutta did not own Unit 2-206, the unit in dispute in this case.

In 2002, the association amended its bylaws to require that all units be owner occupied and to prohibit the lease of any unit as of January 1, 2003. The amendment stated that any rental agreements entered into before December 18, 2002, were not subject to the restriction. However, the units were to become owner occupied once the existing tenants vacated the units. In addition, the bylaws were amended to require written consent from the board of directors to renew or extend a lease or rental agreement in effect before December 18, 2002.

The tenant leasing Unit 2-206 from Gloria MacHutta vacated the unit in August 2004. When the MacHuttas sought approval from the board for a prospective tenant, the board rejected approval based on the amended bylaw requiring that the owner occupy the unit. Nevertheless, Gloria MacHutta proceeded to rent Unit 2-206 in violation of the bylaws.

In March 2005, the association sued the MacHuttas, asking the court to rule that the 2002 amendment to the bylaws was enforceable against Gloria MacHutta. The MacHuttas counterclaimed, arguing that the amended bylaws violated the 1988 agreement and the association had tortiously interfered with the rental of Unit 2-206. The MacHuttas then asked the court to grant them judgment, arguing that the amendment to the bylaws and the use restriction requiring owner occupancy violated Wisconsin law. The trial court ruled in favor of the association, and the MacHuttas appealed. The appeals court affirmed the trial court's finding that the 2002 amendments did not violate Wisconsin law. The court also determined that the amendments did not violate the 1988 agreement because the agreement pertained to Steven MacHutta's rental rights solely.

The MacHuttas argued that to give prospective buyers notice of restrictions that may impact their interest, all restrictions must be stated in the declaration. The MacHuttas suggested that because the restriction was placed in the bylaws rather than the declaration the restriction was unenforceable.

Alternatively, the MacHuttas argued that, although the bylaws may contain use restrictions under Wisconsin law, the law only applies to restrictions regarding management and operation of the condominium. They asserted that any restrictions on the use of property must appear in the recorded declaration because prospective buyers rely on the instrument for notice of their rights and interest in the property, and this is why the declaration is more difficult to amend than the bylaws. Accordingly, they accused the association of amending the bylaws to include the use restriction to avoid the difficult process of amending the declaration.

However, the appeals court found the MacHuttas' argument too narrow. The court considered the entire statutory scheme governing a condominium's declaration and bylaws. Just as the trial court had found, the appeals court found that although the declaration allowed units to be rented, nothing in the declaration prohibited the association from amending the bylaws to restrict rental of the units and that Wisconsin law expressly permits bylaws to contain use restrictions. Further, Wisconsin law requires strict compliance with bylaws. The court noted that since specific statutory language prevails over general statutory language, the use restriction requiring owner occupancy contained in the bylaws was enforceable.

Citing Bankers Trust Company of California, N.A. v. Bregant, 261 Wis. 2d 855, 661 N.W.2d 498 (2003), the MacHuttas also contended that the 2002 amendment to the bylaws violated a Wisconsin law that states that bylaws may not render title to a condominium unit unmarketable. However, the court found that Bankers Trust was not applicable to this case. In Bankers Trust, an amendment to the condominium bylaws provided that after a certain date, sales of the units could only be to owners who would reside in the units. However, when the homeowners association objected to the sale of a unit to a person who did not intend to live in the unit, the court confirmed the sale because at the time of the hearing the purchaser had not failed to occupy the unit. The court in Bankers Trust held that because Wisconsin law prohibits the bylaws from rendering title unmarketable, the association could not use the bylaws to prevent the transfer of title.

The court in this case reasoned that the association, in contrast to the association in Bankers Trust, was trying to enforce a use restriction against a current owner, not trying to use the bylaws to prevent the transfer of title. The court explained that although the use restriction may limit the appeal of the condominium units to potential buyers, it does not limit an owner's ability to transfer title to his or her property rendering title unmarketable.

The MacHuttas also cited language in a treatise on condominium association documents in which the authors explain that they do not feel the bylaws are the proper place for use restrictions. However, the court noted that the MacHuttas took the statement out of context. The authors of the treatise did not state that use restrictions must be placed in the declaration but instead explained that placing the use restrictions in the declaration rather than the bylaws can protect them from challenges.

Finally, the MacHuttas argued that the 2002 amendment violated the 1988 settlement agreement. However, the court found that the terms of the 1988 agreement addressed Steven MacHutta's rights specifically. The court noted that Gloria MacHutta did not own Unit 2-206 at the time of the 1988 agreement. Accordingly, the court ruled that the agreement did not prohibit the association from enforcing the 2002 amendment.

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

Owner Required to Pay Fees, Costs Related to Unpaid Common Charges

Board of Directors of Hill & Dale Homeowners Association, Inc. v. Cappello, 852 N.Y.S.2d 586 (2007)

Assessments/Covenants Enforcement/Contracts: A New York appeals court reversed a lower court ruling in favor of a condominium association that did not include an award of late fees, interest, and attorney's fees because the fees were authorized under the declaration and bylaws.

When Amy Cappello purchased a unit in Hill & Dale condominium complex in August 2003, she became a member of Hill & Dale Homeowners Association, Inc. ("association"). For two years, she paid assessments of $429.18 per month but fell behind on her payments in 2005. The association's board of directors sued her and her father, Gene Cappello, alleging breach of contract and seeking $1,083.36, which represented unpaid assessments plus interest, late fees, and attorney's fees that the board alleged were authorized under the association's declaration and bylaws.

The Cappellos moved to dismiss the complaint for failure to state a cause of action on the ground that there was no contract between the parties. Cappello argued that she never received copies of the association's governing documents or discussed their terms with the board of directors.

The association argued that Cappello was in default because she did not appear and answer the summons within the prescribed time period, and she was obligated under the terms of the condominium declaration and bylaws to pay the entire amount by virtue of her ownership of the unit. The court denied the Cappellos' motion to dismiss and ruled in favor of the association in the amount of $429 plus costs. The association appealed on the ground of inadequacy.

On appeal, the association argued that the ruling had effectively excused Cappello's default and asserted that, instead, the court should have allowed the association to apply to the clerk for a default judgment. It further argued that Gene Cappello had no right to bring the motion to dismiss because he had no ownership interest in the condominium and was, therefore, not a proper party to the action.

The appeals court found that the trial court did not err in refusing to dismiss the case and refusing to hold Cappello in default. It explained that, because the association named Gene Cappello as a party to the suit, he had the right to bring the motion to dismiss the action. The court, however, was precluded from dismissing the suit against Gene Cappello because the Cappellos had not filed a cross-appeal.

The association also claimed that the trial court erred in deciding the entirety of the matter and not limiting itself to the issues raised by the motion to dismiss. The appeals court found that the trial court clearly went beyond the Cappellos' motion to dismiss, rendering the judgment in their favor. However, it could not determine from the record whether a trial was held.

Because the parties disputed the amount of common charges outstanding, the appeals court found that a trial was necessary. Referring to the New York Condominium Act ("Act"), the court stated that the Act requires condominium owners to comply strictly with the governing documents adopted by a condominium. The Act does not require a condominium board of directors to furnish a copy of the condominium governing documents to all unit purchasers; instead, it is only required to retain copies of the documents and make them available in the office for inspection. Since the declaration and bylaws were duly recorded in the Putnam County, New York land records, as purchaser of the unit, Amy Cappello had constructive notice of the contents of the documents. Therefore, the court found that Cappello was bound to comply with the terms and conditions set forth in the declaration and bylaws.

The court remanded the case to the lower court for further proceedings.

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

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Association Entitled to Unassigned Parking Spaces as Dictated By Covenants

Crestmar Owners Association v. Stapakis, 157 Cal. App. 4th 1223, 69 Cal. Cal. Rptr. 3d 231 (2007)

Covenants Enforcement: A California appeals court ruled that where a covenant indicates a specific time for performance, a demand for performance is not necessary for the cause of action to arise, and the statute of limitations for a quiet title action does not begin to run until a claim adverse to the person in possession of the property is declared.

In 1977, after Hartford Equity and Management Corporation (" Hartford") converted a building into condominiums, Crestmar Owners Association ("association"), became the manager of the common area. Under the community's declaration of conditions, covenants, and restrictions, Hartford was required to convey at least one parking space with each residential unit sold. The declaration also stated that if any of the residential units were not sold three years after the first unit was purchased, Hartford was to transfer all of the remaining parking spaces to the association. Since the first unit was sold in the late 1970s, any remaining parking spaces should have been conveyed by the early 1980s. Although two parking spaces remained unassigned, Hartford failed to transfer them to the association.

Nearly 20 years later, in October 2004, Hartford transferred the two unassigned parking spaces to its president and sole shareholder, William Stapakis. Stapakis then demanded that the association allow him to use the spaces for his personal use and that it pay him back rent for use of the two spaces since the early 1980s. The association responded by suing Stapakis in January 2005, seeking to quiet title to the parking spaces in the association. Although both Hartford and Stapakis filed an answer, Hartford withdrew its answer because California had suspended Hartford's corporate charter in 1979 for failure to pay state taxes.

Stapakis asserted that the cause of action to enforce the declaration accrued in the early 1980s when Hartford failed to transfer the parking spaces. Stapakis argued that an action based on a document such as the declaration has a statute of limitations of four years and that the association's complaint was untimely. The court disagreed, noting that the cause of action did not arise until the association demanded Hartford's performance. In an amended complaint, the association asserted that it had not made a demand for performance until it filed the complaint. The trial court quieted title to the two parking spaces in the association, and Hartford and Stapakis appealed.

On appeal, they presented four main arguments. The first and primary issue was whether the statute of limitations for the association to bring an action to enforce the declaration had expired. Hartford and Stapakis argued that the trial court erred when it relied upon Cutujian v. Benedict Hills Estates Association, 41 Cal. App. 4th 1379, 49 Cal. Rptr. 2d 166 (1996) (CALR August 1996) to determine that the statute of limitations to enforce the declaration did not begin running until the association demanded performance. The court agreed that Cutujian was distinguishable from this case but did not find that the trial court erred.

Cutujian involved a covenant that did not specify a precise time for performance. In that case, the court explained that where a covenant does not attach a time to the performance obligated, the cause of action does not accrue until the property owner makes a demand for performance of the covenant. However, if a covenant provides a specific time for performance, a demand is not necessary for the cause of action to accrue. In contrast to Cutujian, the declaration in this case provided the specific time at which Hartford was to convey the parking spaces. Therefore, it was not necessary for the association to demand performance in order for the cause of action to arise. Rather, the court stated that the reason the complaint was timely was that the statute of limitations for an action to quiet title does not begin running until a complaint is filed against the person holding the property.

Hartford and Stapakis argued that the association was required to have exclusive and undisputed possession of the parking spaces in order to prevent the cause of action from accruing. The court determined that the association did have exclusive and undisputed possession of the parking spots until Hartford conveyed the spaces to Stapakis because the association had used the spaces for storage and temporary parking. Hartford and Stapakis neither used the spaces nor asserted a claim to the spaces until 2004. However, they maintained that they were in possession of the parking spots because they held the title.

Additionally, Hartford and Stapakis argued that even if the association had exclusive possession of the parking spaces, the possession was disputed. The court found this argument to be unsupported because Hartford did not assert a claim to the spaces until 2004. The court noted that "undisputed" means the absence of a dispute before a present controversy.

The second issue on appeal was whether the trial court properly denied Hartford's motion to dismiss its default. Although Hartford did not have the right to defend itself in the lawsuit at the time the complaint was filed, Hartford moved to set aside its default when its corporate charter was reinstated in 2006. It claimed that the association had made material changes to the original complaint and had failed to deliver the amended complaint to Hartford before trial. The trial court found that the changes were not material and denied the motion to vacate. The appeals court explained that regardless of whether the changes were material, because Hartford was under the sole control of Stapakis, who had been served the amended complaint, Hartford could not show that it suffered prejudice by not receiving a separate copy of the amended complaint.

As a third argument, Hartford and Stapakis asserted that the language of the declaration provided Hartford with a right to transfer parking spaces to unit owners of their own selection or to deed the remaining spaces to the association. The appeals court refused to consider this argument because Hartford and Stapakis relied solely on the language of the declaration and provided no legal authority to support the contention. Additionally, the court felt there was no evidence indicating that the trial court disregarded the language of the declaration.

Finally, Hartford and Stapakis claimed that the trial court improperly pierced Hartford's corporate veil to enable the court to order Stapakis to pay the association's attorney's fees of over $20,000. According to Hartford and Stapakis, Stapakis did not have the bad faith required to pierce the corporate veil. The court disagreed, stating that Stapakis abused the corporate form when, as Hartford's president, he conveyed the parking spots to himself in violation of the declaration.

The court found that because the declaration provided a specific time for performance a demand by the association was not necessary for the cause of action to accrue but that the statute of limitations for an action to quiet title did not begin until a claim was made adverse to the person in possession. Therefore, the court affirmed the trial court's decision to quiet title to the parking spaces in the association.

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

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Association Owes Damages After Failing to Properly Terminate Management Contract

G&W Management, Inc. v. Glenwood Green Homeowners Association, Inc, No. CV075004185S, Conn. Superior Ct. December 5, 2007

Contracts/Association Operations: In an unreported case, a Connecticut trial court determined that a homeowners association breached a management contract when it notified the management company of its intent not to renew outside of the specified period to do so.

Glenwood Green Homeowners Association ("association") contracted with G&W Management, Inc. ("G&W") to provide management services for the association for a period of one year beginning May 1, 2005, and ending April 30, 2006, with an automatic renewal for annual periods unless the contract was terminated. The contract provided for termination if (1) G&W failed to perform its duties and obligations under the contract for a continuous 30-day period after receiving written notice from the association specifying the performance failure or (2) either party gave written notice to the other of its intention not to renew the contract. Such written notice had to be given not less than 90 or more than 120 days prior to the expiration of the term of the contract.

By the end of 2005, the association's board of directors was dissatisfied with the management services provided by Bryan Palmer, the G&W manager assigned to serve them. At one time, the board even requested a change of property managers. In August 2005, the association sent a letter to G&W terminating the agreement. G&W responded to that letter by indicating that the contract renewed on May 1, 2006 and, pursuant to the contract, for the association to terminate it, G&W had to have failed to perform continuously for 30 days after such written notification. G&W notified the association that its termination notice was not in compliance with the contract but complied with the association's demand that the association's work be transferred to a new management company. The association did not pay G&W for the seven months from October 2006 until April 2007, and G&W sued the association for breach of contract.

The trial court looked to Connecticut case law and to the Restatement (Second) of Contracts when it considered G&W's claim. A breach of contract action consists of three things: formation of an agreement, performance by one party, and breach of the agreement by the other party and damages. Citing Chiulli v. Zola, 97 Conn. App. 699, 905 A.2d 1236 (2006), the court noted that Connecticut's general rule in breach of contract cases would put G&W in the same position as it would have been had the contract been performed. Citing Ambrogio v. Beaver Road Associates, 267 Conn. 148, 836 A.2d 1183 (2003), the court noted that lost profits are considered an element of compensatory damages.

In looking to the Restatement (Second) of Contracts, the court noted that the Restatement divides a recovery into two components: (1) direct damages, composed of the loss in value to him of the other party's performance caused by its failure or deficiency and (2) any other loss, including incidental or consequential loss, caused by the breach.

The court found that consequential damages include any loss that may have arisen naturally from the contract breach so long as such loss is not too speculative and remote. However, the court stated that the party asserting the loss must provide sufficient evidence to prove the damages. Because damages are an essential element of the breach of contract claim, damages are recoverable only to the extent that the evidence affords a sufficient basis for estimating their amount in money with reasonable certainty.

Since G&W proved each element of its case for breach of contract, the court ruled that the association was liable for such breach and directed the association to pay damages to G&W equal to the amount due for seven months under the management contract.

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

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Golf Club Had No Authority to Assess Service Fee Against Unit Owner

Krasner v. Greens Golf Club, LLC, 849 N.Y.S.2d 378 (2007)

Covenants Enforcement: Since a golf club membership contract made no mention, expressly or inferentially, to a "service fee," and the "service fee" could not be construed as a "social membership fee," the club could not institute a service fee against condominium unit owners who automatically became social members of the club.

In 2004, Harold Krasner purchased one of 384 condominium units in the Greens at Half Hollow Conservation I from SBJ Associates, LLC ("SBJ"). The offering plan disclosed that the Greens at Half Hollow Golf Club, located adjacent to the community, was to be owned by an affiliate of SBJ. The golf club included an executive golf course, tennis courts, a swimming pool, and a clubhouse. The offering plan explicitly stated that the club was a privately-owned facility, was not part of the condominium common area and was not owned by the condominium association.

All unit owners automatically became social members of the club when they purchased their units, and they paid $100 per month to the club owner. All social members had complete rights and privileges to use all club facilities, and the club owner was entitled to file a lien on each unit if the owner did not pay the social membership fee. The offering plan for the community stated that the current social membership fee would remain at the same level for all homeowners for two years after the sale of the first home in the community, or it would stay at the same level for one year after an owner purchased his or her home., whichever alternative applied. After the initial guarantee period, the club owner could modify the fee annually.

In a letter dated December 2005, the club notified Krasner that it was increasing his social membership fee to $125 a month. In addition, the letter advised him that the club was eliminating the 18 percent service charge applied to non-food club activities and instead would impose a mandatory annual staff services/appreciation fee of $115. Krasner paid the $115 service fee on February 20, 2006, "under protest" and then sued the club.

While not expressly stipulated by the parties, it appeared to the court that the parties sought judicial intervention solely to consider whether the club was legally authorized to impose a mandatory annual service fee in addition to the social membership fee.

According to the court, contract law, not condominium law, governed the issue because the club is not a condominium under New York law. In addition, although the court found no contractual privity between Krasner and the club and found no executed deeds to establish liability running with title to Krasner's property, the court accepted both parties' assertions that the club had legal authority to charge a social membership fee, which could result in a lien on Krasner's property if it was not paid.

In this case, the club attempted to recover as a third party beneficiary of the membership contract between Krasner and SBJ. According to the court, a party who seeks to recover as a third party beneficiary of a contract must establish three things: (1) that a valid and binding contract exists between other parties; (2) that the contract was intended for his or her benefit; and (3) that the benefit was intended to be direct rather than incidental. In determining whether a third party is an intended beneficiary to a contract, the actual intent of the parties is critical and the best evidence of the contracting parties' intent is the language of the agreement itself. According to the court, the contract clearly indicated that the club was a third party beneficiary of the agreement between SBJ and Krasner. Since the court did find a third party beneficiary relationship, it relied on the express contract language to determine if the club was able to increase the amount of the social membership fee and whether it had the ability to institute a service fee. As a matter of contract law, if there is an ambiguity as to the meaning of a contract's terms, the contract is construed against the drafter.

Looking at the contract, the court found that the contract between SBJ and Krasner expressly created and authorized a social membership fee and provided for its increase, so the club could lawfully increase the social membership fee from $100 to $125 a month. However, since the contract did not expressly or inferentially mention a service free, and the service fee could in no manner be construed as a social membership fee, the club could not institute such a fee. The court noted that there was no contractual basis for the service fee. Therefore, the court found that the club breached the third party contract by imposing and collecting the service fee and was liable for its return under a common law restitution theory.

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

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Insurance Policy's Exclusion on Repairing Water Damage Applied

Legacy Condominiums, Inc. v. Landmark American Insurance Company, No. 1:06cv1108-KS-MTP, U.S. Dist. Ct., So. Dist. of Miss., January 4, 2008

Risks and Liabilities: A federal court agreed with an insurer that after paying all covered wind damage, the remaining damage to a building came from wind-driven rain, which was excluded from coverage.

Legacy I Condominiums is a 103-unit condominium that was completed in April 2005. The condominium was insured under a commercial property policy sold by Landmark American Insurance Company ("Landmark"). The policy covered up to $27 million of potential damage to the building and was subject to a 3 percent ($810,000) wind deductible. The policy specifically excluded damage caused by "flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not." However, in the limitations section of the exclusion, the policy provided that the exclusion was not applicable if a building or structure first sustained damage by a "covered cause of loss" to its roof or walls through which the rain, snow, sleet, ice, sand, or dust entered.

The condominium was located on the Gulf Coast of Mississippi and sustained damages during Hurricane Katrina. Legacy Condominiums, Inc. ("Legacy"), which owns and operates the condominium, filed a claim under the policy, and Landmark paid Legacy $706,181.98 for wind damage, after application of the $810,000 deductible. The policy excluded "storm spray and/or…wind-driven rain which seeped into the building around undamaged windows and doors and other openings in the building envelope which were not created by direct wind damage during the storm." As a result, Legacy sued Landmark, alleging breach of contract and bad faith failure to investigate.

The dispute centered on how water entered the structure above the flood line. Landmark claimed that the remainder of uncompensated losses were from wind-driven rain, an excluded loss under the policy. The association argued that an exception to the exclusion reinstated coverage for water that entered when hurricane winds ripped open the roof of the condominium, making those losses compensable. Landmark agreed to pay for the damage caused by wind and water entering through three blown-off room chases but argued that it should not be responsible for the wind-driven rain and/or storm surge entering around undamaged windows and doors. Landmark asked the court for summary judgment on four separate issues. First, Landmark asked that a determination of costs of completed repairs supersede prior estimates for those same repairs. Second, it asked the court to rule that Legacy had the burden of proof in establishing a right to collect additional damages under the exception to the water exclusion. Third, Landmark asked the court to rule that storm spray was excluded from coverage and therefore was not compensable. Finally, Landmark asked the court to determine that Legacy cannot hold Landmark liable for punitive damages as a matter of law.

Regarding actual costs, the court determined that where actual repairs had been completed on Legacy units, prior estimates of those repairs were irrelevant. Under the contract, Landmark was not obligated to compensate Legacy until the damaged property was repaired or replaced and unless the repairs or replacement was made as soon as reasonably possible after the damage was done.

Regarding wind damage, Legacy disputed the proposition that the "wind driven rain" exclusion applied to their property. Instead, it argued that once water entered a building through a breach in the roof or wall, the wind driven rain and storm spray exclusions do not apply. The court agreed that Landmark should be entitled to summary judgment on the issue of wind damage. Under the policy, "water" that is "driven by wind or not" is excluded from compensable losses. Moreover, if water driven by wind combined with any other force to cause a loss, that loss was not compensable under the policy.

Regarding the burden of proof, Mississippi law places the burden on proving the right to recovery under an insurance policy squarely on the insured. Once an insured establishes damages that result from a covered cause of loss, the insurer then shows that an exclusion applies to avoid payment. The court noted that in this case the burden of proof was properly placed on Legacy and that Landmark was entitled to summary judgment on this issue as well. The court reasoned that Legacy had the burden to show that it had the right to recover in the first instance; it also must show that it had the right to recover for damages that it now asserts were unpaid.

Finally, the court ruled that because Landmark was entitled to summary judgment it could not be held liable for punitive damages. Mississippi places the duty on insurers to properly investigate the claims of their policyholders. To prove bad faith under Mississippi law, policyholders must prove (1) that there was no arguable or legitimate reason to deny coverage and (2) that the insurer acted willfully, maliciously, or with gross and reckless disregard for the insured's rights. In Mississippi, if an insurance carrier has an arguable reason to deny coverage, punitive damages are impermissible. Citing Caldwell v. Alf Insurance Company, 686 So. 2d 1092 (Miss. 1996), the court noted that the Mississippi Supreme Court defined an "arguable reason" as one where "nothing more than an expression indicating the act or acts of the alleged tortfeasor do not rise to the heightened level of an independent tort." In this case, there existed no arguable reason for Landmark to deny coverage for damage plainly outside the terms of the contract, and Legacy did nothing to show that Landmark acted with a gross disregard for their rights. As a result, the court ruled in Landmark's favor regarding punitive damages.

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

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Lender Does Not Have To Be Institutional Mortgagee

Quality Foods, Inc. v. Smithberg, 288 Ga. App. 47 (2007)

Sales and Leases: A trust that acquired a condominium unit because the unit's buyer defaulted on its loan was exempt from a requirement that the association approve or disapprove the transfer of the unit because the trust was a lender.

Paxton Building, a condominium in Savannah, Ga., was created and made subject to a declaration of condominium on June 17, 1985. The declaration provided that the condominium was to be operated by the Paxton Building Condominium Association, Inc. ("association"). Johan and Gisela Lindeman purchased Unit Two of the five-story condominium (each story constituting a unit) in 1985. In 1996, the Lindemans sold their unit to Restaurant Consultants, Inc., and created the Lindeman Family Trust, to which they transferred the note and deed of trust from the sale of the unit.

In 1997, the unit was transferred back to the trust, which then leased it to Quality Foods in 1998. The terms of the five-year lease granted Quality Foods an option to purchase the unit, in which Quality Foods expressed interest in 2002. In a letter sent to the other individual unit owners, Quality Foods' attorney requested that the owners confirm that they had no interest in purchasing the unit. One owner, Roy Smithberg, was interested in the property, so he responded that he would not sign a waiver of first refusal. Nevertheless, on January 15, 2003, the Lindemans notified the association of the trust's intent to sell Unit Two to Quality Foods.

On January 29, 2003, the association president and secretary signed a letter prepared by Smithberg to the trust stating the association had not approved the sale. The letter noted that four individual unit owners had agreed to the decision. The trust proceeded with the sale on March 7, 2003, and the four owners sued the Lindemans, Quality Foods and Darby Bank & Trust Company, which had financed the sale. The four owners sought to have the sale set aside on the grounds that it violated the declaration. Quality Foods and Darby Bank counterclaimed against the unit owners and the association, seeking a declaration that they were the lawful owner and mortgagee of the unit, that the sale was not subject to being set aside, and that if the sale was subject to being set aside that title to the unit would re-vest in the trust.

The four unit owners argued that as individual owners, they possessed the right of first refusal to purchase Unit Two. The court disagreed and, based on the straightforward reading of the declaration, determined that the unit owners were not granted right of first refusal. The court ruled that the association—rather than individual owners—had the power to approve or disapprove any proposed transaction; and, even if the unit owners, including the Lindemans, believed the unit owners had the right of first refusal, there was no ambiguity in the declaration with regard to that right; and rules of construction could not be employed to create such a right where none existed. Both parties appealed.

Quality Foods contended that the trial court erred in denying its motion for summary judgment because the trust was not required to obtain the association's approval to sell the unit. The appeals court agreed because there was no issue of material fact as to whether the declaration's "lender"-exception applied to the trust’s sale to Quality Foods and determined that the trial court erred in deciding that issue was for the jury. The court noted that the requirement that the association approve or disapprove any proposed transaction did not apply to a lender who acquired title as a result of owning a mortgage on a unit whether the title was acquired by deed or through foreclosure.

The court agreed with Quality Foods' assertion that the trust was a lender under this definition because it held a deed to secure debt on Unit Two and acquired that unit from Restaurant Consultants in 1997 by deed in lieu of foreclosure. Although the term "lender" was not defined in the declaration, the court noted that in construing contracts, a term's usual and common meaning should be used, and the trust would not be barred from being a lender under the usual and common meaning of the term. Furthermore, the court noted that a lender did not refer to an institutional mortgagee, as asserted by the four unit owners. Therefore, there was no question for the jury as to the definition of a lender.

The court concluded that the trust acquired Unit Two as a lender for purposes of the declaration's provision requiring the association to approve or disapprove the transaction. Therefore, the association's approval was not required for the trust's sale of the unit to Quality Foods, and the association's disapproval of the sale was moot. The court declared that Quality Foods and Darby Bank were the lawful owner and mortgagee of Unit Two, respectively, and that their interests in Unit Two were not subject to being set aside.

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

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Original Developer's Lien Invalid

Razak v. The Marina Club of Tampa Homeowners Association, Inc., 968 So. 2d 616, Fla. Dist. Ct. App. (2007)

Risks and Liabilities: A Florida appeals court affirmed a trial court's ruling that a mortgage that included a future advance clause does not encumber title to real property if no advances were made.

When construction of The Marina Club condominium project began in 1982 in Hillsborough County, Florida, the developer agreed in the declaration of covenants to convey title of the common area to The Marina Club of Tampa Homeowners Association ("association") by December 31, 1992. When the developer encountered financial trouble, he conveyed his interests (including the common area) in the project to a subsidiary of the bank that provided financing. Eventually, Resolution Trust Corporation ("RTC") acquired the property title through foreclosure proceedings.

RTC sold the project to Mohammad Husein Bhadelia ("Bhadelia"). Bhadelia's brother, Abdul Razak (the original developer), loaned the $1,075,000 purchase price for the property to Bhadelia through a promissory note that matured five years from the date of execution in January 1993. As security for the note, Bhadelia executed a mortgage on the property that included a future advance clause. The clause indicated that the mortgage served as security for any future advances Razak made to Bhadelia for 20 years after the mortgage was executed.

In 2004, in a court-ordered mediation, Bhadelia and the association agreed that in exchange for $675,000, Bhadelia would convey title to the common area to the association, free and clear of all liens. However, prior to the mandate being issued, Bhadelia conveyed title of the property to Razak by deed in lieu of foreclosure. The association filed a motion in a federal district court, asking the court to enforce the final judgment to quiet title. After judgment was entered in its favor, the association amended a complaint it previously filed in the trial court and sought to quiet title against Razak. The question the trial court addressed was whether Razak's lien against the property was valid.

First, the association argued that title to the common area had already been quieted in the association. Second, the association claimed that its interest in the property was superior to Razak's because the declaration set forth its interest. Finally, it argued that the mortgage lien expired five years after the date of maturity of the note. Although Razak raised a number of defenses, the trial court ruled in favor of the association.

Razak appealed, arguing that the future advance clause created a lien on the property. However, the evidence did not show that any advances had been made. The court relied on a Florida law that provides that the lien of a mortgage terminates five years after the date of maturity of the note. Bhadelia executed the note on January 7, 1993, and the note specified a five-year maturity date. Therefore, as a matter of law, the mortgage lien expired January 7, 2003. The court noted that the statute it cited is a statute of repose, indicating that after the statutory date, the cause of action no longer exists. Accordingly, the title obtained by the association was free and clear of the encumbrance.

Razak argued that the court should have considered a different Florida law, which states that a mortgage lien secures those future advances made within 20 years of the execution of the mortgage. The court ruled that a future advance clause may only create a lien against the property for 20 years if advances have been made subsequent to the execution of the mortgage. Razak's alternative interpretation would suggest that by including a future advance clause, property could be encumbered for 20 years even if no advances were actually made. Since Razak had not made any advances, the lien did not exist. Therefore, the appeals court affirmed 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 Decisions Must Be Reasonable

Wright v. Piedmont Property Owners Association, Inc., 288 Ga. App. 261, 653 S.E.2d 846 (2007)

Architectural Control: A committee charged with reviewing fence plans to ensure that all fences within a community were harmonious must make decisions that are in good faith, reasonable, and not arbitrary and capricious.

In 1999, Lisa Wright bought property that was subject to restrictive covenants recorded in 1979. The covenants were administered by the Piedmont Property Owners Association, Inc. ("association") and prohibited a property owner from constructing or maintaining a fence without first obtaining approval from a committee that reviewed fence plans to ensure that new fences fit the parameters in terms of design and quality of the existing fences in the community.

In 2003, Lisa and Robert Wright told a neighbor that they planned to construct a chain link fence around their property without seeking approval from the committee. When construction of the fence began, a committee member contacted the Wrights by telephone, demanding they stop construction until the plans for the fence were reviewed and approved by the committee. In addition to the initial contact by a committee member, two additional committee members wrote letters to the Wrights demanding construction of the fence be halted. The Wrights belatedly submitted plans for the fence to the committee, which determined that the fence did not meet the standards of like fences in the community and denied the submittal. Nevertheless, the Wrights completed the fence.

The association then sued the Wrights, and the trial court granted an injunction against them that prohibited their maintaining the fence and then ordered the Wrights to remove the fence. The trial court agreed with the committee's decision that found the Wrights' fence was dissimilar to other fences in the community.

The Wrights appealed, arguing that the trial court should not have issued an injunction against them because the covenants were only binding against the owner of the property (Lisa Wright). While the appeals court conceded that the covenants were binding only against Lisa Wright, the court cited a Georgia statute that provides that an injunction is binding "upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive notice of the order...." Therefore, the trial court was authorized to enter an injunction against Lisa Wright, her agents and "all those in active concert or participation with her." Because Robert Wright acted as Lisa Wright's agent and actively participated in constructing the fence, he was a party against whom relief could be granted.

The Wrights challenged the sufficiency of the evidence against them, specifically that the trial court should have considered the "unrebutted" evidence that the association allowed the construction and maintenance of other fences that the committee did not approve. Citing King v. Chism, 279 Ga. App. 712, (632 S.E.2d 463) (2006) (CALR March 2007), the court noted that in reviewing an association's decisions, the court could look only at whether the exercise of that authority was procedurally fair and reasonable and whether the substantive decision was made in good faith, was reasonable, and was not arbitrary and capricious.

The Wrights also contended that the committee's decision was arbitrary and capacious because the association allowed other property owners to build similar fences without approval from the committee. The Wrights maintained that the association had waived its authority and was estopped from requiring the Wrights to obtain approval prior to constructing a fence on their property. Countering the Wright's argument, the association presented evidence at trial that no fences comparable to the Wright's fence existed in the community. Furthermore, no community members objected to the other fences in the community.

The appeals court found that the Wrights relied on incomplete association records to assert that certain other fences in the community were unapproved. The court also determined that the trial court's decision that other fences that the Wrights relied upon as unapproved were dissimilar from their chain link fence. In ruling in favor of the association, the appeals court concurred with the trial court in finding that the association acted in a procedurally fair and reasonable manner, and the substantive decision not to approve the Wright's fence was made in good faith, was reasonable, and was not arbitrary and capricious.

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

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