June 2009
In This Issue:
Foreclosure Meets Notice Requirements; Low Price Won’t Invalidate Sale
Foreclosure Does Not Violate Fair Debt Collection Practices Act
Judgment Void Because Association Does Not Have Legal Standing
Courts Need Justiciable Controversy to Interpret Covenants and Award Fees to Prevailing Party
Cell Phone Tower Not Incidental to Residential Use
Association Decisions Must be Reasonable and Use Good Faith
Golf Course Subject to Implied Restrictive Covenants
Statute of Limitations Tolled In Homeowners' Personal Injury Claim
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Foreclosure Meets Notice Requirements; Low Price Won’t Invalidate Sale

Demuth v. Maryknoll, LLC, No. A07-2376, Minn. App. Ct., Dec. 9, 2008

Powers of the Association: In an unpublished opinion, a Minnesota appeals court declined to set aside an assessment lien foreclosure sale of a condominium on the grounds that the required foreclosure notice period was not met and the foreclosure sales price was below the fair market value of the unit.

Sherry Demuth owned a unit in Oakdale Condominium Association ("association") located in Washington County, Minn. She is required to pay monthly assessments to the association. Demuth stopped paying her assessments in June 2006, and the association filed a lien on her unit and commenced foreclosure by publishing a notice of assessment lien foreclosure sale. The first notice was published on July 27, 2006, and the last on Aug. 31, 2006. Maryknoll, LLC purchased the unit at auction for $3,196.35, far below the fair market value of $135,000. The unit remained subject to redemption for six months, but Demuth did not attempt to redeem it. In April 2007, she sued Maryknoll, alleging she still owned the unit. She argued that the sale should be voided because the foreclosure notice period was too short and the auction price was grossly inadequate. When the court dismissed her complaint with prejudice, she appealed.

Demuth contended that the trial court erred in granting Maryknoll's motion for judgment on the pleadings because the foreclosure sale occurred too soon. She argued that the sale was invalid because it occurred exactly six weeks after the first notice was published. She based her argument on her view that Minnesota law requires that six weeks—before and exclusive of the day of the foreclosure sale—must elapse between the first notice and the date of sale.

The appeals court's review was limited to the facts set forth in the pleadings. Its construction of the relevant Minnesota statute was the same as the trial court's: that an association may foreclose on a lien for assessments in the same way that a mortgage would be foreclosed. The statute that governs foreclosure notice provides, "six weeks published notice shall be given that such mortgage will be foreclosed by sale of the mortgaged premises." Section 645.15 directs how the six-week period shall be computed:

Where the performance or doing of any act … is ordered or directed, and the period of time or duration for the performance or doing thereof is prescribed an fixed by law, the time … shall be computed so as to exclude the first and include the last day of the prescribed or fixed period or duration of time.

The first week of the association's notice occurred on July 27, 2006, and the notice was published for six consecutive weeks until the sixth and last publication on Aug. 31, 2006. The court found that excluding the first day of notice and including Sept. 7, the day of sale, the foreclosure sale occurred exactly 42 days—six calendar weeks—after the initial publication; therefore, the sale was valid.

Demuth also argued that the trial court erred in its computation because it relied on Worley v. Naylor, 6 Minn. 192, 6 Gilf. 123 (1861), a case that interpreted an 1858 statute that since was repealed. In Worley, a notice of sale was first published on Aug. 3, 1859, and it was published for six consecutive weeks, as required by the statute. The foreclosure sale took place on Sept. 14, 1859, exactly 42 day after the initial publication. Although the sale occurred on the last day of the sixth week, the court determined that the sale was valid. A review of the statute's legislative history led the appeals court to conclude that it was not repealed, but only amended and supplemented. The court recognized that the statute's language might be construed the way Demuth argued because it does not expressly require six weeks of notice before and exclusive of the day of sale. However, the Worley court resolved the issue by determining that the day of sale may be counted in the six-week notice period. Contrary to Demuth's contention, the relevant notice requirements in 1859 are substantially the same today. The court found the district court's decision to be well-reasoned and affirmed it.

The appeals court found Demuth's second count also unavailing. She argued that the foreclosure sale was invalid because the sales price was grossly inadequate because the unit had a fair market value of $135,000. The district court rejected her theory because the general rule supported by Minnesota case law is that a foreclosure sale free from fraud or irregularity will not be invalidated for inadequacy of price. The appeals court noted that the general rule rests on the protection conferred on property owners through their statutory right of redemption. Contrary to Demuth's argument that a low foreclosure sale price results in an inequity, a low price actually provides the foreclosed owner with an advantage because the mortgagor has a remedy of repurchasing the property for the price paid at sale. The court could not find a Minnesota case that set aside a foreclosure sale for inadequacy of price.

Demuth argued that the appeals court should carve out a per se exception to the general rule in cases of assessment liens because the amounts secured by assessment liens are often a small fraction of the foreclosed property's full value, but the court noted that, apparently, the Minnesota legislature anticipated that argument and implicitly rejected it. The statute specifically provides, "the amount of the association's lien shall be deemed to be adequate consideration for the unit subject to foreclosure, notwithstanding the value of the unit." The court determined that Demuth's argument failed because the justification for the general rule in mortgage foreclosure cases is equally applicable to assessment lien foreclosure cases. The procedure for conducting an assessment lien foreclosure sale is the same as the one for conducting a mortgage lien foreclosure sale.

As with a mortgage lien foreclosure sale, a statutory redemption period follows an assessment lien foreclosure sale. In both situations, buyers at the foreclosure sale will attempt to purchase the property at the lowest possible price. Because mortgage lien foreclosure sales and assessment lien foreclosure sales involve the same competing financial interests and follow identical sale procedures and redemption rights, the general rule that inadequacy of price alone does not invalidate a mortgage foreclosure sale also applies to assessment lien foreclosure sales.

The court affirmed the district court's decision.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Foreclosure Does Not Violate Fair Debt Collection Practices Act

Gray v. Four Oak Court Association, Inc., 580 F. Supp. 2d 883 (Dist. of Minn. 2008)

Assessments/Federal Law and Legislation: The U.S. District Court for the District of Minnesota ruled that enforcement of a security interest, including foreclosure of an assessment lien, does not constitute "collection of a debt" as defined in the Fair Debt Collection Practices Act.

Birchell Gray purchased a townhome in Eagan, Minn. His townhome is part of Four Oak Court, a common interest development governed by a recorded declaration of covenants and managed by Four Oak Court Association, Inc. ("association"). In May 2006, the homeowners approved a special assessment in the amount of $2,000 per unit to replace roofs and attic insulation. In August 2006, Gray paid half of the assessment. In September 2006, the association fined Gray $500 for not draining his unit's exterior water pipe, and he failed to pay the fine.

In January 2007, the association's attorney sent Gray a letter by regular and certified mail making a demand for $1,834, which included the remainder of the special assessment, the fine, the January 2007 monthly assessment and a $25 penalty. The letter notified him that all monthly dues payable for the 2007 fiscal year were accelerated under the terms of the declaration, but the acceleration would be waived if he made full payment of the fine, penalty and current assessments by Feb. 7, 2007. The letter stated that the law firm was acting as a debt collector pursuant to the Fair Debt Collection Practices Act ("Act"). Gray claimed he never received the letter.

On Feb. 27, 2007, the association sent Gray a copy of a lien statement filed in the Dakota County land records by regular and certified mail. The statement indicated that the association intended to claim a lien on Gray's townhome in the amount of $4,493 for unpaid assessments, interest, late fees and attorney's fees. Gray claimed he never received the statement.

On March 6, 2007, the association sent another letter to Gray by certified and regular mail enclosing a copy of the association's notice of lien foreclosure. The foreclosure notice indicated that the association had a lien on Gray's townhome for $4,493 that would be foreclosed on April 17, 2007. Again, Gray claimed he never received the notice. In addition to the letter, an attempt was made by the association's attorney to have the county sheriff's office serve the notice, but the sheriff's office returned a certificate of non-service. Gray was subsequently personally served on April 3, 2007.

Gray contacted the association and agreed to pay the special assessment but refused to pay the fine. He sent the association a check for $1,085 for the assessment and associated late fees. On May 2, 2007, the association bought Gray's townhome for $7,988.62 at the foreclosure sale. After an inquiry from Gray, a partial copy of the certificate of sale was mailed to him. The certificate stated that Gray had six months from the date of sale to redeem the property. Enclosed with the certificate was a letter indicating the association would not accept partial payment.

In June 2007, Gray received a letter from the association's accounting firm stating he had paid the special assessment in full but owed $29.15 in interest. He sent a check for the interest amount to the accounting firm on July 29, 2007. He also alleged that he paid the monthly general assessments to the accounting firm.

In September, the association sent Gray a letter informing him that the redemption period would expire on Oct. 2, 2007, and if the property was not redeemed by that date, he would have to vacate the premises on Oct. 18, 2007. A revised letter was sent Oct. 15, 2007, indicating that the redemption period would expire on Nov. 2, 2007, and Gray would have to vacate the premises on Nov. 15, 2007, if he had not redeemed the townhome. The redemption amount stated in the letters was $8,963.15.

On Oct. 30, 2007, Gray sued the association, asserting claims under the Act and Minnesota state law. On Nov. 1, 2007, the court granted a temporary restraining order and on Nov. 30, the court issued a preliminary injunction staying the redemption period until further order of the court. The association moved for summary judgment.

Gray argued that the association's attorneys violated the Act by: (1) failing to provide the correct amount due and payable during the lien foreclosure proceedings; (2) indicating that the redemption date was Oct. 2 rather than Nov. 2, 2007; and (3) attempting to collect attorney's fees related to the foreclosure specifically prohibited by Minnesota law. He further asserted that the association violated the Act's notice requirement because he did not receive the association's Jan. 7, 2007 letter. The association argued that the Act did not apply to the foreclosure activities underlying Gray's claims and that its collection activities complied with the Act.

The court noted that Congress enacted the Act to eliminate abusive debt collection practices by debt collectors. The parties agreed that the special assessment and the fine were a debt, and the association did not argue that their law firm was not a debt collector. The issue before the court was whether the association's communications related to lien enforcement were "in connection with the collection of any debt," as set forth in the Act.

The Act defines the term "debt" as, "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family or household purposes, whether or not such obligation has been reduced to judgment." "Debt collector" is defined in the Act as:

any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another … [s]uch term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.

The court determined that the lien foreclosure activities in this case did not constitute debt collection under the Act and granted summary judgment on Gray's claims to the extent that they were based on conduct related to enforcing the assessments lien.

The Act requires that a debt collector send the consumer written notice with certain information relevant to collection of the debt. It does not require that a debt collector establish actual receipt of the notice by the debtor. The association's Jan. 7, 2007 letter contained the information required under the Act and the court established that the letter was sent to Gray by regular and certified mail. Therefore, the court concluded that the association did not violate the Act's notice requirements and granted summary judgment on its claim.

The court granted the association's motion for summary judgment, dismissed Gray's claims under the Act with prejudice, dismissed his state claims without prejudice, and lifted the preliminary injunction staying the foreclosure redemption period.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Judgment Void Because Association Does Not Have Legal Standing

Irish Beach Clusterhomes Association Board of Governors v. Farrell, Nos. A120147/A12049, Cal. App. Ct., Jan. 21, 2009

State and Local Legislation/Miscellaneous: In an unpublished opinion, a California appeals court voided a trial court's judgment against an association's board of directors because the entity did not have legal standing.

Michael Farrell owns a home in Irish Beach, a common interest development in Mendocino County, Calif. The property was originally owned by William and Tona Moores. In 1980, the Moores subdivided the property and recorded covenants, conditions, and restrictions against the lots. Unit 8 of Irish Beach consists of 16 lots and a large common area that is maintained by Irish Beach Clusterhomes Association ("association"). William Moores built six homes in Unit 8, selling five and keeping one for himself. He retained ownership of the other 10 lots. Although the homeowners association was established, it was not active. There were no formal meetings from 1980 through 1997, and Moores acted informally on the association's behalf. The association did not have a budget and did not levy assessments.

In 2003, a fire destroyed homes owned by Moores and Farrell. After the fire, Moores asked Farrell to act as president of the association to pursue the insurance claim and rebuild the homes. During the rebuilding process, tensions developed between Moores and Farrell. 

Moores held association meetings in May and June 2004, at which a president and board of governors were elected and assessments imposed on the homeowners in Unit 8. Moores, his wife, and their daughter were the only members who attended the meetings, and they cast a total of 11 votes.

In March 2005, the association and Moores sued Farrell seeking: (1) to collect the assessments levied in May and June; (2) appointment of a receiver and an accounting from Farrell for sums he had spent rebuilding the homes damaged by the fire; (3) an injunction preventing Farrell from acting on behalf of the association; and (4) a judicial declaration of the parties' rights to manage and operate the association.

In May 2005, Farrell filed a cross-complaint seeking: (1) a declaration that the association's board of governors had not operated the association properly under applicable law; (2) injunctive relief to force the association's board to manage properly the association; and (3) a ruling that Moores had breached his fiduciary duties as developer of the property.

The primary issue at trial was whether the actions the board of governors took at the May and June meetings were valid. The trial court concluded that only those owners of improved lots were entitled to vote and ruled that the actions taken in May and June 2004 were invalid and enjoined the association from imposing assessments against Farrell. The court also ruled that Moores breached his fiduciary duty to the association and awarded nominal damages to Farrell in the amount of $1. Subsequently, Farrell asked the court for attorney's fees, which the court denied. The association appealed the ruling, and Farrell appealed the court's decision denying him attorney's fees. The appeals court consolidated those actions.

The association argued that the trial court interpreted the governing documents incorrectly when it ruled that only owners of improved lots were entitled to vote. The appeals court, however, did not consider the issue because it concluded that the association was not a legal entity that had power to bring or defend a suit. The court explained that a civil action can only be maintained by a legal entity. When a suit is brought by or against an entity that does not exist legally, the proceeding is void. If no legal entity exists, no lawful judgment can be rendered for or against it.

Both parties conceded that the association's board of governors was not a legal entity that was capable of bringing suit. The court pointed out that Moores himself would be able to sue in his individual capacity; however, the complaint plainly stated that he sued as president of the association. The court stated, "A person filing suit on behalf of a nonexistent entity does not thereby manufacture an ability to sue that does not otherwise exist."

The court found that while it was true that Moores was sued in his individual capacity in Farrell's cross-complaint, an entity without legal standing is beyond the authority of the court. The trial court's judgment, therefore, was void and not within its jurisdiction. Further, the appeals court's jurisdiction was limited to reversing the trial court's void acts.

Farrell relied on a California law that provides that the prevailing party in an action to enforce governing documents of a common interest development is entitled to recover fees. The trial court denied his motion because the plaintiffs in the underlying complaint were not legal entities and, therefore, could not be called upon to pay attorney's fees. Also, it did not consider Farrell to be a prevailing party within the meaning of the statute.

The appeals court ruled that the trial court's decision was void to the extent the action was resolved in favor of or against the association. The court affirmed the trial court's order declining to award attorney's fees to Farrell.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Courts Need Justiciable Controversy to Interpret Covenants and Award Fees to Prevailing Party

Jones Ranch Homeowners Association v. Degnan, Nos. A118584, A119884, Cal. App. Ct., Nov. 25, 2008

Covenants Enforcement/Attorney Fees: In an unreported case, a California appeals court ruled that under California law, relief is appropriate to test the enforceability of covenants asserted against a property owner.

Jones Ranch is a common interest development consisting of several large, high-end luxury homes in Alamo, Calif. The Jones Ranch homeowners association ("association") operates the community under CC&Rs first adopted in 1987. Kevin Degnan owns the largest site in the community, a 13-acre lot on a hilltop with majestic views. In front of Degnan's house is a large paved turnaround area that can accommodate at least 50 cars.

On Oct. 31, 2003, Degnan hosted a Halloween pajama party. A homeowner found an invitation to the party that indicated that women guests were to wear sexy costumes and that male guests were to bring at least two ladies or they would not be admitted. Following the party, the street was littered with beer cans and bottles, a brick mailbox was damaged and a resident complained that her driveway was blocked. The association's president spoke with Degnan about those matters.

Degnan hosted another large social event on Sept. 11, 2004, which he described as a pajama-themed costume party. A Contra Costa County deputy sheriff responded to three calls from Jones Ranch residents about that party. According to the deputy, there were about 500 people at the event and they were in various stages of undress. The crowd was loud and boisterous, cars were double parked, driveways were blocked and numerous parked vehicles impeded traffic flow. At one point, a helicopter landed in Degnan's yard and flew off at 1 or 2 a.m.

After that event, the association cited Degnan for violations of the then-existing covenants and proposed a third amendment to the covenants to regulate large-scale social events. The board held a special meeting to address the alleged violations and the proposed amendment. The third amendment contained four key provisions: (1) restricting members or guests from parking more than 10 vehicles in the common area at any given time without board permission; (2) prohibiting the use of helicopters and light aircraft in the community except for emergencies; (3) requiring members to submit an application to the board 45 days in advance of events if there would be more than 100 people; and (4) permitting the association to levy reimbursement assessments to be enforced by lien with power of sale, and increasing the upper limit on fines that can be levied against a member from $50 to $25,000.

Under the third amendment, the application had to include information about the event's date and time, the estimated number of guests, whether guests would be indoors or outdoors, whether there would be outdoor music and a description of security and cleanup plans. The applicant also had to provide evidence of liability insurance, naming the association as an additional insured, and had to pay a $1,000 deposit to cover any costs incurred as a result of the event.

The board would approve applications unless it found that proceeding with the event would result in a violation of the covenants. Failure to comply with the covenants that result in an expense for the association results in a fine for the violator. If the board denies the application, the applicant would have an opportunity to meet conditions for approval identified by the board in its rejection notice. Assessments could be levied for failure to comply with the covenants in cases where the violation requires the association to expend funds to achieve compliance, or results in imposition of a fine. After the Oct. 4 meeting, ballots were sent to members, and the amendment received the required 75 percent approval. Degnan was the only member who voted against it.

Degnan's attorney advised the board by letter dated Dec. 9, 2004, that Degnan planned to hold an open house party on Dec. 31, 2004 and that he was uncertain how many guests would attend. When the association's attorney contacted Degnan's attorney to discuss the planned event, he refused to say how many people would attend the open house.

After further correspondence, the association's attorney hinted that the association would seek a temporary restraining order to prevent Degnan's open house. The association's attorney offered to drop the plan to seek a temporary restraining order if Degnan signed a statement that no more than 100 people would attend the open house and that he would comply with the amendment. In a letter, Degnan's attorney responded that the association acted improperly toward Degnan, that the amendment was not enforceable, and that the board had no basis to believe that more than 100 persons would attend the open house at any one time. Degnan's attorney stated that should the association seek injunctive relief against him, Degnan would seek sanctions and would claim as damages any unnecessary legal expenses the association caused him to suffer.

The association sued Degnan on Dec. 28, 2004, seeking an injunction to prohibit the open house and asking the court to affirm the enforceability of the amendment. The trial court: (1) declared the existence of a justiciable controversy validating the pursuit of declaratory relief, (2) adjudged three of the four amendments valid and enforceable, (3) ruled that the amendment allowing at 500-fold increase in the amount of fines that could be levied against a homeowner was unreasonable and unenforceable, and (4) awarded the association 80 percent of its attorney's fees. On appeal, Degnan did not attack the enforceability of the proposed amendment but asserted that the controversy was ripe for litigation and claimed that he, not the association, was entitled to attorney's fees.

According to the appeals court, it has long been the law of California that relief is appropriate to test the enforceability of covenants asserted against a property owner, and the owner need not violate the restrictions in order to ascertain his or her legal rights. Homeowner associations have standing to initiate litigation in matters pertaining to enforcement of the community's governing documents. Therefore, the court agreed with the trial court that there was a legitimate and immediate controversy between the two parties that warranted judicial intervention.

According to the court, there was nothing vague, ethereal or hypothetical about the dispute arising out of Degnan's social activities. The court based its decision on the fact that the parties not only set out their respective legal positions regarding the legality of the third amendment, but Degnan repeatedly refused to be bound by the new restrictions. He also alluded to the inevitability of litigation barring an "amicable" resolution; a result that was plainly impossible given the intractable respective positions of the parties. According to the court, Degnan's attorney stated that Degnan had purchased the property specifically so he could throw lavish parties and that, for that reason, Degnan's rights to use his property as he had in the past would be preserved. Degnan's attorney said that those rights include using all of his resources to resist the association's newly-enacted restriction against large-scale social events.  

The court also found it important that Degnan complained that he was deterred from freely exercising his First Amendment rights, by the restrictions designed to regulate large-scale social events. According to the court, there was a direct conflict between the association and Degnan that gave rise to a controversy, and a declaratory judgment was necessary to clear the cloud of uncertainty surrounding Degnan's right to exercise his perceived constitutional rights.

Finding that a justiciable controversy existed between the parties based on their different interpretations of the amendment, the court ruled that the trial court did not err in considering the association's request for declaratory relief. Accordingly, it affirmed the trial court's decision and the order awarding attorney fees and costs to the association as the prevailing party. It further provided that each should party to bear its own costs on appeal.

The dissenting judge disagreed on the basis that the complaint did not allege a justiciable controversy and that the trial evidence did not established a justiciable controversy. According to the justice, glaringly absent from the facts was any allegation that Degnan violated, intended to violate, said he would violate, or threatened to violate the amended covenants, or that Degnan hosted or sought approval of an event that might be subject to or run afoul of the amendment. Degnan expressed an opinion, albeit strongly, by objecting to the amendment and claiming, through his attorney, that it was not enforceable, but in Reardon's opinion, this fundamental disagreement as to enforceability did not rise to a justiciable controversy. According to the dissenting judge, the association sought only a judicial determination of the enforceability of the amended covenants—a request for an advisory opinion to settle an abstract difference of opinion. Holding differing opinions about the validity or enforceability of the amended covenants in itself is insufficient to create a controversy. Finally, the judge stated that he was troubled by the implications of the majority opinion. According to him, under the majority's opinion, an attorney cannot vigorously question the legality and potential consequences of enacting newly proposed restrictions on his or her client's use and enjoyment of property without exposing the client to a preemptive declaratory relief action with an attorney fees trigger. Based on these arguments, he would reverse the declaratory judgment and also reverse the order awarding costs and fees to the association and remand for a determination of reasonable attorney fees to Degnan.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Cell Phone Tower Not Incidental to Residential Use

Kaung v. Board of Managers of the Biltmore Towers Condo Association, No. 6653/08, Sup. Ct. N.Y., Dec. 10, 2008

Powers of the Association: A board of directors was not authorized to enter into agreement with a cell phone company to construct a cell phone tower on top of condominium because the cell phone tower was neither a residential use nor incidental to a residential use.

Rose and Bill Kaung and other owners of condominium units in Biltmore Towers Condominium, a 12-story, 131-unit residential building in White Plains, N.Y., sought an injunction enjoining the construction of a cell phone tower by MetroPCS New York LLC ("Metro") on the roof their building because they were concerned about health hazards involved with the placement of cell towers on the roof of their condominium. Kaung and the other owners contended that, based on provisions found in the offering plan, declaration and bylaws for the condominium, the condominium's board was without authority to enter into the agreement with Metro without the approval of a majority of the owners. They also argued that the agreement involved a commercial use of the roof, and thus violated the governing documents, which maintain the residential character of the condominium with the exception of one unit that was designated for office use.

In addition, the owners sought $1,750,000 in damages from board members, alleged breach of fiduciary duties, and asked the court for a mandatory injunction removing the current board members from their positions on the board based on their alleged breaches of fiduciary duty. They also alleged that Metro conspired to commit a tort, an action not recognized as an independent cause of action by New York court, which was summarily dismissed by the appeals court.

In opposition, Metro asserted that, in connection with its federal license to provide advanced wireless services to the public in the greater New York area, it has invested millions of dollars and had plans to construct 10 rooftop wireless sites within White Plains. Metro contended that the condominium site was essential to providing the services it was obligated to provide and that it may be the only viable location for its cell phone tower within the city of White Plains. Metro further stated that it attempted, but was unable to locate, a site classified in a nonresidential zoning district and that there would be no negative aesthetic impact as a result of the agreement since the construction would consist of small antennas mounted to the existing roof on the common areas of the building.

Metro claimed that it would be irreparably injured if it was not allowed to proceed with the installation of the cell towers. This is because, given the time it took to obtain zoning approvals and permits and to obtain the agreement, Metro would be unable to timely redesign the network and find, lease, zone and construct any alternative site(s) in time for its intended launch in the first half of 2009.

On appeal, the first issue for the court was whether the board had the authority to enter into the agreement with Metro. Under New York law, as long as a board acts for the purposes of the condominium, within the scope of its authority, and in good faith, courts will not substitute their judgment for the board's judgment. However, a court may review improper decisions, such as when a board's action had no legitimate relationship to the welfare of the condominium, the board deliberately singles out individuals for harmful treatment, the board acts without giving notice or consideration of the relevant facts, or the board acts beyond the scope of the board's authority.

According to the court, the bylaws have the force and effect of a contract between the owners and the board. Thus, the provisions of the bylaws control whether the board had the authority to enter into the agreement. Under New York law, the board is not at liberty to act in ways that are contrary to the provisions regarding the use and occupancy of the condominium as outlined in the bylaws. The court stated that the crux of this action is the provisions restricting the uses to which the residences and common elements may be put.

Accordingly, the court determined that the condominium's governing documents were unambiguous and that interpreting their provisions in accordance with their plain meaning was a matter of law for the court. Relevant for the court's analysis was the fact that not only do the bylaws limit the units' use to residential uses, but the governing documents provide that the common elements shall be used only for the furnishing of services and facilities which are incidental to the use and occupancy of units.

The court agreed that the cell phone antennas are reasonably suited for placement on the roof, which is common area; however, it stated that the real question is whether the use is incidental to the use and occupancy of the units, that use and occupancy being almost entirely residential. The court looked to Webster's II New College Dictionary to define "incident" as "something contingent upon or related to something else" and "incidental" as "of a minor, causal or subordinate nature." The court stated that it recognized that some amenities installed for the benefit of building residents may also be available to non-residents. Therefore, it stated that it was not inconceivable that a non-resident might use the laundry room or, that if the building installed a wireless router, the signal might escape the confines of the building and be accessible by someone outside the building. According to the court, even if some modest or slight use or unpreventable use occurred by others, the reality is that the amenity was provided principally for the use of the residents.

In this instance, the court determined that Metro's placement of cell towers on the condominium's roof at a rent of $2,300 a month for the purpose of becoming a provider of wireless communications to a vast area of White Plains simply could not be said to be incidental to the residential use of the condominium's units, particularly where there was no evidence that the residents presently lack cell service or have complaints about the quality of the cell service they do have. According to the court, the number of antennas does not appear to have been selected based upon the needs of the residents but rather on the desire on the part of Metro to enter this White Plains market as a new wireless communications provider.

According to the court, Metro's letter to the White Plains planning board makes clear that the agreement was entered into because Metro had a need to provide wireless communication service to an area much greater than the condominium in question; thus, the purpose of the installation of the towers on the roof of the building is far broader than merely providing service to building residents and the installation is not limited to the amount of equipment necessary to provide service to the building. The substantial rental payments that Metro was willing to pay the board combined with the substantial revenues Metro would receive as a result of the cell service supported the conclusion that the agreement was commercial in nature and not incidental to the residential use of the units.

The mere fact that the owners held an undivided interest in the common elements does not confer capacity and standing on them to seek the rescission of the agreement; such relief may only be sought derivatively. However, the owners have a contractual right to enforce the restrictive covenant set forth in the bylaws through a declaration that the board was without authority to enter into the agreement and an injunction against any attempt by the parties to effectuate the provisions of the agreement. Accordingly, the court declares that the board was without authority to enter into the agreement since it violated a restrictive covenant limiting the use of the common elements to uses incident to the units' residential use.

The alleged breaches of fiduciary duties by the board members included: (1) entering into the agreement without proper notice to the owners and an opportunity to be heard, (2) not allowing the owners to vote on the agreement, which was required by the bylaws, and (3) acting outside the scope of their authority. The court ruled that while individual board members have fiduciary duties owed to the condominium and its owners, the owners' complaint was devoid of any specific allegations of fraud, self-dealing or other wrongdoing that would support a finding of individual liability against the board and the individual board members. According to the court, the only acts alleged are that the board members incorrectly construed that they had authority to enter into the agreement. Such a claim cannot support a breach of fiduciary duty as a matter of law. Therefore, the court dismissed that complaint.

The board's acts, while mistaken in the sense that the court disagreed with their claim of authority, were shown not to have been illegal or fraudulent. Therefore, the court refused to oust the board members. On that basis, the court concluded that owners were entitled to a declaration that the agreement with Metro was void and were entitled to an injunction against the installation of the cell towers.

©2009 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 and Use Good Faith

Pacific Ranch Homeowners Association v. Murry, No. G039899, Calif. App. Ct., Dec. 12, 2008

Powers of the Association: In an unpublished opinion, a California appeals court found that if an association's actions are reasonable and in good faith, those actions are presumed to be reasonable.

In 1999, Elmer Murry, Jr., purchased a unit in Pacific Ranch Condominium. The condominium was subject to CC&Rs, enforced through the Pacific Ranch Homeowners Association ("association"). Subsequent to moving into his unit, Murry installed a spa on his patio. In August 2003, the association learned of Murry's spa and advised him that the modification to his patio required approval by the architectural committee. Murry did not respond to the letter. The association's board of directors discussed the issue of personal spas at its April 2004 meeting. Based on its concerns related to its lack of ability to monitor noise, the close proximity to neighboring condominium units, and the fact that the association provides three spas in the common area for the use of association members, the board voted not to allow free-standing spas. To support its decision, the board cited a section of the declaration, which provides that nothing:

shall be … done … which may be, or may become, an annoyance or nuisance to the neighborhood, or which shall in any way interfere with the quiet enjoyment of each of the [o]wners of his respective condominium unit.

In August 2004, the association sent Murry a notice of hearing. Murry attended that board meeting and argued that noise was not an issue with his spa as none of his neighbors had complained; further, he offered a letter to the board from his doctor indicating he need the spa therapy as a treatment for his back pain. Based on its earlier vote, the association demanded that Murry remove his spa. Murry did not comply, and the board sought an injunction requiring him to remove the spa. The trial court ruled that the association acted reasonably and in good-faith in requiring Murry to remove his spa and directed Murry to remove it within 30 days.

Murry appealed the trial court's decision. On appeal, the court found that Murry had the burden of proving that the association had not acted reasonably. The court cited Nahrstedt v. Lakeside Village Condominium Association, Inc., 8 Cal.4th 361, 33 Cal. Rptr. 2d 63 (1994) (CALR October 1994) in finding that courts generally uphold decisions made by an association's board of directors as long as those decisions represent good faith efforts to further the purposes of the common interest development, are consistent with the development's governing documents, and comply with public policy. In arguing against that burden of proof, Murry cited Dolan-King v. Rancho Santa Fe Association, 81 Cal. App. 4th 96 (2000). The appeals court distinguished between this case and Dolan-King by finding that Dolan-King dealt with guidelines, not recorded restrictions enforceable as equitable servitudes.

The court then looked at whether the board's decision was reasonable. Evidence showed that the association acted reasonably and in good faith because the patios adjacent to the condominium were limited common elements and, as such, were a part of the common area. Personal spas located on a unit's limited common element could present a noise problem. Association records noted that there had been noise-related complaints from unit owners located near one of the spas located in the common area. Personal spas would provide the potential for an exponentially greater noise issue because of their proximity to other units. The declaration authorizes the association to make rules regarding use of the common area, and it specifically prohibits unit owners from doing anything that could be an annoyance or nuisance to the community. The court upheld the trial court's decision to bar personal hot tubs from patios because it was supported by a reasonable reading of the declaration.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Golf Course Subject to Implied Restrictive Covenants

Skyline Woods Homeowners Association, Inc. v. Broekemeier, 276 Neb. 792, 758 N.W.2d 376 (2008)

Architectural Control/Covenants Enforcement/Use Restrictions: The Supreme Court of Nebraska ruled that implied restrictive covenants limiting a property's use to a golf course are enforceable and run with the land.

Skyline Woods is a subdivision in Douglas County, Neb., that abuts a piece of property known as Skyline Golf and Country Club. In 2004, Skyline Country Club filed for Chapter 11 bankruptcy. In early 2005, the bankruptcy court approved the sale of the golf course to Liberty Building Corporation ("Liberty"), a company owned by David and Robin Broekemeier. The court delivered a warranty deed to Liberty, conveying the property "free from encumbrance except covenants, easements and restrictions of record."

As early as 1967, the property was operated as a golf course. It changed ownership many times over the years. In 1969 a group of partners, including Seb Circo, purchased the golf course. Between 1969 and 1977, the chain of title is unclear; however, sometime around 1977, Dennis Circo acquired the property. Dennis Circo and his father, Seb Circo, formed Skyline Golf Club, Ltd., and changed the name of the golf course to Skyline Woods.

Circo also owned land adjacent to the golf course, which he developed as the Skyline Woods subdivision. When marketing the lots in Skyline Woods, Circo advertised the proximity of the lots to Skyline Woods golf course. He testified at trial that the golf course was the "center and the heart" of the residential development.

In 1990, Circo sold the golf course to American Golf Corporation, retaining ownership of the unsold residential lots in Skyline Woods. Eventually, American Golf Corporation merged with National Golf Operating Partnership, L.P., and the partnership conveyed the property to Skyline Woods Country Club, L.L.C.

In late 2004, Skyline Woods Country Club, L.L.C. filed for bankruptcy. Skyline Woods homeowners were not included in the creditor's matrix, so their claimed restrictive covenants were not specifically raised in the proceeding. The bankruptcy court's order approved a sale of the golf course property to Liberty and the Broekemeiers.

Shortly after Liberty purchased the golf course, David Broekemeier called a meeting of the members of Skyline Country Club and informed them that he would not be honoring their membership contracts. Liberty operated the property as a golf course for one year and did not honor the membership contracts that generated $70,000 a month from club members. The condition of the golf course deteriorated, and Skyline Woods Homeowners Association, Inc., The Villas at Skyline Homeowners Association, Inc., and numerous individual homeowners (collectively "homeowners") sued Liberty and the Broekemeiers to compel them to maintain the property as a golf course.

At trial, the homeowners produced various documents as evidence of an implied restrictive covenant to maintain the property as a golf course, including a declaration of protective covenants recorded in 1981 and three amendments to the declaration that specifically related to the golf course. In 1980, Circo recorded an easement against the homeowners' properties in Skyline Woods to ensure the use of the property as a golf course was not disturbed by the adjacent homeowners.

A 1990 memorandum of understanding between Circo and American Golf Corporation provided instructions on necessary improvements and maintenance of the golf course. It was not recorded at the time, but it was recorded in 1997 as an attachment to an assignment of memorandum rights. The memorandum of understanding referenced an unrecorded 1990 purchase agreement that evidenced the sale of the golf course by Circo to American Golf. In that purchase agreement, American Golf agreed to maintain the golf course in an equal or better condition than the standard of maintenance that Circo used.

A memorandum of understanding dated Dec. 28, 1990 also referenced the purchase agreement and again stated that the terms of the unrecorded purchase agreement, "shall be a covenant running with and burdening the golf course."

Broekemeier admitted that he was aware of the restrictions and covenants affecting the golf course other than the unrecorded purchase agreement. Liberty's title policy specifically excluded "[e]asements, claims of easement or encumbrances which are not shown by the public records." The policy listed as exceptions to title all restrictions of record and "[a]ny facts, rights, interests, or claims which could be ascertained by an inspection of said land or by making inquiry of persons in possession thereof."

In addition, the record showed that Liberty owns Ranch View Estates, a subdivision adjacent to the golf course, and its advertising for the sales of lots in that subdivision included references to the proximity of the golf course.

In April 2006, the trial court issued a temporary restraining order against Liberty and the Broekemeiers, prohibiting them from taking any action that would interfere with or damage the golf course or prevent the property from being used as a golf course, and in June 2006, the parties entered into a joint stipulation whereby Liberty and the Broekemeiers agreed to maintain the property in accordance with specified standards during the pendency of the litigation.

In March 2007, the court granted partial summary judgment in favor of the homeowners on the issue of whether restrictive covenants limiting use of the golf course ran with the land. The court concluded from documents presented by the homeowners that the golf course was encumbered by restrictive covenants; however, the court's order did not require Liberty and the Broekemeiers to operate the property as a golf course. The court also concluded that the bankruptcy order did not sell the property free and clear of the restrictive covenants because restrictive covenants are property rights belonging to third-party homeowners.

After another trial held in August 2007, the court determined that the homeowners failed to prove their remaining causes of action. However, the court's order stated that restrictive covenants burdened the golf course property and required that Liberty and the Broekemeiers properly maintain the club property in a manner that would prevent the value of the homes in Skyline Woods from declining. All parties appealed, with Liberty and the Broekemeiers alleging that the trial court erred in: (1) concluding that the bankruptcy court's judgment directing sale and delivery of title to Liberty left the real estate encumbered by implied restriction; (2) entering judgment against the Broekemeiers as individuals; and (3) failing to find that Liberty and the Broekemeiers were protected by Nebraska's statutes governing the impact of unrecorded instruments on subsequent purchasers.

In their appeal, the homeowners argued that the district court erred in finding that it could not order Liberty and the Broekemeiers to operate the property as a golf course or, alternatively, order that the property be sold or leased to an entity that would operate the property only as a golf course.

Citing Kentucky case law, the Nebraska Supreme Court noted that it is possible for restrictive covenants to arise by implication from the conduct of the parties or from the language used in deeds, plats, maps or general building development plans. Although the court had never addressed whether a restrictive covenant will be implied from a common plan of development when there is no express covenant found in the chain of title, it noted that other courts had invariably found an enforceable restrictive covenant where it is sufficiently implied by the conduct and expectations of the parties and any documents known to the purchaser.

Although the record did not contain plats or maps, it was replete with testimony supporting the existence of a common plan of development at Skyline Woods that established implied restrictive covenants. Not only did homeowners rely on the existence of the golf course when purchasing their property, they also were required to take certain precautions for the property because of the golf course, such as installing Plexiglas windows.

The court concluded that homeowners who bought property relying on the proximity and existence of the golf course should be protected by implied restrictive covenants that the property be maintained as a golf course. The court found that Liberty's and the Broekemeiers' argument that such implied covenant was unenforceable under Nebraska's recording statute because it was unrecorded to be without merit.

The court determined that the Broekemeiers had notice of the implied restrictive covenants and failed to satisfy their duty of inquiry. Even though they were aware that the property had been used as a golf course since the 1980s, they failed to inquire about how the surrounding homeowners would be protected. Additionally, Liberty obtained a title insurance policy that included the restrictions and requirements filed against the surrounding homeowners' properties. The court found that these facts would certainly alert a prudent purchaser of the possibility of restrictions on the use. Even more convincing to the court, however, was the fact that Liberty promoted sale of Ranch View Estates property by referencing its proximity to Skyline Woods golf course. The court concluded that the property should be maintained as set forth in the joint stipulation.

Liberty and the Broekemeiers argued that the bankruptcy court's order selling the property to Liberty extinguished any covenants running with the land, while the homeowners argued that the bankruptcy court lacked jurisdiction to vacate the covenants. The court found that, under the bankruptcy code, a trustee is limited in its authority to sell property of an estate free and clear of "any interest," and that pertinent case law demonstrated that the bankruptcy order authorizing the sale to Liberty did not extinguish the implied restrictive covenants limiting the property to use as a golf course because the interests were not within the meaning of "any interest" found in the bankruptcy code. The court noted that the homeowners were not seeking to vacate, reverse, modify or prevent the enforcement of the bankruptcy order.

In their cross-appeal, the homeowners asserted that the district court erred by not ordering that Liberty be compelled to reopen and operate the golf course or sell it to an entity capable of doing so. The court believed the restrictive covenants demonstrated that the homeowners relied on the character and attraction that living on a golf course provides and that they had an enforceable right to have the property maintained at least to the same standard that was set out in the joint stipulation. However, the court did not find that the covenant established an obligation that Liberty operate the golf course and found no merit in the homeowners' cross-complaint.

The court affirmed the district court's order and further ordered that the property be maintained according to the standards set forth in the joint stipulation dated June 13, 2006.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Statute of Limitations Tolled In Homeowners' Personal Injury Claim

Smith v. Executive Custom Homes, Inc., No. 08CA0426, Colo. App. Ct., Feb. 5, 2009

Developer Liability: Homeowners were entitled to equitable tolling of the statute of limitations in a personal injury action brought against the developer of their townhome because they notified the association's property manager of a defect.

In 2001, James and Judith Smith bought a townhome in a retirement community from Executive Custom Homes, Inc., the community's developer. The community is managed by a homeowners association that employs a property management company.

On Feb. 6, 2004, the Smiths noticed an accumulation of ice on their front steps, and, that day James Smith sent an e-mail to the property manager stating he felt the accumulation of ice was caused by a construction defect that should be repaired by the developer.

The property manager forwarded his message to the developer, which, without notifying the Smiths, contracted with a gutter repair company to inspect the Smiths' roof and rain gutters. On Feb. 13, the developer informed the property manager that an inspection showed leaking gutters that would be repaired in the next week or so. The developer did not give the Smiths this information. Between February and June 2004, repairs were made to the roofs and rain gutters of a number of homes in the subdivision, including the Smiths' home.

When Judith Smith slipped on ice accumulated on the front walkway of her home and sustained injuries, the Smiths notified the homeowners association about the fall. The developer told the Smiths about the repairs that were made in 2004 but failed to tell them that the gutter service had failed to repair the gutters satisfactorily. Without informing homeowners, the developer had continued its efforts to remedy the leaking gutters after Judith Smith's injury. In connection with those efforts, the association hired another company to inspect the roofs and gutters of several homes, including the Smiths' home. The report from that company stated that the Smiths' home suffered from, "loose tile/missing flashing/tile overhangs the gutter/flashing not secured," and concluded by warning that the homes must be repaired immediately in order to prevent severe icing.

On Jan. 17, 2007, the Smiths sued the developer. The trial court granted the developer's motion for summary judgment, ruling that the Smiths action was barred by the two-year statute of limitations. The Smiths appealed.

The Smiths' claims were based on Colorado's Construction Defect Action Reform Act ("Act"), which provides that, "a claim for relief arises under this section at the time the claimant or the claimant's predecessor in interest discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury." The court found that this language was quite clear in its intent that a claim for relief arises not on the date of the physical injury but when the construction defect that causes the injury was physically manifested.

The Smiths did not dispute the plain reading of the statute but contended that a claim for serious personal injury under the Act would be barred simply because the injury occurred two years and a day after a minor construction defect was noted. They argued that the application of the plain language reading in such circumstances, when personal injury does not occur until after the defect is observed, is unfair and absurd because it precludes recovery for injuries that were not foreseeable at the time the construction defect was noticed and encourages unnecessary lawsuits by effectively requiring persons to file claims prior to sustaining injury.

Nevertheless, the trial court and appeals court agreed that it is not for the courts to interfere with the legislature's explicit determination that in all statutory construction defect cases, the need for faster resolution trumps the need to wait for an injury to occur. Furthermore, the appeals court did not find the statute to be absurd, noting that potential injury from construction defects is usually foreseeable and adopting a policy that such problems should be remedied as soon as possible is not irrational.

The appeals court determined that under the Act, property owners must act with diligence upon the discovery of a construction defect or risk possible forfeiture of their claim for relief. However, the court explained that a statute of limitations can be equitably tolled by the "repair doctrine," which allows tolling of a limitation period when a person can show that after a defect was noticed: (1) repairs were attempted; (2) representations  or promises, express or implied, were made by the other party that the repairs would remedy the defect; (3) that the claimant reasonably relied on the representations or promises; and (4) as a result, the claimant delayed filing its legal action. Both the trial court and the parties recognized the repair doctrine in this case, and the appeals court agreed.

The court noted that the developer did not contest the application of the repair doctrine at trial, but argued there were no undisputed issues of fact because the Smiths did not present evidence showing they were aware of repairs in 2004 or that they relied on such repairs in deferring their action.

However, the appeals court concluded that summary judgment was not appropriate to resolve the issue. Colorado case law has established that the repair doctrine protects a homeowner who has sought to remedy a defect but who was led, "to reasonably believe that he or she will receive relief without having to resort to litigation." Thus, the promise of repair need not be directly communicated to the party, but may be reasonably implied from the circumstances.

The Smiths were part of a multi-home community that had specific procedures for directing complaints of construction defects to the property manager, who would then direct them to the developer. The court found that because of these procedures, it was not unreasonable that the Smiths might conclude that the developer was promising to remedy the defect when their request was duly made unless they were informed differently.

The record was undisputed that the Smiths not only promptly complied with the procedures but expressly demanded that the developer either repair the condition or reimburse them repair costs. Moreover, after making their demand, the Smiths did not notice further accumulation of water or ice until the date of the accident. So, regardless of whether they knew of the repairs undertaken in 2004, it would not be unreasonable for them to assume that the repairs were undertaken to fix the icing problem.

Although the Smiths' lawsuit was filed after the applicable statute of limitations, whether the repair doctrine should toll the running of the statute was not appropriately resolved by the trial court. The appeals court reversed the ruling for summary judgment and remanded the case with directions to the trial court to reinstate the Smiths' complaint and conduct further necessary proceedings.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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