July 2009
In This Issue:
Majority Vote on Referendum Constitutes Approval of Capital Expenditures
Association Does Not Have to Repair Water Damage to Condominium Units
Association Cannot Enforce Roofing Material Restriction after Project Complete
Owner Responsible for Balcony Repairs
Owners Must Remove Non-Compliant Basement Windows
Compensatory Damages Awarded to Association Cannot Include Attorney Fees
Mortgagor Is Entitled to Insurance Proceeds Payable to Owner of Flooded Unit
Master-Planned Community Not Subject to Wisconsin Condominium Act
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Majority Vote on Referendum Constitutes Approval of Capital Expenditures

Baumann v. Long Cove Club Owners Association, Inc., 380 S.C. 131, 668 S.E. 2d 420 (2008)

Covenants Enforcement: A South Carolina appeals court upheld a trial court ruling that a majority vote not to require a referendum on capital expenditures constituted approval of the expenditures.

Long Cove Club Subdivision is on Hilton Head Island, S.C. The development includes a golf course and club house. Long Cove Club Owners Association, Inc. was established under a recorded declaration that makes all property owners members of the association. The association is governed by a board of directors elected by the membership.

In January 2006, the board approved a nine-year contract with a provider of golf carts in the amount of $450,000, and in June 2006, it approved a proposal for $525,000 to refurbish and redecorate the club house. The declaration provides that any expenditure from the revenues collected from capital assessments and initiation fees in excess of $150,000 for a single item or project must be approved by the membership, either as part of the annual budget or in a separate referendum. The board did not submit these expenditures to the members for approval, either at the annual meeting or in a separate referendum.

The declaration provides that 15 percent of the members in good standing can call a meeting of the membership to require the association to take action by referendum. Ninety-two members requested a referendum on the golf cart and club house renovation expenditures, which met the 15 percent requirement.

The board mailed notice of a special meeting to members that stated that the purpose of the meeting was to, "receive the report from the Inspector of Elections on the results of an election to decide whether action by referendum shall be required in connection with the approval of the 'long-term-plan to purchase golf carts and the $525,000 Redecorating and Refurbishing Plan.'" The mailing also included a statement from the members who called the meeting that the meeting was called to approve or disapprove the board's actions.

In September, the board conducted the referendum. The choices contained in the notice were "Do not require a referendum" and "Require a referendum." Two hundred fifty-one votes were cast not to require a referendum, and 102 votes were cast to require one.

The Baumanns and other owners sued the association, asking the court to compel the association to comply with the declaration. The trial court ruled in the association's favor. The Baumanns appealed.

The Baumanns argued that the trial court erred by basing its finding on the business judgment rule because that rule only protects a board acting within its authority. They further maintained that the trial court erred in finding that the association had the right to frame the question for the referendum.

The appeals court noted that a corporation can only exercise the powers granted to it by law, its charter or articles of incorporation, and its bylaws. Under South Carolina case law, in disputes between directors of homeowners associations and its members, the conduct of the directors should be judged by the business judgment rule. Without a showing of bad faith, dishonesty or incompetence, courts will not set aside the directors' judgment.

The court acknowledged that the Long Cove declaration required the association to obtain member approval by referendum or in the annual budget for expenditures over $150,000. The court determined that the association secured the member approval by referendum. Although the association did not phrase the referendum choices in the manner the Baumanns proposed, the notice did contain a statement by the members giving the reasons for the meeting. The court determined that the choices amounted either to approving or denying the expenditures, and because the majority of members voted for no referendum, the expenditures were approved. 

The Baumanns contended that they were entitled to attorney's fees and costs pursuant to the declaration, but the appeals court disagreed because they did not prevail in their action.  

The association argued that the trial court erred in failing to award attorney's fees on its action, because the declaration provides that a prevailing party is entitled to recover attorney's fees and costs. The appeals court disagreed. The court interpreted the declaration to provide only for an award of attorney's fees when a party demonstrates that the opposing party has violated the covenants. The appeals court found that the association did not prove or even allege that the Baumanns violated the declaration.

The court affirmed the trial court's decision.

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

Association Does Not Have to Repair Water Damage to Condominium Units

Calemine v. Jared Court Homeowners Association, Inc., No. B200299, Cal. App. Ct., Feb. 17, 2009

Association Operations/Powers of the Association: In an unpublished opinion, a California appeals court upheld a ruling that a condominium association acting in good faith and in the best interests of the community can select not to take responsibility for costs incurred by unit owners due to construction defects in common areas.

Jared Court is located in Woodland Hills, Calif. The condominium project consists of 18 units in four buildings and common area that includes a tennis court, swimming pool, concrete walkways, front patios and mature landscaping. The condominium declaration created Jared Court Homeowners Association, Inc. to maintain and operate the condominium common areas in the most cost effective manner. The declaration expressly requires the association to "maintain the portion of the project not occupied by the units, in good, clean, attractive and sanitary order and repair."

Each unit in Jared Court has a similar tri-level design. The lowest level consists of a garage and a windowless "bonus room"; the second level contains an entry foyer, living room, family and dining room, kitchen and powder room; and the upper level has three bedrooms and two bathrooms.

In 1982, shortly after the project was completed unit owners became aware that water was leaking through the foundation. The association sued the developer for construction defects and received a settlement of $335,000. Using the settlement funds, the association hired Westar Flooring to repair and waterproof the interior of the below-grade surfaces of the garages and bonus rooms.

The repairs performed by Westar were defective, so the association sued Westar in 1996 and settled the matter for $565,000. During the lawsuit, the association hired Robert H. Jacobs & Associates ("Jacobs") as a consultant. Jacobs estimated that it would cost approximately $1,020,896 to repair the structural defects and that the repairs would involve extensive trenching and disruption to the common areas. After the settlement, the association received repair estimates for less extensive work from Construction Headquarters, Inc. ("CHI") that ranged from $119,800 to $305,000. The association decided to hire CHI to repair the foundation and use the balance of the settlement received from Westar for other unrelated common area repairs.

CHI completed its work in 1998, but wrote the association to document its discussions with the association's board members in which it advised the board that CHI would neither take responsibility nor give any guarantees that the water penetration issues would be controlled or corrected, citing many contributing factors. However, Jared Court did not experience any water intrusion problems between the time the CHI repairs were completed until late 2004.

Larry and Camille Calemine bought an end unit in Jared Court in July 2002. The front and left sides of their unit face an upward slope that is supported by a retaining wall. The Calemines used the lower level bonus room as an office. In January 2005, during a period of unusually high rainfall, water leaked through the foundation of their unit into the garage and bonus room.  There was standing water in the bonus room and water that flowed over the slightly slanted garage floor. These same areas suffered water intrusion in April 2005 and April 2006. Ultimately, the bonus room became unusable due to moisture, concerns about mold infestation and the threat of further water damage. An industrial hygienist who examined the unit found evidence of certain types of fungi and spores.

The Calemines' insurance company rejected their claim on the basis that the cause of the damage originated from the condominium common area. In 2005, when the Calemines made attempts to have the association and management company address their problem, they learned of the past water intrusion problems.

In February 2005, the board sent a memo to all association members regarding the water intrusion problem and, in June, sent a more thorough explanation to both association members and prospective purchasers. The initial letter summarized previous water intrusion issues and indicated that while efforts would be made to address roof and foundation leaks, the association could not prevent all leaks but would investigate and make certain repairs. The subsequent letter outlined the previous problems in more detail and discussed the extent and cost of the work required to solve the problem, noting that the work still could not guarantee that there would be no further water intrusion during times of heavy rainfall. The letter stated that the work would have to be paid for by a substantial special assessment levied against each homeowner. The letter further stated that the board had determined, in the best interests of the association members, that the association would not assume liability for water intrusion into below grade portions of the units or pay to repair or abate damage to such areas or personal property in those areas resulting from such water intrusion.

The president explained that the board reached its decision not to undertake additional repairs after it consulted with and acted upon the advice of its attorney and the contractor who performed the repair work in 1998. The board also considered that the special assessment necessary to fund the repairs would be a hardship to many of the Jared Court homeowners who were retirees on a fixed income. Finally, the board weighed the facts that prior repairs had been unsuccessful, that contractors could not guarantee future success and that the water intrusion was limited to non-habitable areas of the units.

The Calemines sued the association for nuisance, breach of contract, negligence and misrepresentation or concealment. They alleged that the association maintained and repaired the premises in a manner that permitted moisture to collect in common areas, which resulted in damage to the walls and floors of the condominium and constituted a nuisance under California law. They further alleged that the association breached its duty to maintain and repair common areas by allowing damage to continue to occur as a result of its past negligent decisions. The association denied the allegations.

In October, the Calemines amended their complaint, adding new claims that alleged that the association breached its duty to maintain the common areas in good repair as outlined in the declaration. They sought a permanent mandatory injunction directing the association to conduct immediate, effective and permanent repair to the common area adjacent to and surrounding their unit, so as to permanently prevent future water intrusion into their unit and the damage resulting therefrom and enjoining the association from continuing to violate the mandatory provisions that required them to affect the repairs. The association again denied the allegations.

During discovery, testing conducted by experts revealed that initial construction of the condominiums was defective in that a below-grade drain was installed upside down at the wrong depth. The defect allowed water to seep under the retaining wall and concrete slab into the garage and bonus room area when the soil outside the Calemine's building became saturated. The work necessary to correct the defect would take about six months to complete and was described as a major project that would involve removing landscape and hardscape. Estimates for the cost of the work ranged from $270,000 to $429,000 without any guarantee that further water intrusion would be prevented. Estimates for the additional cost to repair the interior of Casteline's condominium ranged from $33,000 to $45,000.

The trial court ruled that the Calemines failed to offer evidence of damages to support their claims that they were entitled to injunctive relief. Applying the rule of judicial deference defined in Lamden v. La Jolla Shores Clubdominium Homeowners Association, 21 Cal. 4th 249, 87 Cal. Rptr. 2d 237, 980 P.2d 940 (1999) (CALR November 1999), the trial court found that the Calemines failed to offer evidence of damages to support their tort claims and to establish a right to enjoin the association's reasonable and good faith decision. The court noted that the history of prior repairs demonstrated the association's sincere desire to solve the problem. The appeals court determined that the decision whether to provide any additional waterproofing was a decision best left to the discretion of the board. The Calemines appealed.

In their appeal, the Calemines argued that the trial court improperly applied Lamden in deferring to the association's decision to require individual homeowners to correct further water intrusion problems. They contended that even if the case were applicable, the court should have issued an injunction requiring the association to undertake action to alleviate further water damage as its duty to maintain the condominium common areas. The appeals court found no merit in these arguments.

The court noted that the declaration imposed a duty of maintaining, operating and managing the common areas of the condominium. In Lamden, the California Supreme Court adopted a rule of judicial deference to community association board decision-making to apply when owners in common interest communities seek to litigate maintenance decisions entrusted to the discretion of the board. That precedent established that:

[W]here a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statute, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise.

The trial court found that the members of the association's board appeared sincerely interested in the well-being of the association membership as a whole and seriously grappled with their decision not to fund further repairs through levy of a special assessment. The appeals court saw no basis to disturb the trial court's conclusion. It rejected the Calemines' argument that Lamden did not apply.

The appeals court cited California case law that stresses that someone who purchases a unit in a common interest community, having knowledge of the power of its owners association, accepts a risk that the association's power may be used in a way that harms that individual for the benefit of the community.

The appeals court affirmed the trial court's judgment and awarded costs of the appeal to the association.

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

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Association Cannot Enforce Roofing Material Restriction after Project Complete

Falkner v. Colony Woods Homes Association, 40 Kan. App. 2d 349, 198 P.3d 152 (2008)

Covenants Enforcement: Because an association did not respond to a request for architectural approval within the required time period, it waived its right to enforce compliance.

Michael and Nan Falkner own a home in Colony Woods, a subdivision in Lenexa, Kan. Colony Woods Homes Association was created under a declaration of restrictions filed in 1975. The association is responsible for enforcing the declaration. Section 9 of the declaration states:

Roofs shall be covered with wood shingles, wood shakes, slate or tile. Any building products which may come into general usage for dwelling construction in this area after the date of these restrictions shall be acceptable if approved in writing by the Architectural Control Committee.

The Architectural Control Committee ("ACC") is responsible for approving proposed construction plans for homes in the subdivision. In 1998, the ACC sent a notice to Colony Woods homeowners informing them that it would allow additional colors of housing materials to be used pursuant to a provision in the declaration that allowed the use of materials that may come into general usage in the region. The notice explained that the ACC had developed a form to be used when homeowners installed a new roof or altered the existing roofing materials in their homes. The notice also outlined a new approval process requiring homeowners to fill out and sign the form, provide a material data sheet, bid proposal and copy of the City of Lenexa's building roofing permit. Homeowners were then to wait for a signed written response from the ACC before ordering material for work to begin. The ACC had 30 days to respond to requests. Included with the notice was the provision for a two-week period for "comments, objections, or suggestions" to the new rule on alternate roofing contained in the notice.

In March 2006, the Falkners replaced their wood roof with one of laminated asphalt shingles. The association knew prior to completion that they were using materials that did not comply with the declaration. The Falkners did not obtain approval for the roof from the ACC, and, on the final day of construction, the Falkners spoke with a member of the ACC who told them their roofing material was not an approved product and advised them to submit the required request form. The ACC then sent them a letter restating that their roofing material was not approved and the ACC would deny their use of the material unless they could prove it was an accepted roofing material. A "Request Form for Exterior Roofing Material Change" was enclosed with the letter, and the ACC requested that the Falkners return the form by April 18, 2006.

The Falkners returned the form and included sample materials used in the re-roofing project.  When they received no response from ACC, they wrote the ACC in June to determine whether their request had been approved. On June 8, 2006, the ACC responded that the roofing materials had been disapproved before the Falkners submitted their request form, and the association planned to take further legal action.

The Falkners sued the association, asking the court to interpret the declaration. The trial court determined that the Falkners did not comply with the declaration or the procedures contained in the notice for obtaining approval for their roof.

However, the declaration provides: "[I]f no suit to enjoin the erection of said building or the making of such alterations has been commenced prior to the completion thereof, such approval will not be required and this covenant will be deemed to have been fully complied with." Because the association took no action to enjoin the construction of the new roof before it was completed, the court ruled in the Falkner's favor and denied the association's motion for summary judgment. The association appealed.

In its appeal, the association argued that the trial court's interpretation of the declaration was in error because the court used the rules of contract construction incorrectly and ignored the intent of the drafter. The association also argued that it had no duty to respond to the Falkners' request for approval of their roof. Finally, it argued that the trial court's interpretation of the declaration generated an absurdity because it required the association to self-police the subdivision.

The association contended that the trial court erred by applying sections of the declaration to the Falkner's re-roofing project and that the court should apply Section 22 of the declaration, which provides:

[T]he Developer, its successors and assigns, and also the owner or owners of any of the lots hereby restricted shall have the right to sue for an injunction, prohibitive or mandatory, to prevent the breach of, or to enforce the observance of, the restrictions above set forth, in addition to ordinary legal actions for damages, and failure of the Developer, its successors or assigns, or any owner or owners of any lot or lots hereby restricted to enforce any of the restrictions herein set forth at the time of its violation shall, in no event be deemed to be a waiver of the right to do so thereafter.

In its review of the declaration, the appeals court found that while Section 9 outlines the approved building material when the declaration was drafted and allows the ACC to approve additional materials, Section 7 furnishes the specific procedure by which a homeowner can obtain construction approval. The court found that these provisions were not in conflict and no alternative meanings could be extrapolated from them. Further, the court found that, interpreting the declaration in its entirety, it was clear that Section 22 is a general clause concerning the ability of the association and homeowners to enforce the declaration, while Section 7 applies specifically to situations in which homes are built or altered.

The association argued that its response to the Falkners' request for approval would have been useless because the Falkners were notified that the materials used were disapproved. Nevertheless, the court found that the Falkners, immediately upon receipt of the association's March letter, complied with the approval process and provided the necessary paperwork to the ACC. Additionally, after waiting almost three months for the association's response, the Falkners inquired whether the materials had been approved.

The court questioned why the association had asked them to submit the form by April 18, 2006 if the association had already disapproved the materials before the Falkners submitted their application.

Additionally, the court proposed that the Falkners sought to be excused from literal compliance with the approved roofing materials listed in the notice and the ACC's letter of March 22, 2006. The court found that the ACC had authority to excuse the Falkners from literal compliance with the materials listed in the notice and its March 22, 2006 letter and approve the roofing materials. Again, if it did not have the authority, the court questioned why the ACC asked them to submit an approval request form.

Waiver was one of the arguments that the Falkners made in their appeal. Although the Falkners took no action to obtain approval from the ACC before installing their roof, they did seek approval after the ACC requested they do so by April 18, 2006. The ACC never told the Falkners that it would not consider their approval request. The fact that the letter requested that the Falkners submit their request by a specified date implied that the ACC was willing to consider the request. The court found that the Falkners relied upon the ACC's invitation to submit the approval request.

The court considered that once a homeowner has submitted a request form under Section 7 of the declaration, the ACC could disapprove the homeowner's request in one of three ways: (1) by notifying the homeowner in writing within 30 days; (2) by suing to enjoin the construction before the work was completed; or (3) by doing both. Because the ACC allowed the Falkners to submit an approval request form after they completed their roof, it was left with only one alternative: to disapprove the re-roofing.

Noting that Section 22 of the declaration generally applied to homeowners who failed to seek prior approval to construct or alter a building under Section 7, the court found that because of the unique facts of this case, Section 22 was inapplicable and Section 7 controlled. The appeals court affirmed the trial court's ruling.

In a dissenting opinion, one justice disagreed with the majority's decision that the association waived its right to require compliance with the declaration. The justice agreed with the majority that the 30-day time limit for ACC action contained in Section 7 did not control since the Falkners did not comply with the pre-construction approval process, but he suggested that the Falkners' roofing material had already been disapproved because they used an unapproved product. The ACC had a right to expand the list of approved roofing materials, and the Falkner's request form constituted only a request that the ACC expand the list of approved materials to include the material used on their roof. Contrary to the majority's opinion, the justice did not construe the ACC's delay in refusing to expand its list of approved materials as an intentional renunciation of its right to set and maintain standards in the subdivision for roofing materials. He concluded that rather than rely on an implied waiver, the Falkners operated under the old adage that it is better to ask for forgiveness than permission. He respectfully suggested that the concept of waiver did not apply and the ruling of the trial court should have been reversed.

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

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Owner Responsible for Balcony Repairs

Gabriel v. Canyon Haven Homeowners Association, No. D052178, Cal. App. Ct., Jan. 28, 2009

Covenants Enforcement/Powers of the Association: In an unpublished opinion, a California appeals court affirmed a grant of summary judgment to an association that made repairs to a condominium balcony and assessed the owner for the costs.

Canyon Haven is a condominium development in San Diego, Calif., comprised of 74 units, 60 of which have upper-level balconies. In 1985, Cedric Gabriel purchased a unit that included a balcony. In 2005, Canyon Haven Homeowners Association hired a consultant to inspect the waterproofing systems and structural components of all the decks and balconies in the development after noticing water damage. A licensed architect inspected Gabriel's balcony on two occasions and notified the association that he had seen deterioration and damage to many of the decks and balconies in the development, including the waterproofing system on Gabriel's balcony.

Based on their interpretation of the declaration, the association's board determined that each individual owner was responsible for repairing his or her waterproofing system, and the association was responsible for repairing damage to the underlying structures due to water seepage. The association informed the owners that it had retained a contractor to make the necessary repairs at each owner's expense but also informed them they could hire private contractors if they preferred.

From January to May 2006, Gabriel notified the association that he disagreed with the association that the repairs to his balcony were his sole responsibility. In February 2006, the association sent Gabriel a letter in accordance with the notice requirements contained in the declaration, informing him he had 30 days to repair his balcony. In March, Gabriel sent the association a letter stating he had retained a private contractor to repair the balcony. In May, when no work had been done to the balcony, the association had it resurfaced and sent Gabriel an assessment for his share of the costs.

Gabriel sued the association, alleging: (1) breach of contract; (2) a claim for injunctive relief through equitable apportionment of the repair costs among all Canyon Haven homeowners; and (3) negligence for failure to adhere to the declaration.

The association denied most of the allegations and also filed a cross-complaint alleging: (1) breach of contract; (2) injunctive relief to remedy interference and disruption; (3) nuisance; and (4) claim for declaratory relief in interpreting the declaration.

The trial court ruled in favor of the association because it found that Gabriel's reading of the declaration was unreasonable and did not take into account portions of the declaration that justified the association's actions. The court entered a judgment in the amount of $1,474 and attorney's fees and costs amounting to over $18,500. Gabriel appealed.

Gabriel contended that the trial court erred in granting the association's motion for summary judgment because triable issues of material fact remained unresolved. He also argued that the trial court failed to consider the age of the decks, the "surface" area that was the homeowners' responsibility, and the fact that all the decks in Canyon Haven were deemed to have deteriorated due to the association's failure to maintain the waterproofing systems.

The appeals court found Gabriel's argument to be inconsistent with his argument at trial that no triable issue of fact existed. He argued that the decks, balconies and patios were clearly common area. The declaration defines balconies as part of the owners "Exclusive Use Area" of the common area. He correctly stated that the declaration allocates responsibilities for maintenance and repair to the association in many situations; however, it includes the qualifying phrase, "[e]xcept as otherwise provided herein." The court interpreted, therefore, that the declaration includes exceptions to the association's general duties of maintenance and repair. For example, Article V provides that each individual owner has responsibility for:

[M]aintenance of areas which he has the exclusive right to use, and shall make repairs in such manner as shall be deemed necessary in the judgment of the Board to preserve the attractive appearance thereof and protect the value thereof.

Gabriel then argued that the definitions of "maintenance" and "repair" in the declaration constituted a triable issue of fact. Although the words are not defined in the declaration, the court, considering the plain language and common usage of the terms, concluded that his argument was unconvincing. He also contended that replacement of the waterproofing system essentially created something new, and, thus, was not a "repair." The court found that the undisputed facts did not support his conclusion. It noted that replacement of a portion of an item in order for that item to be sound fit within the plain meaning of the word "repair." In addition, the court found that Gabriel's fact-specific attempts to limit his responsibility to only the top layer of a multi-layer waterproofing system were unavailing as well. His arguments failed to contradict the court's conclusion that any maintenance and repairs to the balcony were Gabriel's responsibility as owner of the unit.

Finally, although Gabriel did not challenge the amount of the trial court's judgment or attorney's fees award, the court noted that his case should have been filed in small claims court because of the small monetary amount in controversy. Small claims courts may fashion certain types of equitable relief, and Gabriel could have saved more than $17,000 in costs and attorney's fees. In affirming the trial court's decision, the court expressed frustration that a dispute of such limited financial nature had consumed such a great amount of trial court resources and was so costly to the litigant.

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

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Owners Must Remove Non-Compliant Basement Windows

The Montgomery Towne Homeowners' Association, Inc. v. Greene, No. C-070568, Ohio App. Ct., Dec. 31. 2008

Covenants Enforcement/Architectural Control: An Ohio appeals court reversed a grant of summary judgment to condominium unit owners and required that they remove basement windows that were installed without the association's approval.

In 1998, Edward and Priscilla Greene purchased a condominium unit in the Montgomery Towne complex in Hamilton County, Ohio. When they purchased their unit, the basement windows consisted of four plate-glass windows. Montgomery Towne is subject to a declaration of condominium that requires owners to obtain prior approval of any alterations to the exterior of the units.

The condominium complex is governed by The Montgomery Towne Homeowners' Association, Inc., which is responsible for enforcing the declaration. The association has never approved glass-block windows and has challenged each attempt by unit owners to install them. In April 2004, the association's board expressly prohibited the use of glass block under the amended terms of the community's information guidelines and rules. Nevertheless, the Greenes replaced the plate-glass windows in their basement with glass block. After the Greenes refused to remove the windows, the association sued them, seeking an injunction compelling them to remove the glass block windows and replace them with plate glass.

The association first asked the court for summary judgment in March 2006. The court denied the motion and referred the case to a magistrate. The magistrate again denied summary judgment. After additional discovery, both parties moved again for summary judgment, and the court ruled in the association's favor. The Greenes filed objections to the magistrate's decision, which the trial court granted. The association filed another motion for summary judgment in April 2007, and the Greenes filed another motion for summary judgment in May. The court granted the Greenes' motion on July 1, 2007, and the association appealed.

While the appeals court questioned the wisdom of resolving declaratory-judgment actions by summary judgment, the fact that both parties filed for summary judgment indicated they believed there was no genuine issue of material fact.

Under Ohio's condominium statute, unit owners must comply with the condominium declaration and other governing documents. A condominium association can bring an action for damages, injunctive relief, reasonable attorney's fees and costs for noncompliance. The statute also provides that unit owners can block enforcement of an unreasonable restriction by injunction. Precedents in Ohio case law reflect that a condominium owner's freedom of action is necessarily limited because his unit is one of many that are physically and legally dependent upon each another.

Ohio courts have applied a three-part test to determine if a restriction is reasonable: (1) whether the rule is arbitrary; (2) whether the rule is applied in an even-handed manner; and (3) whether the rule is made in good faith for the common welfare of the owners.

The court cautioned that in reviewing an association's decision, a trial court should not substitute its own judgment for the association's. When a restriction is in place prior to the purchase of a condominium unit, the reasonableness test has less relevance. The court noted that if an owner disrupts the general plan because he wants a change, it defeats the idea and purpose of condominium living.

The Greenes submitted an application for architectural improvement to replace their windows in November 2000. The application contained a certification signed by both of the Greenes that stated they would not authorize or perform any work until they had received written authorization to do so. The board of trustees reviewed the application and another similar one from another unit owner and denied both applications in January 2001. The board notified the Greenes in writing that their application was denied. It was clear that the Greenes ordered the installation of the glass-block windows with full knowledge they did not have the association's permission to do so.

The court noted that the association demonstrated an interest in maintaining the integrity and uniformity of its common property and found that the trial court erred when it did not rule in the association's favor. Therefore, the appeals court sustained the association's assignment of error and declared that the Greenes were in violation of the terms of the condominium declaration and that they must remove the non-complying glass block windows.

Because the association was entitled to an award of attorney's fees for successfully pursuing the action, the case was remanded to the trial court to determine the amount of the association's award for fees and costs.

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

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Compensatory Damages Awarded to Association Cannot Include Attorney Fees

Palacio Del Mar Homeowners Association, Inc. v. McMahon, No. G039731, Cal. App. Ct., Dec. 1, 2008

Attorney Fees: In an unpublished opinion, a California appeals court reversed a grant of compensatory damages to an association seeking relief under the Uniform Fraudulent Transfer Act because it included an award for attorney fees.

Arnold and Elizabeth McMahon owned a home in Palacio del Mar, a common interest development in San Clemente, Calif., that is subject to restrictive covenants enforced by Palacio del Mar Homeowners Association, Inc. Beginning in 1997, the McMahons made several improvements and modifications to the exterior of their home without seeking the approval of the architectural review committee as required by the community's CC&Rs.

In 1998, the McMahons denied the association access to part of their lot that is a designated landscape maintenance area. Elizabeth McMahon confronted a worker attempting to access the water irrigation system and demanded that he leave the area. After she threw valve boxes into the street hitting his truck, he left. On several other occasions she confronted, photographed and followed association representatives who tried to inspect the area. The association sued the McMahons to enforce the declaration.

The trial court found the McMahons violated the declaration when they failed to obtain approval for the modifications they made to their home and by denying the association access to and modifying the limited maintenance area. The court awarded the association attorney's fees in the amount of $124,775.25 and costs of $9,909.49. The McMahons filed an appeal and a 20-count cross complaint. The trial court ruling was affirmed.

In 2001, the association sued the McMahons for avoidance of fraudulent transfer, pursuant to the California Uniform Fraudulent Transfer Act ("Act") alleging that McMahon wrongfully transferred his ownership and title to three properties with the intent of defrauding the association, a judgment creditor in the 1998 covenants enforcement action. That suit was stayed pending the final decision affirming the original enforcement action. In 2004, activity resumed when the association filed its first amended complaint seeking to enjoin the transfers and recover general, special and punitive damages, interest at the maximum legal rate, and costs and expenses, including attorney's fees. The McMahons failed to appear for trial.

In July 2007, Arnold McMahon notified the association that the court had set trial for Sept. 10, 2007. Three weeks before the trial date, Elizabeth McMahon filed a change of venue motion with a hearing date of October 2007, which the court denied. The McMahons failed to appear at trial even though the association had informed them that day by fax that the trial was proceeding. The court ruled in favor of the association and granted an award of compensatory damages slightly in excess of $570,000—$250,000 in punitive damages, along with an unspecified amount of attorney's fees and costs. The McMahons asked the court to set aside the judgment, but the court denied their motion. They appealed.

In their appeal, the McMahons contended that they lacked notice of the trial date. They argued that Elizabeth McMahon's venue motion vacated the scheduled trial date and required the court to set a new one and that they could not have known that the trial would start as scheduled because they lacked notice that the venue motion had been denied. The court determined that no additional notice was required because the trial proceeded on the scheduled date. The McMahons also argued that compensatory damages are unavailable under the Act. They argued that the court was limited to an award of equitable relief. The court noted that jurisdictions differ on whether the Act's provision for other relief allows recovery of compensatory damages and, if it does, what those damages may comprise. Given the sparse information the appeals court had, it concluded that the Act did not categorically preclude an award of compensatory damages for fraudulent transfer.

The court also rejected the McMahons' contention that they lacked notice of the potential compensatory damages award. They argued that the association failed to demand a specific amount of damages in their complaint, as California law requires. The association conceded its error but argued that it was immaterial because the purpose of such a requirement is to ensure that a defendant is sufficiently aware of the consequences of not answering a complaint. The association asserted that in any other case, the court may grant any relief consistent with the case made by the complaint and embraced within the issue. Hence, the absence of a specific amount is not fatal if the pleaded facts entitle the plaintiff to relief.

The McMahons' answer made no coherent claim that compensatory damages were inconsistent with it. They asserted that they were not liable for fraudulent transfer because they eventually satisfied the underlying judgment before the association incurred most of its alleged damages. The court found that this unsupported claim failed to meet the applicable pleading standard (i.e., compensatory damages must be consistent with the complaint's allegations). The McMahons challenged the merit of the association's complaint, not its allegations. The court noted that they could have challenged the merits of the association's complaint at trial had they shown up.

In addition to the pleading requirements, due process required that the McMahons have notice of the scope of the potential liability they faced. If the eventual judgment exceeded the amount that they had been given notice was at risk in the litigation, the constitutional mandate of due process would void the excess. The court found that the fact that the precise amount of requested damages was not specified in the association's complaint did not mean that the resulting judgment deprived the McMahons of due process. The court explained that the key elements of procedural due process are notice and an opportunity to be heard. The association asserts it informed the McMahons in June 2007 that it was seeking in excess of $430,000 in attorney's fees and costs, and the McMahons confirmed this. Even though the compensatory damages award of $570,000 exceeded the $430,000 demanded in June 2007, the court determined that the McMahons had adequate notice of the award's potential magnitude.

Even though the association generally may seek a recovery of compensatory damages, it must still prove the damages it seeks. The association claimed that the $540,000 in compensatory damages consisted of attorney's fees and costs incurred in the appeal. The association's attorney testified that fees and costs to enforce the underlying judgment against the McMahons amounted to approximately $30,000 to $40,000, which the McMahons had satisfied long ago. The association incurred another $500,000 in fees and costs to maintain this action after the judgment was satisfied.

The court determined that the association could not recover its attorney's fees as compensatory damages because California follows what is commonly referred to as the "American rule," which states that unless attorney's fees are expressly provided for by statute, the measure and mode of compensation is left to the parties' express or implied agreement. The Act does not specifically provide for recovery of attorney's fees incurred while prosecuting the fraudulent transfer claim. Relief is subject to the principles of equity in accordance with applicable rules of civil procedure. Therefore, the court determined that the Act did not authorize the association to recover attorney's fees.

After oral arguments, the court allowed the parties to submit letter briefs regarding the association's entitlement to recover attorney's fees. The association argued the tort of another doctrine and the plain language of the Act. The court found that the tort of another doctrine only applied to actions against a third party and did not allow a plaintiff to recover against joint tortfeasors. The court reversed the compensatory damages award and remanded the case for retrial so the association would have the opportunity to establish the existence and amount of any proper compensatory damages.

The court stated it could not determine whether the punitive damages award to the association was proportional to the McMahons' ability to pay because the association did not offer any evidence of their financial condition. The association noted that Arnold McMahon testified in his deposition that he sold two properties in 2000 for $487,000 and $430,000, and he owned a house valued in 2004 at $935,000, but the association failed to offer evidence of his current income, expenses or liabilities. Therefore, the court found that the association failed sufficiently to show the McMahon's ability to pay punitive damages.

The court ruled that in the interest of justice, the parties bear their own costs of this appeal.

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

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Mortgagor Is Entitled to Insurance Proceeds Payable to Owner of Flooded Unit

RBS Citizens, N.A. v. Erie Insurance Exchange, No. 1:07 CV 3634, U.S.D.C., N. Dist. Ohio., Jan. 30, 2009

Contracts: A U.S. District Court ruled that a mortgage holder was entitled to all insurance proceeds payable under an owner's policy on her unit and the association's policy on her undivided interest in the common areas when the condominium development was destroyed by flood.

Susan Tackett owned a unit in Millstone Condominium Development located in Painesville, Ohio. On July 26, 2006, the development sustained extensive flood damage, and the owners association passed a resolution electing not to rebuild because it was not economically feasible. Tackett's ownership included her ownership interest in the common area.

CCO Mortgage Corporation was the mortgagor on Tackett's unit. RBS Citizens, N.A. is the successor by merger to CCO Mortgage Corporation and Charter One Bank. Under the terms of her mortgage, Tackett was required to carry flood insurance. She obtained a policy from National Flood Insurance Program. Her mortgage states that any insurance proceeds and miscellaneous proceeds paid to her for damage or destruction of her property would be applied to her mortgage balance. "Miscellaneous Proceeds" is defined in the mortgage as "any compensation, settlement, award of damages or proceeds paid by a third party (other than insurance proceeds…"

The owners association also carried a flood insurance policy on the common area. CCO Mortgage Corporation was a listed mortgagee and third party beneficiary of the association's policy.

In November 2007, RBS Citizens, N.A. ("RBS") sued Tackett, alleging it was entitled to proceeds of a flood insurance policy issued to her by FEMA, any proceeds from the pending partition and sale of the development to which Tackett would be entitled based on her interest in the common property, and any insurance proceeds related to damage of the common area and facilities. In November 2008, RBS filed a motion for partial summary judgment. Tackett did not respond.

The court found the situation was unusual because a district court cannot grant summary judgment to one party merely because the adverse party does not respond to the motion. The court must ensure that the moving party proved there is genuine issue of material fact and he or she is entitled to judgment as a matter of law. RBS presented the following arguments:

(1)RBS is contractually entitled to any proceeds Tackett received under the terms of her mortgage, her insurance policy and the association's insurance policy; and

(2)RBS is statutorily entitled to any insurance proceeds or other indemnity related to the common areas and facilities and any portion of the proceeds from sale of the development that Tackett would otherwise receive for her interest in the common area. 

The court noted that under Ohio law, the interpretation of written contract terms is a matter of law for courts to determine. The language in the documents was clear and unambiguous; the mortgage terms clearly entitled RBS to any proceeds Tackett received from her insurer or any third party for damages to her property. Tackett also expressly acknowledged that RBS was entitled to any proceeds from the insurance policy and any third parties payable to her. Based on these facts and RBS' arguments, the court determined that RBS was entitled to the proceeds as a matter of law and entered a judgment in its favor on the contract claim.

RBS' second argument was based on Section 5311.14 of the Ohio Revised Code. Specifically, RBS argued that the statute entitled it to any insurance proceeds or other indemnity related to the condominium common area or proceeds from sale of the development that Tackett would receive based on her interest in the common areas. The statute provides:

No unit owner is entitled to receive any portion of those proceeds until all liens and encumbrances on the unit, except taxes and assessments of political subdivisions not then due and payable, are paid, released or discharged.

It was undisputed that the common areas and facilities were totally destroyed by the flood and that the association passed a resolution electing not to repair or restore the property. Thereafter, the association filed a partition action in the court of common pleas to effectuate the sale of the common property. Tackett did not dispute either the fact or the amount of RBS' lien; therefore, the court found it was appropriate to enter judgment in its favor on the statutory claim. 

In accordance with these findings, the court granted RBS' motion for summary judgment.

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

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Master-Planned Community Not Subject to Wisconsin Condominium Act

Solowicz v. Forward Geneva Trust, No. 2008AP10, Wisc. App. Ct., Dec. 23, 2008

Developmental Rights: An appeals court affirmed a trial court's decision that a master-planned community was not subject to the Wisconsin Condominium Ownership Act and was specifically not subject to the Act's limitations on the developer's control period.

Mark Solowicz, Jesse Soltis and Stephen Havey (collectively, "Solowicz"), each bought condominium units in Geneva National, a master-planned community near Lake Geneva, Wisc. The subdivision consists of 1,600 acres with single- and multi-family residential homes and commercial and recreational property, including a golf course. The multi-family residential buildings include 32 condominium projects. Each condominium has an individual declaration and owners association. There are two declarations recorded against each condominium unit in Geneva National: the condominium declaration for that particular project and the declaration for Geneva National Community.

Geneva National Condominium Master Association, Inc. ("condominium association") serves all residential and certain commercial condominiums situated in Geneva National. The developer has no control over the condominium association. The association is responsible for maintenance and administrative services.

The declaration created two governing bodies for Geneva National: Geneva National Community Association, Inc. ("association") and Geneva National Trust ("trust"). The association maintains the private roadways, medians, entrances and common property; provides utilities to the development; levies assessments on property owners; and, in the discretion of its board of directors, takes any action necessary to exercise powers and discharge duties pursuant to the declaration. The trust presides over the community's architectural review committee. The architectural review committee adopts and enforces architectural standards and implements rules and regulations that control the use of property. It is governed by the majority vote of three trustees who act in their sole discretion.

Five classes of voting members control the association's board of directors, including club owners, golf club, commercial property owners, multiple-family unit owners, single-family unit owners and the developer.

The declaration grants the developer the power to appoint and remove officers or directors, amend the declaration, execute documents and take any other actions it deems necessary or desirable within its power. When the developer amends the declaration, it must have the approval of unit owners unless the amendment does not materially affect any unit owner's right to the use and enjoyment of its unit. Pursuant to the declaration, the developer's control period will expire upon the conveyance of 85 percent of the maximum number of residential units. Its power to expand the development does not expire.

Solowicz sued the developer, the trust and the association for declaratory judgment, alleging that Geneva National's governing structure granted too much control to the developer and violated Wisconsin's Condominium Ownership Act ("Act").

The issue in this case was whether the Act limits the duration of a developer's control over a master-planned community. Under the Act, a developer can only maintain control for three years or until 75 percent of the units are sold, whichever first occurs, or 10 years for an expandable condominium.

When Solowicz filed this action, the developer had been in control of Geneva National for 18 years and only 52 percent of the maximum allowable units had been sold. He argued that the trust and the association were only figure heads because the developer could exercise its powers and perpetually control the majority of the association's board through its own four votes and its power to appoint and remove officers and directors. He implied that the developer was using its position to control the community and assess owners without recourse, or, as the court characterized his argument, a "taxation without representation to infinity" argument. He sought a declaration from the court that the developer must relinquish control of the community to the owners.

Solowicz argued that the declaration is a condominium instrument, and, as such, is governed by the Act. Under his interpretation of the Act, the developer's control should have ended three to 10 years ago. He argued that the declaration was subject to the Act because it controlled the condominiums within Geneva National, and, finally, that even if the declaration was not subject to the Act, it was unreasonable, ambiguous, vague and against public policy.

Ruling in favor of the developer, the trial court found that the declaration was clear and specific and was not subject to a reasonableness evaluation. Solowicz appealed, presenting the same arguments to the appeals court that he raised with the trial court. The appeals court considered that the Act governs only condominiums with a recorded condominium declaration. A condominium declaration must have the word "condominium" in its name and a statement that the owner intends to subject the property to the condominium declaration established under the Act. The declaration contains neither of those prerequisites.

Solowicz argued that even if the declaration were not a condominium instrument it was designed to control the condominium lying within Geneva National. The developer maintained that there were vast differences between a condominium venture and a master-planned community, explaining that master-planned communities represent a complex development method distinct from condominiums. Agreeing with the developer, the appeals court noted that master-planned communities were quasi-towns that may contain different types of homes, commercial property, private streets, parks and other recreational facilities. It found that Geneva National fell under the definition of a master-planned community, the scope of which extended beyond a condominium venture.

Solowicz cited three cases from other states to support his arguments. In the first, a New Jersey court ruled that an umbrella organization could manage common area used by unit owners of several separate condominium associations but could not manage the common elements of an individual condominium. The court noted that Geneva National's umbrella association manages only the common roadways, open space and recreational facilities—the same areas permitted under the New Jersey ruling.

The second case Solowicz cited was a Florida case where unit owners used Florida condominium law to cancel a maintenance contract between the developer and a management company. The court noted that Geneva National's developer had no lease or contract to provide maintenance for condominium common areas and iterated that the Geneva National Covenant does not control the individual condominium property, only the community property.

Finally, Solowicz cited another New Jersey case where the court determined that the developer could not require the condominium association to be responsible for assessments owed to an umbrella organization. In that case, the covenant provided that the condominium association, instead of individual unit owners, was responsible for the umbrella association's assessments. The court pointed out that the New Jersey case did not apply to this case. Geneva National's association assesses unit owners directly; the assessments do not pass through the condominium association.

The appeals court concluded that the overriding covenant is not subject to the Act just because a master-planned community has condominiums as part of its plan. The court found no reference to master-planned communities in the Act. The court's review of extraneous sources confirmed that the Act did not contemplate master-planned communities. In fact, the court found that master-planned communities might cease to exist if they were limited by provisions of the Act.

Solowicz asserted that the declaration failed because it does not specifically state the maximum number of allowable units and does not clearly define the term "convey." He contended that the declaration was drafted so the developer may expand its construction plan in such a way that the 85 percent threshold is never met. Lacking the court's intervention, he charged that the developer would never have to turn over control. He requested that the court excise the developer control provision from the covenant, which would transfer the developer's control to the trust and association so that unit owners would have a say in governing how their money was spent.

The appeals court found that that provision was unambiguous and provided a clear and specific method for determining when the developer would turn over control of the community. By comparing the developer turnover timetable in the declaration to the timetable and policy of the 1994 Uniform Common Interest Ownership Act ("Uniform Act"), the court found that the declaration was reasonable in light of the special needs of master-planned communities.

In conclusion, the appeals court said it would view the case differently if the developer had promised Solowicz that the association's fees would be less than a certain dollar amount; if it had already conveyed 85 percent of the maximum planned units but retained control; or if it had continued its control years after development and new construction had ceased, even if the threshold were not met. At Geneva National, however, the developer is still building and selling units to reach the threshold.

The court found that it was of great importance to drafters of the Uniform Act that purchasers be given full disclosure of the rights and interests of the developer of a master-planned community. The court agreed with the trial court that Solowicz bought his unit with "eyes wide open." If he now dislikes the restrictions placed on his unit, he has the option to sell his condominium and end the contract.

The court refused to void an entire method of community development because a few condominium owners differed with the developer about what the future of the community should be, nor would it make a public policy decision to limit the development of master-planned communities when the declaration complied with contract principles and provided clear and specific standards that follow the policy of the Uniform Act. For these reasons, the court affirmed the trial court's judgment in the developer's favor.

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

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