October 2009
In This Issue:
Fear of Judge's Personal Bias Legally Sufficient for Trial Disqualification
Special Meeting Notice Does Not Constitute Republication of Defamatory Statements
Declaratory Judgment Action Dismissed After Underlying Suit Dropped
Owners May Bring Derivative Lawsuit Against Board for Breach of Fiduciary Duty
Association's Motion for Relief from Automatic Bankruptcy Stay Denied
Trustees Have Standing to Sue to Enforce Subdivision Covenants
Association Awarded Attorney's Fees and Costs in Action Arising From Lot Line Dispute
Failure to Provide Keys for Medical Helpers Violates Fair Housing Act
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Fear of Judge's Personal Bias Legally Sufficient for Trial Disqualification

Aberdeen Property Owners Association, Inc. v. Bristol Lakes Homeowners Association, Inc., No. 4D08-4467, Fla. App. Ct., April 22, 2009

State and Local Legislation and Regulations: A Florida appeals court ruled that a judge's undisclosed personal bias against mandatory club membership was legally sufficient to disqualify him from presiding over an action to challenge restrictive covenants that required members of a sub-association to become members of a subdivision country club.

Park Walk Planned Unit Development is located in Palm Beach County, Fla., and is governed by the CC&Rs for Parkwalk Planned Unit Development and Parkwalk Planned Commercial Development. Bristol Lakes Homeowners Association ("Bristol Lakes") is a sub-association within a master association, Aberdeen Property Owners Association ("Aberdeen"). Bristol Lakes sued Aberdeen to challenge several amendments to the declaration that required mandatory membership in Aberdeen Country Club for owners taking title to property in Bristol Lakes after Oct. 30, 2004.

The trial court ruled in favor of Bristol Lakes, and Aberdeen moved for reconsideration and rehearing. While that motion was pending, Aberdeen moved to disqualify Judge David French because it became aware of a conflict of interest that arose from his involvement with a similar dispute with his own homeowners association. 

In support of its motion for disqualification, Aberdeen produced two letters from the judge. In one, he listed his concerns that "the mandatory membership could severely affect the future alienation of our properties." In the other, he questioned the "legality of the mandatory vote." 

Florida Rules of Civil Procedure 2.330(f) requires a judge to enter an order granting disqualification if the motion to disqualify is "legally sufficient." A motion for disqualification is legally sufficient if it shows the party's well-grounded fear that it will not receive a fair trial. The court explained that it is not a question of what the judge feels, but the feeling in the mind of the party seeking to disqualify and the basis of that feeling.

Aberdeen argued that Judge French should have disclosed his personal dispute and disqualified himself from the proceedings. The Florida Code of Judicial Conduct requires that:

A judge should disclose on the record information that the judge believes the parties or their lawyers might consider relevant to the question of disqualification, even if the judge believes there is no real basis for disqualification.  The fact that the judge conveys this information does not automatically require the judge to be disqualified upon a request by either party, but the issue should be resolved on a case-by-case basis.

The court granted Aberdeen's petition for disqualification, finding that it had shown "an actual factual foundation for the alleged fear of prejudice."

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

Special Meeting Notice Does Not Constitute Republication of Defamatory Statements

Ariz v. Beverly Glen Park Homeowner's Association, Inc, No. B205934, Cal. App. Ct., April 22, 2009

State and Local Legislation and Regulations: In an unpublished opinion, a California appeals court affirmed a trial court's order granting an association's motion to strike pursuant to California's Anti-SLAPP Statute, dismissing the association from an action for defamation.

Beverly Glen Park is a 220-unit condominium development located in Los Angeles County, Calif. Fereshteh Ariz, a member of the board of directors of Beverly Glen Park Homeowner's Association served as vice president of the association and chair of the architecture and landscape committee.

When a dispute arose between Ariz and her neighbors, David and Robin Curtis, regarding an easement for accessing Ariz's air conditioning unit that purportedly ran across the Curtis property, the Curtises circulated two letters to other members of the association as part of a campaign to have Ariz removed from the association's board of directors. The letters accused her of taking advantage of her position as chair of the architecture and landscape committee and pursuing personal interests instead of the association's when acting as a member of the board. 

In response to the letters, 49 owners petitioned the board to schedule a special meeting to vote on recalling Ariz. A board meeting was held on Sept. 11, 2007, to review and respond to the petitions. Ariz attended the meeting and, in a brief statement, maintained that the charges made in the letters were false and defamatory, and the petitions were gathered through fraudulent methods and were therefore invalid.

The board voted to call a special meeting of the membership to be held on Oct. 30, 2007. A total of 99 homeowners attended the meeting; however, because a quorum was not present no action was taken, and the members voted not to reconvene the meeting at a later date.

On Oct. 15, 2007, two weeks before the special meeting, Ariz sued the Curtises, the association, and others for defamation, intentional infliction of emotional distress, negligence and declaratory relief. She also asserted claims against the association alone for breach of fiduciary duty and sought to enjoin the special meeting.

Ariz claimed that the association was liable in tort for republishing the defamatory letters at the September board meeting, and acted wrongfully by scheduling the special meeting without investigating the accusations against her or determining the validity of the signatures on the petitions.

The association demurred and filed a special motion to strike pursuant to California's Anti-SLAPP Statute, Sec. 425.15 of the California Code of Civil Procedures. In both filings, it argued that it was obligated by the California Corporations Code and its bylaws to schedule a special membership meeting to consider recalling Ariz when it was presented with the petition signed by more than 20 percent of its membership, and any statements made at the board meeting or in connection with the recall process were privileged under Sec. 47 of the Civil Code. Ariz filed a combined opposition to both pleadings.

In February, the trial court heard oral arguments and granted the special motion to strike. The court found that Ariz's claims against the association arose from statements made in a public forum in connection with an issue of public interest. The court determined that Ariz failed to demonstrate a probability of prevailing on the merits because, "the association's statements and conduct were privileged and in compliance with its legal obligations." The court also granted the association's request for attorney's fees, with the amount of fees and costs to be determined by a separately noticed motion. Ariz appealed.

California's Anti-SLAPP Statute provides that "a cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim."

The appeals court considered that the trial court engages in a two-step process in ruling on a motion under the Statute. First, it must decide whether the defendant has made a threshold showing that the cause of action arose from protected activity and whether the act or acts complained of were in furtherance of the defendant's right of petition or free speech under the United States or California Constitution in connection with a public issue, as defined in the Statute. If the court finds a showing has been made, it then must determine whether the plaintiff has demonstrated a probability of prevailing on the claim. The critical point is whether the plaintiff's claim itself is based on an act in furtherance of the defendant's right of free speech. If the defendant can establish that the Statute applies, the burden shifts to the plaintiff to demonstrate a "probability" of prevailing on the claim. The defendant has the burden on the first issue; the plaintiff has the burden on the second.

The appeals court determined there was no question that convening a special board meeting to consider the petitions to recall Ariz and setting a special meeting to vote on the recall (the conduct underlying each of Ariz's claims against the association) were actions taken in furtherance of the association's, or its members' rights of petition and free speech. However, whether those actions were simply part of a private property dispute or were made in connection with a "public issue" within the meaning of the Statute was a more difficult question for the court.

"Public interest," as defined in the Statute has been broadly defined in California case law to include, "private conduct that impacts a broad segment of society and/or that affects a community in a manner similar to that of a government entity." The court relied upon Du Charm v. International Brotherhood of Electrical Workers, 110 Cal. App. 4th 107, 119 (2003), which held that a matter may be of public interest for purposes of Sec. 425.16 even if interest in the communication is not general but is limited to a private group, organization or community—a "definable portion of the public"—provided the activity occurs in the context of an ongoing controversy or discussion. Although the association had only 220 members, the court found that the number was sufficient to warrant protection by the Statute. In light of the California Legislature's express directive to broadly construe the Statute to encourage continued participation in matters of public significance, the court had no difficulty concluding that the association's activities fell within the ambit of the Statute and that the association met its threshold burden on the special motion to strike.

Ariz claimed that by removing her as chair of the architectural and landscape committee and vice president of the board and calling a special meeting to consider her recall without first investigating the charges, the association, "ratified and republished the defamatory remarks" contained in the letters. However, the court observed that the facts she described in her declaration of opposition failed to make clear that the association published or republished the defamatory comments. The court explained that there must be some communicative act to a third party for a defendant's conduct to be actionable. It concluded that Ariz's assertion that the association effectively republished the statements contained in the letters by acting on the charges without independently investigating them was misplaced. It further concluded that the actions taken by the board, though arguably the product of tortious communications by others, were not themselves communicative acts.

Even if the court were to conclude that the association's actions constituted a republication of defamatory statements, however, the court found that the challenged acts were privileged because nothing in California law or the association's governing documents authorizes or requires the association to question the motives of homeowners who petition the board to call a special meeting. In light of this, the court determined that any republication of the defamatory statements that occurred in connection with the September board meeting or notices subsequently sent to members to advise them of the board's actions, fell within the common-interest privilege established by Civil Code Sec. 47 because it occurred "in the initiation or course of [a] proceeding authorized by law."

Sec. 47 provides that a privileged publication is one made in a communication without malice to a person interested therein by one who is also interested. The court found that although Ariz made an adequate showing that circulation of the letters and the recall petition were motivated by ill will toward her, evidence presented at trial clearly was insufficient to establish malice on the part of the association. The board's failure to conduct an investigation was not proof that the association was motivated by ill will. In sum, the court found that the circumstances relied upon by Ariz fell far short of providing an adequate basis for a finding that the association's actions were "made with malice."

Although Ariz failed to address her other tort claims on appeal, to the extent she claimed that the association's actions inflicted emotional distress, the court found that her claim failed to survive the element of extreme and outrageous conduct necessary to permit recovery.

Finally, the court found that the trial court properly awarded attorney's fees to the association pursuant to the Statute, which provides that, "a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney's fees and costs." 

The court affirmed the trial court's order granting the special motion to strike and dismissing Ariz's action as 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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Declaratory Judgment Action Dismissed After Underlying Suit Dropped

Auto-Owners Insurance Company v. Hickory Springs Estates Homeowners Association, Inc., No. 5:08-CV-049, U.S. Dist. Ct., Middle Dist. Ga., June 11, 2009

Federal Law and Legislation: A U.S. District Court dismissed an insurance company's action for declaratory judgment for lack of jurisdiction because no actual controversy existed after the underlying suit against its insured, a neighborhood association, was dismissed.

Hickory Springs Estates Homeowners Association is the governing body for Hickory Springs Estates, a subdivision in Macon, Ga. In March 2006, a dam located in the subdivision failed and damaged Richard Craft's property. Craft sued the association to recover the damages.

Auto-Owners Insurance Company issued a general liability policy to the association that was in effect at the time the dam failed. In February 2008, Auto-Owners filed a motion for declaratory judgment pursuant to Rule 57 of the Federal Rules of Civil Procedure and 28 U.S.C. sec. 2201, seeking a ruling that it had no duty to defend or indemnify the association in Craft's suit. In June 2009, the parties filed a Joint Motion to Stay Proceedings, informing the court that the underlying state court action had been dismissed by Craft, allegedly to be re-filed at a later date. The court dismissed the case for lack of jurisdiction pursuant to the Declaratory Judgment Act.

The act provides that, "In a case of actual controversy within its jurisdiction … any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such a determination, whether or not further relief is or could be sought." The court noted that Congress limited federal jurisdiction under the act to actual controversies; therefore, the threshold question in a declaratory judgment action is whether "actual controversy" exists.

The court explained that an actual controversy exists in the context of insurance disputes when the insurer is defending an underlying case but disputes its obligation to do so. Conversely, no actual controversy exists in cases when the duty to defend is not in dispute.

In the present case, an actual controversy existed while Auto-Owners was defending the association, but disputing its duty to do so. However, with the dismissal of the underlying action against the association, Auto-Owners no longer bore the burden of defending the association against Craft's claims. The issue of Auto-Owners' duty to defend, therefore, was no longer in dispute. Because federal jurisdiction under the act is limited to actual controversies, Craft's intention to re-file his suit against the association was immaterial.

The court dismissed the case for lack of jurisdiction.

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

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Owners May Bring Derivative Lawsuit Against Board for Breach of Fiduciary Duty

Davis v. Dyson, 387 Ill. App. 3d 676 (2008)

Association Operations/Risks and Liabilities: An Illinois appeals court ruled that condominium unit owners had standing to sue the association's former directors for breach of fiduciary duty after the property manager embezzled association funds.

Granville Beach Condominium is a 300-unit complex in Chicago. Unit owners sued former members of the association’s board of directors alleging that they failed to take proper precautions to protect the association from losses incurred when Larson Property Management, the property manager, embezzled more than $550,000 in association funds over a five-year period by forging a board member's signature to more than 100 of the association's checks.

The owners claimed that the directors, who all served on the board of directors at some time between 1998 and 2003, received monthly checking account statements but did not review them. Nor did they ever order any financial review or audit of the association's records, or properly supervise financial dealings between the property manager and the association. In addition, they failed to obtain adequate liability insurance coverage to protect the association's funds, violating both the Illinois Condominium Property Act ("Condo Act") and the association's bylaws.

After the embezzlement was discovered, the association sought indemnification from its insurer, and sued both the property manager and the bank in an attempt to recover lost funds, but was only able to recover $60,000. The owners argued that not only did the association lose the embezzled funds, but it also suffered out-of-pocket expenses of approximately $200,000 to $250,000 to pay attorneys, accountants and other professionals to obtain advice and investigate the loss. They sought damages in two counts from the director defendants. Both counts were for breach of fiduciary duty.

Count I was a derivative claim on behalf of the association for damages suffered as a result of the directors' failure to take due care to protect the association against the property manager's fraud. In support of this count, the owners asserted that in 2004, residents of the condominiums requested that the association's current board of directors sue the director defendants, but the current board refused. Not only did the current board refuse to vote on the matter, but they declined to investigate the conduct of the former board members or form a committee to consider the residents' requests. The owners further alleged that the current board's failure to take action resulted from its failure to obtain and consider sufficient information to make an informed decision, violating the business judgment rule.

Count II of the owners' complaint was for individual loss from lowered market value of their homes. The owners stated that the losses incurred by the association in connection with the embezzlement caused the association to fall into disrepute and, as a result, the market value of each of their units declined.

The director defendants argued that (1) the owners failed to state a claim for breach of fiduciary duty since they did not allege that the director defendants acted other than in the association's best interest; (2) the business judgment rule shielded them from liability because the owners failed to allege fraud, illegality, conflict of interest or bad faith on their part; and (3) the doctrine of election of remedies precluded the owners from seeking relief because they chose instead to sue the bank and the property manager to recover the losses.

The court granted the director defendants' motion to dismiss, ruling that the owners lacked standing to sue on both their derivative and individual claims. The owners appealed the ruling.

The appeals court considered that a derivative lawsuit is one of the remedies for situations in which corporate management, through fraud, neglect of duty or other cause declines to take proper action to assert the rights of the corporation. A derivative action is an action brought by shareholders to seek relief for injuries done to the corporation when the corporation either cannot or will not assert its own rights. It is a device to protect shareholders against abuses by the corporation, its officers and directors, and it is a vehicle to insure corporate accountability. Necessarily, the general rule is that shareholders have standing to sue third parties who wrong the corporation. Although a corporation is a necessary party to a derivative suit, it is only nominally a defendant because any judgment obtained runs in its favor.

The court noted the concession by the director defendants in their brief that unit owners may bring derivative suits on behalf of condominium associations. It relied on case law in jurisdictions other than Illinois to conclude that although the right to sue belongs exclusively to the association, unit owners do not usurp that right by bringing derivative actions on the association's behalf against third parties, but rather they are acting as the arms of the association to exercise the association's rights. The director defendants argued, however, that the power to sue derivatively was limited and restricted to derivative actions against the current board members. The court disregarded this argument, finding that by bringing a derivative suit, the owners effectively stepped into the association's shoes; and once they were permitted to act for the association, it followed that they should be able to sue any party the association itself might sue. Thus, the court determined that once the door is opened to permit derivative suits against current board members, the distinction drawn by the director defendants with respect to suits against third parties becomes untenable.

The court observed that the director defendants had not provided a valid reason for deviation from general corporate law that would lead to a conclusion that condominium owners may bring derivative suits against third parties on behalf of their condominium association, and found further, that available case law supports that derivative lawsuits against third parties are a permissible vehicle for unit owners who are dissatisfied with their board's decision not to bring a suit.

The court next considered the owners' argument that the loss of value of their units was sufficient to sustain a claim on an individual basis against the director defendants. The court noted that it was not automatically fatal to their claim that the allegations that gave rise to their individual claim were the same as those giving rise to the derivative claim. The director defendants raised two main arguments: that the damages, i.e., lower property values, were not separate and distinct, and the damages were not the direct, but the indirect result of the loss incurred by the association. The court discounted the first argument, but addressed the second.

The court discounted the first argument because the fact that the same kind of damage was alleged for multiple unit owners did not preclude the damage being separate and distinct for each owner. If the value of each unit in a group goes down, the court determined that each individual owner suffers a separate injury. The court explained that Illinois law does not require the injury to be unique, only separate and distinct.

With regard to the second argument, the court found that when injury is inflicted on a corporation, and the only injury to a shareholder is the indirect harm of diminution in value of the corporate stock, courts consistently have held that the primary wrong is to the corporation and the shareholders, experiencing no direct harm, possess no primary right to sue. The court agreed with the director defendants' argument that, by analogy, the owners had no standing to sue in their own right when the injury was inflicted on the association, and the only injury to the unit owners was the indirect result of lower property values.

The director defendants then argued that regardless of whether the suit was brought individually or derivatively, the unit owners had substantially failed to state a cause of action for breach of fiduciary duty because they did not allege that the directors acted contrary to the association's best interest. The unit owners responded that those allegations were implicit in their complaint. They argued that the director defendants violated the Condo Act and the association's bylaws by failing to purchase the required liability insurance. The court found that this was sufficient to allege violation of fiduciary duty.

The director defendants argued that they were substantively protected from liability by the business judgment rule. The court noted that under the rule, courts are not at liberty to interfere with the exercise of business judgment by corporate directors absent evidence of bad faith, fraud, illegality or gross overreaching. The purpose of the rule is to protect directors who have been diligent and careful in performing their duties from being subjected to liability from honest mistakes of judgment. A director who fails to exercise due care may rely on the business judgment rule as a shield. The court explained that one component of due care is that directors must inform themselves of material facts necessary to properly exercise their business judgment. Thus, the rule is defeated when directors act without becoming sufficiently informed to make an independent decision. The court determined that, here, the directors failed to review the association's monthly bank statements or to learn about their legal responsibilities to obtain insurance coverage, oversee association finances and supervise key personnel. Therefore, they could not rely upon the business judgment rule as a shield.

Finally, the court waived the director defendants' argument that the doctrine of election of remedies precluded the owners from seeking relief because their brief did not contain any law to support their argument.

The court affirmed the trial court's dismissal of the owners' individual claims, but reversed its dismissal of the derivative count. The case was remanded for further proceedings not inconsistent with its opinion.

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

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Association's Motion for Relief from Automatic Bankruptcy Stay Denied

In re Polly, No. 08-15663-SSM, U.S. Dist. Ct., E. Dist. Va., Nov. 14, 2008

Federal Law and Legislation: Association was not entitled to relief from an automatic stay to enforce a pre-petition garnishment of a bankrupt homeowner's checking account because the lien was likely to be avoided by homestead exemption.

Scott Polly is a real estate agent. He filed a voluntary petition for Chapter 7 bankruptcy in September 2008. Among the assets listed by Polly was a checking account at Chevy Chase Bank with a balance of $269.15, which Polly claimed was exempt under the Virginia homestead exemption. Woodburn Village Condominium Unit Owners Association was listed on the schedule of debts as the holder of an unsecured claim in the amount of $2,568.59.

Prior to the bankruptcy filing, the association obtained a judgment against Polly in the District Court of Fairfax County, Va., and subsequently served a garnishment summons on the bank. The bank answered the summons saying it was holding $2,022.28 that represented the account balance on the date of service. Prior to the return date, Polly filed a suggestion of bankruptcy with the state court. In September, the association notified the bank that Polly had filed a bankruptcy petition and intended to seek recovery of the funds the bank was holding. The association requested that the bank not release the funds until the court advised it to do so.

The same day, Polly's attorney advised the association that any attempt to move forward with the garnishment would violate the automatic stay and advised that any further action against Polly would expose the association to a motion for damages.

In October, the association filed a motion asking that the automatic stay be lifted so that it could proceed to enforce its lien, or that the court issue an order of protection of the association's rights in the funds. In his answer to the motion, Polly requested an award of damages and attorney's fees against the association for directing the bank not to release the garnished funds.

The association argued that it was a lien creditor. Virginia law provides that a creditor who files a garnishment does not replace the debtor as owner of the property, but merely has a right to hold the garnishee liable for the value of the property. Therefore, the court noted that the funds withheld by the bank and not yet paid over, remained the property of Polly and, thus, property of the bankruptcy estate.

Although the association argued that its lien on the garnished funds made it a secured creditor, the court explained that the value was largely illusory because the lien was subject to avoidance, either by the debtor or by the bankruptcy trustee. If Polly properly claimed that the funds were exempt, he could bring a motion to avoid the lien for impairing the exemption. If he were unable to claim the garnished funds exempt, and if the lien attached, as in this case within 90 days prior to filing of the bankruptcy petition, the trustee could bring an adversary proceeding to avoid the lien as a preference. The court further noted that, even outside bankruptcy, a garnishment lien can be defeated by filing a homestead deed at any time prior to the entry of an order of payment. Although Polly did not schedule the garnished funds as an asset or claim them exempt, he was free to amend his schedules.

Because there was little real possibility that the association's lien would not be avoided, the court declined to order any specific form of adequate protection. Because the funds would plainly fall within the definition of "cash collateral," the trustee would normally be unable to use them unless the association consented or the court authorized their use, which the court could only do if it found the association's lien was adequately protected. Once a lien is avoided, however, no further protection is required. If avoidance were at all in doubt, the court found that the association would be entitled to adequate protection of its lien until the matter could be sorted out. Here, however, the court did not find that there was any likelihood that the lien would not be set aside. The court directed Chevy Chase to pay the funds over to the bankruptcy trustee, but provided that the funds paid over would, subject to any avoidance proceedings, remain impressed with any execution lien in favor of the association that became fixed prior to filing of the bankruptcy petition.

The association's correspondence with the bank requested that the bank "not release the funds until and only if the Court advises you to do so." In considering Polly's request that the association be sanctioned for directing the bank not to release the funds, the bankruptcy court noted that, as a threshold matter, the reference to "the Court," in the association's  letter was ambiguous and might refer either to the state court or to the bankruptcy court. The court found that had the association attempted to argue its entitlement to the funds to the state court, there was no doubt that its actions would have violated the automatic stay. In fact, the court detected a hint that the association intended to do just that. However, since the purpose of an automatic stay is to protect both the debtor and the bankruptcy estate by maintaining the status quo until competing interests have been sorted out, the court found it difficult to see how a direction to the bank to await a court order could be construed as a violation of the automatic stay because the association did not attempt to obtain an order of payment from the state court.

The court found that Polly's request for sanctions was premature on the incorrect notion that he had an immediate right to the funds. The court explained that the funds in the bank account, including those that the bank was holding in response to the garnishment summons, became the property of the estate on the date the bankruptcy petition was filed. The court relied on Section 541(a) of the Bankruptcy Code, which provides that an entity in possession, custody, or control of property that the trustee may use, sell, or lease, or that the debtor may exempt, is required to deliver it to the trustee unless the property is of inconsequential value or benefit to the estate. Thus, while a creditor is required to take affirmative steps to ensure that a garnishment is stopped when bankruptcy is filed; it is a different issue from whether the funds withheld prior to the bankruptcy filing must be released to the debtor.

In summary, the court ruled that the funds withheld by the bank in compliance with the garnishment summons remained Polly's property, and, thus, became property of the bankruptcy estate. Although the association, by virtue of its garnishment, acquired a lien on the funds, its lien was subject to avoidance and was, therefore, entitled to only the most limited protection. Finally, although the court questioned the association's wisdom and motives in not simply conceding the issue, it could not find that requiring Polly to jump through the hoops of bringing a lien avoidance action and seeking to preserve the funds in the interim was a violation of the automatic stay.

The court observed that it should rarely be necessary, as in this case, to resort to a formal lien avoidance motion where a pending garnishment against a debtor has been stayed because of a bankruptcy filing. To the extent the debtor properly exempts the funds that have been withheld but not yet paid over, such exemption trumps the lien, and the debtor is entitled to the funds. Therefore, unless the funds withheld have previously been turned over to the trustee, they should be paid to the debtor once the debtor's exemption is established.

The court entered a separate order directing release of the funds to the trustee without prejudice to the association's lien, but also without prejudice to Polly's and the trustee's right to bring an appropriate avoidance proceeding.

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

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Trustees Have Standing to Sue to Enforce Subdivision Covenants

Indian Springs Owners Association v. Greeves, 277 S.W.3d 793 (Mo. App. Ct. 2009)

Covenants Enforcement/Architectural Control: A Missouri appeals court reversed a trial court's dismissal of a homeowners association's suit to enforce restrictive covenants because the trial court mischaracterized the argument that the association's trustees lacked capacity with an argument that the association lacked standing to sue.

Indian Springs Subdivision is located in St. Charles County, Mo. Since 1997, the subdivision has been governed by Indian Springs Owners Association subject to a set of CC&Rs.

In April 2007, the association sued Todd and Deanna Greeves for violating the covenants by erecting a shed on their property without obtaining the approval of the association's trustees. Count I of their petition sought an injunction requiring the Greeves to remove the shed and submit their plan to erect a shed for review, and Count II was a request for attorney's fees. The Greeves did not respond to the association's petition.

A bench trial was held in December 2007. The Greeves asserted that trustees for the association had failed to hold annual elections in 2005, 2006 and 2007, and thus were not validly in office and did not have authority to sue on behalf of the association. The association objected to their argument on the ground that it was not raised in a motion or responsive pleading. In overruling the association's objection, the court stated that, "a party can raise standing at any time." The court determined that although the Greeves had violated the covenants, the trustee's failure to hold elections as provided in the covenants took away their authority to bring suit. The trial court, therefore, dismissed the petition on the grounds that the association lacked standing. The association appealed.

In its appeal, the association argued that the trial court erred in dismissing the petition on the grounds that the association lacked standing. It argued that the legal issue was not whether the association had standing, but whether the trustees had capacity to sue. Further, it asserted that the Greeves had waived their right to challenge the trustees' capacity by failing to raise the issue in a motion or responsive pleading.

The appeals court distinguished between the issue of capacity to sue and the issue of standing to sue, noting that the difference was important because a claim that a party lacks capacity may be waived by amending the pleadings, but a claim that a party lacks standing cannot. While objections to capacity must be raised in a motion or responsive pleading, objections to standing may be raised at any time. The court explained that capacity to sue is the authority of a person or entity to bring suit, and a standing refers to the requirement that a party seeking relief in the courts must demonstrate a legally protectable interest in the subject matter.

Current Missouri law provides that an unincorporated property owners association may sue by designating certain members, such as trustees, as representative parties, so long as they fairly and adequately protect the interests of the association and its members. The association may sue in its own name to enforce restrictive covenants against noncompliant members of the association. The association has standing if: (1) its members would have standing in their own right; (2) the interest to be protected is germane to the organization's purpose; and (3) neither the claim asserted nor the relief requested requires the participation of individual members.

The court concluded that the trial court mischaracterized the argument that the association lacked standing to sue, when the issue was whether the trustees, as representative parties of the association, lacked capacity.

Because the Greeves did not respond to the association's petition, they waived their claim that the association lacked capacity by failing to raise it in a motion or responsive pleading. The appeals court found that the association had standing to sue the Greeves because all the elements of standing were met: (1) the members would otherwise have standing to sue in their own right; (2) the interest the association sought to protect was germane to its purpose; and (3) neither the claim asserted nor the relief requested required the participation of individual members in the lawsuit.

The court reversed the trial court's judgment and remanded the case for further proceedings with instructions to (1) hold a new trial to determine if the Greeves are in violation of the covenants and whether the association is entitled to an injunction; and (2) award attorneys fees and costs to the prevailing party in accordance with the terms of the covenants.

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Association Awarded Attorney's Fees and Costs in Action Arising From Lot Line Dispute

Martin v. Bridgeport Community Association, Inc., 173 Cal. App. 4th 1024, 93 Cal. Rptr. 3d 405 (2009)

Contracts/Covenants Enforcement: A California appeals court upheld a ruling that occupants lacked standing to sue a homeowners association for breach of contract in a lot line dispute because they did not own an interest in the property and the owners' rights were not assignable.

Richard and Rachel Peterson purchased Lot 33 in Bridgeport, a planned unit development located in Santa Clarita, Calif. Bridgeport Community Association was responsible for managing the common areas and enforcing the declaration. Rae Ann Martin is the Petersons' daughter, and she and James Martin had an agreement with the Petersons whereby they would live in the home and pay all costs associated with the property, including the mortgage payments. They also agreed that the Martins would deal directly with the association on any issues regarding the property, and the Petersons agreed to assign all their rights, title and interests in their causes of action against the association to the Martins. They executed a power of attorney that was accepted by the association.

Richmond American Homes built the home on the Peterson's property. During construction, the Petersons and the Martins observed that the lot was smaller than represented in the purchase transaction. Richmond agreed to move the northern property line 10 ft. to include approximately 5,593, sq. ft. within the lot lines ("Adjustment Area"). This required two separate lot line adjustments ("Lot Line Adjustment No. 1" and "Lot Line Adjustment No. 2"). Before either adjustment was completed, Richmond transferred the Adjustment Area to the association as part of the common area. As a result of negotiations between the Martins, on behalf of the Petersons, and the association, the association agreed to deed the Adjustment Area to the Petersons under certain terms and conditions ("Lot Line Agreement"), as evidenced by two letters from the association addressed to the Martins. The Martins accepted the terms proposed by the association on behalf of themselves and the Petersons. Both letters represented that the association's board agreed to complete Lot Line Adjustment No. 2 and the transfer of land if the Martins would pay both the association's attorney's fees to prepare and execute the necessary documents and costs to relocate the common area sprinklers from the Adjustment Area.

After lengthy delays, the City of Santa Clarita approved Lot Line Adjustment No. 1. When the association did not cooperate to begin the required city-approval process for Lot Line Adjustment No. 2, the Martins sued the association to enforce the Lot Line Agreement, seeking specific performance. The original complaint named the Petersons and the Martins as plaintiffs and the association as defendant. The association filed a demurrer to the complaint, partly on the ground that the Martins lacked standing.

The trial court sustained the demurrer to the complaint with leave to amend as to all but two of the causes of action, allowing them to amend the complaint to bring in the Petersons and giving them one last chance to see whether any of their other claims could be pled.

A second amended complaint was filed in August 2007. The Petersons were the only named plaintiffs. They alleged four causes of action: (1) breach of the rules and regulations; (2) breach of the declaration; (3) violation of the Davis-Stirling Common Interest Development Act ("Act"); and (4) negligence based on violation of the Act. The association filed a demurrer to the complaint. After a hearing in December 2007, the trial court sustained the demurrer with leave to amend the complaint as to the first three causes of action on the ground of failure to allege sufficient facts to support the causes of action, but without leave to amend as to the fourth cause of action.

The Petersons filed the third amended complaint in January 2008, naming only the Petersons as plaintiffs, and the association filed a request that the court enter judgment against the Martins, arguing that the court granted the association's demurrer to the first amended complaint without leave to amend except to substitute the Petersons as the real parties in interest for the Martins. The association also filed a motion for the award of attorney's fees in the amount of $29,371.39 for defending the claim. The court granted the motion, awarding attorney's fees and costs to the association. The Martins appealed.

On appeal, the Martins argued that the trial court erred in sustaining the association's demurrer on the ground that they lacked standing. They contended that they had standing to all causes of action because the Petersons assigned, "all of their rights, title, and interest in their causes of action," to them. They also presented other grounds upon which they claimed to have standing. They further argued that the trial court erred in including an award of attorney's fees and costs.

In reviewing the propriety of sustaining a demurrer, the appeals court treated the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. Accordingly, the statement of facts was based on the factual allegations in the first amended complaint, which was the subject of the demurrer.

Standing is the threshold element required to state a cause of action, and, thus, lack of standing may be raised by demurrer. The appeals court explained that to have standing to sue, a person must have a real interest in the ultimate adjudication because he either suffered or is about to suffer injury of a sufficient magnitude to assure that all the relevant facts and issues will be adequately presented. California's Code of Civil Procedure ("Code") provides that every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute. A real party in interest is someone who has actual and substantial interest in the subject matter of the action and who would be benefited or injured by the judgment.

The Martins did not claim to have an ownership interest in the property. The court noted that that ownership is a prerequisite to standing. Each of the Martin's causes of action sought redress for violations of the rights of owners, for which those causes of action were not assignable from the Petersons to the Martins.

The Martins argued they had standing based on California Code Sec. 954, which states that, "A thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner." Assignability under Sec. 954 is limited to a "thing in action," defined as, "a right to recover money or other personal property by a judicial proceeding."

The court claims in the first amended complaint for breach of the Lot Line Agreement and specific performance involved a right to recover an ownership interest in real property, not a "right to recover money or other personal property." Therefore, contrary to the Martin's argument, the Petersons' rights, as the real parties in interest, could not be assigned.

The Martins argued that they had standing as parties to, or third-party beneficiaries of the Lot Line Agreement. In the complaint, however, they admitted that the Petersons were the owners of the property and the parties to be bound by the agreement, and that their related actions were on behalf of the Petersons. They also admitted that specific performance would require the association to deed the Adjustment Area to the Petersons. Thus, they had no standing to assert a claim for specific performance. The same facts that showed that the Martins were not parties to the Lot Line Agreement showed that they were not intended to be third-party beneficiaries of the Lot Line Agreement. The court explained that in order to qualify as third-party beneficiaries, the Martins would have to prove that the Lot Line Agreement was made for their benefit and the agreement would have to clearly manifest the intent to make the obligations under the agreement inure to their benefit.

The court determined that, even if it assumed that the facts pleaded were sufficient to allege an enforceable contract, the facts pleaded by the Martins were that the Lot Line Agreement was meant to require the association to deed the Adjustment Area to the Petersons. Given the Martins' role, the court found no significance to the fact that the letters from the association were addressed to the Martins, and the facts pleaded did not support a determination that the Martins were third-party beneficiaries to the Lot Line Agreement.

The court concluded that the Petersons' property and their membership in the association and, consequently, the rights of enforcement and duties owed, were indivisible interests under applicable law and the Bridgeport governing documents. The Act provides that in a planned unit development, any transfer of a separate interest includes the undivided interest in the common areas, and any transfer of the separate-interest owner's lot also includes membership in the association. Under the declaration, an owner is not allowed to subdivide a unit or change its boundary lines. The court noted that the Martins cited no provision in the Act that authorizes an owner or an association member to assign any right or obligation to any third party.

In their cause of action for negligence, the Martins claimed that the association had a duty to them as "residents and members," which it breached by improper use and maintenance of the watering system, causing water damage to the property. The court, however, as previously discussed, found they did not qualify as members of the association.

The Martins asserted that the association had a common law duty to, "exercise due care for the residents' safety in those areas under [its] control." The duty they pleaded was breached, however, was the association's duty to maintain the common area. They argued that they suffered damage to their vehicle, personal injury, loss of work, clean-up of excess water, interference with their peaceful enjoyment of the property and loss of use and, therefore, had standing to bring negligence claims against the association on the basis of nuisance and trespass. However, the court found that these were not the elements they pleaded as negligence. The damage they asserted was to the property owned by the Petersons, and not being owners, they, therefore, had no authority to enforce the covenants and no standing to maintain the negligence cause of action.

In summary, the court determined that the causes of action in the amended complaint were not assignable and the Petersons, as owners of the property, were the real parties in interest. The court concluded that the Martins failed to establish standing under any of the arguments they advanced. Even though they were given leave to amend the complaint to state other cause of action for which they may have had standing, and to substitute the Petersons as the real parties in interest, they did not take the opportunity to do so, and, thus, forfeited the right to remain a part of the action.

The court found that the trial court properly ruled against the Martins in favor of the association.

The Martins argued that the trial court erred in awarding attorney's fees and costs to the association. They contended that if they did not have standing because they had no ownership interest in the property and if, under the Act, the covenants, rules and regulations were enforceable only by property owners, then there was no basis for the award of fees and costs to the association. However, the court responded that the mandatory award of attorney's fees and costs under the Act applies when a plaintiff brings an action to enforce the governing documents, but is unsuccessful because he or she dos not have standing to do so.

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

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Failure to Provide Keys for Medical Helpers Violates Fair Housing Act

Stross v. The Gables Condominium Association, No. C09-830JLR, U.S. Dist. Ct., Western Dist. Wash., June 18, 2009

Federal Law and Legislation/Powers of the Association/Association Operations: Pursuant to the Fair Housing Act, a U.S. District Court enjoined a condominium association from changing the lock on the front entranceway without providing keys for the unit owner's medical aides.

The Gables is a 12-unit condominium located in Seattle that is governed by The Gables Condominium Association. Susan Stross suffers from progressive multiple sclerosis and has limited use of her legs and arms. She has owned a condominium unit in The Gables for 20 years.

For 16 years, Stross was able to provide keys to the front door of the building to each of her six medical aides and four emergency responders. In April 2009, however, the association's board of directors decided to change the locks on the front door and informed unit owners that they would each be given only four keys to the front door.

Stross requested that she be given 12 keys for her medical helpers as a reasonable accommodation under the Fair Housing Act. As a gesture of good faith, she agreed to install a key box on the front gate so that the aides could use one communal key to access the building. She also agreed to give the association a list of the aides and to provide the aides with instructions about rules established by the association.

In May 2009, the association sent Peter Stross, her father, two proposed documents for his signature entitled "Agreement between The Gables Homeowners Association and Stross Family Regarding Caregivers for Susan Stross" and "Instructions for Caregivers for Unit #202 in The Gables Condominiums." He refused to sign the documents.

On June 10, 2009, the board notified Susan Stross that the locks would be changed on June 19, 2009, and she would not be allowed to install a key box or to have 12 keys unless her family signed the Agreement and Instructions. She subsequently sued the association and filed a motion for a temporary restraining order, seeking an injunction to prevent the association from changing the locks without providing her with an adequate number of keys for her medical aides.

In order to obtain a temporary restraining order, a plaintiff must meet the standards for issuing a preliminary injunction. The court noted that the standards for both are "substantially identical."

In order to obtain a preliminary injunction, a party must meet either the court's "traditional" test or the "alternative" test. The traditional test requires the court to find that (1) the moving party will suffer irreparable injury if relief is denied; (2) the moving party will probably prevail on the merits; (3) the balance of potential harm favors the moving party; and (4) the public interest favors granting relief. The alternative test requires the court to find: "(1) a combination of probable success and the likelihood of irreparable injury or (2) that serious questions are raised and the balance of hardships tips sharply in its favor." The court's ultimate decision is within its discretion.

Under Federal Rule of Civil Procedure 65(b), an ex parte temporary restraining order can issue only if: (1) facts clearly show that immediate and irreparable harm will result to the applicant before the adverse party's opposition can be heard; and (2) the applicant's counsel certifies to the court in writing the efforts, if any, that were made to give notice and the reasons supporting the claim that notice should not be required.

Stross served copies of her complaint on the association on June 17, 2009, prior to the June 18 hearing on the motion. In addition, she advised the association of her intent to seek a temporary restraining order prior to filing the complaint and motion.

The court concluded that it was likely Stross would suffer immediate and irreparable harm if the association changed the locks without providing her with either 12 keys or a key box for her aides and emergency responders. She established a strong likelihood that she would not be able to continue living in her condominium unit unless her aides had a viable means to access her unit. The court found that forcing her from her home of 20 years struck directly at her core dignitary interests and was, moreover, a type of harm that cannot be remedied by an award of damages.

The court further concluded that Stross established a strong likelihood of success on the merits of her reasonable accommodation claim under the Act. To be entitled to a reasonable accommodation under the Act, a plaintiff must demonstrate that: (1) he or she suffers from a handicap; (2) defendant knew or could be expected to know of the handicap; (3) accommodation of the handicap might be necessary to provide the plaintiff with equal opportunity to use and enjoy the dwelling; and (4) defendant refused to make such accommodation.

The court found that on the face of her complaint, she alleged a prima facie case under the Act:  First, she suffers from a handicap within the scope of 42 U.S.C. § 3602(h); second, the association knew of her handicap; third, accommodation of her handicap was necessary to afford her the opportunity to use her condominium unit; and due to her physical limitations, she could not open the doors to the building herself; fourth, the association refused to make the accommodation. 

As to the balance of hardships, the court determined that the association would suffer little or no harm if enjoined from changing the locks and not providing Stross with the keys she requested. The association raised concerns regarding the safety of the other condominium owners; however, the court could find no evidence in the record to support that Stross' aides or emergency responders had contributed to security concerns. The court concluded that the balance of hardships tipped sharply in Stross' favor and she had met her burden for issue of a temporary restraining order.

The court ruled that upon Stross' deposit of a $1,000 cash bond with the court registry, the association was enjoined from changing the locks without providing her with 12 keys to the building or allowing her to install a key box for the use of her medical aides. It stipulated that she need not sign any agreement as a pre-condition to the relief granted and admonished the association to provide new keys to her in a timely manner. The court then set a hearing on preliminary injunction and converted her motion for temporary restraining order into a motion for preliminary injunction, with instructions that the temporary restraining order continue in effect until the an order was issued on her motion for preliminary injunction.

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

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