November 2009
In This Issue:
Declaratory Statements Limited to Issues Raised by Individuals in a Particular Set of Facts
Easements Must Be Specific to Be Enforced
Failure to Show Association as Intended Beneficiary Excludes it from Related Attorney’s Fees
Incorrect Apportionment of Assessments Does Not Render Them Invalid
Lawsuit for Malicious Prosecution Must Establish That a Prior Action Was Terminated in Plaintiff's Favor
Motion to Dismiss Granted; New Action Not Filed Within One Year of Prior Case
Doctrine of Adverse Domination Not Applicable to Condominium Association Board
Association's Contract to Purchase Management Services Precludes Antitrust Claim
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Declaratory Statements Limited to Issues Raised by Individuals in a Particular Set of Facts

Carr v. Old Port Cove Property Owners Association, Inc., 8 So. 3d 403 (Fla. Dist. Ct. App. 2009)

State and Local Legislation and Regulation: A Florida appeals court upheld an order by the Florida Department of Business and Professional Regulation denying a petition for a declaratory statement as to whether a condominium association's lobbying activities were barred under the Florida Condominium Act.

Patrick Carr is a unit owner and member in Harbor Village Condominium Association, one of seven condominium associations in the Old Port Cove community. Old Port Cove Property Owners Association, Inc. ("association") is the master condominium association in the community.

Carr petitioned the Florida Department of Business and Professional Regulation ("DBPR") for a declaratory statement as to whether the association may engage in lobbying the Florida Legislature to amend the Florida Condominium Act ("Act"), directly or through an organization of condominium associations, for a fee or at no cost. He sought interpretation of the Act, which defines statutory powers and duties of a condominium association. The association intervened in the proceedings, arguing that it had the right to lobby the Florida Legislature pursuant to the First Amendment to the United States Constitution, as it pertained to states through the Due Process Clause. It argued further that the governing documents of Old Port Cove community authorized it to lobby.

DBPR denied Carr's petition, stating that interpretation of the association's governing documents and a constitutional provision, as applied to facts of the case, were not approved functions of the agency. Also, it found that the petition involved a disputed issue of material fact concerning the association's membership in a lobbying organization. Carr appealed the ruling, arguing that the DBPR erred in denying his petition because the constitutional issue, contract interpretation issue, and factual dispute all arose from the association's response to his petition. He asserted that the DBPR should merely answer the questions in the petition that pertained to the Act and ignore all the issues raised by the association.

Under the Florida Administrative Procedure Act, "any substantially affected person may seek a declaratory statement regarding an agency's opinion as to the applicability of a statutory provision, or of any rule or order of the agency, as it applies to the petitioner's particular set of circumstances." However, the court noted that the DBPR's authority to issue declaratory statements is limited to resolving a controversy or answering questions or doubts concerning the applicability of statutory provisions over which it has authority. It is not the appropriate means for determining personal conduct. In addition, the court relied on Florida case law that established that a declaratory statement may not be used to decide constitutional issues. 

The appeals court noted that the DBPR could not provide Carr and the association with a proper interpretation of the Act’s chapter 718 if it ignored the constitutional issue raised in the petition. The court determined that the agency did not err by denying the petition because it was not authorized to respond to the questions raised therein. It, therefore, affirmed the agency's order denying the petition.

In a concurring opinion, Judge J. Farmer also affirmed the DBPR's refusal to issue a declaratory statement, explaining that chapter 718 is not the only possible source of an association's right or power to engage in lobbying. Therefore, asking whether the activity was permitted under the statute could not yield an application that would affect the owner's actual situation. Finding that the DBPR's declaratory statements are limited to its position on an issue raised by an individual petitioner in a particular set of facts, Judge Farmer stated that the DBPR is barred from using a declaratory statement to adopt broad agency policy or to provide interpretations that apply to an entire class of people. He held that Carr's petition had no direct effect on Carr personally or the activity he challenged, and therefore, the DBPR did not err in denying his petition.

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

Easements Must Be Specific to Be Enforced

Holter Lakeshores Homeowners Association, Inc. v. Thurston, 350 Mont. 362; 207 P.3d 334 (Mont. Supr. Ct. 2009)

Contracts/Development Rights/Use Restrictions: The Montana Supreme Court affirmed a lower court's ruling that the terms of an easement reservation in a declaration and deed were too vague to be enforced by a homeowners association.

In 1973, Bruce and Betty Nelson established the Holter Lakeshores Subdivision on the west shore of Holter Lake in Lewis and Clark County, Mont. Before the county planning board would approve the subdivision, it required that the Nelsons provide parking and boat docking facilities for future lot owners. To meet the requirements, the Nelsons acquired two adjoining lots about four miles north of the subdivision: a one-acre lot on the lake and a 1.49-acre lot adjacent to it.

In 1973, the Nelsons recorded the CC&Rs for Holter Lakeshores Subdivision. It provides that lot owners could form a homeowners association when 75 percent of the lots were sold and 75 percent of the lot owners voted for its creation. It also provided that one of the responsibilities of the association would be to work with the Nelsons regarding the lots purchased for future parking spaces.

In 1992, the Nelsons sold the lots in question to Thomas Clark. Clark's deed reserved an easement for parking and mentioned a "companion property." It referenced the declaration and provided a metes and bounds description of the 1.49-acre lot that did not have lake access, but failed to describe the other lot. In 1998, Clark sold the lots to Stephen, Victoria, and Lonnie Thurston. Their deed did not reference the declaration or Clark's deed, and did not restrict use of the lots.

No one in the subdivision expressed any interest in using the lots until 2004, when it seemed that the parking and lake access that had been used until then might be curtailed. At that time, someone inquired of the Thurstons about the right to use the lots for parking and boat docking, and the Thurstons denied access. Subsequently, no lot owners insisted on a right to use the lots until 2006, when the Thurstons again denied access.

In May 2006, Holter Lakeshores Homeowners Association was formed, and in October 2006, it sued the Thurstons to quiet title to its right to use the lots for parking and lake access.

The trial court reasoned that the declaration did not create an enforceable easement because the language in both Clark's deed and the declaration merely expressed the Nelson's intended use of the lots and was conditioned upon formation of the association and establishment of rules and regulations. It determined that because of the 33-year delay between recording the declaration and forming the association, the association's claim was barred by laches. The court further concluded that even if it were to consider the Clark and Thurston deeds, the statute of limitations would bar the association from enforcing an interest in the lots. The court granted summary judgment to the Thurstons, and the association appealed.

In its appeal, the association argued that the district court erred in finding that it could not enforce its right to use the lots for parking and boat docking because the doctrine of laches did not apply; the eight-year statute of limitations had not expired; and the association's interest was not subject to conditions precedent. The Thurstons responded that there was no recorded right to use the property; performance of conditions precedent necessary to create an easement had not been met; and the district court did not err in finding that laches barred any rights of the association in the lots.

The appeals court considered Montana case law rulings establishing that an agreement, the terms of which are not sufficiently clear to make the act to be done clearly ascertainable, cannot be specifically enforced; and, further, that a contract that necessitates specific performance must be clear in all essential matters within its scope. The court determined that the declaration and deed did not create an enforceable easement for use of the lots because the lots were not described with particularity. Although it appeared that the Nelsons desired to reserve an easement for some parking spaces for members of the association, if one was formed, there was no indication in the declaration of how many parking spaces were to be in the easement, where they were to be located, or how much of the lot would be used for parking. In regard to the one-acre lot with lake access, the court noted that even if it had been described in the deed, the easement reservation stated that Clark, his heirs and assigns could use the lot as they saw fit. 

The court held that the scope and terms of the easement were too vague to be specifically enforced, and the deed was insufficient to constitute an easement by reservation. Therefore, it affirmed the district court's decision.

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Failure to Show Association as Intended Beneficiary Excludes it from Related Attorney’s Fees

Lofts at the Round Condominium Association v. Ware Malcomb, Inc., No. 09-166-HA, U.S. Dist. Ct., S. Dist. Ore., June 18, 2009

Developer Liability/Contracts: Counterclaim for attorney's fees in a suit for negligent design and construction was dismissed because developer failed to show that a condominium association was an intended beneficiary of a third-party contract.

Lofts at the Round Condominium Association ("association") sued Construction Management & Development Inc. ("CM&D"), alleging it negligently supervised, coordinated and directed the construction of Lofts at the Round, a condominium project located in Portland, Ore. The association asserted that CM&D owed the association and the condominium owners a duty to act with reasonable care and competence and to perform its construction tasks in a non-negligent manner to ensure that the condominium was properly built, including proper installation of the windows. The association maintained that CM&D's failure to fulfill its responsibilities caused or contributed to construction defects and property damages.

CM&D filed a counterclaim for attorneys fees based on its contracts with a third party, LDP Beaverton, LLC ("LDP"), for performance of certain construction management services in connection with the project.

The contracts between CM&D and LDP provide that the prevailing party in any action, "arising out of … or related to th[e] [contracts] and/or the Project," may recover all of its legal fees and costs. 

The court dismissed CM&D's counterclaim, finding that the counterclaim was directly contradicted by the pleadings and CM&D failed to show that an assignment of contractual rights includes responsibility for attorney's fees when an assignee foreign to the original contract sues pursuant to its own rights.

The association asserted that its claims were not based on contractual obligations owed by CM&D to LDP, to the association, or to any other person or entity. The court held that, while the association could have sued CM&D under a right assumed from LDP, it chose not to do so. The court acknowledged that CM&D pointed to some authority that a contract may allow attorney's fees in a tort action under Oregon law; however, it concluded that CM&D did not adequately address whether an assignee or intended beneficiary of a third-party contract can assume liability for attorney's fees, especially in the absence of a claim based on that assignment.

The court determined that CM&D did not properly plead a counterclaim for privity of contract and a right to relief based on that privity. Instead, it claimed that the legal basis for the association's suit relied upon that privity. The court held it did not.

Because no set of facts could prove that the association's claim was based on its assumption from LDP, the court granted the association's motion to dismiss, but granted CM&D leave to file an amended counterclaim and each of the parties leave to conduct limited discovery to determine whether the association assumed LDP's burden to pay attorney's fees.

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Incorrect Apportionment of Assessments Does Not Render Them Invalid

Oronoque Shores Condominium Association No. 1, Inc. v. Smulley, 114 Conn. App. 233, 968 A.2d 996 (2009)

Assessments/Attorney Fees: A Connecticut appeals court affirmed a ruling that special assessments were valid liens when they were correctly reapportioned on the basis of each owner's percentage interest in the common elements.

Dorothy Smulley owns a unit in Oronoque Shores Condominium in Stratford, Conn. Oronoque Shores Condominium Association No. 1 maintains and repairs the condominium common area. The association imposed two special assessments against Smulley's condominium unit, one for additional costs incurred for snow removal and the other for a fund to pay litigation expenses. The association levied a special assessment for additional costs incurred for snow removal for the winter of 2004-05 because the costs exceeded the amount budgeted. Although, it initially incorrectly apportioned the amount to each owner equally, it subsequently reapportioned the amount correctly on the basis of each owner's percentage interest in the common elements, which reduced the amount owed by Smulley.

The association sued Smulley to enforce the assessment liens, and the trial court foreclosed the liens and awarded attorney's fees to the association. Smulley appealed.

On appeal, Smulley argued that the snow assessment was not a valid lien because it failed to conform to the association bylaws and the Connecticut Condominium Act. She maintained that the original snow assessment was invalid because it was improperly apportioned, and the correctly reapportioned assessment was invalid because the board did not vote on it and it was not litigated at trial. The appeals court disagreed.

The court found that the unit owners were notified that a snow assessment could be levied in the future if the costs for snow removal exceeded the budget. It held that the snow assessment was, "forewarned, properly imposed and voted on by the board and within the association's authority to impose."

Smulley then argued that the lien for the snow assessment was not valid because the board was required to reconvene to vote on the corrected apportionment and failed to do so. The appeals court held that apportioning of the snow assessment was a ministerial task that did not affect the validity of the assessment itself, and, therefore, found this argument had no merit.

She further argued that the snow assessment was invalid because it was neither pleaded nor litigated. However, the court determined that the association's complaint alleged that it had a valid lien for "special assessments." The court concluded that the trial court properly determined that the snow assessment was a valid lien and could be foreclosed upon on the basis of nonpayment.

As to the litigation assessment, Smulley claimed that it was invalid because notice of the special meeting at which the assessment was approved was not proper, and the assessment was not calculated in proportion to the percentage of interest each unit owner had in the condominium common elements. She did not challenge the trial court's factual findings, but rather its legal reasoning.

The trial court found that the notice provision in the condominium bylaws was not strictly adhered to. In its memorandum of decision, it relied upon Connecticut case law for the proposition that notice is not a rigid concept, but one of fundamental fairness. Accordingly, it found that because Smulley knew the purpose of the special meeting, attended the meeting, and later in a letter acknowledged that she owed the litigation assessment. The court would not invalidate the assessment on the basis of defective notice. Exercising its equitable jurisdiction, it reduced the amount Smulley owed to her proportional share.

Likewise, the appeals court's review of the record led it to the same conclusive findings and agreed with the trial court that a technical deficiency in the notice did not invalidate the assessment, and the trial court properly determined that the assessment was valid.

Last, Smulley claimed that because the liens were invalid, the association had no claim for attorney's fees. Because the appeals court found that the liens were valid, it found that the trial court properly awarded attorney's fees to the association as the prevailing party.

The appeals court affirmed the trial court's judgment.

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Lawsuit for Malicious Prosecution Must Establish That a Prior Action Was Terminated in Plaintiff's Favor

Osman v. Cyprus Shore Community Association, No. G041174, Ca. App. Ct., June 22, 2009

State and Local Legislation and Regulations: In an unreported opinion, a California appeals court granted a motion to strike a complaint for malicious prosecution because the plaintiff failed to show that a prior action that ended in a settlement was terminated in his favor.

Richard Osman owns a residence in Cotton Point Estates, a San Clemente, Calif., community. Cyprus Shore is an adjoining community, managed by Cyprus Shore Community Association. A street named Calle Ariana runs between the two communities. A landscaped area lies on Osman's side of the street, and Cotton Point has an easement to maintain the area.

Cyprus Shore contends the landscaped area extends from Calle Ariana to an old perimeter wall that once surrounded a residential estate that was later developed into Cotton Point Estates. Osman contends that the area covers only a three-foot strip that extends from the street to his lot line.

Cotton Point Estates lies on part of tract 10909 in Orange County, Calif., and includes lot C of that tract, which runs from the center line of Calle Ariana to Osman's lot (and that of two adjoining neighbors).

In 1984, Cotton Point and Cyprus Shore entered into a maintenance agreement that referred to an easement granted to Cypress Shore, "for ingress and egress for vehicular and pedestrian traffic over … lot C." The agreement provided that the two communities would share maintenance, landscaping and tree-trimming responsibilities along Calle Ariana, with each community assuming maintenance responsibility for its side of the street.

In September 2003, Osman purchased a lot in Cotton Point and had a survey done that confirmed the lot extended to the three-foot strip and boundary markers were laid out. In early 2006, he began construction of a house on the lot and erected a construction fence inside the boundary markers. Shortly after the fence was constructed, several members of Cyprus Shore tore down the fence and threatened his contractors. Osman called the sheriff's office, and a deputy sheriff was dispatched who disbursed the intruders and warned that they would be arrested for trespassing if they returned.

When Osman erected his fence, he destroyed an old perimeter wall that formed a natural barrier between the two communities. The area outside the wall was partially located on Osman's land. However, members of Cyprus Shore had continuously used the area for recreation, and they believed Osman was subject to the 1984 maintenance agreement, and his fence interfered with maintenance of the disputed area.

In May 2006, Cyprus Shore sued Osman, several of his neighbors and Cotton Point Homeowners Association, alleging that the disputed area served as quasi-common area for members of Cyprus Shore. It argued that Osman's fence destroyed the landscaping and denied members of Cyprus Shore access to the area. It asserted that construction of improvements in the area and Cotton Point's failure to remove them constituted breach of the maintenance agreement.

In October 2006, Cyprus Shore amended its complaint to further allege (1) that it owned Calle Ariana, which extended three feet beyond the curb of the existing street; and (2) that the disputed area had been used continuously for more than five years by Cyprus Shore residents for recreational purposes. The causes of action for the second charge included: quiet title in fee simple; quiet title to a prescriptive easement outside the old perimeter wall; trespass; ejectment; and an injunction. Osman and his neighbors responded with cross-complaints.

Ultimately, Cyprus Shore entered into a settlement agreement with one of the neighbors, paying them $200,000, and dismissed its action against all defendants, including Osman, in return for dismissal of the neighbors' cross-complaint. Approximately one week later, Cyprus Shore settled with Osman, paying him $100,000 in return for the dismissal of his cross-complaint. Osman then sued Cyprus Shore for malicious prosecution, and Cyprus Shore filed a special motion to strike, arguing that its action was based on its exercise of the right to free speech, and Osman could not show a probability of prevailing on the merits. The trial court denied the motion without comment.

The appeals court held that Cyprus Shore's argument that the motion to strike should have been granted because Osman failed to show a probability of success on the favorable termination element of the suit was convincing. The court determined from the record that Cyprus Shore believed its case was meritorious but settled because it was too expensive to pursue further litigation. Osman failed to offer evidence that Cyprus Shore dismissed its case for lack of merit or concern it would lose at trial.

Osman argued that Cyprus Shore's payment to settle his cross-complaint reflected a victory for him. The court, however, explained that the test is not which party obtained what it sought in the prior action, but whether the settlement reflected its belief that Osman was innocent of the misconduct it asserted, or was only a financial capitulation.

Since Osman did not offer evidence that the prior action terminated in his favor, the appeals court granted Cyprus Shore's anti-SLAPP motion, reversing the trial court's judgment with instructions to dismiss the complaint. The court awarded costs of the appeal to Cyprus Shore.

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Motion to Dismiss Granted; New Action Not Filed Within One Year of Prior Case

PMG Land Associates v. Harbour Landing Condo. Association, CV0850174797S, Conn. Superior Ct., May 28, 2009

State and Local Legislation and Regulations: In an unreported decision, a Connecticut superior court granted an association's motion to dismiss a suit for alleged vexatious litigation, finding that the complaint could not be saved under Connecticut's accidental failure of suit statute because it was not timely filed.

PMG Land Associates ("PMG") sued Harbour Landing Condominium Association and its board of directors, alleging statutory and common-law vexatious litigation and tortious interference with its business expectancies. PMG asserted that the association prosecuted a prior claim against it for a prescriptive easement and a violation of the Connecticut Unfair Trade Practices Act without probable cause and with malicious intent to vex, harass and annoy. PMG claimed that the association's actions in the prior claim were for the purpose of tortiously interfering with its business expectancies, causing it significant damages.

The association moved to dismiss the complaint, the third complaint filed by PMG against it, on the ground that it could not be saved under Conn. Gen. Stat. sec. 52-592(a), the accidental failure of suit statute, because it was not filed within one year from dismissal of the prior case. PMG argued that the motion to dismiss was not the proper procedural vehicle to determine the applicability of the accidental failure of suit statute.

The accidental failure of suit statute provides that, "If any action commenced within the time limited by law has failed one or more times to be tried on its merits … for any matter of form … the plaintiff … may commence a new action … for the same cause at any time within one year after the determination of the original action or after the reversal of the judgment." Generally, a motion to dismiss is not the proper procedural instrument for challenging the applicability of the statute, that being a properly pleaded special defense. However, a motion to dismiss only allows the court to rule on the facts alleged in the complaint, and, therefore, a court may consider a motion to dismiss when a plaintiff does not object. If the motion is not challenged, it is an accepted procedural vehicle to attack the statute.

The court found that the opposition was filed seven months following the association's motion. During two court appearances, PMG never articulated any objection to the use of a motion to dismiss as an inappropriate procedural vehicle. The court held that the motion to dismiss was a proper procedural vehicle as the objection was not filed five days prior to argument, but less than three days, which violated provisions of Connecticut's General Practice Book.

In determining the substantive weight of a claim brought under the statute, the court's analysis rested on the type of conduct that occurred; the egregiousness of the conduct; any explanation for the conduct; and prejudice upon the non-movant. Courts also must be watchful of attempts to avoid the purpose of statutes of limitation.

The court considered cases along a continuum; at one extreme were dismissals for mistake or inadvertence, at the other extreme were dismissals for serious misconduct or a series of cumulative transgressions. Patterns of conduct such as repeated dismissals for failure to prosecute and continually running deadlines to their limits before filing motions to reopen or complying with court orders far surpassed mistake, inadvertence or excusable neglect.

The court determined that the statute is inapplicable in cases involving conduct that results in filing of numerous motions and considerable delays and inconvenience to the court or opposing parties and granted the association's motion to dismiss.

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Doctrine of Adverse Domination Not Applicable to Condominium Association Board

Prairie West Condominium. Association, Inc. v. Wiseman, No. 99,305, Kan. App. Ct., March 13, 2009

Association Operations/Risks and Liabilities: In an unpublished opinion, a Kansas appeals court affirmed a district court's ruling that two-year statute of limitations barred an action against a condominium association's board of directors for breach of fiduciary duty.

Prairie West Condominium Association, located in Labette County, Kan., was built in the 1970s and consists of 81 units and a clubhouse.

In 2004, the association's entire board of directors was replaced, with the exception of one member. John Foley and Jack Fatchett were elected to the new board. Foley served as president. He owned two units in Prairie West. Fatchett owned 54 units. Foley became concerned about the condition of Prairie West in 2000 or 2001, thinking that it looked "worn and tired," but he did not attend any membership meetings held by the association, even though he received proper notification. Prior to being elected to the board in 2005, he repeatedly requested that the previous board provide him with the association's financial information, but he claimed that the information provided to him was inadequate.

Over a 20-year period that ended in 2004, Fatchett visited the association approximately eight to 10 times to check on his units. Although he never complained to the board, he complained to the property manager about leaking roofs, unpainted doors, poor landscaping, dirty hallways and other maintenance issues. Foley and Fatchett believed that the association's financial statements were not prepared in an acceptable manner, and in 2003, contacted the board about their concerns.

When Foley became president of the association, he realized that the association had serious financial problems. The new board established a replacement reserve account and a maintenance reserve account, which were required under the bylaws, and began calculating the unit assessments based on a percentage of the square feet of each unit compared to the total square footage in the condominium. However, although the association's special assessment savings account grew from $29,000 to $40,000 under the new board, the association incurred a $100,000 loan for needed repairs to the common areas.

The new board hired an engineering firm to determine needed repairs and to provide an estimate of the money needed to maintain the property over the next 15 years. It made recommended repairs that cost approximately $61,000.

In 2005, the association sued the previous board members, alleging that they had breached their fiduciary duty to the association and its members. The board members argued that the association's claims were barred by the statute of limitations.

At a bench trial held in 2007, an architect hired by the association testified that Prairie West would not be livable within 15 years without repairs and replacements that were estimated to cost approximately $440,030. He stated that the repairs would require that each unit be assessed approximately $568 per year for the next 15 years. Also, Jeffrey Quirin, a professor of accounting at Wichita State University, testified on the association's behalf that the previous board's failure to establish a reserve funds account damaged the association. He determined that a portion of the repair costs would have been mitigated if the repairs had been made earlier. He testified that the previous board's accounting methods and records were inadequate; and he saw no evidence that reserve accounts were established.

The district court found that the board members had a fiduciary duty to the association and the unit owners; that special accounts were established for maintenance and replacement; that no complaints were made to the board members regarding the establishment of reserve accounts for maintenance or replacement; and that there was no evidence to suggest self-dealing. It concluded that the defendants had not breached their fiduciary duty to the association; however, even if they had, any action on that breach would be barred by the two-year statute of limitations. The association appealed.

On appeal, the association argued that the trial court erred in finding that its claim was barred by the statute of limitations because the doctrine of adverse domination should have tolled the running of the statute of limitations. The board members argued that adverse domination did not apply to the facts of the case.

The Kansas statute provides:

"[T]he causes of action listed in subsection (a) shall not be deemed to have accrued until the act giving rise to the cause of action first causes substantial injury, or, if the fact of injury is not reasonably ascertainable until some time after the initial act, then the period of limitation shall not commence until the fact of injury becomes reasonably ascertainable to the injured party, but in no event shall an action be commenced more than 10 years beyond the time of the act giving rise to the [*9] cause of action."

The court found that although the association, through Foley and Fatchett, raised concerns about the management, maintenance and financial situation of Prairie West prior to 2001, it did not sue until March 16, 2005. Because any alleged injury resulting from the previous board's actions could have been reasonably ascertained prior to March 16, 2003, the association's claims were barred by the statute of limitations. Still, the association contended that the previous board members so adversely dominated the association that it prevented a unit owner from gaining control of the board and knowing the damage caused by the board members.

The court noted that Kansas had never applied the adverse domination doctrine to a property owners association's volunteer board of directors. It explained that the doctrine is generally used when bad loans are made by a bank or financial institution to determine when a cause of action would accrue against bank officers and directors. In weighing whether the defendants, as volunteer members of the condominium's association, could be held to the same standard as directors of financial institutions who controlled all information regarding the institutions, the court found that they had held regular open meetings with notice and had allowed any unit owner to attend. At the meetings, the association's budget was approved after discussions regarding scheduled or needed maintenance work. Furthermore, the court found that absolutely no evidence was presented to indicate that the board members maintained exclusive control of the association's budget or maintenance work needed.

Because Foley, Fatchett and the association had ample time and opportunity to express their concerns about the previous board members' actions, the appeals court affirmed the trial court's ruling, finding that the court correctly concluded that the adverse domination doctrine did not apply and the two-year statute of limitations was tolled.

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Association's Contract to Purchase Management Services Precludes Antitrust Claim

Smugglers Notch Homeowners' Association, Inc. v. Smugglers' Notch Management Company, Ltd., No. 1:08-CV-186, U.S. Dist. Ct. of Vt., May 29, 2009

Federal Law and Legislation: Where a service provider's power to "force" an association to purchase tying products stems from a contractual agreement and not the "market," an association's claim under the anti-trust provisions will not prevail.

Smugglers' Notch is a ski and recreational community located in Cambridge, Vt. It is operated by Smugglers Notch Homeowner's Association, Inc. ("association"). Smugglers' Notch Management Company, Ltd. and Smugglers' Notch Water Company (collectively, "companies ") provide community and quasi-municipal services to the association and individual homeowners. Historically, the companies have entered into one of three versions of service contracts with the association's homeowners, providing either (1) property management services; (2) property management services and social and recreational services; or (3) property management services, social and recreational services, and rental management. The companies and the association originally negotiated the terms of the contracts in 1985, and the association has been negotiating with the companies to revise and update the contracts since 2006. The companies proposed three contracts in July 2008, and required homeowners to sign one by Sept. 15, 2008. On Sept. 12, 2008, the association sued the companies, alleging violations of federal antitrust laws. The companies moved to dismiss.

The association asserted four antitrust claims, each of which complains of an illegal tying arrangement under sec. 1 of the Sherman Act. Sec. 1 provides that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations." The essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force a buyer to purchase a tied product.

The court noted that to survive dismissal, a plaintiff must provide grounds upon which its claim rests through factual allegations sufficient to raise a right to relief above the speculative level. A plaintiff alleging an illegal tying arrangement must show: (1) a tying and a tied product; (2) evidence of coercion by a seller that forces a buyer to accept the tied product; (3) sufficient economic power to coerce a buyer's acceptance of the tied product; (4) anti-competitive effects in the tied market; and (5) significant involvement of interstate commerce in the tied market. To survive a motion to dismiss, an alleged product market must bear a rational relation to the method used by courts to define a market for antitrust purposes. The court noted that dismissals on the pleadings frequently involve either failed attempts to limit a product market to a single entity that competes with potential substitutes or failure to plausibly explain why a market should be limited.

Market power is generally inferred from a seller's possession of a predominant market share, or where a product is unique. Courts have determined the outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. The courts define a market for antitrust purposes-analysis of the interchangeability of use or the cross-elasticity of demand and it must be plausible.

The association argued that the unique geographic qualities of ski areas tend to give vacation properties sufficient product differentiation that there is limited substitutability between those properties and properties at other ski or resort areas. However, the court found that it did not demonstrate why the vacation properties and recreation facilities at Smugglers' Notch are different from other options at ski resorts in Vermont. The association's proposed geographic market for access to recreational facilities—the other alleged tying product—consisted of seven towns that offer proximity and access throughout the year. It alleged that similar recreational facilities outside a range of access from Smugglers' Notch were poor substitutes for facilities located in the township. The court, however, found that this allegation was insufficient to survive the companies' motion to dismiss. The court determined that the association's proposed markets did not encompass all interchangeable substitute products and, therefore, were insufficient to state a claim for relief.

In addition to failing to properly define relevant markets, the court found that the association's arguments regarding market power missed the mark. The association argued that the existence of the contracts was evidence of the companies' ability to coerce homeowners to purchase products they might rather purchase elsewhere. The companies relied on Queen City Pizza v. Domino's Pizza, Inc., 124 F.3d 443, where a company's power to "force" another company to purchase a tying product stemmed from a contractual agreement, not from the market, and, thus, did not state a claim for relief.

In this case, the court held that the association's members could have avoided the effects of which they complained by purchasing different or no vacation property, and noted that, in fact, the homeowners were currently renegotiating the contracts and had the option not to sign any further contracts or sell their properties.

The companies sought dismissal of the association's claims with prejudice, arguing that it could not support its tying claims, and that repleading its case would be futile, and the court agreed. Since the association's antitrust claims were dismissed with prejudice, the court declined to exercise supplemental jurisdiction over the remaining state-law claims and dismissed those claims without prejudice.

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

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