December 2009
In This Issue:
Fines and Assessments Not Authorized By Covenants Cannot Be Imposed
Fire Damage to Condominium Unit Covered By Casualty Insurance Policy
Condominium Owner Who Sued Association Without Probable Cause Liable for Damages
Owner Must Comply with Association's Off-Season Occupancy Rule
Homeowners Not Liable for Assessments That Exceed Maximum Amount Stated in Deed Restrictions
Covenants May Be Amended By Fewer Than Majority Vote in Accordance with Bylaws
Motor Home Must Be Parked in Garage or Screened Area Approved by Architectural Committee
Action to Recover Monies Improperly Collected by Master Association Must Comply with Consent Settlement Order
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Fines and Assessments Not Authorized By Covenants Cannot Be Imposed

Concerned Neighbors of Lotus Lake Estates, Inc. v. Lotus Lake Estates Homeowners Association, No. 2007AP1510, Wisc. App. Ct., Oct. 15, 2008

Powers of the Association/Covenants Enforcement: In an unpublished opinion, a Wisconsin appeals court affirmed a declaratory judgment in favor of a group of homeowners who challenged their homeowners association's authority to impose fines for violations of restrictive covenants.

Lotus Lake Estates is a subdivision located in Polk County, Wisc. Protective Covenants for Lotus Lake Estates were recorded in 1995 and amended in 1996. Until 2003, the homeowners association functioned as an informal, unincorporated association. The members voted to incorporate Lotus Lake Estates Homeowner's Association and adopted bylaws in December 2003. 

Concerned Neighbors of Lotus Lake is a Wisconsin nonstock corporation formed by residents of the subdivision to challenge policies and actions of the association's board of directors. Concerned Neighbors sued the association, alleging that the board of directors had adopted a policy whereby it imposed unauthorized fines on homeowners who violated the restrictive covenants.

The board authorized its secretary to patrol the neighborhoods and issue noncompliance notices and fines. Concerned Neighbors were upset that homeowners were cited for "petty" infractions, and that the fines were imposed selectively, with some residents being cited repeatedly and others not at all for the same infractions. The most common infraction was parking a car in one's driveway overnight, for which some residents incurred thousands of dollars in fines. The fined residents were not afforded a hearing, appeal rights or other due process. 

Concerned Neighbors also worried that the board might attempt to impose assessments to fund projects other than common area maintenance and improvement. It argued that residents were unable to exercise control of the association because the nonresident developers had adopted bylaws that classified themselves as "charter members" entitled to three votes for each vacant lot in the subdivision. Because of these super-majority votes, the developers were able to maintain control of the board and the association.

In a written decision, the trial court agreed with Concerned Neighbors and granted judgment declaring that: (1) the association lacked authority to impose fines on homeowners as a means of enforcing the covenants; (2) the association lacked authority to assess homeowners for expenses incurred in its enforcement activities; and (3) nonresident developers were ineligible to vote for members of the association's board of directors. The association appealed.

In its appeal, the association argued that it was empowered by paragraph 20 of the covenants to impose fines. Paragraph 20 provides that the association "shall have power to enforce these Protective Covenants in conjunction with any resident or in the name of all the residents." The appeals court wasn’t persuaded by this argument and found that the question was not whether the covenants could be enforced, but, rather, how they could be enforced. The appeals court noted that paragraph 21 of the covenants, entitled "Enforcement," authorizes enforcement of the covenants through a court action for damages or injunctive relief. The court found that absent a restriction imposed by express language or a purpose clearly discernable from the covenant's terms, the association had no authority to impose fines.

The association argued that it was authorized to adopt and regulate rules under paragraph 20, which states that the association "shall be authorized to adopt reasonable rules and regulations pertaining to the use of easements, the common lands and facilities in Lotus Lake Estates." The appeals court found that the provision specifically limited the association's rule-making authority to easements, common lands and facilities, and did not grant a power to impose fines for violations of the covenants on private property.

Similarly, the court found that the covenants limited the association's power to impose assessments. Paragraph 20 authorizes the association to assess the residents an annual fee for construction and maintenance of common areas and facilities; however this provision does not grant authority to the association to impose assessments for other expenditures. The court stated that the association could not circumvent the covenants by authorizing fines and assessments through its internal operating bylaws.

Finally, the association argued that the trial court erred by concluding that the nonresident developers were ineligible to vote for members of the association's board of directors. The covenants provide that the association "shall be governed by a Board of Directors elected by the residents of Lotus Lake Estates according to the Charter and Bylaws." The association insisted that the bylaws refer to the nonresident developers as "charter members," and entitle charter members to cast a super-majority vote "on all matters calling for a vote of the members." The court, however, determined that the association's reliance on the bylaws rendered meaningless the covenants' express language that the board is to be "elected by the residents." Moreover, the court noted that the trial court correctly observed that the covenants themselves expressly distinguish between residents and nonresidents in its other provisions. Therefore, the plain meaning of "elected by the residents" in paragraph 20 of the covenants effectively rendered the nonresident developers ineligible to vote for the board of directors.

The court affirmed the trial court's judgment.

Editor's Observation: One may wonder how much the court was influenced by the board's methodology. The autocratic, seemingly discriminatory practices alleged certainly could have had an impact. Proper, open and fair procedures are vital. In this case, it is obvious what the consequences can be to a community.

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

Fire Damage to Condominium Unit Covered By Casualty Insurance Policy

Craig v. Sandy Creek Condominium Association, Inc., No. COA08-1048, N.C. App. Ct., June 16, 2009

Risks and Liabilities: In an unpublished opinion, a North Carolina appeals court upheld a ruling in favor of a condominium unit owner and condominium association to enforce the provisions of a hazard insurance policy. The court ruled that the association's insurance coverage extended to the unit owner's fee ownership and personal belongings. 

Michael Craig, Sherrill Craig and Marion Suitt (collectively, the "Craigs") owned Unit 127 in Sandy Creek Condominium located in Raleigh, N.C. Unit 129 was owned by Marshall and Barry Fogg. In January 2006, a fire started in the Foggs' unit and spread to adjoining units, causing substantial fire and smoke damage to the Craigs' unit.

The recorded condominium declaration and bylaws for Sandy Creek established Sandy Creek Condominium Association as the condominium's governing body. Membership in the association is appurtenant to the ownership of each unit. Pursuant to the bylaws, the association is managed by its board of directors.

The declaration requires that the association carry casualty or physical damage insurance for the condominium property. The association purchased a policy from Harleysville Mutual Insurance Company that was in effect when the fire occurred. The association submitted claims to Harleysville for damages to the Craigs' unit. Harleysville made payments that covered certain structural damages to the Craigs' unit, but did not pay for losses to the interior of the unit. The Craigs sued the association and the Foggs for damages caused as a result of the fire. The association and the Foggs argued that Harleysville was liable for the damage to the interior of the Craigs' unit and for their personal property loss. Harleysville argued that the policy only covered the exterior elements of the building. Harleysville filed an answer and counterclaim against the Craigs and a cross-claim against the association, seeking declaratory judgments.

In February 2008, the Craigs filed a motion for partial summary judgment against the association and Harleysville, requesting a ruling as a matter of law that the policy covered damages sustained to the interior and exterior of their unit. The trial court granted the Craigs' motion against the association and Harleysville. Harleysville and the association appealed. 

The appeals court noted that the claims were controlled by the North Carolina Unit Ownership Act ("Act"). The Act provides that:

The manager of the board of directors, or other managing body … shall … obtain insurance for the property against loss or damage by fire … insurance coverage shall be written on the property in the name of such manager or of the board of directors of the association of unit owners, as trustee for each of the unit owners.

The Act defines "property" to mean and include "the land, building, all improvements and structures thereon and all articles of personal property in connection therewith…" "Unit" is defined as "an enclosed space consisting of one or more rooms occupying all or a part of a floor or floors in a building … and shall include such accessory spaces and areas as may be described in the Declaration…"

Under the declaration, the association is required to carry insurance on the condominium property "in an amount equal to the full replacement value (i.e., 100% of full 'replacement cost') of the condominium property, exclusive of excavations and foundations." In addition, the declaration provides that all casualty insurance policies shall be purchased by the association for the benefit of the unit owners and, "all proceeds payable as a result of casualty losses shall be paid to the board of directors as trustee for each of the unit owners." The declaration allows unit owners to purchase additional insurance and recommends that each owner obtain a homeowners policy.

In its review, the court relied on Gaston County Dyeing Machine Co. v. Northfield Ins. Co, 351 N.C. 293, 524 S.E.2d 558 (2000), in which the North Carolina Supreme Court held that the "intention of the parties" to a policy must guide the court in the interpretation of the policy. In McCoy v. Coker, 174 N.C. App. 311, 315, 620 S.E.2d 691, 694 (2005,) the court held that any ambiguities in a policy be construed in favor of coverage.

The Harleysville policy states: "In return for 'your' payment of the required premium, 'we' provide the coverage described herein subject to all the 'terms' of the Commercial Output Program." Harleysville argued that "your" meant the named insured on the policy, the association. However, pursuant to the Act, insurance coverage shall be written on the property, in the name of the manager or board of directors of the association as trustee for each of the unit owners. Further, the court pointed out that the association is comprised of every person owning an interest in the condominium.

Harleysville argued that because the association was the named insured, and it did not own any part of the Craigs' unit, the policy coverage was limited to common areas of the condominium. The court explained, however, that the association owned nothing. The individual unit owners own all common areas as tenants-in-common. Therefore, unless otherwise excluded from coverage, the Craigs, as owners of their unit, part owners of the common areas, and members of the association, had an insurable interest under the policy.

Under a provision entitled, "Property Not Covered," the Harleysville policy states: "We do not cover property which is more specifically insured in whole or in part by any other insurance. We do cover the amount in excess of the amount due from the more specific insurance." The Craigs carried additional insurance on their unit, but the insurance did not cover all the costs of repair or replacement. The court, therefore, determined that Harleysville was responsible for those costs not covered by the Craigs' additional insurance.

The court noted that nowhere in the section did the policy exclude coverage for individual units. The court found that Harleysville, as the author of the policy, could have excluded individual condominium units from coverage, and it could have excluded fire damage to the interiors of buildings, as it expressly did with rain, snow, sleet, ice, sand and dust. Having done neither, the court found nothing to indicate that Harleysville meant to exclude the type of damage suffered by the Craigs. The court concluded that the policy covered the fire damage to the Craigs' unit and determined that any ambiguities in the policy were to be construed in favor of coverage.

In light of its decision, the court found that Harleysville's argument that the Craigs lacked standing to bring a direct action because they did not have an enforceable contractual right under the policy failed. The court construed the terms of the policy de novo, and held, as a matter of law, that the Craigs' damages were covered under the policy. Harleysville's argument that genuine issues of material fact existed concerning whether the policy covered the damages was also without merit.

The court affirmed the trial court's grant of summary judgment.

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

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Condominium Owner Who Sued Association Without Probable Cause Liable for Damages

The Meadows Condominium Association, Inc. v. Redman, No. MMXCV075001923S, Conn. Super. Ct., July 30, 2009

Assessments/Covenants Enforcement: In an unreported case, a Connecticut trial court awarded damages to a condominium association when it prevailed in its suit against a unit owner for vexatious litigation.

The Meadows Condominium Association manages The Meadows Condominium. John Redman owns Unit 15. In 2003, the association sued Redman to foreclose its lien for unpaid condominium fees ("foreclosure action"). A judgment was entered in favor of the association. Redman appealed the ruling. In November 2005, the appeals court upheld the foreclosure judgment.

While his appeal was still pending, Redman sued the association to recover damages that he claimed were caused by malfeasance and by the association's pursuit of the foreclosure action against him ("tort lawsuit"). He maintained that the association's actions constituted harassment and interfered with his right to quiet enjoyment of his unit. The case was tried, and after presentation of Redman's evidence, the association moved for dismissal. The court granted the association's motion.

In January 2007, the association sued Redman, alleging that Redman engaged in vexatious litigation by pursuing the tort lawsuit. The association argued that Redman knew or should have known that he had no probable cause to bring the suit and, as the direct result of his groundless lawsuit, the association incurred legal fees and costs in excess of $9,000.

The court relied upon fundamental principles of Connecticut law to resolve the vexatious litigation issues. The court explained that the cause of action for vexatious litigation permits a party who has been wrongfully sued to recover damages; the purpose being to compensate a wronged individual for damage to his reputation and to reimburse him for the expense of defending against unwarranted action. Section 52-568 of the Connecticut General Statutes provides that any person who commences and prosecutes a civil action or complaint against another (1) without probable cause, shall pay such other person double damage, or (2) without probable cause, and with a malicious intent unjustly to vex and trouble another person, shall pay him treble damages. To establish a claim under the statute, it is necessary to prove want of probable cause and termination of a previous lawsuit in the plaintiff's favor.

The court noted that probative evidence established that Redman brought his tort lawsuit after the association had prevailed in the foreclosure action. The court next considered whether he had probable cause to bring the lawsuit. To resolve the issue, the court had to determine what facts he had actual or apparent knowledge of at the time he filed the suit and whether a reasonable person would believe that he or she had probable cause.

The court noted that in his answer and through his trial testimony, Redman admitted knowing that the court had ruled against him in the foreclosure action. He also admitted that he filed his tort lawsuit as a direct result of the foreclosure action, even though he knew he had lost. These admissions were sufficient to establish that he knew the foreclosure action was properly brought against him and sufficient to support the conclusion that he, nevertheless, knowingly and intentionally filed his tort lawsuit, without just cause, in an effort to aggrieve the association.

The court next considered whether a reasonable person would believe that he or she had probable cause to bring the tort lawsuit based on claims presented. It concluded that one's knowledge of the court's decision in the foreclosure action would have led a reasonable person to conclude that he or she had no lawful grounds for bringing a complaint. The court found sufficient evidence that Redman lacked "a reasonable, good faith belief in the facts alleged and the validity of the claim asserted" when he brought the suit.

The court found that credible evidence supported a determination that Redman filed and pursued his action for the purpose of intentionally inconveniencing and financially ruining both the association and the law firm that served as its counsel. In reaching its conclusion, the court credited testimony of association's counsel that Redman admitted to him that he brought the lawsuit with the express intention of making the parties involved in the foreclosure action "pay for what had happened to him in the foreclosure." This testimony was consistent with Redman's admission at trial that he filed the suit because he wanted the association to experience "statutory destruction." Redman's resentment toward the association adversely affected his credibility in the matter and was further evidence of his repeated efforts to open the foreclosure action. Other evidence further supported the court's conclusion that he brought his suit with malicious purpose. Even though the foreclosure court found him to be legally liable to the association, he remained unwilling or unable to accept any responsibility for the circumstances that led to entry of the judgment against him. Taken as a whole, the evidence was sufficient to establish that Redman's motivation in pursuing the tort claim was to harm the association.

Redman asserted in his counterclaims that the association acted fraudulently in bringing the original foreclosure action against him without advising the trial court of a condominium association rule change. He claimed that his own opinion with other evidence was sufficient to support a finding of fraud and an award on his behalf. The court, however, found that he failed to meet his burden of proof on any of the counterclaims. In addition, he admitted that the issues he raised were substantially the same as those arguments he set forth in previous actions.

Having found that Redman commenced and prosecuted the tort lawsuit without probable cause, that the matter was terminated unsuccessfully in favor of the association, and that he brought his suit with legally malicious intent, the court ordered that he pay the association treble damages that amounted to $25,666.05 plus taxable court costs.

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

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Owner Must Comply with Association's Off-Season Occupancy Rule

Nimmer v. Hidden Ridge Resort Condominiums Association, 760 N.W.2d 184 (2008)

Covenants Enforcement/Use Restrictions: In an unpublished opinion, a Wisconsin appeals court affirmed a judgment in favor of an association seeking to enforce a seasonal occupancy rule.

Hidden Ridge Resort Condominiums is an "RV park" located near Sturgeon Bay in Door County, Wisc. It is governed by Hidden Ridge Resort Condominiums Association. The condominium declaration was recorded in 1987 and amended in 1997 to provide that "no recreational vehicle located on any Unit … shall be occupied on a continuous year-round basis or used as a permanent abode or place of residence."

In 2001, Joseph Nimmer purchased a unit in the condominium. In 2005, the association passed an "off-season occupancy rule" that prohibited owners from occupying their units for more than nine consecutive days or 13 days in aggregate during any 30-day period during the off season. The rule provides for an evidentiary hearing if any allegations are contested and establishes procedures for enforcement, including a $100-per-day fine for violations.

In December 2005, the association sent Nimmer a notice of violation and scheduled an evidentiary hearing when Nimmer contested the complaint. Nimmer failed to appear for the hearing and did not contest subsequent violation complaints. The association filed liens against Nimmer's unit in February and June. In July, Nimmer notified the association that the occupancy rule was unenforceable and demanded that the association release the liens. The association refused to release the liens, and Nimmer sued for declaratory judgment that the occupancy rule was contrary to Wisconsin's Condominium Ownership Act ("Act"). The association counterclaimed for a money judgment on the fines and foreclosure of the liens. Nimmer moved for summary judgment, arguing that because the 1997 declaration permits year-round access to the property, the rule was inconsistent with his deed and violated the Act. The association filed a cross motion for summary judgment. The trial court determined the rule was consistent with the declarations, bylaws and not contrary to the Act. It denied Nimmer's motion and the association's motion, finding there was a dispute about whether Nimmer had violated the rule. The association moved to postpone a trial and filed a new motion for summary judgment. The association argued that Nimmer had waived his right to trial because he refused to comply with the association's review procedure. Instead, he bypassed the hearing procedure and gave up the opportunity to confront the allegations. Nimmer appealed.

The appeals court first addressed whether Nimmer waived his right to challenge the board's determination that he violated the rule. Nimmer asserted that he need not follow the association's procedure for challenging the determination against him. However, the Act requires that every unit owner "comply strictly with the bylaws and with the rules adopted under the bylaws…" The occupancy rule states, "If the unit owner contests the written complaint, the Board of Directors shall hold a hearing within twenty days of receipt of the written response…" If the unit owner fails to respond or the board finds a violation occurred, the owner is subject to a fee and daily fine. The appeals court concluded that Nimmer was required to participate in the review procedure before proceeding with a court action because under the Act, he had a statutory obligation to comply with the bylaws. Moreover, the court found that he bought his unit after the 1997 declaration prohibited year-round occupancy and was, therefore, fully aware of the seasonal use limitation.

Nimmer argued that the board acted oppressively or unreasonably because the rule placed fines on some unit owners and not others. However, the court found that the rule applied to some owners and not others because when the new declaration was recorded, present owners were "grandfathered" in and not forced to follow the seasonal use restriction. Nevertheless, the declaration sought "to eventually eliminate year-round residency." The appeals court concluded that it was not arbitrary or oppressive to apply the new rule prospectively and to gradually phase out those owners following the prior rules.

Nimmer asserted that the association could not prevent him from using his property in any manner he deems fit. He complained that "access" to the property was the same as "occupancy." The court, however, agreed with the trial court that "access" does not have the same connotation as "occupancy." The association permits owners to access their property at any time. It even permits short-term occupancy, but the rule prohibits extended occupancy, consistent with the fact that the association does not provide services for residents year-round. The appeals court found that the rule was not inconsistent with either of the declarations or the Act and affirmed the trial court's judgment.

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

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Homeowners Not Liable for Assessments That Exceed Maximum Amount Stated in Deed Restrictions

Popponesset Beach Association, Inc. v. Duffy, 74 Mass. App. Ct. 1119; 907 N.E.2d 1161 (2009)

Assessments/Covenants Enforcement: In an unpublished opinion, a Massachusetts appeals court reversed a lower court's ruling in favor of a homeowners association to collect past due assessments because the association did not have the authority to raise assessments above a maximum amount stated in the deed restrictions.

Popponesset Beach Association is the homeowners association responsible for maintenance and upkeep of Popponesset Beach located in Mashpee, Mass. The association sued homeowners William Duffy and Geraldine O'Donnell for several years of unpaid association dues comprised of maintenance and improvements costs. The court granted summary judgment to the association, ordering Duffy and O'Donnell to pay approximately $3,000 each. They appealed the ruling.

On appeal, the homeowners argued that the association did not have the authority to modify the payment obligation by increasing it above the maximum $20 per year, per lot as stated in their deeds. They argued that they had the right to rely on the $20 ceiling spelled out in the deeds. The association argued that it had the right to amend the amount of the payment that emanates from the reservation of right by the grantor to enforce and construe the restrictions contained in the deeds. Both deeds provide:

By the acceptance of this deed, the grantees … agree to pay to the grantor, its successors and assigns, their proportional share to be determined by the grantor, its successors or assigns, but not to exceed the sum of twenty dollars a year per lot of the annual expenses for maintenance, servicing and general improvement of the whole development …

The grantor reserves to itself … the right to enforce and construe the above restrictions and obligations … and to permit variations and modifications thereof, and any action taken by the grantor, its successors and assigns, in connection with such restrictions and obligations shall be conclusive and binding upon the grantees.

Using the tenets of contract interpretation, the appeals court held that it would be inconsistent to state in one paragraph that $20 is a maximum charge if the language of the next paragraph could be interpreted to allow an increase of that amount by permitting "variations and modifications." Moreover, the court found that the use of the word "permit" was inconsistent with a reservation of rights by a grantor, implying that permission may be given to another, not that a right is being reserved to make a unilateral change.

Further still, the court found that the grantors did not cap the amount a grantee would owe for the installation and maintenance of utilities. Within the same sentence, the grantor imposed a financial cap on its right to charge for general maintenance expenses, but did not impose a cap with respect to the costs of utility installations. In the court's opinion, if the grantor had intended to reserve the right to vary the annual charge, it could have left the amount open-ended, or specifically reserved the right to amend the amount.

Finally, the court concluded that the grantor explicitly reserved rights unto itself in the last two paragraphs, indicating it did not intend to reserve the right to vary the annual charge.

The court reversed the trial court's order and remanded the case for determination of the amounts owed of the annual $20 assessments not yet paid by each defendant. Given its decision that the association did not have the right to modify the annual assessment above $20 per year, it vacated the trial court's judgment on damages.

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

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Covenants May Be Amended By Fewer Than Majority Vote in Accordance with Bylaws

Regency Homes Association v. Schrier, No. No. S-07-903, Neb. Supr. Ct., Jan. 23, 2009

Architectural Control/Covenants Enforcement: The Nebraska Supreme Court affirmed lower court rulings that covenants may be amended by a majority of those voting at a meeting, even if the number of votes constitutes a minority of association members.

Regency Homes is a subdivision located in Omaha, Neb. Regency Homes Association sued Jeffrey Schrier after he replaced his roof with asphalt shingles, violating a restrictive covenant contained in the declaration. The association adopted bylaws and recorded the declaration in 1968. The bylaws separated members into two classes: (1) regular members, who have one vote for each lot or dwelling owned; and (2) special members, who have only one vote regardless of the number of properties they own. The bylaws define a "quorum" as, "[s]uch members present in person or by proxy … for any meeting of regular members or for any meeting of any one or both membership classes." The covenants provided that no residence could be constructed or altered without the express written approval of the association acting through an architectural review committee. The covenants further provided that the association has the right to extend, modify, or terminate all or any part of the declaration. The association's bylaws provide that:

[A]ll or any part [of the declaration] shall be extended, modified or terminated only when no one person holds more than one-fourth of the entire number of memberships of regular members and upon recommendation of the Board of Directors accepted by a three-quarters vote of the entire number of memberships of regular members present in person or by proxy at any annual or special meeting or responsive to a vote thereon by mail.

In 1988, the association extended the declaration through Dec. 31, 2028. In 2002, at the annual meeting, the members voted on amendments to the declaration and bylaws after being notified of specific changes proposed. The amendments were recommended by the board of directors and passed after 119 members voted in favor and 18 voted against. The amendments set forth more detailed building specifications, including the added requirement that all roofs be covered with wood shakes, wood shingles, tile or slate. Asphalt and woodruff products were specifically prohibited.

In 2004, Schrier purchased a home in the subdivision and replaced the roof with an asphalt shingle roof without first obtaining the committee's approval. The association notified him that the roof violated the covenants and demanded that he replace the roof with approved materials. Schrier refused, and the association sued him, requesting an injunction restraining him from maintaining the roof. Schrier moved for summary judgment and the association moved for partial summary judgment. The trial court granted the association's motion. Schrier appealed the ruling and, in a memorandum opinion, the appeals court affirmed the decision. The appeals court concluded that the bylaws clearly provided that the governing documents could be amended by a vote of three quarters of those members participating in the vote—as opposed to three quarters of all members of the association. It also concluded that the roof requirement merely clarified restrictions already contained in the declarations and was not an attempt to enact a restriction of which Schrier would have had no notice. Schrier again appealed, and the state supreme court granted further review.

Schrier argued that the appeals court erred in determining that (1) a minority of members can modify, extend or terminate restrictive covenants; (2) an amended restrictive covenant that prohibits asphalt shingles was not effective because the parties stipulated that prior declarations did not limit or restrict materials for roof construction; and (3) the proper interpretation of the bylaws was that the covenants can be modified, extended or terminated by a minority of lot owners.

The court noted that the management and internal affairs of a voluntary association are governed by its constitution and bylaws, which constitute a contract between the members of the association. If the language of the governing documents is unambiguous, they shall be enforced according to the plain language of the documents. The court found that the bylaws clearly allowed amendment by three-quarters of those voting, regardless of how many total homeowners chose to participate in the vote. The court did not agree with Schrier's argument that homeowners could not, as a matter of law, agree to a bylaw that would result in a minority of homeowners passing an amendment to the covenants. The Nebraska Nonprofit Corporation Act ("Act") provides that a corporation's bylaws "may contain any provision for regulating and managing the affairs of the corporation that is not inconsistent with law or the articles of incorporation." The court found that nothing in the Act prohibited the bylaw in question.

The court found that Schrier's reliance on secondary sources such as the Restatement (Third of Property and American Jurisprudence) was misplaced. Additionally, the court determined that his characterization of the bylaws as allowing a minority to modify the covenants was inaccurate. The court noted that under the bylaws, as well as the Act, all homeowners must be adequately notified of any proposed amendment and the manner in which it will be voted on. If enough members choose, after proper notification, not to participate in the vote, it is difficult to find any reason to invalidate a clearly written provision that would allow those participating to proceed.

The court recognized that it was undisputed that Schrier violated the covenants when he replaced his roof with asphalt shingles. He argued that the amendment created a "new and different" covenant that could only be passed unanimously. However, the court considered that the declaration set forth that members could "extend, modify or terminate all or any part" of the declaration. Since the original declaration described that an architectural committee would have control over architectural factors, the broad language of the original covenants contemplated control over the general appearance of residences in the subdivision, including roofing materials. The court concluded that homeowners would have reasonably contemplated that an "extension" of the committee covenant could later include a more specific description of roofing materials.

The court determined that the roof amendment was passed in accordance with the association's bylaws and the original declaration. Since it was undisputed that Schrier violated the covenant, the court affirmed the judgments of the appeals and trial courts.

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

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Motor Home Must Be Parked in Garage or Screened Area Approved by Architectural Committee

Schwartz v. Banbury Woods Homeowners Association, Inc., 675 S.E.2d 382 (2009)

Architectural Control/Covenants Enforcement: A North Carolina appeals court upheld a ruling in favor of a homeowners association to enforce a parking restriction that required owners to park campers in a garage or screened area approved by the association's architectural committee.

Michael Schwartz and Dawn Gray own a home in Banbury Woods Subdivision in Raleigh, N.C. The subdivision is governed by CC&Rs recorded in 1985. The declaration restricts lot owners from parking "boats, trailers, campers and all other similar property" on streets in the development, and requires that such vehicles be parked in a garage or screened area. The declaration was amended in 2006 to require that the screened area be approved by the architectural committee.

In May 2006, after completing improvements to their home that provided additional parking and access to a pad behind their garage, Schwartz and Gray began parking their motor home on their property.

In October, Banbury Woods Homeowners Association notified them that they were in violation of the covenants and they would be fined if they did not submit a request to the architectural committee for approval of a screening method. In November, they submitted a request for a privacy fence, but the committee denied their request, asking them to delay plans to screen the motor home until further notice.

Correspondence between the association and the owners continued during 2007, and in September, the association asked the owners to submit a request for approval for screening that implemented a "plantings approach." When they failed to do so, the association sent a notice, requesting that they take action within 30 days to correct the violation, and then sent a confirmation letter notifying them that the board would take action if the request was not submitted by Oct. 23, 2007. Schwartz and Gray responded that they did not believe they were in violation of the covenants and stated they would not be submitting the request.

In December, the association implemented a $100 fine to be assessed daily until Schwartz and Gray relocated their motor home to an off-site storage facility. Schwartz and Gray sued the association, seeking a declaratory judgment that the motor home did not fall within the purview of the declaration's parking restriction and a temporary restraining order and injunction against the association from imposing any fines or taking action against them for violation of the covenants. The trial court denied their motions and granted summary judgment to the association, ordering them to comply with the covenants by not parking their motor home on their lot unless it was in a garage or screened area approved by the architectural committee. Schwartz and Gray appealed the orders.

In construing the declaration, the appeals court found that, although "motor home" was not listed as a type of property subject to the covenants, based on the natural meaning of the term "camper," strict construction of that term to exclude Schwartz's motor home would defeat the restriction's purpose. The court determined that the motor home fell within the declaration's definition of "campers," and, therefore, it must be parked in a garage or screened area approved by the architectural committee. The court noted that the association did not target the owners or act unreasonably, arbitrarily or in bad faith when it passed the resolution, and it did not abuse its discretion by issuing the injunction that required Schwartz and Gray to comply with the plain language of the covenants and complied with procedural requirements contained in the North Carolina statutes prior to assessing the fine. The court affirmed the trial court's orders.

Editor's Note:  Thanks to Brian S. Edlin with the firm of Jordan Price Wall Gray Jones & Carlton in Raleigh, N.C., for contributing this case.

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

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Action to Recover Monies Improperly Collected by Master Association Must Comply with Consent Settlement Order

Wintergreen Homeowners Association, Inc., v. Kings Grant Maintenance Association, Inc., No. A-4471-07T1, N.J. Sup. Ct., June 16, 2009

Miscellaneous/Powers of the Association: In an unpublished opinion, a New Jersey appeals court remanded this case for a determination of the nature and scope of a consent settlement order between a master association and a sub-association attempting to recover monies improperly collected from its members by the master association.

Kings Grant Maintenance Association was established to manage a large residential community located in Evesham Township, N.J. Under the community's declaration, sub-associations were created for the various communities within the development, but all powers and duties for maintenance and preservation of the common property were delegated to Kings Grant. The sub-associations sued Kings Grant, alleging it had been granted excessive powers, and the county law division ordered a reformation of its powers and responsibilities. Shortly thereafter, residents of the sub-association of Wintergreen sued Kings Grant, alleging that it had not relinquished control and was impinging on their right to manage their own community. The suit resulted in a consent settlement order ("CSO") that established Wintergreen Homeowners Association.

Because of a concern that Kings Grant had overcharged Wintergreen residents, the CSO provided that an accountant could be appointed to examine Kings Grant records and that Wintergreen could seek recovery of any amounts overcharged. The CSO required that any complaint be filed by Dec. 1, 2004.

In letters between Wintergreen and Kings Grant, it was agreed that the language in the CSO requiring an "audit" be changed to "examination."

The accountant retained by Wintergreen orally advised its treasurer that Kings Grant had improperly charged various litigation expenses both to Wintergreen residents and to all Kings Grant residents generally. However, he did not issue a written report.

In November 2004, Wintergreen sent Kings Grant a letter demanding payment, and that month, one day before the deadline contained in the CSO, it sued to recover the amounts improperly collected. The matter was referred to a judge, who determined that Wintergreen’s complaint did not comply with the terms of the CSO, which required that a written audit be completed prior to filing a complaint. The judge dismissed the complaint with prejudice, and Wintergreen appealed.

The appeals court held that the meaning of the CSO was not clear about the time and form of the examination to be conducted by Wintergreen's auditor and remanded the matter for a plenary hearing to determine the intent of the parties.

During the course of the hearing, Wintergreen conceded that the CSO required it to contemporaneously file the audit and the complaint. The judge ended the hearing early, but assured Wintergreen it would have the opportunity to call witnesses at a later date. Wintergreen submitted three certifications alleging that discovery documents it had not received from Kings Grant were necessary to complete the required audit; that it had sought production of the discovery in good faith; that parties to the CSO did not intend to require a full audit; and that the parties did not want to incur the expense of a full audit. The judge dismissed the case with prejudice, finding that Wintergreen's failure to file a discovery motion precluded its estoppel claim and that Wintergreen's demand letter did not meet the audit requirement. Wintergreen appealed.

In its appeal, Wintergreen contended that the mutual intent of the parties was that no written report was required under the CSO as a prerequisite to its suing Kings Grant to recover improperly collected funds. The court agreed. The appeals court noted that its previous remand order described a broader mandate to fully resolve any ambiguities in the language of the CSO. The record on appeal suggested there was some merit to Wintergreen's underlying claim that Kings Grant improperly charged for its litigation expenses and that Wintergreen should be compensated for the misappropriated funds. Given the multiple ambiguities in the language of the CSO, the court conducting the plenary hearing should have fully resolved the intent of the parties on all challenged issues.

Wintergreen argued that Kings Grant should be estopped from claiming entitlement to a written audit because it delayed production of documents. However, it appeared to the court that Kings Grant supplied Wintergreen with all documents it was required to produce under the CSO and made it clear why any requested documents were withheld. The court rejected Wintergreen's argument because it never sought enforcement. Moreover, the court found nothing in the record that suggested that Kings Grant acted fraudulently, unconscionably or in bad faith. It found that Wintergreen did not take steps necessary to ensure it had tools to complete the audit, and did not suggest prior to the plenary hearing that it needed documents it now claimed prevented it from completing the audit.

Accordingly, the appeals court remanded the case to the county law division for a determination of the nature and scope of the audit required by the CSO, specifically: (1) whether a formal audit was required or whether a less formal examination would suffice; and (2) what level of detail should be included in the report. The law division then must determine whether Wintergreen's action would go forward or be dismissed.

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

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