February 2010
In This Issue:
Association That Levied Fines to Enforce Covenants Did Not Violate Federal Statutes
Trial Court Cannot Arbitrarily Dismiss Suit Before a Plaintiff Completes Its Proof
Associations Must Comply with Laws that Prohibit Discrimination
Attic Lofts Do Not Violate Restriction Against Two-Story Dwellings
Lot Owners May Use Private Road Maintained by Homeowners Association
Judicial Review Provision in Washington State's Condominium Act Preempted by Federal Arbitration Act
Parking Spaces Were Not Conveyed in Resale of a Foreclosed Condominium Unit
Tax Injunction Act Bars Federal Courts from Exercising Jurisdiction When State Courts Can Resolve the Matter
Quick Links:
E-mail Our Editor
Visit Our Home Page
View Archives
View Credits
printer friendly
 

Association That Levied Fines to Enforce Covenants Did Not Violate Federal Statutes

Durso v. Summer Brook Preserve Homeowners Association, 641 F. Supp. 2d 1256 (2008)

Federal Law and Legislation/Powers of the Association/Covenants Enforcement: A U.S. District Court dismissed four counts of a suit filed against a homeowners association, alleging violations of federal statutes, because the plaintiff failed to state a claim upon which relief could be granted.

Patrick Durso owns a home in Summer Brook Preserve Homeowners Association, located in Melbourne, Fla. Durso violated the association’s declaration by parking his boat and trailer on the street and installing an improperly located basketball backboard on his lot, among other things. The association fined him for the violations, and he sued the association. His suit included four counts alleging violations of federal statutes, including: (1) unlawful debt collection under the Fair Debt Collection Practices Act ("FDCPA"); (2) violation of the Racketeer Influenced and Corrupt Organizations ("RICO") Act; (3) harassment; and (4) tampering with U.S. mail and invasion of privacy. The remaining 12 counts of Durso's complaint were based on Florida state law.

Durso alleged that his neighbors and members of the association had harassed, threatened and retaliated against him; selectively enforced association rules against him; defamed his character; tampered with his mail; barred his access to the association's financial information and participation in association meetings; and failed to follow proper procedures for homeowners associations established by Florida law. The association moved to dismiss the complaint on the ground that Durso failed to state a claim upon which relief could be granted.

The association first argued that Durso failed to state a claim for relief under FDCPA. FDCPA provides that a debt collector who fails to comply with the act with respect to any person is liable to such person. This act defines "debt collector" as a person who uses interstate commerce or mails to collect debts or who regularly collects or attempts to collect debt, directly or indirectly. "Debt" is defined as an obligation of a consumer to pay money arising from a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family or household purposes. The court noted that debt governed by FDCPA must arise out of some form of transaction. Although "transaction" is not defined in the statute, the court cited the 11th Circuit Court of Appeals explanation that the ordinary meaning of "transaction" necessarily implies some type of business dealing between the parties. In other words, "the act limits its reach to those obligations to pay arising from consensual transactions, where parties negotiate or contract for consumer-related goods or services."

Durso argued that the unpaid fines imposed on him by the association created a debt under FDCPA, and the association became a "debt collector" when it sought to collect the fines. The association argued that it was not a debt collector and that fine imposed for violations of association rules were not debt. While the association acknowledged that courts have held that failure to pay homeowners associations' fees and assessments can create a debt under FDCPA, it pointed out that there was no authority for the proposition that a fine is a debt within the meaning of the statute.

The court found that the fines were penalties against Durso for violating the association rules and were not the result of a business dealing or an obligation to pay for goods or services. Thus, it concluded that the association could not be a debt collector within the meaning of the statute. The court dismissed this count of Durso's complaint.

Durso alleged that the association injured him by conducting a business through a pattern of racketeering activity, and the association moved to dismiss. To prevail in a RICO action, a plaintiff must identify and prove a pattern of racketeering activity by showing two "predicate acts" of racketeering activity within a 10 year period. "Racketeering activity" is defined as including any act that is indictable under certain criminal offenses, including violations of statutes prohibiting mail fraud. In order to survive a motion to dismiss a RICO claim, a plaintiff must allege facts sufficient to support each of the statutory elements for at least two of the pleaded predicate acts.

Durso sought to show that the association violated the federal mail and wire fraud statutes. In order to establish liability under the statute, Durso had to prove (1) that the association knowingly devised or participated in a scheme to defraud; (2) that it did so willingly with an intent to defraud; and (3) that it used the U.S. mail or interstate wires for the purpose of executing the scheme. The Federal Rules of Civil Procedure provide that a party alleging fraud must state with particularity the circumstances constituting the fraud. Durso alleged that the association participated in several frauds in applying and enforcing the association bylaws and covenants.

The association argued that there was no allegation in Durso's complaint that the alleged mail fraud and wire fraud caused direct injury to Durso. The court concurred, finding that, while he alleged numerous acts that may have been inappropriate or even illegal, he failed to allege any acts of fraud that caused him injury. Because he failed to properly plead the required predicate acts of mail or wire fraud or to allege how he was directly injured by such fraud, the court dismissed his RICO claim.

Durso next argued that the association violated Title 18 of United States Code (USC) Sec. 241 by harassment and other torts. This statute is a criminal conspiracy statute which provides that persons who conspire to injure another person's free exercise of any right available to him under the Constitution shall be fined, imprisoned or both. The association moved to dismiss the count because it was based on a criminal statute that does not create any civil liability. Because the statute does not authorize civil suits or give rise to civil liability, the court granted the association's motion to dismiss.

In the fourth and final count alleging a violation of federal law, Durso claimed that the association tampered with his mail and invaded his privacy, violating Title 18 USC Sec. 1705. The association also moved to dismiss this count because it was based on a criminal statute. The court found, like the previously discussed statute, that this statute provides criminal penalties, but does not create civil liability. It, therefore, dismissed the complaint.

Because Durso failed to state a claim under federal law, the court dismissed all claims over which it had original jurisdiction and declined to exercise supplemental jurisdiction over the remaining state law claims.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Trial Court Cannot Arbitrarily Dismiss Suit Before a Plaintiff Completes Its Proof

Featherfoot Point Property Owners Association, Inc. v. Zwieg, No. W2008-02494-COA-R3-CV, Tenn. App. Ct., Aug. 29, 2009

Miscellaneous/Covenants Enforcement: A Tennessee appeals court reversed an order to dismiss an action to enforce restrictive covenants because the plaintiff association was not allowed to present all of its evidence.

Jim and Pauline Zwieg own a home in Featherfoot Point Property Owners Association, located in Decatur County, Tenn. The association sued the Zwiegs for violating a restriction in the bylaws that provided that "no more than one (1) detached structure or building shall be erected on each lot."

The Zwiegs built a carport on their lot in February 2006. They argued that the carport was not a second structure as defined in the bylaws. In support of their argument, they provided minutes of a meeting of the association's board of directors indicating that director Fred Reinhardt had recommended that "carports are not to be considered second buildings." They also argued that the association randomly enforced some bylaws and covenants and failed to enforce others.

In 2007, the association filed an amended complaint naming Fred Reinhardt as an additional defendant. It alleged that Reinhardt approved the construction of the Zwieg's carport, knowing that his action violated the association's restrictions. As evidence, the association presented an e-mail from Reinhardt to the Zwiegs informing them that the carport was permissible. The association accused Reinhardt of breach of fiduciary duty, malfeasance, breach of duty of good faith misrepresentation, negligent representation and fraud. Reinhardt filed a motion for indemnification, demanding that the association be required to pay reasonable attorney's fees. He argued, among other things, that the association's action was barred by the statute of limitations.

At trial, the association presented testimony of two homeowners. Before it could call its next witness, the court sua sponte stopped the proceedings and dismissed the case, finding that the restriction had been violated by the association because it arbitrarily enforced the restriction against some property owners and not others, and finding that the association's actions were unfair and unlawful. The court ordered the association to pay Reinhardt's attorney's fees, stating that it saw no reason for him to have been included as a defendant in the case. The association was not permitted to present its remaining witnesses and exhibits. The association appealed.

The association raised four issues on appeal: (1) the court erred by sua sponte dismissing the case prior to completion of the association's case; (2) the court erred in failing to enforce restrictive covenants against the Zwiegs by finding that the association had allowed violation of the covenants; (3) the court erred in awarding attorney's fees to the Zwiegs; and (4) the court erred in dismissing the association's claim against Reinhardt.

In addressing whether the trial court was authorized to dismiss the association's action, the appeals court relied on Tennessee case law and its Rules of Civil Procedure that provide that after the plaintiff in an action completes presentation of its evidence, the defendant may move for dismissal on the ground that plaintiff showed no right to relief, but the court shall reserve ruling until all parties have presented their evidence. Tennessee courts have held that a trial court may, under certain circumstances and upon adequate grounds, order involuntary dismissal of an action. However, this power must be exercised most sparingly and with great care that the rights of the parties to a hearing are not denied or impaired. Rule 41.02(2) contemplates that the plaintiff's evidence will be evaluated by the trial court prior to an involuntary dismissal.

The appeals court found that the trial court erred in dismissing the case before the association completed its proof and found, furthermore, that the court did not offer any justification for taking such a drastic action.

Reinhardt argued on appeal that the association's claim against him was barred by the statute of limitations. However, he did not make a properly supported motion to assert the statute of limitations as an affirmative defense. Consequently, the court reversed the trial court's judgment with respect to Reinhardt because it erred in granting the involuntary dismissal. The appeals court reversed the trial court's finding on attorney's fees because it was a direct consequence of its order for dismissal. Reinhardt's request for attorney's fees on appeal was denied.

The court remanded the matter to the trial court for the completion of the association's case and assessed costs of the appeal one-half to the Zwiegs and one-half to Reinhardt.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

[ return to top ]

Associations Must Comply with Laws that Prohibit Discrimination

Jessica Moore v. The Club at Orlando Condominium Association, Inc, No. 6:09-cv-274-Orl-31KRS, U.S. Dist. Ct., Middle Dist. Fla., Nov. 19, 2009

Federal Laws and Legislation/Association Operations: A Florida U.S. District Court denied summary judgment to a homeowners association because it found that homeowners associations are subject to the Fair Housing Act because they have the authority to reject potential lessees, and the association's actions were rooted in negative racial stereotypes.

Jessica Moore is an African American woman who inquired about leasing a condominium unit in the Club at Orlando Condominium Association in Orlando, Fla. She contacted the property management company and made an appointment to see the unit with a leasing agent. During her inspection of the unit, she and the leasing agent were joined by Peggy Cullen, the community association manager. Cullen informed Moore that the unit had been rented. The leasing agent disagreed, telling Moore that she knew the unit was still available. Cullen asked Moore where she worked and whether she had children. She informed Moore that she would have to be approved by the association, and that the association had strict rules, including a rule against loud parties and a rule that tenants pay their rent in a timely fashion. She told Moore that she could not have multiple boyfriends spending the night. At the end of the meeting, Cullen shook the leasing agent's hand, but refused Moore's offer to shake hands. Moore did not submit her leasing application and subsequently sued Cullen and the association for discrimination.

Moore's suit contained three counts that alleged violations of federal statutes: (1) violation of Title 42 United States Code (USC) Sec. 3601, et seq., the Fair Housing Act ("Act"); (2) violation of Title 42 USC Sec.1981, which is meant to insure that all citizens have the same right to make and enforce contracts, regardless of race; and (3) violation of Title 42 USC Sec. 1982, which is meant to insure that all citizens have equal property rights. She requested punitive damages pursuant to the Act. The association sought summary judgment on all three counts.

The association asserted that it was exempt from the Act because it did not own or lease any condominiums, and, therefore, could not affect the availability of housing. However, the association conceded that its bylaws gave it the authority to reject potential lessees. Moreover, the association admitted that it requires criminal background checks on potential lessees before it will grant approval.

The court noted that the Act makes it illegal to represent that a dwelling is not available to a person because of race, color, religion, sex, handicap, familial status or national origin. The association argued that Moore did not establish a violation of the Act because she received truthful information about the availability of the condominium from the leasing agent and she failed to show that her race or color played a role in Cullen's false statement that the unit had been rented. However, the court found that Moore established that Cullen was aware of her race at the time she told her the unit was unavailable. The court concluded that the association was in a position to affect the availability of housing, and that if a jury credited Moore's testimony regarding topics Cullen raised during their encounter, it could reasonably infer that Cullen's actions and her statement that the unit was not available were rooted in negative racial stereotypes. The court, therefore, denied the association's motion for summary judgment on this count of the complaint.

Sec. 1981 provides, in pertinent part, that all persons "shall have the same right … to make and enforce contracts … as is enjoyed by white citizens." To prevail in a claim under this section, a person must show that (1) she is a member of a racial minority; (2) the defendant intended to discriminate on the basis of race; and (3) the discrimination concerned one or more activities enumerated in the statute. The association took issue only with the second element as it pertained to Moore's claim, arguing that she failed to present any evidence of intentional discrimination. However, as explained above, the court believed that racial stereotypes fueled Cullen's conversation with Moore, and she did, in fact, intend to discriminate against Moore by denying her an opportunity to rent the condominium.

Sec. 1982 is similar to Sec. 1981, except that it focuses on property rights rather than contract rights. The association contended, and Moore conceded, that to establish a claim, a party must show that she applied for and was denied the right to rent the condominium. The association argued that Moore did not meet the requirements because she never submitted her leasing application and failed to present evidence that she was qualified to rent the unit. Moore contended that the "futile gesture doctrine" precluded her from having to apply for the unit in order to pursue her claim. The court observed that Moore did not present any evidence that she did not submit her application because she believed it would be rejected. Instead, the evidence indicated that she did not rent the unit because she was angry about the way she was treated. The court granted the association's motion for summary judgment on this count.

The court found that summary judgment was not appropriate as to Moore's punitive damages claim because there was at least some evidence that Cullen was aware of the Act and its prohibitions.

The association's motion for summary judgment was granted in part and denied in part.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

[ return to top ]

Attic Lofts Do Not Violate Restriction Against Two-Story Dwellings

Morton v. Paradise Cove Property Owners Association, Inc., No. 11-08-00022-CV, Tex. App. Ct., Sept. 3, 2009

Covenants Enforcement/Architectural Control: A Texas appeals court established that a finished attic did not violate a requirement that waterfront homes in a subdivision be one-story.

Phyllis Morton owns a home in Paradise Cove Property Owners Association in San Jacinto County, Texas. She sued the association, alleging that it violated deed restrictions by allowing construction of two-story homes and improperly displaying signs or allowing signs to be displayed in the subdivision. She asserted claims for breach of contract, fraud and deceptive business practices. She sought damages for diminished property values, mental anguish and exemplary damages. Both parties moved for summary judgment. The association's motion contained a motion for sanctions, in which it presented both traditional and no-evidence summary judgment grounds.

The trial court granted the association's motion in all respects and denied Morton's motion. The court entered a final judgment that awarded the association $50,200 for attorney's fees through trial; $12,000 for attorney's fees in the event of an appeal to the court of appeals; $3,000 for attorney's fees in the event a petition for discretionary review is filed in the Texas Supreme Court; and $5,000 for attorney's fees in the event the Supreme Court requests briefing on the merits.

Morton presented two issues on appeal: (1) that the trial court erred in granting summary judgment; and (2) that the trial court erred in granting the association's motion for sanctions. She asserted that a statement that the trial court erred in granting summary judgment was sufficient to preserve error and allow argument pertaining to all possible grounds upon which summary judgment should have been denied. The appeals court noted that although she used this broad statement of the issue, her arguments were limited to whether a genuine issue of material fact existed as to whether the single-story deed restriction was violated, and whether the discovery rule applied to prevent limitations or laches. She did not present any argument to support any claims other than the one for violation of the one-story restriction.

She argued that it was an error that the trial court granted the association's motion for sanctions. However, the trial court's final judgment did not impose sanctions against her. Furthermore, the final judgment provided that "all relief requested in this case and not expressly granted is denied." Therefore, the appeals court determined this issue was moot.

The court observed that, despite the relative simplicity of the issues, the parties had presented the court with a clerk's record of more than 6,000 pages and a 19-volume reporter's record. It admonished the attorneys in the case that the record was excessive because it contained many items that were unnecessary to its review. The court found the task of reviewing the lengthy record to be unduly burdensome and it unnecessarily delayed the disposition of the case and other appeals pending before the court.

The deed restriction at issue provides that "All homes in Block eight (8) will be single story only." Morton alleged that three houses in Block 8 violated the covenant. These houses were referred to as the Spickard Home, the Shotwell Home and the Hanson Home.

The summary judgment evidence presented by the association conclusively established an affirmative defense of limitations in regard to the Spickard Home. The court noted that actions to enforce restrictive covenants are controlled by a four-year statute of limitations. The association established that the two-story residence existed on the lot when Bruce Spickard purchased it in 1999, the same time Morton purchased her lot. Morton did not file her suit until 2005, and she acknowledged in her brief that she knew the home was a two-story home prior to filing the underlying action. In this regard, she did not argue to avoid application of the four-year limitation period by invoking the discovery rule. The court determined that her suit was not filed within the applicable limitations period.

The court then focused on Morton's characterization of the Shotwell and Hanson homes as two-story dwellings. The court found that the homes were similar in construction, both having attics that were converted into lofts. Viewed from the outside they resemble other homes on Block 8.  The court referred to a photograph showing that the distance between the ground and the eaves of all the homes in Block 8, except the Spickard Home, were roughly the same, and the heights of the Shotwell and Hanson homes were comparable to the five other one-story homes in Block 8.

Morton contended that a fact issue existed regarding the local taxing entities' characterization of the homes as two-story. The appeals court found that while those descriptions differed from the trial court, it disagreed that the difference raised a genuine issue of material fact. The court held that controversy on the characterization of the homes centered on their characterization under the deed restriction. In that regard, the court found no showing that the standards used by the taxing entities were the same as the standard set forth in the deed restriction.

The court reviewed the deed restriction to determine its intent and concluded that all the homes in Block 8 are waterfront lots; therefore, the obvious purpose of the restriction was to protect the view of other property owners. The court found that the Shotwell and Hanson homes complied with the restriction in that they appeared to be one-story when viewed from the exterior.

The court affirmed the trial court's summary judgment ruling.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

[ return to top ]

Lot Owners May Use Private Road Maintained by Homeowners Association

Oak Lane Homeowners Association v. Griffin, No. 20080084-CA, Utah App. Ct., Sept. 11, 2009

Use Restrictions/Developmental Rights: In an unpublished opinion, a Utah appeals court affirmed a ruling that lot owners had a right and easement of use, ingress and egress to a private road maintained by the homeowners association, even though they were not members of the association and did not contribute to the maintenance costs.

Oak Lane Subdivision consists of five lots located in Alpine, Utah.  Lots 1, 3, 4, and 5 are accessible only by Oak Lane, a private street within the subdivision, but Lot 2 is accessible from Oak Lane and a public roadway. All of the original lot owners signed the plat that provided for the property to be "subdivided into lots, blocks, streets and easements."

Dennis and Renae Griffin are the third owners of Lot 2, having purchased the lot in 1988. Their deed references the 1977 subdivision plat and states that they obtained title subject to "easements, covenants, conditions and restrictions of record."

In 2003, the owners of Lots 1, 3, 4 and 5 formed Oakland Homeowners Association to manage the maintenance and landscaping of Oak Lane. The Griffins did not join the association. All the owners who were members of the association conveyed their interests in Oak Lane to the association. The association subsequently placed boulders on Oak Lane and sued the Griffins to prevent them from using the street. The trial court granted the Griffins summary judgment, holding that they had a right to access their lot through the lane because the lane was deemed a common-use private lane open to the public under the terms of the Alpine, Utah Zoning Ordinance. The association appealed.

The association challenged the trial court's determination that the Griffins had an "easement by plat" to use Oak Lane to access their property. It argued that Utah did not recognize easement rights in landowners whose property abuts roads referenced in recorded plats. The appeals court found this argument to be simply wrong. Although the court acknowledged that Utah case law does not specifically address whether an easement in a private roadway arises based on a deed's reference to a plat showing that a landowner's property abuts a private roadway, it readily supports the proposition that a right of use may arise when property is purchased with reference to a recorded plat describing streets or common areas within a subdivision. The court relied upon Tuttle v. Sowadzki, 126 P. 959 (1912), that while specifically addressing the rights of landowners abutting a once public street, supports a conclusion that persons who purchase property described on a recorded plat along with a description of an abutting roadway, may obtain a right to use such roadway based on circumstances surrounding their acquisition of the property, regardless of whether the roadway is public or private. Under Utah law, when an owner creates a plat that clearly identifies a street and then sells the property that abuts the street by referencing the plat, the purchaser of the lot acquires a right that prevents the original owner from vacating or obstructing the street. When the recorded plat dedicates the street to the public, a person whose land abuts the platted street obtains both a public and a private easement. The private easement can survive even if the public easement is abandoned or vacated. It is appurtenant to the property and "[it] constitutes a property right which can only be taken from [the affected owners] or obstructed by making proper compensation." Although the Tuttle court determined that an independent private right arises when a public right to use a street has been created by a plat, this appeals court saw no reason that such a right would not arise when a person purchases a lot with reference to a recorded plat showing private roadways instead of public.

The appeals court concluded that when a party acquires land via a deed that references a recorded plat showing privately owned streets or other privately owned areas of common use for the apparent benefit of the landowner, a right to use those streets or common areas will typically arise in favor of the landowner. This right may be enforced not only against the original developer, but also against neighbors who would attempt to interfere with that right. The court recognized that there was a longstanding doctrine that a private easement over platted streets arises upon the purchase of property with reference to the plat, so long as the roads have not been legally vacated prior to the purchase.

The appeals court found that the trial court's conclusion that the Griffins had an easement to use the road based on the deed's reference to the plat was sustainable as a matter of law because Oak Lane was used as a roadway at the time the Griffins purchased Lot 2 and is still used as a roadway. Therefore, at the time they purchased their property and received the deed referencing the recorded plat, it was entirely reasonable for the Griffins to assume that Oak Lane was what it was purported to be on the plat. Regardless of whether an actual easement arose, the right the Griffins obtained by their deed referencing the plat clearly encompassed the right to use Oak Lane to access their property because it was being used that way when they acquired their lot.

The association challenged the trial court's ruling on the ground that there were three disputed material facts relating to the use and ownership of Oak Lane. While the court agreed that there were definitely facts in dispute, it found that none of those facts were material to a determination of whether the Griffins had a right to use Oak Lane to access their lot.

First, whether the Griffins continuously used Oak Lane did not determine whether a right or easement arose, as would be true of a prescriptive easement. The court explained that the Griffins' right arose based on the deed reference to the plat and use of the street at the time they bought their lot. A prescriptive easement requires continuous use. To establish a prescriptive easement, one must show an open, notorious, adverse and continuous use of the property for at least 25 years. However, continuous use is not necessary when claiming a right of use based on a recorded plat.

Second, the court stated that ownership of the road is not material because the easement came into being irrespective of who owned Oak Lane, because the deed referenced the plat and the obvious purpose of Oak Lane as a road by which the subdivision lots were accessed.

Third, the court found that the precise nature of the road was not material to resolution of the appeal because the trial court based its ruling on the legal determination that an easement arose to use Oak Lane when the Griffins received the deed to Lot 2, and that deed referenced the recorded plat that depicted Oak Lane as an access road to the subdivision lots. The appeals court concluded that since that right would arise under the facts of the case regardless of whether Oak Lane was public or private or some variation of the two, it was not material to the legal determination.

The court revealed that it was not unmindful of the underlying problem between the Griffins and the association: namely that the other lot owners did not want the Griffins to use Oak Lane to park their vehicles and the Griffins, although using the street, refused to contribute to maintaining it. Because these issues were not briefed, the court did not address them. It did note, however, that the trial court's ruling indicated that the Griffins' easement only includes "access, ingress and egress from Oak Lane to their property." The court further noted that when more than one landowner has an interest in an abutting street, absent an agreement otherwise, the presumption is that they should divide maintenance costs pro rata.

The appeals court concluded that the trial court did not err in granting summary judgment to the Griffins because Utah case law fully supported its determination that a right to use Oak Lane to access Lot 2 arose in favor of the Griffins when their deed referenced the recorded plat showing that Lot 2 abuts Oak Lane. Further, although some facts were clearly in dispute, none of the disputed facts identified by the association were material to the trial court's ruling, given the applicable legal analysis.

The court affirmed the trial court's summary judgment ruling.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

[ return to top ]

Judicial Review Provision in Washington State's Condominium Act Preempted by Federal Arbitration Act

Satomi Owners Association v. Satomi, LLC, Nos. 80480-0, 80584-9, 81083-4, Wash. Supr. Ct., Dec. 24, 2009

Warranties/Developer Liability/Contracts/State and Local Legislation and Regulations/Federal Law and Legislation: The State of Washington's Supreme Court ruled that the Washington Condominium Act's judicial enforcement provision was preempted by the Federal Arbitration Act. The court found that condominium associations were subject to the binding arbitration clauses contained in the warranty addenda to purchase agreements signed by unit owners.

Satomi, LLC developed the Satomi Condominium project, an 85-unit complex located in Bellevue, Wash. Purchasers signed an addendum to the sales contract entitled a "warranty addendum." It contained an arbitration clause that provided that all provisions of the addendum applied to all warranties from the seller to the purchaser, including the implied warranties of quality under the Washington Condominium Act. The addendum further provided that the seller could require that any claim under the warranty be decided by arbitration.

In early 2005, Satomi Owners Association sued the developer, Satomi, LLC, alleging defects in construction, breach of implied and express warranties under the Washington Condominium Act ("WCA"), violation of duty to disclose documentation, breach of implied warranty of habitability and violations of Washington's Consumer Protection Act. The developer denied the allegations and demanded arbitration based upon the arbitration clause in the warranty addendum. The association moved to quash the arbitration demand. The developer opposed the association's motion and cross-moved to compel arbitration.

The trial court granted the association's motion to quash on three grounds: (1) the Federal Arbitration Act ("FAA") did not apply, and, thus, did not preempt the WCA's judicial enforcement provision; (2) the developer did not prove that all individual unit purchasers agreed to arbitrate; and (3) even if the individual owners agreed to arbitrate, the clause was inapplicable to the association because it was a corporate entity that lacked individual standing. Satomi, LLC appealed. The appeals court, in a divided opinion, affirmed that portion of the trial court's order denying arbitration of the association's WCA statutory arbitration claims, finding that the FAA did not preempt the WCA's judicial enforcement provision because the FAA did not apply under the circumstances. The court reversed the trial court's ruling with respect to contractual and common law warranty claims, however, holding that all unit owners signed the addenda and the association was bound by the addendum's arbitration clause.

The developer petitioned the state supreme court to review the portion of the appeals court's decision that the WCA's judicial enforcement provision was not preempted by the FAA. The association argued that the court should reverse the portions of the appeals court's ruling that all unit owners signed the addenda and the association was bound by the arbitration clause. The supreme court granted review and consolidated the matter with two other cases, Blakeley Commons Condominium Association, Inc. v. Blakeley Commons, LLC¸ and The Pier at Leschi Condominium Owners Association v. Leschi Corp.

Blakeley Village is a condominium project in Seattle that consists of 109 units, 106 of which are residential. Twenty-nine units were sold to residents of other states, and one unit was sold to a Canadian citizen. Every purchaser of a unit in the condominium signed a warranty addendum that contained an arbitration clause. In January 2006, Blakeley Commons Condominium Association ("Blakeley association") sued the developer, Blakeley Commons, LLC, alleging defects in workmanship and materials that affected the units, common elements and limited common elements. The Blakeley association's claims were for breach of implied warranty under the WCA, breach of implied warranty of habitability, breach of fiduciary duty, violations of the Consumer Protection Act and breach of contract.

The Pier at Leschi Condominium is a 28-unit condominium complex also located in Seattle. The building originally operated as an apartment complex until Leschi Corp. purchased it and converted the units to condominiums. Each purchaser of a unit executed a sales contract and limited home warranty addendum. The addendum contained arbitration provisions that were incorporated into the sales contract. The Pier at Leschi Owners Association ("Leschi association") sued Leschi Corp., alleging, among other things, breach of implied and express warranties of the WCA, breach of implied warranty of habitability and violation of the Consumer Protection Act. Leschi Corp moved to enforce binding arbitration. The motions were denied, and Leschi Corp. appealed. The appeals court certified the case to the supreme court, and the matter was consolidated as set forth above.

The supreme court noted that Satomi was moot because the parties settled their dispute. Ordinarily, the court will not review a moot case; however, the court may review a moot case if it presents an issue that is of continuing and substantial public interest. The court chose to review the preemption question, but declined to review the factual question of whether Satomi, LLC proved that all the unit owners had agreed to arbitrate disputes arising pursuant to the warranty addendum to the purchase agreement. The court also declined to review the legal question of whether the association was legally bound by the arbitration provisions.

The question to be considered by the court was whether the FAA preempted a state statute that otherwise applied to a transaction. To answer the question, the court needed to determine (1) whether the FAA applied to the transaction, and, if so, (2) whether the WCA conflicted with the FAA. The court conducted a de novo review of the trial court's decision granting a motion to compel arbitration.

In considering the scope of the FAA, the United States Supreme Court, in Citizens Bank v. Alafabco, Inc, 539 U.S. 52 (1995), interpreted the term "involving commerce" as "the functional equivalent of the more familiar term 'affecting commerce'—words … that ordinarily signal the broadest permissible exercise of Congress' Commerce Clause power." The court emphasized that because the statute provides for "the enforcement of arbitration agreements within the full reach of the Commerce Clause," it is clear that it encompasses a wider range of transactions than those actually within the flow of interstate commerce. Congress' Commerce Clause power can be exercised in individual cases without showing any specific effect upon interstate commerce. In other words, the FAA applies to transactions involving an economic activity that, in the aggregate, represents a general practice subject to federal control that bears on interstate commerce in a substantial way. Subsequent to the decision in Citizens Bank, courts in California and Alabama have held that the FAA applied to home construction or remodeling contracts based solely on the receipt and use of out-of-state materials.

In Citizens Bank, the court found that where it applies to a transaction, the FAA may preempt a state statute governing the transaction by conflict preemption. Conflict preemption occurs where (1) it is impossible to comply with both state and federal law or (2) state law "stands as an obstacle to the accomplishment of the full purposes and objectives of Congress." The court noted that the FAA's displacement of conflicting state law is "now well established." For instance, it preempts or supersedes state laws that require a judicial forum for resolution of claims that parties agree to resolve by arbitration.

When the court reviewed whether the FAA applied in the instant cases, it agreed with the developers' arguments that the transactions were the sales contracts and the warranties incorporated in them by reference. The court next considered whether the FAA applied to the transactions in each case. The developers argued that the transactions were within the scope of the FAA. The associations argued that the FAA did not apply. The court again agreed with the developers.

The court noted that the U.S. Supreme Court concluded that "[i]f the Commerce Clause gives Congress the power to regulate local business establishments purchasing substantial quantities of goods that have moved in interstate commerce," it necessarily reaches the warranting and sale of condominiums in Satomi because the goods amount to more than 70% of the component parts. Under the circumstances, the substantial use of out-of-state materials placed the transactions within the reach of the FAA. The court reversed the portion of the appeals court's opinion reaching the opposite conclusion. The court also held that under the respective circumstances of both cases, the transactions in Blakeley and Leschi involved commerce under the FAA.

Because it concluded that the FAA applied to the transactions in each case, the court examined whether the WCA's judicial enforcement provision conflicted with the FAA. Two versions of the provision were at issue: the "prior" and "current" enforcement provisions. In Satomi and Blakeley, the parties agreed that the prior enforcement provision applied. The parties in Leschi agreed that their dispute was subject to the "current" enforcement provision. In any case, however, the court reached the same analysis of both versions of the provision.

The Satomi association conceded that the provision was the type of statute that is preempted under the conflict preemption doctrine, and the court agreed. The court determined that the arbitration provisions in each of the cases were enforceable, "like other contracts, in accordance with their terms." The prior enforcement provision, however, "preserved the parties' rights to enforce the WCA provisions by judicial proceeding should alternative methods of dispute resolution fail." The court noted that it goes without saying that arbitration is not binding if a party can later seek judicial review. It found, therefore, that the prior enforcement provision directly conflicted with the FAA because it served to obstruct enforcement of the arbitration agreements.

Likewise, under the current enforcement provision, the parties must participate in private arbitration of statutory warranty claims if any party files a demand within a specified time. Upon the conclusion of the arbitration hearing, however, any aggrieved party may demand a trial on all claims. Thus, the arbitration proceedings are nonbinding.  The court concluded that the FAA required it to enforce the arbitration agreements in these cases, including the terms providing for binding arbitration. Because the court determined that the FAA applied to the transaction in each case, and the prior and current enforcement provisions directly conflicted with the FAA, it held that the FAA preempts the prior and current enforcement provisions.

The court next turned to the question of whether the developers could compel the associations to arbitrate their claims pursuant to the alleged arbitration agreements between the developers and the unit owners. The Blakeley association argued that it was not bound by the arbitration clause because the owners were not agents of the association when the addenda were executed. The court held that whether the association was bound by the arbitration clause was an issue for the courts to determine. It noted that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." The court noted further that Washington law generally favors the use of alternative dispute resolution where the parties agree by contract. There are certain limited exceptions, however to the general rule that a nonsignator to an arbitration agreement cannot be compelled to arbitrate. For instance, a nonsignator is bound by the terms of an arbitration agreement where the nonsignator's claims are asserted solely on behalf of a signator.

The causes of action alleged by Blakeley association included damages to "the association and its unit owners." The only property identified in the complaint was the units, common elements and limited common elements owned by the unit owners, not by the association. Thus, the association did not allege damage to any property in which it had a protectable interest. Therefore, the court concluded that the association lacked standing to bring the claims on its own behalf. This fact, taken together with the terms of the arbitration clause, caused the court to conclude that the association was bound by the warranty addenda.

The court ruled that the FAA preempted the WCA's judicial enforcement provision based on its determinations that (1) the FAA applied to the transactions at issue and (2) the prior and current enforcement provisions conflicted with the FAA. In Satomi, the court reversed the portion of the appeals court's opinion finding that the FAA did not apply to the transactions. In Blakeley, the court reversed the portion of the trial court's order denying arbitration of the association's statutory warranty claims and denying a stay of those claims pending arbitration. In Leschi, the court reversed the trial court's order denying arbitration of the association's claims. Finally, the court remanded Blakeley and Leschi to the trial courts for further proceedings consistent with its opinion.

In a dissenting opinion, Judge Tom Chambers held that the majority opinion incorrectly framed the issue, answered the wrong question and ignored the nature of the homeowners' claims. He believes that the issue is whether a claim for breach of implied warranty, established by Washington statute, and imposed on builders to protect condominium purchasers in the State of Washington can be preempted by federal law simply because some of the materials used in building the condominiums came from across the border. He asserted that the homeowners' claims were not predicated upon defective materials that were shipped in interstate commerce. Instead, the claims arose out of a warranty imposed by state law, that requires that the seller warrant that a unit and common elements are suitable for ordinary uses of real estate and any improvements made or contracted for will be (1) free from defective materials; (2) constructed in accordance with sound engineering and construction standards; (3) constructed in a workmanlike manner; and (4) constructed in compliance with all laws applicable to such improvements.

Chambers found that the breach of warranty claims were not based on interstate commerce, but on the builders' obligation to select suitable materials and install them in a workmanlike manner, all of which would occur wholly within the state. He stated that the court's analysis should begin with an examination of the history and purpose of the WCA. He gave as an example that some portions of Washington are known for rain and moisture. Because the state legislature perceived a problem that the construction of condominiums would deteriorate because of inadequate weatherproofing, it appointed a committee to study the problem and suggest solutions. The legislature tried to remedy the problems arising from poor construction by enacting and enforcing stricter building and inspection codes and statutory warranties.

The legislature sought to solve the problem of excessive and expensive litigation through a dispute resolution mechanism designed for these specific types of disputes. The WCA makes arbitration mandatory upon request of nearly any party to a condominium dispute. It also makes trial available if a party is not satisfied by arbitration, and makes binding arbitration without the possibility of judicial review unlawful.

Chambers stated that the majority's conclusion that the purchase and sale of condominiums sufficiently implicates interstate commerce that preemption applies to make the arbitration portions of the WCA unenforceable, is inconsistent with the established principle that the sale of real estate, including requirements for and interpretation of purchase agreements, is governed by state law. Conversely, the federal government does not, as a general rule, regulate property sales.

He found that the question arises whether the Washington legislature can, in response to a perceived problem in the state concerning condominiums, regulate condominiums through comprehensive legislation that includes implied warranties and their enforcement, or whether the warranties sufficiently involve interstate commerce to justify federal intervention. He agreed with the appeals court in Satomi, finding four reasons why the FAA does not apply to the statutory warranties under the WCA: (1) the real estate transactions were of a "garden variety"; (2) real property law historically is the law of individual states; (3) the warranties arise entirely from state law; and (4) the transactions have no characteristics of an economic activity that, in the aggregate, would represent a general practice subject to federal control. He advocated that force be given to Washington legislators who created the WCA and a decision be upheld that the statutory warranty claims are subject to its jurisdiction.

Editor's Observation: One must wonder how the United States Supreme Court would view this case especially in light of its position on the limited power of Congress to override the states and the constriction of the Commerce Clause. I suspect the dissent would prevail.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

[ return to top ]

Parking Spaces Were Not Conveyed in Resale of a Foreclosed Condominium Unit

Shehadeh v. Fountains at McLean Condominium Unit Owners Association, No. CL-2008-13077, Va. Cir. Ct., June 24, 2009

Miscellaneous/Use Restrictions/Contracts: A Virginia circuit court ruled that rights to use parking spaces appurtenant to a foreclosed condominium unit were extinguished when the unit was foreclosed upon and subsequently vested in the purchasers of the foreclosed unit.

Yousef and Denise Shehadeh are plaintiffs in this action to quiet title to two parking spaces conveyed with the purchase of their condominium unit. Mark Schwartz and Soon-Won Pak are the defendants. The Fountains at McLean Condominium Unit Owners Association was initially a named defendant, but the claims against the association were dismissed.

In 2003, the association sold Unit 1517-301 to Robert Hart. The deed conveyed the unit and "limited common element parking spaces Nos. 0-333 and O-332." Immediately thereafter, Hart sold the unit to Samuel White, P.C., trustee for Mortgage Electronic Registration Systems, Inc. The deed of trust described the property to include the limited common elements thereto, including the parking spaces. The deed of trust stated that White held legal title only to the interests granted by Hart.

In 2007, Hart and the association executed an amendment to the condominium documents reassigning the parking spaces to units owned by Schwartz and Pak. In 2008, Professional Foreclosure Corporation of Virginia, trustee for White, foreclosed the deed of trust and conveyed its interest in the unit to Bank of America. The Shehadehs bought the foreclosed property from Bank of America.

After the Shehadehs purchased the unit, they discovered that Schwartz and Pak claimed a superior interest in the parking spaces. They sued the association, Bank of America, Hart, Schwartz and Pak. The court sustained demurrers to all parties and counts except one against Schwartz and Pak. Schwartz and Pak requested sanctions in the form of attorney's fees against the Shehadehs, asserting allegations of fraud. They argued that the suit was without any factual basis and the claims not warranted by existing law.

Shehadeh argued that conveyance of the parking spaces to White was valid because exclusive use of the parking spaces was Hart's personal property and could be used as collateral for the deed of trust. They asserted that if use of the parking spaces were not personal property, the right could not have been sold to Schwartz and Pak. Therefore, they reasoned, the trustee had the superior claim, and any subsequent purchasers had an inferior claim against the trustee. Additionally, they argued that because White recorded its deed first, prior to the amended parking space assignments, it took priority and Schwartz and Pak acted at their own peril by purchasing the right to use the parking spaces without first conducting a title search because when the deed of trust was foreclosed, the foreclosure extinguished any rights that were later transferred to them. They further argued that the amendment reassigning the parking spaces became effective before the foreclosure occurred and could not be foreclosed on because the spaces were no longer appurtenant to the unit.

"Limited Common Elements" are defined in the Virginia Code as "those common elements which are agreed upon by all of the co-owners to be reserved for the use of a certain number of apartments to the exclusion of the other apartments."

The court had to determine whether Hart could convey the parking spaces or the right to use the parking spaces to White in the deed of trust. Initially, Hart purchased the unit with the exclusive right to use those limited common elements. The property conveyed in the deed of trust was described exactly as it was described in Hart's deed, including the reference to the parking spaces. Furthermore, the deed of trust stated that "all easements, appurtenances, and fixtures now or hereafter a part of the property" are being conveyed in addition to the unit. The court noted that although Schwarz and Pak were correct in stating that Hart did not have necessary title to convey the parking spaces in fee simple, he could convey the right to use the parking spaces.

In addition, the court noted that the association did not need to approve any transfer of the right to use the parking spaces so long as that right was being transferred appurtenant to the units. The court concluded, therefore, that the right to use the parking spaces was legitimately transferred to White by the deed of trust and the public had constructive notice when the deed of trust was recorded.

The court held that when Hart assigned the right to use the parking spaces to Schwartz and Pak, he could only transfer the interest he possessed in the parking spaces subject to foreclosure. Schwartz and Pak purchased the spaces at their own risk and only retained the right to use the spaces until it was foreclosed on. Until Hart's debt was discharged, Schwartz' and Pak's claims to the parking spaces were inferior to White's claim. When the deed of trust was foreclosed on, their rights to the parking spaces were likewise foreclosed on and extinguished.

The court concluded that, as of the date of foreclosure, Schwartz and Pak were divested of their interests in the parking spaces, and Professional Foreclosure Corporation of Virginia acquired the exclusive right to use of the spaces. Since Professional Foreclosure Corporation of Virginia sold the right in its entirety to Bank of America, and Bank of America sold the right to the Shehadehs, the Shehadehs possessed the exclusive right to use of the spaces.

In considering Schwartz' and Pak's request for sanctions, the court found that while the dismissed counts in the action were not sufficiently pled, they were not devoid of a foundation in fact or law, but Schwartz and Pak failed to prove any factual legal basis for an award of attorney's fees.

The court ruled that the Shehadehs had the exclusive right to use the parking spaces and granted their action to quiet title. Schwartz and Pak were ordered to cease any further use of the spaces.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

[ return to top ]

Tax Injunction Act Bars Federal Courts from Exercising Jurisdiction When State Courts Can Resolve the Matter

Terminello v. Village Of Piermont, No. 08 CV 01056 (WCC)(DCP), U.S. Dist. Ct., So. Dist. N.Y., Oct. 28, 2009

Federal Law and Legislation: A New York U.S. District Court remanded an action to the state superior court for proceedings in an action brought by a group of condominium owners and condominium associations to challenge reassessment of their property values for tax purposes.

Condominium owners and associations of condominium owners sued the Village of Piermont in Rockland County, N.Y., challenging adoption of Article 19 of the New York Real Property Tax Law. Passage of this local law led to the reassessment of properties in Piermont for tax purposes.

Plaintiffs sought injunctive relief and punitive damages for alleged violations of the New York and United States Constitutions and Title 42 of United States Code Sec. 1983 resulting from the reassessment. Sec. 1983 provides that "every person who … causes to be subjected, any citizen of the United States … to the deprivation of any rights, privileges, or immunities secured by the Constitution …," shall be liable to the injured party for redress. Specifically, the plaintiffs alleged that the reassessment adopted by the Village of Piermont infringed their rights to equal protection, due process and freedom of speech.

After careful consideration of relevant authority, the court concluded that it was precluded by the federal Tax Injunction Act ("TIA") and principles of comity from exercising subject matter jurisdiction over the case.

The court explained that injunctive challenges to state tax laws are barred by the TIA, and declaratory judgments in response to challenges to state tax laws are barred on the basis of comity. The principle of comity also bars federal courts from granting damages in such cases. The court relied on Fair Assessment in Real Estate Association, Inc. v. McNary, 454 U.S. 100, 102 S. Ct. 177 (1981) and Long Island Lighting Co. v. Town of Brookhaven, 889 F.2d 428 (2nd Cir. 1989) in holding that taxpayers are barred from asserting actions pursuant to Sec. 1983 against the validity of state tax systems in federal courts. The McNary court ruled that such taxpayers must seek protection of the federal rights by state remedies if those remedies are plain, adequate and complete.

The Long Island Lighting court held that because New York provides remedies that afford plaintiffs the opportunity to raise all constitutional objections to the real property taxes imposed, both comity and the TIA bar access to federal court, and federal courts are precluded from exercising jurisdiction over equal protection and due process claims.

The court ordered that the case be remanded the state superior court.

©2010 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

[ return to top ]

 

6402 Arlington Blvd. | Suite 500 | Falls Church, VA  22042 | (888) 224-4321
This e-mail was sent to inform you of CAI products, services or events.
For more information, please visit www.caionline.org.
Change your e-mail address