April 2010
In This Issue:
Association Can Pursue Claim Against Bankrupt Contractor in State Court
Owners Not Required to Pay Assessments Unrelated to Road Maintenance
Developer Cannot Grant Access Easements Over Association's Private Streets
Tar and Gravel Driveway Violates Restrictive Covenants
Rejection of Unexpired Lease An Acceptable Option for Bankrupt Condominium Association
Insurer's Property Damage Claims Not Protected by Attorney-Client Privilege
Lawsuits Constitute Frivolous Litigation
Anti-SLAPP Statute Not Applicable to Architectural Guidelines Enforcement
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Association Can Pursue Claim Against Bankrupt Contractor in State Court

Concord West of the Ashley Homeowners' Association v. J. A. Jones, Inc., No. 3:09-cv-00182-GCM, U.S.D.C., W. Dist. N.C., Jan. 12, 2010

Risks and Liabilities/Federal Law and Legislation: A district court in North Carolina reversed a bankruptcy court's ruling that a homeowners association was barred from suing a bankrupt contractor for construction defects.

Ashley Knoll Apartments in Charlotte, N.C., were constructed in 2000. In 2003, J. A. Jones, Inc. f/k/a Metric Contractors, Inc. ("debtor") filed for bankruptcy protection, and the bankruptcy plan was confirmed in 2004.

During the bankruptcy, the apartments were sold to a developer unrelated to debtor. In 2005, the new developer formed Concord West of the Ashley Homeowners' Association ("association"), converted the apartments into condominium units and offered them for sale. Several years later, latent construction defects were discovered in the units, and the association filed a state court action to recover damages. The association filed a motion to add debtor and Zurich American Insurance Company, its insurer when the apartments were constructed, as defendants in the action. The bankruptcy court denied the motion, and the association appealed.

The appeals court noted that if a claim falls within Sec. 101(5)(A) of the Bankruptcy Code ("code"), it can be subject to the code's discharge and stay provisions. Courts interpret this section broadly so that "all legal obligations of the debtor, no matter how remote or contingent … are dealt with in the bankruptcy." With this concern for finality in mind, the courts use the "conduct test" to determine when a claim arises. The test provides that a right to payment is created at the time the conduct giving rise to the alleged liability occurs. Prepetition conduct can give rise to a claim, but post-petition conduct cannot.

The conduct test is one among several tests used to determine whether a Sec. 101(5)(A) claim exists; the "prepetition relationship test" is another. The prepetition relationship test requires that some relationship exist between the debtor and the claimant prior to the bankruptcy petition. The appeals court noted that the two tests are not mutually exclusive; rather, the prepetition relationship test is a threshold inquiry that allows for analysis under the conduct test.

The court concluded that the association had no prepetition relationship with the debtor because the relevant conduct giving rise to the association's action was the debtor's construction of the apartments in 2000. At that time, the association did not exist and no condominium units had been sold. Nor did a relationship arise before the debtor's bankruptcy plan was confirmed; the bankruptcy plan was confirmed in 2004, and the association was created in 2005. Because the parties' relationship did not predate confirmation of the plan, the association's claim against the debtor could not be discharged, so its state court action could not be barred or stayed.

Zurich argued that the association had taken inconsistent positions in arguing that it should not be bound by terms of the bankruptcy plan because unit owners did not purchase properties until the bankruptcy plan was confirmed, while also arguing that its damage claims should relate back to the coverage period of the Zurich policies that expired in 2003—the implication being that debtor's prepetition conduct was irrelevant for purposes of the conduct test but relevant to whether the Zurich policies applied.

The court found that the association's positions were not inconsistent when applying the prepetition relationship test and the conduct test jointly. The court held that the association could not be bound by the debtor's bankruptcy plan because there was no prepetition relationship. However, the absence of a relationship between debtor and the association had no bearing upon whether Zurich could avoid insurance coverage. The court observed that Zurich agreed to insure the debtor's pre-2004 conduct, and neither Zurich nor debtor offered evidence that the policy in place during construction of the apartments excluded future claimants who had no present relationship with J. A. Jones.

The court reversed the stay of the bankruptcy court and ruled that the association was free to pursue an action against the debtor in state court.

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

Owners Not Required to Pay Assessments Unrelated to Road Maintenance

Eagle Ridge Estates Homeowners Association, Inc. v. Anderson, Nos. 25220 and 25234, S.D. Supr. Ct., Jan. 6, 2010

Contracts: The South Dakota Supreme Court reversed a grant of summary judgment to a homeowners association because the association's general assessment included more road assessments than the owners were required to pay pursuant to an access easement agreement.

Terry and Ann Anderson own three lots in Eagle Crest, a subdivision in Lawrence County, S.D. Access to their property is provided by roads running through an adjacent subdivision, Eagle Ridge Estates.

By written agreement, the prior owners of Eagle Ridge Estates granted a private access easement to the Andersons' predecessor. The access easement operated as a covenant running with the land and inured to the benefit of successors in title. In exchange for the easement, the Andersons, as grantees, are required to pay an annual general road assessment determined by the Eagle Ridge Estates’ covenants. Pursuant to the access easement agreement, only those provisions of the covenants pertaining to the general road assessments apply to the Andersons. The agreement specifies that delinquent general road assessments, together with interest and collection costs as provided in the covenants, shall become a continuing lien upon the property until paid.

Eagle Ridge Estates Homeowners Association ("association") sued the Andersons to collect the 2005, 2006 and 2007 general assessments. The Andersons argued that the association was not authorized to levy assessments against their property other than "general road assessments." They claimed that the association's general assessments included more than road assessments and, thus, were outside their contractual obligations. The Andersons asked the association to itemize those portions of the general assessments that were used only for road maintenance, but the association did not provide the information.

The trial court granted summary judgment to the association and entered a judgment for foreclosure on the Andersons' lots. The Andersons appealed.

The Andersons conceded they are required to pay general road assessments under the terms of the access easement agreement. The association argued that general road assessments are the same as general assessments. Referring to the covenants, the association asserted that only two categories of assessments were mentioned, "general assessments" and "special assessments," and "general road assessments" was not mentioned as a third category.

The court observed that the covenants give the association authority for a variety of duties beyond maintaining roads, including authority to promote the community's welfare and safety and to protect the investments of owners and residents in the subdivision.

In contrast, the language of the easement agreement refers only to roads. The easement agreement requires the Andersons to pay for "general road assessments" subject to periodic adjustments as determined by the covenants. The agreement only incorporates those covenants that deal with "general road assessments" for lots. The court observed that, while the easement agreement incorporated certain provisions of the covenants, it could not expand the Andersons' obligation beyond its terms. The association's argument that the term "general assessments" was synonymous with "general road assessments" had the effect of expanding the Andersons' obligation because the covenants do not equate the two terms. The term "general assessment" is defined in the covenants to include "operating expenses; management and administration; taxes; insurance costs; reserves; improvements; and maintenance." Conversely, the plain meaning of the easement term "general road assessments" indicates it is limited to expenses associated with roads. By definition, that term could not include expenses unrelated to roads otherwise assessed against the association's members.

The court concluded that it was an issue of material fact whether the assessments that the association imposed upon the Andersons only included assessments for roads. The association failed to show that the assessments were strictly for roads, and, by its own evidence, indicated that it used general assessments to pay for costs and expenses other than roads, such as liability insurance and miscellaneous office expenses.

Because the court determined that, pursuant to the access easement agreement, the Andersons were not required to pay assessments unrelated to general road assessments, it found that the trial court erred by resolving the issue through summary judgment. Therefore, it reversed the trial court's judgments and remanded the case for further proceedings.

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

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Developer Cannot Grant Access Easements Over Association's Private Streets

Gray v. The Key Ranch at the Polo Club Home Owners Association, Inc., No. 03-09-00145-CV, Tex. App. Ct., Jan. 12, 2010

Covenants Enforcement/Developmental Rights: A Texas appeals court affirmed a trial court ruling that easements granted by a developer over private streets, conveyed as common area to a homeowners association, were invalid and unenforceable.

J. Kelly Gray is the limited partner of Rooster Springs, LP and the developer of the Key Ranch subdivision in Hays County, Texas. Key Ranch is a gated residential community that contains multi-acre lots that are accessible by three private roads. The subdivision is subject to CC&Rs for The Key Ranch at the Polo Club, recorded in 1998. The Key Ranch at the Polo Club Home Owners Association ("association") was formed to administer and enforce the declaration.

In 2006, without obtaining the consent of the association, Rooster Springs executed easement agreements to provide access from private streets located within Key Ranch to a public highway to facilitate the development of a tract of land adjacent to the subdivision. The association sued Rooster Springs, seeking a declaration that the easements were invalid because the developer no longer owned property in the subdivision at the time of the conveyances.

The trial court reviewed two plats of the subdivision that were recorded in 1998 and 1999, respectively. The plats contain a dedication that states that the roads are private and are the property of the subdivision and/or subsequent owners of the property. The plats are expressly made "subject to any easements and/or restrictions heretofore granted."

The declaration includes "streets and roadways" as part of the subdivision's "common area." It provides that all property within the subdivision shall be held, sold and conveyed subject to restrictions contained therein and that the restrictions run with the land and bind successors of property.

The trial court concluded that the easements were invalid because Rooster Springs had sold all of its lots in Key Ranch before the easements were transferred and granted declaratory judgment to the association. Rooster Springs appealed the ruling.

Rooster Springs contended that the trial court erred in its determination that the roads were conveyed to the association because real property cannot be transferred by dedication.  The association responded that the use of the term "dedication" was not meant to implicate the doctrine of public dedication, but rather referred to how Rooster Springs defined and consistently used the term in the declaration as a way of transferring ownership of the common areas to the association.

The court found sufficient evidence in the record to support the association's argument, noting that courts have long recognized that the transfer of property within a subdivision from a developer to the homeowners association may be affected by the use of dedicatory language in restrictive covenants such as the ones in this case.

Relying on the principles of contract construction to interpret the meaning of the declaration, the court found that various provisions in the declaration, the most prominent of which was the definition of "common area," read in conjunction with the plats, evidenced a clear intention to accomplish a conveyance of the streets and roadways to the association.

Other provisions supported the court's interpretation. The declaration provides that the association has the right to grant and convey an easement, right-of-way or mortgage to construct or maintain roads and streets. It further provides that the association shall maintain, repair and replace as necessary all streets and roadways "within or adjacent to the property." Additionally, the association is directed to, "accept, own, operate and maintain all common area which may be conveyed or leased to it by declarant" and "pay all real and personal property taxes and assessments levied upon … any property owned by or leased to the association."

The appeals court observed that Rooster Springs executed the access easement agreements on April 20 and July 7, 2006. Evidence presented at trial was undisputed that as of April 12, 2006, Gray and his partners resigned from the association, and the association began to maintain and pay taxes on the common area, including the streets and roadways. These facts were sufficient to support the trial court's finding that Rooster Springs transferred the subdivision streets and roads to the association prior to April 20, 2006. Thus, the trial court did not err in finding that Rooster Springs did not have authority to grant the easements.

Because Rooster Springs did not own the streets in Key Ranch on April 20, 2006, it could not grant easements over the property on or after that date.  The court affirmed the trial court's judgment declaring that the easements were invalid and unenforceable.

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

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Tar and Gravel Driveway Violates Restrictive Covenants

Grove Hill Homeowners' Association, Inc. v. Rice, No. 2081093, Ala. App. Ct., Feb. 5, 2010

Architectural Control/Covenants Enforcement: An Alabama appeals court reversed a ruling that a driveway constructed with concrete overlaid with tar and gravel complied with a restrictive covenant that prohibited driveways made of gravel or loose stone.

William and Laura Rice purchased a home in the Grove Hill subdivision in 2008. The subdivision is situated in Lee County, Ala. and is subject to CC&Rs. The covenants are enforced by the Grove Hill Homeowners' Association ("association"). The covenants require all property improvements to be approved by the association's Architectural Review Committee ("ARC").

When the Rices purchased their home, it was in foreclosure and construction was not complete. The house had been abandoned by the contractor for four months and the driveway was a narrow concrete road that was stained red and contained a long crack that ran from the street to the house.

The association sent the Rices a letter welcoming them to the neighborhood and attached a copy of the restrictive covenants to the letter. Section 6.20 of the covenants provides:

6.20  Driveways and Sidewalks. All driveways and sidewalks for each lot or dwelling shall be constructed of asphalt or concrete. Other materials may be used but only if approved by the [Architectural Review Committee]. All driveways and sidewalks shall be paved; chert, gravel and loose stone driveways and sidewalks are prohibited. Provided, however, that the foregoing shall not be applicable to any of the roadways within the development which may constitute common areas.

No one from the association told the Rices that their driveway needed to be repaired, but they wanted to improve the appearance of the house and considered several options to address the driveway problem, some expensive and others impractical. They decided not to completely replace the driveway, but to add a pad and top it with liquid asphalt and loose pea gravel, retaining the original concrete base. They failed to notify the ARC and obtain its approval before beginning the modifications.

When the improvements were complete, the association received an anonymous complaint about the driveway. A representative of the ARC inspected the driveway and discovered that it did not comply with the covenants. The representative spoke with the Rices and showed them the restriction governing the driveway, and the Rices asked for a variance. In support of their request for a variance, they submitted a survey of 21 neighbors who approved the driveway, along with photographs of the driveway before it was modified. Four members of the ARC reinspected the driveway. At a subsequent meeting, the members of the ARC unanimously decided that the driveway did not comply with the covenants and rejected the Rices' request for a variance. The Rices requested a meeting to explain that the modifications had improved the appearance of the driveway, but the ARC refused. In April 2009, the association sued the Rices seeking an injunction and damages.

The trial court rejected the association's request for preliminary injunction, and the case proceeded to trial. The association introduced photographs showing loose gravel from the driveway scattered across the street. Rice admitted that loose gravel had gotten onto the street. The association stated that the ARC was concerned about the aesthetic difference between the Rices' driveway and all other driveways in the neighborhood, as well as the potential impact on property values. The association insisted that the Rices were required to comply with the restriction, no matter the cost or disruption. Rice estimated that the cost to make the changes demanded by the association would be $15,000.

One of the developers of the subdivision testified on the Rices' behalf that the city required the use of gravel driveways during construction. The purpose of the restriction was to assure that contractors and homeowners did not simply leave the gravel driveways in place after a house was completed. He stated that he had served on the ARC for a time and during that time, he did not approve any gravel driveways; however, he had inspected the Rices' driveway and considered it to be constructed in a workmanlike manner, aesthetically pleasing and similar to other driveways in the area. In his opinion, the driveway complied with the covenants. 

The trial court ruled in favor of the Rices. It found that the covenant specifically prohibited driveways made of gravel or loose stone, but specifically allowed driveways of concrete and asphalt. The Rices' driveway was, in fact, concrete covered with asphalt and gravel, a combination not contemplated by the covenants. In fact, the court found that a large portion of the gravel was fastened in place by asphalt sprayed to the surface of the concrete. The court denied the relief sought by the association, and the association appealed.

In its appeal, the association argued that the trial court used an incorrect standard for reviewing the ARC's decision. The appeals court determined that the question of whether the driveway violated the covenants depended on the meaning of the pertinent restriction. The court observed that if no inconsistency or ambiguity exists within a restrictive covenant, the clear and plain language of the covenant is enforceable by injunctive relief. In its review, the court found no patent ambiguity in the restriction. The court reviewed the trial court's finding of latent ambiguity in that the Rices' driveway consists of a mixture of concrete, asphalt and gravel. It determined that the first two sentences of the restriction plainly addressed the situation by prohibiting such a mixture without the pre-approval of the ARC. It concluded that even if there were latent ambiguity in the restriction, that ambiguity would have to be resolved by applying the more specific provision. The court held that the trial court erred in finding that the driveway did not violate the covenants. Based on that error, the trial court did not address the remaining requirements for preliminary injunction. The court reversed the judgment and remanded the case for the trial court to consider whether the association proved the necessary elements to obtain the permanent injunction it requested.

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

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Rejection of Unexpired Lease An Acceptable Option for Bankrupt Condominium Association

In re Maison Grande Condominium Association, Inc., No. 09-21589-LMI, , U.S. Dist. Ct., S. Dist. Fla., Jan. 13, 2010

Association Operations/Assessments/Recreation Leases: A Florida bankruptcy court ruled that a condominium association was exercising good business judgment by seeking to reject a 99-year lease of recreational amenities executed by the developer during the developer control period.

Maison Grande Condominium is an ocean-front condominium located in Miami Beach, Fla., that consists of 502 privately owned residential units. The project is governed by declarations recorded in November 1971 and managed by Maison Grande Condominium Association ("association").

While the developer was in control of the association, it executed a 99-year lease ("lease") with affiliates of the developer ("lessor") for 10,000 square feet of property that includes the swimming pool, a portion of the pool deck and parking spaces located underneath the pool. The lease provides that the unit owners are responsible for taxes, insurance, upkeep and maintenance of the leased premises.

In 2008, a significant number of unit owners became delinquent on their assessment obligations, and the association lacked the funds to pay all its expenses. By early 2009, approximately 25 percent of unit owners were delinquent. Many of those unit owners lacked equity, and their units were in foreclosure.

The association's board of directors closely scrutinized its expenses and took various steps to reduce those expenses. It worked with legal counsel to collect outstanding assessments from delinquent unit owners.

The board considered whether to cover its shortfall by imposing a special assessment against the unit owners, but after soliciting input from the owners, it determined that members lacked the financial resources to pay the additional assessments that were necessitated by other owners failing to pay their fair share. The demographics of the unit owners included many elderly residents living on fixed incomes. The board concluded that increased assessments would only result in increased delinquencies.

The association's largest expense was the rent payment under the lease. The board tried to negotiate a purchase of the leased premises, but the lessor refused to consider a sale. In early 2009, the association ceased paying the monthly rent due under the lease. The lessor sued the association and sought appointment of a receiver. In June 2009, the association filed a bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code and an Emergency Motion to Reject Unexpired Lease ("rejection motion").

In its rejection motion, the association argued that rejection of the lease was appropriate because the monthly rent was oppressive, unrelated to the lessor's actual costs and a strain on the association's resources. In its response, the lessor argued that the association could not reject the lease because it failed to exercise its business judgment appropriately. Lessor claimed that rejection of the lease would cause the condominium to lose its certificate of occupancy and subject individual unit owners to direct payment of all lease obligations and possible foreclosure actions.

Sec. 365 of the Bankruptcy Code provides that a trustee's right to reject executory contracts and unexpired leases is subject only to court approval. Because the association was operating as a debtor-in-possession in the petition, it possessed the rights afforded trustees. Both the association and the lessor agreed that the standard by which the court should measure the proposed rejection was whether the association's board exercised sound "business judgment." A court may not substitute its judgment for that of a debtor unless the debtor's decision is so manifestly unreasonable it cannot be based on sound business judgment, but on bad faith, whim or caprice. Florida case law, as it is generally applied in corporate litigation, supports the rule that courts should defer to decisions of corporate directors upon matters entrusted to their business judgment, except upon a finding of bad faith or gross abuse of their business discretion. The court observed that because the business judgment rule is to be interpreted liberally, motions to reject leases should ordinarily be granted.

The lessor argued that officers and directors had a fiduciary relationship to unit owners pursuant to the Florida Condominium Act ("act"). The act provides that condominium boards are subject to the business judgment rule, but are only insulated if the board acts in a reasonable manner. The boards of directors derive their powers, duties and responsibilities from the condominium governing documents and the act.

After reviewing the evidence presented by the association and the lessor, the court found that the association adequately demonstrated that its decision to reject the lease was a proper exercise of its business judgment as to how best to restructure the association's finances and was consistent with the board's fiduciary duties to its members.

The court briefly addressed each of the arguments presented in the lessor's response to the rejection motion even though in each instance, it found that lessor failed to demonstrate the association acted in bad faith, by whim or with caprice.

The lessor argued that the board did not give adequate notice of the meeting at which it determined that the association would file bankruptcy. The court held that neither the act nor the governing documents require that unit owners vote on a decision to place the association in bankruptcy. The lessor said that the association acted unreasonably and in breach of its fiduciary duty to the unit owners, but the court found, based on credible evidence, that the association acted reasonably in seeking to reject the lease and did not breach its fiduciary duty to the unit owners in seeking such relief.

The association's treasurer testified that the board considered each of the various arguments presented by the lessor in its opposition to the rejection motion, with input from legal counsel and the unit owners, and determined that the interests of the unit owners were best served by rejection of the lease.

Lessor argued if the lease were rejected, the condominium would lose its certificate of occupancy because it would not have the number of parking spaces required by the City of Miami Beach. However, the city's planning and zoning manager refuted this argument, explaining that the ordinance provided that no existing parking spaces could be eliminated, but unless and until the required parking spaces were permanently destroyed, the ordinance would not be implicated.

In response to the lessor's assertion that it would seek to collect post-rejection rent directly from the unit owners, the court noted that regardless of whether or not the lessor had a secured interest in any assets of the unit owners, so long as the owners paid, either to the association or to lessor, their allocable portion of the lease payment, the lessor could not take adverse action against them. The lease itself provides that, "No lien against any fixtures or equipment in the condominium unit shall secure a sum greater than the percentage of the total existing monies due and owing the lessor …" The court noted that this language unambiguously prohibited lessor from foreclosing on the property of any owner who paid its proportionate share of the rent to either the association or the lessor. 

The lessor disputed the association's position that rejection of the lease would terminate the lease. The court held that while rejection does not eliminate the existence of the entire executory contract, it does, with limited exceptions not applicable in this case, terminate a debtor's ongoing obligations under the contract.

The lessor argued that the rejection would not benefit the unit owners because of lessor's alleged status as a fully secured creditor in all the association's property. This claimed interest was based on language in the lease that purportedly grants lessor a "continuing lien paramount and superior to all others …" However, the court pointed out that the association owned no real property and had very limited personal property. Further, lessor's alleged interest in personal property was never perfected and, therefore, could be set side in bankruptcy.

The lessor argued that the association had better alternatives than rejection of the lease, and consequently acted negligently in failing to levy special assessments to meet obligations of the condominium and by failing to properly pursue remedies against nonpaying unit owners. Lessor's position was that the association had the absolute obligation to assess unit owners in order to meet its obligations, whatever the consequence, comparing the condominium to a mini-municipality, where interests are foreclosed when owners fail to pay their real estate taxes.

The association's treasurer testified about the association's efforts to collect delinquent assessments. It hired an experienced management company and replaced its collection counsel. It redrafted form leases used by owners to strengthen remedies available to the association in cases of default, but it did not commence lien foreclosure actions based on the specific advice of collection counsel that doing so would not be cost-effective because of lack of equity in delinquent units.

Lessor claimed that the association filed bankruptcy solely for the purpose of rejecting the lease. The court, however, rejected this argument and found, based on testimony that the association did not file its petition to abuse the judicial process and did not commence the bankruptcy case for the purpose of rejecting the lease.

It is proper for a court to refuse to authorize rejection of a lease if the party whose contract is to be rejected would be disproportionately damaged to any benefit derived by creditors of the estate. The courts must exercise their discretion fairly in the interests of all who have had dealings with the debtor. The bankruptcy court must balance equities in making a determination whether to authorize rejection of a contract and focus on the ultimate goal of Chapter 11 when considering the equities. In this instance, the court found that lessor drafted the lease that retained for itself a portion of a patio that contained a pool, a small portion of the pool deck and the parking spaces located directly underneath this isolated area. For whatever reason, lessor chose to carve out what appeared to be an arbitrary section of the amenities to retain. So, at the end of 99 years, if the lease continued for its full term, the lessor would be left the property with no possibility of using it for any other purpose. The court observed that it was the result the lessor chose, and, therefore, any injury that lessor would suffer by rejection of the lease was injury of lessor's own making and design.

Accordingly, the court granted the association's rejection order and provided for a further hearing on the effective date of the rejection.

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

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Insurer's Property Damage Claims Not Protected by Attorney-Client Privilege

Sandalwood Estates Homeowner's Association, Inc. v. Empire Indemnity Insurance Company, No. 09-CV-80787-RYSKAMP/VITUNAC, U.S.D.C., S. Dist. Fla., Jan. 29, 2010

Miscellaneous Association Problems: A Florida District Court granted an association's motion to compel document production relating to its first-party bad faith lawsuit against an insurer for alleged improper handling of claims for property damage caused by hurricanes.

Sandalwood Estates Homeowners' Association ("association") sued Empire Indemnity Insurance Company, alleging Empire improperly handled the association's claims for property damage caused by Hurricane Frances in 2004 and Hurricane Wilma in 2005. The association alleged that its Hurricane Frances claim was resolved on April 11, 2006, and its Hurricane Wilma claim was resolved on Aug. 24, 2009, the date it signed a settlement agreement and release in the underlying lawsuit regarding the appraisal of its claim.

The association alleged that Empire breached its statutory duties of good faith and engaged in unfair claim settlement practices that violated Sec. 624.155 and Sec. 626.9541 of the Florida Insurance Code, which governs actions of insurance field representatives. The association asserted that Empire improperly resisted paying its property damage claims as part of a general business practice of refusing to fully and fairly pay significant claims.

In September 2009, the association served its request for production of documents on Empire, seeking its claim files for both Hurricane Frances and Hurricane Wilma. In October 2009, Empire responded to the document request, but withheld entire documents and redacted portions of others, citing attorney-client privilege and work product immunity. The association filed a motion to compel production of documents.

Empire argued that the association's motion was untimely, citing Local Rule 26.1(H)(1), which requires that discovery motions be filed within 30 days of the occurrence of grounds for the motion. While the court agreed that the motion was late, it observed that Rule 26.1 affords courts discretion in whether to consider a late motion, and determined that the association showed reasonable cause for its late filing. Because the case was in its early stages, the court concluded that Empire would not be prejudiced by the association's minor delay in filing the motion.

At issue in the motion was whether any of the documents withheld by Empire or redacted prior to being produced were protected by attorney-client privilege. The association argued that the documents contained in Empire's claim files were discoverable in a bad faith lawsuit. Empire argued that some of the documents contained in the claim files were protected under the attorney-client privilege. Specifically, Empire argued that the privilege applied to those communications between Empire and its personal counsel.

The issue is governed by Allstate Indemnity Co. v. Ruiz, 899 So.2d 1121, 1129-30 (Fla. 2005), in which the Florida Supreme Court held the following:

…in connection with evaluating the obligation to process claims in good faith under Sec. 624.155, all materials, including documents, memoranda, and letters contained in the underlying claim and related litigation file material that was created up to and including the date of resolution of the underlying disputed matter and pertain in any way to coverage, benefits, liability, or damage, should also be produced in a first-party bad faith action.

Florida appeals courts have interpreted this case differently than the federal district courts in Florida. They have held that the case does not extend to materials protected by attorney-client privilege. However, district courts in Florida have consistently held that the supreme court intended the case to extend to claim file materials that would otherwise be protected by attorney-client privilege.

With no definitive decision from the supreme court on this issue of state law, district courts are bound to follow the decisions of the appeals courts unless there is persuasive evidence that the supreme court would decide the issue differently. The district court for the Southern District of Florida has consistently found that there is persuasive indication that the supreme court would decide this issue differently than the appeals courts. This court agreed, finding that the attorney-client privilege was not applicable in a bad-faith action, and all documents in the underlying claim and litigation files created on or before the date of resolution of the underlying claim must be produced.

Empire and the association disputed the date on which the Hurricane Wilma claim was resolved. Empire argued that the claim was resolved in December 2008, when it paid the appraisal award. The association contended that the claim was resolved Aug. 24, 2009, when the settlement agreement was executed. Since Empire offered no case law to support its argument, the court ruled that the proper resolution date was the date on which the settlement agreement was signed.

Finally, the court noted that Empire had lodged several objections to the association's production requests, but, based on information before it, the court was unable to determine whether the documents might still be protected under either the work-product doctrine or by attorney-client privilege. Therefore, it ordered Empire to produce all documents in its claims and litigation files in their entirety and unredacted—that related to processing of the claims on or before the date of resolution, and if Empire still believed that any of the documents were not discoverable, it should file a notice of filing documents for in camera inspection within 20 days of the order and submit each document withheld or redacted to the court for review.

The court granted the association's motion to compel.

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

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Lawsuits Constitute Frivolous Litigation

Taylor v. Messmer, No. 02:09-cv-1116, U.S.D.C., W. Dist. Pa., Feb. 9, 2010

Miscellaneous Association Problems/Federal Law and Legislation: A U.S. District Court imposed Rule 11 sanctions for frivolous litigation against a condominium owner who filed a barrage of civil and administrative complaints against another unit owner and the condominium council.

Negley Park Condominium is a four-unit condominium building established in 1978.  It is located in Pittsburgh. Negley Park is subject to rules and regulations set forth in the Code of Regulations for Negley Park, and the condominium's business is conducted by Negley Park Homeowners Association Council ("condominium council"). The condominium council consists of three individuals who serve as president, vice president and secretary-treasurer.

Carol Taylor purchased a condominium in Negley Park in 2003. Almost immediately after she bought the unit, she began to file complaints about discrimination against her and the maintenance, operation and administration of the condominium. Her complaints evolved into a lengthy and tumultuous history of litigation.

The instant lawsuit is identical to claims Taylor filed in the Allegheny Court of Common Pleas. After conducting a non-jury trial, the court concluded that Taylor "had no good faith justification for bringing or pursuing" her claims and ordered her to pay damages of $48,923.70.

In this case, the court noted that Taylor had filed a seemingly endless barrage of other civil and administrative cases against another unit owner and the condominium council raising the same issues, all of which were conclusively dealt with by the courts and the City of Pittsburgh Commission on Human Relations.

In light of the fact that Taylor had forced the unit owner and the individual council members to defend themselves numerous times in various venues on the same claims, and finding that the same resolution had previously been reached by the Allegheny County Court of Common Pleas, the Pennsylvania Superior Court, the Pennsylvania Supreme Court, the U.S. Supreme Court and the City of Pittsburgh Commission on Human Relations on the same issues, the court found that this suit was simply Taylor's attempt to relitigate issues that had already been adjudicated. Finding that Taylor's complaint constituted "abusive litigation or misuse of the court's process," the court entered an order for Rule 11 sanctions against her and granted attorney's fees to the unit owner and the condominium council. The court cautioned Taylor that should she file additional frivolous lawsuits against the defendants involving the same issues, the court would not hesitate to impose additional sanctions.

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

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Anti-SLAPP Statute Not Applicable to Architectural Guidelines Enforcement

Turner v. Vista Pointe Ridge Homeowners Association, No. G040480, Cal. App. Ct., Dec. 22, 2009

State and Local Legislation/Covenants Enforcement/Architectural Control: A California appeals court reversed a trial court's order granting an anti-SLAPP motion to strike a complaint filed against a homeowners association arising from the association's efforts to enforce architectural guidelines.

Jeffrey Turner owns residential property in Vista Pointe Ridge Subdivision located in Aliso Viejo, Calif. The property is subject to CC&Rs that require homeowners to obtain the approval of Vista Pointe Ridge Homeowners Association ("association") before constructing improvements on their property. Turner obtained approval for an addition to his home and for substantial outdoor improvements, including a casita. The approval specified that the casita could not exceed 10 feet 6 inches in height.

After construction of the casita began, Turner increased the height by a foot or more without obtaining a variance from the association. A neighbor complained to the association, threatening to sue the association because the casita unreasonably obstructed the view. The association offered to grant Turner the variance if he held the association harmless against any claims by the neighbor and paid $15,000 in attorney's fees. Turner refused the offer. In addition to the dispute about the casita, there were issues about whether other improvements Turner constructed were approved by the association or in conformity with architectural guidelines. The association levied a reimbursement assessment against Turner in connection with the disputes. Turner sued the association, asserting seven causes of action, including breach of contract; nuisance; breach of implied covenant of good faith and fair dealing; violation of architectural review procedures; and breach of fiduciary duty.

The association filed a Sec. 425.16 anti-SLAPP motion to strike Turner's complaint, arguing that each cause of action in Turner's complaint arose from the controversy pertaining to Turner's architectural plans and asserting that all the association's activities to enforce the architectural guidelines constituted "conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right to free speech in connection with a public issue or an issue of public interest" protected within the meaning of California Code of Civil Procedure Sec. 425.16 ("statute"). The trial court granted the association's motion and noted that each cause of action arose out of the dispute over the architectural guidelines and the association's communications pertaining to Turner's noncompliance. Turner appealed.

On appeal, the association characterized Turner's complaint as an effort to chill its exercise of free speech. It maintained that it made perfectly clear to Turner that it would not approve a height for the casita that exceeded 10 feet 6 inches, and, nevertheless, Turner deliberately built a taller structure and then tried to bully the association into approving it by filing meritless litigation.

The focus of the appeals court's review was whether the association's actions were exercised in furtherance of its protected right of free speech. The court noted that the act underlying Turner's cause of action must itself have been in furtherance of the association's right of petition or free speech.

The statute provides for a special motion to strike a cause of action arising from any act in furtherance of a person's right of petition or free speech in connection with a public issue. It was enacted to protect defendants from interference with the valid exercise of their constitutional rights. To prevail on an anti-SLAPP motion, a party must make a threshold showing that the challenged cause of action arises from protected activity. If this burden is met, the burden shifts to the plaintiff who must show a probability of prevailing on its claim.

In this case, the appeals court found no indication that the association's acts were undertaken in furtherance of its right of petition or free speech. It determined that written demands made to enforce the subdivision covenants gave rise to breach of contract and other causes of action that did not raise free speech concerns. Consequently, regardless of whether the subject matter of the underlying dispute was a matter of public interest, the trial court erred in granting the association's motion because the association's actions were not undertaken in furtherance of the its right of free speech.

The court reversed the trial court's order and awarded Turner costs of the appeal.

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

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