June 2010
In This Issue:
Owner Must Pay Assessments If Board Acts within Scope of Business Judgment Rule
Lien Notice Verification Requirement Applies to Condominiums, But Not Homeowners Associations
Association Cannot Impose a Lien on Property That Burdens Purchaser with Expenses Incurred by the Former Owner
Association Cannot Bar Public's Access to Hiking and Equestrian Trails
Statutory Defense Does Not Extend to Misinterpretation of the Law
Addition to Unit Does Not Violate Condominium Statutes
Unincorporated Association Does Not Have Standing to Sue for Past Due Assessments
Stay of Board Member Recall Exceeds Court's Jurisdiction
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Owner Must Pay Assessments If Board Acts within Scope of Business Judgment Rule

The Board of Managers of Lido Beach Towers Condominium v. Gartenlaub, No. 015217/09, N.Y. Supr. Ct., April 8, 2010

Assessments/Covenants Enforcement: In an unpublished opinion, a New York court granted summary judgment to a condominium board of managers in an action to collect past due assessments, finding that the board acted within the scope of the business judgment rule.

Bernard Gartenlaub owns a unit in Lido Beach Towers Condominium, located in Nassau County, N.Y. The Board of Managers of Lido Beach Towers Condominium sued Gartenlaub to collect past due assessments, moving for summary judgment.

The board provided proof of—and Gartenlaub did not dispute—the correctness of the amounts owed. His defenses were based on allegations that repair work on the condominium building was grossly mishandled, the board failed to obtain proper approval of the construction budget for the repairs, and his unit had numerous uncorrected problems arising from the repair work. He also alleged in a counterclaim that the board frustrated his attempt to sell his unit.

The court noted that someone who purchases a condominium unit enters into a binding relationship with every other unit owner, both by contract and by statute. One element of that relationship is the obligation to pay common assessments, irrespective of any dispute an owner might have with another unit owner, a board of managers, or third parties acting on behalf of the association. Under a condominium regime, all unit owners comply with the bylaws, rules, regulations, resolutions and decisions adopted pursuant thereto. Lido Beach Condominium's bylaws provide that all owners are obligated to pay common charges assessed by the board, as well as special assessments, and interest, attorneys' fees and legal expenses incurred for collection in events of default. The obligation to pay common and special assessments cannot be avoided.

When a unit owner challenges an action by a condominium's board of managers, the court will apply the business judgment rule, which limits the court's inquiry to whether the board acted within the scope of its authority and whether the action was taken in good faith to further a legitimate interest of the condominium. Unless the unit owner is able to demonstrate a breach of the board's duty to act in good faith within the scope of its authority, judicial review of the board's actions is not available.

In accordance with the law, a unit owner cannot withhold payment of common assessments based on defective conditions in his unit or the common areas, or because of any disagreement with actions lawfully taken by the board. In view of this, the court determined that the board had made a prima facie case for summary judgment, based on the evidence it submitted to the court. The board was able to demonstrate that Gartenlaub's affirmative defenses lacked merit.

Gartenlaub was unable to show that issues of fact existed that would merit a trial. He offered no allegations or proof that would permit the court's inquiry beyond that permitted by the business judgment rule. He alleged that the board made significant increases to the budget to fix problems with the building, and owners were billed for large assessments to cover the cost. However, he admitted that the owners voted to authorize a proposed budget. He failed to present evidence indicating that the assessments themselves were not authorized under the bylaws and admitted there were two votes by the owners in favor of large expenditures for the construction work. The court concluded these votes by the members constituted implicit acknowledgment of the board's general authority to act.

The court considered the only issue raised by Gartenlaub that might overcome the business judgment rule, his assertion that a construction budget was to be put before the owners for a vote, but never was. However, he presented no facts to show that the board was obligated under the bylaws to do so. Because he presented no proof that the assessments themselves were unauthorized, and a legitimate purpose was evident—to complete the construction work—the legal sufficiency of the court's response to this motion rested on his allegations of bad faith.

Gartenlaub claimed that the board overspent and mismanaged the construction project, it failed to keep owners apprised of the construction progress, and failed to address the problems in his own unit. The court observed that, even if Gartenlaub's allegations were true, they did not rise to factual allegations of fraud or self-dealing sufficient to permit the court to bypass the business judgment rule. Given Gartenlaub's inability to demonstrate the board's lack of authority to impose the assessments at issue, his disagreements with the board's actions were not enough to avoid payment of the assessments he owed.

The court refused Gartenlaub's request for discovery, because he made no showing that such discovery might lead to facts that would serve as a basis to defeat the board's motion. The court dismissed his counterclaim, because he expressed no legal theory in its support.

The court granted the board's motion for summary judgment, with attorney's fees in accordance with the condominium's bylaws.

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

Lien Notice Verification Requirement Applies to Condominiums, But Not Homeowners Associations

Board of Directors of Hunt Club at Coram Homeowners Association v. Hebb, No. 2009-01264, N.Y. Supr. Ct., April 27, 2010

Assessments/State and Local Legislation and Regulations/Covenants Enforcement: In an unpublished opinion, a New York appeals court reversed a ruling that denied summary judgment to a homeowners association that sought to foreclose a lien for assessments, finding that the requirement that a notice of lien be verified did not apply to homeowners associations.

Hunt Club at Coram Homeowners Association sued Carole Ann Hebb to foreclose a lien for unpaid assessments and other charges levied against her property located in a residential development in Suffolk County, N.Y., and managed by the association under a duly recorded declaration.

The association filed a motion for summary judgment, a motion to strike Hebb's first affirmative defense and a motion to appoint a referee to compute the total amounts owed to the association. Hebb maintained that the notice of lien filed by the association was invalid because the association failed to verify it, as required by New York's Real Property Law. The court ruled for Hebb and denied the association's motions. The association appealed.

In her opposition, Hebb effectively conceded that she had not paid the assessments and other charges underlying the subject lien. The appeals court held that because the association was a homeowners association, not a condominium association, the requirement that a notice of lien be verified did not apply. Moreover, the association's right to foreclose a lien for unpaid assessments arose from its CC&Rs, which also contain no requirement that a notice of lien be verified.

The court concluded that Hebb failed to raise a triable issue of fact in opposition to the association's prima facie showing that it was entitled to judgment as a matter of law, and reversed the trial court, granting the association's motions.

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Association Cannot Impose a Lien on Property That Burdens Purchaser with Expenses Incurred by the Former Owner

Carniello v. Second Horizons Condominium Association, Inc., No. 3D08-1326, Fla. App. Ct., April 7, 2010

Assessments: In an unpublished opinion, a Florida appeals court reversed a trial court judgment that imposed an assessment lien on a condominium unit's subsequent purchasers for repair costs incurred when the unit was owned and occupied by the former owner.

Second Horizons Condominium Association imposed an assessment lien against a condominium unit purchased by Lazaro Nunez and Jeimy Salazar in June 2004 for charges that were incurred when the association repaired the unit's air conditioner in May 2003 when the unit was owned and occupied by Tania Carniello. The circuit court ruled in favor of the association and the respective unit owners appealed the judgment.

The parties differed as to whether the case was controlled by the CC&Rs or the Florida Condominium Act ("Act"). On the one hand, the declaration provided for a special assessment on non-common areas only in the case of an alteration or improvement. The provision did not apply to a case where an inoperable air conditioner was simply repaired. On the other hand, the statutory prerequisites to a valid special assessment under the Act were simply not demonstrated.

In order to foreclose based on a unit owner's failure to pay a special assessment, the association is required to prove it sent written notice of the "specific purposes" of the assessment to each unit owner. To be valid, a claim of lien must state the description of the parcel, the name of the record owner, the name and address of the association, the amount due and the due dates. It must be executed and acknowledged by an officer or authorized agent of the association.

Upon review, the appeals court found no need to resolve the controversy between the parties, because a charge against the condominium unit was unsustainable under either approach. The court found no basis for establishment of a lien on property that would burden a subsequent purchaser for expenses incurred by a previous owner.

The trial court's judgment was reversed and the case remanded for dismissal of the action.

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Association Cannot Bar Public's Access to Hiking and Equestrian Trails

County of Los Angeles v. La Vina Homeowners Association, No. B210444, Cal. App. Ct., April 5, 2010

Use Restrictions/Developmental Rights/Municipal Relations: In an unpublished opinion, a California appeals court ruled that hiking and equestrian trails that were part of a subdivision's common area were subject to the county's specific plan for the property, which included public access to the trails even though they were mistakenly omitted from the final maps of the subdivision.

La Vina Subdivision lies in the foothills of the San Gabriel Mountains in the unincorporated Altadena area of Los Angeles County, Calif. The northern portion of the property is within the Angeles National Forest. An Environmental Impact Report prepared in 1987 revealed that the public had been using hiking and equestrian trails located there.

In 1989, the county adopted the La Vina Specific Plan. The plan serves as the county's zoning ordinance for the property. It stated that the developers would provide a hiking and equestrian trail system that integrated with existing trails on and off the property. In 1991, the county prepared a supplemental environmental impact report that stated that public hiking and equestrian trails were part of the development of the property. In 1992, the conditional use permit for the property specifically identified two trails on the west side of the property. In 1993, the county approved a tract map for the property that depicted and made specific mention of the trails. In 1996, the county issued final approval of the development.

La Vina’s CC&Rs were recorded in May 1997. It states that it "envisioned . . . equestrian and hiking trails within the Common Area." Following through on the specific plan, the developers began developing the trails. They highlighted the trails in their sales strategy and marketing materials, and large maps in the developer's offices showed hiking and equestrian trails.

Final maps of the development were recorded between 1996 and 1998. Unaccountably, the maps failed to depict the trails. No reason could be established for the county's intentional omission of the trails from the maps, other than a mistake was made and the omission was an oversight.

For approximately five years after the final map was recorded, work continued on the trails. The developers submitted reports indicating their progress, and their budgeting and staffing plans included the trails. The county entered into an agreement with the developer for bond financing of public improvements, including full public access to the trails. There was no evidence to suggest that the developers ever claimed that the trail requirements were waived because they were not shown on the final maps.

During 2001, 2002 and 2003, the La Vina Homeowners Association supported the county's efforts to require completion of all outstanding conditions in the development, including the trails. The association's chief financial officer testified before the county board of supervisors in 2003 in support of the trails.

In December 2003, the association wrote the county a letter stating that its board of directors had voted unanimously to deny access to the trails and use of the property to all parties other than association members. The county attempted to resolve the matter informally but failed in its effort. The association posted "no trespassing" signs along one of the trails.

The county sued the association, seeking a declaration that it had a right to enforce the specific plan and that the association's failure to comply with the trail requirements violated the county's zoning ordinance and constituted an ongoing public nuisance. The county charged that the association breached the declaration, which required compliance with the specific plan, and requested specific performance of the trail requirements. The association argued that the county's action was time-barred.

After a lengthy trial, the court issued a statement of decision in favor of the county as well as a post-trial award of attorney's fees in the amount of $783,944. The association appealed.

In the introduction to its decision, the appeals court made clear that it would look to the trial court's statement of decision in its review. Because the association made no effort to claim that any of the trial court's findings were unsupported by substantial evidence, the court continued to look only to the statement of decision for the facts of the case.

In addressing whether the county's action was time-barred, the appeals court acknowledged that the Subdivision Map Act provides that judicial review or action to set aside the decision of an agency, including a final map, must be commenced within 90 days of the decision to be reviewed. However, the activity challenged by the county was not approval of the final maps, but the association's refusal to abide by the specific plan for the property.

The appeals court found that there was no substantial evidence suggesting that the county or the developers ever intended to waive or eliminate the public trail requirement in the specific plan.  The court found the error to be an unintended omission of the trails that were shown in the specific plan from the final maps. The county, although certainly dissatisfied with the errors, could advance no reason or ground to set aside its own decision to approve the final maps. The county's action was predicated instead on the association's conduct, and, therefore, the Subdivision Map Act did not apply.

The association recognized that the county's breach of covenant claim was based on the declaration, which required that the association comply with all applicable ordinances, but argued that the county's approval of the final maps constituted its acknowledgment that they complied with the specific plan. The appeals court admonished the association for continuing to ignore the trial court's determination that the omission of the trails from the final maps was an inadvertent mistake, and not a planning decision. The court found the association's argument that the specific plan, the conditional use permit, and the tract map were inconsistent in showing the location of the trails devoid of merit.

The trial court had rejected the association's claim that the breach of covenant claim was time-barred, and the appeals court agreed, finding that the association breached its obligation in December 2003, and the county filed its action in July 2005. Since the relevant period is five years, the action was timely.

The appeals court also concluded that substantial evidence supported the finding that in violating the specific plan and condition use permit, the association had violated the county's zoning code and was, therefore, maintaining a public nuisance. In addition, the appeals court concluded that the award of attorney's fees to the county was well within the scope of the trial court's discretion.

The court affirmed the trial court's judgment and ordered that the county be entitled to recover its costs on appeal.

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

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Statutory Defense Does Not Extend to Misinterpretation of the Law

Jerman v. Carlisle, No. 08-1200, U.S. Supr. Ct., 6th Cir., April 21, 2010

Federal Law and Legislation: The U.S. Supreme Court reversed a decision in favor of a debt collector who used the bona fide error defense under the Fair Debt Collection Practices Act. The court ruled that debt collectors are precluded from claiming ignorance of the law to excuse violations of the statute.

The Fair Debt Collection Practices Act ("Act") imposes civil liability on "debt collectors" for certain prohibited collection practices. A debt collector who fails to comply with the Act is liable for actual damages, litigation costs and attorney's fees, as determined by the court. In addition, violations of the Act are deemed unfair or deceptive acts under the Federal Trade Commission Act, and a debt collector who knowingly violates the Act is subject to civil penalties enforced by the FTC. A debt collector is not liable in an action brought pursuant to the Act if it can be shown that the violation was not intentional and resulted from a bona fide error.

A law firm (Carlisle, McNellie, Rini, Kramer & Ulrich LPA) sued Karen Jerman in Ohio state court on behalf of a mortgage company to foreclose a loan on Jerman's property. The complaint included a notice that the mortgage debt would be assumed to be valid if Jerman did not dispute the claim in writing. Jerman disputed the debt and, when the mortgage company acknowledged that the debt had, indeed, been paid, Carlisle withdrew the suit.

Jerman then sued Carlisle, claiming that the law firm had violated Sec. 1692g(a) of the Act, which governs the contents of notices to debtors, by sending a notice requiring her to dispute the debt in writing.

The district court granted summary judgment to Carlisle under the bona fide error defense and the appeals court affirmed that judgment. Jerman appealed.

On writ of certiorari to the U.S. Supreme Court, Jerman contended that the bona fide error defense did not extend to Carlisle's misinterpretation of the requirements of the Act. Carlisle argued that the defense was not limited to clerical or factual errors but also applied to errors of law. The court concluded that the bona fide error defense does not apply to a violation resulting from a debt collector's mistaken interpretation of the legal requirements of the Act. The court held that the attorney, the same as every debt collector, was precluded from claiming ignorance of the law to excuse the violation, and the violation resulting from the attorney's legal misinterpretation was not "not intentional" under the Act. Further, the court noted that the Act does not explicitly provide for the mistake-of-law defense to civil liability that appears in other statutes, indicating that liability attaches to intentional violations. The judgment extending the bona fide error defense to the attorney's legal error was reversed, and the case was remanded for further proceedings.

Carlisle raised the concern that the court's opinion would have unworkable consequences for debt collecting lawyers, claiming that the Act's private enforcement provisions have fostered a "cottage industry" of professional plaintiffs who sue debt collectors for trivial violations of the Act. Carlisle foresees a flood of lawsuits against creditor's lawyers. The threat of such liability creates an irreconcilable conflict between an attorney's personal financial interest and the ethical obligation of zealous advocacy on behalf of the creditor client: An attorney uncertain about the Act's requirements must choose between exposure to liability on one hand and resolving the legal ambiguity against a client's interest on the other. However, the court did not believe its opinion portended such grave consequences because the Act contains several provisions that expressly guard against abusive lawsuits, thereby mitigating financial risk to creditors' attorneys. The court noted that lower courts have discretion in calculating reasonable attorney's fees under the statute are authorized to award fees to the defendant if a plaintiff's suit is brought in bad faith. The court was unpersuaded by the argument that the bona fide error defense is a debt collector's sole recourse to avoid potential liability, finding that to the extent the Act imposes some constraints on a lawyer's advocacy on behalf of its client, it is hardly unique. The court said, "[A]n attorney's ethical duty to advance the interests of his client is limited by an equally solemn duty to comply with the law and standards of professional conduct." Moreover, the court noted, that a lawyer's interest in avoiding liability under the Act may not always be adverse to the client, finding that some courts have held clients vicariously liable for their lawyers' violations of the Act.

The majority opinion of the court also deemed that the dissent's suggestion that its reading would create unworkable consequences was undermined by the existence of numerous state consumer protection and debt collection statutes that contain bona fide error defenses that are either silent to or expressly exclude legal errors. The court maintained that the dissent's reading raised concerns of its own. In focusing on the facts of the case, the dissent found that the debt collector "acted reasonably at every step" and committed a "technical violation" that did not result in actual harm to the debtor. Under that approach, the court could foresee that non-lawyer debt collectors could obtain blanket immunity for mistaken interpretations of the Act simply by seeking the advice of legal counsel. Moreover, many debt collectors are compensated with a percentage of money recovered, and so would have a financial incentive to press the boundaries of the Act's prohibitions on collection techniques.

The court also noted that the dissent's reading invited litigation about a debt collector's subjective intent to violate the Act and the adequacy of procedures maintained to avoid legal error. Among other uncertainties, the dissent failed to address whether its reading would impose a heightened standard for the procedures attorney debt collectors must maintain, as compared to non-attorney debt collectors. The increased cost to prospective plaintiffs in time, fees and the uncertainty of outcome may chill private suits under the statutory right of action, which would undermine the Act's intention to encourage self-enforcement. The court noted the argument that under the dissent's reading, consumers would have little incentive to bring enforcement actions, "where the law [i]s at all unsettled, because in such circumstances a debt collector could easily claim bona fide error of law";  in the States' view, the resulting "enforcement gap" would extend to federal and state levels.

In sum, the court could not foresee that its decision would place unmanageable burdens on lawyers acting as debt collectors. To the extent that attorney debt collectors face liability for mistaken interpretations of the Act's requirements, the dissent failed to show that "the result would be so absurd as to warrant a disregard of the textual authority presented in the case."

A concurring opinion pointed out that the court's interpretation of the Act may create a dilemma for lawyers who regularly engage in debt collection, i.e., can they act in the best interests of their clients if they face personal liability when they rely on good-faith interpretations of the Act that are later rejected by a court? However, as the majority noted, the statute offers alternatives, thought not a panacea for the dilemma, in that faced with legal uncertainty, a lawyer can obtain an advisory opinion from the FTC, though the FTC might refuse to issue such an opinion.

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

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Addition to Unit Does Not Violate Condominium Statutes

Lake v. Woodcreek Homeowners Association, No. 81873-8, Wash. Supr. Ct., April 15, 2010

Architectural Control/Covenants Enforcement/State and Local Legislation/Developmental Rights: The Washington Supreme Court held that an addition to a condominium unit that included combining common area with the unit area was not barred by the Washington Horizontal Property Regimes Act.

Woodcreek Homeowners Association, located in Bellevue, Wash., is a condominium developed with several different style units, some with two stories and others with one. The developer marketed the second story as an optional bonus room, and several original purchasers paid extra to have a second story built.

Over the years, several owners applied to the association's board of directors for permission to build second-story additions to their units, and the board liberally granted permissions.

Sandra Lake and Glen Clausing own units that neighbor one another but are separated by a small greenbelt. Lake's unit was originally built with a second story. Clausing's was not. Clausing requested permission from the association to construct a second-story addition to his unit. Without putting the matter to a vote of the owners or seeking an amendment to the declaration, the association granted permission for him to go forward with his construction plans. The addition required construction of new exterior walls that were designated in the condominium declaration as common area. When the addition was completed, the size of Clausing's unit was increased by 458 square feet. The association, without changing each owner's percentage interest in the common area and expenses, increased Clausing's monthly assessment to cover the increase in maintenance costs that the association would bear.

Lake sued the association and Clausing, alleging that the association violated Washington's Horizontal Property Regimes Act ("Act") when it approved Clausing's request to build a second-story addition to his unit. She sought an order that Clausing remove his addition, that the association obtain unanimous consent of the owners for the addition, or that she receive an award of damages. Without discussing the issue, the trial court granted summary judgment to Clausing and the association and dismissed Lake's complaint. She appealed.

The appeals court reversed the decision, finding that Clausing's addition, by enveloping air space, took common area for unit area. The association argued that the declaration authorized the association to divide common area and combine it with a private unit. The appeals court disagreed, concluding that the Act only permitted combining units with units or common areas with common areas. The court further concluded that any combination of common area with a private unit necessarily changed the values for each unit set forth in the declaration. The state supreme court granted separate petitions by Clausing and the association for review.

The association contended that the declaration did not have to be amended because it had always preserved an option for owners to build a bonus room. It relied on a 1976 amendment to the declaration that enabled the third and final phase of construction, which discussed a purchaser's option to build a bonus room:

At the option of the purchaser the floor plans . . . will include an additional area to be situated directly above the car garage area which is incorporated within the basic structure of the apartment unit.  The bonus room will increase the square footage of said units by 416 square feet.

The association argued that, because the declaration was incorporated into deeds for each unit, every unit owner acquiesced to the right of each other owner to build a second-story addition. On this ground, no further consent was required to build Clausing's bonus room.

However, the question still remained whether the addition triggered the unanimous consent requirement under the Act. The developer submitted amendments to the condominium declaration in 1977, along with revisions to the survey and building plans, which gave a final accounting of the condominium space. The revised plans listed the units that had second-story additions, and Clausing's unit was not among them.

The appeals court reasoned that the association's increase in Clausing's assessments reflected a change in the percentages of undivided interests in the common areas and effectively reallocated the declaration's values and percentages. The supreme court acknowledged that, unquestionably, changing common area into unit area would change the fair market value of each owner's interest in the common area; however, the "value" as stated in the declaration would not change, and the Act does not require it to change. Neither would each owner's percentage of undivided interest change. The court explained that, "With less common area, of course, there is a smaller pie, and the pieces of pie shrink. But the number of pieces, and their size relative to one another, remains the same." It determined that there was no change in the rate by which the Act defines each owner's voting power, ownership share in the common areas, or responsibilities for common expenses. Furthermore, although the association did not have authority to increase Clausing's assessments, the proper remedy for that was to nullify the increase.

The court concluded that Clausing's construction project did not change the "percentage of undivided interest in the common areas and facilities" within the meaning of the Act. Furthermore, it determined that the Act and the declaration did not bar division of the common areas and did not require the unanimous consent of owners to combine portions of the common area with owners' units.

The court reversed and awarded attorney's fees to Clausing, as the prevailing party.

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Unincorporated Association Does Not Have Standing to Sue for Past Due Assessments

Port Village HOA, Inc. v. Summit Associates, 2010 N.Y. Slip Op 50780U

Association Operations/State and Local Legislation and Regulations: In an unpublished opinion, the Civil Court of the City of New York, Richmond County, dismissed an action to collect past due assessments because the action was brought in the name of a non-existent corporation.

Emad Basha purchased a condominium unit at 26 Port Lane in Staten Island, N.Y., managed by Port Village HOA. In August 2007, the mortgage holder foreclosed its lien on the unit. Henry Ortiz purchased the property after the foreclosure. Subsequently, Ortiz sold the property to Victoria Hickson. In February 2009, the association sued to collect unpaid common charges due and owing through Feb. 1, 2009. The notice of lien named Basha as the unit owner.

The association claimed because it was not named in the foreclosure, its rights were not extinguished by the action. It sought the entire outstanding amount due, not just the amount due since Hickson purchased the unit. The association contended that New York's Real Property Law created a lien in favor of the association that "runs with the land," making Hickson, as the present owner, liable for all open charges.

The court immediately noted that the action was commenced by Port Village HOA, even though no such legal entity existed. The association’s CC&Rs, an exhibit filed in the action, indicated that the sponsor created "Port Village Association, Inc." under the New York Not-for-Profit Corporation Law. A search of the Department of State records confirmed that name, and the association did not present any evidence that it had filed a certificate to do business under an assumed name. The court concluded that the association lacked standing to bring the action.

The association moved to amend the caption on its complaint to correct the name of the corporation, arguing that the amendment could be permitted at the court's discretion if the rights of the parties were not prejudiced. The court found, however, that correcting the caption from the name of a non-existent entity to one that actually existed was not in the nature of an amendable defect, and would substantially prejudice the defendants.

Evidence presented at trial showed that the association had operated for years under the wrong name. The court noted that the association had participated in a recurring course of conduct that included collecting monies from unit owners and other residents in the wrong entity name and depositing those monies in a bank account under the wrong entity name. In addition, by failing to do its homework, the association had deceived the court into assisting it in its endeavors by obtaining judgments and docketing them with the county clerk in the wrong entity's name. The court ruled that the defect could not be corrected and dismissed the action on the merits.

The court then addressed whether the association's rights to collect assessments were terminated by the foreclosure. The court found that the notice of pendency in the foreclosure action was filed in August 2007. The association did not demonstrate that its lien was ever filed with the county clerk, as required prior to commencement of the foreclosure action. Its financial records indicated that an initial judgment was entered against Basha, then owner, in February 2008 for the period through February 2007 in the amount of $1,430.42, as a result of an action in small claims court. There was no independent evidence that a lien was ever entered by the association against the unit any time prior to that date. A second judgment was entered against Basha in February 2009 in the amount of $2,401.80. The court found no explanation for the difference in the judgment amount and the lien amount.

The court deduced that the lien being asserted by the association was entered after the foreclosure action was commenced, so the notice of pendency recorded in the foreclosure action gave the association constructive notice of the foreclosure, binding it by all proceedings in the action.

The summons and complaint in the foreclosure proceeding named as "John Doe" as a party with the intention to designate any and all occupants of the premises being foreclosed upon and any parties having an interest in the premises. This language seemed to reflect the intent of the plaintiff to give notice to third parties such as the association.

The court found it incredible that foreclosure counsel would accept a file without having performing a title search to ascertain the existence of any liens, homeowners or condominium associations. The court also questioned who prepared the initial mortgage and loan documents, in view of the fact that the mortgage was devoid of either a condominium or planned unit development rider that would have put lenders on notice of the existence of the obligation to pay association dues and fees and the possible existence of a lien for those charges if they remained unpaid.

Additionally, the court pointed out that the terms of the foreclosure judgment issued were published in the local newspaper to alert the public of the impending foreclosure sale and the unit was identified by street address, and named Basha as the defendant. Because Basha was not paying his association dues, it should have alerted the association if they had been more diligent in reviewing foreclosure sale notices in the local newspaper.

Based on the filing of the notice of pendency and publication of the notice of sale in the newspaper, the court held that the association had constructive notice of the foreclosure and was, therefore, precluded from asserting its claim.

As to the current status of the lien filed against the unit, the court noted that the acknowledgment on the notice of lien showed only February 2009, the recording cover page was dated Feb. 9, 2009, and the preparation date was dated Feb. 12, 2009; all of which were later than the date of the closing of the sale to Ortiz.

Testimony in the case revealed that the association retained a property management company that collected assessments, paid bills and maintained litigation on behalf of a non-existent corporation. It also appeared that taxes and annual filings for the association were filed for the wrong entity. In addition, the company maintained a lock box in a Georgia bank for deposit of association members' assessments. A check of the FDIC list of failed banks disclosed there were 140 bank failures in 2009, 25 of which were in Georgia and only one of which was in New York. In 2010, 50 banks failed, seven were Georgia banks, and two were New York banks. Based on these statistics, the court observed that any benefit gained by using a Georgia bank was far outweighed by the risks for depositors; in fact, for the two previous years, Georgia had the highest number of bank failures in the country.

The court objected to the association's use of any out-of-state bank for the deposit of Port Village assessments on the basis that the funds collected were homeowners' monies, to be used to maintain the common property and for the benefit of the unit owners. The court emphasized that the association's board of directors had a fiduciary relationship with the members and the property manager, as the board's agent, was also a fiduciary. The court observed that deposits made in the Georgia banks were beyond the jurisdiction of New York's courts and regulatory authorities, and a judgment from New York courts could be ignored by the Georgia bank.

Because Summit Associates and Fidelity Title, named as defendants in the action, had no contractual relationship to the association, the court ruled that they bore no liability for the charges.

The court considered whether counsel for the association had an obligation to investigate the legal status of the association, or whether it was entitled blithely to pursue claims on behalf of any client who walked through its door. The court concluded that as an officer of the court, counsel for the association had an obligation to investigate the association's status, especially when, if successful in the litigation, the association would not only be obtaining a judgment against an individual—with all the negative connotations attached to that, such as impairment of a person's credit—but as an entity entitled to a lien against the person's property. The court observed that the association could adversely affect the title to a homeowner's property, leading to loss of the property in a foreclosure sale. The court queried whether the actions of counsel gave rise to possible claims by owners for "slander by title."

Further, because homeowners associations are formed under the Not-For-Profit Corporation Law, verifying the status of the association was readily accessible to counsel in the database maintained by the Department of State. Further, counsel could not feign ignorance of the correct name because it had submitted a copy of the declaration as an exhibit at trial, which showed the correct name of the association. Also, as part of its post-trial memorandum, the print-out from the Department of State showed the correct name of the entity.

A search of the court's records revealed 14 other actions commenced in the wrong name that resulted in liens being filed with the county clerk. The question then remained: Did counsel's actions amount to frivolous conduct?

The court articulated what it perceived to be the "common sense rule": Counsel representing a corporation has an obligation to ensure that litigation is commenced in the name of the correct entity; counsel has an obligation to check if a business is doing business under an assumed name and properly plead that information; and counsel has an obligation to check if a property has a valid certificate of occupancy and is being used in conformity with the certificate. 

The court dismissed the action on the merits, with the following directives:

1.) Summit Associates and Fidelity Title had no legal obligation to the association;

2.) The association's motion to amend the caption of its pleading was denied on the merits;

3.) The court clerk was directed to vacate any and all judgments entered in favor of Port Village Homeowners' Association, Inc., or Port Village HOA, Inc., and to simultaneously dismiss any actions currently pending before the court;

4.)The court clerk was directed to vacate any judgments or liens docketed in favor of Port Village Homeowners' Association, Inc., or Port Village HOA, Inc.; and

5.) T.W. Finnerty Property Management was directed to close any and all bank accounts maintained for the association or any other homeowners or condominium associations in a bank not located in New York State and to reopen those accounts in banks subject to New York State's jurisdiction.

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

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Stay of Board Member Recall Exceeds Court's Jurisdiction

Villa Europa Homeowners Association v. The Superior Court of San Diego County, No. D056640, Cal. App. Ct., April 22, 2010

Association Operations/State and Local Legislation and Regulations: In an unpublished opinion, a California appeals court found that the trial court exceeded its jurisdiction when it stayed the effect of a vote to recall a homeowners association's board of directors.

In 2002, Renee Sack sued Villa Europa Homeowners Association in connection with water and mold damage to her condominium unit caused by a leak in the ceiling of her master bedroom and a backup in the drain line of her kitchen sink.

In 2009, she served the association with a request for production of documents, asking that the association produce all minutes from 2003 to the present and its financial records, in addition to documents that related to her mold case. The association objected to the requests and agreed to produce all relevant, non-privileged documents, with the exception of its financial records. Sack filed a motion to compel further responses.

In October 2009, Sack went to the offices of the association's management company and requested access to the association's books and records. She was told she would have to schedule a time to return when the office manager was present. The following day, she was informed by an employee of the management company that she would have to provide a list of documents she was seeking and declare whether she was making the request as a board member or homeowner. She refused, asserting that she had an absolute right to inspect the documents as a member of the board. The association's representative then informed her that she was not entitled to review documents related to her personal dispute in the mold case or documents that impacted the rights of third parties. She was presented with a form to sign acknowledging her fiduciary duty to maintain the confidentiality of privileged information, and agreeing to maintain the confidentiality of the documents and not produce them to her counsel in the mold case, use them in her litigation, or disclose them to third parties. She refused to sign.

In November 2009, the association cautioned Sack from using her position as a director to obtain documents to assist in her personal litigation, and reminded her she had a duty to act in the association's best interest. The association agreed to make all records not pertaining to her dispute available for inspection, so long as she acknowledged her fiduciary duty not to disclose such records without approval of the association's board.

Sack filed a petition under California's Corporations Code, to obtain the same documents she sought through the discovery process in the mold case. The association agreed to allow her to inspect the association's records without formal acknowledgment of her fiduciary duty to maintain confidentiality but warned her that if she chose to use her inspection rights for personal gain, the association would consider her actions a breach of her fiduciary duty. She would not agree not to use evidence she obtained as a board member in her mold case and continued with her petition seeking access to all association documents except those governed by attorney-client privilege. The court granted her petition.

Before the court granted the petition, however, the association's board voted to remove Sack as a board member based on her failure to attend three consecutive board meetings, and she sought an ex parte restraining order to prevent the association from removing her as a board member. Her application did not seek a stay of the effect of the vote to remove her. At the hearing, the court denied her request for a temporary restraining order, but ruled that the effect of any vote removing her from the board was stayed until after the court ruled on her petition or the association produced any documents ordered by the court.

Her petition was heard on Dec. 31, 2009, and the court granted it in part, ordering the association to produce the documents except those protected by attorney-client or work product privileges. The court declined to rule on whether it was proper for her to share the documents with any other person. It also extended the stay on the effect of any vote to remove directors to the date of the recall vote scheduled for Jan. 9, 2010.

On that date, the association's membership voted to remove all the directors and elect a new board. However, because of the court's stay, the current board remained in power.

The association and its management company, the custodian of its corporate records, appealed the court's decision, arguing that the court exceeded its jurisdiction by issuing a stay of the recall vote; allowing Sack access to the association's records was an abuse of the discovery process in the mold case; and the order requiring the association to produce its records to Sack would result in a breach of her fiduciary duty to the association.

To the appeals court, it was undisputed that the entire board of directors had been recalled and could no longer remain on the board. Sack did not dispute that the recall was proper and valid.

Because of the governmental nature of homeowners associations, the appeals court applied municipal law, and concluded that the trial court acted in excess of its jurisdiction by staying the effect of the recall vote, because it attempted to enjoin a validly enacted vote. Further, the court's stay of the recall vote permitted a board that had been voted out to remain in power and prohibited the properly elected board from assuming power. The court ruled that because Sack was no longer a board member, her right to access the association's records had ceased.

The court granted the association's petition for writ of mandate and directed the trial court to set aside its previous orders.

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

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