October 2010
In This Issue:
Enforcement of Consumer Protection Laws Rests Only with the Attorney General
Restrictive Covenants, Easements May Be Enforced by Successors-in-Title
Floodlight Violates Restrictive Covenants
Owner Responsible for Late Fees, Interest on Unpaid Assessments Mailed to Wrong Address
Association Has No Liability for Damage Caused by Failure to Correct Drainage, Sinkhole Problems
Ten-Year Limitation on Developer Rights Unenforceable
Association Entitled to Recover Unpaid Assessments
Unincorporated Association Has No Standing to Sue for Past Due Assessments
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Enforcement of Consumer Protection Laws Rests Only with the Attorney General

Board of Managers of 374 Manhattan Avenue Condominium v. Harlem Infil LLC, No. 105826/08, N.Y. Supr. Ct., June 18, 2010

Developer Liability/Warranties: With the exception of a cause of action for fraudulent misrepresentation, a New York Supreme Court dismissed all claims against a condominium sponsor, his affiliates, architects and engineers, finding that the suits were precluded by the Martin Act.

The Board of Managers of 374 Manhattan Avenue Condominium ("board") commenced an action on behalf of the unit owners of the condominium building located at 316 West 116th Street, New York City, seeking to recover damages against the sponsor, Harlem Infil LLC ("sponsor"), its affiliated companies ("sponsor defendants"), as well as named architects and engineers, seeking damages for design and construction defects in the building.

The building involved the rehabilitation of two vacant buildings into a single structure. The complaint alleged that the units were priced, "to reflect their luxury status," and by selling at such prices, "Sponsor represented that the building and the [units] would be of premier caliber and would be constructed using the highest quality materials and workmanship." The board alleged that the units did not correspond to the representations made in the offering plan the sponsor filed with the office of the New York Attorney General.

The board's complaint asserted 22 causes of action, including breach of contract, unjust enrichment, negligence, fraudulent and negligent misrepresentation, fraudulent conveyance, and violation of New York Business Law Sections 349 and 350. The defendants moved to dismiss those claims that were specific to each of them. The motions were consolidated into this action for disposition.

The sponsor defendants did not seek dismissal of the breach of contract claims, but sought dismissal of the remaining causes of action on various grounds. First, they argued that the claims against them should be dismissed pursuant to Section 609(a) of the New York Limited Liability Law, which provides that:

[n]either a member of a limited liability company, a manager of a limited liability company managed by a manager or managers nor an agent of a limited liability company … is liable for any debts, obligations or liabilities of the limited liability company … solely by reason of being such member, manager or agent … in the conduct of the business of the limited liability company.

The court held that their reliance on this statute was misplaced. The court considered that the tort claims asserted against the entities were not based solely on their being a member or manager of a limited liability company. In fact, the board claimed that the entities "worked individually and in concert" to make misrepresentations in the offering plan and to promote sales of the condominium units. Thus, the statute did not bar the board's tort claims.

The board submitted evidence that, besides the inter-relatedness of the sponsor defendants, their corporate structures and various documents (such as the purchase agreement and inspection statement) reflected that the sponsor and two of the named sponsor defendants shared common office space and a common mailing address.

To prevail on their motion to dismiss based on documentary evidence, the sponsor defendants had to rely on documents that would resolve all factual issues, but the evidence submitted by the sponsor defendants was a small excerpt from the offering plan that the court considered insufficient to resolve all factual issues regarding the role, if any, that the sponsor defendants played in the development, construction and sale of the condominium units.

The sponsor defendants argued that the claims of fraudulent misrepresentation, negligent misrepresentation and violation of consumer protection laws alleged by the board should rest exclusively with the Attorney General, pursuant to the Martin Act ("Act"). In other words, they argued that the board could not maintain private causes of action under the Act.

The board relied on Kramer v. W10Z/515 Real Estate Ltd Partnership, 44 AD3d 457, (2009), for its contrary position. In Kramer, the court ruled that because the Act was enacted to protect the public from fraudulent practices, it was antithetical to construe it as having abolished the rights of purchasers to bring private actions for common-law fraud. Kramer is only the latest determination by the New York appeals courts that the Act does not preclude a private cause of action based on common-law fraud, even though the Attorney General is empowered to prosecute all civil and criminal claims, including fraud claims, under the Act.

Here, the court found that the board's complaint had all the requisite elements of a fraud claim and set forth examples of the alleged fraud. Hence, the board argued, the fraudulent misrepresentation claim was not preempted by the Act.

Although the sponsor defendants contended that a long-standing precedent provided that claims predicated on alleged material representations in a condominium offering plan are, likewise, preempted by the Martin Act, the court found their argument unpersuasive, noting that even the Attorney General had argued that it "does not have exclusive jurisdiction to prosecute Martin Act violations … ." The board's complaint alleged that fraudulent misrepresentations were made in the offering plan and/or in promoting sales of units in the condominium. The sponsor defendants did not argue that the complaint failed to adequately plead the requisite elements of a common-law fraud action, nor did they contend that the misrepresentations constituted omissions; therefore, the motion to dismiss the board's claim of fraudulent misrepresentation was denied.

The board argued that the sponsor defendants had a duty to the unit owners to use reasonable care to impart correct information to them because a special relationship existed between the sponsor defendants and the unit owners. It alleged that the sponsor defendants made negligent misrepresentations that were relied upon by unit owners in making their decisions to purchase the units.

A negligent misrepresentation claim requires proof that a defendant had a duty to impart correct information to an injured party because of the existence of a special relationship between the parties. The court found that the board failed to show any special relationship between the unit owners and the sponsor defendants, finding that liability for negligent misrepresentation is only imposed on persons who have unique expertise or who are in a special position of confidence and trust such that reliance on the negligent misrepresentation is justified. Thus, the court dismissed this cause of action.

The board alleged that the sponsor defendants engaged in deceptive consumer practices and false advertising in violation of General Business Law Secs. 349-350. Section 349 prohibits deceptive trade practices that have a broad impact on consumers at large. The board failed to allege this threshold element of the statute, and the court dismissed the cause of action.

The board's claim for fraudulent conveyance alleged that the sponsor made distributions or other property transfers that left it with liabilities that exceeded the fair market value of its assets. The sponsor defendants sought to dismiss this claim, arguing that the allegations were conclusory and unsubstantiated. While the board argued the required elements for a fraudulent conveyance claim, it did not recite facts to support the allegations. The board contended that single-purpose limited liability companies that distributed or transferred their assets to their affiliates soon after completion of a development and sale of units left the sponsor as a "hollow shell," with little or no assets when construction defects, "reared their ugly head." The court found the board's allegations, though lacking in supporting facts, permitted a reasonable inference of the alleged conduct of the real estate industry, but was insufficient to permit a reasonable inference as to the conduct of the sponsor defendants. The court, therefore, dismissed the board's claim, without prejudice to re-plead, and granted it leave to conduct discovery prior to any re-pleading.

The board's breach of contract and unjust enrichment claims were asserted solely against the sponsor; therefore, the sponsor defendants did not seek dismissal of those claims based on the sponsor's alleged breach of the terms of the offering plan. Additionally, the court noted that it is a well-established fact that a valid written contract governing a subject generally precludes seeking quasi-contractual remedies (such as a claim for unjust enrichment) based on the same subject matter. However, the court found it to be undisputed that the offering plan was a contract that governed the parties in the case. The board's claim against the sponsor defendants for unjust enrichment was essentially based on the same factual allegations as the breach of contract claim, namely, the condition of the condominium building. Hence, the court dismissed the unjust enrichment claim.

The board asserted seven claims against the architect defendants: negligence, fraudulent misrepresentation, negligent misrepresentation, breach of contract as a third-party beneficiary, unjust enrichment, professional malpractice, and violation of General Business Law Secs. 349-350.

As an initial matter, the architect defendants argued that David Hirsch could not be held personally liable because he, as president of Urban Architectural Initiatives, RA, P.C., executed the architectural agreement with the sponsor in connection with the design and construction of the building pursuant to the doctrine of respondeat superior. Under the doctrine, an employer is vicariously liable for the tortious acts of its employees that are committed within the scope of employment. The doctrine, however, does not shield employees from personal liability for their own tortious acts. In a ruling by the New York Court of Appeals, the court found that a corporate officer who participates in the commission of a tort may be held individually liable, regardless of whether the officer acted on behalf of the corporation in the course of official duties and regardless of whether the corporate veil was pierced. The board alleged that the architect defendants, including Hirsch, individually, committed the tortious acts. The argument that Hirsch could not be held individually liable was insufficient to conclusively support a summary dismissal of all the tort claims asserted against him, where he was not only a principal in the architect defendants, but also played a role as one of the sponsor defendants.

The board alleged, without substantiation, that the unit owners were intended beneficiaries of the contract between the sponsor and the architect defendants, and as a result of breach of the contract, the unit owners were injured. However, the case law relied upon by the board was recalled and vacated on appeal. In the case, the supreme court dismissed the claims because the certifications in the offering plan were made pursuant to the Attorney General's implementing regulations under the Martin Act and, as such, could not be the basis of a private cause of action.

Here, the court ruled that the unit owners were not in contractual privity with the architect defendants. The agreement itself stated that, "[n]othing in this agreement shall create a contractual relationship with or cause of action in favor of a third party against either the owner or the architect." 

The board also argued that the certifications made by the architect defendants in the offering plan were false, and the architect defendants had knowledge of this based on their inspections of the building. The board argued that the unit owners reasonably relied on the misrepresentations in the certifications to their detriment. The architect defendants sought to dismiss the claim on the premise that the power to raise the claim was exclusively within the jurisdiction of the Attorney General pursuant to the Act. The court observed that a common-law fraud claim was still actionable notwithstanding the Act, and was not foreclosed. However, the fraud claim was based primarily on the architect defendants' report and certification contained in the offering plan, and had to be filed pursuant to the regulations. The court dismissed the claim for fraudulent misrepresentation, finding that, unlike the sponsor who was the selling agent, the architect defendants were not involved in the sale, and were unlikely to have orally represented the building's conditions to buyers. The court dismissed the remaining claim against the architect defendants, finding that they were within the exclusive purview of the Attorney General under the Act.

Elliott Hardie is a licensed engineer who was retained by the sponsor to review the report prepared by the architect defendants. He visually inspected portions of the renovated building and reviewed the building's plans and specifications before issuing his certification. The board asserted seven claims against Hardie, including violation of the General Business Law Secs. 349-350, negligence, third-party breach of contract, unjust enrichment, malpractice, fraudulent misrepresentation and negligent misrepresentation. Hardie moved to dismiss the claims. The board's claims and the court's findings were the same as pertained to the architect defendants, and the court granted the motion to dismiss. In Hardie's answer to the complaint, he also moved to dismiss the cross claims of Vertex, the general contractor retained by the sponsor to rehabilitate the buildings. Vertex asserted two cross claims (contribution and indemnification) against Hardie. Hardie argued that the cross claims were barred by the Act, but the court found his argument unpersuasive and rejected his attempt to stretch the scope of the Act.

Vertex's indemnification cross claim was based on common law, rather than contractual indemnification. The court observed that it is well-settled that the predicate of common-law indemnity is the vicarious liability without actual fault on the part of the proposed indemnitee, so it follows that a party who actually participates to some degree in the wrongdoing cannot receive the benefit of the doctrine. Although Vertex may have been only vicariously liable for the acts of other defendants, it could not be vicariously liable for Hardie's acts because the court dismissed the board's claims against him. Accordingly, the court dismissed both of Vertex's cross-claims.

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

Restrictive Covenants, Easements May Be Enforced by Successors-in-Title

Fallis v. River Mountain Ranch Property Owners Association, Inc., No. 04-09-00256-CV, Tex. App. Ct., July 7, 2010
Covenants Enforcement/Developmental Rights: A Texas appeals court ruled that a homeowner, who acquired his property subsequent to the time violations of restrictive covenants were alleged to have occurred, could enforce the covenants, because he was a successor-in-interest and the covenants ran with the land.

Properties of Southwest, Inc., developed River Mountain Ranch subdivision in Kendall County, Texas and filed the declaration, which prevents any structure from being built on "any five acre or larger tract nearer than 25 feet to the side property line or no nearer than 100 feet to any public road or no nearer than 50 feet to the rear property line." River Mountain Ranch Property Owners Association is responsible for enforcing the declaration.

In 1998, the developer granted a mailbox easement and a water well easement to the association. The association installed mailboxes and a structure over the mailboxes on the mailbox easement.

In 2004, Fallis bought a lot in the subdivision. Three years later, he informed the association that the mailbox structure violated the declaration and the mailbox easement, and demanded that the association remove the structure. The association refused to comply with the demand and sued Fallis, seeking a declaratory judgment and attorney's fees. Fallis filed a response and counterclaim, alleging multiple claims against the association. Both parties sought declaratory relief on the issue of whether the mailbox easement allowed the association to build and maintain the structure over the mailboxes.

Fallis asserted two additional claims: (1) a claim seeking a declaration that the water well easement did not allow the association to remove and use water from the well, which was located on his property; and (2) a claim seeking a declaration that the mailbox structure violated the restrictive covenants. He also requested an injunction ordering the association to remove the mailbox structure and prohibiting the association from interfering with the use and ownership of the well and underground water. Fallis also asserted claims for breach of contract, trespass, and breach of fiduciary duty, contending that the association had breached the declaration and the mailbox easement by installing the structure over the mailboxes. Both parties moved for summary judgment.

The association argued that Fallis lacked standing to bring a suit and his claims were barred by statutes of limitation. The association also moved to sever any of Fallis' remaining issues if its motion for summary judgment was granted.

The trial court denied Fallis' motion for summary judgment, granted the association's motion for summary judgment with regard to the water well easement, and granted the association's motion to sever, finding that all Fallis' claims were resolved on their merits by the summary judgment order. Fallis appealed.

In the appeal, Fallis noted that the association's motion only challenged the claims for breach of contract or tort. In arguing that the claims were barred by limitations, the association's challenge did not address Fallis' declaratory relief claims or his request for an injunction. The association's subsequent motion addressed only the claim for declaratory relief regarding the water well easement.

The court held it was axiomatic that judgment could not be granted on a claim not addressed in the proceeding; but also noted that although granting more relief than a movant is entitled to makes an order reversible, it does not affect the court's jurisdiction to consider the order on appeal.

The court considered all those matters properly raised and reversed those portions of the trial court's judgment that disposed of claims that were not addressed. Because the court failed to address Fallis' declaratory relief claims regarding the mailbox easement and the restrictive covenants or the request for an injunction, it concluded that the trial court's order was overly broad and reversed it as to those claims.

The appeals court is generally not permitted to consider denials of motions for summary judgment where the parties do not file competing motions. Because the association's motion did not address Fallis' mailbox easement claim, the court was unable to consider the merits of that claim.

Fallis sought a declaration that the water well easement conveyed the association only the right to use the existing water line connected to the well, and not the water from the well. The appeals court reviewed the easement pursuant to rules of basic contract construction. The easement conveyed a "perpetual, non-exclusive easement and right-of-way for the purpose of operating, maintaining, constructing, repairing, removing, and reconstructing an existing water line … ," to the association, along with "the right of ingress, egress and regress in, upon, along, over and through said easement for the purposes of providing water from an existing well located upon Lot 29 and for the benefit of a sign easement situated and located upon Lot 30." Although Fallis maintained that the water well easement did not authorize the association to use water from the well, the court held that the easement expressly granted the association that right. Reading it as a whole, the court determined that the purpose of the water well easement was to provide water from the well to the waterfall, pond and sprinkler system located on the sign easement. Accordingly, the court concluded that the association had the right to use both the water from the well and the existing water line for purposes of transporting water to and from the sign easement, and the trial court did not err in granting the association's motion for summary judgment on this claim.

Fallis argued that the association failed to establish his lack of standing or a limitations bar with respect to each of his claims. The association contended that Fallis' claims were brought more than four years after the mailbox structure was erected, and, as a result, were barred by a four-year statute of limitations on actions to enforce the declaration.

Actions for trespass in real property claims are governed by a two-year statute of limitations, the accrual of which depends on whether the trespass is temporary or permanent. Although a trespass action may not be barred by limitations if it is an ongoing tort, the court determined, in this case, that the association's trespass was permanent and subject to the two-year limitation. A four-year statute of limitations controls actions for breach of fiduciary duty and fraud. Similarly, a four-year statute of limitations governs actions for breach of contract.

Fallis argued that his claims were timely filed pursuant to the Texas Civil Practice and Remedies Code ("code"), which provides that if a counterclaim arises out of the same transaction or occurrence that is the basis of an action, a party may file the counterclaim even though it would be barred by limitations as a separate action on the date the party's answer is required. The counterclaim must be filed no later than 30 days after the date the party's answer is required.

The court acknowledged that the claims were timely filed. The association's motion for declaratory judgment focused on the mailbox easement. Each claim of Fallis' counterclaim was based on that request for declaratory relief. The facts underlying both parties' actions were closely related. The appeals court concluded that Fallis' claims arose out of the same transaction as the association's claim for declaratory relief. Therefore, given the exception to the limitations bar contained in the code, the association failed to prove that Fallis' claims were barred.

Without standing, a court lacks subject matter jurisdiction to hear a case. Unless standing is conferred by statute, whether a party has standing to assert a claim depends on the facts pleaded. The association contested Fallis' standing to assert his claims, based on the principle that a subsequent purchaser cannot recover for an injury committed before he purchased property absent an express provision. The association established that the mailbox structure was constructed in 1998, and Fallis did not purchase his lot until 2004. It argued that because the structure existed before Fallis bought the property, he could not recover for an injury occurring before he owned the property, even if the injury arose from a breach of restrictive covenants, unauthorized use of an easement, trespass, breach of fiduciary duty, or fraud. However, with respect to the breach of covenants and unauthorized use of an easement claims, the appeals court found that the association's reliance on this principle was misplaced.

The court held that restrictive covenants restrict permissible uses of the property in a subdivision and run with the land. Because the property was conveyed as a fee simple estate, the requirement of privity was satisfied. A restrictive covenant runs with the land and may be enforced by a successor-in-interest. Like a restrictive covenant, the mailbox easement creates a covenant that runs with the land, and, therefore, may also be enforced by a successor-in-interest. Because Fallis was successor-in-interest to the original grantor, the developer, and the restrictive covenants and mailbox easement created covenants that run with the land, Fallis had standing to enforce the declaration and the mailbox easement.

The court held that the association failed to establish its affirmative defense of limitations with respect to each of Fallis' claims. The court further held that the association failed to establish its affirmative defense of lack of standing. Therefore, it found that the trial court erred in granting the association's motion for partial summary judgment.

However, with respect to Fallis' claim of trespass, the court held that the association established his lack of standing to assert the claim; therefore, the trial court did not err in granting the association's motion for summary judgment as to the trespass claim.

Fallis' final argument on appeal was that the court erred in granting the association's motion to sever, which, in effect, severed Fallis' claims from the association's claim for declaratory relief. Fallis argued that the claims should not have been severed because they were compulsory counterclaims and the facts necessary to prove them were interwoven with the facts necessary to prove the association's claim for declaratory relief.

The court agreed that the claims were compulsory counterclaims and could not be severed from the association's request for declaratory relief. Accordingly, it found that the trial court abused its discretion in severing the claims.

Because the trial court's order was overly broad, the appeals court reversed the portion that granted the association's motion for partial summary judgment with respect to Fallis' claims for declaratory relief regarding the restrictive covenants and the mailbox easement as well as the request for injunction. Those claims were remanded for further proceedings consistent with the court's opinion. The court affirmed the order granting summary judgment to the association as to the water well easement.

With regard to Fallis' non-declaratory relief claims, the court reversed that portion of the order granting partial summary judgment to the association with respect to Fallis' claims for breach of restrictive covenants, breach of unauthorized use of easement, breach of fiduciary duty, and fraud; however, affirmed that portion of the order with regard to the trespass claim. Lastly, the court reversed the trial court's order severing Fallis' claims from the association's original claim for declaratory relief.

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

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Floodlight Violates Restrictive Covenants

Hawk's Landing Homeowners Association, Inc. v. Williams, No. 2009AP701, Wisc. App. Ct., June 24, 2010

Architectural Control/Covenants Enforcement: In an unpublished opinion, a Wisconsin appeals court ruled that a floodlight mounted on a 17-foot pole to illuminate a backyard sports court violated the architectural restrictions contained in the subdivision's declaration of covenants.

Hawk's Landing Golf Club is located in Dane County, Wisc. The lots in the subdivision are subject to CC&Rs that established Hawk's Landing Homeowners Association, which is made up of every subdivision lot owner, and an architectural control committee that is made up of three persons elected by a majority of the association members. The architectural control committee is charged with reviewing all building and landscaping plans and specifications.

In 2006, Kathleen Cox and Kimberly Whalen bought a lot in Hawk's Landing and, prior to constructing a house on their lot, they submitted a landscaping plan to the architectural control committee for approval. The plan included a 30-by-60 foot backyard sports court, illuminated by a floodlight. They indicated the light would consist of a 16-inch square box with a 400-watt lamp, mounted on a 17.5-foot pole. The committee approved the plans except for the proposed floodlight, and the homeowners proceeded with construction of the sports court without the light.

In 2007, Cox and Whalen installed a three-light fixture, mounted on top of a freestanding 17-foot pole in the same location as the light shown on the original landscaping plan. The association demanded that they immediately stop using the light and have the light and pole removed. When the homeowners refused, the association sued, seeking an injunction preventing them from using the light, and an order requiring that the light be removed. The association moved for summary judgment, and the homeowners moved for partial summary judgment on the grounds that the architectural control committee was not authorized by the declaration to disapprove the light, and even if the committee were authorized under the declaration, the light had been approved by default because the committee did not follow required procedure and its decision was untimely. The court granted summary judgment in the association's favor on the homeowners' two defenses, finding that the committee had the authority to disapprove the light and, based on undisputed facts, there was no default approval of the light proposed in the homeowner's original landscaping plan. The court, however, concluded there were material factual disputes about whether the committee acted reasonably in denying approval of the 2007 light after it had already been installed. The court considered evidence submitted by Cox and Whalen showing that their light did not significantly impact their neighbors, and other lights as tall and obtrusive as theirs had been approved by the architectural control committee. The court denied the association's motion for summary judgment and held a trial on the reasonableness issue.

Before trial, the association filed a motion in limine, asking that Cox and Whalen be precluded from introducing evidence on either the reasonableness or timeliness of the committee's 2006 decision. The court granted the motion in part, because it concluded that because the light installed in 2007 was not the same light as the one proposed in 2006, any procedural deficiencies, and resulting approval by default in 2006, was irrelevant to denial of approval of the light that was actually installed in 2007. The court decided, however, that evidence on the reasonableness of the 2006 denial might be relevant to the reasonableness of the 2007 denial, so it declined to grant that part of the motion. After the trial, the court ruled in favor of the association, and Cox and Whalen appealed.

Cox and Whalen contended that the declaration did not authorize the committee to regulate their floodlight. They contended that the trial court erroneously exercised its discretion in partially granting the association's motion in limine. They contested the trial court's factual findings and the award of attorney's fees to the association.

The appeals court agreed with the trial court's conclusion that the declaration required approval by the committee of the homeowners' light.  It noted that the declaration provides that "no building or other improvement shall be erected, placed or altered on any lot until its construction plans and specifications shall have been approved in writing by the … committee." The court concluded that the light on the pole was part of the improvement that was the sports court. The homeowners argued that the light could not be subject to approval because the criteria for approval were not applicable to the light. The court disagreed, finding that a floodlight on a pole over a sports court could be judged as to "quality of workmanship and materials" and "harmony of exterior design," those criteria set forth in the declaration. The court found that the general purpose statement of the declaration gave further definition to the applicable criteria for approval; specifically, the purposes of "preserve[ing] and maintain[ing] harmonious improvements and use of material and color schemes … in evaluating improvements and alterations." The court did not agree with Cox and Whalen that the absence of an express reference to lights in the declaration meant that it did not regulate them.

In addressing the homeowners' assertion that the trial court employed an incorrect legal standard in granting the association's motion in limine, the appeals court observed that the trial court had acknowledged that the facts in their defenses were undisputed; however, the undisputed facts did not establish either defense as a matter of law. The court did not deny summary judgment on the defenses, but, in effect, awarded summary judgment on the defenses to the association. The court denied summary judgment on the association's claim because there were factual disputes on the propriety of the committee's disapproval of the light that was actually installed.

Because Cox and Whalen did not provide authority or a developed argument that took into account their own motion for partial summary judgment, the appeals court was not persuaded that the trial court was required to allow them to present additional evidence on their defenses at trial. Nonetheless, it noted that the trial court did give them the opportunity to identify specific additional evidence that showed that the light proposed in 2006 and the light installed in 2007 were the same. Instead of producing this evidence, Cox and Whalen argued that it did not matter which light they had described. Finding that the trial court was attempting to get Cox and Whalen to focus on a point that the court found critical to its analysis, and, instead, the homeowners' response was an explanation of their disagreement with that analysis, the appeals court found that it was reasonable for the trial court to conclude they had not presented evidence that the light they proposed to install in 2006 was the same as the one that they installed in 2007. Therefore, the appeals court concluded that the trial court did not apply an incorrect legal standard or erroneously exercise its discretion in deciding to grant in part the motion in limine.

After evidence at trial showed that Cox and Whalen had not sought the committee's approval of the 2007 light prior to its installation, the trial court could have decided against them on this ground alone. However, to avoid the risk of a second lawsuit, the court proceeded to decide whether a hypothetical denial of approval by the committee would have been consistent with the declaration. The court determined that it was. The appeals court's review of the trial court's findings of fact indicated that the court considered both the reasonableness standard and the requirement that the committee's actions were not arbitrary or discriminatory. The appeals court saw nothing that precluded the trial court from applying a requirement of reasonableness in addition to applying the criteria in the declaration when it concluded that the light was not harmonious with the rest of the subdivision.

The homeowners challenged the trial court's findings that the lights installed over the backboards of basketball hoops in the neighborhood did not impact the neighborhood in the same way as did their light, and that an important feature of the harmony the committee tried to maintain was the "open sky" aspect of the subdivision. The appeals court, however, rejected their arguments, finding that their light illuminated a larger area and was more intrusive than those installed over backboards. Further, the court drew a reasonable inference from the layout, natural features and topography of the subdivision that an important characteristic of the subdivision was an "open sky."

The trial court had credited the testimony of the committee members who testified that the location and design of the light was not in harmony with this important characteristic. The appeals court concluded that this was the appropriate role of the trial court sitting as fact-finder:  to weigh the evidence, to decide which reasonable inferences to draw from the evidence, and to assess the credibility of the witnesses.

The declaration provides that any lot owner can bring an action to enforce the declaration, and "the prevailing party shall be awarded reasonable attorney's fees and costs." Cox and Whalen argued that Richard Williams, who was president of the association and a named plaintiff in the lawsuit, was not entitled to attorney's fees because he joined in the lawsuit because the association could not recover legal fees, but as an individual, he could. They asserted that Wisconsin contract law requires that contracts that provide for attorney's fees must do so unambiguously. In other words, for Williams to recover, the declaration must expressly state that a lot owner may recover attorney's fees even though the association is also bringing the action.

The appeals court concluded the declaration's language was not ambiguous and plainly provided for attorney's fees to be paid to Williams, regardless of whether the association was also a party.

The homeowners asked that the appeals court use its discretionary power to reverse the trial court's order and remand the case for a new trial on the ground that the controversy had not been fully tried, but the appeals court declined and affirmed the trial court's judgment and order.

In a dissenting opinion, a judge complained that the ruling set a precedent that would bestow unlimited power on the three-member architectural committee to control the structures for a community of at least 234 families, an ending that did not comport with Wisconsin's long held views about the value and free, unrestricted use of private property. The judge said he foresees that prospective purchasers of a home or lot in the subdivision would have no way of knowing whether they would be victims of discrimination in the committee's purported exercise of discretion.

Although the judge agreed with the majority that the light pole and light are an improvement, he interpreted the declaration to only review and approval of plans and specifications for buildings, and he asserted that light fixtures were not included in the declaration as structures that must be submitted to the committee. He concluded that while a light pole is an improvement, a restrictive covenant must at least give a warning of the improvements sought to be restricted to avoid being ambiguous. Merely writing that an architectural control committee can prohibit any improvement it wants is not enough. He would reverse the trial court's judgment and order and remand with instructions to dismiss the association's complaint.

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

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Owner Responsible for Late Fees, Interest on Unpaid Assessments Mailed to Wrong Address

Hazelwood Association, Inc. v. Helfrich, No. 09 CA 0119, Ohio App. Ct., June 16, 2010

Assessments/Covenants Enforcement: An Ohio appeals court affirmed a trial court's finding that an owner was liable for late fees and interest on unpaid assessments, even though the invoices were incorrectly mailed to the vacant property address.

Hazelwood Association is located in Licking County, Ohio. Deed restrictions that encumber all lots in the subdivision provide for annual assessments of $175 to be paid to the association. The restrictions further provide that delinquent homeowners are responsible for collection costs and reasonable attorney's fees.

In January 2007, James Helfrich bought a lot in Hazelwood. He was aware of the deed restrictions when he purchased the lot. Helfrich does not reside on the property, but uses it as investment property. In April 2007, the association invoiced Helfrich $175 for annual association dues. The invoice was mailed to the property address. At the time, the property was vacant. The property manager used regular mail to send the invoice, and it was not returned as undeliverable or vacant.

The invoice remained unpaid for a period of more than 30 days after it was issued. In June 2007, the association sent a second invoice to Helfrich at the subdivision property address. The June invoice included a notice that Helfrich was charged a late fee and interest because of non-payment of the annual assessment. The invoice was not returned by the postal service as undeliverable or vacant.

When Helfrich received the June invoice, he called the association to ask that the late fee and interest be waived because the invoices were not sent to his personal address. He sent a check to the association in the amount of $163.97 with a notation on the check that read "1312 Harold Stewart Dues paid in full 2007," and a letter stating he had spoken with a representative of the property manager, Lisa Spires, who confirmed that invoices for the annual dues were sent to the property address instead of the billing address on record. He also explained that he had prorated the amount of the fees to reflect that he owned the property for only 342 days. The association cashed the check.

Subsequently, the association issued a revised invoice to Helfrich in the amount of $38.95, indicating that, "as Lisa told you," the charges were his responsibility and would remain on his account until paid. Helfrich wrote back disputing that he had spoken with Lisa Spires about the additional charges to his account.

In February 2008, the association invoiced Helfrich for the 2008 annual assessment. The invoice included $175 for the 2008 assessment and the unpaid prior balance with accruing interest, for a total of $216.97. The invoice was sent to his personal mailing address, and Helfrich sent the association a check for $175 and noted on the check, "Paid in full 1312 Harold Stewart."

The association refused to accept Helfrich's check and returned it to him with a note stating that it would not be accepted as payment in full of his account. In November 2008, the association filed a small claims action for $278.28 for the unpaid assessments and demanded $500 in attorney's fees and court costs. The magistrate ruled in the association's favor and awarded $778.38, plus interest at the statutory rate. Helfrich filed a request for findings of fact and conclusions of law, and the magistrate again ruled in the association's favor. Helfrich then filed an objection to the magistrate's decision on a form provided by the magistrate's court. He attached an affidavit as required on the face of the form, but the trial court overruled his objection because he failed to attach a copy of the transcript of the magistrate's hearing. The trial court also denied his request for a new hearing.

Helfrich then filed a motion to set aside the judgment entry, arguing that the form provided by Licking County's Small Claims Division for objecting to a magistrate's decision specifically stated that he could attach a transcript and/or an affidavit. The trial court granted his motion and gave him seven days to provide a transcript at his own cost.

Helfrich provided the transcript to the trial court in September 2009, and the court issued a judgment entry adopting the magistrate's decision. Helfrich appealed.

In his appeal, Helfrich argued that the trial court erred when it failed to consider accord and satisfaction as an affirmative defense to the debt. The court explained that a defendant must show presence of an offer and acceptance (accord) and that the accord must be carried out. Additionally, two other conditions that must be present for a valid accord and satisfaction: a good-faith dispute of the debt and reasonable notice to the creditor that the check is intended as full satisfaction of the debt. While the court found there was a good faith dispute of the debt, the trial record indicated that Helfrich failed to establish accord and satisfaction. The record contained a note written by Lisa Spires documenting her conversation with Helfrich and stating that she had explained to him that he was responsible for the full amount of the dues and late fees. Her note further stated that she had told him it was customary for her office to send annual assessment invoices to the property addresses unless told otherwise. In her note, she wrote that Helfrich had said he had not known how to contact the property manager with his mailing address and that he had said he would "only pay what he thought he owed," (2007 dues less 23 days for January, and no late fees). Helfrich tried to enter tape recordings he made of his conversation with Spires to support his argument that an oral agreement was reached and there was accord and satisfaction; however, the association objected to the tape, and the magistrate sustained the objection. Helfrich failed to proffer the recording into record for appeal, but testified to his recollection of the conversations he had with Spire.

While the appeals court found that the tape recording could have gone to the matter of whether there was an agreement between the association and Helfrich to accept less than full payment for the June 2007 invoice, the evidence was not part of the record, so the court could not reach any conclusion.

Based on Helfrich's notation on his June 2007 check, the magistrate determined that the check constituted an accord and satisfaction of the dues he owed. However, he did not reference the late fee and interest charges that were also included in the invoice. Although the court found there was a good faith dispute about the debt Helfrich owed, the notation on his June 2007 check did not give the association reasonable notice that the check was intended to be full satisfaction of the debt that included the dues, late fees and interest.

Evidence was presented to the appeals court by both parties as to their understanding of the disputed debt and whether there was an oral agreement to remove the late charges and interest. However, the appeals court, as a reviewing court, found that its role was to determine whether there was relevant, competent and credible evidence upon which the trial court based its judgment.

The court concluded that there was credible evidence to support the trial court's determination that Helfrich failed to establish accord and satisfaction as to the late fees and interest due. Thus it overruled Helfrich's first and second assignments of error.

Helfrich argued that the magistrate failed to consider all the evidence in the trial record. His arguments hinged on the mailing address where the invoices were sent. He stated that the association should have used his personal mailing address rather than the property address, which was vacant. He further argued that he should not have been charged late fees or interest because the association had mailed the invoices to the incorrect address.

Evidence at trial established that it was customary for the association's property manager to mail the invoices for annual assessments to the property addresses. The invoices were not returned to the association as undeliverable or vacant. Although Helfrich had given the property manager his mailing address before he bought the property when he requested information, there was no evidence that he contacted either the association or its property manager after he purchased the property to give them his correct mailing address. He received the 2007 invoice, but was not able to tell the court how he received it. Therefore, the court affirmed the trial court's finding that Helfrich was liable for the late fees and interest.

Helfrich argued that the trial court ignored its own rules of procedure when it overruled his objections and admonished him for not filing a transcript of the magistrate's proceedings. Because the trial court vacated its judgment and permitted Helfrich to file a transcript of the hearing, the appeals court held that any prejudice Helfrich may have suffered was harmless and remedied by the trial court.

Helfrich appealed the award of attorney's fees to the association. The deed restrictions provide each lot owner is personally liable for collection costs of unpaid assessments. The association presented evidence establishing that the amount of $500 was accurate and reasonable. In any event, upon review of Helfrich's objections to the magistrate's decision, the appeals court observed that Helfrich failed to object to the magistrate's determination of attorney's fees, thus forfeiting his right to assign error on appeal.

The trial court's judgment was affirmed.

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Association Has No Liability for Damage Caused by Failure to Correct Drainage, Sinkhole Problems

Lore v. Suwanee Creek Homeowners Association, Inc., No. A10A0012, A10A0013, Ga. App. Ct., June 24, 2010

Risks and Liabilities: A Georgia appeals court reversed the trial court's determinations in a suit filed by residents of a subdivision against their homeowners association for trespass, nuisance and negligence, and a separate personal injury claim that arose from the association's alleged negligence.

Rebecca and David Lore own property in Suwanee Creek Homeowners Association in Fulton County, Ga. The Lores sued the association, alleging claims for nuisance, trespass and negligence, based on water runoff from a common recreation area that abutted the rear of their property. They also asserted a personal injury claim based on injuries Rebecca Lore sustained when the ground on which she was standing collapsed, attributing the collapse to the repeated flooding and storm water runoff from the recreation area owned by the association.

The association filed a motion for summary judgment. After oral argument, the trial court granted summary judgment in favor of the association on Lore's personal injury claim and denied the association's motion for summary judgment on the claims for trespass, nuisance and negligence. The Lores appealed the ruling on their personal injury claim, and the association appealed the denial of their motion for summary judgment on the trespass, nuisance and negligence claims. The appeals court combined the cases.

The Lore's property is downhill from the recreation area. The plat for the development shows a 20-foot ditch to direct water runoff through pipes into a pond and a creek within the recreation area. The ditch was designed to ensure that water did not run off onto lots in the subdivision; however, the ditch was never constructed.

The subdivision declaration provides that the association "shall maintain and keep in good repair … all storm water, storm water management and detention facilities serving the development."  Rebecca Lore complained to the association about the water runoff, but the association failed to respond. The developer offered to construct the ditch in exchange for a "hold harmless" agreement from the association, but the association refused.

In October 2006, Lore walked onto the recreation area to pick up some trash and fell at the top of an embankment where a sink hole had formed due to the water runoff, injuring her arm. Prior to her accident, she had notified approximately 28 people, including association board members and county officials about the hole. She took multiple pictures of the hole and placed orange cones around it, fearing that someone could fall into the hole and injure themselves.

To survive a motion for summary judgment, the plaintiff must show that the defendant had constructive knowledge of the hazard; if that showing is made, the burden then shifts to the defendant to show that the plaintiff's injury was caused by his or her own negligence, and if the defendant is successful, the burden then shifts back to the plaintiff to show a genuine dispute of fact exists as to the parties' negligence.

Although it was undisputed that the association was aware of the sinkhole in the recreation area, there was no evidence that the association had actual knowledge that the ground around the sinkhole was unstable. The fact that Lore had repeatedly notified the association of the sinkhole raised the issue that the association failed to conduct a reasonable inspection of the area to determine whether it posed a danger, which inspection would have provided constructive notice to the association of the dangerous condition. Lore argued that, through her complaints, the association had constructive knowledge of the hazard of the sinkhole, but it consistently turned a blind eye to the problem. The association had previously agreed to fill in the hole, but ultimately failed to do so.

The association's argument focused on Lore's knowledge of the danger posed by the sinkhole (arguably, conceding that it had constructive knowledge of the hazard). Both Lore and the association recited the rule that a plaintiff must prove that a defendant has constructive knowledge of a hazard to recover for injuries sustained in a slip and fall. The association asserted that Lore had knowledge of the sinkhole that was equal to or greater than the association's. The appeals court observed that although Lore was aware of the danger posed by the sinkhole, she did not fall into the sinkhole, but slipped when the ground nearly 4 feet away from the sinkhole collapsed. There was no evidence that she had knowledge of the instability of the surrounding area or that the danger associated with the ground's erosion and collapse were not within the realm of an ordinary person's knowledge.

In analyzing the issue, the court noted that issues of premises liability are generally not subjects susceptible to summary judgment, and summary judgment should only be granted when the evidence is undisputed. The court held that the issue of whether Lore exercised ordinary care for her own personal safety was a jury question, and found that the trial court erred in granting summary judgment to the association.

In its appeal, the association contended that the trial court erred in denying its motion for summary judgment on the Lores' claim for trespass, nuisance and negligence based on the water runoff. The court noted that causation is the essential element of nuisance, trespass and negligence claims. To establish proximate cause, Lore had to show a causal connection between the association's conduct and Lore's injury. The appeals court concluded that the Lores failed to demonstrate that any action or inaction on the association's part artificially increased the water runoff from the recreation area to the Lores' property, or caused the water to collect on their property in a harmful way, different than it would if it had simply run downhill by the laws of gravity. The Lores relied on the fact that the drainage ditch was never installed, but they failed to show how that caused the soil to wash away. Because they failed to present evidence of proximate cause, the court held that the trial court erred when it denied the association's motion for summary judgment on those claims.

The presiding judge concurred with the majority's finding that the association was entitled to summary judgment on the Lores' claims for trespass, nuisance and negligence. However, he dissented from the majority's decision in the personal injury case, holding that the association was entitled to summary judgment because Lore was equally aware of the possibility that the ground around the sinkhole could collapse, and because no argument was made that the association had a duty to inspect the sinkhole, as inferred by the majority.

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Ten-Year Limitation on Developer Rights Unenforceable

Madowitz v. The Woods at Killington Owners' Association, No. 08-502, Vt. Supr. Ct., July 2, 2010

Developer Rights: A Vermont court rejected an association's argument that conflicting language contained in property deeds and a condominium declaration could be read harmoniously. The unambiguous language of the declaration explicitly gave developers the right to continue with their phased development plans, even though the deeds provided that there was a 10-year limitation on future development.

The Woods at Killington Owners' Association is located in Rutland County, Vt. The condominium was created by a declaration filed in July 1985. Under the declaration, the developer is entitled to add more units than the number that existed when the declaration was recorded. The additional units were to be filed in phases.

The condominium statute in effect at the time provided that each unit owner be conveyed an undivided interest in the common areas and amenities, which percentages were set forth in the declaration. The original statute provided that once the percentages of undivided interest were declared in the declaration of condominium, they had a permanent character and could not be altered without the consent of all the unit owners expressed in an amendment to the declaration. To meet requirements of the condominium ownership statute, the 1985 declaration included a limited power of attorney provision to provide a way for unit owners to give prior consent for the developer to amend the declaration to change the owners' percentages of undivided interests by adding additional units. The same provision for limited power of attorney was included in a 1988 amendment to the declaration.

The developer began to convey units to individual owners in 1985. Starting in 1986, the deeds to each unit included language expressly limiting the extent of the power of attorney given from grantees to grantor, stating that such power would expire in 10 years. A total of 107 units were conveyed by the original developer, of which 105 contained the 10-year limitation on consent to future development. Thus, a pronounced conflict arose between the original declaration, which granted the developer the owners' consent to future development that would alter their undivided interests in the common areas, and the powers of attorney and deeds that provided the consent was limited to a period of 10 years.

When the original developer went into bankruptcy, Probos, Ltd., acquired development rights to the property. In 1994, Probos conveyed the development rights to Richard Madowitz and Douglas Kohl ("developers"). Shortly thereafter, the developers filed for an amendment to an existing permit to extend the construction completion date to Jan. 1, 2000. The amendment, which concerned only the completion date, was granted in 1995.

Prior to the Jan. 1, 2000, deadline, the developers applied for another amendment to the permit, seeking to extend the completion date another five years. During the proceeding, the association argued that the developers did not have rights to develop the condominium because the 10-year limitation period had expired. The commission denied the developers' amendment application, finding that they failed to show that they had adequate rights to develop the property and they had not overcome the requirement that they show good cause to waive co-applicancy of the association. The developers sued the association, and the association filed a motion for summary judgment arguing that the developers' rights had expired because of the 10-year limitation. The developers filed a cross-motion.

The court ruled that the consent provisions in the original and amended declarations and power of attorney did not require the specific written consent of unit owners. It concluded that the 10-year limitation on development was unenforceable because it conflicted with the express and unambiguous provisions of the declaration. The court further found nothing in the declaration to indicate that the development rights were personal to the original developer and could not be transferred to successor developers, and it gave the developers the power to amend existing state and local land permits for development plans, within the scope of the declaration, without having to first obtain consent from unit owners. The association appealed.

The sole issue before the appeals court was whether the development rights created under the declaration could be cut off by the 10-year limitation created by the deeds and powers of attorney.

The association advanced two arguments: (1) The 10-year limitation could be read harmoniously with the declaration, contending that after the 10-year limitation period expired, the developer needed to obtain owner consents to make additions that would alter percentage interests in the condominium common areas. (2) Vermont condominium statutes prohibit developers from relying on the general consent given in the declaration and require that the developers obtain individual powers of attorney from each unit owner.

The court rejected the association's argument that the declaration, the deeds and the powers of attorney could be read harmoniously, finding that the unambiguous language of the declaration and the amended declaration explicitly gave developers the right to continue with their phased development plans. The declaration's provisions directly conflicted with the 10-year limitation. Where the declaration, the deeds, and the powers of attorney pointed in opposite directions, the declaration had to prevail. Next, the court rejected the argument that the Vermont condominium statutes prohibited developers from obtaining prior consent to future development that would alter the undivided percentage interests held by unit owners without executing a separate power of attorney. The plain language of the statutes did not contemplate a bar on procurement of prior consent through embedding the power of attorney in the declaration. The court considered that the association's reliance on the statute was misplaced, as it addressed conveyances.

The court affirmed the trial court's judgment.

In a dissenting opinion, two judges saw the case as a conflict between the association and the developers' development rights. The minority found that the provisions in the deeds and the language in the declarations were interrelated because they triggered the same act. The language in the deeds referred to the declaration with respect to alteration of undivided interests in the common area. The minority saw the dispute to be between all the unit owners and the developers, related solely to the power of developers to build new condominium units without the consent of current unit owners. They accepted that the declaration would ordinarily trump the provisions in the deeds, but felt that, in this case the declaration was "being used as a weapon against the common interest community, not in support of it." They concluded that the developers came into the equity action with unclean hands and should be denied relief on that basis. The minority opinion pointed out that while the declaration lacks an explicit time limit on development, it does not provide that the grantee's power of attorney is effective indefinitely. Noting that many condominium statutes require that condominium declarations contain overall time limits for development, it was the minority's opinion that the deeds and the declaration in this case should be treated as one instrument and construed together to set an overall time limit on the developers' development rights, beyond which developers could not proceed, even under the powers of attorney and additional consents.

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

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Association Entitled to Recover Unpaid Assessments

Pew v. One Buckhead Loop Condominium Association, Inc., No. A10A0569, Ga. App. Ct., July 12, 2010

Assessments/Covenants Enforcement: A Georgia appeals court upheld a trial court's award of summary judgment in an action to collect unpaid assessments.

One Buckhead Loop Condominium Association sued Stephen E. Pew to foreclose its lien against his unit for unpaid assessments and penalties. Pew removed the lawsuit to federal court, which remanded the case to the trial court for lack of jurisdiction. The trial court granted summary judgment to the association, awarding assessments in the amount of $93,122.72 plus interest and attorneys fees of approximately $20,000. Pew appealed.

Pew argued that the trial court erred in granting summary judgment to the association for damages greater than those set forth in the complaint. He contended that the additional charges barred by state statute as claims not properly argued by supplemental pleading upon leave of the court, and despite the judicial estoppel that resulted from the association's representation in federal court, the amount owed was less than $75,000. The appeals court disagreed.

In spite of the fact that the association did not seek leave to file supplemental pleadings, the appeals court determined that the trial court's ruling in favor of the association for damages that accrued after the date the complaint was filed implicitly approved an amendment to the pleadings. Sec. 9-11-15(b) of the Georgia Code provides that when issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.

The appeals court noted that it is well established that a trial court may exercise its authority to amend a complaint on motion for summary judgment.

Pew did not argue that he was prejudiced in his ability to defend against the association's claims as to accrued damages, but only argued the procedural defect based on the association's failure to amend its complaint. The trial court established that Pew had notice of the association's claims against him, and he did not challenge the amounts owed, as calculated by the association, except with respect to attorney's fees. Since Pew did not argue prejudice, the court found the trial court did not abuse its discretion by granting summary judgment to the association.

The court found no merit in Pew's claim that judicial estoppel operated to limit the association's entitlement to damages for unpaid assessments to $75,000, based on representations made before the federal court regarding the amount in controversy. The record showed that Pew's notice of removal was untimely filed. Finding that he failed to show that the amount in controversy exceeded $75,000, the federal judge, without addressing the merits of the association's timeliness argument, remanded the case to the trial court for lack of subject matter jurisdiction. The appeals court found nothing in the record to indicate that the association made any representation to the federal court that its claims would never exceed $75,000. Thus, the court found that the trial court properly determined that judicial estoppel did not bar the association from recovering damages in excess of $75,000.

Pew challenged the amounts awarded, arguing that the trial court erred in disallowing a set-off of $11,537.92, the amounts paid to the association in two prior actions brought against him for unpaid assessments in 2006 and 2007. The appeals court noted that his own affidavit showed that he paid all amounts owed to the association, and the association dismissed the suits as a result of his payments. The record further showed that Pew made the payments voluntarily in lieu of pursuing the litigation. Accordingly, summary judgment in favor of the association foreclosing a set-off of amounts paid in those cases was not in error.

Pew argued that the trial court erred in awarding attorney's fees in this case that the association incurred in other litigation seeking protective orders. By its motion for summary judgment, the association sought to recover fees and expenses incurred in its collection action and those allowable as a special assessment against the unit for expenses occasioned by the conduct of its occupant. Pew did not argue that the amounts were calculated incorrectly or that they had been paid. Since the declaration expressly authorized recovery of the assessed fees, the appeals court determined the award was not in error.

Finally, the court concluded that the trial court did not abuse its discretion when it denied Pew's motion to reopen discovery, because the record showed that he made no effort to engage in discovery in the six-month discovery period. The trial court's judgment was affirmed.

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Unincorporated Association Has No Standing to Sue for Past Due Assessments

Port Village HOA, Inc. v. Summit Associates, SCR 60571/09-1, N.Y. Civ. Ct., April 21, 2010

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 in Port Village HOA in Staten Island, N.Y. 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, when no such legal entity existed. The CC&Rs 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, the 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 could find 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 parties "John Doe," it being the intention of the plaintiff 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 association or condominium association. 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 pointed out 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, including 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 clerk of court 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 clerk of court 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, Inc., 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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