November 2010
In This Issue:
Percentage of Required Votes Can Be Reduced
County’s Sidewalk, Curb Not Subject to ARC Enforcement
Condo Rental Ad Doesn’t Violate Fair Housing Act
Right to Appeal Waived Through Stipulation to Arbitrate
No Merit to Suit to Collect Payment
Counsel’s Breach Entitles Association to Fee Reduction
Reasonableness Basis Determines Attorneys’ Fees
ARC Can Reject House Plans Based on Location on Lot
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Percentage of Required Votes Can Be Reduced

Alga Hills Homeowners Association v. Gallagher, No. D055534, Cal. App. Ct., July 28, 2010

Documents/Architectural Control/State and Local Legislation and Regulations: A California appeals court affirmed an order granting the petition of a homeowners association to reduce the percentage of votes necessary to revise its governing documents.

Alga Hills is a common-interest development consisting of 240 single-family homes in Carlsbad, Calif. The community is subject to a Declaration of Covenants, Conditions and Restrictions and bylaws that were originally recorded in 1989 and governed by Alga Hills Homeowners Association (“association”).

In 2008, the association’s board of directors completed a proposed restated declaration and sent copies of the revised document and ballot materials to each homeowner. The association was required to obtain the approval of 75 percent of the homeowners to adopt the restated declaration. When not enough ballots were received by the original return deadline proposed by the association, the deadline was extended twice. By October 2008, the association had received 179 ballots and tallied the results. One hundred fifty-seven (157) owners voted in favor of the restated declaration, and 22 owners voted against it. Although more than 85 percent of owners who voted approved the revised declaration, the vote did not satisfy the requirement that 75 percent of all homeowners approve the restatement.

The association filed a Sec. 1356 petition pursuant to the California Davis-Sterling Common Interest Development Act (“Act”), which provides that a homeowners association may petition the superior court for a reduction in the percentage of affirmative votes required to amend the declaration. The court may grant the petition if:

  • Notice is properly given.
  • The balloting process is properly conducted in accordance with the current governing documents of the association.
  • Reasonable efforts are made to permit eligible members to vote.
  • More than 50 percent of owners in a single class vote in favor of the amendment.
  • The amendment is reasonable.

The purpose of Sec. 1356 is to give property owners associations the ability to amend their governing documents when, because of voter apathy or other reasons, important amendments cannot be approved by normal procedures authorized by the declaration. Trial courts have broad discretion in ruling on Section 1356 petitions.

Maureen Gallagher, an association member and homeowner, opposed the petition and raised numerous arguments, including: that the restated declaration contained a new “view policy” that was unreasonable; that the restated declaration contained a “no liability” clause that was unreasonable because it barred a court from imposing liability on the association for failing to enforce the declaration; and that relief under Sec. 1356 was unavailable to the association because the amendment impaired the security interest of mortgagees.

The trial court granted the association’s petition and issued an order approving the restated declaration. Gallagher appealed.

To support her arguments, Gallagher submitted her own affidavit, as well as affidavits from several other homeowners and a real estate agent, that were primarily objections to the change in the declaration pertaining to views and tree trimming.

The trial court found that the “view” provision was reasonable because the amended declaration essentially incorporated an existing policy that had been adopted earlier by the association’s architectural committee. The original declaration provided that trees could not exceed the height of the residence unless the tree did not obstruct the view from any other lot. The association’s architectural committee later formed a “view committee” to evaluate the many complaints by homeowners. During the next several years, numerous conflicts arose between homeowners who wanted to maintain tree heights for privacy reasons and those who wanted to protect views from their lots. In response to the ongoing conflicts, the board formulated a procedure to handle the complaints. After consulting legal counsel and a horticulturist and carefully considering the competing opinions of homeowners, the board adopted a written “view policy” and a new complaint procedure to handle issues pertaining to trees and obstruction of views. Thereafter, there was a significant reduction in conflicts among neighbors and fewer complaints about the process. Thus, when drafting the restated declaration, the board incorporated the “view policy” into the amended document.

Gallagher claimed that she purchased her home because of the view, and because of the tree provision in the original declaration, believed the view would be protected. The court observed that, “Anyone who buys a unit in a common interest development with knowledge of its owners association’s discretionary power accepts the risk that the power may be used in a way that benefits the commonality but harms the individual.” Thus, the fact that the original declaration contained the tree-trimming rule did not mean that Gallagher could reasonably rely on the provision to claim a legal right to a view.

Gallagher next argued that the restated declaration was unreasonable because it barred a court from imposing liability on the association for failing to enforce the covenants.

Sec. 12.1 of the original declaration provides that, “Failure by the Association, Declarant, or any Owner to enforce any covenants or restrictions contained in the Declaration shall not be deemed a waiver of the right to do so thereafter.” Sec. 18.4 of the restated declaration provides that, “The failure of the board or any Owner to enforce any of the provisions contained in the Governing Documents shall not constitute a waiver of the right to enforce the same thereafter, nor shall such failure result in or impose any liability on the Association or the Board.” Gallagher argued that the foregoing final sentence of Section 18.4 violated public policy and was unreasonable because it insulated the association and the board from liability even when they breached fiduciary duties.

In addressing the issue, the appeals court used the cardinal rule of interpreting an instrument to give it such construction as to make it effective rather than void. Applying this rule, the court determined that it was reasonable for the homeowners to add a provision barring liability against the association in a situation when it makes a good faith determination and acts consistent with its fiduciary duties in deciding whether to enforce the declaration. The court rejected Gallagher’s argument that the association had a specific duty to highlight the new “no liability” clause for association members.

Gallagher contended that the association failed to adequately disclose the nature of the revisions to the declaration and/or misled the members about the changes.

The appeals court noted that, in seeking a vote on the restated declaration, the association mailed a ballot to each homeowner with a copy of the proposed restated document, black-lined to compare the changes between the new version and one proposed three years earlier. The document contained bracketed section numbers to assist homeowners to compare the changes between the restated declaration and the existing one. The association also sent a detailed letter prepared by the association’s counsel that explained the history of the proposed changes and the need for them. The letter included a specific explanation of the editing notations on the document. Additionally, the association sent each homeowner a document entitled “Summary of Changes for Restated CC&RS and Restated Bylaws.” A disclaimer at the top of the Summary read, “NOTE: This summary outlines the changes that the Board feels are significant. This document should not be solely relied upon when making your decision on how to vote.” The association gave the homeowners several months to review the proposed restated declaration, extended the deadline for response twice and mailed a ballot that explained the voting instructions. The association also provided members with the opportunity to attend monthly board meetings to discuss the proposed restated declaration and ask questions.

For the reasons set out above, the court rejected Gallagher’s numerous claims that the materials provided to homeowners were inappropriate and misleading. It also rejected her argument that the association had failed to obtain the approval of 75 percent of the mortgagees, as required by Sec. 1356, because, as the association responded, there was no requirement to obtain mortgagee approvals because the restated declaration did not impair the security interests of the mortgagees.

Gallagher had relied on the real estate agent’s statement that the value of homes with second story views would be negatively impacted and the security interest in those homes impaired by adopting the restated declaration. The court determined, however, that the trial court had a reasonable basis to reject this argument as insufficient, observing that there was no foundation that the agent had any factual basis upon which to base the argument. Additionally, the evidence showed that the developer had provided notice to some home buyers that it had the right to construct additional improvements that could obstruct views and made no express or implied representations as to “the nature or extent of the view from any portion of your lot or residence.”

The appeals court upheld the trial court’s order granting the Sec. 1356 petition with each party to bear its own costs of the appeal.

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

County’s Sidewalk, Curb Not Subject to ARC Enforcement

Discovery Bay Property Owners Association, Inc., v. Di Fate, No. A127505, Cal. App. Ct., Aug. 4, 2010

Architectural Control/Covenants Enforcement: A California appeals court ruled that a homeowner was entitled to reasonable attorneys’ fees because he prevailed in a case brought by a homeowners association to enforce restrictive covenants against property that was owned by the county.

Roger Di Fate, Sr., owns a home in Discovery Bay subdivision, located in Contra Costa County, Calif., that is subject to the Discovery Bay Covenants, Conditions and Restrictions. The governing homeowners association is Discovery Bay Property Owners Association, Inc. (“association”).

In 2004, Di Fate submitted plans to the association for approval to install a new driveway, sidewalk and curb cut in front of his home. The association approved his plans, and Di Fate completed work on the project. After the work was complete, he applied to have the front yard landscaping approved. The association refused to approve the landscaping project and told him he had to remove the driveway, sidewalk and curb and install a new sidewalk and curb. Di Fate contested the requirements, and the association began to issue monthly fines for his noncompliance.

In 2008, the association sued Di Fate for permanent injunction and damages, alleging that the declaration entitled it, as the prevailing party in an action to enforce the declaration, to attorneys’ fees. Di Fate filed a cross complaint for declaratory relief requesting costs and attorneys’ fees.

At a bench trial in 2009, the court ruled in Di Fate’s favor, granting his motion for nonsuit on two grounds: First, the association was a common-interest development as defined in the Davis-Stirling Common Interest Development Act (“Act”) and the association failed to offer mediation as required by the Act; and second, the declaration did not apply to Di Fate’s project, because Contra Costa County was a necessary party to the action, being the owner of the curb cut and sidewalk located off Di Fate’s property. Accordingly, the court ruled that the association did not have the authority to enforce the declaration for property not located on Di Fate’s property.

In his motion for costs and attorneys’ fees, Di Fate asserted that he was the prevailing party and entitled to recover attorneys’ fees under Sec. 1354 of the Civil Code and Sec. 1717 of the Contracts code.

The association opposed Di Fate’s motion for attorneys’ fees, arguing that the award would be contrary to the court’s ruling that the declaration did not apply to the project. Further, the association argued that Di Fate had “unclean hands.” In view of the ruling that the declaration did not apply to the litigation, the court denied Di Fate’s request for attorneys’ fees. Di Fate appealed, and the sole issue in this appeal is whether the trial court properly denied his request for attorneys’ fees.

Courts have consistently held that, when a party prevails in an action on a contract by establishing that the contract is inapplicable, Sec. 1717 permits the party to recover attorneys’ fees whenever the opposing party would have been entitled to attorneys’ fees under the contract had it prevailed. Since declarations of covenants and restrictions are considered to be subject to contract interpretation, this reciprocal remedy was triggered by the presence of an attorneys’ fee provision in the Discovery Bay declaration, because the action was based on enforcement or violation of another provision in the declaration.

Because the association would have been entitled to attorneys’ fees if it had prevailed in the action, under Sec. 1717, Di Fate was entitled to attorneys’ fees as the prevailing party, because he established that the declaration was inapplicable.

The association asserted that Di Fate had “unclean hands” because of his conduct at trial. The appeals court found that he was entitled to the fees, because he had obtained an unqualified win. The court did observe, however, that although a party’s litigation conduct may not be used to determine who prevailed at trial, Di Fate’s conduct could be considered when the trial court determined whether the fees were reasonable or should be reduced because they were due in part to Di Fate’s unreasonable conduct.

The appeals court reversed the trial court’s order denying Di Fate an award of attorneys’ fees and remanded the case for determination of the reasonable amount to be awarded.

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

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Condo Rental Ad Doesn’t Violate Fair Housing Act

Fair Housing Center of the Greater Palm Beaches, Inc. v. The Shutters Condominium Association, Inc., No. 09-16184, U.S. App. Ct., 11th Cir., July 29, 2010

Sale and Lease Restrictions/Federal Law and Legislation: Appeals court affirms denial of a new trial to a fair housing center because it failed to show that a condominium discriminated against lessees on a familial basis by posting an advertisement that seemed to exclude children.

In 2006, an employee of the Fair Housing Center of the Greater Palm Beaches, a nonprofit organization that works to eliminate discrimination in access to housing in the Greater Palm Beaches area of Florida, discovered an advertisement on the Internet website that offered a condominium for rent in The Shutters complex. The advertisement included the statement, “Sorry, no kids or pets.” The Center then obtained copies of the Declaration of Condominium for The Shutters that contained two provisions restricting residency to adults. One provision stated, “Age limit of children permitted with parents as owners, 18 years of age.” The other provision permitted rental of apartments to “one family consisting of the father, mother and adult children, if any” and also stated there could be “no children.”

The Center concluded that the advertisement and restrictions in the condominium declaration violated the Fair Housing Act (“Act”) and filed charges with the Department of Housing and Urban Development and the Palm Beach Office of the Equal Opportunity against The Shutters Condominium Association, Inc. (“association”), the association’s president, the person who advertised the unit for rent and the unit owner.

The Center offered to settle the charges if, among other conditions, members of the association would complete an education program that cost $5,000 per participant. The dispute was not resolved. In 2007, the Office of Equal Opportunity found reasonable grounds that the association had violated the Act. In 2008, the Center sued the association alleging four violations of the Act:

  1. Making housing unavailable to potential lessees because of their familial status.
  2. Discriminating in the sale or rental of housing because of potential lessees’ familial status.
  3. Advertising in a manner that discriminates against potential lessees based on their familial status.
  4. Interfering “in the exercise or enjoyment of ... any right granted or protected by [the Act].”

The Center complained that although it had spent substantial time and resources on this complaint, its ability to ensure that the area was free from discriminatory housing practices had been impaired. The Center listed injuries suffered because of the association’s alleged discrimination. Before trial, the association amended the declaration to delete all language prohibiting sales and rentals of its condominium units to families with children.

In 2009, the Center and the association moved for summary judgment. The district court denied the Center’s motion, but granted in part the association’s motion, finding that the Center failed to prove that the association had discriminated against any person about the sale or rental of the condominium unit or the provision of services or facilities in connection therewith because of familial status. The court also found that there was a factual dispute about whether the person who published the advertisement did so because of the language in the condominium declaration.

At trial, the Center presented testimony about its activities and the damages it had sustained. It solicited testimony from the person who placed the advertisement on the Internet site, then rested its case. The jury returned verdicts in favor of the association and the unit owner, whose daughter had posted the rental advertisement, and the court entered the judgment in their favor. The Center moved for a new trial and judgment as a matter of law on the grounds that the verdict was contrary to the weight of the evidence. The court denied the motion, and the Center appealed.

Because the appeals court could not examine the sufficiency of the evidence supporting the jury’s verdict in the absence of the Center’s timely motion for judgment as a matter of law, its inquiry was limited to whether there was an absolute absence of evidence to support the jury’s verdicts. The Center challenged the jury’s finding that the Center was not injured by the publication of the advertisement.

The appeals court could not conclude, as a matter of law, that there was no evidence to support the jury’s verdicts, but speculated that the jury may have presumed that the Center failed to establish a causal connection between its alleged damages and the advertisement. Although it complained about the injuries it suffered, the Center offered scant evidence to support its claims.

The appeals court also found that the Center’s testimony did not support the complaint that the advertising “interfered with the rights of its constituents and frustrated its mission,” because the Center’s director admitted that “no one was turned away” as a result of the advertisement, nor was she aware that anyone had even “showed an interest in the apartment.” Likewise, the owner testified that “[n]ot one person” responded to the advertisement, even after she removed the “no children” language.

The court affirmed denial of the Center’s motion for a new trial and judgment as a matter of law.

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

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Right to Appeal Waived Through Stipulation to Arbitrate

Fridman v. Beach Crest Villas Homeowners Association, No. G042757, Cal. App. Ct., Aug. 4, 2010

Covenants Enforcement: Condominium association waived its right to appeal an award of attorneys’ fees to a unit owner because it entered into a stipulation to arbitrate the dispute.

In 1999, Moisey Fridman installed an air conditioning unit in his Beach Crest Villas condominium. In 2006, Beach Crest Villas Homeowners Association (“association”) voted to compel Fridman to remove the air conditioning unit because it had been installed without the approval of the association’s board of directors. Fridman refused, contending he had properly applied for and received permission to install the unit. The association began fining Fridman weekly, and he refused to pay the fines.

In 2007, Fridman sued the association for negligence, breach of fiduciary duty, intentional infliction of emotional distress, violation of fair housing laws and breach of contract of the Declaration of Restrictions for Beach Crest Villas Condominium. The association filed a cross-complaint for breach of the declaration, private nuisance, defamation, conversion and declaratory relief.

In 2008, both parties stipulated to binding arbitration, and a hearing was conducted in March 2009. The arbitrator ruled that the association breached its fiduciary duty to Fridman and awarded him $100 for emotional distress damages. The arbitrator further found that the association failed to prove any of its causes of action against Fridman. Because Fridman was the prevailing party, the arbitrator awarded him $110,000 in attorney’s fees.

The association requested that the arbitrator amend the award, and he issued a corrected award, eliminating the $100 damages award for emotional distress, but again found that Fridman was entitled to recover $110,000 in attorney’s fees. The association appealed.

Fridman filed a motion to dismiss the association’s appeal on the ground that the parties’ stipulation to binding arbitration constituted waiver of the association’s right to appeal. The stipulation to arbitrate signed by the association included a specific reference to California Rules of Court, rule 3.827(c), which reads: “The judgment so entered has the same force and effect in all respects as, and is subject to all provisions of law relating to, a judgment in a civil case or proceeding, except that it is not subject to appeal . . . “[Italics added.] Additionally, the stipulation reads: “all rights to . . . appeal are waived.” The court found that either provision of the stipulation would operate as a clear and express waiver of the right to appeal, concluded that the waiver was unassailable and granted Fridman’s motion to dismiss.

Fridman also filed a motion for sanctions. The association opposed the motion on the ground it did not comply with the California Rules of Court. The appeals court rejected the argument. Because the association provided no other specific argument against the imposition of sanctions, although the court interpreted the association’s opposition to the motion to dismiss as an argument that sanctions were unwarranted, the court believed the language and intent of the stipulation to binding arbitration were clear. The court, however, found nothing in the record to establish that the association’s motive in bringing the appeal was improper, and, therefore, denied Fridman’s motion for sanctions.

The court dismissed the appeal and awarded costs on appeal to Fridman.

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

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No Merit to Suit to Collect Payment

Herres v. Millwood Homeowners Association, Inc., No. 23552, Ohio App. Ct., July 30, 2010

Association Operations: A landscaper who accepted and cashed a homeowners association’s check as payment in full for disputed invoices is barred from collecting money damages by the affirmative defense of accord and satisfaction.

Mark Herres, who owns a home in Millwood Estates in Montgomery County, Ohio, operates Creative Artworks Landscape & Design, a landscaping business. In 1999, Millwood Homeowners Association, Inc., (“association”) solicited bids for lawn care services on Millwood’s common areas for the spring, summer and fall seasons of 2000. Herres submitted an estimate of $5,180, and although he had no formal written contract with the association, he performed lawn care services for the association during 2000 and 2001. Herres submitted various invoices to the association for work performed to the Millwood common area, some of which the association considered either not authorized or not actually performed.

Herres’ invoices were presented to the association members at a meeting on Aug. 5, 2001. On Aug. 6, 2001, the association sent Herres a check for $2,380 with a letter itemizing the outstanding invoices and detailing its disputes with each. The letter also stated, “The check enclosed totals $2,380, which is consolidated payment in full for all services provided by Creative Artworks Landscape & Design. Millwood Association has voted to discontinue all services previously provided to the Association.” A list of invoice numbers and a notation that read “payment in full,” was entered on the memo line of the check. The association later mailed Herres another check dated Aug. 8, 2001. The memo line of that check listed an invoice number, but did not include a notation of “payment in full.” Herres cashed both checks.

In June 2008, Herres sued the association for breach of contract, quantum meruit, and action on account. The association raised the affirmative defense of accord and satisfaction and counterclaimed for unpaid homeowners association dues for 2007 and 2008. The association moved for summary judgment, and Herres filed a motion in opposition. In May 2009, a magistrate granted the association’s motion in full, reasoning that Herres’ claims were barred by the association’s defense of accord and satisfaction, and no genuine issue material fact existed regarding Herres’ liability for unpaid association dues. The trial court adopted the magistrate’s decision in full. Herres appealed.

Herres’ sole assignment of error on appeal was that the trial court erred in granting summary judgment in favor of the association because genuine issues of fact remained in dispute. He argued that the Aug. 6, 2001, letter and enclosed check were insufficient to constitute accord and satisfaction. He stated that he reasonably believed that the association intended to pay further invoices, that there were still invoices due and owing, and that he had performed other work not identified by the invoice numbers listed on the two checks he received. He did not take issue with the trial court’s decision on the association’s counterclaim for unpaid assessments.

The appeals court observed that the substantive law of the issue at hand was accord and satisfaction, which is an affirmative defense to a claim for money damages. If a party against whom a claim for damages is made can prove accord and satisfaction, that party’s debt is discharged by operation of law. The court makes three inquiries: Was there an offer and acceptance (accord)? Was the accord carried out (satisfaction)? Was the accord and satisfaction supported by consideration? If the accord and satisfaction relates to cashing a check, the plaintiff must have reasonable notice that the check is intended to be payment in full of the debt.

The association’s argument rested in part on a similar Ohio case in which the court found that, “Where a check is tendered as payment in full of a disputed claim, the creditor must accept the amount tendered upon the terms of the condition, unless the condition be waived, or he must reject it entirely.” Seeds Grain & Hay Co., v. Conger (1910), 83 Ohio St. 169, 93 N.E. 892

In this case, the court found that the association’s Aug. 6, 2001, letter to Herres and the enclosed check for $2,380 was an offer for final payment in full of all services rendered by him, and he accepted and cashed the check (accord and satisfaction and consideration). The court further concluded that Herres had reasonable notice that the check was intended to be payment in full of the debt, because the letter clearly stated that the check was “payment in full for all services provided” by Herres, and the check itself included the same notation. The second check did nothing to call into question the import of the Aug. 6, 2001, letter and was dated the same day as the first. The letter clearly indicated that his services were being terminated, and the check was final payment for all services. Herres never claimed to be owed for services provided after Aug. 6, 2001, and the record did not indicate that he was owed money for other services performed.

The appeals court concluded that the trial court did not err in finding that the check and letter were sufficient to constitute an accord and satisfaction and properly entered summary judgment in favor of the association. Accordingly, the court found that Herres’ sole assignment of error was without merit and affirmed the trial court’s judgment.

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

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Counsel’s Breach Entitles Association to Fee Reduction

Levin & Stein v. Meadow Valley Condominium Owners Association, No. 62334-6-I, Wash. App., July 26, 2010

Attorney’s Fees/Developer Liability/Risks and Liabilities: A Washington appeals court upheld findings that counsel representing a homeowners association in construction defect litigation breached its fiduciary duty by urging settlement by mediation.

Meadow Valley, LLC, developed Meadow Valley Condominium, located in King County, Wash. Meadow Valley Condominium Owners Association (“association”) retained the law firm of Levin & Stein (“L&S”) to sue the developer for construction defect damages. The association’s undisputed litigation objective was to recover the amount necessary to repair the construction defects and resulting damage. Relying on the law firm’s advice, the association entered into a settlement agreement with the developer and its general contractor whereby it stipulated the entry of a $7.2 million judgment and agreed to assign coverage and bad faith claims against the insurance carriers. At the reasonableness hearing on the terms of the settlement, the trial court approved the $4.8 million award for construction defect damage, but reduced the amount of attorneys’ fees from $2.4 million to $1.6 million.

The association subsequently terminated L&S, and the law firm filed a fee lien against the association for $1,632,000. The association challenged the lien, asserting that L&S had breached its fiduciary duty to the association. In response, the association sued for relief under Revised Code of Washington Sec. 4.24.005, petitioning the court to determine the amount of reasonable attorneys’ fees owed to L&S.

The association also asked the court to determine the amount that L&S should forfeit based on a claim that L&S had committed numerous breaches of its fiduciary duty. The trial court determined that L&S was entitled to $996,300 but deducted $400,000 based on a finding that the law firm did breach its fiduciary duty to the association. The court also ruled that the association was entitled to an attorney-fee award of $492,075 as the prevailing party in the action. L&S appealed.

The appeals court held that the association proved that L&S committed numerous breaches of fiduciary duty in violation of the Rules of Professional Conduct. The court expressly rejected the testimony of the L&S attorneys as not credible. L&S appealed.

L&S argued that the doctrine of judicial estoppel precluded the association from challenging the reasonableness of the fee award because: (1) in the reasonableness hearing, the court determined that the fee was reasonable; and (2) the association argued in federal court litigation that the fee was covered as “costs taxed” under the defendants’ liability insurance policy.

The doctrine of judicial estoppel prevents a party from asserting one position in a court proceeding and later taking an inconsistent position in another court proceeding. The appeals court found that the determination that the $1.6 million award was reasonable was not inconsistent with the association’s later challenge to the amount it owed L&S based on claims of breach of fiduciary duty that were unknown at the time.

The court also found that the association’s challenge to the amount of reasonable attorneys’ fees was also not inconsistent with its position in the federal court insurance litigation. The association argued that it was entitled to attorneys’ fees of $1.6 million under the supplemental payments provision of the insurance company’s policy as part of the settlement agreement it entered into with the developer.

The appeals court determined that neither the reasonableness hearing determination nor the association’s position in the coverage action precluded it from later challenging the attorneys’ fees L&S was entitled to.

Alternatively, L&S argued that the trial court abused its discretion in determining the reasonable amount of attorneys’ fees it was entitled to recover in quantum meruit. After reviewing the trial court findings of fact, the court concluded that substantial evidence supported the findings of fact, sufficient to persuade the court that the premise was true.

L&S contended that the trial court erred by failing to award a risk multiplier. The purpose of an upward adjustment is to account for the contingent nature of the fee agreement and is based on an assessment of the likelihood of success at the outset of litigation. The court concluded that a multiplier was not warranted because it would amount to a recovery beyond what L&S would have received if it had fully performed on behalf of the association and had not been terminated.

L&S contended that the trial court erred in reducing the settlement amount based on findings that it breached its fiduciary duty to the association. It claimed that its conduct was not egregious enough to warrant a reduction of fees.

The trial court found that the testimony of the L&S attorneys was evasive, exaggerated and frequently followed a shifting course that contradicted themselves and each other. The court found that credible trial evidence convincingly refuted the testimony. The appeals court noted that if an attorney engages in conduct that breaches a fiduciary duty to the client, the trial court has the inherent authority to require that the attorney forfeit or disgorge fees. The trial court determined that L&S breached its fiduciary duty by failing to insist that the association obtain independent counsel when renegotiating its fee agreement with L&S, breached its fiduciary duty based on misrepresentations during the 2005 reasonableness hearing, filed an inflated attorney-fee lien and failed to adequately investigate the defendants’ insurance coverage. While L&S advertised itself as experienced and successful trial attorneys, its experience was largely limited to case resolution by mediation, not trial. Although L&S persuaded the association to enter into the settlement agreement, it never advised the association of the ways in which the agreement could work to its disadvantage. Realizing that there was insufficient insurance coverage to pay the association’s repair costs, L&S focused on a settlement strategy to resolve the whole case.

Numerous acts and omissions made clear to the court that L&S, throughout the case, exhibited ambivalence toward its ethical obligations to the association that was grossly unbecoming. The court noted that it found ethical violations by former and three current firm members who actively participated in the case. It found their unprofessional and unethical behavior to be highly improper and deserving of the sanction imposed.

The appeals court observed that the findings that L&S challenged in their appeal did not implicate the trial court’s largely undisputed core findings that L&S withheld information and pursued a strategy that undermined the association’s objective of recovering the amount necessary to repair the construction defects and resulting damages. Therefore, even if the court disregarded the challenged findings, the remaining breach of fiduciary duty findings were supported by substantial evidence that supported the decision to reduce the amount of attorneys’ fees.

The appeals court determined that L&S flagrantly disregarded the association’s goals entirely and placed its own goals and agenda ahead of its client’s from the beginning. During the course of its representation, the association was in the position that it could not trust its lawyers to honor its basic goals in the case. The court noted L&S’ entire efforts were aimed at forcing a settlement of $2.5 to $3 million dollars, an amount that L&S knew would never have met the association’s goals of representation. The finding that L&S pursued a settlement strategy that contravened the association’s goals was further confirmed by the finding that persuading the association to enter into the settlement agreement had significant drawbacks for the association because it foreclosed additional investigation of defects. L&S failed to persuasively refute the critical findings by the appeals court.

L&S asserted that the trial court abused its discretion when it awarded attorneys’ fees to the association as the prevailing party under the fee agreement. The trial court determined that the association was entitled to the award under the fee clause in the agreement and on equitable grounds based on breach of fiduciary duty. L&S argued that the trial court erred in concluding that the association was the prevailing party, because L&S obtained an affirmative judgment in its favor.

The appeals court found that the trial court only summarily concluded that the association was the prevailing party. Because it relied on equitable grounds and not a substantial analysis of the issue, the appeals court remanded the case for the court to determine whether either party should be entitled to fees as the substantially prevailing party or whether both parties should bear their own fees. The appeals court also directed that if the trial court awarded fees, it should also determine the amount of reasonable attorneys’ fees incurred on appeal.

In all other respects, the trial court was affirmed.

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

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Reasonableness Basis Determines Attorneys’ Fees

Monmouth Meadows Homeowners Association v. Hamilton, 408 Md. 487, 970 A.2d 892 (2009)

Assessments: A Maryland appeals court found that circuit courts correctly refused to use the lodestar method in determining awards of attorneys’ fees, because the cases did not involve a fee-shifting statute.

Homeowners associations in three combined cases sued homeowners in the district courts of Harford and Prince George counties in Maryland for unpaid assessments and attorneys’ fees. The district courts awarded attorneys’ fees, but the circuit courts in the counties, on de novo review, awarded fees using different methods. The associations appealed.

The district courts awarded attorneys’ fees based on a percentage of the principal sought, but the circuit courts assessed the fees according to a reasonableness standard. The associations sought review of the awards, arguing that the lodestar method was appropriate for calculating fee awards.

The appeals court concluded that while the district courts erred in awarding fees as a flat percentage of the amounts in controversy, the circuit courts correctly addressed the fee awards on appeal and affirmed their judgments.

Each circuit court used a different approach in awarding fees in the respective cases. In the Hamilton and Tillery cases, the Harford County circuit court awarded fees that the association initially requested when the lien was filed, plus fees incurred in the district court litigation but not fees incurred on appeal.

In the Thomas-Ojos’ case, the circuit court for Prince George’s County discussed the lodestar method and, finding that it was not required to use the method, concluded that the fees requested by Montpelier Hills Homeowners Association were unreasonably high for the actual work performed. That court reduced the fee award to a flat $300 and refused to award fees incurred on appeal. 

The appeals court addressed how awards should be determined under the Maryland Contract Lien Act. The facts in each case are similar: The residents were contractually obligated to pay annual assessments to the associations, and the associations charged interest and late fees on the delinquent assessments. In each case, the associations directed the same law firm to collect the debts.

The associations contacted the homeowners in writing in an effort to resolve their delinquencies, but the homeowners were unable or unwilling to make the required payments, and the associations recorded liens on the properties. The liens included principal and interest on the assessments owed, as well as court costs and attorneys’ fees. The associations notified the homeowners of the liens in writing and demanded payment.

When the homeowners failed to respond, the associations sued the homeowners in the Harford and Prince George’s Counties’ district courts. In each case, the associations won affidavit judgments against the homeowners in largely uncontested proceedings and sought attorneys’ fees calculated according to the lodestar method.  (The lodestar method takes as a starting point for a fee award the product of the number of hours reasonably expended on a legal matter and the reasonable hourly rate for the type of work performed. This method could allow associations to recover more in fees than the amount of the debt owed.) In each instance, however, the courts elected not to calculate the fees under this method, but rather chose to award fees as a flat percentage of the amounts of the principal sought in each case.

The appeals court noted that it was improper to use the lodestar method of calculating fees in a contractual debt-collecting case, explaining that this method is meant to be applied in cases in which a statutory fee-shifting provision encourages litigation in the public interest. The court further explained that an action for debt collection on a breach of contract is a strictly private matter and does not address any broader public ills.

The associations argued that the cases were sufficiently related to advancing the public interest to justify the use of the lodestar method in determining reasonable attorneys’ fees. They claimed that “[h]olding delinquent owners accountable for paying their share of association assessments supported social benefits that extended far beyond the association itself.” The associations also claimed that they and other homeowners associations provided public services, such as street maintenance and security, thus relieving local governments of those obligations.

The appeals court, however, was unpersuaded that any tangential benefit the associations provided to local government or the public was sufficient to justify use of the lodestar method in awarding attorneys’ fees. In the court’s opinion, the associations failed to apprehend a fundamental distinction between the legal liabilities incurred by the homeowners in these cases and the legal wrongs that are the subject of public interest litigation under true fee-shifting statutes.

The court stated that the circuit court for Prince George’s County encapsulated the approach that the appeals court, itself, approved. The district court awarded fees equal to 15 percent of the amount of principal requested at trial. The circuit court considered the reasonableness of the award in light of the factors enumerated in the Maryland Lawyers’ Rules of Professional Conduct, i.e.:

  1. The time and labor required; the novelty and difficulty of the questions involved; and the skill requisite to perform the legal service properly.
  2. The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment of the lawyer.
  3. The fee customarily charged in the locality for similar services.
  4. The amount involved and results obtained.

Based on its reasoning, the court reduced the fee award to $300.

The court found that the circuit court for Harford County used a similar approach in addressing Hamilton’s and Tillery’s cases. The court awarded fees set forth at trial but refused to award fees for legal work beyond that point. The appeals court observed that Hamilton’s case followed much the same trajectory. Although it awarded the amount of principal, costs of collection, interest owed, court costs and reasonable attorneys’ fees, the appeals court declined to award the balance of the fees requested, which represented charges for the de novo appeal.

The appeals court held that circuit courts in these cases acted within their discretion and correctly rejected the approach adopted by the district court of awarding attorneys’ fees based merely on a percentage of principal sought. The court also held that it was improper to use the lodestar method in calculating attorneys’ fees in contractual debt-collection cases, and, instead, approved the use of Section 1.5 of Maryland’s Rules of Professional Conduct as a rubric for determining reasonable fees. The court affirmed the judgments of the circuit courts for Harford County and Prince George’s County regarding the costs to be paid by the associations.

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

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ARC Can Reject House Plans Based on Location on Lot

Walker v. Sandy Pointe Homeowners Association, Inc., No. 2010-UP-354, S.C. App. Ct., June 12, 2010

Architectural Control/Covenants Enforcement: In an unpublished opinion, a South Carolina appeals court upheld an architectural committee’s rejection of plans for a proposed home because it would be situated closer to the street than neighboring houses.

William and Terri Walker purchased a lake-front lot in Sandy Pointe subdivision in Anderson County, S.C. The lot is flat in front, rolls down to a terrace and then drops sharply to the lake shore. Sandy Pointe is governed by Sandy Pointe Homeowners Association, Inc., (“association”) and subject to restrictive covenants that require homeowners to submit plans for improvements to the Architectural Committee (“committee”) for approval prior to construction. The covenants require a minimum setback of 40 feet.

The Walkers submitted preliminary plans for their house to the committee in 2001. The committee approved the preliminary plans, in principle, and notified the Walkers that final approval was contingent upon further review of detailed plans and specifications. The committee reminded the Walkers to include “all necessary specifications, drawings, etc., according to Sandy Pointe covenants and bylaws” in their submission of final plans.

In early December 2005, the Walkers submitted the final application for their house. On Dec. 13, 2005, the committee notified the Walkers by phone that the plans had been rejected because of the proposed location of the house on the lot. Without consulting the Walkers, their builder contacted the committee and proposed moving the house back an additional 25 feet, rather than the 40 feet desired by the committee.

The committee formally gave notice to the Walkers in a letter dated Jan. 11, 2006, that it disapproved their plans. The letter noted that while the builder had proposed to move the house back an additional 25 feet, no revised plans had been submitted to the committee in accordance with the covenants.

The Walkers responded that they had, at all times, maintained the original proposed location was appropriate and any other location was unacceptable. Their letter stated that they intended to move forward with construction at the original location.

The association sent a letter to the other homeowners explaining the situation and asking them to vote on whether to pursue litigation for an injunction. Although the majority of the homeowners voted in favor of litigation, the association did not file a complaint; instead, the Walkers sued the association for a declaratory judgment ordering the committee to approve and issue a permit for construction of their house and for damages arising from the delay in construction of the house.

The trial court ruled that a reasonable basis existed for the committee’s exercise of its judgment, finding that its decision was not arbitrary and bore a sufficient relation to Sandy Pointe’s general plan of development. In addition, the court rejected the Walkers’ argument that the committee was not properly appointed in accordance with the covenants and bylaws. The Walkers appealed.

The Walkers alleged that the trial court erred in finding that the covenants provided the committee with the authority to reject the proposed location of their house. The covenants provide:

No improvements shall be erected … until and unless the building plans, specifications and plot plan showing the proposed type of construction, exterior design and location of such improvement have been approved in writing by the … Architectural Committee as to conformity and harmony with external design and consistence … with existing improvements …

Thus, the court concluded that the covenants give the committee the right to approve the location of a house with respect to the configuration of the land and position of natural and man-made features and the authority over where a house can be located.

The Walkers contended that the committee did not properly exercise its authority. However, the appeals court observed that when a covenant provides an architectural review board with broad authority for approval of improvements, the board’s discretion is constrained only by reasonableness and good faith. Courts will uphold an architectural review board’s rejection of a homeowner’s improvements based on aesthetic considerations when the board’s decision is not arbitrary but bears a sufficient relation to the subdivision’s general plan of development.

The committee disapproved the Walkers’ plans because the location of the house was too close to the road in comparison with the other homes on that side of the street. Two committee members testified that the location would have been “way out” in front of the other houses on the street and that the neighboring homeowners would be looking at the back of the Walker’s house from the front of theirs.

Walker’s builder testified that he explained to the committee that it would be extremely difficult to build the house 40 feet further back because of the steep drop-off of the lot and that the cost would be prohibitive. He stated that moving the house back 25 feet would cost an additional $25,000, and he would not build the house at the committee’s proposed location because the slope would be too great.

Committee members stated they were never informed what the relocation cost would be, and two members stated they would have accepted the compromised location proposed by the builder, but the Walkers never filed an application for that location. Although the Walkers’ builder testified he would not build the particular house they had selected at the committee’s location, other houses on that side of the street had been constructed on a slope.

The appeals court concluded that the trial court correctly determined that the committee’s decision to deny the Walkers’ application was not arbitrary and bore a sufficient relation to the subdivision’s general plan of development. Although the covenants dictated a minimum setback of 40 feet, the committee, in its discretion, could require a house to be constructed further back. The committee’s disapproval did not have to be grounded upon violation of a specific restrictive covenant.

The Walkers asserted that the committee failed to provide them with timely written notice of denial of their application. The covenants provide:

In the event that the Architectural Committee fails to approve or disapprove such plans within thirty (30) days after they have been submitted to it, or if no suit to enjoin the erection or alteration of such building or improvement has been commenced before such erection or alteration is substantially completed, approval of the Architectural Committee will be conclusively presumed and this covenant will be deemed to have been fully complied with.

The Walkers submitted their application early in December 2005. A committee member called Walker on Dec. 13, 2005, to inform him that the plans had been rejected. A letter dated Jan. 13, 2005, gave the Walkers official written notice that the committee had disapproved their plans.

One basis for the committee’s rejection of the Walkers’ plans was that they failed to submit two set of plans, one on which the committee is to note its decision to be returned to the petitioner, as required by the covenants. The Walkers were notified by letter because they only submitted one set of plans.

The Walkers challenged the appointment of the committee members, but the appeals court found no basis for reversal on the matter. They also took issue with the committee’s failure to provide homeowners with guidelines to be used in considering applications, but they offered no evidence that the committee’s review of their application would have been any different if the committee had provided guidelines to the homeowners. Therefore, the court found no reversible error on that issue.

The Walkers also contended that the association acted improperly in sending the ballot asking homeowners whether they supported bringing an action for injunction. The court stated that, even if the vote had been improper, it was irrelevant to the court’s decision. The Walkers failed to meet their burden of demonstrating reversible error on the remaining issues raised in their appeal, and the court affirmed the trial court’s findings.

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

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