January 2012
In This Issue:
Windstorm Deductible Does Not Apply to Storm Damage
Excessive Late Fees Not Recoverable in Foreclosure Action
Boat Dock on Common Area Violates Deed Restriction
Special Assessment Does Not Require Majority Vote
Associationís Liability for Dog Bite To Be Determined at Trial
Boat and Trailer on Lot Doesnít Violate Restrictive Covenants
Manager Can Execute Notes on Associationís Behalf
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Windstorm Deductible Does Not Apply to Storm Damage

Bliss Mine Road Condominium Association v. Nationwide Property and Casualty Insurance Company, No. 2009-33-Appeal, R.I. Supr. Ct., Nov. 1, 2010

Risks and Liabilities: A Rhode Island appeals court ruled that a deductible for windstorm damage did not apply to damage sustained by a condominium during a snowstorm.

Susan and Robert Phinney own a unit at the Bliss Mine Road Condominium in Narragansett Bay, R.I. In December 2005, their unit was severely damaged by a snowstorm that had wind gusts of up to 75 miles per hour. Their unit was insured by Bliss Mine Road Condominium Association (association) under a policy issued by Nationwide Property and Casualty Insurance Company.

Nationwide estimated that the unit sustained $16,691.59 in damages from the storm. Not satisfied with this estimate, the Phinneys countered with two estimates of their own. Ultimately, the parties were unable to agree upon a value for the loss and the cost of necessary repairs.

Nationwide prepared a second estimate and sent a check to the Phinneys. They chose not to accept the offer and returned the check. The Phinneys then began an appraisal process set forth in the insurance policy. As the result of the process, a determination of award in the amount of $26,977.77 was made. However, shortly after the determination was made, Nationwide notified the association that the amount of the award was less than the windstorm deductible set forth in the policy, and the company would not provide compensation.

Although the policy’s declarations page specified a $1,000 deductible for claims, the policy also stated there was a different deductible if damages are caused by a “windstorm.” The schedule showed a deductible of one percent of the policy’s amount of coverage (approximately $32,400). Because that figure exceeded the appraisal, Nationwide refused to make further payment on the claim.

The association sued Nationwide, alleging breach of contact. At trial, a meteorologist testified on behalf of Nationwide that a storm producing very heavy snow and sleet traveled northward into Narragansett Bay. As the storm system intensified, the winds increased. The National Weather Service registered winds as high as 100 miles per hour.

Following the trial testimony, the association moved for judgment as a matter of law (a motion made by a party, during trial, claiming the opposing party has insufficient evidence to reasonably support its case), and the court granted its motion. Nationwide appealed, arguing that the court’s judgment and denial of a motion for a new trial were improper. 

The appeals court applied the rules of contract construction to interpret the association’s Nationwide policy. The term “windstorm” was not defined in the policy, and therefore, the court considered the meaning of the word in context of the contract as a whole. The association asserted that the term was ambiguous and should be construed in favor of the insured. It submitted examples of dictionary definitions that defined “windstorm” as a storm marked by high wind with little or no precipitation.

Nationwide contended that the term “windstorm” was not ambiguous when considered in the context of the policy and offered an altogether different definition. Nationwide maintained that a windstorm is a storm with high levels of wind, irrespective of precipitation.

The appeals court determined that the term “windstorm,” as used in the policy, was reasonably susceptible to more than one meaning and was, therefore, ambiguous. The court construed the ambiguity strictly in favor of the insured. It construed the term “windstorm” to mean a storm with high winds or gusts, but little or no precipitation. The testimony of the meteorologist precluded any conclusion that the storm was a storm of high wind with little or no precipitation. Because the storm included a considerable amount of precipitation in a variety of forms, it could not be described as a windstorm under the terms of the association’s Nationwide policy.

The court held that a reasonable jury could not draw any conclusion other than the damage was caused by a snowstorm, albeit a snowstorm that included very strong winds, and therefore, the windstorm deductible did not apply.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Excessive Late Fees Not Recoverable in Foreclosure Action

Board of Managers of The Bay Club v. Kaplan, No. 21120/04, N.Y. Supr. Ct., Feb. 28, 2011

Assessments: A New York court modified a foreclosure judgment, finding that the association’s bylaws authorized a late fee that was excessive and unreasonable to the actual costs.

Julian Kaplan owned a unit in The Bay Club Condominium in Bayside, N.Y. The development is governed by the board of managers of The Bay Club (board). In 2004, the board served Kaplan with a notice of lien for unpaid assessments dating back to November 1995. Kaplan did not pay the charges in response to the notice, and the board sued him to foreclose its lien. Kaplan filed a motion to dismiss the suit but failed to answer the complaint. The court, therefore, denied his motion. 

In 2008, a referee was appointed by the court to compute the amount owed to the board. The board filed a motion to confirm the report and sought a judgment of foreclosure and sale. Kaplan opposed the motion and again moved to dismiss the suit on grounds that the notice of lien was defective and the board lacked standing to bring the foreclosure action.

The court denied Kaplan’s motion to dismiss but directed the referee to recalculate the amount due and to prepare an amended report following a further hearing based on evidence presented at the hearing. In a second report dated Nov. 29, 2009, the referee determined that Kaplan owed $22,744.59. 

The board filed a motion to disaffirm the referee’s finding. The motion also requested that the court determine the amount to be $182,036.59 as of January 2010 and to issue a judgment of foreclosure and sale. The board argued that the referee had only calculated the amounts due through May 2004. Kaplan opposed the motion and separately moved to confirm the referee’s report.

The court ruled that the notice of lien was not defective and the board had standing to bring suit because Kaplan failed to answer the original complaint and, therefore, could not be heard relative to the merits of any defenses raised in his initial motion to dismiss.

The court held that the referee’s decision not to include those amounts accruing after May 31, 2004, was improper because sufficient evidence was submitted that enabled him to calculate the amounts through and including January 2010. The evidence clearly set forth the amounts billed to Kaplan, which were due from him each month from January 1995 through and including December 2008, as well as amounts billed as late charges.

The court granted the board’s request to make further findings as to the amount owed based on the referee’s report. However, the court found that the referee’s decision not to include late fees identified by the board as 9 percent “interest” per year was proper. Under its bylaws, the board was authorized to institute a foreclosure action for nonpayment of common charges, which is defined in the bylaws to include late charges. A late charge is defined in the bylaws as “ten (10%) percent of the unpaid amount payable to the Board of Managers for each month or part of the month that such amount or any part thereof remains unpaid.”

Although the bylaws provide for recovery of late fees, New York law provides that such charges may not be used as a penalty and that those charges must have a reasonable relationship to the loss for which it is imposed. In this case, applying the late-fee provision of the bylaws would result in hundreds of thousands of dollars in late fees, and the board had submitted no evidence to show that such amounts were reasonable. Thus, the bylaws’ provision for late fees was unenforceable. However, the bylaws also provided for the board to recover attorney’s fees in an action for unpaid charges.

The court affirmed the referee’s recommendation that the board should not be awarded late fees. The court modified the referee’s report to award the board $72,024.99 for unpaid assessments and utility charges and an additional award of $64,602.81 for attorney’s fees.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Boat Dock on Common Area Violates Deed Restriction

David v. Martins Point Property Owners Association, Inc., No. 2011-UP-086, S.C. App. Ct., March 1, 2011

Covenants Enforcement: A South Carolina court upheld a ruling in favor of a developer who sought to enforce a deed restriction prohibiting construction of a boat dock on common area conveyed to the homeowners association.

Martins Point subdivision is located on Wadmalaw Island, S.C. It is governed by Martins Point Property Owners Association, Inc. (association). Douglas E. David, a developer of the subdivision, sued the association to enforce a deed restriction prohibiting construction of a dock on common area owned by the association.

David purchased 1,000 acres of property in 1989, which included both marsh and river-front property, for the purpose of creating a residential subdivision. Of the 32 lots in the subdivision, eight have deep-water frontage, and each of those eight lots has a private dock.

The developers’ goal was to preserve and protect the ecologically valuable area and to design and develop it in a low-impact, ecologically friendly manner. David currently retains ownership of three lots in Martins Point, as well as title to Martins Point Road. In 1991, he deeded the common areas to the association, including a 0.725-acre parcel on which a boat ramp and landing area are located. The deed contained the following restriction: “No dock shall be constructed as an appurtenance to [the] Common Area containing 0.725 acres.”

In 2001, a number of new property owners began discussing the possibility of constructing a boarding dock at the boat ramp. In 2005, the association sought and received a permit from the state authorizing construction of a 90-foot-long fixed pier, ramp and floating dock. David sued the association, seeking to permanently prohibit construction of the dock. The trial court found that the deed restriction was enforceable and prohibited construction of the dock. The association appealed.

Although the association conceded that the deed contained the express prohibition against construction of a dock, it argued that David did not have standing to enforce the restriction. Further, the association argued that the restriction was unenforceable because there was no substantial benefit served by its enforcement. The association maintained that circumstances had changed since conveyance of the parcel, making enforcement of the restriction unreasonable and oppressive.

Generally, a grantor may enforce a restriction against a grantee when the grantor owns land that stands to benefit from the restriction’s enforcement. Here, in limiting the number of docks and the flow of boat, passenger and automobile traffic on the waterfront, David’s interest of minimizing environmental impact was served; therefore, the court determined that David had standing to enforce the restriction. Likewise, because the restriction served the stated purpose of the development strategy, the restriction was not unenforceable for lack of serving a substantial purpose. Finally, the court concluded that, although a number of private docks were constructed since the common area was conveyed, it was never contemplated that such docks would not be permitted; thus, conditions had not changed to a degree significant enough to warrant ignoring the express deed restriction. The appeals court affirmed the trial court’s ruling.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Special Assessment Does Not Require Majority Vote

Oberbillig v. West Grand Towers Condominium Association, No. 09-1097, Iowa Supr. Ct., Dec. 16, 2011 

Assessments: The Iowa Supreme Court overturned a ruling that a special assessment for garage repairs was void because the board failed to obtain preapproval of the repairs from a two-thirds majority of the membership.

Robert Oberbillig owns a unit in West Grand Towers, a condominium development in Des Moines, Iowa. West Grand Towers Condominium Association (association) is responsible for maintaining the common area. 

The common area includes a two-level, heated parking garage. When large pieces of concrete were dislodged from the garage in 2003, the association solicited an engineering study. The study indicated that cracks in the upper floor should be repaired to stop leaks to the lower floor. A financial report of the repair costs was presented to the association members in 2007, and the association then solicited bids for the work.

At a meeting in November 2007, members expressed differing views of whether repairs exceeding $25,000 required a membership vote. The bylaw provides: 

. . . the board shall not approve any expenditure in excess of Twenty-five Thousand Dollars ($25,000), unless required for emergency repair, protection, or operation of the Common Elements or Limited Common Elements.

The repairs were completed in the summer of 2008, and the association levied a special assessment in the amount of $200,000. All members fully paid their proportionate share of the costs except Oberbillig and another owner. Oberbillig was concerned that paying the assessment would waive his right to challenge the cost of the repair, as well as result in a precedent for bypassing a membership vote.

Oberbillig sued the association while the repairs were underway, seeking a declaratory judgment (a court judgment that determines the rights of parties without ordering anything to be done or awarding damages). The association counterclaimed, seeking a judgment against Oberbillig for his share of the repair costs and reimbursement of attorney’s fees. Oberbillig maintained that the special assessment was void because the association failed to obtain the preapproval of a two-thirds majority of the members.

The association asserted it had acted in good faith and that the decision was reasonably prudent and in the corporate interest. Because of this, the association claimed that the business judgment rule (a legal principle where agents of a corporation aren’t liable for loss incurred in corporate transactions when sufficient evidence demonstrates that the transactions were made in good faith) required that a ruling be rendered in its favor. The court concluded that prior approval was necessary to make the repairs and ruled in Oberbillig’s favor. The association appealed.

During the appeal, the association argued that the trial court improperly applied the business judgment rule and misinterpreted the bylaw governing expenditures. The association argued that the word “emergency” in the bylaw modified only the word “repair,” while Oberbillig argued that it modified the entire phrase, “repair, protection or operation of the Common Elements.” The court held that “emergency” unambiguously modified the entire phrase, such that a nonemergency expenditure required prior approval of two-thirds of the membership.

The court explained that under the trial court’s interpretation, a minority of owners could block a necessary but nonemergency expenditure favored by 65 percent of the owners, thereby undermining the association’s ability to prevent common areas from falling into disrepair.

The court noted that 83 of 87 members—well above a two thirds majority—voluntarily paid the assessment without a membership vote, effectively approving the action. Further, the declaration provides: 

In the event of any dispute or disagreement . . . or any questions of interpretation or application of the provisions of the Declaration or Bylaws, such dispute or disagreement shall be submitted to the Board. The determination of such dispute or disagreement by the Board shall be binding on each and all such Unit Owners.

The court held that this provision constituted an express grant of authority to the association board to interpret the bylaws and decide disputes over their application.

Finally, the court noted that application of the business judgment rule is appropriate when directors act in good faith in making business decisions. It found that the association thoroughly investigated the need for repairs to the garage and the proposed special assessment. Its deliberations spanned several years and numerous board meetings to which members were invited. It secured multiple estimates and firm bids for the work. Oberbillig did not challenge the necessity for the repairs or the reasonableness of the ultimate cost. His sole challenge was the absence of a vote of two-thirds of the membership approving the repairs.

The court concluded there were factual predicates for the business judgment rule in the trial court’s findings. The court applied the rule to defer to the association’s interpretation. Accordingly, it held that the association was entitled to proceed with the garage repairs and special assessment without preapproval of two-thirds of the membership.

The trial court’s ruling was reversed, and the case was remanded for entry of judgment (a recorded and legal judgment) in the association’s favor.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Associationís Liability for Dog Bite To Be Determined at Trial

Pargament v. The Oaks at Latourette Condo, 1, 2, 3, 4, TS-57-08/RI, N.Y. Civ. Ct., Oct. 28, 2010

Association Operations/Risks and Liabilities: A New York court denied a condominium association’s motion for summary judgment because the association failed to show that it did not know that a unit owner’s dog was dangerous.

Leticia Pargament sued The Oaks at Latourette Condo, 1, 2, 3, 4 (association), seeking damages for injuries she sustained at the condominium when she was bitten by a dog owned by Linda Hines, who was a resident at the Oaks at the time of the incident. Pargament alleged that the association was negligent in the ownership, operation, management, supervision, use and control of the animal. The association moved for summary judgment to dismiss the action. 

The association contended that liability for the dog bite was based on ownership and control of the animal. Since the association did not own the dog or the premises where it lived, it was not liable for any injury that Pargament sustained.

While the condominium does not own individual units, it is responsible for the enforcement of bylaws and condominium rules. This control extends to the activities conducted by residents, both within their units and within the common areas. The court determined that, in this respect, the association board is comparable to a landlord when it exerts control over acts of individuals residing in their units. In order for a landlord to prevail on a motion for summary judgment (a determination made by a court without a full trial) when a person has been injured by a domestic animal, the landlord must establish that it had neither actual nor constructive notice (that a person received notice even though it was not personally delivered to them) of the animal’s vicious nature. 

Pargament stated that she notified the association’s president that she had been attacked by Hines’ dog. She further claimed that he told her he was aware of a prior occasion when the dog attacked someone else in the condominium development.

The court concluded that these allegations raised the factual issue of whether the association was aware of the vicious nature of Hines’ dog. In light of the association’s failure to produce a sworn statement by someone having personal knowledge of the facts and circumstances to contradict Pargament’s statement, the court could not grant a motion for summary judgment. Accordingly, the motion was denied in its entirety. The association’s liability for the incident will be determined at a trial in the future.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Boat and Trailer on Lot Doesnít Violate Restrictive Covenants

Rawlinson Road Homeowners Association, Inc. v. Jackson, No. 4893, S.C. App. Ct., Sept. 28, 2011

Architectural Control/Covenants Enforcement: A South Carolina court affirmed a ruling that a homeowners association did not have the authority to impose fines on a lot owner who kept a boat and trailer on his property.

Ronald Jackson owns a lot in Phase I of Brewington Park subdivision, located in York County, S.C. The property is governed by Rawlinson Road Homeowners Association, Inc. (association). The association’s declaration provides that all lot owners are members of the association and must “abide by such rules and regulations as may be promulgated by [the association] for holding, maintaining and upkeeping the amenities and common areas conveyed to the [association].” It further provides that “each owner shall keep his lot in an orderly condition and prevent it from becoming unkempt, unsightly, or unclean.” 

When Jackson purchased his property, the restrictive covenants did not address parking a boat and trailer on a privately owned lot. In January 2007, the association, citing its authority under the declaration to regulate the use of common areas, adopted a rule that prohibited the parking of trailers, boats or boating equipment on a homeowner’s lot or anywhere else in the subdivision.

The association notified Jackson that parking his boat and trailer on his lot was a violation of the rules. After he failed to remove them, the association imposed an initial fine of $50 and subsequent fines of $25 per week. The association recorded a notice of lien against his lot for the unpaid fines. It also filed suit against Jackson to enforce the rule and foreclose on its lien against the property. Jackson counterclaimed, seeking dismissal of the suit. 

The association filed a motion for an injunction (a court order requiring a party to perform or restrain from a particular act) that would require Jackson to remove his boat from his lot. Jackson filed a motion seeking summary judgment (a judgment made on the basis of statements and evidence presented for the record without a trial), and the association withdrew its foreclosure claim.

At trial, the association urged the court to construe the “no boats” rule as a restrictive covenant itself and that it is considered as part of the declaration’s restriction that property owners must prevent their lots from becoming “unkempt, unsightly, or unclean.” Jackson argued that the association sought to enforce the rules, not the declaration, and the rule exceeded the association’s authority. He contended that the question of whether his boat was “unsightly” was not properly put before the court because the association’s complaint omitted any allegation that the boat was unsightly. 

Jackson maintained that he relied upon the restrictions in force at the time he purchased his property, which he interpreted as permission to store the boat and trailer he already owned. Although he refused to pay the fines relating to the suit, he was current in paying his assessments. In addition, he argued that the association lacked the authority to create a lien by imposing fines. The trial court denied the association’s motion for an injunction and granted summary judgment in Jackson’s favor. The court declared the bylaws and rules related to the imposition of fines null and void and vacated the association’s lien against Jackson’s property. The association appealed.

The trial record indicated that Jackson filed a motion for summary judgment supported by an affidavit (a written sworn statement). The association failed to file any opposing affidavits or seek permission to oppose Jackson’s affidavit in any other way.

The appeals court’s examination of the pleadings revealed that the association’s allegations of Jackson’s wrongdoing rested entirely upon his alleged violation of the rules. Although the association’s complaint incorporated the declaration by reference, it failed to allege any violation of the declaration. The association's sole focus was on its authority to enforce the rules. However, as the court noted, the amendment that authorized regulation of private property was enacted several months after the association publicized the rules and began imposing fines on Jackson.

The association’s failure to file a responsive affidavit disputing any factual issues prohibited the trial court from denying summary judgment based on facts that the association claimed to have challenged. The material facts properly recited in the documents before the court were unchallenged. Accordingly, the court did not err in finding that no genuine issue of material fact existed and in granting summary judgment to Jackson.

The appeals court also affirmed the trial court’s denial of the association’s request for injunctive relief because it failed to establish the three elements necessary for such a finding: irreparable harm; a likelihood of success on the merits; and absence of an adequate remedy at law.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Manager Can Execute Notes on Associationís Behalf

TD Bank, N.A. v. The Atrium Condominium Association, Inc., No. CV085023687S, Conn. Super. Ct., Feb. 9, 2011

Documents/State and Local Legislation and Regulations: A Connecticut court ruled in favor of a bank that sued to collect amounts due on promissory notes executed by a condominium association’s manager without approval of the unit owners.

In 2004, The Atrium Condominium Association (association) executed a commercial promissory note (a signed document containing a written promise to pay a stated sum to a specified person at a specified date) in favor of Banknorth, N.A., in the amount of $145,000. In 2005, the association refinanced the note with an additional loan, increasing the principal amount to $225,000. In 2007, the association executed a second commercial promissory note in favor of TD Banknorth, N.A., in the amount of $75,000. When the association defaulted on monthly payments, TD Bank, N.A., the holder of both notes, sued the association, seeking to recover the outstanding principal, interest and attorney’s fees.

In response to the bank’s allegations, the association raised three special defenses (a defense strategy stating that despite the fact that the plaintiff’s allegations were proven true, the plaintiff has no grounds to remedy said allegations). The first special defense alleged that the notes and security agreements were void and unenforceable under the Uniform Commercial Code and the Common Interest Ownership Act (act) because they were executed by the condominium manager, who was not authorized by the unit owners to assign future income and common expense assessments. The second special defense alleged that the notes and security agreements were void and unenforceable because 80 percent of the unit owners did not approve of encumbering common elements, and the act requires at least 80 percent of unit owners to approve of a common element encumbrance. The third special defense alleged that the court should exercise its equitable power to void or reduce any alleged debt based on the other two special defenses. The bank filed a motion to strike all three special defenses. 

As a preliminary matter, the court noted that the bank brought this action based on two promissory notes, but the association, in its first special defense, raised an issue regarding related security agreements. The basis of the defense was that certain deficiencies invalidated the security agreements. The association also argued the notes were invalid because the security agreements were incorporated into the notes by reference (the act of including a second document within another document by only mentioning the second document and not writing out what was stated in the second document). Connecticut law provides that, with respect to collateral, a promissory note is not considered conditional (valid only if the specified terms and conditions of the contract are carried out) if it contains an item that is incorporated by reference. In order to demonstrate that incorporating the security agreements into the notes by reference would taint the promissory notes, the association must show that the notes were conditional.

The bank argued that the act authorizes associations to “make contracts and incur liabilities.” Because the association did not claim that the condominium’s declaration precluded the manager from exercising this right, the bank stated that the association’s first special defense should be stricken. The association maintained that the notes were void because they referenced security agreements that, in violation of the act, made assignments of future income and common expense assessments. Because the association’s conclusion that the notes were void was not supported by facts in evidence, and because the association did not demonstrate that the manager could not make contracts and incur liabilities on behalf of the association, the court granted the bank’s motion to strike the first special defense. 

The bank argued that the association’s allegation in its second special defense—that the notes were void and unenforceable because the association did not approve, by the requisite 80 percent of the unit owners, the encumbrance of the common elements—was wrong for two reasons: (1) the bank did not obtain an encumbrance against the common elements, and (2) even if the security agreements provided for an encumbrance without proper authorization, the error would only taint the security agreements, not the notes. The court found, as previously stated, that a note’s mere reference to a security agreement did not make the validity of the security agreement a condition for enforcement. Moreover, the association’s conclusion that such an encumbrance was obtained was insufficient to support the special defense in the absence of any supporting facts. Accordingly, the court granted the bank’s motion to strike the second defense.

In its third special defense, the association sought either a determination that the debt was void or an equitable reduction of the amount due. The bank argued that this defense should be stricken because it was based on the first and second special defenses, which were deemed to be invalid, and the association did not otherwise allege any wrongdoing to justify a reduction. The court agreed.

For the foregoing reasons, the court granted to strike all three motions, and the case will proceed to trial.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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