May 2012
In This Issue:
Settlement for Construction Defects Is Unreasonable
Board Properly Assessed Units for Elevator Repair Costs
Parking Canít Be Reallocated on Withdrawn Property
Bankruptcy Wonít Stall Time to File for Attorney Fees
Special Assessment Doesnít Require Majority Vote
Owner Canít Convert Common Area into Private Foyer
Restriction Expiration Doesnít End Assessment Obligation
HOAís Assessment Lien Superior to Mortgage Lien
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Settlement for Construction Defects Is Unreasonable

Aspen Grove Owners Association v. Park Promenade Apartments, LLC, No. CV09-1110, U.S. Dist. Ct., W. Dist. of Wash., Jan. 9, 2012

Conversions/Warranties/Risks and Liabilities: A Washington district court denied a condominium association’s motion to declare a mediated settlement reasonable, and reduced the settlement agreed upon during mediation based on the merits of the association’s arguments.

Aspen Grove is a condominium complex located in Seattle, Wash., that was originally built as apartments in 1996. In 2005, the building was converted to condominiums, and in 2007 extensive water damage was discovered. This left the building in need of major renovations and repairs, and Aspen Grove Owners Association (association) sued several entities involved in the construction, conversion and sale of the complex for damages.

In September 2010, the parties attended a mediation conference. Farmers Insurance Exchange was the company defending the declarant-appointed directors sued by the association. Farmers said it would only cover the directors for the portion of the total judgment that was related to property damage caused by the directors’ breach of fiduciary duty.

In March 2011, the parties attended a second mediation conference. Farmers offered to settle the case for $230,000. The directors claimed that the cost of their liabilities exceeded their assets, and, thus, the directors could not contribute to the settlement. The association told Farmers they would settle the matter if Farmers paid the association $3.75 million in cash. However, less than 24-hours later (and before Farmers had given their decision on the settlement offer), the association went directly to the directors, and the parities settled for a $5.75 million stipulated covenant judgment (a judgment both parties agree to), in which the association agreed to drop all claims against the directors and go after Farmers exclusively. The association filed a motion for judicial determination that the settlement was reasonable.

The association asserted that the directors owed a fiduciary duty of care to the unit owners, and had breached that duty when they failed to order an inspection of the condominium. Farmers contended the association could not prove the directors breached their fiduciary duty because it could not show that the claimed breach had likely caused the water damage.

The court was doubtful that the directors’ failure to arrange a property inspection had caused the water damage. And even if the directors failed to inspect the condominium properly, as the association insisted, the court doubted the lack of one inspection in 15-years caused the water damage.

The association next argued that the directors were liable for having unreasonable omissions in the public offering statement (document stating the number and type of units in the building, the homeowners association rights and duties to owners and a list of any easements or liens affecting the title of the building) that was delivered to unit purchasers. The Washington condominium statute only requires that a condominium’s structural components be inspected to the extent that is “reasonably ascertainable.” In 2005, before the statute was amended to include stronger protections for unit purchasers, it was unclear whether information that could only be acquired through invasive inspection was “reasonably ascertainable.”

In addition to not proving that the directors were liable for unreasonable omissions, the association failed to effectively demonstrate that the building’s condition was a breach of the suitability warranty. The association also couldn’t prove that the ongoing water intrusion problem was likely to create severe deterioration throughout the complex in the future because it could not prove the condition of the building at the time it was converted into a condominium.

The largest portion of damages was the repair costs. The association submitted an estimate from Charter Construction for approximately $5 million. Farmers alleged that Charter had a history of submitting inflated bids for litigation purposes and renegotiating the actual cost of repairs after the settlement. Farmers presented an estimate for approximately $3,200,000, and the court concluded it was the more reasonable of the two.

The association estimated damages for loss of use and reduction in property value to be approximately $10,000 for each of the 96 units, or $960,000. Farmers contended that the amount of damages should be the lesser of the repair costs or reduction in value, but not both. It presented expert testimony that the owners would not be required to move while the repairs were being completed. The court concluded that a figure of $1,000 per unit was a more reasonable representation. Accordingly, the court awarded loss of use damages in the amount of $96,000.

The association stated it was entitled to approximately $2.25 million in attorney’s fees. Farmers argued that the association’s counsel failed to discount the hourly total for work spent on unsuccessful claims and duplicated efforts. After reviewing the billing report submitted by the association’s counsel, the court found that attorney’s fees in the amount of $770,000 were appropriate.

Taking into account the weaknesses in the association’s arguments, evidentiary problems with the association’s case, and the directors’ inability to pay, the court denied the association’s motion for a determination that the settlement reached during mediation was reasonable, and reduced the reasonable settlement value to $1,921,525.70.

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

Board Properly Assessed Units for Elevator Repair Costs

Epstein v. Villa Dorado Condominium Association, Inc., No. ED96777, No. ED96778, Mo. App. Ct., April 10, 2012

Assessments: A Missouri appeals court approved a special assessment for elevator repairs that was distributed equally to all condominium units—including units in buildings without elevators—because the Missouri Condominium Act requires common expenses to be allocated against all units in accordance with the interests set forth in the declaration.

Villa Dorado Condominium Association, Inc. (association) is a residential community located in St. Louis, Mo, that consists of 264 units in 45 separate buildings. Of these, nine buildings are equipped with elevators. Laurence Epstein owns a unit located in a building that is not served by an elevator.

In 2008, the association’s board of directors voted to repair the elevators and levied a special assessment to fund the repairs in the amount of $351,000. The board decided to assess all the units for the repairs, including those units in buildings that were not served by elevators.

Epstein sued the association, seeking an injunction (a judicial order to stop an action) that would prohibit the association from assessing repair costs of all limited common elements. She also sought a declaratory judgment ruling that the assessment to repair the elevators was illegal, invalid and void.

The trial court ruled in Epstein’s favor, finding the special assessment was illegal, invalid and void to all owners in buildings without elevators, and ordered the association to refund all assessments collected from those units. The court also prohibited the association from taking action to enforce the assessment and ordered the association to pay the unit owners’ attorney’s fees. The association appealed.

As previously reported in the February 2011 issue of Law Reporter, the appeals court reversed the trial court’s judgment, finding that Epstein was not entitled to seek relief on behalf of other unit owners because the other unit owners were not named in the lawsuit. The court reversed the trial court’s judgment for further deliberation.

Epstein’s amended petition for a class action suit included the names of 83 unit owners in buildings without elevators, and they filed a second motion to certify the classes. The trial court denied the class action petition, but ruled in Epstein’s favor, limiting the judgment to those parties named in the action. The association appealed.

The primary issue was whether the Missouri Condominium Act and the Villa Dorado declaration required repair costs to be paid solely by the owners of units in buildings that were served by elevators.

The appeals court held that the act requires common expenses to be allocated against all units in accordance with the percentages of ownership interests set forth in the declaration. Since the Villa Dorado declaration did not state that expenses for common elements that did not benefit all units were to be assessed exclusively against the units receiving the benefit, the association had properly assessed all units in the condominium for the elevator repairs. The trial court’s judgment was reversed.  

This case is significant because it protects the condominium unit owners’ expectations that common expenses will be allocated to all owners as provided in the governing documents. It emphasizes that the exceptions in the Uniform Condominium Act, while authorized, must be expressly stated in the declaration. Moreover, to rule otherwise would force the association to dissect each and every repair—for roofs, hallways, stairways, etc.— to determine which group of owners should be assessed the repair costs.

Editors Note: The Editor thanks Marvin J. Nodiff of the Law Office of Marvin J. Nodiff, P.C. in St. Louis, Missouri for contributing this case.

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

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Parking Canít Be Reallocated on Withdrawn Property

In re: 1801 Robert Fulton Drive, LLC, U.S. Bankruptcy Ct., No. 11-12753-BFK, Feb. 2, 2012

Covenants Enforcement/Developmental Rights: A Virginia court ruled that the clear and unambiguous language of a condominium declaration prohibited a developer from reallocating parking spaces previously assigned to the condominium and its unit owners in its plan to develop withdrawn property.

In April 2005, 1801 Robert Fulton Drive, LLC (declarant) recorded the Declaration of Sunrise Oak Professional Park Condominium in the land records of Fairfax County, Va. Sunrise Oak Professional Park consists of 30 units in a five-story office building. There are 311 parking spaces in the condominium, 250 of which are allocated to specific units.

The declaration provides that the declarant has the right to withdraw land (to remove a property from being bound by the terms of the association’s declaration)—described in the declaration as Parcel 3-A—for a period of up to seven years. Each person who purchased a unit in Sunrise Oak received disclosure documents that included a copy of the declaration and its exhibits.

In February 2006, the declarant’s control period expired. In April 2006, the declarant prepared a site plan for Parcel 3-A. The site plan was approved by the Fairfax County Works Department in July 2007, and the declarant recorded an amendment to the declaration to withdraw Parcel 3-A.

The site plan proposed a four-story office building with underground parking spaces. The site plan proposed to use 114 parking spaces located on Parcel 3-A, which were previously allocated to Sunrise Oak and/or its unit owners. The withdrawal amendment purported to create an easement granting Sunrise Oak unit owners access to and use of the parking spaces located on Parcel 3-A.

In March 2011, the association sued the declarant to quiet title (a lawsuit filed to establish ownership of real estate), seeking a declaration that the declarant’s withdrawal amendment and site plan for Parcel 3-A were unauthorized. In April 2011, the declarant filed a Chapter 11 bankruptcy petition. Subsequently, both parties filed motions for summary judgment (a determination made by a court without a full trial).

The court noted that whether the declarant could withdraw Parcel 3-A was not in dispute; but rather, whether it could reallocate parking spaces situated on the withdrawn property that were previously assigned to Sunrise Oak and its unit owners. The court was also looking to determine whether the declarant could grant a permanent easement to the association so that the declarant could use the parking spaces that remained in dispute.

In considering the case, the court reviewed the Virginia condominium statute and the condominium’s declaration itself. The statute requires that a condominium declaration explicitly contain the option for the developer to contract (withdraw land from) the condominium; a statement of any limitations on the option, including whether the consent of unit owners is required; a time limit to exercise these options not exceeding seven years from recording of the declaration; a legal description of the land that may be withdrawn as well as a legal description of all the submitted land that cannot be contracted.

Section 4.1 of the Sunrise Oak declaration specifically provides that “Declarant expressly reserves the right to withdraw any or all portions of the Withdrawable Land, including parking spaces thereon in excess of allocated spaces, at any time, at different times, in any order, without limitation; provided, however, that the Withdrawable Land shall not exceed the area described on Exhibits A-1 and C-1 attached hereto.” [Emphasis added.]

The declarant argued that the declaration’s language should be broadly construed to accomplish its purpose, which was the withdrawal of Parcel 3-A. The declarant also stated that in its interpretation of the declaration as a whole, the court should give more weight to the specific plats attached as exhibits to the declaration. The association maintained that Section 4.1 unambiguously provided that the previously allocated parking spaces could not be reallocated.

Finally, the declarant argued that the association’s interpretation of Section 4.1 corrupted the declarant’s intent to allow the withdrawal of Parcel 3-A. However, the court maintained this was not entirely so because the declarant had an inarguable right to withdraw the land; it just couldn’t reallocate the previously allocated parking spaces under the plain and unambiguous language of the declaration. Furthermore, pursuant to the condominium statute, the declarant was prohibited from creating a site plan that might affect the condominium without the association’s consent after the declarant control period expired.

The court granted summary judgment to the association.

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

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Bankruptcy Wonít Stall Time to File for Attorney Fees

Lewow v. Surfside III Condominium Owners Association, Inc., No. B230595, Calif. App. Ct., Feb. 2, 2012

Attorney’s Fees: Although a plaintiff’s bankruptcy petition did not suspend a condominium association’s statutory time period to file a motion for attorney’s fees, the California appeals court affirmed the award of post-judgment attorney’s fees, finding that for good cause, the trial court had the power to extend the time for filing.

On February 3, 2010, the Superior Court of Ventura County, Calif., entered a judgment in favor of Surfside III Condominium Owners Association (association) on Paul Lewow’s suit against the association, which alleged the association had failed to perform its duties. Notice of entry of judgment (a notice issued by the judge stating that a judgment has been entered in the case) was mailed to Lewow on Feb. 10, 2010.  The same day, Lewow filed for Chapter 13 bankruptcy relief. The judgment included an award of attorney’s fees in the amount of $292,205.50. Lewow appealed the award.

As the prevailing party in the original claim, the association prepared a motion for an award of attorney’s fees. It delayed filing the motion, however, because it believed the trial court proceedings were stayed (the act of temporarily stopping a judicial proceeding through a court order) by Lewow’s bankruptcy petition.

The association filed the motion for an award of attorney’s fees on Aug. 26, 2010, 32 days after the association had been mailed notice of Lewow’s bankruptcy dismissal. Lewow objected to the motion on the ground that it was not filed in a timely manner. He argued the court rules require that “[a] notice of motion to claim attorney’s fees must be filed no later than 60 days after notice has been served with notice of entry of judgment.” Since notice of entry of judgment was served on behalf of Lewow on Feb. 10, 2010, the association had 60 days to file its motion, but waited until Aug. 26, 2010, to do so.

The association, on the other hand, argued that the motion was filed in a timely manner because the time period to file was suspended while the bankruptcy stay was pending. The trial court accepted the association’s argument that the statutory period was suspended by the bankruptcy stay and awarded fees in the amount of $292,205.50. Lewow appealed.

The appeals court found that although filing a bankruptcy petition operates as an automatic stay (an injunction that prohibits most collectors from going after a debtor) that stops the commencement or continuation of a judicial proceeding against the debtor, it does not suspend the statutory period (a defined time period during which legal action may be taken) for filing a motion for attorney’s fees. However, California law states that under good cause, a trial judge may extend the time for filing. Accordingly, the trial court had the power to extend the time for filing the association’s motion. Good cause was the association’s mistaken belief that the bankruptcy stay had suspended the statutory period for filing the motion. Since the issue was complex and debatable, it was understandable that the association was mistaken.

The court concluded that, while the trial court’s rationale for granting the association’s motion was erroneous, it reached the correct result. Therefore, the post-judgment order awarding reasonable attorney’s fees to the association was affirmed.

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

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Special Assessment Doesnít Require Majority Vote

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

Assessments: A trial court’s 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 members was overturned by the Iowa Supreme Court because the special assessment didn’t require a majority vote.

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 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 bylaws provide:

. . . 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 validity of the special assessment 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 which 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 the decision was reasonably prudent and in the corporate interest. The association went on to state that the court was required to rule in its favor because of the business judgment rule (the legal presumption that the officers, directors and managers of a corporation are protected from judicial review, as long as their decisions were made in good faith). The court concluded that prior approval was necessary to make the repairs and ruled in Oberbillig’s favor. The association appealed.

On 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 all members except Oberbillig and one other member—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 granted the association express authority to interpret the bylaws and decide disputes over their application.

Finally, the court noted that it’s appropriate to apply the business judgment rule 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 votes from two-thirds of the membership approving the repairs.

The court concluded there were factual reasons for the business judgment rule to be utilized 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 (sent back to a lower court with instructions about further proceedings) for a 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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Owner Canít Convert Common Area into Private Foyer

Picerno v. 1400 Museum Park Condominium Association, 959 N.E.2d (Ill. App. Ct. 2011)

State and Local Legislation and Regulations/Architectural Control/Covenants Enforcement: An Illinois appeals court reversed a trial court’s ruling that allowed a unit owner to incorporate a common element hallway into his renovated unit as a private foyer, holding that the modification would diminish the interests of the remaining unit owners.

1400 Museum Park Condominium Association (association) is a 32-story building with 250 residential units located in Chicago, Ill. Michael and Christine Picerno purchased a corner unit on the 23rd floor, and Christine’s mother purchased the adjacent corner unit.  

In 2009, Picerno sought approval from the association to combine the two units. The association denied his request because rather than proposing to combine the two units by removing an existing wall (a proposal the association did not object to), Picerno proposed to convert approximately 35 square feet of a common element hallway into a private foyer for the combined units.

The association proposed instead that Picerno license the hallway under the following conditions:

  1. Re-submit plans showing a hallway door for uniformity.
  2. Pay for an architect retained by the association to review and approve the plans.
  3. Fund an escrow account to cover any future damage and [removal of] any improvements at a future date.
  4. Use only contractors fully insured and bonded, naming the association, board of directors and managing agent as additional insureds.
  5. Obtain written consent of all other unit owners on the floor.
  6. Submit a draft amendment to the condominium declaration combining the units.
  7. Execute a license agreement for use of the hallway.
  8. Pay all legal fees and costs (and engineering fees and costs) expended by the association relating to the board’s approval of the improvements and license agreement.

The association subsequently specified that Picerno was to provide $6,000 in permanent collateral to remediate his modifications, as well as pay a monthly license fee of $150 that was subject to a percentage increase mirroring any increase in the association’s budget.

Picerno sued the association, seeking a determination that he was entitled to incorporate the hallway into his unit pursuant to the Illinois Condominium Property Act (act) and Section 11 of the condominium’s declaration.

The trial court relied on Section 31 of the act to conclude that the hallway was not “necessary or practical for use” by the other unit owners and ruled in Picerno’s favor. The association appealed.

The association contended that the trial court misconstrued the act and failed to give effect to the condominium documents. It was undisputed that the hallway was part of the condominium common elements and, thus, owned by all the unit owners. Picerno’s exclusive use of the hallway prevented all the other unit owners from using a common element that they previously had access to and diminished their ownership interests.

The appeals court determined that converting the hallway to private use was plainly contrary to Section 4(e) of the act, which “expressly provides that once the percentage of ownership interest in the common elements has been determined and stated in the declaration, the percentage shall remain constant, absent an agreement by all the unit owners.” Nothing in the record suggested that Picerno sought the consent of all the other unit owners.

Furthermore, the court found that Picerno misconstrued paragraph 11(a) of the declaration when he argued he was entitled to convert the common element hallway into a limited common element foyer: according to the court, the reference to “common element” in 11(a) plainly applied only to walls between adjoining units, not to the enclosure of a hallway that already provided ingress and egress to the two units.

Section 31 of the act provides that an application to combine adjoining condominium units shall be granted as long as the limited common elements used are “not necessary or practical for use by the owners of any units other than the owner or owners of the combined unit.” The court acknowledged the trial court correctly found that terminating the section of hallway outside Picerno’s units was not necessary or practical for use by other unit owners. However, the trial court’s interpretation was too narrow and failed to account for the additional language of the statute, which indicated that a proposed renovation is “subject to additional limitations provided by the condominium instruments.”

The appeals court reversed the trial court’s ruling and directed that Picerno accept the association’s conditions to license the hallway, with the exception that he must obtain approval of all the other unit owners, not just those on the 23rd floor of the modification.

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

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Restriction Expiration Doesnít End Assessment Obligation

Sullivan v. O’Connor, No. 10-P-1590, Mass. App. Ct., Jan. 27, 2012

Assessments/Covenants Enforcement: A Massachusetts appeals court affirmed a ruling that even though a property’s deed restrictions had expired, owners were still obligated to pay assessments because the obligation was an equitable servitude that burdened the property.

John Sullivan purchased a home in Westwood Hills Community in Suffolk County, Mass. The subdivision is governed by Westwood Hills Improvement Association (association), created by a declaration of trust recorded in 1929 to provide services and amenities to the community. The declaration obligates property owners, as members of the association, to pay assessments to fund the services and amenities.

From July 1977, when he purchased the property, until June 1983, Sullivan paid assessments to the association. After June 1983, he ceased all payments, disputing the association’s authority to levy assessments against his property and claiming he was not a member of the association. In 2007, the association sued him to collect unpaid assessments from and after June 1983. The court ruled in the association’s favor, and Sullivan appealed.

The deed language in Sullivan’s chain of title (the history and chronological list of all owners and lien holders of a property) expressly subjected his property to “any and all restrictions of record which are now in force and applicable thereto.” However, the deed restrictions did not contain language that expressly required membership in, or payment of assessments to, the association.

The trial court based its determination on three distinct legal theories: title-based responsibility, common scheme of development (a plan or process for developing a common interest community) and implied-in-fact contract. The appeals court found that any one of these theories provided a sufficient basis to affirm the trial court’s decision.

Two exceptions exist to Massachusetts’ general rule that land “is free of encumbrances that are not noted on the certificate of title”: (1) reference to prior documents that would prompt a reasonable purchaser to investigate further; and (2) a purchaser’s actual knowledge of an encumbrance. Although Sullivan’s deed did not contain an explicit provision stating that owners are automatically members of the association or that they must pay assessments, the deed specifically referenced the association multiple times in connection with the restrictive covenants, thereby providing sufficient notice to stimulate a search for obligations that would have led to the 1929 declaration.

In light of the obvious nature of the association’s private services and amenities, and the substantial duration of time Sullivan received the benefit of those services—as well as explicit references to other association restrictions—Sullivan had sufficient knowledge of his duty to pay assessments, which he paid for six years.

Furthermore, Massachusetts law provides that if a developer conveys enough lots in a subdivision plan with deeds that include uniform restrictions proving the existence of a common scheme of development but don’t expressly agree to insert the same restrictions on later conveyances, an agreement to do so may nevertheless be implied and enforced in equity.

There was sufficient evidence that a common scheme of development was created for Westwood Hills in the 1929 declaration, and that the scheme continued to exist when Sullivan purchased his property. The declaration explicitly states that the association has the power to impose membership or use fees on lot owners; such clear language demonstrated the existence of a burden to be shared by lot owners to support the trust property by paying assessments.

Under an implied-in-fact contract theory, when there is an absence of an express agreement, an implied contract may exist that states the terms of conduct expected of the parties. Sullivan’s purchase of his property was subject to the association’s control, and the fact that he benefited from association membership implied his consent to be charged assessments common to all other members.

Sullivan argued that the deed restrictions were extinguished by Section 28 of the Massachusetts General Laws, which provides that restrictions imposed before 1962 are expired 50 years from their initiation unless a new notice of restrictions is recorded every 20 years. However, the court discerned that there was a difference between an obligation to pay assessments from the deed restrictions.

Massachusetts common law provides that a previous owner’s promise to make payments that are connected with a property may impose an equitable servitude (the right for a party to use, or implement restrictions on, a piece of property it does not own) on the property. The equitable servitude is enforceable against the subsequent owner who takes title of the property, so long as there is actual or constructive notice of the obligation. Although the restrictions in Sullivan’s deed had expired, his obligation to pay assessments had not.

The appeals court affirmed the trial court’s judgment.

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

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HOAís Assessment Lien Superior to Mortgage Lien

Summerhill Village Homeowners Association v. Roughley, No. 66455-7-I, Wash. App. Ct., Feb. 21, 2012

Assessments/Powers of the Association/State and Local Legislation and Regulations: A Washington appeals court affirmed a trial court ruling that the foreclosure of a condominium association’s lien for assessments extinguished the mortgage lender’s lien on the property because the lender did not attempt to pay the assessment lien prior to the sheriff’s sale, and the sale extinguished the lender’s earlier deed of trust.

In November 2006, Dawn Roughley purchased a unit in Summerhill Village Homeowners Association (association), a condominium development in King County, Wash. She financed the purchase with a loan from Homecomings Financial LLC, which was secured by a deed of trust from Mortgage Electronic Registration Systems (MERS).

When she became delinquent on her condominium assessments, the association filed an action to foreclose on the unit through the assessment lien it placed on the property, and served MERS with the summons and complaint. MERS forwarded the summons and complaint to GMAC Mortgage, LLC, the loan servicer (an entity that collects, monitors and reports loan payments), and GMAC did not respond.

The association obtained a default judgment (a judgment entered in favor of the plaintiff when the defendant fails to appear in court) in September 2009, and proceeded with a foreclosure sale. In December 2009, Plumbline Profit Sharing Plan bought Roughley’s unit at a sheriff’s sale for $10,302—the amount of the default judgment plus $100.

Shortly thereafter, MERS assigned its beneficial interest in Roughley’s deed of trust to Deutsche Bank Trust Company Americas. Deutsche Bank appointed LSI Title Agency Inc as a successor trustee (the trustee who takes over when the initial trustee can no longer function). Both documents were returnable to Executive Services LLC after recording.

Plumbline notified both LSI and Executive Services about its purchase of the unit at the sheriff’s sale and requested information about their intentions regarding the unit. Neither LSI nor Executive Services responded to its request.

Meanwhile, Roughley was delinquent on her loan payments. GMAC, as loan servicer and attorney-in-fact for Deutsche Bank, instituted foreclosure proceedings and thereby learned of the association’s foreclosure action for the first time.

GMAC moved to intervene in the association’s foreclosure action, seeking either to vacate the year-old default judgment and obtain a declaration stating that Deutsche had lien priority, or to confirm its right to redeem the property.

The court allowed GMAC to intervene but refused to vacate the judgment, ruling that GMAC was not qualified to redeem the foreclosed property. GMAC appealed.

As a general rule, the priority of competing lien claims depends on the order in which the claims attach to the encumbered property. One exception to this rule is found in the Washington Condominium Act (act), which provides that a condominium association automatically levies an assessment lien against the unit from the time the assessment is due. The assessment lien has priority to all other liens and encumbrances, except for a unit’s mortgage recorded before the date the assessment became delinquent. The act further provides that the association’s lien has priority to a mortgage (including a deed of trust) when the lien is for assessments that cover common expenses. The reasoning for this was when drafting the condominium statute, the Washington legislature expected that, as a practical matter, lenders would most likely pay the association assessments rather than have the association foreclose its lien on the unit and eliminate the lender’s mortgage lien.

Under the condominium statute, the association’s 2008 assessment lien on Roughley’s unit had priority over the 2006 MERS deed of trust because the association’s lien was for assessments that cover common expenses. MERS was notified of the foreclosure action, but GMAC, as the loan servicer, did not attempt payment of the assessment lien prior to the sheriff’s sale, and the sale extinguished the 2006 deed of trust.

Washington’s redemption statute permits a borrower or mortgage lender to redeem foreclosed property for the price paid at the sale. Redemption is the process of cancelling and annulling the title created by a tax sale (property sold by a taxing authority or the court to recover delinquent taxes) by paying the debt. The statute identifies qualified redemptioners as the judgment debtor (a person obligated to satisfy a court judgment) or a creditor having a lien acquired by judgment, deed of trust, or mortgage on any part of the property after the time the property was sold.

To qualify as a redemptioner, the lien holder (by deed of trust) must have acquired the lien after to the one being foreclosed on. Deutsche Bank’s 2006 deed of trust was not acquired after the association’s super priority assessment lien. Therefore, the appeals court concluded that Deutsche Bank was not a proper redemptioner under the statute.

The court affirmed the trial court’s decision.

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

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