July 2013
In This Issue:
Amendment to Relieve Developer of Maintenance Obligations Is Improper
Insurance Doesn’t Provide Coverage for Lawsuit
Association Waived Right to Enforce Declaration
Association Didn’t Unreasonably Restrict Owner’s Easement Rights
Claims for HOA's Breach of Fiduciary Duty Are Insured
Owner’s Lawyer Barred from Board Meetings
Association Has Authority to Sue Developer for Damages to Individual Units
City Must Compensate HOA for Taking Open Space
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Amendment to Relieve Developer of Maintenance Obligations Is Improper

Flescher v. Oak Run Associates, Ltd., Nos. 5D12-2575, 5D12-32354 (Fla. Dist. Ct. App. Apr. 5, 2013)

Developmental Rights/State and Local Legislation and Regulation: A Florida appeals court ruled that a developer’s amendment to a subdivision’s restrictive covenants—which relieved the developer of its maintenance obligations—was an improper exercise of its amendment power.

Oak Run subdivision consists of 25 neighborhoods with approximately 3,439 homes. The developer, Oak Run Associates, Ltd., recorded a declaration of restrictive covenants for each neighborhood, which were materially all the same. As part of its development plan, the developer retained ownership and control over all common areas and recreational facilities. Each declaration requires homeowners to pay assessments to the developer for common area upkeep and maintenance, with the base assessment amount for the individual neighborhoods provided in each declaration.

Prior to 2005, the declaration required that annual assessments be collected not only to maintain the recreation and common areas but also to cover community operating costs, such as utility charges, trash collection, security, cable television, roads and drainage facilities. The assessments could include a reasonable amount for reserves, but reserves were not required. The declaration provides that the developer may unilaterally amend the declaration at its sole and absolute discretion.

In May 2005, the developer recorded an amendment to each of the declarations that limited the use of homeowners’ assessments to recreational and common area maintenance. The amendment also removed the requirement that assessments were to be used to fund  landscaping, utilities, roads and drainage facilities. Finally, the amendment allowed the developer to retain any unused assessments, effectively preventing the creation of any reserves.

A group of individual homeowners in Oak Run sued the developer, seeking, among other things, to invalidate the amendment. The owners filed a motion for summary judgment (judgment by the court without a trial) with respect to the developer’s authority to amend the declaration.

The owners contended that the developer’s right to amend the declaration was limited by an implied “reasonableness test” and that the amendment was invalid as it substantially changed the character of the subdivision. The trial court ruled against the owners, and the owners appealed.

The Florida courts have previously recognized at least one implied limitation on the right to amend a declaration, which is “that the reserved power be exercised in a reasonable manner so as not to destroy the general plan.” The appeals court also looked to the Restatement (Third) of Property for guidance, which recognizes this same limitation, but “imposes an additional restriction that the developer may not materially change the burdens on the existing community members unless they are apprised of this possibility by the declaration.” Further, the Florida courts have previously held that an amendment to a declaration is impermissible if it brings about a “radical change” which “would create an inconsistent scheme or, a deviation in benefit from that of the grantee to that of the grantor.”

The appeals court held that the amendment was an improper exercise of the developer’s amendment power because it improperly and changes the burdens between the parties. The appeals court found it unreasonable for the developer to collect fees that were intended to cover certain obligations while subsequently eliminating its duty to apply the funds toward those obligations and allowing the developer to keep excess funds.  

The appeals court reversed the trial court’s judgment in part and affirmed in part.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Insurance Doesn’t Provide Coverage for Lawsuit

Hunt v. Beach Club Condominium Association, Inc., No. 2012AP2197-FT (Wis. Ct. App. June 4, 2013)

Risks and Liabilities: A Wisconsin appeals court affirmed a finding that a condominium association’s directors and officers insurance policy did not provide coverage for a legal suit because the plaintiffs did not seek monetary damages.

In 1989, Dan Hunt and Janet Ziegler-Hunt constructed Beach Club Condominium on property they owned in Chippewa County, Wisc. The Hunts, whose family owns adjacent property, sought to preserve their right to use the beach located on the Beach Club property by including a provision in the condominium declaration which stated that “use of the beach area shall be shared with the Declarant and their family.”

In 2010, the members of Beach Club Condominium Association, Inc. (association) voted to terminate the Hunts’ use of the beach area. They formally amended the declaration on June 7, 2013. The Hunts sued the association, seeking to have their ownership interest (the rights an owner has to a property) in the beach area verified and to establish their rights to use the beach.

The association asked  Auto-Owners Insurance Company, the provider of its directors and officers liability policy, to defend the lawsuit. The policy provided: “We will pay those sums the insured becomes legally obligated to pay as damages because of any negligent act, error, omission or breach of duty directly related to the management of the premises.” (emphasis added).

Auto-Owners intervened in the lawsuit, seeking a determination that its policy did not provide coverage for the Hunts’ claims. (Intervention is a procedure by which a third party, not originally a party in the case, claims an interest in and seeks to join the suit to protect his rights). The trial court dismissed Auto-Owners from the suit. The association appealed.

On appeal, the association’s sole argument was that the insurance policy provided coverage for the Hunts’ claims. The dispute revolved around whether the Hunts sought “damages.” The association argued that the policy was ambiguous because it failed to define the term “damages.”

The appeals court noted that, although the Hunts’ claimed several causes of action (a set of facts sufficient to justify a plaintiff’s right to sue the defendant), they clearly sought only one remedy. They alleged breach of contract, seeking “to have their interest in the condominium and real estate declared and made certain.” The Hunts also asserted that the declaration reserved to them  ownership interest in the property and stated that they were co-owners of the beach area (listed as tenants-in-common with the association). They further sought judicial clarification of the phrase “beach area” because that term was not defined in the declaration. Finally, the Hunts claimed a prescriptive easement in the beach. (A prescriptive easement is the right to use another’s property in a manner consistent with the owner’s rights, which is acquired by open and notorious use of the land over a continuous period of time set by state law).

The appeals court determined that it was plain the Hunts sought only the right to continue using the beach area. The court explained that prior case law defines the term “damages” in a commercial liability policy as meaning “legal damages”—compensation for past wrongs or injuries consisting of money or something that has monetary value. Here, the Hunts did not seek remedial relief; the desired result was merely the right to use the beach area in the future. Thus, the appeals court rejected the association’s argument that the policy was ambiguous.

The association further argued that coverage should not be denied because the Hunts’ complaint included a request for “costs, disbursements and attorney fees” as their final prayer for relief. The appeals court found that, while prayers for relief commonly found at the end of a complaint may clarify allegations stated elsewhere in the complaint, they are only a small part of a plaintiff’s request. Here, the appeals court determined that the substantive portion of the Hunts’ complaint did not need clarification; it was abundantly clear that they did not seek a monetary remedy for past wrongs. Taken as a whole, the complaint indicated that the Hunts only wanted the right to use the beach area.

The appeals court concluded that Auto-Owners was properly dismissed from the case because the insurance policy did not provide coverage for the claims set forth in the Hunts’ complaint. The trial court’s judgment was affirmed.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Waived Right to Enforce Declaration

Loch ‘N’ Green Village Section Two Homeowners Association, Inc. v. Murtaugh, No. 02-12-00094-CV (Tex. App. May 30, 2013)

Covenants Enforcement: A Texas appeals court affirmed a trial court’s order that certain lots specifically excluded from the association’s declaration could not be compelled by the association to become members or pay assessments.

Lake Interlochen is a subdivision in Arlington, Texas, containing two water reservoirs. The Lake Interlochen Homeowners Association (Interlochen) is responsible for operating those reservoirs.

In 1980, Coventry Southwest, Inc. (Coventry) purchased almost 50 acres of land near one of the reservoirs. Coventry proposed to enlarge the reservoir by storing additional water on Coventry’s parcel. Interlochen objected to the proposal, and litigation ensued. The parties agreed to a settlement in which Interlochen agreed to the reservoir expansion.

In exchange, Coventry agreed to establish the Loch-N-Green Homeowners’ Association (Loch-N-Green HOA) and to require those who purchased property there to become members of the Loch-N-Green HOA. The settlement agreement also provided that Loch-N-Green HOA would make a pro rata contribution (proportionately according to a certain rate, percentage or proportion) for the cost of maintaining the reservoir and the upstream dam. Further, Coventry agreed that the settlement agreement was a covenant running with the land, which would bind its successors and assigns in title to its property. A plat for Loch ‘N’ Green Village was recorded, but Coventry never developed the land. Ownership of the property changed several times.

In 1986, six lots in Loch ‘n’ Green Village—lots 27 through 32 of Block 2—were sold to Terra-One Partnership. These six lots were sold to individual home buyers. Some of the remaining Coventry property was eventually acquired by JMH Investments, Inc. (JMH).

In 1993, JMH recorded a declaration of covenants, conditions and restrictions against its property (called the “Addition”), which expressly did not include lots 27 through 32 of Block 2. The declaration established Loch ‘N’ Green Village Section Two Homeowners Association, Inc. (association) and mandated that lot owners in the addition pay annual assessments to the association. The declaration also contained use restrictions and acknowledged the association’s obligation to share in the costs of the dam and reservoir maintenance pursuant to the settlement agreement with Interlochen.

JMH proposed privatizing the streets in Loch ‘N’ Green Section Two subdivision. Through letters sent to the owners of lots 29 and 39 in August 1993, JMH expressed that such owners would not be compelled to join the association, but could do so if they desired.

Sharon Murtaugh acquired lot 27 in 1999. Pamela Johnston purchased lot 30 in 2003. Connie Ragsdale bought lot 28 in 2006. Eileen and Russell Greene purchased lot 32 in 2007. (Murtaugh, Johnston, Ragsdale and the Greenes are collectively referred to as the “defendants”). The deed to each of these lots provided that the property was subject to any and all recorded restrictions and covenants. None of the deeds expressly referenced the association or stated that the lot was subject to the declaration.

In 2010, a dispute arose between the association and the defendants over parking restrictions. The association sued the defendants, alleging they had refused to comply with the declaration terms and had failed to pay association assessments. The defendants counterclaimed, seeking a determination that their lots were excluded from mandatory association membership and not bound by the declaration. The defendants maintained that they had reasonably relied on the association’s inaction to enforce the declaration over the years, thereby extinguishing any of their alleged obligations to the association. 

The association argued that the defendants cannot assert that they are not subject to the declaration since each defendant signed a planned unit development rider (a provision added to ownership documents) as part of its mortgage. By signing the rider, the defendants  acknowledged that their lots were part of the Loch ‘N’ Green planned unit development. The association also asserted that the defendants were required by either the restrictive covenant or equitable servitude (land use restriction which may be enforced in equity) to become members of the association based, in part, on the settlement agreement between Interlochen and Coventry.

The trial court granted summary judgment (judgment without a trial) to the defendants, stating that membership in the association was voluntary for the defendants and they were not required to fulfill any member responsibilities to the association. The association appealed.

The appeals court concluded that the declaration and each amendment to the declaration clearly showed an intention to regulate only property within the addition, which expressly excluded the defendants’ lots. JMH never owned the defendants’ lots and, therefore, would not have had the authority to impose the declaration on such property. The declaration also contained restrictions and obligations beyond those in the Interlochen settlement agreement. Moreover, no attempt had been made to enforce any restrictions against the defendants’ lots for nearly 15 years.

Even if there was a rationale for finding that the declaration had applied to the defendants’ lots, the appeals court concluded that the association had acquiesced in such substantial violations of the declaration with respect to defendants’ lots that it waived any right to enforce the declaration. The waiver may be proved by inaction for a period long enough to show an intention to yield a known right.

The trial court’s order to grant summary judgment was affirmed.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Didn’t Unreasonably Restrict Owner’s Easement Rights

Northwest Properties Brokers Network, Inc. v. Early Dawn Estates Homeowners’ Association, 295 P.3d 314 (Wash. Ct. App. Feb. 20, 2013)

Miscellaneous Association Operations: A Washington appeals court reversed a trial court ruling that an association had unreasonably restricted the easement rights of an adjacent property owner when it denied him a key to the access gate control box.

Early Dawn Estates is a residential community in Yacolt, Wash., and is managed by Early Dawn Estates Homeowners’ Association (association). In 2000, Frank Fredericks purchased property adjacent to Early Dawn Estates, which he subdivided into four lots. He retained one lot and sold the other three. The only way Fredericks could access the nearby public road from his property was via Northeast 159th Avenue (159th), a private road located within Early Dawn Estates. When he purchased the property, Fredericks obtained a nonexclusive easement for ingress, egress and utilities along 159th.

Early Dawn Estates’ covenants, conditions and restrictions (declaration) require that association members pay for the upkeep of the private roads within Early Dawn Estates through roadway maintenance assessments. Approximately 80 percent of the association’s road maintenance expenditures were for 159th.

The county required Fredericks to create a separate road maintenance agreement as a condition of his subdivision’s approval, which also requires the four lot owners to contribute toward the maintenance of 159th. Under the agreement, the lot owners could meet their obligations by (1) performing maintenance on 159th themselves, (2) paying contractors to perform the maintenance or (3) paying association fees for road maintenance. Fredericks initially paid the association’s $250 annual road maintenance assessment, but he later stopped paying because he didn’t believe that he should be required to pay the same rate as association members. Fredericks did on occasion, however, perform or pay contractors to perform some additional road maintenance.

A security gate spanned 159th at the time Fredericks purchased the property. The gate could be opened in four ways: (1) residents could open the gate remotely from their vehicles; (2) residents count enter an access code into a keypad by the gate; (3) guests could call an owner who could open the gate remotely; or (4) the power could be turned off at the gate’s electrical panel.

After burglars discovered how to turn off the power at the electrical panel, the association installed a lock on it and gave keys to only a few people. The association established gate-opening guidelines, which provided that the access gate could be left open only upon prior authorization by a board member or designated representative. It was within the board’s sole discretion to grant requests that the gate be left open.

Fredericks requested a key to the electrical panel, but his request was denied. In 2010, he asked the association on multiple occasions to leave the gate open. Although the association granted his first two requests, it denied his subsequent requests because he failed to comply with the association’s gate guidelines.

Fredericks sued the association, asserting that refusal to give him a key to the electrical panel constituted unreasonable interference with his easement rights. He petitioned the court to require the association to provide him with a key. He also requested that the court determine that he was not required to pay the association’s road maintenance assessments.

The association counterclaimed that Fredericks had been unjustly enriched by its past maintenance of 159th and sought a judgment of $960 and a ruling requiring Fredericks to pay the same annual road maintenance assessment as association members.

The trial court ruled in Fredericks favor, finding that even though Fredericks was responsible for paying his fair share of road and gate maintenance costs, he was not required to pay the same amount as association members. The trial court held that the association had unreasonably restricted Fredericks’ easement rights by denying him a key to the gate’s electrical panel and that he was entitled to leave the gate open as he deemed necessary, provided he place an “Event” sign at the gate when he left it open. The association appealed.

The appeals court analyzed the gate’s original purpose at the time the easement was created; the court also studied the nature of the property subject to the easement and the manner in which the road has been used and occupied. The appeals court determined that the association had implemented reasonable measures to accommodate changing conditions when it became clear that the gate, as it was being operated, did not provide adequate security for the subdivision. Denying Fredericks the ability to leave the gate open at will did not preclude him from opening the gate altogether because the gate could still be opened by other reasonable methods. There were also no legitimate health or safety concerns resulting from the locked gate. Therefore, the appeals court found that the trial court had abused its discretion in ruling that the association unreasonably restricted Fredericks’ easement rights in refusing to give him a key to the gate’s control box and requiring him to obtain approval before leaving the gate open for an extended period.

The appeals court reversed and vacated the trial court’s finding that the association had unreasonably interfered with Fredericks’ easement rights.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Claims for HOA's Breach of Fiduciary Duty Are Insured

Pulliam v. Travelers Indemnity Company, No. 2012-211939 (S.C. Ct. App. May 8, 2013)

Risks and Liabilities: A South Carolina appeals court ruled that an association’s insurance policy did provide coverage for allegations against the association, including failing to establish a reserve fund and failing to warn owners of the potential conflict of interest in a developer-controlled board of directors.

M.U.I. Carolina Corporation, Regent Carolina Corporation and Regent Corporation (developers) completed construction of the Kensington Place Horizontal Property Regime between 1994 and 1995. The developers incorporated Kensington Place Property Owners Association (association) in 1996 to manage the condominium. The association’s board of directors initially comprised the developers’ employees or designees. Control of the board and the condominium common elements was transferred to the unit owners in April 2007.

In 2008, a group of unit owners sued the association, alleging breaches of fiduciary duty and negligence for failing to: (1) adequately inspect and maintain the common elements, (2) inform unit owners of the conflict of interest in a developer-controlled board and (3) establish a reserve fund to pay for repairs. The unit owners then filed an action against Travelers Indemnity Company, seeking a determination as to whether the association’s insurance covered the alleged claims in the underlying lawsuit.

Travelers argued that the unit owners’ claims were for “property damage” and punitive damages (damages awarded by a court against a defendant as a deterrent or punishment to redress an egregious wrong perpetrated by the defendant), both of which were excluded under the Directors and Officers Endorsement section of the association’s insurance policy (policy) issued by Travelers. The unit owners filed a motion for summary judgment (judgment without a trial), arguing that their claims were not excluded because they claimed economic loss based on breaches of duty and negligence, not “property damage.”

The trial court granted the unit owners’ motion, finding that the breach of fiduciary duty claims were related to damage from defective construction or design and were covered under the policy. The trial court reasoned that defective design or construction was not considered “property damage” under the standard established by Crossman Communities of N.C., Inc. v. Harleysville Mutual Insurance Co., 395 S.C. 40, 717 S.E.2d 589 (2011). The trial court concluded that damages to correct the initial defective construction are covered, but other property damage caused by the defective construction is not covered. Travelers appealed the judgment.

On appeal, Travelers argued that the trial court erred in relying on Crossman to determine what constituted “property damage” under the policy. The policy specifically provides that “property damage” is excluded from coverage and defines “property damage” as: (1) Physical injury to tangible property, including all resulting use of that property; (2) Loss of use of tangible property that is not physically injured; or (3) Diminution of property value.

The appeals court held that it was not improper for the trial court to look to Crossman for guidance since the policy at issue in Crossman also involved the same definition of “property damage.” Nevertheless, the appeals court concluded that the application of the principles set forth in Crossman did not correlate adequately to the facts and the policy in this case. Therefore the appeals court did not support the trial court’s conclusion in its entirety.

The appeals court noted that the unit owners did not argue that the association had completed construction or made repairs to Kensington Place before the association came into existence in 1996. Consequently, no reasonable interpretation of the allegations could support a finding that the association was being sued for any initial construction defects.

Additionally, any further deterioration of the faulty construction that arose from 1997 to 2006 and that could be attributed to the association’s inaction would at most constitute diminution of the unit owners’ property value, a harm specifically included in the policy’s definition of “property damage.” Thus, there was no coverage for any property damage claims.  

However, the appeals court concluded that the association’s duty to establish a reserve fund, while related to property damage, did not result in physical damage to tangible property, but rather caused economic damage when the unit owners had to spend more money to make repairs. Likewise, allegations that the association breached its duty by failing to warn residents of the conflicts of interest in the developer-controlled association did not allege physical injury to tangible property. Therefore, neither breach of duty claim was excluded from coverage under the “property damage” exclusion.

Travelers argued that the unit owners’ claims were excluded from coverage under other policy provisions which were not ruled upon by the trial court. The association’s policy also excludes coverage for damages resulting from “[a]ny dishonest, fraudulent, criminal or malicious act, error or omission committed by or with the knowledge of any insured.” The appeals court determined that no dishonest, fraudulent, criminal or malicious action was alleged.

The policy excludes coverage for damages resulting from “[t]he failure of any insured to enforce the rights of the Named Insured against the builder, sponsor or developer of the property designated in the Declaration.” However, the appeals court determined that none of the allegations amounted to a claim that the association had failed to enforce any rights or compel the developer to perform a particular action.

The policy excludes coverage for damages resulting from “[a]ny claim or ‘suit’ made by any insured against another insured.” Travelers argued that this provision excludes coverage since seven of the unit owners had served on the board in the past. Under the policy, the term “insured” includes those who were directors when the “wrongful act” took place. However, all of the unit owners came onto the board after the time during which the wrongful acts were alleged to have occurred.

Therefore, the appeals court concluded that the policy provided coverage for the breach of fiduciary duty allegations because the association failed to establish a reserve fund and warn residents of potential conflicts in the developer-controlled association. The appeals court upheld the trial court’s determination that damage to other property flowing from defective design or construction were excluded as “property damage.” It also concluded the trial court erred in finding that the policy covered initial defective construction. Finally, the appeals court held that the policy did not cover claims for punitive damages, which were clearly excluded under the policy’s terms.

The appeals court affirmed part of and reversed part of the trial courts ruling.

Editor’s Note: The Editor thanks the McNair Law Firm, P.A. of Charleston, S.C. for contributing this case for publication.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Owner’s Lawyer Barred from Board Meetings

SB Liberty, LLC v. Isla Verde Association, Inc., No. D061261 (Cal. Ct. App. May 22, 2013)

Covenants Enforcement/State and Local Legislation and Regulation: A California appeals court upheld a ruling that an association was not required to open its board meetings to a member’s legal counsel.

Isla Verde is a residential community in Solana Beach, Calif., and is managed and maintained by Isla Verde Association, Inc. (association). The association’s bylaws provide that any association member in good standing may attend any board meeting except executive sessions.

In 2006, Gregg and Janet Short purchased a home in the community. When the Shorts submitted architectural plans to remodel their home, a dispute arose between the Shorts and the association regarding the scope of the construction, which resulted in litigation brought by the association. The Shorts’ lawyer, Peter Lepiscopo, notified the association’s attorney, William Budd, that he represented the Shorts and that he planned to attend the September 2011 board meeting on the Shorts’ behalf. Budd said he would not be at the meeting and asked Lepiscopo not to attend because his attendance would violate the rules of professional conduct, which prohibit an attorney from communicating with another party represented by counsel without permission from the party’s counsel.

Lepiscopo replied that his attendance at the meeting would not implicate the rules of professional conduct because he would be appearing on the Shorts’ behalf. On the day before the meeting, Budd again notified Lepiscopo by e-mail that he was not allowed to attend the board meeting over Budd’s objection. Budd also instructed Lepiscopo not to communicate with the association without Budd’s permission. Lepiscopo nevertheless attempted to attend the meeting but was denied access.

The next day, the Shorts recorded a deed conveying ownership of their home to SB Liberty, LLC (LLC), a limited liability company organized in early 2011 with Gregg Short designated as the sole manager. About a week later, Gregg Short, as manager of the LLC, executed a power of attorney that appointed Lepiscopo as the LLC’s attorney-in-fact, or agent, giving Lepiscopo the right to present requests and motions to the board and to attend and participate in the board’s meetings on behalf of the LLC.

Lepiscopo then notified Budd that he planned to attend the October 2011 meeting and attached a copy of the power-of-attorney to his letter. Budd again then argued that the power of attorney only authorized Lepiscopo to act as the LLC’s attorney, which didn’t confer any membership rights. At the October meeting, the board again asked Lepiscopo to leave.

The LLC then sued the association, seeking an injunction to enjoin the association from taking any action that would prevent or interfere with its representatives, including Lepiscopo, from attending or participating in board meetings. It argued that the association was a quasi-governmental entity, and as the LLC’s membership rights were fundamental in nature, the loss of such rights constituted irreparable harm.

The association maintained that there was no legal basis for allowing a member’s attorney to appear before the board without the member or the association’s counsel present. The association claimed that Lepiscopo’s direct contact with the board violated the rules of professional conduct, and that only members were allowed to attend association meetings.

Under California corporate law, management of a limited liability company is vested in all members unless the articles of organization provide otherwise. It was undisputed that Lepiscopo was not a member of the LLC. The trial court noted that the LLC was free to appear at association meetings through its manager, Gregg Short, and its members. The trial court determined that the board had authority under the corporations code to determine how to conduct its meetings and to exclude nonmembers from meetings. The trial court denied the LLC’s motion for injunction. The LLC appealed.

The appeals court found that the LLC’s claim—that it was entitled to send a representative of its own choosing to participate in association meetings—was not persuasive. The LLC relied on the Davis-Stirling Common Interest Development Act, which provides that any association member may attend and speak at board meetings. However, the appeals court noted that the association’s governing documents define who qualifies as a member and who is allowed to participate at board meetings.

Isla Verde’s declaration defines “member” as the record lot owner. The trial court properly found that Lepiscopo was not a member of the LLC and was not authorized by its articles of organization to manage the business or affairs of the LLC. Thus, the LLC could not delegate management authority to him.

Furthermore, the declaration and corporate law prohibited the LLC from transferring any membership rights to Lepiscopo except the right to vote by proxy. Holding a member’s proxy does not entitle a nonmember to attend or speak at board meetings since no business is conducted by association members at board meetings.

The appeals court affirmed the trial court’s order denying the LLC’s motion for preliminary injunction.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Has Authority to Sue Developer for Damages to Individual Units

University Commons Riverside Home Owners Association, Inc. v. University Commons Morgantown, LLC, 741 S.E.2d 613 (W. Va. Mar. 28, 2013)

Association Operations/Developer Liability: The West Virginia Supreme Court held that the State’s Uniform Common Interest Ownership Act authorizes an association to sue a developer for damages to two or more individual units from alleged construction defects.

University Commons Riverside Condominium Complex is located in Star City, W.Va., and consists of 84 units. The unit owners are members of University Commons Riverside Home Owners Association, Inc. (association).

In 2009, the association sued University Commons Morgantown, LLC, the developer and other entities (collectively, developer) on its own behalf and on behalf of its members for damages arising from alleged defective development, negligent construction and misleading marketing. Individual unit owners were not named as plaintiffs in the lawsuit.

In November 2010, the developer moved to have all unit owners joined as plaintiffs. The developer argued that while the West Virginia Uniform Common Interest Ownership Act (act) allowed the association to represent its members in matters affecting the “common interest community,” the association did not have authority to pursue claims for damages to individual units.

Concerned about the burdensome scope of discovery, the association opposed the motion to join the individual unit owners and moved for a protective order to secure the right to sue on behalf of its members for all claims asserted in the complaint. The parties had engaged in extensive discovery for nearly three years: They had taken 44 depositions, identified 31 experts and produced thousands of pages of documents. The developer sought to depose more than 200 people.

The trial court granted the developer’s motion to join all unit owners to the suit, denied the association’s motion for a protective order and determined that questions concerning the scope of the act should be certified to the West Virginia Supreme Court for decision. The act gives an association the power to: “Institute, defend, or intervene in litigation or administrative proceedings in its own name on behalf of itself or two or more unit owners on matters affecting the common interest community.”

The trial court determined that the association had standing to bring an action on behalf of its members in regards to matters affecting the “common interest community,” but lacked the capacity to represent unit owners with respect to damages to individual units. The association argued, however, that it had the power to assert claims pertaining to individual units due to the act’s broad definition of "common interest community."

The developer argued that such an interpretation goes beyond the plain language of the act. Under the rules of statutory interpretation, where the wording is clear and unambiguous, the statute should be applied as written and not interpreted by the courts. Moreover, the evidence revealed that some unit owners not only believed the association did not have the authority to bind the individual unit owners, but that they would have the right to assert individual claims if they were not satisfied with the outcome of this case.

After analyzing the relevant statutory provisions, the supreme court determined that the plain language of the act supported the association’s position. It was critical to the supreme court that the act defines the term “unit” as “a physical portion of the common interest community designated for separate ownership or occupancy.” “Given the fact that a unit is a physical portion of the common interest community, it necessarily follows that damages only affecting individual units are nonetheless matters affecting the common interest community.”

Thus, the act permits the association to bring an action on behalf of two or more unit owners for damages specific to individual units. The supreme court recognized this approach follows the national trend acknowledging the representative capacity of an association to represent its members more effectively in construction defect disputes, thereby simplifying the litigation process and facilitating more prompt action.

However, the supreme court also acknowledged that the act provides no guidance or mechanism to handle this type of case and offers no procedure for approving any type of settlement with regard to individual unit damage claims. Therefore, the supreme court advised the parties to proceed under the West Virginia mass litigation rules before a mass litigation panel. It is a panel’s duty to develop and implement case management and trial methodologies to resolve fairly and quickly the matters before it, which may include imposing requirements or limits with respect to additional discovery.

In addition, the supreme court ordered that individual notice should be given to all unit owners to make them aware of the lawsuit and to advise them that they are currently represented by the association.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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City Must Compensate HOA for Taking Open Space

Willowmet Homeowners Association, Inc. v. City of Brentwood, Tennessee, No. M2012-01315- COA-R3-CV (Tenn. Ct. App. May 16, 2013)

Association Operations: A Tennessee appeals court reversed a trial court’s decision to deny a homeowners association compensation for open space that was conveyed to the City of Brentwood by the subdivision’s developers.

In 2000 and 2001, two land developers—Centex Homes and Tiara Development, LLC—created Willowmet, a residential subdivision on Concord Road in Brentwood, Tenn. The developers recorded a declaration of protective covenants, conditions and restrictions for Willowmet on August 24, 2001, and incorporated Willowmet Homeowner’s Association, Inc. (association) on December 19, 2001.

The declaration mandated that the developers convey (to transfer title of real property from one person [grantor] to another [grantee]) all open space to the association before it sold the first lot. The first lot was sold on March 28, 2002. However, the developers did not convey any of the open space to the association until 2011. In the interim, the City of Brentwood informed the developers that it planned to widen Concord Road and needed to acquire a portion of Willowmet’s open space from each developer. The title search conducted by the city revealed that the property was subject to the declaration.

On October 12, 2010, Tiara Development executed a Right-of-Way and Easement Conveyance in favor of the city for land identified as Tract 77 in exchange for $3,675. On October 27, 2010, the successor-in-interest of Centex Homes—Pulte Home Corporation—executed a Right-of-Way and Easement Conveyance in favor of the city for land identified as Tract 86 in exchange for $20,300. Both documents provide that: “Grantor covenant [sic] that it is lawfully seized and possessed of the real estate described in this conveyance, and has a good and lawful right to convey the same, and that the title thereto is unencumbered, and Grantor will forever warrant and defend the same against the lawful claims of all persons whatsoever.”

Thereafter, the developers conveyed the remaining open space to the association by a series of quitclaim deeds (an instrument which transfers all of the rights, title and interest that the conveyor has in a piece of property, but with no warranty or assurances that the conveyor has good and legal title).

In June 2011, the association sued the City of Brentwood, seeking compensation for its lost property rights in Tract 77 and Tract 86. The association asserted that: (1) it had an equitable interest (an ownership interest in property recognized by equity, even though legal title is vested in another) in the open space before it was conveyed to the city; (2) the city had actual and constructive notice of that interest; and (3) the city’s purchase constituted a taking the association’s equitable interest in the property, for which it was entitled to just compensation under Tennessee’s inverse condemnation statute. A “taking” occurs when government action directly interferes with or substantially disturbs the owners use and enjoyment of the property. Inverse condemnation is an action brought by a property owner to recover the value of property that is taken for public use by a governmental body even though no formal condemnation proceeding has been instituted. Under the statute, the property owner may sue for damages.

The trial court ruled in the city’s favor, holding that the inverse condemnation statute did not apply. The association appealed.

The association argued that it possessed a property interest in the open space at the time the developers conveyed the property to the city, and it did not consent to the conveyance. Consequently, the association claimed that the city “took” the association’s property interest in the open space, and the association was entitled to just compensation for its value. The city contended that the developers were the owners of record when it purchased the two tracts; therefore, the association had no claim against the city.

The appeals court noted that the association’s rights to the disputed property arose from the association’s declaration, which states in Article VII, Section 8.5 that the developers “will deed the completed Open Space found on the subject Properties to the Association free and clear of encumbrances before the first Lot is conveyed to a Lot Owner.” Furthermore, the open space “is to be owned by the Association and used in common by all Lot Owners.”

The court concluded that, once the declaration was recorded and the association was incorporated, the developers had an affirmative duty (a legal obligation that requires some effort to satisfy) to convey the open space to the association before selling the first lot. After the first lot was sold in March 2002, without first conveying the open space to the association, the developers were in breach of the declaration.

The association had a definite interest in the tracts that the developers conveyed to the city. It also held equitable title to the tracts by virtue of the declaration. Moreover, when the city purchased the property from the developers, it had actual and constructive notice that the tracts were subject to the declaration. The developers could not unilaterally extinguish the association’s equitable title in the tracts by selling them to the city without the association’s knowledge or consent. Although the city had the authority to acquire property to widen the road, it could not “bury its head in the sand” and ignore the association’s real outstanding interest. In other words, the association’s equitable title was a valuable property interest for which it was entitled to just compensation under the inverse condemnation statute.

The appeals court reversed the judgment of the trial court and remanded the matter to the trial court for further proceedings consistent with its findings.

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