August 2013
In This Issue:
Condominium Act Does Not Require Insurer to Cover Property Excluded Under Its Policy
Association Must Own Community Building
Lot Owner's Club Membership May be Suspended
Golf Course Cannot be Converted to More Profitable Use
Association Not Liable for Visitorís Injuries
Association Not Entitled to Compensation for Lost Assessments
Association Not Negligent for Architectural Review
Board Breached Fiduciary Duty by Failing to Conduct Owner Vote
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Condominium Act Does Not Require Insurer to Cover Property Excluded Under Its Policy

Citizens Property Insurance Corporation v. River Manor Condominium Association, Inc., No. 4D12-901 (Fla. Dist. Ct. App. Apr. 10, 2013)

Association Operations/State and Local Legislation and Regulation: The Florida Court of Appeals held that a condominium association may obtain less insurance coverage than is required by the Florida Condominium Act.

River Manor Condominium Association, Inc. (“association”) operates a residential condominium in Broward County, Florida. The complex consists of three buildings, and each was insured separately by Citizens Property Insurance Corporation (“Citizens”) during Hurricane Wilma.

When the association and Citizens were unable to agree on the extent of the damage caused by the hurricane, they participated in a mandatory appraisal process that produced an award specifying the total loss sustained by each building and the exterior common elements. The appraisers were not asked to decide coverage issues, only to ascertain the amount of damage. The trial court entered final judgment confirming the appraisal award.

Citizens appealed the judgment, arguing that the trial court improperly awarded damages for property that was excluded under its policies and for amounts that should have been deducted from the award based on facts the court refused to consider.

The Citizens policies excluded from coverage “other structures . . . set apart from the building by clear space,” including carports, cabanas, swimming pools, Jacuzzis, piers, seawalls, bridges, ramps, walks, decks, patios and similar structures. Also excluded were trees, shrubs, plants and other landscaping.

Each policy contained a requirement that the policy be amended to “conform” to conflicting state statutes. The association claimed the exclusions in the policies conflicted with Section 718.111 of Florida’s Condominium Act (act). Section 718.111(11)(a) requires an association to use its “best efforts to obtain and maintain adequate insurance to protect the association, the association property, the common elements, and the condominium property required to be insured by the association pursuant to paragraph (b).” (Emphasis added by the court). Section 718.111(11)(b) describes “property required to be insured by the association” as “[a]ll portions of the condominium property located outside the units.”

The association argued that the insurance policies—to conform to the act—must delete the exclusions for detached structures and landscaping since these were items the association was required to insure under the act. The appeals court disagreed.

The appeals court held that the act, when considered as a whole, was intended to regulate the association’s obligation by specifying items the association (rather than the unit owners) was responsible for covering and requiring the association to use its “best efforts” to obtain the coverage. The statute did not intend to impose mandatory insurance obligations upon insurers or to further regulate the insurance business, an industry extensively regulated elsewhere in the Florida Statutes.

The appeals court also found that a literal interpretation of subsection (11)(b) could lead to undesirable consequences since it could require associations to purchase prohibitively expensive insurance rather than allowing the association to use its business judgment to negotiate a contract that fits its particular needs. The appeals court noted that the absence of related provisions in the statute strongly suggests it was not intended to force contractual terms on unwilling participants or eliminate the association’s power to negotiate its own insurance contracts, a power that all property owners possess.

The trial court’s judgment was reversed in part and remanded for entry of a final judgment removing the appraisal amounts for items excluded under the policies.

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

 

Association Must Own Community Building

Greens at Half Hollow Home Owners Association, Inc. v. Greens Golf Club, LLC, 39 Misc. 3d 1242(A) (N.Y. Sup. Ct. June 5, 2013)

Developmental Rights/Municipal Relations: A New York Supreme Court ruled that the zoning code required subdivision common areas, including community building and associated recreational facilities, be conveyed to the homeowners association.

The Greens at Half Hollow subdivision is a 382-acre parcel of land in Huntington, New York. In 1999, the developer sought a zoning change from residential to planned unit development (PUD) and submitted a proposed master plan to the Town of Huntington for approval. Included in the plan were an 18-hole golf course, a 20,000-square-foot community center, a swimming pool and tennis court complex and a golf clubhouse.

The developer also submitted proposed PUD zoning regulations. The town adopted the master plan and granted the re-zoning. PUD zoning allows three types of land use: (1) dwellings; (2) community buildings not to exceed 25,000 square feet, which may contain indoor and outdoor recreational facilities and support services for the residents’ and guests’ exclusive use; and (3) golf courses, including clubhouse and accessories necessary to operate and maintain the facilities. PUD zoning also requires the developer to create a homeowners association that owns and maintains all common areas.

The initial development plans showed a golf clubhouse and a separate community center with indoor recreational facilities. However, the developer decided that two structures were unnecessary and wasteful; he decided instead to combine the golf clubhouse and community center into one building. The plans submitted to the town showed a 33,845-square-foot building identified as “Community Building/Golf Course Club House.”

Before the town approved the plan or issued a building permit, it asked the developer to break down the building’s community and clubhouse portions to ensure the building complied with necessary codes. The developer identified portions of the lower level (7,765 square feet) and the entire upper level (15,587 square feet) as community building area with a combined total of 23,574 square feet. At this time, Greens Golf Club, LLC (Golf Club) constructed a golf course and operated it as a private, for-profit business.

A condominium association (association), five condominium boards and four unit owners (collectively, the plaintiffs) sued the Golf Club to convey the community building/clubhouse to the association. The Golf Club filed a motion for summary judgment (a determination by the judge where there are no undisputed material facts or only questions of law are involved), arguing that the zoning code dictates only land use, not land owners. Additionally, the motion stated that zoning code cannot compel the Golf Club to convey the building to the association. The plaintiffs also filed a motion for summary judgment.

The court agreed with the plaintiffs that, under the zoning code, the community building and its associated outdoor recreational facilities were common areas that should be owned and maintained by the association. The term “common area” was not defined in the zoning code; however, since the zoning code permitted only dwellings, community buildings and golf courses, buildings not used for these purposes must be common area. 

By permitting the developer to combine the community building and the golf clubhouse, the town did not, in effect, merge their uses, thereby changing the community building from common area to part of the privately-owned golf course. In fact, the town insisted that the developer identify the community building within the structure. The building permit and occupancy certificate each described the building as “community building” with “golf course accessory facilities.” This demonstrated to the court that the town insisted the community building and golf clubhouse be separate and distinct.

The town also enacted PUD zoning based on regulations proposed by the developer, and the developer never objected to the zoning once it was adopted. The court determined that the zoning code required the association to own the community building and its associated outdoor recreational facilities. Therefore, the court denied the Golf Club's motion for summary judgment.

However, the court acknowledged that the relief awarded to the plaintiffs was complicated by the fact that the community center and the golf course clubhouse were combined, and the zoning code did not regulate golf course ownership and associated uses. Therefore, the case was scheduled for trial where the court will hear evidence as to the appropriate combined building ownership and an equitable manner for the parties to share future building maintenance and operation costs.

The court also granted an injunction (court order prohibiting someone from doing something) prohibiting the Golf Club from allowing anyone other than subdivision residents to use the community’s portions of the building, including the swimming pool and tennis courts.

The court dismissed the plaintiffs’ other causes of action and denied all other requested relief.

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

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Lot Owner's Club Membership May be Suspended

Peters v. Bentwater Yacht and Country Club, Ltd., No. 4:12-cv-3596, U.S. Dist. Ct. (S. D. Tex. June 3, 2013)

Miscellaneous Association Operations: A federal district court in Texas ruled that a lot owner's club membership may be suspended when the spouse fails to pay club dues on a separate lot owned by the spouse.

In 2002, Paul Peters purchased a lot in the Bentwater subdivision in Montgomery County, Texas. Deed restrictions require lot owners to maintain a membership in Bentwater Yacht and Country Club (club). From March 2005 until April 2011, Mr. Peters paid club dues and other charges by automatic debit from his checking account.

In 2004, Peters' wife, Angela Peters, purchased a residence on another lot in Bentwater. The deed restrictions required that Angela maintain a separate club membership for this lot. However, Mrs. Peters did not pay club dues or other charges after making the first payment at closing.

In 2010, the club advised Mrs. Peters that she and her family’s club facility use was suspended until her account was brought current. Mr. Peters continued to pay his dues until May 2011, when he terminated the automatic debit.

In 2011, Bentwater Property Owners Association, Inc. (association) filed a lien against Mrs. Peters’ lot. Mr. Peters sued the club under state law for theft, wrongful lien and breach of contract as well as various federal law violations. The club filed a motion for summary judgment (judgment without a trial) on the state law claims.

Mr. Peters alleged that the club unlawfully appropriated control over his money and property when it debited his checking account during the period in which his membership was suspended because of his wife’s delinquency. However, Mr. Peters did not dispute that he authorized the automatic debits. Furthermore, the club’s rules and regulations provide that a suspended member is still required to pay monthly dues during the suspension. Therefore, the court found his argument that he did not consent to the automatic withdrawals unpersuasive.

The club asserted that it was not liable for the wrongful lien claim because the lien was filed by the association, not the club. The court held that Mr. Peters could not recover from the club on this claim because it did not meet the statutory requirements for liability. Even if Mr. Peters had alleged a fraudulent lien against the appropriate party, the court found no genuine issue of material fact to demonstrate that the lien was, in fact, fraudulent.

To establish a fraudulent lien, Mr. Peters would need to show that the club: (1) made, presented or used a document with the knowledge that it was a fraudulent lien; (2) intended the document be given legal effect; and (3) intended to cause Mr. Peters financial injury. The fact that Mr. Peters might dispute the amount charged to his wife’s account or find his own suspension unfair does not make the lien fraudulent. The court found no evidence that the document was filed with the knowledge that it was false or with the intent to cause injury.

Mr. Peters argued that the club breached its membership policies by suspending his membership and requiring his wife to acquire a duplicate membership. His membership was suspended because a family member’s account was in default for more than 90 days. Mr. Peters signed a membership application indicating he had received the membership policies and agreed that his membership privileges were subject to the terms and conditions of those policies.

The membership policies specifically provide that any membership account more than 90 days delinquent may be revoked or privileges suspended. During the suspension period, the “Member and his or her Family shall have no rights or privileges to use the Facilities.”

The court found that, although Mr. Peters did not violate the membership policies directly, the club still had a contractual basis to suspend his membership. The policies made it clear that all family members would lose their club privileges and be suspended if the lot owner was overdue for more than 90 days. The deed restrictions did not exempt a member who owned more than one lot from the requirement for each lot. Therefore, the court held that the club was not in breach of its contractual obligations to Mr. Peters.

The court granted summary judgment to the club on all of Mr. Peters’ state law claims.

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

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Golf Course Cannot be Converted to More Profitable Use

Ponderosa Pines Golf Course, LLC v. Ponderosa Pines Property Owner's Association, No. 31,489 (N.M. Ct. App. May 2, 2013)

Developmental Rights/Sale and Lease Restrictions: A New Mexico appeals court upheld an order that precluded a privately owned golf course located within a subdivision to be converted into another, more profitable use.

Ponderosa Pines Golf Course, LLC (PPGC) owns a 37-acre golf course in the Ponderosa Pines subdivision located in Otero County, New Mexico that it purchased in 2005. The subdivision was developed in 1973 by El Dorado Land Corporation (developer). It contains 125 lots, on which 50 homes have been built. The subdivision is managed and maintained by Ponderosa Pines Property Owners' Association (association). Despite efforts to advertise and promote the golf course, it has operated at a loss over the last five years.

PPCG sought a declaratory judgment (a determination of a controversy where the plaintiff is in doubt as to its legal rights) against the association and the lot owners to convert the golf course into something more profitable. The association moved for summary judgment (judgment without a trial), arguing that purchasers bought lots believing the golf course would be part of the subdivision; this created an equitable servitude (land use restriction), making the property a golf course or open space in perpetuity. PPCG argued that disputed material facts precluded summary judgment in the case.

The trial court granted the association's motion for summary judgment, finding that the developer and realtors told purchasers the golf course would remain a golf course. The trial court concluded that the association and property owners had the right to demand the Ponderosa Pines Golf Course be used as a golf course in perpetuity and maintained “in a condition of natural beauty and view at least equivalent to that of a golf course.” PPCG appealed.

The central question for the appeals court was whether the developer induced purchasers to buy lots by representing the golf course as part of the subdivision. The association argued that a private right rooted in equity precluded PPCG from converting the golf course to some other use.

The New Mexico Supreme Court established that “where land is sold with reference to a map or plat showing a park or like open area, the purchaser acquires a private right, generally referred to as an easement, that such area shall be used in the manner designated.” The supreme court’s rationale is that a seller who uses a plat to induce purchasers to believe that streets, squares, courts, parks, or other open areas will be kept open for their use and benefit is required by common honesty to do what he said he would do. The private rights created when buyers purchased their lots based on a plat are superior to the developer’s attempt to reserve the power to alter the areas marked on the plat as golf course or open space.

While PPGC argued that the existence of disputed material facts precluded summary judgment, PPGC conceded that some buyers received assurances from the developer that the golf course would remain. As such, there is no requirement for the association to show that such assurances were made to all lot purchasers.

Based on New Mexico’s policy to protect the rights of lot purchasers who relied on a plat and assurances from the developer that the golf course would be preserved as a place of natural beauty and view, the appeals court concluded that the evidence was sufficient to prove that representations about the golf course were made to buyers.

The trial court’s order granting summary judgment to the association 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 Not Liable for Visitorís Injuries

Siegel v. Park Avenue Condominium Association, Inc., No. A13A0357 (Ga. Ct. App. June 19, 2013)

Association Operations: The Georgia Court of Appeals held that a condominium association was not liable for injuries sustained by a visitor when she fell inside the automatic revolving door at the building’s entrance.

Park Avenue Condominium is a high-rise condominium in Atlanta, Ga., managed and maintained by Park Avenue Condominium Association, Inc. (association). While Lorraine Siegel was visiting a Park Avenue resident, she fell while standing inside the automatic revolving door in the lobby.

The undisputed evidence showed that Siegel left her car with the valet and entered the Park Avenue lobby through the recently installed automatic revolving door. When she and two friends returned to the lobby several hours later, they asked the valet to retrieve their cars. One of the women asked Siegel to hold her portable oxygen bottle while she got into her car. Siegel stepped out of the wind into the revolving door. When Siegel signaled to the valet to come get the oxygen bottle, her movement triggered the door’s sensor. The door began to rotate and hit Siegel’s foot, causing her to fall and break her hip and elbow.

Siegel sued the association, contending that the association was responsible for her injuries. The trial court granted the association’s motion for summary judgment (judgment without a trial), and Siegel appealed.

To recover on a theory of premises liability, a plaintiff must show injury caused by a hazard on the property that the property owner should have removed in the exercise of ordinary care for the safety of the invited public. In addition, the plaintiff must show the property owner had superior knowledge of the hazardous condition. It is not sufficient to show that an unfortunate accident occurred and the plaintiff was injured.

Siegel presented no evidence that the automatic door malfunctioned. She also testified that she noticed the new revolving door when she arrived at the building and that the previous sliding entry doors had also been motion-activated. Siegel did not have to push the door when she entered the building because it had a motion sensor.

The building manager testified that the association changed the building's entryway from sliding doors to a revolving door because the lobby was cold and engineering studies had indicated there was no other reasonable way to keep it warm. After the incident, the door installer inspected the door and indicated it was functioning properly, and Siegel presented no evidence to the contrary. The association also presented evidence of the door's safety mechanisms.

The appeals court held that, absent evidence of a defect in addition to the fall, the evidence does not support a finding that the association has superior knowledge that the revolving doors were a hazard to Siegel. Therefore, the trial court's grant of summary judgment to the association on the premises liability claim was not in error.

Siegel also contended that the association was negligent because there was no separate door within 10 feet of the revolving door, as required by changes in the building code. The manager testified that the association had contracted with a company to install the second door, but Siegel fell before the door was installed. Siegel argued that absent an alternate entry, she had no choice but to use the revolving door; however, she did not claim that she would have used a side-swinging door if one had been available.

Absent evidence that Siegel would have behaved differently had a swinging door been present, the trial court could not declare the association had acted negligently. The appeals court held that the grant of summary judgment to the association on the negligence claim also was not in error. Accordingly, 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 Not Entitled to Compensation for Lost Assessments

United States of America v. Mariners Cove Townhomes Association, Incorporated, 705 F.3d 540 (5th Cir. 2013)

Covenants Enforcement/Federal Law and Legislation: A U.S. appeals court ruled that an association's right to collect assessments on condemned townhomes was not a compensable property interest because the loss was incidental to taking property subject to restrictive covenants.

Mariner’s Cove is a residential development consisting of 58 townhomes near Lake Pontchartrain and the 17th Street Canal in New Orleans, La. Mariner’s Cove Townhomes Association (association) provides residential services to homeowners pursuant to a declaration of servitudes, conditions and restrictions. The declaration provides that each townhome owner shall pay a proportionate share of the community maintenance, repair, operation and administration expenses.

Mariner’s Cove suffered substantial damage from Hurricane Katrina. The U.S. Army Corps of Engineers (Corps) began to repair and rehabilitate the levee adjacent to Mariner’s Cove and to construct an improved pumping station. The Corps later determined it needed to acquire 14 of the 58 townhomes to access the pumping station.

While the government was negotiating townhome acquisition with the owners, the association claimed an interest in the properties based on the declaration. Specifically, the association claimed it was entitled to just compensation for loss of its right to collect assessments on the properties. The government reached agreements with each of the 14 townhome owners for the purchase of their properties but did not resolve the association's claim.

In June 2009, the government filed condemnation actions (taking private property for public use through eminent domain) against each of the 14 townhome properties. It named the association as a purported owner in each of the proceedings based on the association's claimed interest. The trial court issued an order in each proceeding granting the United States possession of the townhomes.

After the government took possession of the properties, the association responded to the condemnation complaints, claiming that the government was obligated to pay the yearly assessments arising since the Corps’ occupation in September 2005, and for the reasonable lifetime of a townhome association such as Mariner's Cove as compensation for reducing its assessment base. The association also argued alternatively that it was entitled to a lump sum payment based on the future assessments that would have been paid by the 14 condemned townhomes.

The government moved for judgment on the pleadings (a request for the court to decide the matter based on the filed documents without submitting additional evidence), and the trial court granted the government's motion. The trial court found that the property had already vested in the United States, and all existing possessory and ownership interests not specifically excepted were extinguished. The association appealed.

The central issue for the appeals court was whether the federal government must provide just compensation under the Takings Clause of the Fifth Amendment to the U.S. Constitution when it condemns property burdened by a party's right to collect assessments and thereby diminishes the party's assessment base. The Takings Clause provides that private property shall not be taken for public use without just compensation. The court considered the question in two parts: was the right to collect assessments a property right; and, if so, was it is compensable under the Takings Clause.

While the meaning of the term “property” is a federal law question, the appeals court acknowledged that state law normally provides the context for the definition. The appeals court observed that Louisiana law suggests that the right to collect assessments is a building restriction but is viewed as an affirmative covenant. Therefore, the right to collect assessments is a property interest.

The next step is to determine whether the association’s property interest is compensable. The U.S. Supreme Court has imposed a consequential-loss rule in cases where interests other than property are lost. The rule requires that government pay for all tangible interests actually condemned and for intangible interests directly connected with the property taken. The consequential-loss rule excludes compensation for such things as future profit loss, the expense of removing fixtures and moving personal property from the premises and the loss of good will associated with the property’s location. 

While the consequential-loss rule is generally intended to bar payment for business losses and contract frustration, the appeals court determined that the rule should be applied to this case because the association’s right to collect assessments is a real covenant that functions like a contract and is not directly connected with the land. The appeals court concluded that the association's right to collect assessments was not a compensable property interest under the Fifth Amendment. In addition, if the court recognized the association’s right as compensable, the court would be giving special status to what is, essentially, a contract simply because it appears in the condemned land’s title chain.

The appeals court affirmed the trial court’s judgment. The association filed a petition for certiorari to the U.S. Supreme Court on June 12, 2013 (No. 12-1453), which is pending. (A writ of certiorari is the name given to the discretionary device used by the U.S. Supreme Court to choose the cases it wishes to hear. The Supreme Court declines to hear most cases.)

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

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Association Not Negligent for Architectural Review

W&W Del Lago, LLC v. Rancho Del Lago Homeowner's Association, No. D060990 (Cal. Ct. App. June 19, 2013)

Covenants Enforcement/Architectural Control: A California appeals court affirmed a ruling that an association was not negligent in reviewing and approving a lot owner's inaccurate construction plans.

In 2007, W&W Del Lago, LLC (W&W) purchased Lot 42 in the Rancho Del Lago subdivision in Rancho Santa Fe, Cal. The subdivision is subject to a declaration of restrictions and managed by Rancho Del Lago Homeowners Association (association).

The declaration provides that no building or other improvement may be constructed on a lot unless the owner first submits plans and specifications to the association's art jury for written approval. Approval is based on “quality of workmanship and materials, harmony of height, location, and external design with existing structures, and as to location in relation to surrounding structures, topography, and finish grade elevation.”

W&W retained an engineering company to provide a preliminary grading plan for proposed construction on Lot 42. The plans showed the elevation for W&W’s proposed building pad was 389 feet, and the elevation of the residence owned by Stacey and Jeffrey Feinberg on the adjacent lot was 407 feet—a difference of 18 feet. In calculating the elevations, however, the engineer used an inaccurate benchmark, resulting in the plan elevations being seven feet lower than their actual elevations.

W&W submitted a site development plan, site sections and a topographic survey reflecting elevations on Lot 42 and adjacent lots based on the benchmark established by the engineer. Unbeknownst to W&W, the art jury reviewed a topographical plan unrelated to their development that showed the Feinberg building pad elevation to be 414 feet. Based on these plans, the art jury determined the difference in height between the two pads was 25 feet. However, the actual elevation was seven feet higher than shown on the W&W plans.

The art jury asked W&W to erect story poles on the lot to reflect the proposed structure’s height and general exterior dimensions. The art jury viewed the story poles but not from surrounding properties. W&W’s plans were approved by the art jury, subject to changes for one outbuilding. W&W began to grade the property and construct the home in accordance with the (inaccurate) plans.

In 2009, the Feinbergs sued W&W because W&W’s construction obstructed their view. Recognizing its plans were defective and not approved as presented, W&W settled the lawsuit by paying the Feinbergs $201,000 and agreeing to remove the home under construction.

In 2010, W&W sued the association, asserting negligence, among other things. W&W claimed that the art jury had recognized there was an elevation variance between Feinberg's lot and their proposed plans, but negligently did not seek an explanation for the variance.

The association demurred to W&W complaint, arguing it did not owe W&W a duty of care. (A demurrer is an assertion that the complaint does not set forth a cause of action upon which relief can be granted, and it admits, for purposes of testing the sufficiency of the complaint, all properly pled facts but not conclusions of law.) The trial court sustained the demurrer, finding that the association owed W&W no duty of care. The trial court entered a judgment dismissing W&W's action against the association. W&W appealed.

The elements of a cause of action for negligence are: (1) a legal duty to use due care; (2) a breach of that legal duty; and (3) the breach is a proximate or legal cause (the primary cause of an injury, without which the result would not have occurred) of the resulting injury. On appeal, W&W argued that the association acted unreasonably in reviewing its plans because it did not verify the accuracy of the elevation measurements. The trial court and the appeals court both concluded that W&W's negligence claim could not be sustained because it did not satisfy the first element of a cause of action for negligence—it could not establish a legal duty owed to W&W. The duties the association owed to W&W are limited to those set forth in the association's governing documents, the Davis-Stirling Common Interest Development Act and the corporations code.

Nowhere is there any obligation imposed on the board or a volunteer art jury to insure an owner for errors in plans certified by the owner’s own licensed engineer. The declaration imposed a duty on owners to submit complete plans and specifications to the association for approval; it did not impose a duty on the association to verify the accuracy of the plans.

Moreover, W&W did not allege the association's decision to approve its plans was unreasonable, arbitrary or capricious. The appeals court held, therefore, that W&W failed to state a cause of action for negligence because the facts did not support that the association owed it a legal duty of care in the circumstances. 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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Board Breached Fiduciary Duty by Failing to Conduct Owner Vote

Wolinsky v. Kadison, 987 N.E.2d 971 (Ill. App. Ct. Mar. 29, 2013)

Covenants Enforcement/Sale and Lease Restrictions: An Illinois appeals court affirmed a finding that an association board breached a fiduciary duty to a unit owner by exercising the association's right of first refusal to purchase a unit without first obtaining the unit owner vote required under the governing documents.

In 1976, Debra Wolinsky rented an apartment in Ambassador House in Chicago, Il. In 1977, the apartments were converted to condominiums, and Leonard Chavin purchased Unit 4D, a one-bedroom unit, for Wolinsky. Wolinsky was divorced and Chavin was married; however, he and Wolinsky had a 19-year relationship and three children together.

In 1978, Wolinsky was pregnant with twins and wanted to move to a two-bedroom unit. Since the condominium documents gave the association a right of first refusal, she notified Ambassador House Condominium Association (association) that she intended to purchase Unit 21F for $118,000. Shortly thereafter, the association received another offer to purchase Unit 21F from Dr. Frank Oliver, a widower. Without conducting the owner vote required by the bylaws, the board exercised the association's right of first refusal and rejected Wolinsky’s offer to purchase Unit 21F. It then sold the unit to Oliver for $120,000. Subsequently, Wolinsky purchased Unit 7B for $143,000. Both Wolinsky and Chavin signed the mortgage.

In 1979, Wolinsky sued the association and the individual board members, alleging, among other things, breach of fiduciary duty by failing to conduct an owner vote. This case has been pending for 34 years. The case was appealed twice as various court rulings were challenged and eventually sent back to the trial court for trial.

In 2007, the association filed a motion for summary judgment (judgment without a trial), arguing that the business judgment rule protected the association and the board against claims of breach of fiduciary duty. In 2009, the trial court denied the association's motion, finding that the association could not rely on the business judgment rule because the directors failed to comply with the bylaws and declaration.

At trial, the sole issue was the amount of damages due to Wolinsky for the breach of fiduciary duty. Wolinsky sought $86,000 based on the difference in the purchase price of Units 21F and 7B, the difference in mortgage payments, the alleged difference in the two units’ current market values and the money she spent to improve Unit 7B, which was not as nice as 21F.

After hearing the present value of Units 21F and 7B and the time value of money from two appraisers, the trial court awarded $56,992 to Wolinsky on her breach of fiduciary duty claim based on the difference in the down payment, purchase price and additional mortgage payments required to purchase Unit 7B instead of 21F. Wolinsky appealed the amount of damages. The association appealed the denial of its motion for summary judgment.

The association conceded that the required owner vote was not taken, but argued that it was still entitled to summary judgment under the business judgment rule because Wolinsky could not establish that the board's actions proximately caused her injuries (proximate cause is the primary cause of an injury, without which the result would not have occurred).

The business judgment rule will protect directors from liability for honest mistakes, but a prerequisite to the rule’s application is that directors exercise due care in carrying out their corporate duties. The business judgment rule does not apply where directors act without becoming sufficiently informed to make an independent business decision.

The appeals court found that the association's argument was undermined by its own actions. According to testimony, the board exercised its right of first refusal to prevent Wolinsky from purchasing Unit 21F due to her lack of income, her dependency on Chavin for support, her 1976 bankruptcy and complaints about her conduct from other unit owners and the managers.

Despite the stated concerns about Wolinsky, the board failed to exercise the right of first refusal when Wolinsky purchased Unit 7B for more money. The association suggested that this was in response to an alleged statement by Chavin that he would continue making offers on two-bedroom units until Wolinsky was allowed to purchase one. The appeals court found this action did not reflect the board exercising business judgment. As such, the appeals court concluded the business judgment rule does not apply to protect the association.

The appeals court also concluded there was proximate cause between the board’s breach of fiduciary duty and Wolinsky’s claim for damages. As such, denying summary judgment to the association was proper.

The appeals court further found that awarding damages was not against the manifest weight of evidence, as is required to overturn a trial court's judgment following a bench trial (trial before a judgment instead of a jury). Accordingly, the trial court's order was affirmed.

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

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