January 2014
In This Issue:
Association Cannot Demolish House
Tenants Are Not Responsible for Paying Condominium Assessments
Cost Discrepancy Does Not Relieve Contractor from Performing Under Settlement Agreement
Country Club Breached Member Contract
Association Failed to Provide Evidence That Yard Was Not Well Maintained
Boat Slips Are Not Condominium Units
Insurer Is Not Obligated to Compensate Association for Loss Due to Lawsuits Brought by the Association
Common Interest Ownership Act Does Not Limit Application of Corporate Law Voting Restrictions
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Association Cannot Demolish House

Evans v. Davis, No. 14-12-01053-CV (Tex. App. Nov. 19, 2013)

Architectural Control/Covenants Enforcement/Use Restrictions/Powers of the Association: A Texas appeals court ruled that an association did not have the authority to demolish a house that was in violation of the deed restrictions.

Russell and Terrie Evans (collectively, Evans) owned a home in the Happy Hide-A-Way subdivision in Houston, Tex. The subdivision is subject to deed restrictions administered by Happy Hide-A-Way Civic Club, Inc. (association).

In April 2010, the association notified Evans that their property was in violation of the deed restrictions because it was being used as a dumping ground, various vehicles were improperly stored on the lot and the weeds and grass were not maintained in a “sanitary, healthful and attractive manner.” Mrs. Evans testified that they got the property cleaned up shortly after receiving the notice, but an association official testified that the property remained in violation.

Evans moved in September 2010 and allowed someone else to occupy the house. The occupant began remodeling the house but never finished. As a result, construction debris was strewn over the property, and much of the home’s interior was removed. The property was also stripped of all wiring, breakers and plumbing, but one neighbor attributed the missing components to thefts. The occupant subsequently moved out, and Evans never moved back in.

The association alleged that the house was allowed to deteriorate to an unlivable condition. Evans claimed to know nothing about the property’s condition until March 2011, when they received an abatement notice from a Harris County public health official, along with another letter from the association stating the property was “being used or maintained as a dumping ground for rubbish, trash, garbage or other wastes” and it was not “maintained in a sanitary, healthful and attractive manner.” Mrs. Evans testified that they immediately began cleaning up the property and remained in regular contact with the association about the progress.

In May 2011, the association allegedly sent Evans a letter stating that structures on the property would be demolished the week of June 6 and Evans would be billed for the demolition costs. Neither this letter nor the two previous letters mentioned a fine or contained notice of the right to a hearing before the association board.

In June 2011, the association had the house and two outbuildings demolished. Evans sued the association, primarily seeking damages for loss of the home. The association counter-sued, seeking demolition and cleanup costs ($3,200) and a $200 fine for each day Evans was in violation of the deed restrictions ($80,600).

Both parties moved for summary judgment (judgment without a trial). The trial court ruled in the association’s favor, awarding it damages, and dismissed Evans’ counterclaims. Evans appealed.

The issues on appeal were (1) whether the association had authority to demolish Evans’ property, and (2) whether the trial court erred by awarding fines and damages.

The association argued that its bylaws, the deed restrictions and the Texas Property Code authorized it to demolish the structures on Evans’ property. The appeals court found no authority for the association to demolish property without incurring liability to Evans.

The association contended the demolition fell within the association’s corporate purposes. The bylaws provide that the association was organized, among other things, to enforce the deed restrictions and to encourage all efforts and activities to improve the community and maintain property values. The deed restrictions further prohibit using a lot for dumping rubbish, garbage, or trash and provide that, in the event of default, the association may, without liability to the owner or occupant for trespass or otherwise, enter upon the lot and:

. . . remove or cause to be removed, such garbage, trash, rubbish and so on, so as to place said tract in a neat, attractive, healthful and sanitary condition and the occupant or owner of such tract shall owe for the cost of such work.

The appeals court held that to fall within this liability exception, the association would have to establish that the structures it destroyed are garbage, trash or rubbish, and the association failed to meet this burden.

The Property Code provides that an association may “regulate the use, maintenance, repair, replacement, modification, and appearance of the subdivision.” The appeals court held that this authorization to “regulate” does not confer upon the association the power to enforce its regulations by any means the association deems appropriate. Indeed, the statute provides multiple enforcement mechanisms, none of which allows for self-help measures. Finally, there was no evidence that the association gave Evans notice of their right to a hearing or state the amount of any possible fine, as required by the Property Code.

The appeals court reversed the trial court’s order granting summary judgment to the association and dismissing Evans’ claims against the association, and remanded the case for further proceedings.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Tenants Are Not Responsible for Paying Condominium Assessments

Granville Condominium Homeowners Association v. Kuehner, 312 P.3d 702 (Wash. Ct. App. Nov. 5, 2013)

Assessments/Covenants Enforcement/State and Local Legislation and Regulation: A Washington appeals court affirmed that tenants occupying a condominium unit were not obligated to pay association assessments levied against the unit they occupied.

Granville Condominium is a development in Pierce County, Wash. It is managed and maintained by Granville Condominium Homeowners Association (association). Casey and Gwen Ingels own a unit in the condominium.

Michael and Brenda Kuehner loaned the Ingels more than $100,000 for business projects. When the Ingels were unable to repay the loan, they reached an agreement with the Kuehners whereby the Ingels would allow the Kuehners to live in their condominium unit rent free. The parties did not record the terms of the agreement or execute a lease; however, it was undisputed that the Kuehners did not pay the Ingels (or the association) to live in the unit. 

At the time the parties made this arrangement, the association had recorded a lien against the Ingels’ unit for $3,555.22 in unpaid assessments. In October 2010, the Kuehners moved into the unit.

A few months after the Kuehners moved in, the association approached them about the Ingels’ unpaid assessments. The association requested that the Kuehners make the payments, indicating that a number of owners were delinquent, and utilities may be shut off if the assessments were not paid. The Kuehners made partial payments to the association on a voluntary basis based on these representations.

In November 2011, the association sued the Kuehners for the unpaid assessments. The association did not name the Ingels as defendants in the suit. The association admitted that the Kuehners were not paying rent to occupy the unit, and the Ingels were delinquent in their assessments for a total of $7,780.08 when the Kuehners moved into the unit. However, the association argued that even though the Kuehners were not unit owners or members of the association, they were utilizing and consuming the services and utilities made available to them as occupants of the unit. The association claimed that the Kuehners owed $5,671.80 for unpaid assessments accrued during the period of their occupancy.

In December, the association filed a motion for partial summary judgment (judgment on the merits of the case without a hearing), in which they asserted that the condominium declaration, as a recorded document, served as notice to the public, including the Kuehners, of the obligation to pay monthly assessments to the association. The association also asserted that under the Washington Condominium Act, the Kuehners and the Ingels should be held jointly liable for the unpaid assessments, and the Kuehners should be liable for the outstanding assessments accrued during their occupancy.

The Kuehners filed a motion to dismiss, in which they argued that the declaration did not establish that they had any contractual obligation to the association, and the association should be recovering outstanding assessments from the Ingels. The trial court ruled that the assessment obligation was the owner’s, not the tenant’s. The trial court granted the Kuehners’ motion to dismiss, and the association appealed.

The declaration provides that, if a unit is rented, the tenant shall be obligated to pay to the association as much of the rent as is required to pay any assessments due for the unit. The appeals court held that this provision is inapplicable where the tenant does not pay rent. The declaration contains no provision that imputes the assessment obligation to the tenant.

The appeals court further found the Condominium Act to be inapplicable. The Condominium Act provides that, in a voluntary conveyance of a unit, the grantee shall be jointly and severally liable with the grantor for all unpaid assessments up to the time of conveyance. The appeals court held that the living arrangement did not constitute a conveyance of the unit to the Kuehners and that the Kuehners were simply tenants-at-will.

Finally, the appeals court rejected the association’s argument that the Kuehners should be liable under a quantum meruit theory. “Quantum meruit ‘is the method of recovering the reasonable value of services provided under a contract implied in fact.’ ” For an implied contract to exist, (1) the defendant must have requested work from the plaintiff, (2) for which the plaintiff expects to be paid, and (3) the defendant knows or should have known that the plaintiff expected to be paid. The appeals court found no mutual understanding between the association and the Kuehners that could be construed as an implied contract. Accordingly, the trial court’s judgment was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Cost Discrepancy Does Not Relieve Contractor from Performing Under Settlement Agreement

Association of Apartment Owners of Nihilani at Princeville Resort v. Nihilani Group, LLC, 310 P.3d 1052 (Haw. Ct. App. Sept. 30, 2013)

Contracts: A Hawaii appeals court affirmed a ruling that a developer was responsible for fulfilling its obligations under a negotiated settlement with an association in spite of the developer’s mistaken assumption regarding cost of performance.

Nihilani Group, LLC and Brookfield Homes Hawaii, Inc. (collectively, Brookfield) were the developer and general contractor, respectively, of Princeville Resort, a condominium project in Kaua`i, Haw. Princeville Resort is managed and maintained by the Association of Apartment Owners of Nihilani at Princeville Resort (association).

In 2010, the association sued Brookfield for alleged construction defects, including its failure to provide a proper surface for an interior turnaround area and visitor parking stalls. The existing surfaces consisted of “grass crete” (a reinforced concrete system with voids for grass), which the association found unsatisfactory. Subsequently, Brookfield and the association entered into a settlement agreement to resolve all claims between the parties.

The agreement required Brookfield to replace existing grass crete with pervious concrete (porous concrete that allows water to pass directly through), pending approval from the association’s design committee and Kaua`i County. If the project was not approved, Brookfield agreed to pay a cash equivalent of the cost to install pervious concrete. If the association rejected Brookfield’s proposed cash equivalent, the agreement provided for Brookfield to pay $20,000 and install a grass crete alternative. By October 2011, the county and the design committee had approved the pervious concrete plan.

In January 2012, Brookfield notified the association that its masonry contractor had pulled out of the project and offered to pay the association the cash equivalent of $60,000 to satisfy the agreement. Brookfield explained that it had believed the pervious concrete would cost between $60,000 and $80,000, but later found the costs were between $200,000 and $240,000. The association rejected Brookfield’s offer and insisted that Brookfield fulfill its obligation to install pervious concrete.

In May 2012, the association filed a motion in the underlying lawsuit to enforce the settlement agreement. Brookfield argued the agreement was unenforceable because at the time it was signed, Brookfield mistakenly believed the costs were substantially less than they actually were. Brookfield had relied solely on a 2010 grass crete price quote and a statement by Brookfield’s president that he believed pervious concrete would cost between $60,000 and $80,000.

The trial court granted the association’s motion, requiring Brookfield to install pervious concrete, and awarded the association $5,325.18 in attorney’s fees and costs. Brookfield appealed.

Brookfield argued that its mistaken assumption constituted a genuine issue of material fact that precluded the trial court’s grant of the motion to enforce the agreement. One party’s mistake as to a basic assumption supporting a contract at the time of its making may render a contract voidable if the mistake is material and has an adverse effect on the agreed performance, provided (1) the mistaken party did not bear the risk of the mistake, and (2) enforcing the contract would be unconscionable, or the other party had reason to know of the mistake or caused the mistake. If the party seeking relief was not mistaken but consciously ignored the fact that he had limited knowledge of the facts, he effectively undertook the risk of his mistake.

Here, the evidence showed that the cost to install grass crete (not pervious concrete) in just the visitor parking stalls (excluding the turnaround area) would cost about $57,000. In addition, during negotiations, Brookfield acknowledged to the association that the difference in the cost of grass crete and pervious concrete would be “substantial” and got the association to agree to reduce the area to be paved and to contribute $6,000 towards the paving project.

The appeals court determined that Brookfield’s mistake was not a material issue because it had borne the risk of its own mistake. A party bears the risk of a mistake if (1) the risk is allocated in the agreement, (2) the party has only limited knowledge of the facts relating to the mistake, or (3) the court allocates the risk to the party on grounds that are reasonable under the circumstances.

While the agreement neither expressly required Brookfield to pay a particular price for pervious concrete installation nor allocated to it the risk of price increases, the appeals court determined that Brookfield bore the risk because it knew pervious concrete was substantially more expensive, yet failed to get actual bids for pervious concrete prior to signing the agreement. Because Brookfield “consciously ignored” its limited knowledge about the actual cost of pervious concrete, its mistake was not a material issue of genuine fact that would require the trial court to deny the association’s motion to enforce the agreement.

The trial court’s judgment was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Country Club Breached Member Contract

Caley v. Glenmoor Country Club, Inc., Nos. 2013 CA 00012, 2013 CA 00018 (Ohio Ct. App. Nov. 4, 2013)

Contracts: An Ohio appeals court ruled that a country club breached its contract with resigning members because it required them to continue paying dues following resignation but did not allow them to use the club facilities.

Glenmoor Country Club, Inc. (Club) is a private club in Canton, Ohio that sold equity memberships pursuant to a membership plan and a code of regulations (regulations). Equity members are required to pay a $30,000 initiation fee to join the Club. The regulations set forth the process for handling member resignations. Upon resignation, the member’s name is placed on a resigned membership list. After three new memberships are issued, the fourth membership issued is a resale of the membership from the top of the resigned list. At the time a membership is repurchased, the resigned member is entitled to a return of either 80 percent of the current value of the equity initiation fee or 100 percent of the initiation fee originally paid by the member.

The original regulations provided that a resigned member is not entitled to use the Club facilities after his or her resignation. In 1992, the regulations were amended at a membership meeting to state that a resigned member is not entitled to use the Club facilities after his or her membership has been repurchased.

Ron and Susan Caley became equity members in 1997. In 2004, Mark and Trudy Gehring became equity members. Sometime in 2004 or 2005, the Club president sent a letter to Club members that the Club was reverting back to its original policy in which members would not be allowed to use Club facilities after resignation, although dues would still continue to accrue until the membership is repurchased.

In late 2011, the Caleys and the Gehrings (the members) resigned their memberships and demanded the return of their initiation fees. In January 2012, the members sued the Club for the return of their initiation fees. The Club counterclaimed against the Gehrings for the amount due on their Club account at the time of resignation, $11,028.99.

The Club’s general manager testified that it provides new members with the 1992 version of the regulations, even though they are not an accurate statement of the Club’s current policy, which is to deny members use rights after resignation. The manager stated that the policy change was enacted by the Club’s current owner without a member vote, although nothing in the regulations allowed the regulations to be modified without a member vote.

The members testified that the general manager told them they would receive a refund of the $30,000 initiation fee upon resignation. Caley claimed he was never told he would be placed on a waiting list, that only one membership was repurchased for every four memberships sold, or that he would not be able to use the Club facilities while waiting for his membership to be repurchased. Further, he testified that he was never given a copy of the regulations or membership plan when he joined the Club, but he admitted he never requested the documents.

Gehring admitted that the membership application he signed stated that he was bound by the membership plan and regulations and that the membership must be resold before the equity refund would be issued. He also admitted that he never requested the Club documents and that his Club account was delinquent by about $4,700.

The Club’s controller testified that members on the resigned list continued to be charged quarterly dues while they remain on the list awaiting repurchase; the dues amounts are subtracted from the member’s equity refund. As a practical matter, since the typical waiting period is 10 years, most resigned members never receive any refund of their initiation fees.

The trial court awarded each member $30,000, but it reduced Gehring’s award by $4,774.95 for outstanding dues. The Club appealed.

The Club claimed the trial court erred in finding that the membership agreement was unconscionable. A contract or a particular contract provision can be set aside if it is unconscionable. A contract clause is unconscionable where there is an absence of meaningful choice for one party and the contract terms are unreasonably favorable to the other party.

The appeals court held that the members did not prove the terms were unconscionable. No evidence was presented that the members lacked a meaningful choice or were in an unequal bargaining position. Further, there was no evidence of coercion, duress or that members were pressured into signing the contract. Although a discrepancy did exist between the current use policy and regulations, the appeals court determined that the contradiction did not render the contract unconscionable.

The Club also argued the trial court erred in finding a breach of written and oral contracts. The appeals court noted that, while there was a great deal of testimony about what Club employees told the members and the members’ expectations, the signed membership agreements clearly address how and when a resigned member would receive a refund. When written contract terms are clear and unambiguous, the court may not hear testimony to contradict the contract terms. The appeals court held that the membership agreement was not ambiguous, and, as such, the trial court erred in finding the existence and breach of an oral contract with regard to the refund.

On the breach of a written contract claim, the appeals court found that the 1992 regulations were still controlling, and the Club breached the membership agreement by not allowing the members to use the Club facilities until their memberships were repurchased or their equity depleted. Therefore, the appeals court remanded the matter back to the trial court to determine damages for the Club’s breach of contract for the time the members were charged quarterly dues but prohibited from using the facilities.

The trial court’s judgment was affirmed in part, reversed in part and remanded for further proceedings.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Failed to Provide Evidence That Yard Was Not Well Maintained

Boyle v. Hernando Beach South Property Owners Association, Inc., No. 5D12-2993 (Fla. Dist. Ct. App. Sept. 27, 2013)

Covenants Enforcement: A Florida appeals court reversed the grant of an injunction requiring a homeowner to comply with a restriction by “properly maintaining and trimming his landscaping and trees” because the association failed to specify how the owner violated the restriction and what steps he must take to ensure compliance.

John Boyle owns a home in the Hernando Beach community in Hernando County, Fla. The community is subject to a restrictive agreement (agreement), which is enforced by Hernando Beach South Property Owners Association, Inc. (association). The agreement requires, among other things, that property owners keep their lots in a “neat, clean, and orderly condition.” The agreement also provides that the association may sue violators to enforce the restrictions.

The association sued Boyle, seeking a mandatory injunction requiring him to comply with the agreement. The association filed a motion for summary judgment (judgment without a trial) that was supported by affidavits of five association officers and directors who stated that, based on their personal knowledge, Boyle failed to properly maintain his lot; specifically, the landscaping and trees needed to be trimmed and properly maintained, and mold needed to be removed from Boyle’s home.

The trial court granted the association’s motion and issued an injunction (a court order commanding someone to do something or prohibiting them from doing something) requiring Boyle to comply with the agreement by properly maintaining and trimming his landscaping and trees and cleaning or removing the mold on his home. The injunction further provided that if Boyle failed to comply, the association could enter and maintain the property and place a lien on the property that could be foreclosed if the costs incurred by the association in remediating the property were not paid. Boyle appealed.

Boyle argued that material issues of fact remained unresolved and the supporting affidavits provided by the association were insufficient to support summary judgment on the landscaping issue. If there are material facts in dispute, the case must proceed to trial, and the judge is precluded from granting summary judgment.

Boyle maintained that evidence did not indicate how he was in violation of the agreement. In regard to the landscaping complaint, the appeals court agreed. It noted that, although the affidavits submitted with the association’s motion for summary judgment stated that Boyle failed to properly maintain his lot, the affidavits merely reasserted the allegations of the complaint. The association provided no allegations or evidence to show how the landscaping and trees were not properly maintained.

Boyle listed a number of uncertainties, questioning whether the association’s allegations meant, for example, that his grass was dead or uncut, that his trees were dead or untrimmed, or to what extent his shrubbery was overgrown, if at all. Given the lack of evidence provided by the association to establish that Boyle’s landscaping and trees violated the agreement and what steps he was to take to ensure that his landscaping and trees were in compliance, the court found there were material issues of fact that made summary judgment regarding the issue of the landscaping and trees improper. But the mold on the house was another matter. Because statements in the affidavits left no room for speculation or conjecture, the association met is burden of proving the absence of any material issue of fact regarding the mold.

The court reversed that portion of the trial court’s order pertaining to the landscaping and trees and remanded the issue for further proceedings. That part of the order pertaining to the mold was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Boat Slips Are Not Condominium Units

Steenrod v. Louisville Yacht Club Association, Inc., Nos. 2010-CA-001444-MR, 2010-CA-001493-MR (Ky. Ct. App. Nov. 8, 2013)

Developmental Rights/State and Local Legislation and Regulations: A Kentucky appeals court ruled that a marina was not a condominium under the Kentucky Horizontal Property Act.

The Louisville Yacht Club is composed of a boat marina and other ancillary property along the Ohio River in Oldham County, Ky. In 1984, a declaration of condominium for the Yacht Club was recorded by the developer, Louisville Yacht Club, LTD. Under the declaration, 148 “Boat Slip Units” were created as part of the condominium. Louisville Yacht Club Association, Inc. (association) was created to govern the Yacht Club; its members were all boat slip owners, including Ralston Steenrod.

A dispute arose between Steenrod and the association when the association imposed special assessments on its members to pay for dredging sediment, silt and other materials from the riverbed where the marina is located. Steenrod maintained that the Yacht Club was not validly organized as a condominium and had no authority to levy assessments. The association contended that the Yacht Club was validly organized as a condominium under Kentucky law at the time it was created. The trial court ruled in the association’s favor and denied Steenrod’s motion for reconsideration. Steenrod appealed.

In Kentucky, creating a condominium is governed by the Horizontal Property Law, KRS Section 381.805, et seq. To be valid, a proposed condominium must comply with the statutory mandates. Specifically, every condominium must consist of two types of real property— property owned in common by all owners (common elements) and property owned exclusively by one owner (unit). A purchaser of a unit receives fee simple title to the unit and an undivided interest in the common elements. Thus, to constitute a valid condominium, the regime must provide for the establishment of units.

The statute defines “unit” as “an enclosed space” that “consist[s] of one or more rooms.” The appeals court found this definition to be plain and unambiguous.

The declaration described the “Boat Slip Units” as being part of a marina that is located on the water and is contiguous to the marina docks and piers. The appeals court further held that a boat slip located entirely on the water could not constitute a “unit” under the Horizontal Property Law since the boat slip does not qualify as an “enclosed space,” and it does not contain any rooms.

While the Kentucky legislature has since adopted a Condominium Act, which would allow boat slips to count as condominium units, the act does not apply retroactively to projects created prior to January 1, 2011. Consequently, the trial court erred by finding that the Yacht Club was properly organized as a condominium and that boat slips were units.

The appeals court reversed the trial court’s judgment and remanded the case for further proceedings.

In a concurring opinion, Judge Maze fully joined in the reasoning of the majority opinion but did so recognizing that the potential effects of the decision would likely be chaos for the Yacht Club membership. While he agreed the law is clear that boat slips do not meet the definition of a “unit” under the pre-2011 Horizontal Property Law, he anticipated the result would leave the Yacht Club and similarly situated organizations in a great deal of uncertainty. Although Steenrod insisted he did not want to destroy the Yacht Club, Judge Maze observed that its destruction could be the end result of the court’s decision. He expressed the hope that the parties would work together to reach the best solution in their common interests.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Insurer Is Not Obligated to Compensate Association for Loss Due to Lawsuits Brought by the Association

Culbreath Isles Property Owners Association, Inc. v. Travelers Casualty and Surety Company of America, No. 8:12-cv-2928-T-26EAJ, U.S. Dist. Ct. (M.D. Fla. Nov. 5, 2013)

Risks and Liabilities: A Florida district court ruled that because an association’s losses were the result of claims filed by the association against property owners, the insurer had no duty to indemnify or otherwise provide coverage for those losses.

Culbreath Isles Property Owners Association, Inc. (association) governs a subdivision in Hillsborough County, Fla. In 2008, the association sued property owners Phyllis Kirkwood and Nancy and Richard Lewis in two separate actions, alleging that the condition of their respective properties violated the association’s bylaws. The lawsuit was brought pursuant to Section 720.305, Florida Statutes, which contains a “prevailing party” provision, whereby the losing party in a lawsuit must pay the prevailing party’s legal fees.

Travelers Casualty and Surety Company of America (Travelers) issued a Non-Profit Management and Organization Liability insurance policy to the association that provided coverage for the association’s losses, up to the available maximum, resulting from any “claim” first made against the association during the policy period.

In her answer to the association’s complaint, Kirkwood demanded the attorney’s fees she would incur in defending the action if she prevailed and asserted a counterclaim against the association for slander of title. The association filed a claim with Travelers, and Travelers appointed attorneys to defend the association against the counterclaim. In December 2008, the Lewises filed a motion to dismiss the case against them, in which they also demanded attorney’s fees should they prevail. The association did not make a claim for coverage of its exposure for the fees the Lewises expected to incur defending against the association’s lawsuit.

In June 2010, the court granted final summary judgment in favor of Kirkwood and the Lewises and entered an order granting their motions for attorney’s fees and costs, reserving jurisdiction to determine the award amount. The association appealed. In July 2010, more than a year after the Lewises filed their motion to dismiss, the association notified Travelers it was seeking coverage under its liability policy for the fees.

In December 2010, prior to the hearing on the award amount, the association and Kirkwood reached an agreement whereby Kirkwood waived her right to collect her legal fees from the association in exchange for the association’s agreeing to a judgment against it in the amount of $295,000 in Kirkwood’s favor. The association assigned to Kirkwood the proceeds from any and all actions it had against “any person or entity,” including Travelers, and Kirkwood agreed that she would not proceed against the association for the $295,000 judgment.

In March 2011, Kirkwood filed a third party complaint against Travelers under the association’s liability policy. Kirkwood argued that the association’s policy provided the association with coverage for the $295,000 in defense fees she was awarded in the stipulated judgment. The association also settled with the Lewises, agreeing that the Lewises were owed $212,417 for legal fees. The association filed a complaint against Travelers, in which it argued that it was indemnified under the policy for its liability for the Lewises’ legal fees.

The parties agreed that the lawsuits should be resolved through summary judgment proceedings (determination by the judge without a trial).

The Lewises and Kirkwood (collectively, plaintiffs) contended that the Travelers policy insured the association’s liability for the plaintiffs’ legal fees resulting from the association’s unsuccessful suits against them. They argued that the judgment against the association was a “loss” under the policy. The court found their arguments untenable in light of the policy’s language and legally incorrect. The court noted that, even if the fee demands could be considered “claims,” that type of claim did not fall within the ambit of the policy’s liability coverage. The policy clearly contemplated insuring only loss incurred as a result of wrongful acts committed by the insured. For this reason, the policy provided that Travelers would pay amounts resulting from claims made against the association. Since the loss resulted from the association’s decision to pursue lawsuits against the two homeowners, that was the first act that precipitated the “loss” at issue.

Travelers provided the court with a number of cases decided by courts across the country that all stood for the proposition that insurance companies that issue liability and defense policies have no obligation to offer policy benefits to insureds who initiate lawsuits. The plaintiffs provided nothing to refute these cases. The court also observed that the plaintiffs’ coverage theory would give insureds leave to file risk-free lawsuits and give insurers incentives to low-ball settlements and raise premiums, all of which flies in the face of public policy and common sense. It was clear that the parties understood that there was no place for Travelers at the beginning of the underlying lawsuits, and suing the homeowners did not necessitate Travelers’ intervention.

The court found that the Travelers policy did not provide coverage for the association’s loss incurred as a result of claims made by the association against the homeowners. Accordingly Travelers was granted final summary judgment on all claims.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Common Interest Ownership Act Does Not Limit Application of Corporate Law Voting Restrictions

The Triple Crown at Observatory Village Association, Inc. v. Village Homes of Colorado, Inc., No. 13CA1390 (Col. Ct. App. Nov. 7, 2013) (rehearing denied Dec. 5, 2013)

State and Local Legislation and Regulation/Powers of the Association: A Colorado appeals court affirmed that a declaration amendment was invalid because the association failed to comply with the nonprofit corporation act’s 60-day time limit for actions without a meeting.

Triple Crown at Observatory Village is a common interest community in Larimer County, Col., governed by The Triple Crown at Observatory Village Association, Inc. (association). The subdivision is subject to a Declaration of Covenants, Conditions and Restrictions (declaration) recorded by Village Homes of Colorado, Inc. (declarant).

Article 14 of the declaration required that various claims be decided by arbitration, including claims by the association against the declarant. In 2012, the association began collecting votes from its members to revoke Article 14. After 60 days, 48 percent of the members had voted to revoke the provision. After another 60 days, the association obtained the required 67 percent of votes necessary to amend the declaration. The association recorded the amendment and, shortly thereafter, sued the declarant for negligent construction, violating the Colorado Consumer Protection Act and breaching fiduciary duties.

The declarant moved to dismiss the lawsuit for lack of jurisdiction, citing the mandatory arbitration provision in Article 14. The declarant argued that because the association failed to amend the declaration within the time limit set forth in the Colorado Nonprofit Corporation Act (NCA), the parties were still bound by Article 14’s dispute resolution procedures. The trial court granted the motion to dismiss and ordered the parties to arbitrate the dispute under Article 14. The association appealed.

Section 38-33.3-217(1) of the Colorado Common Interest Ownership Act (CIOA) allows an association to amend its declaration with a vote of 67 percent of the association. The trial court held that Section 7-127-107 of the NCA applied to require that, where votes are collected outside of a meeting, all votes must be received within a 60-day period. The association argued that the Colorado General Assembly intended associations to have an indefinite time to vote on declaration amendments since no time limit is specified in the CIOA. 

Where two statutes address the same subject, both must be construed together; the court seeks to avoid inconsistencies and to reconcile conflicts. The appeals court agreed with the trial court and found that applying the NCA does not impair the substantive rights of associations. Reading the statutes together, the appeals court held that the NCA’s time limit for voting without a meeting merely provides a procedure to implement an association’s substantive right to amend its declaration. Since the association did not obtain sufficient votes within the 60-day time limit, the attempt to revoke Article 14 was ineffective.

The second question addressed by the appeals court is whether the association has a right under Section 38-33.3-302(1)(d) of the CIOA to initiate a judicial proceeding, notwithstanding the declaration’s arbitration requirement. The CIOA grants an association the power to “[i]nstitute, defend, or intervene in litigation or administrative proceedings . . . on matters affecting the common interest community.” The appeals court agreed with the trial court that the term “litigation” should include both judicial proceedings and arbitrations because Colorado’s longstanding public policy favors arbitration as a dispute resolution method.

The association next argued that Section 38-33.3-302(2) of the CIOA invalidates a mandatory arbitration provision between the association and the declarant. This section provides that the declaration may not impose limitations on an association’s power to deal with declarants that are more restrictive than limitations imposed with regard to other persons. The appeals court rejected this argument, finding that the CIOA prohibits only restrictions unique to the declarant. Here, Article 14 was not limited to the association’s dealings with the declarant, but controlled disputes between the association and, essentially, all parties subject to the declaration. Accordingly, the appeals court concluded that the CIOA did not preclude enforcing Article 14.

The trial court’s judgment was affirmed and the case was remanded for further proceedings.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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