October 2014
In This Issue:
Association’s Decision Making Protected by Business Judgment Rule
Directors May Be Liable for Negligent Actions
Homeowner Cannot Enforce Architectural Guidelines Against Another Homeowner
Association Cannot Enforce Plat Restrictions
Super-Priority Assessment Lien Has Priority Over First Mortgage Lien on Condominium Unit
Association Not Liable for Homeowners’ Injuries
Unit Purchaser Is Liable for Pre-Foreclosure Assessments
Amendment Imposing New Lease Restrictions Is Invalid
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Association’s Decision Making Protected by Business Judgment Rule

Anklowitz v. Greenbriar at Whittingham Community Association, No. A-3606-12T1 (N.J. Super. Ct. App. Div. Aug. 29, 2014)

Covenants Enforcement: A New Jersey appeals court upheld a ruling that when an association denied a homeowner’s application to construct a sunroom, that decision was protected by the business judgment rule, even if it was based on misinformation or faulty logic.

Greenbriar at Whittingham is a subdivision in Monroe Township, N.J., that is managed by Greenbriar at Whittingham Community Association (association). Leonard and Rose Anklowitz have lived in the community since it was built in the 1990s.

The subdivision’s restrictive covenants prohibit homeowners from adding, altering or improving their property without the prior written approval of the association’s covenants committee (committee). In 1998, the Anklowitzes applied for permission to build a deck over their patio. The request was approved by the township and the committee.

In June 2007, the Anklowitzes requested approval to install a screen enclosure on the deck. The township zoning officer indicated that association approval was required before he would review the request. The committee denied the request because the subdivision developer already had built out the maximum allowable square footage. In addition, to achieve proper water run-off, the township allowed only 20 percent of the lot to be covered with impervious surface material.

In November 2008, the Anklowitzes renewed their request, this time describing the proposed addition as a multi-seasonal sunroom to be built on an existing concrete patio; thus, the construction would not increase their lot’s impervious coverage. In January 2009, the committee denied the request, stating that the association’s policy was to deny additions to ensure that the community complied with the township’s density and impervious coverage requirements.

In May 2009, the Anklowitzes filed suit against the association, asserting that the blanket prohibition on additions was unconscionable, arbitrary and capricious, in particular because they had no notice of the policy when they purchased their home.

The association moved to dismiss the complaint, claiming protection under the business judgment rule. The trial court granted the association’s motion and dismissed the complaint. The Anklowitzes appealed.

The appeals court noted that the business judgment rule would apply if two conditions were met: whether the association’s action was authorized by statute or by its own bylaws or covenants, and, if so, whether the action was fraudulent, self-dealing or unconscionable. If both of these tests are met, the court will not interfere with the association’s judgment.

The appeals court also noted that the association had a fiduciary relationship with each homeowner that required it to act reasonably and in good faith and to protect the interests of all homeowners as a whole, as well as each owner individually. Further, when the covenants restrict structural changes to homes, individual owners are required to subordinate their own interests to those of the larger community.

The evidence indicated that the association’s policy against additions developed over time as the developer and the association interacted with zoning authorities. The township approved the developer’s original site plan but denied variances for screened-in porches for certain homes. As a result, the committee believed the township would deny all subsequent requests for porches or other additions, so no additions were approved for any home. Whether the association was correct or mistaken in its belief does not diminish its business judgment in denying the Anklowitzes’ application.

Further, there was no blanket prohibition on all additions and alterations. The association’s policy prohibited only changes that enlarged the home. Other types of additions or alterations were evaluated individually on their merits. The appeals court held that a blanket policy on certain types of additions or improvements was not unconscionable as a matter of law.

Finally, the appeals court found that the covenants and bylaws did not mislead the Anklowitzes into believing they could construct a sunroom or similar addition. Since the policy developed over time, there was no unconscionable deception of home buyers in 1990s.

The appeals court agreed with the trial court that the association’s decision to deny the sunroom addition application was protected by the business judgment rule. 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.

Directors May Be Liable for Negligent Actions

Waltz v. Tanager Estates Homeowner’s Association, 332 P.3d 1133 (Wash. Ct. App. Aug. 19, 2014)

Covenants Enforcement/Architectural Control/Powers of the Association: A Washington appeals court ruled that association directors may be liable for negligence in performing their duties by failing to follow proper procedures.

The Tanager Estates subdivision in Mead, Wash., is subject to a declaration of covenants, conditions and restrictions (declaration) enforced by Tanager Estates Homeowner’s Association (association).

The declaration provides that additions or changes to homes must be approved by an architectural committee (AC). In 2007, James Waltz began building a storage shed on his property without permission of the AC. Gary Wilson, association vice president and AC chair, alerted him to the approval requirement.

Waltz then submitted plans to construct a storage shed, shop and single-story garage on his property, which the AC approved. In June 2008, AC members became aware that Waltz’s garage addition was different from the approved plans. Waltz had decided to enlarge the garage to include a second story bonus room. Wilson advised Waltz to submit revised plans. Waltz submitted new plans on July 6 and resumed construction.

On July 13, the association’s president presented Waltz with a stop-work order from the board. At the time, the AC had not yet acted on Waltz’s latest plan. On July 15, the AC denied the plan, indicating that the garage was too tall and not harmonious with other homes in the subdivision. Waltz submitted yet another plan on July 17, which added the garage dimensions and included an elevation drawing. The AC also denied this plan for the same reasons.

Wilson subsequently suggested four alternate designs to Waltz, and Waltz selected a plan that depicted a garage height that was still in excess of the 24-foot house measurement. Before the AC voted on the plan, Wilson sent three e-mails to the AC members, each showing different garage measurements.

AC members became confused as to which of the plans the AC was voting on and asserted that the proposed designs continued to be too tall. Wilson responded that he intended to proceed with an e-mail vote rather than hold a meeting; anyone who felt the plan lacked information could vote against it.

The president sent Wilson an e-mail stating:

All current votes are null and void as the AC has not been provided with a complete set of plans to evaluate. An AC member has requested a meeting. As you are not willing to schedule one, I will. You will not send out a denial or approval on this plan. I will be contacting the AC and Mr. Waltz.

Wilson resigned from the AC and the board and claimed that Waltz’s plan would have been approved by the AC if the president had not voided the vote. The president appointed a replacement for Wilson on the AC and asked Waltz to submit a new plan.

Waltz submitted a revised plan on August 2. The AC turned the matter over to the board. The proposal was rejected by the board with suggested modifications. Under protest, Waltz submitted a plan that incorporated the suggested modifications. The board approved the plan, and Waltz resumed construction. The project was completed in September 2008.

In May 2011, Waltz sued the association and individual board members, alleging violations of fiduciary duties. He asserted the president improperly prevented a vote on the late July plans and falsely stated that the August 2 plan had been denied; these actions, ratified by the board, entitled him to damages and to rebuild the addition the way he wanted.

The trial court ruled in the association’s favor, finding the directors did not breach their fiduciary duties and were not liable to Waltz. The court also found that the claims were barred by equitable estoppel (preventing a party from asserting a claim or right that contradicts what the party has said or done before). Waltz appealed.

Waltz argued that the president induced the August 4 plan by lying about the August 2 plan when he told the board it had not been approved, although he knew the AC had taken no action on the proposal. The association countered that Waltz voluntarily submitted the August 4 plan, which was approved by the board.

The appeals court determined that the president and the association could not rely on Waltz’s submission of the August 4 plan due to their inappropriate actions. Equity does not aid those with unclean hands. The president and the association induced Waltz to offer the final plan under false pretenses, and they could not take advantage of that action.

Waltz further argued that his plans were approved by default since the AC did not act on the July 29 and August 2 plans he submitted. The declaration provided that plans are automatically approved if the AC fails to approve or disapprove the proposed plans within 30 days of submission.

The appeals court agreed with the trial court that Waltz’s argument was unpersuasive. First, the matter was transferred to the board on August 3, so the AC had no authority to act, and nothing was left pending before the AC. The declaration provision granting automatic approval only applied to the AC. Additionally, Waltz could not expect strict compliance with the declaration when he did not strictly comply with the same declaration section before beginning construction.

Moreover, the president may have lied and usurped the AC’s authority, but it did not take away from the fact that Waltz submitted new plans. If Waltz could show that the earlier plans would have been approved, then the president’s actions actually harmed him. If the plans would have failed anyway, then the fact that Waltz was duped into changing them does not matter.

The appeals court found plenty of blame for each party. Waltz acted precipitously by starting construction before submitting plans or receiving approval. But some directors appeared to have acted without regard for proper procedures. Some of these failures may have impacted the questions of causation and harm critical to determining whether Waltz was entitled to damages.

The trial court correctly rejected Waltz’s argument that his plans were automatically approved because the AC failed to act on them, but the trial court erred in concluding that equitable estoppel barred Waltz’s claims. Accordingly, the appeals court reversed the trial court’s judgment and remanded the case for a new trial.

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

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Homeowner Cannot Enforce Architectural Guidelines Against Another Homeowner

Harper v. Canyon Hills Community Association, No. G048445 (Cal. Ct. App. Aug. 19, 2014)

Covenants Enforcement/Architectural Control: A California appeals court ruled that neither California law nor the subdivision declaration permitted a homeowner to enforce governing documents other than the declaration against another homeowner.

Canyon Hills is a residential subdivision in Newport Beach, Calif. All lots are subject to a declaration of covenants, conditions and restrictions (declaration) that is enforced by Canyon Hills Community Association (association). Under the declaration, homeowners must obtain written association approval before making structural changes to their property.

The association’s board adopted architectural guidelines (guidelines) specifying minimum standards for evaluating proposed alterations. All architectural applications must include signed “neighbor awareness forms” documenting that neighbors have been informed of the proposed alteration and do not object to it.

Jacklyn Harper and David and Patricia Valentine own adjoining lots in Canyon Hills. In 2006, the Valentines applied for permission to tear down their existing two-story home and replace it with another two-story, 10,800 square-foot residence. They showed Harper and their other neighbors the proposed plans, and Harper consented to the proposal and signed the neighbor awareness form. The association approved the plans with some variances from the guidelines. However, the Valentines did not proceed with the project.

In 2009, the Valentines withdrew their first application and filed a new application to build a 5,528 square-foot, single-story home. The Valentines submitted the neighbor awareness forms purportedly containing signatures of Harper and the other neighbors. The association approved the revised project, and construction began in May 2010.

At the January 2011 board meeting, Harper complained about the construction. She stated she had not been informed of the 2009 application, and she believed the new home encroached on her property and would reduce her home’s value. The board investigated. It contacted other neighbors and learned they had not been given the opportunity to review the 2009 revised plans. David Valentine appeared before the board to discuss the matter, after which the board allowed construction to proceed.

Harper subsequently sued both the association and the Valentines for negligence, breach of covenants and nuisance. She alleged that the Valentines’ second proposal was radically different from the first, and they had submitted the 2006 neighbor awareness forms with the 2009 application, circumventing the proper process and concealing their true intent. She further alleged that the board knew she and other neighbors had not received notice of the second proposal, that the board knew the proposed structure would significantly and negatively affect them, and that, by approving the project without complying with the proper application process, the board breached its duties of reasonable care and to protect their homes’ values.

The association filed a motion for summary judgment (judgment without a trial based on undisputed facts), and the Valentines filed a motion for judgment on the pleadings (judgment based solely on the pleadings, excluding other evidence). The trial court granted both motions. It held the board’s decision was subject to the rule of judicial deference for homeowners associations, and Harper failed to defeat the presumption that the board acted in good faith and in the association’s best interests. The trial court further determined that the board satisfied its duty of care by canvassing the Valentines’ neighbors to determine if they had objections to construction of the one-story home.

In granting the Valentines’ motion, the trial court found that Harper was a third-party beneficiary of the guidelines, and the Valentines were obligated to show her the revised 2009 plans. However, Harper presented no evidence that the Valentines’ plans violated the guidelines or that her objections would have made a difference. Harper appealed.

Harper argued that the trial court erred when it placed the burden on her to prove that the board acted in bad faith. When an association enforces its governing documents, the association must show it has followed its own standards and procedures, that the procedures were fair and reasonable and that its decision was made in good faith and is reasonable, not arbitrary or capricious.

The judicial deference rule does not create blanket immunity for all board decisions and actions. Deference is warranted only if the association acted after reasonable investigation, in good faith and with regard for the association’s and the members’ best interests.

The declaration vests broad discretion in the board to grant or deny structural alterations. The association presented evidence it acted in good faith when approving the Valentines’ second application. However, summary judgment in lieu of a trial is warranted only when there is no question of material fact.

The appeals court concluded the trial court erred in placing the burden of proof on Harper to show the association’s bad faith. Therefore, the appeals court reversed the trial court’s grant of summary judgment to the association and remanded the case for further proceedings.

The Valentines claimed that Harper lacked standing to sue them for noncompliance with the guidelines. Under California law, unless the declaration provides otherwise, a declaration may be enforced by any homeowner, by the association or by both. However, other governing documents can only be enforced by the association taking action against an owner or an owner taking action against the association. There is no express authority for an owner to enforce other governing documents against another owner. The appeals court could not sustain the third-party-beneficiary theory, which the trial court relied on to give Harper standing.

While the appeals court disagreed with the trial court’s reasons for its ruling, it nonetheless concluded the trial court reached the correct conclusion, and the judgment in the Valentines’ favor was affirmed.

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

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Association Cannot Enforce Plat Restrictions

Holiday Haven Members Association, Inc. v. Paulson, No. 13CA13 (Ohio Ct. App. Sept. 8, 2014)

Developmental Rights/Assessments/Architectural Control: An Ohio appeals court ruled that an association formed 20 years after the subdivision plats were recorded did not have standing to enforce the plat restrictions where the developer never assigned its rights to the association.

Holiday Industries, Inc. (developer) created Holiday Haven, a subdivision in Perry Township, Ohio. The subdivision was platted in stages during the 1960s and 1970s. In 1973, the developer filed the plat for Holiday Haven No. 8, which contained several use restrictions and required the seller’s permission for other activities.

In 1972, Kenneth and Emily Paulson acquired Lot 108 in phase 8 from the developer. In 1985, they purchased two more phase 8 lots in phase 8 from the developer.

Lawrence Hines, the developer’s principal, initially maintained the subdivision, including maintaining the properties and approving building plans. However, the work eventually overwhelmed Hines, and he urged residents to form an association to take over. As a result, Holiday Haven Members Association, Inc. (association) was formed in 1994. The association’s bylaws provided that the board could enforce the covenants and restrictions; repair, maintain and improve the community’s private roads; and levy and collect assessments to pay for road maintenance.

In December 1994, the developer transferred some common property to the association, but the transfer did not include common property in phase 8. Over the years, the association grew to include 55 members. Thirteen additional property owners voluntarily paid assessments to the association for road maintenance, although they were not association members.

The Paulsons did not join the association, and they did not pay any money to the association. Initially, the association did not bill the Paulsons for road maintenance. However, on advice of counsel, the association began to send them invoices. Believing they were not bound by covenants to which they had not agreed, they refused to pay the association and did not seek approval of plans to build structures on two of their lots.

In 2011, the association sued the Paulsons, seeking an injunction against further construction as well as damages for unpaid road maintenance fees.

The trial court concluded that the association was not the real party-in-interest and had no standing (right) to bring suit. There was no evidence that the developer had transferred the phase 8 common property or phase 8 control to the association. Therefore, the developer was the only one that could enforce the plat restrictions. Moreover, nothing in the plat restrictions allowed the association to levy road maintenance assessments. Finally, the trial court quieted the Paulsons’ title (removed any cloud or encumbrance on title) as to road assessments, but declined to do so as to the plat restrictions. The association appealed.

A plat is one device to restrict how real estate can be used. The developer, or its successor-in-interest, was the only party that could enforce the plat use restrictions. The 1994 deed from the developer to the association was insufficient to make the association its successor-in-interest over phase 8 because phase 8 was not among the properties transferred. Therefore, the association did not have the right to enforce the phase 8 plat restrictions.

After the case was filed, Hines executed a Ratification and Reaffirmation of Assignment and recorded it and an affidavit that indicated the 1994 deed was intended to convey not only property but also all the developer’s rights and responsibilities for all eight subdivision phases. The trial court disregarded this document, which the association claimed was in error.

The appeals court agreed that the ratification and affidavit should be disregarded. A subsequent affidavit can be used to resolve ambiguity in a deed, but it cannot be used to contradict or change the deed’s terms. In this case, Hines attempted to expand the 1994 conveyance by using the ratification and affidavit to add an assignment of rights that was not initially included in the 1994 deed.

Finally, the appeals court noted that, if the restrictive covenant was enacted for the benefit of the one seeking to enforce it, he may do so, but the burden is upon him to show that such covenant restricting the use of another person’s land was intended to be for his benefit. The benefitted party must also show that he has an equitable interest in the other person’s adherence to the covenant. The association did not and could not satisfy this standard.

The phase 8 plat restrictions were filed in 1973. Two decades later, the association was formed. The association could not claim it was the intended beneficiary of the plat restrictions when it did not exist until 20 years later.

The appeals court agreed with the trial court that the association lacked standing to enforce the plat restrictions. 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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Super-Priority Assessment Lien Has Priority Over First Mortgage Lien on Condominium Unit

Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., Nos. 13-CV-623, 13-CV-674 (D.C. Aug. 28, 2014)

Miscellaneous Association Problems: A District of Columbia appeals court ruled that the foreclosure of a condominium association assessment lien extinguished the bank’s first mortgage lien.

Chase Plaza Condominium is located in Washington, D.C. Chase Plaza Condominium Association, Inc. (association) manages the development. In 2005, Brian York purchased a unit in Chase Plaza and financed the purchase through a deed of trust (mortgage). The mortgage named First Financial Services, Inc. as the mortgage holder and Mortgage Electronic Registration Systems, Inc. (MERS) as beneficiary and the nominee for First Financial.

By late 2008, York was delinquent on both his mortgage payments and his monthly condominium assessments. In 2009, the association recorded an assessment lien on the unit and subsequently initiated foreclosure proceedings against York to recover six months of unpaid assessments. The association mailed notice of the foreclosure sale to the parties named in the mortgage, and the notice specified that the foreclosure would not be subject to the mortgage.

Darcy, LLC purchased the unit for $10,000 at the foreclosure sale. After the association deducted six months of unpaid assessments and various other expenses associated with the foreclosure sale from the proceeds, the remaining balance was $478, which the association forwarded to MERS.

In April 2010, JPMorgan Chase Bank, N.A. (JPMorgan) commenced foreclosure proceedings against York for failure to make mortgage payments. After discovering that the association had already foreclosed on the unit, JPMorgan sued the association and Darcy, asking the court to set aside the foreclosure sale and declare that JPMorgan held title to the unit. JPMorgan stated MERS had assigned its interest in the mortgage to Washington Mutual and that JPMorgan acquired Washington Mutual in 2008. It asserted, therefore, that it was the current mortgage holder.

JPMorgan filed a motion for summary judgment (judgment without a trial based on undisputed facts). The trial court voided the foreclosure sale because the unit was not sold subject to the mortgage and declared that JPMorgan owned the unit. Darcy and the association appealed.

The association and Darcy asserted the association was permitted to foreclose on a six-month assessment lien and distribute the sale proceeds to satisfy any remaining liens in order of priority. Any liens unsatisfied by the proceeds are extinguished, and the purchaser at the foreclosure sale acquires free and clear title. JPMorgan argued, to the contrary, that although the association was permitted to foreclose a six-month assessment lien, the foreclosure was subject to any previously recorded first mortgage lien.

Under the District of Columbia Condominium Act (act), a condominium association lien has priority over other liens or encumbrances except a first mortgage recorded before the assessment became delinquent. The act, however, provides the highest priority to liens for the most recent six months’ assessments.

Thus, the act effectively splits condominium assessment liens into two liens of differing priority: (1) a lien for six months’ assessments that is higher in priority than the first mortgage lien (super-priority lien); and (2) a lien for any additional unpaid assessments that is a lower priority than the first mortgage lien.

The act does not expressly address what happens when, as in this case, a condominium association forecloses solely on its super-priority lien and the sale proceeds are not sufficient to pay off a first mortgage. A general principle of foreclosure law, however, potentially provides an answer: liens with lower priority are extinguished if a valid foreclosure sale yields proceeds insufficient to satisfy a higher-priority lien.

The parties did not dispute that the association’s super-priority lien was superior to JPMorgan’s mortgage. Neither did they dispute that the proceeds from the foreclosure sale were insufficient to satisfy the mortgage. Taken together, the act’s language, general foreclosure law principles, and the act’s legislative history supported the conclusion that the association’s foreclosure extinguished JPMorgan’s mortgage.

The trial court’s judgment was reversed and the case 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 Not Liable for Homeowners’ Injuries

Dedeaux v. Lake Caroline Owners Association, Inc., No. 2013-CA-00671-COA (Miss. Ct. App. Sept. 9, 2014)

Risks and Liabilities: A Mississippi appeals court ruled that negligence claims against a homeowners association were correctly dismissed because the homeowners failed to show the association owed a duty to protect them from a third party’s negligent acts.

Marilyn Dedeaux and Russell Guymon are residents of Lake Caroline neighborhood in Madison County, Miss. In the middle of the development is an 800-acre lake owned and operated by Lake Caroline Owners Association, Inc. (association).

On a summer night in 2011, Dedeaux and Guymon were sitting in Guymon’s pontoon boat, which was anchored in the middle of the lake, when Eugene Owen crashed his speed boat into the pontoon boat. Dedeaux and Guymon were tossed into the water and sustained injuries.

Dedeaux and Guymon sued the association for negligent failure to maintain a safe premises. They argued that the accident was reasonably foreseeable by the association. The association filed a motion for summary judgment (judgment without a trial based on undisputed facts), arguing it had no reason to anticipate the boating accident and, thus, no duty to protect Dedeaux and Guymon. Not only was there not a history of boating accidents on the lake, but the association’s rules made clear that lake activities are inherently dangerous and that residents use the lake at their own risk.

The trial court found insufficient evidence that the association should have anticipated the accident; if it had, the association would have had a duty to implement safety measures. Since Dedeaux and Guymon failed to establish that the association owed them a duty to prevent accidents, the trial court dismissed their claims on summary judgment. Dedeaux and Guymon appealed.

The first element of a negligence claim is duty. As the owner and operator of the lake, the association did owe the residents a duty to keep the premises reasonably safe and, when not reasonably safe, to warn only where there is hidden danger or peril that is not in plain and open view. This includes a duty to protect the invitees from reasonably foreseeable injuries caused by third parties. However, “a third-party-inflicted injury is only deemed reasonably foreseeable when there is ‘cause to anticipate the wrongful or negligent act’ of that third party.”

Dedeaux and Guymon presented evidence of a 2005 accident and the testimony of a boating safety expert. Based on the 2005 accident and the fact that the association did not implement new policies following that accident, the expert considered the Dedeaux-Guymon accident foreseeable.

Before the 2005 accident, the association had considered implementing a “lake marshal” program to regulate fishing; it dropped the idea, anticipating that the program would create a false impression that fishing marshals were employed to ensure the safety of swimmers and boaters.

Applying the foreseeability test to the case, the appeals court held that for the association to have reason to foresee Owen’s negligent actions (and thus a duty to protect Dedeaux and Guymon), the association must have had either (1) actual or constructive knowledge that Owen had negligently operated his boat on the lake, or (2) actual or constructive knowledge of a general history of negligent boating on the lake. However, the only evidence Dedeaux and Guymon cited of the alleged negligent boating history was the 2005 accident.

The appeals court rejected the argument that one boating accident was sufficient history or that the association’s mere consideration of a lake marshal program before 2005 created a legal duty to patrol the lake.

Because Dedeaux and Guymon failed to establish the association had a duty to protect them from Owen’s negligent act, the appeals court held that the trial court correctly dismissed their claim.

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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Unit Purchaser Is Liable for Pre-Foreclosure Assessments

1010 Lake Shore Association v. Deutsche Bank National Trust Company, No. 1-13-0962 (Ill. App. Ct. Aug. 12, 2014)

State and Local Legislation and Regulations/Assessments: An Illinois appeals court affirmed a ruling that the bank that purchased a condominium unit at a foreclosure sale was liable for pre-foreclosure assessments that the prior owner had not paid.

1010 Lake Shore Condominium, located in Cook County, Ill., is managed by 1010 Lake Shore Association (association). Deutsche Bank National Trust Company (Deutsche Bank) purchased a unit in the condominium at a foreclosure sale on June 17, 2010.

In May 2012, the association sued Deutsche Bank, alleging the bank was unlawfully withholding possession of the unit because it owed $62,530.81 in unpaid assessments. The association sought possession of the property and an award of all unpaid assessments. In August 2012, the association filed a motion for summary judgment (judgment without a trial based on undisputed facts), asserting that because Deutsche Bank failed to make any payments following the foreclosure sale, the association’s lien for assessments due before the foreclosure had not been extinguished.

Deutsche Bank responded that it was not liable for unpaid assessments levied before its purchase, which accounted for more than $43,000 of the amount claimed by the association.

The trial court granted the association summary judgment, awarding it $70,018.90, possession of the unit and $6,725 in attorney’s fees and costs.

Deutsche Bank appealed, asserting that the trial court’s decision was based on a misinterpretation of Section 9(g)(3) of the Illinois Condominium Property Act.

Section 9(g)(3) consists of two sentences. The first provides that “[t]he purchaser of a condominium unit at a judicial foreclosure sale . . . shall have the duty to pay the unit’s proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale.” The second sentence provides that “[s]uch payment confirms the extinguishment of any lien created” by virtue of the prior unit owner’s failure or refusal to pay assessments. Section 9(g)(1) further provides that, if a unit owner fails to pay assessments when due, the unpaid assessments, interest, late fees, attorney’s fees, and collection costs constitute a lien on the unit.

The association argued that this language plainly stated that a prior owner’s lien is not extinguished until the new owner pays common expenses assessed after the foreclosure and sale. The appeals court agreed.

Citing Illinois Mortgage Foreclosure Law, Deutsche Bank asserted it could not be held responsible for pre-foreclosure amounts because that would contradict well-established law that all outstanding claims on property are extinguished by foreclosure, and the purchaser takes the property free and clear of any such claims.

However, the appeals court observed that when a general law and a specific law relate to the same subject, the specific law must prevail over the general statute. Thus, the Illinois Condominium Property Act, Section 9(g)(3)—being a specific statutory provision—precluded the general rule of foreclosure law cited by Deutsche Bank.

The appeals court concluded that the trial court did not misinterpret Section 9(g)(3). Since Deutsche Bank did not pay any assessments after the foreclosure, the pre-foreclosure lien was not extinguished.

The trial court’s judgment was affirmed: it did not err when it granted summary judgment to the association.

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

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Amendment Imposing New Lease Restrictions Is Invalid

Filmore LLLP v. Unit Owners Association of Centre Pointe Condominium, No. 70013-8-I (Wash. Ct. App. Sept. 2, 2014)

Use Restrictions/Sale and Lease Restrictions: A Washington appeals court upheld a ruling that a declaration amendment restricting leasing was invalid because the association did not obtain approval of 90 percent of the unit owners.

Centre Pointe Condominium in Bellingham, Wash., is managed and maintained by Unit Owners Association of Centre Pointe Condominium (association). The condominium declaration recorded in 2003 provides for the project to be constructed in phases, with each building being a separate phase. The first three phases were buildings A, B and C. The fourth phase was defined as “Development Unit D-3.”

Filmore LLLP purchased Unit D-3 in May 2011 after the bank foreclosed on the prior owner. Filmore secured a loan to finance construction of new residential units. In September 2012, documents were recorded to subdivide Unit D-3 into 35 residential units.

After Filmore purchased Unit D-3 but before the subdivision documents were recorded, the association adopted a declaration amendment to set limits on the number of units that could be leased, imposed new restrictions and created new exemptions.

The declaration provided that amendments could be adopted if at least 67 percent of the owners approved. However, the declaration also stated that no amendment could restrict how a unit is used unless at least 90 percent of the owners approved. This mirrors the requirements of the Washington Condominium Act (WCA). The amendment declared that the association had obtained the requisite consent of 67 percent of the votes, and the amendment was recorded on October 20, 2011.

Filmore sued the association in October 2012 for “violation of statute, breach of declaration, declaratory action and damages” and moved for summary judgment (judgment without a trial based on undisputed facts). Filmore argued that the amendment was void because lease restrictions constituted a restriction on “use,” which required 90 percent approval.

The trial court granted Filmore’s summary judgment motion, finding that the amendment was void and unenforceable for lack of 90 percent approval. The association asked for a discretionary review by the appeals court, which was granted: the association asked whether an amendment that limits how many units can be leased changes how the units can be used, the latter requiring 90 percent rather than 67 percent owner approval.

Filmore contended that leasing constitutes a “use” of the property. The association contended that “use” referred only to residential versus nonresidential. The WCA does not define the term “use,” and the dictionary’s definition is very broad.

The association relied on several WCA provisions in which “use” was qualified by “residential” or “nonresidential.” The WCA also addresses use restrictions separately from leasing restrictions in provisions related to public offering statements. Further, the WCA requires that a declaration specify restrictions on the units’ use, occupancy or alienation (transfer).

The association contended that these provisions show that “use” has a different meaning than “leasing.” The association also asserted that leasing restrictions are a restraint on alienation rather than a restraint on use. The appeals court found the association’s narrow, hyper-technical interpretation unpersuasive.

The appeals court observed that other WCA provisions similarly referred to “use” without specifying residential or nonresidential. Moreover, where the legislature used “residential” or “nonresidential” to describe the word “use,” such references addressed differences in requirements of notice, voting percentages, insurance, public offering statements, warranties or reserve accounts, all of which are reasonable distinctions given the WCA’s strong emphasis on protecting residential purchasers.

The appeals court determined the common, ordinary meaning of “use” applied because no evidence indicated the legislature intended something else. The appeals court concluded the phrase “the uses to which any unit is restricted” unambiguously included leasing. Therefore, to amend the declaration and restrict leasing, 90 percent of the owners had to approve. Since the association did not obtain 90 percent approval, the amendment was invalid.

The appeals court affirmed the trial court’s order invalidating the declaration amendment.

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