November 2014
In This Issue:
Poor Association Bookkeeping Precludes Summary Judgment for Unpaid Assessments
Developer Has a Fiduciary Duty to Association During Control Period
Owner Liable for Damage Caused by Common Area Improvement
Restrictive Covenants Do Not Create Easement for Golf Use on Lots
Associationís Foreclosure of Its Super-Priority Lien Does Not Extinguish First Mortgage Insured by HUD
Owner Must Pay Assessments for Each Lot Purchased
Restrictive Covenant Prohibits Constructing a Storage Building Before Constructing a Dwelling
Insurer Cannot Avoid Coverage for Lawsuit Simply Because It Had No Notice of Suit
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Poor Association Bookkeeping Precludes Summary Judgment for Unpaid Assessments

Hayek v. Chastain Park Condominium Association, Inc., No. A14A1134 (Ga. Ct. App. Sept. 25, 2014)

Assessments/Association Operations: A Georgia appeals court reversed a summary judgment ruling in favor of an association in a collection case because the evidence supporting the association’s claim did not prove the amount due with sufficient certainty.

Joseph and Rosette Hayek own a unit in the Chastain Park Condominium in Atlanta, Ga., which is managed by Chastain Park Condominium Association, Inc. (association).

The condominium declaration requires unit owners to pay annual assessments in monthly installments. Late fees and interest may apply if the monthly installment is not paid by the due date. If assessments and other charges remain unpaid for 30 days or more, the association has the right to file suit and to recover its reasonable attorney’s fees.

In February 2012, the association sent a letter to the Hayeks demanding payment of $4,816.08 for past due assessments, interest and late fees owed through January 2012, as well as the February assessment and attorney’s fees. When payment was not received within 30 days, the association accelerated all assessments and other charges due through December 31, 2012 and filed suit against the Hayeks for $7,064.77.

The Hayeks exchanged numerous e-mails with the association’s counsel, the management company and the board, seeking to resolve a dispute as to the amount due. However, those efforts were unsuccessful, and the Hayeks answered the association’s complaint, denying all allegations about amounts owed.

The association filed a motion for summary judgment (judgment without a trial based on undisputed facts), seeking $20,950.52 for unpaid assessments, late fees, interest, attorney’s fees and costs. In support of its motion, the association submitted an affidavit from Robin Steinkritz, who had been the property manager since May 2011. Steinkritz asserted that the Hayeks owed the amounts shown on an account ledger attached to the affidavit.

According to the account ledger, the Hayeks owed $20,669.46, which included a balance forward of $9,599.03 plus amounts for regular assessments, special assessments, late fees and interest, as well as $11,671.24 for a category labeled as “winter.” The ledger also reflected payments of $4,816.97. The association additionally submitted an affidavit from its attorney, Stephen Winter, attesting that the balance of attorney’s fees owed after applying the payments was $9,592.10. The association submitted no other evidence.

The Hayeks disputed the amounts sought by the association and claimed they were current on their assessments as of January 2011. This was based on an account statement produced by the association in connection with the Hayeks’ financing. They also claimed the prior property management company failed to cash a $2,500 check for all 2011 assessments.

The trial court granted the association’s motion and awarded damages in the amount of $19,333.52. The trial court awarded the amount of assessments, late fees and interest but did not award all attorney’s fees. The Hayeks appealed.

The Hayeks argued that the trial court should not have granted summary judgment because the only evidence offered to support the association’s claims was Steinkritz’s unsupported statements, which were inadmissible hearsay. Further, they claimed the amount of attorney’s fees was unreasonable and unrecoverable since the association failed to prove the underlying debt.

Under Georgia law, the party suing for damages has the burden to prove the damage amount in a manner that provides the judge with a reasonable degree of certainty. In addition, summary judgment is appropriate only when there is no genuine issue of material fact and the party requesting summary judgment is entitled to judgment as a matter of law.

Steinkritz did not explain what was included in the balance forward charge, and no other evidence was offered to show the basis for the charge. The ledger also showed monthly payments by the Hayeks between August 2012 and July 2013 and a lump sum payment of $2,184.57 in September 2012, but there was no indication in the ledger as to how the payments were applied.

The appeals court concluded that the damage amount was insufficiently certain. Without an explanation of the balance forward entry or an indication as to how payments were applied, the court was unable to determine the amount of outstanding assessments and whether interest and late fees were properly imposed and calculated. Therefore, summary judgment was improper because a genuine issue of material fact remained.

The appeals court further held that it could not determine whether the amount of attorney’s fees awarded was reasonable given the uncertainty regarding the delinquent assessments and the inconsistency between the amount of fees sought and the amount awarded by the trial court.

The trial court’s judgment was reversed.

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

Developer Has a Fiduciary Duty to Association During Control Period

Trillium Ridge Condominium Association, Inc. v. Trillium Links & Village, LLC, No. COA14-183 (N.C. Ct. App. Sept. 16, 2014)

Developer Liability/Warranties: A North Carolina appeals court held that there were genuine issues of material fact whether a development entity and developer individuals breached their fiduciary duties to the association when they failed to disclose known construction defects, and therefore, the case must proceed to trial.

The Trillium Ridge Condominiums in Cashiers, N.C., contains 22 units in six buildings. The condominium is managed and maintained by Trillium Ridge Condominium Association, Inc. (association).

Trillium Links & Village, LLC, the developer, filed the condominium declaration in 2004. Trillium Links is principally owned and controlled by S.C. Culbreth, Jr. and Gregory Ward. As developer, Trillium Links had the right to appoint directors to the association’s executive board. Culbreth and Ward were appointed to serve as the association’s initial officers and directors until the developer control period ended.

Trillium Construction Company, LLC was solely owned by Dan Rice, who also owned a minority interest in Trillium Links. Trillium Links and Trillium Construction operated out of the same offices. In 2003, Trillium Links hired Trillium Construction to build the condominium complex.

In October 2004, an engineering report was delivered to Trillium Construction, Culbreth and Ward, which indicated that a failure to install two foundation piers in one building resulted in a sagging floor. The piers were replaced in 2005.

When Trillium Links turned over association control to the unit owners in 2007, no information regarding the foundation problems or the engineering report was disclosed to the new board. The new board began to study future maintenance requirements and commissioned a reserve study. The reserve study noted a shortened lifespan for the wood siding. Further study revealed a number of siding-related issues, including flashing defects.

After discussing the available options with the siding expert, the board decided that the problems could be remedied by continuously caulking over the problematic flashings. The caulking was completed in March 2008.

In 2010, leaks, extensive water damage and rot were discovered in two buildings. The association hired an engineer to inspect the entire property. The engineer reported numerous defects in the original construction, including improper flashing that had caused serious water damage.

In August 2011, the association filed suit against Trillium Links and Trillium Construction for various warranty, construction and negligence claims. The association also sued Trillium Links, Culbreth and Ward for breach of fiduciary duty. In July 2013, Trillium Links, Culbreth and Ward filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court granted the motions, and the association appealed.

The appeals court held that, while Culbreth and Ward may have had no direct involvement in the construction, they did, as directors, have an obligation to disclose to the association material facts regarding the existence of any construction defects of which they were aware.

Culbreth and Ward acknowledged that they received the report noting the failure to install foundation piers and the sagging floor, but they argued that they did not possess any information concerning the flashing and siding defects alleged in the complaint. However, the appeals court found that Culbreth’s and Ward’s knowledge of construction defects created a genuine issue of material fact concerning whether their failure to disclose relevant information amounted to a breach of fiduciary duty. Accordingly, it was improper to grant summary judgment to Culbreth and Ward, and the claim should proceed to trial.

Trillium Links argued that North Carolina law does not impose on a developer a fiduciary duty to an association the developer controls. Under North Carolina law, in addition to fiduciary relationships that arise from legal relations between two parties (such as attorney and client), a fiduciary relationship may be created where there is confidence placed by one party on another that results in superiority and influence on the other.

The appeals court held that Trillium Links’ position of dominance over the association during the developer control period and the fact that individual unit owners had little choice except to rely upon Trillium Links to protect their interests are sufficient evidence of a fiduciary relationship. The appeals court concluded that the facts created a genuine issue of material fact concerning whether Trillium Links breached a fiduciary duty to the association. Therefore, the trial court erred by granting summary judgment in favor of Trillium Links on this issue.

Accordingly, the trial court’s grant of summary judgment on the fiduciary duty claims 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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Owner Liable for Damage Caused by Common Area Improvement

PGA West Residential Association, Inc. v. Mork, No. E054276 (Cal. Ct. App. Oct. 21, 2014)

Covenants Enforcement: A California appeals court ruled that an owner’s improvements to a common area patio that caused water damage to an adjacent unit constituted a nuisance in violation of the restrictive covenants.

The PGA West subdivision in La Quinta, Calif., is managed and maintained by PGA West Residential Association, Inc. (association). Lewis and Patricia Mork and Gail and Lewis Wyatt owned adjacent condominium units in PGA West.

In 2008, the Wyatts discovered mold and moisture damage inside their unit. They concluded water had entered through an exterior wall that served as a common boundary between their unit and the Morks’ patio. The Wyatts sued the Morks and the association for violating the restrictive covenants. The association also sued the Morks for breach of covenant, breach of contract and negligence.

At trial, the association and the Wyatts presented evidence that, in the course of constructing a swimming pool, sprinkler system and other improvements, the Morks had altered the original grade of their patio and limited common area courtyard adjacent to their unit. Consequently, surface water drained away from the Morks’ unit and collected in a two-foot-wide planter that extended the length of the common area wall that separated the Morks’ patio from the Wyatts’ unit. The water then flowed under the wall and into the Wyatts’ unit.

In their defense, the Morks asserted they were not responsible for maintaining the limited common area; therefore, the damage was the association’s responsibility. In addition, they argued that the association’s architectural review committee had approved the swimming pool, and that approval extended to changes in the grade or existing drainage.

The trial court found in favor of the association and the Wyatts. It awarded damages of more than $1 million to the Wyatts and $41,592.37 to the association. The award to the Wyatts included damages for out-of-pocket expenses, loss of use of their property and emotional distress ($300,000 for each of the Wyatts). In addition, the court issued a permanent injunction directing the Morks and any subsequent purchasers, successors, heirs and assigns to do specified things related to the planter, drainage and grading. The Morks appealed.

The Morks contended that the evidence was insufficient to support the trial court’s findings they breached their duty (under the covenants) not to interfere with the lot’s drainage pattern and to maintain the grade. The Morks presented evidence that the patio was a limited common area. Under the covenants, the association is responsible for maintaining limited common areas.

The evidence was undisputed that in 2008, the Morks discovered a leaking sprinkler pipe in their patio planter. They had the leak repaired and installed a new irrigation system. The appeals court held that, even if they were not obligated under the covenants to maintain the limited common area, they assumed the responsibility for the irrigation system by repairing the leak and installing a new system. Consequently, they also assumed the duty to maintain that system in a way that did not create a nuisance. The appeals court further found that the evidence supported a finding that the Morks’ use of the planter constituted a nuisance under the covenants.

The Morks also appealed the emotional distress damage award. The appeals court held that, in a nuisance case involving real property injury, damages could be recovered for diminished value, annoyance, inconvenience and discomfort but not mental distress. That’s because mental distress caused by a nuisance is an element of loss of enjoyment. The trial judge awarded the Wyatts $270,000 for loss of use based on the fair market rental value of the property. Additional mental distress damages were not recoverable. Accordingly, the appeals court reduced the damage award by $600,000.

The Morks further claimed the permanent injunction directing them and subsequent purchasers, successors, heirs and assigns to do specified things was in error. The appeals court agreed because an injunction is a personal decree that operates on the defendant only. An injunction cannot act as a property action that seeks to affect the interests of all persons not before the court. The appeals court ordered the trial court to modify the injunction order to remove the language pertaining to persons other than the Morks.

The trial court’s judgment was reversed and remanded with instructions to alter the injunction and revise the damage award.

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

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Restrictive Covenants Do Not Create Easement for Golf Use on Lots

Chewelah Golf and Country Club Association v. Williams, No. 31748-0-III (Wash. Ct. App. Oct. 23, 2014)

Covenants Enforcement/Architectural Control: A Washington appeals court held that a restrictive covenant did not create an express easement over lots adjacent to a golf course for golfers to use.

Chewelah Golf and Country Club Subdivision is a community in Chewelah, Wash., that was created around an existing golf course. In 1975, Chewelah Golf Course and Country Club Association (association) was formed to construct, maintain and operate a golf course and country club with residences. In 1981, the protective covenants and a plat for developing the property surrounding the Chewelah Golf Course were recorded.

Between 2003 and 2005, Wilbur Williams purchased Lots 14, 16 and 28 along the golf course fairways. Two of the three lots were undeveloped, and there was a shed on the third. Williams built his home on Lot 16 and landscaped the property. The lots were subject to the protective covenants, and Williams received a copy of the covenants when he purchased his first lot in 2003.

In 2007, Williams began having conflicts with golfers hitting balls onto his property, which subsequently escalated. In 2010, the association sued Williams, alleging the existence of an easement for golfers to use the 35 feet on Williams’ lots adjacent to the fairway. In 2012, the association moved for summary judgment (judgment without a trial based on undisputed facts).

Paragraph 6 of the covenants, under building and landscape restrictions, states:

Front yard landscaping on all lots facing or bordering the fairway shall be restricted to grass, trees and flowers. The golf playing area of said front yard area shall be marked and any golf balls entering the lot beyond the marked area shall be out of bounds and not played by the golfer.

No covenant mentioned a 35-foot easement for golf play.

The association presented declarations from the developer, several residents and the golf course superintendent, who all stated that since the association was created, golfers used the private lot in-play area as part of the course. They asserted that the in-play area is marked by out-of-bounds markers and that the association maintains this area. The real estate agent who sold Williams one of his lots stated that he and Williams walked the lot and looked at the out-of-bounds markers.

Williams challenged these assertions with declarations from association maintenance employees, who said there were no markers on the course near Williams’ house prior to 2010 and that remnants of old wooden markers were often rotten or completely missing. Another real estate agent who sold Williams the first lot said he did not observe any markers on the lot and that the property first became playable when Williams removed the thickets on the golf course side of his home.

The trial court granted summary judgment to the association based on theories of express easement, equitable servitude and prescriptive easement. The trial court’s order awarded the association a 35-foot easement for golf play and maintenance across Williams’ three lots and prohibited Williams from interfering with golf play on his lots, maintaining landscaping that would constitute a barrier to golf play or course maintenance within the golf play area or moving or handling golf balls in the golf play area. Williams appealed.

The appeals court found that paragraph 6 of the covenants merely restricts the type of landscaping lot owners may place in certain marked areas of their lots, but it does not create an easement. First and foremost, there was no language in paragraph 6 that created an easement. Second, easements were explicitly created elsewhere in covenants for drainage, utilities, walkways, golf cart use and access roads. The fact that the association chose not to use similar language in paragraph 6 confirmed its intent not to create an easement in that paragraph.

Equitable principles may apply to impose restrictive covenants (called an equitable servitude) on a property owner when the owner knows restrictions apply to the neighborhood but the restrictions were not expressed in the property deed. A question exists, however, as to whether Williams had clear notice of the purported easement or in-play area. Accordingly, it was error for the trial court to grant summary judgment on this issue, and the case should proceed to trial for a determination.

To establish a prescriptive easement, a party asserting the easement must prove (1) use of the land that is adverse to the owner; (2) use that is open, notorious, continuous, and uninterrupted for a period of 10 years; and (3) an owner’s actual and constructive knowledge of such use at a time when the owner was unable to assert and enforce ownership rights.

The evidence showed there were issues of material fact concerning whether, and to what extent, the association continuously used one or more of Williams’ lots for the 10-year prescriptive period. The issue clearly was contested, and summary judgment was improper.

The trial court’s judgment as to the existence of an easement was reversed.

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

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Associationís Foreclosure of Its Super-Priority Lien Does Not Extinguish First Mortgage Insured by HUD

Washington & Sandhill Homeowners Association v. Bank of America, N.A., No. 2:13-cv-01845-GMN-GWF (D. Nev. Sept. 25, 2014)

Federal Laws and Legislation: The U.S. District Court for Nevada ruled that, because a mortgage was insured by HUD, Nevada state laws could not operate to undermine HUD’s ability to obtain title after foreclosure and resell the property.

In 2008, Emiliano and Martha Renteria purchased a property in Las Vegas, Nev., which was subject to covenants, conditions and restrictions administered by the Washington & Sandhill Homeowners Association (association). They financed the purchase by obtaining a loan from IndyMac Bank, FSB that was secured by a deed of trust (mortgage) on the property and insured by the U.S. Department of Housing and Urban Development (HUD) under a federal mortgage insurance program.

In 2009, the Renterias defaulted on their loan, and a default and election to sell notice was recorded against the property on February 11, 2010. The Renterias also failed to pay assessments to the association, and the association filed a lien against the property on February 22, 2010. In April 2010, the mortgage was assigned to Bank of America (BOA).

In May 2010, the association filed a default and election to sell notice against the property. The association filed a notice of trustee’s sale in March 2012. BOA also filed a notice of trustee’s sale on May 10, 2012. The association foreclosed on the property on May 23, 2012, and purchased the property at the foreclosure sale.

In July 2012, BOA also purported to foreclose and assume title to the property. In September 2012, the association filed a lien against BOA and the property for $4,983 in delinquent assessments. BOA conveyed the property to HUD on May 17, 2013. In October 2013, the association filed another lien against the property, this time naming HUD as the owner and demanding $1,250 for delinquent assessments.

The association subsequently decided it was the true owner of the property based on its foreclosure of the property before BOA's foreclosure.  The association then filed a lawsuit in October 2013, seeking a declaration quieting title (a determination of the rightful owner) to the property in its favor and damages against BOA and HUD (defendants) for slander of title (a statement disparaging someone's title to property).  The underlying issue was whether the association’s foreclosure extinguished BOA’s first security interest, rendering BOA’s subsequent foreclosure and claim to title invalid. At the time of the foreclosures and when suit was filed, this question had not been addressed in Nevada. However, in September 2014, the Nevada Supreme Court ruled in an unrelated case that a foreclosure by an association of its super-priority lien under N.R.S. §116.3116 extinguishes a first mortgage on the property.

The defendants filed a motion to dismiss the case, arguing that HUD’s involvement in the property implicated the Property and Supremacy Clauses of the United States Constitution and prevented the association from extinguishing the interests of HUD and BOA under state law.

Under the Constitution’s Property Clause, only Congress has the power to dispose of or make rules with respect to property belonging to the federal government. Accordingly, title to federal property can only be divested by an act of Congress. Under the Constitution’s Supremacy Clause, state legislation must yield to the federal government’s interests when the legislation interferes with, impedes or conditions federal policies or programs.

The defendants asserted that HUD’s interest in the property was protected by these constitutional provisions, which prevented the association from foreclosing on the property and extinguishing the mortgage. The association, however, argued that its foreclosure was against the private interests of the Renterias and BOA, and the federal property interest here did not arise until after the association foreclosed and extinguished the mortgage. The association claimed that because its earlier foreclosure extinguished BOA’s property interest, BOA never could have transferred its property interest to HUD.

However, BOA’s property interest was already insured by HUD at the time of the association’s foreclosure. It is settled law that a title or mortgage interest in property held by a federal agency is a federal property right protected by the Constitution. The court held that, in situations where a mortgage is insured by a federal agency, state laws cannot operate to undermine the federal agency’s ability to obtain title after foreclosure and resell the property.

Accordingly, even though the association would generally be able to conduct a foreclosure pursuant to N.R.S. § 116.3116 that would extinguish a first secured interest, such foreclosure in this case would operate to impede a federal program and must, therefore, yield under the Constitution’s Supremacy Clause.

The court found that the association’s foreclosure was invalid. As a result, the association’s claims for quiet title and slander of title, which were based on the association’s belief that it owned the property, must be dismissed.

The defendants’ motion to dismiss was granted and the association’s complaint was dismissed with prejudice.

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

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Owner Must Pay Assessments for Each Lot Purchased

Walton v. Midland Mira Vista Homeowners’ Association, Inc., No. 11-12-00214-CV (Tex. App. Sept. 18, 2014)

Powers of the Association/Assessments: A Texas appeals court ruled that a lot owner was obligated to pay assessments on two lots, even though the lots had been replatted into a single lot.

The Mira Vista Subdivision in Midland, Texas, consists of 13 residential lots. The subdivision is subject to a declaration of restrictions and covenants (declaration) and governed by Midland Mira Vista Homeowners’ Association, Inc. (association).

Trent Walton purchased Lot 2A in Mira Vista in May 2006 and Lot 1A in June 2007. In October 2007, Walton filed an application with the City of Midland to replat his two lots into a single lot. The city approved his request, and the lots were replatted into a single lot identified as Lot 1B.

In 2008 and 2009, the association levied assessments on both of Walton’s original two lots. Walton refused to pay assessments on both lots, and the association sued him to recover the unpaid assessments.

Walton countered that the association had no authority under the declaration to levy assessments and that, if assessments were authorized, Walton would be responsible for assessments for one lot only due to the replat. Both parties moved for summary judgment (judgment without a trial based on undisputed facts).

Walton argued that the association did not have authority to assess because it was not the association identified in the declaration. The trial court granted in part the association’s motion, finding that the association was a proper nonprofit corporation authorized under the declaration to levy assessments against Walton’s lots. It further concluded that Walton’s property constituted two lots under the declaration and awarded the association damages of $4,233.16. Walton appealed.

The declaration identified the homeowners association with jurisdiction over the subdivision as Mira Vista Homeowners’ Association, a nonprofit incorporated association of all lot owners. The declaration required the developer to create the nonprofit corporation and to convey the common area to the association. The declaration further required that each lot owner be a member of the association and pay assessments for, among other things, common area maintenance costs.

However, the developer never incorporated Mira Vista Homeowners’ Association. When several lot owners discovered this in late 2007, they undertook an effort to establish the association. When they learned from the Secretary of State’s office that the name Mira Vista Homeowners’ Association was not available, they incorporated using the name Midland Mira Vista Homeowners’ Association and began operating in early 2008. The association filed an assumed name certificate that indicated it would be conducting business under the assumed name Mira Vista Homeowners’ Association. After the association was incorporated, the developer conveyed the common areas to the association.

The appeals court concluded that the declaration’s language did not show that the developer intended to limit itself to one particular name because it clearly indicated that the entity had not yet been formed. By creating the association, the lot owners merely effectuated the developers’ intent.

The association asserted that Walton could not avoid the obligation to pay assessments on multiple lots by unilaterally replatting the lots into a single lot. The appeals court agreed. When Walton purchased each lot, each was subject to the declaration. Under the declaration, when Walton accepted a deed to a lot, he agreed to pay assessments for that lot. The declaration further provides that the developer is responsible for the subdivision’s platting and development. Thus, the intent was that the developer, and not individual lot owners, could seek to replat subdivision property.

The declaration further contemplated that lot owners would be assessed on a per-lot basis. If a lot owner could avoid his or her financial obligations by replatting the property, the purpose of this language would be frustrated.

Considering the intent of the parties as expressed in the declaration, the appeals court concluded that Walton could not avoid his obligation to pay assessments on two lots by replatting them into one lot.

The trial court’s orders were affirmed.

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

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Restrictive Covenant Prohibits Constructing a Storage Building Before Constructing a Dwelling

Berry v. Mountain Air Property Owners Association, Inc., No. 13-1324 (W. Va. Oct. 17, 2014)

Covenants Enforcement/Architectural Control: A West Virginia court ruled in favor of an association, finding that the subdivision’s restrictive covenants prohibited constructing a storage building before constructing a home on the lot.

The Mountain Air Subdivision in Hampshire County, W. Va., is subject to a declaration of reservations and restrictive covenants (declaration). The declaration is enforced by Mountain Air Property Owners Association, Inc. (association). The subdivision is not a typical residential subdivision. It consists of large-acreage, mountainous lots that are used as private campgrounds and for recreational purposes. Many lot owners do not build houses on their lots.

Russell and Patricia Berry own Lot #40, which consists of approximately 20 acres. They generally visit their property on weekends for recreational purposes. They have not built a house on the property.

The Berrys wanted to build a storage building on their lot in which to store a tractor, tools and other personal property. They had kept the equipment on the property for years, and it was subject to weather, theft and vandalism. The Berrys did not intend for the storage building to house or maintain animals. Before the storage building was constructed, five of the association’s directors objected. They believed the declaration prohibited the Berrys from constructing a storage building because they had not first built a residence on the lot.

Article VIII, Section (c) of the declaration provided:

(c) Improvements and construction for the maintenance of animals shall be constructed of new materials and must conform generally in appearance with any dwelling upon any Lot, although such improvements need not be constructed of materials identical to an existing dwelling. No such improvements shall precede the construction of the dwelling. Each Lot owner shall maintain such improvements placed upon a Lot and no unsightly or dilapidated buildings or other structures.

In March 2013, the Berrys sued each lot owner in the subdivision to resolve the dispute over declaration’s interpretation. The association intervened and sought a ruling that the declaration prohibited constructing a storage building prior to constructing a dwelling. The parties agreed there were no genuine issues of material fact.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the association. The trial court held that both improvements and construction for the maintenance of animals must satisfy the five requirements outlined in Section (c): (1) be kept in good repair; (2) be constructed of new materials; (3) conform generally to the appearance of the dwelling; (4) not precede construction of a dwelling; and (5) not be maintained in an unsightly manner. The trial court found no ambiguity in the provision, as it specifically referenced an “existing dwelling.” The Berrys appealed.

On appeal, the Berrys argued that the trial court erred by adding language to the restrictive covenant and drawing inferences from separate, unrelated sections, instead of applying basic rules of English grammar and syntax to the plain, unambiguous language as required by West Virginia law.

The appeals court examined whether the phrase “for the maintenance of animals” modifies the term “improvements” and the term “construction,” or only the term “construction.” The Berrys asserted that “improvements and construction” is a compound subject, followed by a prepositional phrase, “for the maintenance of animals.” They argued that a prepositional phrase that follows a compound subject modifies both parts of the compound subject.

The appeals court concurred with the trial court that “improvements” and “construction for the maintenance of animals” were separate items addressed in Section (c), independent of one another. The appeals court further agreed that there was no ambiguity that such improvements may be erected only after a dwelling is constructed because an “existing dwelling” is specifically referenced.

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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Insurer Cannot Avoid Coverage for Lawsuit Simply Because It Had No Notice of Suit

Redfish Key Villas Condominium Association, Inc. v. Amerisure Insurance Company, No. 2:13-cv-241-FtM-29CM, U.S.D. C. (M.D. Fla. Oct. 23, 2014)

Risks and Liabilities: A Florida U.S. District court ruled that material issues of disputed facts precluded summary judgment in a case where an insured contractor failed to give proper notice of a lawsuit for defective construction to the insurer.

Redfish Key Villas is a condominium project in Englewood, Fla. In June 2005, Dooley Mack Constructors, Inc. contracted with the developer to construct a four-story building with a covered parking area. The contract required Dooley Mack to obtain general liability insurance that included completed operations liability coverage. In October 2006, Dooley Mack obtained the general liability policy from Amerisure Insurance Company, which was renewed every year through 2011.

Dooley Mack hired a subcontractor to perform the stucco and plaster work on the condominium. The work performed by the subcontractor was defective.

Redfish Key Villas Condominium Association, Inc. (association) manages and maintains the condominium building. In 2010, the association noticed several water leaks, which it initially believed to be related to windows. After the windows were resealed, however, the water intrusion continued, and the stucco began to delaminate and crack.

In February 2011, the association sent Dooley Mack a construction defect claim notice pursuant to Florida statutes. The notice stated the association’s intent to file suit if the deficiencies could not be resolved.

In April 2011, Dooley Mack forwarded the notice to Amerisure. Amerisure responded by communicating with Dooley Mack about the loss but did not inspect the project. Dooley Mack was unable to repair the defective stucco due to its dire financial condition. The association undertook the repairs, which were completed in July 2012 at a cost of $202,902.97.

In February 2012, while repairs were still pending, the association sued Dooley Mack for the defective stucco work. Dooley Mack did not answer the lawsuit, and a default judgment in the association’s favor was issued in April 2012 against Dooley Mack for $202,902.97.

In November, Kyle Summer, an Amerisure claims supervisor, sent an e-mail to the association’s counsel asking about the current status of the construction defect claim notice and any remediation or repairs that may have taken place. The association asserted this was their first notice of any insurance policy for Dooley Mack. The association’s counsel responded by e-mail requesting information as to how Amerisure planned to satisfy the judgment against Dooley Mack. Amerisure claimed this was its first notice that Dooley Mack had been sued.

In November 2012, pursuant to Summer’s request, the association sent Amerisure documents relating to the lawsuit. In February 2013, Amerisure sent a letter to the association denying coverage for the default judgment under the policy, asserting that it had been materially prejudiced by Dooley Mack’s failure to provide Amerisure notice of the lawsuit as required by the policy. In March 2013, the association sued Amerisure, seeking declaratory relief and alleging breach of the policy as a third-party beneficiary.

Amerisure argued it did not owe either Dooley Mack or the association any duty under the insurance policy because it had no knowledge of the lawsuit. According to Amerisure, the failure to notify breached the policy’s terms and denied it the opportunity to eliminate or reduce the loss by participation in the defense of the suit.

Under the policy, Dooley Mack was required to notify Amerisure “as soon as practicable” if “a claim is made” and if “a suit is brought.” A requirement of notice “as soon as practicable” requires notice to be given with reasonable dispatch and within a reasonable time.

Amerisure did not argue that there was no notice of the “claim,” only that there was no notice of the lawsuit. While there were conversations between Amerisure and Dooley Mack between the time the suit was filed and the time the default judgment entered, no evidence existed to show Amerisure was ever notified that a lawsuit had actually been filed.

The association suggested that because Amerisure received the claim notice, which contained the threat of an imminent lawsuit, there was sufficient notice, even if there was no specific notice of the actual lawsuit. The court disagreed. The policy requires notice of both a “claim” and a “suit.” Amerisure had a contractual right to be notified when the suit was filed, even after it had been notified of the claim. No such notice was given until after a judgment had been obtained, which certainly was not “as soon as practicable.”

However, the court found there was at least a disputed issue of material fact regarding whether Amerisure was prejudiced by the delay. Summer suggested that the prejudice to Amerisure included the inability to conduct discovery, dispute liability and damages, participate in settlement discussions and file claims against others. Nonetheless, the delayed lawsuit notice did not inhibit Amerisure’s ability to verify the defects and the entity responsible for them. Amerisure had access to substantial information regarding the claimed construction defects. If, as Amerisure argued, the lawsuit was defensible, it had an obligation to seek to set aside the judgment.

Therefore, the court denied Amerisure’s motion for summary judgment.

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

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