May 2015
In This Issue:
Recent Cases in Community Association Law
Association Did Not Breach Fiduciary Duty by Rejecting Homeowners’ Plans
Board’s Authority to Fund Litigation Limited
Owners Consented to Liens When Lots Were Conveyed
Owners of Damaged Units Not Entitled to Surplus Insurance Funds
Sewage Treatment Plant Obligated to Continue Providing Service to Condominium
Mortgage Company Not Responsible for Unit Until It Forecloses
Residents May Be Liable for Calling Association Manager a Thief
Developer Appointed Officers and Directors May Owe Fiduciary Duties to Association
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Recent Cases in Community Association Law

Law Reporter provides a brief review of key court decisions throughout the U.S. each month. These reviews give the reader an idea of the types of legal issues community associations face and how the courts rule on them. Case reviews are for information only and should not be applied to other situations. For further information, full court rulings can usually be found online by copying the case citation into your web browser.


Association Did Not Breach Fiduciary Duty by Rejecting Homeowners’ Plans

McShane v. Stirling Ranch Property Owners Association, Inc., 2015 COA 48, No. 14CA0248 (Col. Ct. App. Apr. 23, 2015)

Architectural Control: The Colorado Court of Appeals upheld limitations of liability in the community documents protecting the association and found no breach of fiduciary duty for disapproving redesigned home plans.


Mac McShane and Cynthia Calvin (the homeowners) purchased a lot in the Stirling Ranch subdivision in Garfield County, Colo., with the intent to construct a home. The subdivision is subject to a declaration of covenants and governed by Stirling Ranch Property Owners Association, Inc. (association). Under the declaration, the association’s executive board is authorized to appoint a design review board (DRB), which is charged with enforcing design guidelines.

Prior to construction, the homeowners were required to submit and obtain the DRB’s approval for design plans from a licensed architect. The design guidelines required the design to conform to the county’s height restrictions. The homeowners’ architect mistakenly represented to the DRB that the plans conformed to the county’s requirements. The DRB did not notice a violation of the height restriction, so it approved the plans.

The homeowners began construction. When the county learned that the home exceeded the height limit, the county issued a stop work order. The homeowners had to redesign the home and submit the new plans to the DRB. The DRB rejected the revised plans, citing noncompliance with the design guidelines. The homeowners submitted another set of redesigned plans removing a story. The DRB approved these plans.

The homeowners later sued the association for negligence, declaratory judgment (judicial determination of the parties’ legal rights) and equitable estoppel (preventing a party from pursuing legal claims against another due to the second party’s justifiable reliance upon the first party’s conduct), alleging that the home’s redesign cost them $271,565.97 in damages.

The trial court concluded that the association had not breached any fiduciary duty to the homeowners and that limitations of liability stated in the declaration and the design guidelines (the exculpatory clauses) barred the homeowners’ claims. The homeowners appealed.

When evaluating an exculpatory clause’s validity, a court must examine: “(1) the existence of a duty to the public; (2) the nature of the service performed; (3) whether the contract was fairly entered into; and (4) whether the parties’ intentions were expressed in clear and unambiguous language.” The homeowners argued that the Colorado Common Interest Ownership Act (CCIOA) makes a homeowners association’s operations a matter of public concern.

The appeals court acknowledged that an association’s decision may not be arbitrary or capricious but disagreed with the homeowners that upholding the exculpatory clauses would permit the association to act negligently or violate its fiduciary obligations without consequence. Since CCIOA specifically empowers associations to regulate architectural matters, an association’s decision to approve or deny a design does not imply a duty to the general public.

The homeowners asserted that associations are so prevalent that the service provided by the DRB is an unavoidable practical necessity. The appeals court evaluated whether using the DRB’s service was a matter of choice or necessity. While the homeowners were required to obtain the DRB’s approval for home construction, the appeals court noted they were not required to build on the property. The appeals court determined that the DRB’s design review process for a new custom home was not a necessary service given the availability of other area housing options.

“Exculpatory agreements are unfairly agreed on if one party’s bargaining power leaves it at an obvious disadvantage resulting in a contract placing the party at the mercy of the other’s negligence.” Fairness is evaluated by asking whether the service could have been obtained elsewhere. Again noting the availability of other housing options, the appeals court determined the homeowners were never placed in an unfair bargaining position. The homeowners reviewed the design guidelines before purchasing the lot and knew they needed DRB approval to construct a home. Therefore, the exculpatory clauses were upheld.

The homeowners further argued that since the DRB had approved their initial design, rejecting the redesigned plans was arbitrary and capricious. In the homeowners’ view, the board breached its fiduciary duty when it rejected a plan (redesigned to comply with the county’s height requirement) that otherwise followed the previously approved design.

The appeals court disagreed. The homeowners cited no authority that would prevent the DRB from reevaluating the entire redesigned plan. The DRB indicated it rejected the redesign because it was three stories, blocked view planes and did not reduce the home’s mass or height. The appeals court emphasized that the DRB had been asked to review the redesign because the original design violated the county’s requirements. The DRB was not asked to review its prior decision. The appeals court found no error in the trial court’s determination that no fiduciary duty was breached. The trial court’s judgment was affirmed.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Board’s Authority to Fund Litigation Limited

Nottingham Village Condominium Association v. Pensom, No. 319552 (Mich. Ct. App. Mar. 24, 2015)

Assessments: The Michigan Court of Appeals held that an association board had no authority to levy an assessment to fund construction defect litigation without an owner vote.


John and Jane Doe Pensom own a unit in the Nottingham Village Condominium in Wayne County, Mich. Nottingham Village Condominium Association (association) governs the condominium.

In June 2011, the association filed a lawsuit against the condominium’s developer shortly before the statute of limitations ran out on the association’s construction defect claims. In February 2012, the association’s board of directors held a special meeting to discuss the lawsuit and raising money to pay for it. The board voted to rescind the $160 per month assessment and levied a $3000 assessment, to be paid over three months.

The Pensoms paid some, but not all, of the assessment. The association filed a lien against the Pensoms’ unit and filed suit to foreclose the lien in October 2012.

The association filed a motion for summary disposition (judgment without a trial based on undisputed facts). The Pensoms argued they were entitled to judgment because the additional assessment was invalid according to the association’s bylaws.

The trial court granted summary disposition to the association, finding that the bylaws placed unreasonable restrictions on the association’s right to undertake litigation in violation of the Michigan Condominium Act (MCA) and the Michigan Nonprofit Corporation Act (MNCA). The trial court awarded the association $19,111.55 for the assessment, attorneys’ fees and costs. The Pensoms appealed.

The bylaws authorized the association to levy two types of assessments: annual assessments based on an annual budget approved by the owners and special assessments. The bylaws also allowed the board to change an annual assessment or levy an additional assessment in four circumstances: when the assessments are insufficient to pay for operating and managing the condominium, to replace existing common elements, to make additions to the common elements—not exceeding $1,000 annually—and in an emergency.

The appeals court determined the board could not use the first circumstance to levy the assessment because there was no evidence that the current assessment was insufficient to meet the condominium’s safety, maintenance, repair and replacement needs. Rather, the assessment was insufficient to pay operating and management costs plus the litigation. The board resolution adopting the assessment clearly indicated the purpose of the additional assessment was to fund the lawsuit.

The appeals court held that the board should have reasonably anticipated the need to plan, monitor or limit its litigation costs, particularly considering the suit had been filed more than six months before the special meeting. Thus, the board had no authority to impose an additional assessment to pay for litigation.

The appeals court found the litigation assessment should have been characterized as a special assessment, which the bylaws defined as an assessment in addition to annual assessments that must be approved by more than 60 percent of the owners. The bylaws also required that legal fees—other than those needed to enforce documents or collect delinquencies—be paid by the owners through special assessments. The appeals court found this unambiguously limited the board’s discretion to fund the construction defect litigation without a vote of the owners.

The association argued the bylaws’ litigation requirements conflicted with the MCA, which expressly permits an association to assert, defend or settle claims regarding common elements, and with the MNCA, which provides that nonprofit corporations have the power to sue and be sued, subject to any limitations provided in the MNCA, in the articles of incorporation or otherwise by law. In the association’s view, since the pre-lawsuit requirements were contained in the bylaws and not in the association’s articles of incorporation or the statutes, the association—acting through the board—retained the unfettered discretion to file lawsuits.

The appeals court was not persuaded. The MCA expressly states that condominium administration is governed by the association’s bylaws. Therefore, the assessment was invalid since the board did not obtain owner approval for a special assessment.

The grant of summary disposition and the judgment award to the association was reversed, and the case was remanded to the trial court with instructions to enter summary disposition in favor of the Pensoms.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Owners Consented to Liens When Lots Were Conveyed

Fleet v. Webber Springs Owners Association, Inc., No. 14-0637 (W. Va. Apr. 23, 2015)

Assessments/State and Local Legislation and Regulations: The West Virginia Supreme Court of Appeals upheld an association’s common law liens created under a declaration, despite West Virginia’s prohibition on common law liens.


In 2003, the Webber Springs planned community was established in Berkeley County, W.Va., when a declaration of conditions, covenants, restrictions and easements (declaration) was recorded. Webber Springs Owners Association, Inc. (association) was created to govern the community. The association elected to be a West Virginia Limited Expense Liability Planned Community (LELPC) in accordance with W. Va. Code Section 36B-1-203.

As a LELPC, the association is exempt from all but a few specified provisions of the Uniform Common Interest Ownership Act (UCIOA), and its assessments are capped by statute. The declaration provided that delinquent assessments are the personal obligation of the lot owner as well as a lien on the lot.

In 2005, James Lampley and James and Jamila Fleet acquired lots in Webber Springs. Lampley did not pay association assessments between 2007 and 2011. The Fleets failed to pay from 2006 through 2011. The association filed liens against Lampley’s and the Fleets’ lots in 2008 and 2010.

In 2012, the association filed separate suits to foreclose the liens against Lampley and the Fleets. Lampley and the Fleets (collectively, the homeowners) asked the court to consolidate their cases. The homeowners also brought counterclaims against the association, asserting it violated the West Virginia Consumer Credit and Protection Act (CCPA). The association moved for summary judgment (judgment without a trial based on undisputed facts) on the counterclaims, which the trial court granted.

The homeowners appealed, arguing that the trial court erred in determining the association had common law liens against their lots and that the association’s assessment collection efforts were not subject to the CCPA.

The West Virginia Code does not recognize or enforce common law liens. However, the statute does not affect consensual liens recognized under the common law. The appeals court found the association’s liens to be consensual because they were included in the declaration, and the deeds specifically stated that the property was conveyed subject to all restrictive covenants of record, which would include the declaration.

The homeowners argued the liens were not consensual because they never signed or acknowledged the declaration. The appeals court held that it was not necessary for the homeowners to sign or acknowledge the declaration to be bound by it. Because the deed stated the property was conveyed subject to the restrictive covenants, it incorporated those covenants into the deed. By accepting the conveyance, the homeowners became bound by the restrictive covenants, even though they did not sign the deeds.

The homeowners further argued that, even if there were consensual liens for assessments, the association would not have a common law lien for attorneys’ fees and costs under the CCPA. The association argued that its collection efforts did not qualify as a “claim” under the CCPA. The CCPA relates to unfair debt collection practices related to debts “primarily for personal, family or household purposes.” The association argued its assessments were for community purposes.

According to the declaration, assessments were to be “used exclusively for the purpose of road and street maintenance, promoting the recreation, health, safety, and welfare” of the Webber Springs residents and, in particular, “for the improvement and maintenance of properties, services, and facilities devoted to this purpose and related to the use and enjoyment” of the common property and Webber Springs homes.

The appeals court held that assessments for such purposes are an obligation primarily for personal, family or household purposes and, therefore, constitute claims under the CCPA. Thus, the CCPA debt collection provisions apply to the association’s collection efforts. However, the appeals court declined to state that the CCPA prohibited the association from collecting attorneys’ fees and costs because the trial court made no ruling with respect to these fees and costs since the trial court did not think the CCPA applied at all.

The appeals court affirmed the grant of summary judgment to the association because the association’s liens were generally valid. However, the appeals court reversed summary judgment with respect to the CCPA’s application and remanded the case to the trial court with instructions to consider the liens under the CCPA.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Owners of Damaged Units Not Entitled to Surplus Insurance Funds

The Willows Condominium Owners Association, Inc. v. Kraus, No. SD33447 (Mo. Ct. App. Mar. 23, 2015)

Association Operations: The Missouri Court of Appeals held that surplus insurance funds remaining after reconstruction of several damaged units were to be distributed to all unit owners.


The Willows Condominium Owners Association, Inc. (association) manages The Willows on the Lake in Camden County, Mo., a 58-unit condominium project. In May 2011, a fire completely destroyed a building containing nine units.

The association received $1,154,300 in insurance proceeds and reconstructed the building. During the year-long construction process, the association continued to assess all 58 units, including the nine units under construction. When construction was completed, approximately $550,000 of the insurance proceeds remained.

The association proposed to distribute the surplus to all owners. Michael Krause and the other owners in the reconstructed building (claimants) argued the surplus should be distributed only to them since the insurance proceeds applied only to their units.

The association filed suit against the claimants, seeking a judicial determination concerning the proper distribution of the surplus proceeds. Seven of the claimants filed counterclaims against the association for breach of trust, breach of fiduciary duty and breach of contract regarding assessments. Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court granted the association’s motion and denied the claimants’ motion. The claimants appealed, arguing that distribution of the insurance proceeds to all owners violated the condominium declaration and the Missouri Uniform Condominium Act (UCA).

The declaration requires insurance proceeds to be paid to the association, as trustee for the unit owners, and unit owners are only entitled to insurance proceeds that are left over after the damaged property has been completely repaired. The claimants argued that “unit owners” here referred only to the claimants.

The appeals court noted that the declaration makes excess repair costs a common expense allocated among all owners. If all owners had to share the burden of insufficient insurance proceeds, then all owners would share a surplus.

The claimants argued that other provisions in the declaration supported their position. One provision stated that insurance proceeds attributable to units and common elements that are not rebuilt should be distributed to the owners of those units, and the balance to all unit owners. The appeals court drew the opposite conclusion, finding that this section provided a means to compensate owners whose units are not rebuilt by giving them the insurance proceeds attributable to their units.

The claimants' units, however, were rebuilt, and the insurance proceeds attributable to those units were used to fund the construction. The appeals court found nothing in the declaration to suggest that the term “unit owners” referred to anything other than all unit owners.

The claimants further argued they should not be responsible for assessments levied while their units were being reconstructed based upon the declaration's formula for calculating each unit's percentage share of assessments—a fraction based on square footage of all units in the condominium at any given time. 

The claimants argued that “any given time” meant that assessments could be levied only on the square footage existing at the time of each assessment. They argued their units had zero square footage while being rebuilt and thus, zero assessment liability. However, the declaration identified each unit by reference to the recorded plat. Unit ownership includes a percentage interest in the common elements, and an obligation to pay assessments arises from that ownership and does not depend on unit completion. The appeals court held that the platted square footage is known and does not change; this is the figure to be used in the assessment formula.

The trial court’s judgment was affirmed.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Sewage Treatment Plant Obligated to Continue Providing Service to Condominium

The Riverbend Association, Inc. v. Riverbend, LLC, No. 2130579 (Ala. Civ. App. Apr. 10, 2015)

Contracts: An Alabama appeals court held that an association had acquired an irrevocable license to use a private sewage treatment plant after paying the plant operator for nearly 40 years.


Anne Homes, Inc., developed a marina and the Riverbend condominium project in Marshall County, Ala., in 1974. Public sewer facilities were not available, so Anne Homes constructed a sewage treatment plant (plant) on adjacent property. Anne Homes entered into a lease agreement (agreement) with The Riverbend Association, Inc. (association) and Riverbend Marina Company, Inc. (marina) to use the plant.

The agreement stated the marina owned the plant and was obligated to maintain it; the term was for five years with nine automatic five-year renewals, and the parties could elect not to renew.

The marina and the association were each responsible for half the monthly rental payments to Anne Homes.

Anne Homes defaulted on the mortgage secured by the plant property. When the bank foreclosed on the property, the plant was in need of significant repairs. The bank made the repairs. The bank, on behalf of the marina, and the association agreed to amend the lease (amendment), making it a license permitting the association and the marina to use the plant.

The amendment eliminated the rent payments and instead obligated the marina and the association to share in the plant’s operating expenses; the association was responsible for 90 percent of the costs and the marina 10 percent. The amendment also permitted additional sewer line taps into the plant, in which case the operating expenses would be reapportioned among all users on a pro rata basis.

In 1981, the bank conveyed its interest in the plant and the amended agreement to River Bend, Ltd. River Bend operated the plant from 1981 until October 2010. During that time, River Bend charged the association 90 percent of the plant’s operating costs, which the association paid.

In October 2010, River Bend, Ltd. sold the plant to Riverbend, LLC (LLC). The deed did not contain any reference to the amended agreement. The LLC continued the practice of billing the association 90 percent of the operating costs.

In 2011, the association believed that, since additional sewer taps had been made, it should only be responsible for about 72 percent of the operating expenses based on the total plant use. In June 2011, the association began sending reduced payments to the LLC. The LLC objected to the association’s unilateral reduction in payments and threatened to terminate its sewer service.

In March 2012, the association sued the LLC, seeking a judgment that the LLC was bound by the agreement and the amendment. It sought an injunction preventing the LLC from terminating sewer service and damages for overbilling the association. The LLC argued it was not bound by the amended agreement and was entitled to change the billing for its services and make a profit on the plant’s services. The LLC also sought damages for the association’s failure to pay the full amount of its bills.

Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court granted summary judgment to the LLC. The association appealed.

The association argued it had an irrevocable license to use the plant because it had spent substantial amounts on the plant, funding the majority of the plant operating costs for nearly 40 years, and the condominium unit owners had relied on the service. The appeals court agreed, finding that it would be inequitable for the LLC not to be bound by the agreement when the LLC had notice of the license, the plant operator had induced the association to act over a number of years and retracting the sewer service would cause serious injury to the condominium.

The appeals court held that the LLC was bound by the amended agreement and that the amendment did not contemplate the plant operator making a profit on the sewer service. Furthermore, the plant operating costs were to be apportioned among the sewer users based on the number of users. The amendment clearly contemplated that, once additional sewer users were added, the association would no longer be responsible for 90 percent of the operating costs.

The trial court’s judgment was reversed, and the case was remanded to the trial court with instructions to determine the association’s percentage of use and expenses.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Mortgage Company Not Responsible for Unit Until It Forecloses

Wells Fargo Bank, N.A. v. 1401 Condominium Association, No. COU4-13-002536 (Del. Ct. Comm. Pleas Mar. 24, 2015)

Federal Law and Legislation: A Delaware Court of Common Pleas held that a mortgage company was not liable for association fees since it had not foreclosed on a bankruptcy debtor’s unit, even though the bankruptcy trustee had abandoned the unit.


In May 2008, Jon Ingman purchased a unit in the 1401 Condominium in New Castle, Del., which is governed by 1401 Condominium Association (association). Ingman defaulted on his mortgage with Wells Fargo Bank, N.A. (Wells Fargo) in August 2009.

In September 2010, Wells Fargo filed suit against Ingman to recover the amount due on the mortgage. In September 2011, before the unit could be foreclosed, Ingman filed a Chapter 7 bankruptcy petition. In October 2011, the bankruptcy trustee abandoned the bankruptcy estate’s interest in the unit. The bankruptcy court authorized Wells Fargo to proceed with foreclosure in December 2011. Wells Fargo did not foreclose on the unit, and Ingman continued to live in it. In January 2012, the bankruptcy court discharged Ingman from personal liability for debts incurred before he filed for bankruptcy.

In November 2012, the association sent Wells Fargo a demand letter for $5,352.27 for assessments accruing from November 2011. The association claimed Wells Fargo was responsible for the assessments because the bankruptcy trustee had abandoned the unit. Wells Fargo ignored the demand.

The association filed a debt collection action against Wells Fargo in January 2013, seeking the unpaid assessments plus interest, court costs and attorney’s fees. The trial court awarded the association judgement in the amount of $6,334.27 plus interest, court costs and attorney’s fees. Wells Fargo appealed.

The association alleged that Wells Fargo acquired ownership of the unit when the bankruptcy trustee abandoned the unit. Wells Fargo denied that it owned or possessed the unit.

When a debtor files a bankruptcy petition, a bankruptcy estate is created that encompasses “every conceivable interest of the debtor.” If the bankruptcy trustee determines that an estate asset is either burdensome or has inconsequential value or benefit to the estate, the trustee may abandon the asset. Abandonment means the asset reverts to the debtor, not that the property is transferred from the estate. Upon abandonment, the debtor’s property interest is restored as of the bankruptcy petition date. The debtor holds the abandoned property as if he or she had never filed the bankruptcy petition.

The appeals court held that the unit reverted to Ingman when the bankruptcy trustee abandoned it in October 2011. The bankruptcy discharge released Ingman from personal liability for assessments levied before he filed for bankruptcy. However, Ingman remained liable for assessments incurred after he filed for bankruptcy since he continued to own and occupy the unit.

The appeals court held that the association could not recover from Wells Fargo and that Wells Fargo was not liable merely because it had the right to foreclose and had not actually done so. Judgment was entered in favor of Wells Fargo.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Residents May Be Liable for Calling Association Manager a Thief

Neyland v. Thompson, No. 03-13-00643-CV (Tex. App. Apr. 7, 2015)

State and Local Legislation and Regulations: The Texas Court of Appeals held that the Texas Citizens Participation Act will not protect association members from making false statements about the property manager’s performance when they failed to investigate the truth of the allegations.


Karen Neyland, Susan Sinclair, Phyllis Watts and Connie Causin (collectively, defendants) are residents of Sunchase Condominiums in Austin, Tex., which is governed by Sunchase Homeowners Association, Inc. (association). Nancy Thompson is the association’s manager.

Beginning in 2011, the defendants became vocal about their dissatisfaction with Thompson’s performance. They sent e-mails to association board members expressing concern “about the situation,” stating they wanted Thompson to “shake in her boots.”

The defendants made verbal statements and distributed fliers to association members expressing concern about suspected fraudulent activity by Thompson and the association president and accusing Thompson of incompetence, breach of contract, violation of the association’s bylaws, misappropriation of funds and disregard for the law. The fliers also indicated that Thompson had been fired from three other associations for mismanagement of funds and that one association had sued Thompson to get its money back and had won. Further, the defendants were interviewed by a local television reporter investigating unrest at the condominium, and the televised reports included the defendants’ statements that “something was not right” and that neither the board nor the manager would respond to their requests for information.

In 2013, Thompson filed suit against the defendants for libel (defamation expressed in writing) and slander (defamation expressed orally). “A statement is defamatory when, in light of the surrounding circumstances, a person of ordinary intelligence would interpret it in a way that tends to injure the subject’s reputation and thereby expose the subject to public hatred, contempt, or ridicule, or financial injury, or to impeach the subject’s honesty, integrity, virtue, or reputation.” Some statements are so obviously harmful to a plaintiff’s reputation that no proof of actual damage is required; such statements are considered inherently defamatory.

The defendants filed motions to dismiss the suit under the Texas Citizens Participation Act (TCPA). The trial court denied the motions, and the defendants appealed.

The TCPA employs a two-step process for analyzing claims. First, the defendant must show that the action is based on, relates to or is in response to the right of association, free speech or petition. The appeals court found the defendants met this initial requirement because the communications at issue addressed the community’s well-being.

Next, the TCPA requires that claims be dismissed unless the plaintiff establishes each element of the claim with clear and specific evidence. Since the defendants did not deny making the statements, Thompson needed only to show that the defendants negligently disregarded the truth to prevent her claims being dismissed.

The appeals court determined that the e-mails were not intrinsically defamatory because they made no comments about Thompson’s profession and did not say or imply that Thompson was guilty of anything. The e-mails only expressed vague concern about the association. The statements made to the reporter were similarly vague and were more critical of the board than of Thompson. The appeals court held that the trial court erred in denying the defendants’ motion to dismiss regarding the e-mails and the statements to the reporter.

The appeals court determined the fliers and the verbal comments to residents were defamatory because they injured Thompson professionally by accusing her of dishonest, fraudulent and criminal conduct. The TCPA will not protect these statements if the defendants are negligent regarding the truth. The test for negligence is “whether the defendant acted reasonably in checking the truth or falsity or defamatory character of the communication before publishing it.”

One statement was true—that another homeowners’ association had sued Thompson for lost or misspent funds and had obtained a default judgment against Thompson. Therefore, the trial court should have dismissed Thompson’s claim for this statement under the TCPA.

However, the appeals court found that the defendants acted negligently by failing to investigate whether the remaining oral and written statements were true. The defendants did not review association records before claiming Thompson “stole” from the association and was a “thief.” In fact, earlier, the board sent a letter to association members stating they were not aware of any embezzlement or wrongdoing by Thompson and that Thompson was not responsible for association audits. Thompson also never had signatory authority on any association account; all checks were signed by association directors.

Further, Thompson submitted evidence that she had never been fired by an association for misappropriation and was, in fact, still working for one of the associations the defendants claimed had fired her. The appeals court determined that Thompson submitted clear and convincing evidence that the remaining oral and written statements were false and that the defendants were negligent regarding the truth. Accordingly, the appeals court upheld the denial of the defendants’ motions to dismiss, and the case will proceed to trial.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Developer Appointed Officers and Directors May Owe Fiduciary Duties to Association

Thunderbolt Harbour Phase II Condominium Association, Inc. v. Ryan, 326 Ga. App. 580, 757 S.E.2d 189 (Ga. Ct. App. 2014)

Risks and Liabilities: The Georgia Court of Appeals held that a jury must decide whether the sole officer and director of an association appointed by the developer owed a fiduciary duty to the association and its members to protect the condominium property from construction defects.


Thunderbolt Harbour Phase II Condominium Association, Inc. (association) manages the second phase of Thunderbolt Harbour Condominium in Chatham County, Ga., containing seven residential waterfront units. Ryan Builders, the developer, completed Phase II in the fall of 2003.

All units were sold between December 2003 and June 2005. From the association’s incorporation in 2003 until July 2006, Michael R. Ryan served as the association’s sole officer and director. In July 2006, Ryan transferred control of the association to the unit owners.

In March 2010, the association’s attorney notified Ryan about construction defects in Phase II. When the parties could not come to a resolution, the association filed suit against Ryan (individually), Ryan Builders and other individuals involved in the construction. The parties settled all claims, except claims against Ryan as the association’s officer and director.

Ryan filed a motion for summary judgment (judgment without a trial based on undisputed facts) on the remaining claims against him, including claims for breach of fiduciary duty for failing to adequately inspect and repair construction defects, maintain adequate insurance coverage and maintain the condominium building. The trial court granted the motion, finding that Ryan had no fiduciary duty to turn over the condominium common elements in good repair. The association appealed.

The association argued that the trial court erred in concluding that Georgia does not recognize a breach of fiduciary duty claim against an association officer and director. The appeals court agreed, stating that a “fiduciary or confidential relationship may be created by law, contract, or the facts of a particular case.”

Georgia law provides that a fiduciary or confidential relationship arises “where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith, such as the relationship between partners, principal and agent, etc.”

The appeals court noted further that Georgia courts have recognized that a corporate officer or director owes a fiduciary or quasi-fiduciary duty to the corporation, which requires that he or she act in the utmost good faith. Moreover, in an agency relationship, an agent has a fiduciary duty to the principal.

A jury could find it fell within Ryan’s fiduciary duty as the association’s sole officer and director to protect the condominium property. In addition, a jury could find that Ryan was the association’s agent since he was given the authority to act on the association’s behalf to select insurance coverage and impose association fees. The appeals court held that the trial court erred when it concluded the association had no cognizable claim for breach of fiduciary duty.

The appeals court reversed the grant of summary judgment to Ryan.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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