February 2016
In This Issue:
Recent Cases in Community Association Law
Associationís Lien Canceled by Ownerís Bankruptcy
Interior Alteration Violated Prohibition Against Second Story
Leasing Restriction Does Not Prohibit Roommates
New Restrictions Invalid without Unanimous Consent
Failing to Pay Assessments Does Not Terminate Developerís Rights
Insurer is Not Relieved of Liability by Settlement Agreement
Declaration Does Not Create Lien
Policy Exclusions Preclude Insurance Coverage for Litigation
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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.

Associationís Lien Canceled by Ownerís Bankruptcy

In re: Sligh, 542 B.R. 723 (Bankr. E.D. Pa. Dec. 3, 2015)

Assessments: The U.S. Bankruptcy Court for the Eastern District of Pennsylvania held that the Pennsylvania Uniform Condominium Act did not grant super-lien status to an association’s lien since the unit had not been foreclosed.

North Point I Condominium Association governed a condominium in Philadelphia, Penn. Janice Sligh owned a unit subject to a mortgage held by U.S. Bank National Association (U.S. Bank) with a balance of $97,657, but the unit was only worth about $80,000.

Sligh filed a chapter 13 bankruptcy petition in June 2014. Sligh was in arrears to the association, and the association filed a proof of claim in the bankruptcy case, asserting that it held a secured claim of $1,663 in the unit and an unsecured claim of $1,989, for a total amount due of $3,653 for unpaid assessments, late fees, utility bills, collection costs and attorneys’ fees.

Sligh’s proposed chapter 13 plan provided for the association’s lien to be canceled under the bankruptcy code provisions. Prior to the plan’s confirmation, Sligh initiated an adversary proceeding against the association to determine the value of and to modify the association’s claim. Sligh sought a determination that the association’s lien was entirely unsecured because the lien was inferior to the U.S. Bank mortgage that exceeded the unit’s value, leaving no value to support the association’s lien.

The parties stipulated that the association’s lien was a statutory lien, which subjected the lien to the bankruptcy code’s modification clause. The modification clause “allows for the bifurcation [division] of an under-secured claim into a secured claim and an unsecured claim if the unpaid balance of a claim exceeds the value of the property securing the claim.”

The association asserted that a portion of its lien had priority over U.S. Bank’s mortgage under the Pennsylvania Uniform Condominium Act (act) and, therefore, was not avoidable under the bankruptcy code. Under the act, an association lien has priority status over all other liens and encumbrances, except for mortgages recorded before the association assessment and real estate taxes. If a prior mortgage is foreclosed, the association’s lien is divested, except for a portion that is commonly referred to as the “super-lien.”

The act granted super-lien status for unpaid assessments that came due during the six months immediately preceding the judicial sale (foreclosure) date in a collection action. Sligh argued that the act’s requirements were not met and did not elevate the association’s lien to super-lien status. The bankruptcy court agreed. A judicial sale is a threshold requirement for super-lien status under the act.

The association conceded that a judicial sale did not take place, and no judicial sale was pending. Instead, the association argued that the six-month collection period should be calculated using the bankruptcy filing date. The court determined that the bankruptcy filing date was irrelevant because the act plainly required a judicial sale.

Accordingly, the court held that the association’s lien lacked super-lien status and was entirely subordinate to the U.S. Bank mortgage, which consumed all of the unit’s value. As such, the association’s lien was reduced to zero, subject to Sligh completing her chapter 13 plan.

©2016 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Interior Alteration Violated Prohibition Against Second Story

Pinnacle Peak Ranchos Property Owners Association v. Ramioulle, Case No. 1 CA-CV 14-0409 (Ariz. Ct. App. Dec. 10, 2015)

Covenants Enforcement: The Arizona Court of Appeals held that an association had the authority to inspect home interiors to ensure compliance with the declaration.

Pinnacle Peak Ranchos Property Owners Association (association) governed a subdivision in Maricopa County, Ariz. Frederic and Natalie Ramioulle owned a lot in the subdivision. The Pinnacle Peak Ranchos declaration of covenants, conditions and restrictions (declaration) provided that no structure “shall exceed one story in height.” The declaration also required all construction to be approved in advance by the architectural review committee (ARC).

The Ramioulles submitted proposed plans for their new home which showed an interior staircase and an interior “bridge” at the same elevation as an exterior roof deck. The ARC rejected the plans, stating that the bridge constituted a second story in violation of the declaration. In revised plans, the Ramioulles kept the exterior roof deck at the same elevation but moved the staircase outside and removed the interior bridge, thus creating a tall open interior area labeled “clerestory area.” The ARC approved the revised plans.

During construction, the Ramioulles deviated from the approved plans. Instead of keeping the open clerestory area, they created a second-story room approximately seven feet in height in its place. When the ARC later learned about the second story room, the ARC asked the Ramioulles to remove the floor that had not been in the approved plans. The Ramioulles refused, and the association filed suit, seeking an injunction (order mandating or prohibiting certain action) requiring the Ramioulles to cease construction.

The trial court granted judgment in favor in the association and ordered the Ramioulles to remove the second story and bring the construction into compliance with the approved plans. The Ramioulles appealed.

The association asserted that the declaration barred any construction of more than one story, except for a basement. The Ramioulles argued that the phrase “one story in height” created a height limitation, not a limit on the number of stories a home may have. The restriction was contained under a heading entitled “Height Limitation.”

The appeals court determined that the term “one story” was strong evidence that the drafter intended to limit the number of stories in subdivision homes. After consulting the dictionary for the ordinary meaning of the words “story” and “height,” the appeals court held that the declaration restricted the height of a building to one story, except for a basement.

The appeals court rejected the Ramioulles’ assertion that the restriction was merely a height limitation because that would create no articulable height limit at all. In specifying that a basement is not a story for purposes of the height limitation, the restriction made clear that the relevant height measurement was a “story.”

The Ramioulles argued that the restriction’s purpose was to protect views, and their alleged two-story home was no higher or more obtrusive than the approved one-story home. The ARC conceded that the total building height was no different, but it argued that the second story would allow the Ramioulles to look into their neighbors’ yards without their neighbors’ knowledge. Moreover, the association had never approved a two-story home for the community.

The Ramioulles persisted, arguing that the association lacked authority to review interior features not visible from outside the home. The plan review mandate was contained in a restriction labeled “Obligation to Submit Exterior Plans for Approval.” This section specified that no construction that was visible from neighboring property could commence without prior ARC approval.

The appeals court disagreed, finding that the ARC’s authority extended beyond just exterior review based on the declaration as a whole. The declaration required owners to submit plans to allow the ARC to “understand the nature, kind, size, areas, height . . . of the proposed structure.” The appeals court determined that an inquiry into the nature and kind of home included understanding whether the home has more than one story.

Further, the declaration provided that the ARC had the authority to disapprove any construction that was not suitable or desirable, considering the declaration’s requirements. The appeals court held that reading these provisions together leads to the conclusion that the ARC may inspect a building’s interior when it must do so to ensure compliance with the declaration.

Accordingly, the trial court’s judgment was affirmed.

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Leasing Restriction Does Not Prohibit Roommates

Boston Redevelopment Authority v. Pham, Case No. 14-P-1734 (Mass. App. Ct. Nov. 19, 2015)

Covenants Enforcement: The Appeals Court of Massachusetts held that whether condominium documents required consent for a roommate was, at best, ambiguous, and the ambiguity should not be construed against the owner.

In 2007, Jeffrey Pham won a housing lottery and was approved by the Boston Redevelopment Authority (BRA) to purchase a two-bedroom, affordable condominium unit in Boston, Mass. The affordable housing was designed to mitigate the effect of market rates on persons of moderate and middle income. Pham’s affordable housing application indicated that his sister, a college student, would live in the unit with him.

Pham was required to sign a deed rider covenant for affordable housing (covenant) and a consent indicating that he agreed to the condominium master deed (master deed) and declaration of trust, including the bylaws and rules adopted by the condominium trustees.

The covenant provided that the owner was required to occupy the unit as his principal residence. With BRA’s prior written consent, the owner could lease the unit, provided the rent received was not more than 115 percent of the owner’s then monthly housing costs. The master deed provided that the units would be owner-occupied, and it prohibited leasing “as a regular practice for business, speculative, investment or other similar purpose.” It further provided that no unit may be occupied by anyone other than the owner or leased to anyone without the municipality’s express written consent. The bylaws required that leases be in writing and apply to the entire unit, not just a portion of the unit.

Pham’s sister moved out in 2009, and he then had a succession of roommates. Pham traveled extensively for his job, often being gone for weeks at a time. He also spent a good bit of time in New Jersey with his girlfriend. Pham shared the unit with the roommates, and he had no formal lease or contract with any of them. Pham’s total monthly housing costs were about $3,000, and he never received more than $1,500 a month in rent.

Despite the absences, Pham continued to maintain the unit as his home base, keeping the majority of his belongings and his furniture there. The utilities remained in his name, and he paid the bills. He never rented or purchased a home anywhere else.

Some trustees complained to BRA that Pham was renting the unit, so they began an investigation. BRA filed suit against Pham, alleging he violated the covenant and his mortgage by not occupying the unit and leasing it without BRA’s approval. BRA sought an accounting in addition to an order instructing Pham to convey the unit to a qualified affordable housing buyer.

The trial court determined that the documents did not prohibit Pham from having a roommate, even one who contributes to the monthly housing costs, without BRA’s approval. The trial court dismissed BRA’s complaint and awarded Pham attorney’s fees. BRA appealed.

BRA contended that Pham was not physically present enough to satisfy the occupancy requirement, but the appeals court found that “occupy as principal residence” was not defined in the covenant. BRA’s application materials indicated that preference was given to “Boston Residents,” which was defined as persons who normally sleep, eat and maintain their personal household effects in Boston. BRA argued that the occupancy requirement should have these same parameters.

The appeals court found that “residence” had many different meanings, ranging from domicile to personal presence with some degree of permanence. While Pham was in the unit only one to two weeks per month, he still used the unit’s address for tax and other official purposes. In addition, the master deed’s prohibitions and associated remedies were directed at leasing the entire unit. The appeals court determined that Pham did not violate the master deed as he had never leased the unit for business, speculative or investment purposes.

The appeals court found nothing in the documents that expressly prohibited subleases, roommates, lodgers or boarders. The appeals court disagreed with BRA that leasing to a person other than a family member transformed the unit’s use into business. None of the documents prohibited unrelated persons from living in the unit, and BRA did not require approval of household members.

While the master deed did provide that no affordable unit may be occupied by anyone other than its owner or leased to anyone without the municipality’s consent, BRA never identified this as a violation in its letters to Pham. Moreover, this language was conspicuously absent from the covenant, the principal document governing the transaction’s affordable housing aspect.

The appeals court found that, reading the documents together, there was at least ambiguity as to whether Pham was required to obtain BRA’s consent to share the unit with a roommate, and this ambiguity should not be construed against Pham. Accordingly, the trial court’s judgment was affirmed.

©2016 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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New Restrictions Invalid without Unanimous Consent

Conlin v. Upton, Case No. 322458 (Mich. Ct. App. Nov. 24, 2015)

Developmental Rights: The Michigan Court of Appeals held that an association had no authority to impose new property restrictions without the consent of all owners.

Dixboro Farms Property Owners Association (association) governed the Dixboro Farms development in Washtenaw County, Mich., a 34-lot project developed by Philip Conlon and several investment partners (collectively, the developer).

The subdivision covenants recorded in 2001 required the developer’s consent before construction could commence on any lot. The covenants also gave the developer the right to appoint the association’s board of directors until 90 percent of the lots were sold and developed. At that point, the owners would have the right to elect the board.

There was a lull in construction for several years due to the economy, but Conlin approved plans for two new homes in 2010. After those homes were completed, Conlin learned that many of the existing homeowners were upset about the new homes’ quality, feeling they were not in harmony with the existing homes.

The dissatisfied owners met in January 2011 to discuss their grievances and sent Conlin a letter to inform him of their “decisions.” They wanted to elect the association’s board, even though only 67 percent of the lots had been sold, and they intended to develop association bylaws. They established an architectural control committee to “cooperate and assist in maintaining architectural harmony in the subdivision.” Finally, the owners asked that Conlin sign the letter to indicate his “acceptance and acknowledgement.” Conlin signed the letter.

Conlin attended an owners meeting where proposed bylaws were to be considered. Conlin actively opposed the bylaws, but a majority of the owners approved them.

The new bylaws prohibited construction on any lot without the prior approval of a new architectural review committee. The bylaws required that proposed plans be submitted to the committee, along with a $2,000 fee and a $5,000 deposit. The bylaws gave the committee the right to deny any plan that violated the covenants or that was not harmonious with the existing development. In August 2011, the developer sued the association officers, alleging that the bylaws contained invalid development restrictions.

At trial, the jury decided the bylaws did not constitute restrictive covenants that bound successive owners and did not impair the developer’s rights by violating the covenants. The jury did not consider whether Conlin assigned the developer’s architectural review rights to the association.

In April 2014, the trial court entered judgment in favor of the association and ordered the developer to pay the association more than $58,000 in attorney’s fees. The developer appealed.

Bylaws constitute a binding contractual agreement between the association and its members so long as they are not in conflict with the association’s articles of incorporation or state law. A property owner must consent to restrictive covenants regulating the property’s use in order to bind the owner and its successors. If the association had the authority to alter the existing covenants or adopt new covenants with less than unanimous consent of all owners, such authority must come from the existing covenants, which bound all owners and their successors.

The covenants did not empower the association to amend the covenants or establish new covenants or restrictions. Rather, the covenants merely provided that, after 15 years had passed, two-thirds of the owners would have the power to release the covenants and restrictions. Accordingly, the appeals court held that the bylaws violated the common law mandate that covenants and restrictions be unanimously approved by all affected property owners.

The association argued that the bylaws did not impose new property restrictions but merely interpreted and implemented the existing covenants and provided guidance for the association to enforce them. The appeals court disagreed, finding that the bylaws unambiguously imposed new burdens.

The association also argued that its power to abate covenant violations necessarily gave it a right to approve construction in advance. Specifically, the association asserted that it “need not wait inefficiently for construction to occur and then seek to abate it. Rather, it can proactively approve a potential construction.” Again, the appeals court disagreed. The bylaws did not give owners the option to seek approval in advance to avoid a potential future dispute. Rather, the bylaws required owners to obtain approval in advance, pay a $2,000 review fee and make a $5,000 deposit, none of which was required by the covenants.

Even if Conlin had assigned the developer’s approval rights to the association, the committee’s power would still be subject to the same criteria and limits that applied to the developer. Therefore, the additional burdens were invalid.

The appeals court held that the jury should not have been asked to determine whether the bylaws imposed new restrictions or conflicted with the covenants because these were questions of law—not fact—that must be determined by the trial judge. Finally, the appeals court determined that a jury could find that Conlin had assigned the developer’s review rights. Therefore, the appeals court reversed the jury’s verdict, vacated the judgment and remanded the case for a possible retrial on whether Conlin assigned the review rights.

©2016 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Failing to Pay Assessments Does Not Terminate Developerís Rights

Litchfield Plantation Association, Inc. v. Litchfield Plantation Company, Inc., Case No. 2015-UP-532 (S.C. Ct. App. Nov. 25, 2015)

Developmental Rights/Developer Liability: The South Carolina Court of Appeals held that a developer’s failure to pay the amounts due to an association caused the developer’s voting rights only to be suspended, not permanently terminated.

Litchfield Plantation Association, Inc. (association) governed the Litchfield Plantation subdivision in Georgetown County, S.C. Litchfield Plantation Company, Inc. (developer) was the subdivision developer.

The subdivision declaration of restrictive covenants (declaration) and the association’s bylaws provided for two classes of membership and voting rights in the association—Class A and Class B. Class A members were individual owners assigned one vote for each lot. The developer was the Class B member and was allocated a number of votes equal to all Class A members plus one. The Class B member also had the right to appoint the association’s board of directors.

The declaration required the developer to pay either assessments on all its lots or the difference between the association’s expenses and its income for the year. If the developer was more than 60 days delinquent, the developer’s voting rights were suspended.

In 2010, the developer notified the owners that it would not be able to fund the shortage. The owners called a special meeting and elected new directors to replace the developer appointees. The association next filed a declaratory judgment action (a court determines the parties’ legal rights) specifically asking the court to rule that the owners’ board takeover was valid and binding and to declare that the Class B rights were terminated and converted to Class A rights.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the developer on the Class B rights question. The declaration provided that the Class B rights would be terminated and converted to Class A rights at the earliest of three possible events: (1) the expiration of a control period that initially ended on December 31, 2010 but was automatically extended for successive five-year periods, provided that prior to the automatic extension, the developer sold 100 or more lots to non-affiliated owners; (2) 180 days after the developer sold 90 percent of all lots subject to the declaration; or (3) at an earlier date determined by the developer.

The trial court held that none of these events had occurred, so the only remedy for the developer’s non-payment was to suspend voting rights. Accordingly, the trial court held that the developer’s voting rights were suspended until it paid $149,981 to cover the shortage plus two promissory notes owed to the association. The trial court did not rule on whether the board takeover was valid.

The developer paid the amount due and called a special meeting to remove the owner-elected board and elect new board members. Two days before the scheduled meeting, the association appealed. At the meeting, the owners asserted that the trial court’s order could not be enforced while the appeal was pending. The owner-elected board determined that the developer’s voting rights remained suspended and that they were still in charge. The owner-elected board members then left the meeting. After they left, the developer elected a new board.

The developer asked the trial court to issue a temporary injunction to prevent the owners from interfering with the exercise of its voting rights and the new board’s operations. The trial court granted the temporary injunction and ruled that the appeal did not suspend enforcement of the court’s order.

The appeals court affirmed the trial court’s ruling, holding that the developer’s Class B rights were only temporarily suspended, not permanently terminated. As such, the developer had the right to control the board. Since the trial court never ruled on whether the owners’ board takeover was valid, the appeals court declined to rule on this issue.

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Insurer is Not Relieved of Liability by Settlement Agreement

Brownstone Homes Condominium Association v. Brownstone Forest Heights, LLC, 358 Ore. 223 (Or. Nov. 19, 2015)

Risks and Liabilities: The Oregon Supreme Court overturned precedent by holding that to obtain a complete release of liability in a settlement agreement requires more than a covenant by the plaintiff not to execute a judgment.

Brownstone Homes Condominium Association (association) governed a project in Multnomah County, Ore. The association filed a construction defect suit against several parties involved in the project’s development and construction, including A&T Siding (A&T).

A&T had liability insurance through two different insurers—Capitol Specialty Insurance Co. (Capitol) and Zurich Insurance (Zurich), and A&T submitted claims for the lawsuit to both insurers. The Capitol policy provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” Capitol denied the claim, asserting that the policy did not cover the type of damages sought by the association. Accordingly, Capitol declined to defend or indemnify A&T for the lawsuit.

The association, A&T and Zurich reached a settlement that provided for a $2 million stipulated judgment against A&T and in the association’s favor. Zurich agreed to pay $900,000 of the judgment as A&T’s insurer. The settlement agreement also provided for: (a) an assignment by A&T to the association of A&T’s claims against Capitol related to the lawsuit; (b) the association’s covenant not to execute the judgment against AT&T’s assets (a promise not to pursue the assets) but instead to seek recovery from Capitol for the remainder of the judgment; and (c) a release of all of the settling parties from all claims except for claims between the association and Capitol.

The association then served a garnishment on Capitol for $1.1 million. Capitol refused to pay, and the association asked the trial court to order the garnishment. Capitol argued that the association’s agreement (not to pursue A&T for the judgment) released Capitol from liability because Capitol was obligated to pay only those sums A&T was obligated to pay. Capitol asserted that the 1973 case Stubblefield v. St. Paul Fire & Marine, 267 Ore. 397, supported this position.

The trial court agreed with Capitol and dismissed the garnishment action. The association appealed. The Court of Appeals affirmed the decision, and the association appealed to the Oregon Supreme Court. The association argued that Stubblefield did not apply to garnishment actions and that a 1989 statute overturned Stubblefield. The association further asserted that, even if Stubblefield did apply, Stubblefield was wrong and should be overturned.

The Supreme Court agreed with Capitol on the first two arguments. It determined that Stubblefield clearly held that a covenant not to execute a judgment against an insured debtor releases the judgment debtor from any obligation to pay the judgment creditor and eliminates any damages the insurer is obligated to pay under the insurance policy. The Supreme Court also found that the statute contemplated a particular series of events where the judgment resolving the claim against a defendant precedes the defendant’s assignment of its claims against the insurer. Since the association agreed not to execute the judgment, the insurance claim assignment to the association did not fall within the statute’s protection. Further, the Supreme Court could find nothing in the statute’s legislative history to indicate that the legislature intended to abrogate Stubblefield by enacting the statute.

However, the Supreme Court agreed with the association that Stubblefield was wrong. The Supreme Court found the analysis in Stubblefield to be lacking, which raised great concern when the case was such a significant change in established law and business practice. The Supreme Court held that a covenant not to execute a judgment in exchange for an assignment of rights does not, by itself, operate as a complete release that extinguishes the insured’s and its insurer’s liability. Instead, the settlement agreement must clearly release the claims against the insurer to operate as a complete release.

The settlement agreement expressly stated the parties’ shared intent that the association would be able to satisfy the remainder of the judgment from A&T’s insurance assets. In addition, the release language specifically provided that claims made by the association against Capitol were not part of the release.

Moreover, the Supreme Court found that the insurance policy phrase “legally obligated to pay” was ambiguous, which worked against Capitol due to the long-standing rule that ambiguity must be construed against the insurer. In sum, the Supreme Court held that the settlement agreement did not extinguish A&T’s liability to the association and, therefore, did not extinguish Capitol’s liability either.

The decisions of the trial court and the Court of Appeals were reversed, and the case was remanded to the trial court for further proceedings.

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Declaration Does Not Create Lien

Settlers Walk Home Owners Association v. Phoenix Settlers Walk, Inc., 2015-Ohio-4821, Case Nos. CA2014-09-116, CA2014-09-117, CA2014-09-118 (Ohio Ct. App. Nov. 23, 2015)

Risks and Liabilities: The Ohio Court of Appeals held that recording a declaration does not create a perfected, enforceable lien that binds successive owners.

Settlers Walk Home Owners Association (association) governed the Settlers Walk community in Springboro, Ohio. The Settlers Walk declaration of covenants, conditions and restrictions (declaration), recorded in 1996, provided for a continuing association lien for assessments on each lot that runs with the land, and all persons acquiring an interest in a lot take the interest subject to such lien. The declaration further provided that the association may file a lien notice in the county’s land records, but it is not required to do so in order to enforce its lien

In March 2008, Martin-Coffman Development Company, Inc. (Martin-Coffman) sold 50 of its lots in Settlers Walk to Phoenix Settlers Walk, Inc. (Phoenix). Phoenix gave mortgages in the lots to First Financial Bank, National Association (First Financial).

Martin-Coffman did not pay any assessments to the association for the years 2003 through 2007, but the association never filed any liens on these lots. In December 2009, the association filed suit against Phoenix to collect the unpaid assessments accrued from 2003 through 2007 and 2009 forward. Phoenix disputed that it owed assessments for periods prior to its ownership.

In April 2013, in an effort to facilitate the sale of a number of Phoenix’s lots, the association, Phoenix and First Financial entered into an escrow agreement, which provided for the proceeds from the lot sales to be escrowed and disbursed upon mutual resolution, court order or final judgment in the lawsuit. The agreement specified that $64,003 of the escrowed funds was for 2009 and post-2009 assessments, late charges and attorneys’ fees, and $30,789 was for pre-2009 assessments and late charges.

In January 2014, the trial court granted judgment to the association, finding that the declaration created a lien for unpaid assessments from the time Phoenix took title. The lien was enforceable against each Phoenix lot and against Phoenix personally. The trial court held that the association’s lien was inferior to First Financial’s mortgage interest, and the lien for 2003 and 2004 assessments had been extinguished because the declaration required enforcement action to be commenced within five years.

The final judgment entered in August 2014 specified that Phoenix was personally liable for $46,608 for 2005 to 2007 assessments and late fees for 2005 through 2007 and was personally liable and had a lien on its lots for $74,204 for 2009 to 2013 assessments and late fees.

Phoenix appealed, arguing that the association did not have a perfected, enforceable lien that ran with the land simply by the declaration’s recording without recording a separate instrument notifying potential purchasers that the association had a lien resulting from unpaid assessments.

Prior case law holds that there can be no lien if there is no debt. Thus, when the declaration was recorded, no actual lien existed since no assessments had been charged. The appeals court, therefore, held that the association did not have a perfected and enforceable lien that ran with the land merely by reference to the declaration’s lien provisions.

The declaration may allow for a lien to be created once a debt is established, but the mere creation of a lien is insufficient to bind a subsequent bona fide purchaser. Instead, evidence of the lien must be recorded. The Ohio Planned Community Law (act) did not create the lien the association sought because the act did not become effective until 2010, nearly 15 years after the declaration was recorded.

The appeals court held that the trial court erred when it found that the association had an enforceable lien simply by the declaration’s recording without ever recording a separate lien when the assessments became delinquent. The trial court did not err in ordering $74,204 of the escrowed funds to be released to the association because Phoenix still owed 2009 to 2013 assessments for the years it owned the lots.

Judgment was affirmed in part and reversed in part.

©2016 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Policy Exclusions Preclude Insurance Coverage for Litigation

The One James Plaza Condominium Association, Inc. v. RSUI Group, Inc., Case No. 15-294 (D.C.N.J. Dec. 2, 2015)

Risks and Liabilities: The U.S. District Court for the District of New Jersey found that an insurance policy’s specific litigation exclusion precluded coverage for a second lawsuit against the association involving the same types of claims already litigated.

The One James Plaza Condominium Association, Inc. (association) managed One James Plaza in Wildwood, N.J., as well as Trylon Motel, a nonprofit rental business servicing the condominium units.

From September 17, 2010 to September 17, 2012, the association was insured by Great American Insurance Company (Great American). On September 24, 2010, 20 unit owners sued the association and its board of directors (Lawsuit 1), alleging several breaches of duty and violations of the association’s governing documents, including making expenditures without holding meetings or conducting a vote. The association filed a claim with Great American to recoup its defense costs.

In October 2010, the owners amended Lawsuit 1 to remove 18 of the plaintiffs, leaving only Eugene and Kathy Colsher as plaintiffs. Great American closed the claim in March 2012 after having spent $57,000 in defense costs. The association filed another claim with Great American in May 2012 to recoup additional costs. The second claim was denied because the policy was a claims-made policy and the claim related back to the policy in effect from September 2010 to September 2011. Thus, the second claim was made too late to be covered.

From September 2012 to September 2013, the association was insured by RSUI Group, Inc. (RSUI) through another claims-made policy. The policy also included a specific litigation exclusion, which provided that RSUI would not be liable for any claim arising out of, based on or attributable to litigation involving the Colshers.

In January 2013, the association and the Colshers settled Lawsuit 1 and dismissed the case, but the settlement agreement specifically provided that each party had the right to assert claims which had arisen after October 2010.

In April 2013, eight owners (including the Colshers) filed another lawsuit against the association (Lawsuit 2) for a variety of claims, including more financial claims. The same day it was served with Lawsuit 2, the association filed a claim with Great American, which denied the claim because it was outside the policy period.

In August 2013, the association filed a claim with RSUI for Lawsuit 2. RSUI denied the claim based on the specific litigation exclusion, asserting that Lawsuit 2 was attributable to Lawsuit 1. RSUI compared the two lawsuits and found several similarities. For example, the complaint in Lawsuit 1 detailed the Colshers’ attempts to review association documents, in addition to similar efforts made by other owners who were now all plaintiffs in Lawsuit 2. In Lawsuit 1, the plaintiffs were concerned about conflicts of interest involving Trylon Motel. Those concerns were still present in Lawsuit 2. In summary, RSUI asserted that the same core allegations ran through both Lawsuit 1 and Lawsuit 2.

The association filed suit against RSUI, seeking coverage for Lawsuit 2. RSUI filed a motion to dismiss the suit, arguing that Lawsuit 1 and Lawsuit 2 had common parties and common core allegations.

The court analyzed the complaints in the two lawsuits and found that “Lawsuit 2 arose from and was based upon the same set of factual allegations and claims made in Lawsuit 1.” The court found the overlap of factual allegations to be substantial enough to find that Lawsuit 1 served as a “foundation and logical basis” for Lawsuit 2. Given the substantial overlap, the court found that the specific litigation exclusion applied, and RSUI was not required to cover the association for Lawsuit 2.

Accordingly, the court granted RSUI’s motion and dismissed the case.

©2016 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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