March 2016
In This Issue:
Recent Cases in Community Association Law
Association Lien Foreclosure Does Not Extinguish Second Association Lien
Condominium Act Prevails Over Bylaws Lien Provisions
Association Lien Foreclosure Extinguishes Mortgage
Volunteer Delegates Not Qualified to Vote
Business Judgment Rule Does Not Protect Against Bylaws Violations
Owner Given Choice in Selecting Arbitrators
Dissolved Declarant Cannot Assign Rights
Golf Course Use Restriction Upheld
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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 Lien Foreclosure Does Not Extinguish Second Association Lien

Southern Highlands Community Association v. San Florentine Avenue Trust, Case No. 66177 (Nev. Jan. 14, 2016)

Assessments: The Nevada Supreme Court held that, when one association’s lien is foreclosed, a second association with an equal priority lien is entitled to share in the foreclosure proceeds.

Southern Highlands Community Association (Southern Highlands) and The Foothills at Southern Highlands Homeowners Association (Foothills) both governed a planned community in Clark County, Nev. A unit owner became delinquent to both associations, and both associations held liens on the owner’s unit.

Foothills foreclosed on its lien, and the property was sold to San Florentine Avenue Trust (San Florentine). San Florentine paid $45,100 for the property, which resulted in approximately $35,000 in excess foreclosure proceeds over the amount of Foothills’ lien. After the foreclosure sale, Southern Highlands recorded a lien on the property for unpaid assessments due prior to the foreclosure sale. No one paid the Southern Highlands lien, so Southern Highlands scheduled a foreclosure of its lien.

San Florentine filed suit against Southern Highlands to stop the foreclosure sale and/or to extinguish Southern Highlands’ lien. San Florentine argued that the Nevada Uniform Common-Interest Ownership Act (act) gave equal priority to both associations’ liens, causing Foothills’ foreclosure to extinguish Southern Highlands’ lien but also granting Southern Highlands an interest in the foreclosure sale proceeds.

The trial court granted a preliminary injunction (order prohibiting certain action) halting the sale but did not rule on the merits of San Florentine’s argument. Southern Highlands appealed.

The act provides that, unless an association’s declaration provides otherwise, if two or more associations have assessment liens on the same property, the liens have equal priority, regardless of when the liens were created. The act does not define “assessments,” but the appeals court held that assessment liens include liens securing unpaid association fees or charges, including association assessments. The appeals court determined that the Southern Highlands’ and the Foothills’ liens qualified as assessment liens and, thus, were granted equal priority.

The act does not explain how liens with equal priority are treated during a foreclosure, and the appeals court noted that “equal priority” is, itself, ambiguous. Under traditional lien law, lien foreclosure extinguishes all other liens except for those superior to the one being foreclosed. This creates a conundrum when applied to equal priority liens. On the one hand, foreclosure of one lien cannot eliminate another equal lien. However, the non-foreclosed lien cannot remain or else it would end up being superior to the foreclosed lien.

The appeals court determined that the act did not provide any specific answer to the question, but the act does provide generally that legal and equitable principles supplement the act’s provisions, except to the extent inconsistent with the act. The appeals court relied on this general guidance as license to look beyond Nevada law.

The appeals court found that California’s approach for equal priority mechanics’ liens seemed the most sensible approach. If the foreclosure sale proceeds are insufficient to pay all equal priority lienholders, the proceeds are distributed among all equal priority lienholders on a pro-rata (proportionate) basis. The appeals court found this approach well-suited to association liens because it allows all equal priority lienholders to get paid at the same time or else all such lien holders will share the loss pro-rata. This approach also avoids forcing a race to the courthouse where only the first to foreclose gets paid or having competing foreclosures at the same time.

The appeals court concluded that Southern Highlands could not hold a foreclosure sale because its lien had already been extinguished by the Foothills’ foreclosure. It also held that Southern Highlands was entitled to have the amount of its lien on the foreclosure date paid out of the Foothills’ foreclosure proceeds. If there were insufficient proceeds to pay both Foothills’ lien and Southern Highlands’ lien, then the two associations must share the loss pro-rata.

The trial court’s preliminary injunction in San Florentine’s favor was affirmed.

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

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Condominium Act Prevails Over Bylaws Lien Provisions

The Ventana Owners Association, Inc. v. Ventana KC, LLC, Case No. ED102290 (Mo. Ct. App. Dec. 15, 2015)

Assessments: The Missouri Court of Appeals held that a bylaws provision extinguishing an association’s lien in the event of foreclosure was in direct conflict with the Missouri Uniform Condominium Act’s lien priority provisions and must be stricken from the bylaws.

The Ventana Owners Association, Inc. (association) governed The Ventana, a condominium in St. Louis, Mo. In May 2013, Ventana KC, LLC (VKC) acquired 55 units through foreclosure of a construction mortgage it held on the units.

In September 2013, the association filed suit to foreclose its liens on the units for delinquent assessments totaling $22,879. The association alleged it had statutory liens under the Missouri Uniform Condominium Act (act) for assessments that came due before VKC acquired the units.

VKC filed a motion for summary judgment (judgment without a trial based on undisputed facts), arguing that the association’s bylaws eliminated any liability for pre-foreclosure assessments. The bylaws provided that when a unit is transferred by foreclosure, the unit and the owner acquiring title shall be subject only to the lien for assessments which become due after the title transfer. VKC paid all assessments levied after it acquired title.

The trial court granted summary judgment in VKC’s favor, and the association appealed.

The association admitted that the bylaws would preclude enforcement against VKC, but it argued that the act prevails over the bylaws in the event of a conflict. VKC asserted that the bylaws did not conflict with the act and merely restricted the manner in which the association liens could be collected.

The act provides that a condominium association’s lien has priority over all other liens except for:

(1)   liens and encumbrances recorded before the declaration;

(2)   a mortgage and deed of trust for a unit’s purchase recorded before the date on which the assessment became delinquent;

(3)   liens for real estate taxes and other governmental assessments; and

(4)   up to six months of delinquent assessments or fines.

The lien for six months of assessments or fines is often referred to as a “super-priority” lien. The condominium declaration established the same lien priority as the act, but it did not recognize the super-priority lien.

The appeals court held that the bylaws provision directly conflicted with the act because it extinguished the association’s super-priority lien when there had been a foreclosure. The act contained only four exceptions to the priority status of an association’s lien, and foreclosure was not one of them.

As such, the appeals court held that the act prevailed over the bylaws. The bylaws cannot add to or subtract from the act’s lien provisions. Variations in the act’s requirements are permitted only where the act expressly provides leeway, and the appeals court found no express authority for variation in the act’s lien provisions. Accordingly, the bylaws provision extinguishing the association’s super-priority lien had to be severed from the bylaws.

However, a question remained as to whether any of the other exceptions to the association’s lien priority applied. The declaration was recorded in 2007 and KVC’s deed of trust in 2009, so exception one did not apply. The deed of trust stated that it was a construction mortgage and contained no reference to purchase money. The appeals court held that a construction mortgage and a purchase money mortgage are not the same thing. Therefore, while the deed of trust was recorded before the assessments became delinquent, the appeals court determined it was not a deed of trust for the purchase of a unit and did not fall under the second priority exception.

Since there was no lien priority exception to support KVC’s lien, the appeals court reversed the summary judgment grant in KVC’s favor and remanded the case for further proceedings.

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

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Association Lien Foreclosure Extinguishes Mortgage

Twenty Eleven, LLC v. Botelho, Case No. 2014-10-Appeal (R.I. Dec. 4, 2015)

Assessments: The Rhode Island Supreme Court held that foreclosure of a condominium association’s super-priority lien extinguishes a first mortgage, subject to the first mortgagee’s right to redeem the property for a statutory period.

Lockwood at Warwick Condominium Association (association) governed a condominium in Warwick, R.I. In December 2004, Michael Botelho purchased a unit with a purchase money loan secured by a mortgage in the amount of $114,000, which was assigned to PNC Bank, National Association (PNC).

Many years later, Botelho became delinquent in his assessment payments to the association and in his mortgage payments to PNC. In July 2011, the association foreclosed on its lien on the unit. In August 2011, the association conveyed the unit by foreclosure deed to Twenty Eleven, LLC (Twenty Eleven) for $21,000.

In January 2013, PNC notified Twenty Eleven that the unit would be sold at a mortgage foreclosure sale in March 2013. The foreclosure sale was postponed, but Twenty Eleven filed suit against PNC, seeking to quiet title (definitively establish property ownership) in Twenty Eleven’s name and seeking a declaratory judgment (judicial determination of the parties’ legal rights) that PNC had no further interest in the unit.

Twenty Eleven asserted that the Rhode Island Condominium Act (act) gave the association’s lien higher priority over PNC’s mortgage. Twenty Eleven argued that the mortgage was extinguished when the association foreclosed on its lien, subject only to PNC’s right to redeem (buy back) the property within 30 days as allowed by the act. Since PNC did not redeem the property within 30 days, Twenty Eleven urged that it should hold title to the unit free and clear of the mortgage.

The trial court was not persuaded and ruled that Twenty Eleven took title to the unit subject to the mortgage. The trial court found nothing in the redemption language that suggested that a first mortgage would be extinguished if the mortgagee did not redeem the property within the 30-day period. Twenty Eleven appealed.

The act grants “super-priority” lien status to an association for delinquent assessments for the six months preceding a foreclosure action plus attorney’s fees and foreclosure costs of up to $7,500. The super-priority lien is superior to a first mortgage and the association’s lien for any remaining unpaid assessments and other fees. The act gives a first mortgagee the right to redeem the property within 30 days of the date the association sends the required post-foreclosure notice by paying the association all assessments due on the unit plus all attorney’s fees and collection and foreclosure costs.

The appeals court acknowledged that what happens when the association forecloses on its super-lien is a novel question not previously addressed in Rhode Island. PNC argued that the act merely created a payment preference where, if the first mortgagee foreclosed first, the act ensured that the sale proceeds would be used to pay the association’s super-lien first and then the remainder would go to the first mortgagee. The appeals court noted that the act uses the words “prior to” to describe the priority of the super-lien relative to other liens. In the mortgage and lien context, the appeals court found such words mean prior to other liens, not prior to payment or proceeds.

A general principle of foreclosure law is that liens with lower priority are extinguished if the foreclosure sale yields insufficient proceeds to satisfy a higher-priority lien, provided proper notice of the pending foreclosure is given to the junior lienholders. The appeals court found nothing in the act to suggest that the legislature meant to create a higher priority lien with foreclosure rights but without the ability to extinguish lower priority liens. It believed that, if the legislature had wanted to depart from this well-settled legal principle, it would have explicitly stated it was doing so.

The official comments to the act acknowledge that the concept of splitting the association’s lien into two parts—a super-priority portion and the remaining portion—is a significant departure from existing practice, but the act’s drafters sought to strike a balance between an association’s need to collect unpaid assessments and protecting the mortgagees’ priority security interests.

The appeals court also found the redemption right indicative of the legislature’s intent that a first mortgage could be extinguished by foreclosure of the super-priority lien because, if the first mortgagee had not lost the mortgage, there would be nothing to redeem.

The appeals court held that foreclosure of a condominium association’s super-priority lien extinguishes the first mortgage and other junior liens unless the first mortgagee redeems the unit within the statutory period. Since PNC did not redeem within the required period, Twenty Eleven held title free and clear of PNC’s mortgage. The trial court’s judgment was reversed and the case remanded for further proceedings.

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

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Volunteer Delegates Not Qualified to Vote

Murphy v. Anaheim Hills Planned Community Association, Case Nos. G050817, G050912 (Cal. Ct. App. Jan. 14, 2016)

Association Operations: The California Court of Appeal held that a master association election was void since a quorum of voting delegates properly elected by sub-association members was not present.

Anaheim Hills Planned Community Association (master association) governed a subdivision of more than 2,200 units in Anaheim, Calif. A seven-member board of directors managed the master association. Three directors were elected in even years and four in odd years.

The master declaration of covenants, conditions and restrictions (master declaration) divided the subdivision into 36 voting districts, each of which had its own sub-association and governing documents. The master declaration required the sub-association members to elect a delegate to represent the district at the master level. Individual unit owners/sub-association members did not vote in master association matters. Instead, the delegate was authorized to cast all the votes assigned to the delegate’s district.

For a quorum to convene a meeting, the master association’s bylaws required that delegates representing at least 51 percent of the total master association votes be present. At the 2013 annual meeting, 21 people signed in as delegates (the meeting representatives) holding more than 60 percent of the total master association votes. However, only one representative had been properly elected as a delegate by his sub-association members. The others had either been elected by their sub-association board or simply volunteered to be a delegate. Nevertheless, the president announced that a quorum was present, and four directors were elected to the board.

Soon thereafter, some of the meeting representatives made allegations of wasteful and improper spending by the new board and demanded a special meeting to recall the board. The board responded that the meeting representatives were not real delegates, and, as such, they had no authority to demand a special meeting or to recall the board.

In January 2014, owners Donna Murphy and Pete Bos (the plaintiffs) sued the master association and the four directors elected at the 2013 meeting. The plaintiffs sought a declaration that the 2013 election was void since a quorum of delegates was not present. They also sought a determination of the appropriate consequences since illegitimate directors had been in place for nearly nine months.

The master association argued that a “savings clause” in the master declaration validated the meeting representatives’ voting. The clause provided: “Whenever a matter is presented to the Delegates by the Board for approval … [i]t will be conclusively presumed for all purposes of Master Association business that any Delegate casting votes on behalf of the Members . . . in his Delegate District will have acted with the authority and consent of all such Members.”

The trial court declared that the election was null and void, but it declined to provide instruction on the consequences of such judgment. The trial court awarded the plaintiffs $147,595 in attorneys’ fees. The master association appealed.

The appeals court ruled that the savings clause did not save the election. First, the savings clause only applied to delegates, which the meeting representatives (except one) were not. Second, the clause only pertained to any master association business for which the board seeks approval from the delegates. The appeals court determined that an election is not business for which the board seeks approval; delegates do not approve or disapprove directors selected by the board. Rather, the clause applies to document amendments and other governance matters for which delegate approval is required by the governing documents.

The plaintiffs argued that the effect of voiding the election was to reinstate the directors who held office until the 2013 election. The bylaws provided that each director was to hold office until his successor has been elected or until his death, resignation, removal or adjudication of mental incompetence. The plaintiffs asserted that successors had never been elected. They also urged that a new election should be held as soon as possible to properly elect successor directors.

After the trial court’s ruling, the remaining board members appointed the improperly-elected directors to fill the vacancies created by the trial court’s ruling. The bylaws provided that board vacancies caused by any reason other than a director’s removal by a delegate vote shall be filled by a vote of the remaining directors, even though they may constitute less than a quorum of the board. The board did not take any steps to hold a special meeting or conduct a new election.

The appeals court declined to rule on which side was in the right on the voidance consequences since the issue was not properly before the appeals court, having not been ruled upon by the trial court. However, the appeals court found no error in the plaintiffs being characterized as the prevailing party, even though they did not win on all claims (one claim not being adjudicated).

The trial court’s judgment was affirmed, and appellate costs were awarded to the plaintiffs.

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

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Business Judgment Rule Does Not Protect Against Bylaws Violations

Fisher v. Shipyard Village Council of Co-Owners, Inc., Opinion No. 27603 (S.C. Jan. 27, 2016)

Association Powers: The South Carolina Supreme Court held that each board action must be evaluated individually to determine whether the business judgment rule applied to that action, and the business judgment rule did not protect the board for its bylaws violations.

Shipyard Village Council of Co-Owners, Inc. (association) managed the Shipyard Village project in Pawleys Island, S.C. Phase 1, containing 80 units, was completed in 1982 and began experiencing leaks around the unit windows and doors about a year later. Phase 2, containing 60 units, was completed in 1998.

The Shipyard Village master deed and bylaws provided that the unit doors and windows and door and window frames and casings were the owner’s responsibility to maintain; the remaining portions of the building exterior were common elements and the association’s maintenance responsibility.

Normal common-element maintenance costs were shared by all owners except when owners were negligent. In those cases, the bylaws provided that, if owners failed to maintain their doors and windows and that created a hazard or detracted from the project’s value or appearance, the board was to step in, perform the maintenance and—after notifying the owners and allowing them to correct the problem first—charge the maintenance expense to the owners.

In 1999, the association’s board notified all owners that they were responsible for waterproofing the door thresholds and window frames. By 2002, the board realized the Phase 1 owners were having difficulty dealing with the needed door and window repairs.

In 2002, the association’s engineer informed the board that water was infiltrating the Phase 1 windows, causing the wood framing to deteriorate. The board continued to tell owners that repairing the doors and windows was their responsibility. Some Phase 1 owners replaced their windows, but it did not stop the water intrusion.

In 2003, another construction expert advised the board that water was leaking through cracks in the stucco and the windows lacked flashing. The flashing would be an association responsibility under the master deed. The expert concluded that vertical stacks of windows needed to be removed, flashed and replaced simultaneously; if individual owners replaced their windows separately, it would not correct the problem. The estimated cost to perform this work was $2.4 million.

At the 2006 annual meeting, the board proposed an amendment to the bylaws that would make the association responsible for maintaining the doors and windows, but it failed to pass. The board decided to take another approach by seeking approval of the amendment by written consent outside of a meeting. When the board received consents from two-thirds of the owners, it declared the amendment approved. However, while bylaws amendments could be adopted at a meeting by two-thirds of the owners, approval by written consent outside of a meeting required the approval of all owners.

In 2007 another association consultant found that an open joint between the unit slab and the balcony slab was allowing water to leak into the unit below. Phase 1 was extensively damaged and sustained a number of structural failures.

At the 2008 annual meeting, the board reported that the cost to repair Phase 1 and replace all doors and windows was estimated at $12 to $13 million; the board proposed to cover the costs with a special assessment. A number of Phase 2 owners hired an attorney, who informed the board that the special assessment was invalid because it had not properly amended the bylaws. Thus, the cost to repair the windows and doors remained the Phase 1 owners’ responsibility.

In January 2009, a majority of Phase 2 owners filed suit against the association challenging the bylaws amendment’s validity. At a March 2009 special meeting, the board called for a revote on the amendment, which failed to pass.

At the July 2009 annual meeting, the board proposed a special assessment to fund the Phase 1 window and door replacement. The special assessment was not approved by the owners, so the board added half the costs to the 2010 annual operating budget and planned to include the balance in the 2011 budget. However, the board never submitted the budget to the owners as required by the bylaws.

In October 2009, the Phase 2 owners filed a new lawsuit against the association, alleging negligence, gross negligence, misrepresentation, breach of fiduciary duty and violations of the master deed and the bylaws. The Phase 2 owners moved for summary judgment (judgment without a trial based on undisputed facts) on their negligence and breach of duty claims.

The trial court granted the summary judgment motion, finding that the board breached its duty to investigate, correct and enforce known maintenance violations by the Phase 1 owners.

Under the business judgment rule, a court will not second-guess a board’s business decision so long as the board acts within its scope of authority, in good faith and without corrupt motive. The trial court held that the board’s failure to present the annual budget to the owners and its invalid assessment of repair costs were outside the scope of its authority. The trial court also found the board acted in bad faith by continuing to enforce the bylaws amendment when it knew by 2008 that the amendment was invalid. Therefore, the board was not entitled to protection under the business judgment rule. The association appealed.

The court of appeals affirmed the trial court’s ruling on the existence of a duty to investigate, but it reversed on the breach of that duty. The court of appeals held that any board investigation must be examined under the business judgment rule to determine if the board met its duty. The Phase 2 owners appealed to the South Carolina Supreme Court.

The Supreme Court held that a jury must determine whether the board breached its investigation duty, not a judge on a summary judgment motion. The facts may not have been in dispute, but the conclusions drawn from those facts were in dispute. While there was ample evidence the board breached its duty, a jury could also conclude that the board made an informed choice not to apportion damage costs to the Phase 1 owners after receiving the reports that the water intrusion was through the common elements.

The Supreme Court agreed that the business judgment rule did not apply to acts that were outside the board’s authority, but the court of appeals was incorrect in stating that all board investigations would be examined under the business judgment rule. Instead, the business judgment rule applies only where the board acts within its authority, without corrupt motive and in good faith.

The Supreme Court held that the association must be allowed to assert the business judgment rule as a defense, but it will not be entitled to the rule’s protection for a particular action if the jury finds that the board acted beyond its authority, in bad faith or with corrupt motive with respect to that action.

The Supreme Court affirmed the court of appeals’ decision, as modified by the Supreme Court’s opinion, and remanded the case for trial.

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

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Owner Given Choice in Selecting Arbitrators

Ruiz v. Millennium Square Residential Association, Case No. 15-1014 (D.DC. Jan. 13, 2016)

Documents: The U.S. District Court for D.C. held that an arbitrator-selection process that precluded an owner’s involvement was unconscionable, but it could be severed and did not render the entire mandatory arbitration clause unenforceable.

Millennium Square Residential Association and Millennium Square Unit Owners Association (master association) (collectively, the associations) managed the Millennium Square condominium complex in Washington, D.C. Julio Ruiz owned a unit in the complex.

In 2014, Ruiz sought to make architectural changes to his penthouse unit’s balconies and roof deck. He submitted proposed plans to the associations. When the associations did not disapprove the plans within the time required by the bylaws, the associations were deemed to have consented to the proposed modifications. Ruiz proceeded with the work.

In June 2015, the associations notified Ruiz that a number of the changes made had not been included in his submitted plans and, therefore, had not been approved. The associations demanded that such unapproved changes be removed.

Ruiz filed suit against the associations, seeking a determination that the changes did not violate the bylaws and could remain in place. In response, the associations filed a motion asking the court to stay the case (suspend the case) and to compel Ruiz to arbitrate the dispute, as required by the bylaws.

Ruiz argued that the bylaws’ arbitration provisions were so unfair as to be unconscionable and unenforceable as a matter of law. The unconscionability doctrine allows courts to deny enforcement of unfair or oppressive contracts. Unconscionability consists of two elements—procedural and substantive. Procedural unconscionability means an absence of meaningful choice by one of the contracting parties. Substantive unconscionability requires that the contract terms be unreasonably favorable to the other party.

Ruiz argued that the bylaws were procedurally unconscionable because they were offered on a “take-it-or-leave-it” basis as a condition of purchasing a Millennium Square unit. However, procedural unconscionability requires showing a great disparity in bargaining power, that there was no opportunity for negotiation, and that the services contracted for could not be obtained elsewhere.

Ruiz asserted that he could not go elsewhere because real estate is so unique; to obtain a Millennium Square unit, he had no choice but to accept the bylaws. The court disagreed, finding that Ruiz’s acquisition of a penthouse with balconies and a roof deck is not the kind of transaction that procedural unconscionability is designed to protect. Other luxury real estate was available in Washington. Accordingly, Ruiz must have a strong case for substantive unconscionability to prevail.

Ruiz offered three primary arguments for substantive unconscionability. First, the bylaws did not require the arbitrators to provide a written decision justifying their position. Second, they did not provide for discovery (pre-trial process through which the parties can obtain facts and information from each other). Third, the bylaws did not allow Ruiz to participate in selecting the arbitrators.

The bylaws provided that the master association’s board members who were residential unit owners would select one independent arbitrator; the master association board members who were commercial unit owners would select a second independent arbitrator; and such two arbitrators would select a third independent arbitrator.

The court found the first two arguments unpersuasive. The D.C. Court of Appeals has made clear that arbitrators are not required to state the grounds for their decisions. In addition, the bylaws did not eliminate the possibility of conducting discovery; they were simply silent on the subject. Ruiz asserted that the bylaws statement that the arbitrators would be requested to reach a decision within 30 days eliminated conducting discovery due to the time constraints. The court pointed out, however, that the bylaws provide that the arbitrators are requested to reach a decision within that time frame; they are not required to do so. If the arbitrators determine that discovery issues necessitate a longer period, they are free to decline the request to decide within 30 days.

The court invited the associations to argue that, even if the arbitrator-selection provision is substantively unconscionable, it is not egregiously unconscionable. They declined to do so, which the court viewed as a concession that the provision was indeed unconscionable.

However, such unconscionability did not render the entire arbitration clause unenforceable, as Ruiz desired. The D.C. Condominium Act provides that all provisions of the condominium documents are deemed severable. Thus, the unenforceable term can be stricken from the arbitration clause while leaving the remainder intact and enforceable.

The parties can agree on arbitration procedures not addressed by the bylaws. Or, if they cannot agree, the D.C. Revised Uniform Arbitration Act provides some default procedural rules that fill in some of the gaps.

The court concluded that Ruiz, through the bylaws, entered into a valid arbitration agreement, and the unconscionability of the arbitrator-selection provision did not render the agreement unenforceable as a whole. The associations’ motion to compel arbitration was granted.

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

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Dissolved Declarant Cannot Assign Rights

Landover Homeowners Association, Inc. v. Sanders, Case No. COA14-1337 (N.C. Ct. App. Dec. 15, 2015)

Documents/Developer Liability: The North Carolina Court of Appeals held that an assignment of declarant rights executed years after the declarant was dissolved was invalid.

Thomas and Anna Sanders (the Sanders) and their daughters owned several companies involved in the development of the Landover subdivision in Wake County, N.C.—Sanders Landover, LLC (Sanders Landover), Sanders Equipment Company, Inc. (SEC) and Sanders Development Company, LLC (SDC).

Landover Homeowners Association, Inc. (association) was formed to govern the subdivision, and the subdivision declaration was filed in 2002. The declaration identified the “declarant” as Sanders Landover and its successors and assigns, if such successors or assigns should acquire more than one undeveloped lot from the declarant for the purpose of development.

The declaration established a declarant control period, which expired no later than June 4, 2009. While the declarant controlled the association, it paid only half of the standard assessment rate for its vacant lots.

In 2002, Sanders Landover conveyed a 9.71-acre parcel (townhouse tract) to SDC. In 2003, a townhouse-tract plat was recorded that designated the property as Landover Subdivision Phases 4-6 and subdivided it into 81 townhouse lots. By 2004, all nine subdivision phases had been platted. In March 2006, articles of dissolution were filed to dissolve Sanders Landover, effective December 2005.

In 2006, a supplemental declaration was recorded that formally submitted the townhouse tract to the terms of the declaration. It also purported to amend the declarant’s assessment obligations. One sentence provided that the declarant had no obligation for assessments. The next sentence provided that, during the declarant control period, the declarant was not required to pay any assessments for vacant lots. The supplemental declaration was signed by Sanders Landover and the association, but not SDC, the property owner.

In 2011, SDC conveyed six townhouse lots to SEC. In 2012, SEC conveyed those six townhouse lots to the Sanders, and the Sanders acquired another seven townhouse lots from SDC.

In December 2012, Sanders Landover recorded an assignment of its declarant rights to SDC, retroactive to January 2007. That same day, SDC recorded an assignment of its declarant rights to the Sanders. In May 2013, the Sanders conveyed the 13 townhouse lots to SEC. In July 2013, the Sanders recorded an assignment of their declarant rights to SEC.

No assessments were paid for the 13 townhouse lots for the years 2009 to 2013. In September 2013, the association filed a collection action against the Sanders, SEC and SDC (collectively, the defendants). Both sides filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court granted summary judgment in favor of the defendants, and the association appealed.

The association argued that none of the defendants was a declarant for the years 2009 to 2013, so none of them were exempt from assessments. The appeals court agreed. The N.C. Business Corporation Act provides that a “dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs.” The appeals court found no evidence to indicate that Sanders Landover’s purported assignment of declarant rights, almost seven years after its dissolution, was related to any winding up of its affairs. As such, the declarant rights were never effectively assigned.

The defendants argued that the townhouse tract was not subject to the declaration since it was not signed by SDC, the property owner, and, thus, was not subject to assessment by the association.

The appeals court held that the defendants were barred from arguing about the incorrect signature by the equitable doctrine of quasi-estoppel, which prevents a person from benefitting by taking two clearly inconsistent positions. A party cannot accept the benefits of a deal and then later take a position inconsistent with the deal.

The appeals court determined that SDC accepted the benefit of the supplemental declaration by giving townhouse-lot deeds to other Sanders parties and to unrelated third parties specifying that the townhouse lots were subject to the supplemental declaration. The appeals court stated that SDC cannot argue that such third parties are bound by the supplemental declaration but not it, the Sanders or SEC.

The defendants next argued that the supplemental declaration language should be read as cumulative—that the declarant owed no assessments during the declarant control period and it also did not owe assessments afterwards. The appeals court agreed that the language was sufficiently ambiguous to create an issue of material fact, which precluded the grant of summary judgment.

The appeals court reversed the summary judgment grant to the defendants and remanded the case for further proceedings.

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

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Golf Course Use Restriction Upheld

Save Calusa Trust v. St. Andrews Holdings, Ltd., Case Nos. 3D14-2682, 3D14-2690 (Fla. Dist. Ct. App. Jan. 13, 2016)

Use Restrictions/Covenants Enforcement: The Florida Court of Appeal held that a restrictive covenant required as part of zoning approval was not subject to Florida’s Marketable Record Title Act.

In 1967, a developer sought to create a golf course development in the Kendall area of unincorporated Miami-Dade County, Fla., with a ring of homes around a golf course, club house and driving range (collectively, the golf course). The property was zoned general use, and two zoning changes were needed to permit the development. The proposed residential ring needed estate use modified zoning, and the golf course needed “unusual use” approval.

The County Commission approved the zoning change for the residential ring, but the unusual use had to be approved by the County’s Zoning Appeals Board (zoning board). The zoning board adopted a resolution approving the unusual use on the condition that the developer record a restrictive covenant in a form approved by the zoning board on the golf course to ensure that the golf course would be perpetually maintained for golf course use.

In 1968, the developer recorded a restrictive covenant that provided the golf course could only be used as a golf course and country club. The restrictive covenant was to continue for 99 years unless released by the county with the consent of 75 percent of the owners in the residential ring.

More than 140 homes were built in the residential ring. No reference to the golf course was made in the owners’ deeds, and the owners had no mandatory involvement in the golf course. They had no responsibilities to the golf course; they simply enjoyed the views over the golf course and had to put up with the occasional errant golf ball.

St. Andrews Holding, Ltd. (St. Andrews) acquired the golf course in 2003. Eventually, golf’s popularity declined, and St. Andrews could no longer afford to operate the golf course. In 2011, St. Andrews closed the golf course and sought to redevelop the property. St. Andrews submitted a re-zoning application to the county, which was denied.

In 2012, St. Andrews filed suit against the county and each owner in the residential ring, asking the court to declare that the restrictive covenant was extinguished by the Florida Marketable Record Title Act (MRTA). The owners adopted the name “Save Calusa Trust” to describe themselves collectively.

MRTA was enacted in 1963 to stabilize property titles and give certainty to land ownership. MRTA provides that any interest in or claim, charge or title (collectively, property interest) to real property is extinguished if such property interest is more than 30 years old and has not been preserved by a specified procedure, unless the property interest falls within a specified exception.

All parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court granted summary judgment to St. Andrews and invalidated the restrictive covenant. The owners and the county appealed.

St. Andrews acknowledged that MRTA did not apply to zoning or other land development regulations, but it argued that the restrictive covenant was neither a zoning regulation nor a development order, even if the restrictive covenant was contemplated by the zoning process. It further asserted that MRTA applied since the restrictive covenant gave the owners and the county an “interest” in how St. Andrews used its property and a “claim” against the property if St. Andrews were to violate the restrictive covenant.

Since these property interests were created more than 30 years ago and were not preserved according to the MRTA procedure, St. Andrews argued that the property interests were extinguished. The appeals court did not agree, finding that the restrictive covenant was a product of the governmental approval process. The zoning board’s approval was conditioned on the restrictive covenant, and the restrictive covenant simply sealed the approval.

Florida law recognizes that government-imposed restrictions on property do not affect a property’s marketability, which is what MRTA was enacted to address. The appeals court held that the restrictive covenant was a governmental regulation rather than a property interest affecting the property’s marketability and, therefore, not subject to MRTA. Accordingly, the summary judgment grant in St. Andrews’ favor was reversed and the case remanded for further proceedings.

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