June 2016
In This Issue:
Recent Cases in Community Association Law
Lack of Written Architectural Guidelines Creates Enforcement Problem
Associationís Attempt to Evade Foreclosureís Effect Found Illegal
Associationís Foreclosure Sale Must Be Commercially Reasonable
Association Prevails Even Though Much of Its Case Disallowed
Common Property Sold at Tax Sale Still Bound by Declaration
Associationís Failure to Grant an Exception to No-Pets Rule Proves Costly
Association Acquired Vested Right to Install Subdivision Gates
Super-priority Lien Does Not Include Foreclosure or Collection Costs
Quick Links:
Contact Law Reporter
Visit Our Home Page
View Archives
View Credits
CAI College of Community Association Lawyers
printer friendly
 

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.


Lack of Written Architectural Guidelines Creates Enforcement Problem

Castlewood Property Owners Association, Inc. v. Guerra-Danko, Case No. 45A03-1508-PL-1105 (Ind. Ct. App. May 13, 2016)

Architectural Control: The Indiana Court of Appeals held that an association’s denial of an owner’s request to install vinyl siding was unreasonable because there was no written prohibition on vinyl siding and no evidence that it was not harmonious with the surrounding homes or would devalue them.


Castlewood Property Owners Association, Inc. (association) governed the Castlewood subdivision in Lake County, Ind. The Castlewood protective covenants (covenants) required written approval from the association’s architectural review committee (ARC) before changing or altering a unit’s exterior. The covenants stated that the ARC could consider the suitability of a proposed change with the surrounding homes to ensure an attractive, harmonious development with continuing appeal. In addition, two of the covenants’ stated purposes were to protect the homes against depreciation and to guard against using improper or unsuitable building materials.

In May 2009, Leticia Guerra-Danko purchased a home in Castlewood. In October 2009, she determined that her home’s cedar siding needed to be replaced due to termite damage. She selected a “rough cedar finish siding” that was classified as vinyl siding, even though it was molded from cedar clapboards. Guerra-Danko did not request ARC approval for the siding.

After the association’s president noticed a dumpster outside Guerra-Danko’s home, he informed her that ARC approval was required for external changes. Guerra-Danko submitted a request to the ARC to approve her siding. Because the ARC had never allowed vinyl or aluminum siding in the community, it denied the request without holding a meeting or giving Guerra-Danko the opportunity to state her case.

In July 2010, the association sued Guerra-Danko, seeking a determination that Guerra-Danko had violated the covenants and that she must comply. The trial court ruled in Guerra-Danko’s favor, finding that the association failed to prove that the covenants were unambiguous and did not violate public policy. The association appealed.

After determining that Indiana law did not address how much deference should be given to an association’s decision, the appeals court held that a reasonableness standard applied. The appeals court noted that the vinyl siding prohibition was not in writing, so owners would have no way to know about it.

The association presented absolutely no evidence that Guerra-Danko’s new siding had a negative effect on property values or that it was not harmonious with the neighborhood aesthetic. In fact, no one on the ARC had any real estate expertise, and the ARC did not consult with anyone in the real estate industry about whether vinyl siding would have a negative effect on home values. This lack of evidence led the appeals court to conclude that the ARC did not act in a reasonable manner.

Accordingly, the trial court’s judgment was affirmed.

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

[ return to top ]

Associationís Attempt to Evade Foreclosureís Effect Found Illegal

Walworth State Bank v. Abbey Springs Condominium Association, Inc., Case No. 2014AP940, 2016 WI 30 (Wis. Apr. 29, 2016)

Assessments: The Supreme Court of Wisconsin held that an association’s policy of preventing the purchaser of a foreclosed unit from using the recreational facilities until the former owner’s debt was paid violated established foreclosure law.


Abbey Springs Condominium Association, Inc. (association) governed a condominium in Walworth County, Wisc. Walworth State Bank (bank) held a mortgage on a single residence composed of two units.

Association membership included access to recreational facilities such as fitness and golf facilities, a yacht club, restaurants, and boat slips. Association assessments covered a portion of the facilities’ costs, but some facilities charged a usage fee. The association adopted a membership policy that prohibited owners and their guests from using the recreational facilities until all outstanding assessments were paid in full, including assessments left unpaid by a prior owner.

In 2012, the bank filed a foreclosure action against the two units, and the association was named in the suit because it had a claim on the units for unpaid assessments. In January 2013, the trial court issued a foreclosure judgment that forever barred the owner’s and the association’s “right, title, interest, lien, or equity of redemption” in the units.

Before the sheriff’s sale, the association informed the bank that it prohibited owners from using the recreational facility if assessments on their units were delinquent, even if the association’s lien rights were eliminated by foreclosure. The association suggested that the upcoming sheriff’s sale notice include the membership policy for prospective purchasers.

After the bank purchased the units in April 2013, it informed the association that the membership policy violated numerous laws as well as the foreclosure order. The association responded that it did not claim that the bank or any subsequent owner was liable for the past due assessments.

The bank contracted to sell the units in July 2013, but the buyers refused to close when the association issued a statement for outstanding assessments of $13,225. The bank paid the amount under protest to complete the sale.

The bank then sued the association for a declaration that the membership policy violated the law and the foreclosure judgment and for reimbursement of the assessments it paid. The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the bank as well as a monetary judgment for $13,225. The association appealed.

The appeals court reversed, determining that the policy did not violate any law and that the bank had no obligation to pay the delinquent assessments. The appeals court characterized the policy as merely a pay-to-play requirement that did not create joint and several liability for the new unit owner. The bank appealed to the supreme court.

The supreme court held that the membership policy violated well-established foreclosure law as well as the foreclosure judgment by tethering unpaid assessments to the units, which amounted to the association asserting a right against the units that the foreclosure had eliminated. Mortgage foreclosure terminates all interests junior to the mortgage. The judgment foreclosed the association from perpetually saddling the units and all subsequent owners with debt owed by the former unit owner.

The association’s claim that the underlying debt survived the foreclosure because it was connected to the units violated established law. Foreclosure restores title to the property as it was when the mortgage was executed. If the bank had not paid the association’s demand, title would not have been restored because the association’s claim would continue to affect the current owner’s use of the recreational facilities. The foreclosure did not stop the association from pursuing the former owner for the debt, but it prevented the association from holding the new owner’s rights hostage until the debt was paid.

Moreover, the membership policy could not be characterized as a pay-to-play policy because it required new owners to pay monthly assessments even though the prior owner’s debt prohibited them from using the facilities. Accordingly, the supreme court reversed the appeals court’s decision.

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

[ return to top ]

Associationís Foreclosure Sale Must Be Commercially Reasonable

The Neighborhood Association, Inc. v. Limberger, Case No. SC 19509 (Conn. Apr. 26, 2016)

Association Operations: The Supreme Court of Connecticut ruled that a board-adopted collection and foreclosure policy was a rule requiring owner notice and comment under the Connecticut Common Interest Ownership Act.


The Neighborhood Association, Inc. (association) governed The Neighborhood, a condominium in Connecticut, where Jill Limberger owned a unit. The declaration gave the association’s board of directors the power to adopt rules and regulations, collect assessments, engage in litigation and impose late fees and other charges.

The Connecticut Common Interest Ownership Act (act) provided that an association could foreclose an assessment lien on a unit if the board of directors had either voted to commence an action against the specific unit or adopted a standard foreclosure policy. The act did not prescribe procedures for adopting a standard policy.

However, the act did contain procedures for adopting rules. The board was required to give the owners notice of its intent to adopt a rule and allow a comment period. Then, the board had to give the owners notice of its action on the rule as well as a copy of the new or amended rule. The act specified that an “association’s internal business operating procedures need not be adopted as rules.”

In 2011, the board adopted a foreclosure policy that accounts with a balance due equal to at least two months’ assessments would to be referred to the association’s attorney for foreclosure.

The policy stated that owners would be responsible for the association’s attorney’s fees and collection costs. It also prescribed the order in which payments would be applied to the outstanding debt. The board did not notify the owners that it was considering adopting the policy, did not provide any comment period, and did not notify the owners that the policy had been adopted.

The association subsequently commenced a foreclosure action against Limberger’s unit in accordance with the policy. Limberger sought to dismiss the suit, arguing that the association had not satisfied the statutory prerequisites—that is, voting to take action against Limberger specifically or adopting a standard policy according to the act’s requirements.

The trial court concluded that the foreclosure policy was an internal operating procedure for which the board was not required to give the owners prior notice. The trial court determined that the type of policy contemplated by the act as requiring owner notice and comment was aimed at resident and visitor conduct and use and appearance of the building(s). The trial court entered a judgment by foreclosure sale. Limberger appealed.

While the act did not define “internal business operating procedures,” it did define “rule” as a policy, guideline, restriction, procedure, or regulation which is not set forth in the declaration or bylaws and which governs the conduct of persons or appearance of property. Since the act defined “rule” so broadly, the appeals court determined that the scope of internal business operating procedures excepted from the rules must be quite limited.

The act’s legislative history suggested that internal operating procedures cannot be policies that could lead to abuse in the foreclosure process. The act was based on the uniform act, so the appeals court looked at examples of internal operating procedures given by the uniform act. The examples suggested that internal operating procedures could address daily business activities but not policies that could directly or indirectly impact owners’ rights or obligations.

The appeals court determined that the foreclosure policy was a rule instead of an internal procedure based on the “real and substantial effect that such matters could have on the circumstances under which unit owners will incur financial obligations and potentially lose their residence.” As a rule, the foreclosure policy required a notice and comment period before it could be adopted.

Since the association’s foreclosure policy was not properly adopted, the association could not bring the foreclosure action. Accordingly, the trial court’s judgment was reversed, and the case was remanded with instructions that the case be dismissed.

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

[ return to top ]

Association Prevails Even Though Much of Its Case Disallowed

Almanor Lakeside Villas Owners Association v. Carson, Case No. H041030 (Cal. Ct. App. Apr. 19, 2016)

Attorney’s Fees: The California Court of Appeal upheld a very large attorney’s fees award to an association as the prevailing party in a suit to collect fines, even though most of the fines were disallowed, because the judgment cemented the association’s rulemaking authority.


Almanor Lakeside Villas Owners Association (association) governed a common-interest development on Lake Almanor in Plumas County, Calif. James and Kimberly Carson owned the Kokanee Lodge and Carson Chalets (the properties), which were among only a few lots in the development where commercial use was allowed. All other lots were restricted to residential use by the declaration of covenants, conditions and restrictions (declaration).

The Carsons purchased the properties in 2001 and 2005 to use for short-term vacation rentals. The lodge existed before the association was formed, but it became subjected to the declaration when the development was created. One declaration section provided that the properties could be used for commercial or residential purposes. However, another section prohibited using lots for transient or hotel purposes or renting for fewer than 30 days. Owners were also required to provide the association’s board of directors (board) with the names, addresses, and lease terms for all tenants.

In 2009, the board began developing rules to enforce the declaration, including rules to enforce the 30-day lease limitation. In 2012, rules were added exempting commercial lots from the minimum lease term, although owners were still required to provide the board with the rental agreement at least seven days before the rental period. The rules also regulated such issues as using the community boat slips and common areas and parking.

The Carsons did not believe the short-term rental restriction applied to the properties since the lodge had historically been operated as a hunting, fishing, and vacation lodge and since they had used the properties for short-term rentals for many years.

The board fined the Carsons for a variety of alleged violations, and the Carsons disputed the fines. They also stopped paying association dues for about two years for reasons unrelated to the fine dispute. In June 2012, the Carsons paid more than $14,000 toward delinquent assessments and instructed that the entire amount be applied to assessments. The Carsons believed the payment brought them current, but the association disagreed.

The association sued the Carsons, seeking about $54,000 in assessments, fines, fees, and interest. The Carsons disputed the fines, arguing that the rules were unlawful restrictions on their commercially-zoned properties. They also counter-sued, asserting that the properties were exempt from the rules based on contract and equitable principles and that the board’s actions amounted to an unlawful campaign to put them out of business.

The trial court found an obvious conflict between the two declaration sections. However, despite the conflict, the association could still restrict how the properties were used, as long as the restrictions were reasonable and consistent with commercial lodging use.

The trial court ruled against the Carsons on their counter-suit but also rejected most of the fines, upholding only $6,620 in fines, late charges and interest. Both sides requested attorney’s fees and costs under the Davis-Stirling Common Interest Development Act (act), which awards reasonable attorney’s fees and costs to the prevailing party in a suit to enforce a declaration. The trial court determined that the association was the prevailing party and awarded it $101,803 in attorney’s fees and costs. The Carsons appealed.

The test for determining the prevailing party is “whether a party prevailed on a practical level by achieving its main litigation objectives.” The Carsons argued they were the prevailing party since the trial court allowed only 8 of 88 fines sought by the association. The association asserted that it prevailed because the trial court determined the association could impose reasonable restrictions on the properties.

The appeals court found that the pivotal issue was whether the association’s fines were enforceable. The Carsons’ success in getting most of the fines removed substantially lowered their liability and supported their position that the declaration and association rules could not impose an unreasonable burden on the properties.

However, while the trial court narrowed the universe of restrictions the association could impose on the properties, it also cemented the association’s authority to adopt and enforce reasonable rules. The fact that more than 90 percent of the fines were disallowed did not negate the practical effect of the trial court’s ruling. The trial court also ruled entirely in the association’s favor on the Carsons’ cross-complaint.

The Carsons argued that the judgment rewarded the association for egregious behavior since most of the fines were unlawful. They asserted that the trial court should have apportioned the attorney’s fees based on the degree of the association’s success. The appeals court indicated that the trial court could consider the degree of the association’s success, along with other appropriate factors, in determining reasonable attorney’s fees. However, it could find no manifest abuse of discretion in awarding the full attorney’s fees sought by the association.

The trial court’s judgment was affirmed.

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

[ return to top ]

Common Property Sold at Tax Sale Still Bound by Declaration

Benoit v. Cerasaro, Case No. 2015-057 (N.H. Apr. 19, 2016)

Covenants Enforcement: The New Hampshire Supreme Court held that selling common property at a tax sale did not extinguish the covenants and easements on that property; therefore, requirements in the declaration applied to the purchaser.


Profile Estates Subdivision was created in 1974 in Merrimack, N.H. The subdivision plans depicted 70 lots and a seven-acre parcel labeled “Common Land for Profile Estates” (common land). All property was subject to a declaration of covenants (declaration), which required each lot owner to join the to-be-formed Profile Estates Homeowners Association (association).

The declaration also provided that the developer would convey the common land to the association when 51 percent of the lots were sold. Until then, the developer was obligated to pay the common-land maintenance costs.

The declaration restricted the common land to use by owners for recreation and conservation and prohibited building structures not incidental to those purposes. Each lot owner had an easement to use the common land.

All lots were eventually sold, but the association was never formed. The developer did not transfer the common land and eventually stopped paying the property taxes. In 1979, Robert Gaumont, who lived in Lot 51 adjacent to the common land, purchased it at a tax sale.

In 2001, Gaumont sold Lot 51 to Thomas Benoit and Kathleen Nawn-Benoit (the Benoits). He also sold them the common land for less than $100. Since 2001, the Benoits paid about $40,000 in taxes on the common land. In 2014, over the objection of other owners, the Benoits obtained a variance to construct a single-family home on the common land.

In 2015, the Benoits filed suit against the other owners, seeking a determination that the declaration was unenforceable and that they acquired the common land free and clear of the declaration. Alternatively, if the declaration was determined to be enforceable, the Benoits sought an order requiring the owners to purchase the common land from them at its fair market value and to reimburse them for their out-of-pocket expenses, including the taxes.

Both sides moved for summary judgment (judgment without a trial based on undisputed facts). The trial court ruled in the owners’ favor, ordering the owners to form the association and the Benoits to convey the common land to the association. Further, the trial court determined that the Benoits were unquestionably the developer’s successors-in-title to the common land. As such, they were obligated to pay the common land’s costs until the property was conveyed to the association. Accordingly, the trial court denied the Benoits’ request for payment or reimbursement. The Benoits appealed.

The Benoits argued that the tax sale extinguished the declaration. They also asserted that the association’s rights under the declaration never vested since the association was never formed. The appeals court held that, based on the declaration’s plain language, the association’s common land rights vested when the declaration was recorded in 1974. Further, a tax sale does not extinguish easements. In the absence of a legally created association, the owners could enforce the declaration.

The Benoits asserted that, since the owners delayed enforcing the declaration for decades, they were not entitled to do so now based on a legal doctrine called laches. However, with laches, “delay” begins to be measured when a change in condition triggers enforcement.

The appeals court determined that the need for enforcement was triggered when the Benoits sought the variance; therefore, enforcement was not delayed. Nothing had previously prohibited the owners from using the common land for recreational purposes.

Moreover, the appeals court found no error in the trial court’s order that the common land be conveyed to the association without payment or reimbursement. The deed to Benoits’ Lot 51 referenced the declaration, thus providing notice of the easements and restrictions on the common land. In addition, the extremely low price for such a large parcel should have raised questions about easements and restrictions.

The trial court’s judgment was affirmed.

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

[ return to top ]

Associationís Failure to Grant an Exception to No-Pets Rule Proves Costly

Castillo Condominium Association v. U.S. Dept. of Housing & Urban Dev., Case Nos. 14-2139, 15-1223 (1st Cir. May 2, 2016)

Federal Law and Legislation: The U.S. Court of Appeals for the First Circuit upheld the HUD Secretary’s determination that an association discriminated against a disabled resident by refusing to grant an exception to its no-pets rule for an emotional support animal.


Carlo Giménez Bianco owned a condominium unit in Puerto Rico governed by Castillo Condominium Association (association). The association discovered that Giménez was keeping a dog in his unit in violation of the association’s pet prohibition. The association warned Giménez that he would be fined if the dog was not removed.

Giménez advised the association’s board of directors (board) that the dog was an emotional support animal to assist with his depression and anxiety and provided the board with a letter from his treating psychiatrist. The board refused to make an exception to the no-pets rule.

Giménez complained to the Puerto Rico Department of Consumer Affairs (DCA), who upheld the association’s right to have and enforce a no-pets rule. Giménez moved out and sold the unit.

Giménez filed a complaint with the U.S. Department of Housing and Urban Development (HUD). HUD charged the association with violating the Fair Housing Act (FHA), which prohibits discrimination in housing and housing-related matters based on a person’s disability. HUD alleged that the association had violated the FHA by denying Giménez a reasonable accommodation, thus making housing unavailable to Giménez.

The case was tried before an administrative law judge (ALJ). Giménez, his psychiatrist and his primary care physician all testified that Giménez suffered from an anxiety disorder and chronic depression and that the dog helped alleviate his symptoms. The ALJ recommended that the association had not violated the FHA because Giménez failed to prove that he had a mental impairment warranting a companion animal as a reasonable accommodation.

The ALJ’s decision was appealed to HUD’s Secretary. The Secretary set aside the ALJ’s decision, finding that Giménez suffered from a cognizable disability, that the association knew or should have known of the disability, and that the association had improvidently denied Giménez’s requested reasonable accommodation. The Secretary also found that the association had failed to engage in the interactive process contemplated by the HUD guidelines in which the housing provider and requesting party discuss possible alternatives to the requested accommodation.

After finding the association guilty of discrimination, the Secretary remanded the case to the ALJ to determine damages and fines. The ALJ recommended awarding Giménez $3,000 in emotional distress damages and fining the association $2,000. The ALJ noted that the association’s liability stemmed from ignorance of the law rather than the type of willful and malicious conduct that demands the maximum penalty. The ALJ also recommended that the association implement a reasonable accommodation policy and that its officers receive fair housing training.

The ALJ’s decision was again appealed to the Secretary, who concluded that the ALJ had undervalued Giménez’s emotional distress and underestimated the association’s blameworthiness. The ALJ viewed the association’s ignorance of the law as an aggravating factor, not a mitigating factor. The Secretary imposed the maximum fine of $16,000 on the association and awarded Giménez $20,000 in emotional distress damages.

The association appealed the Secretary’s decision to the U.S. Court of Appeals for the First Circuit. The association argued that the DCA’s determination that the association acted appropriately was binding on the Secretary. The appeals court, however, found that the DCA’s authority under the Puerto Rico Condominium Act (act) was limited to the adoption and enforcement of condominium rules. The act did not give the DCA the power to address housing discrimination. The DCA merely determined that the association had validly adopted the no-pets rule. Thus, the Secretary was not bound by the DCA’s decision as to whether housing discrimination had occurred.

A reviewing court is bound by a federal agency’s factual findings as long as they are supported by substantial evidence. The appeals court found that the evidence supported the Secretary’s determination that the association violated the act by failing to provide a reasonable accommodation due to Giménez’s disability.

There was ample evidence that Giménez was disabled under the FHA’s criteria and that the association knew or had notice of the disability. Giménez told the association that he needed an emotional support animal and requested an exception to the no-pets rule as a reasonable accommodation. In addition, the damage and fine amounts were within the Secretary’s discretion and adequately supported by the evidence.

The association asserted that Giménez’s damages should be reduced because he was able to sell his unit at a considerable profit. The appeals court held that any profit Giménez received after having been forced to move out of his home of 15 years did not excuse the association’s illegal discrimination.

Finding no grounds for reversing the Secretary’s order, the appeals court denied the association’s appeal petition and granted the Secretary’s petition for enforcement of his order.

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

[ return to top ]

Association Acquired Vested Right to Install Subdivision Gates

The Estates Homeowners Association (Grouse Mountain), Inc. v. Whitefish, Case No. DA 15-0486, 2016 MT 87N (Mont. Apr. 12, 2016)

Municipal Relations: The Supreme Court of Montana held that when a city approved a subdivision plat entitling the association to install gates on its private roads, the association acquired a vested right that the city could not later take away by prohibiting gated roads.


The Grouse Mountain subdivision in Whitefish, Mont., was developed in phases. The Estates Homeowners Association (Grouse Mountain), Inc. (Estates HOA) governed Phases I and II, and Grouse Mountain Homeowners, Inc. (Homeowners HOA) governed Phase III.

The Phase III plat approved by the City of Whitefish provided that the Phase III roads would be private and that the Homeowners HOA was entitled to close the roads to the public. The plat also provided for a reciprocal easement agreement between Estates HOA and Homeowners HOA to ensure reciprocal street access through each neighborhood.

In October 2014, the city adopted a resolution that prohibited subdivisions from gating their streets to prevent public access. Estates HOA sued the city, seeking a determination that it had the right to install gates to the entrances to Phase III.

Homeowners HOA sought to intervene in the lawsuit, arguing that gates would obstruct its members’ easement rights through Phase III. The trial court denied Homeowners HOA’s intervention request, determining that Homeowners HOA had no current claim since no gates had been installed and the members’ access was not yet impeded. The trial court also found that the city could adequately represent Homeowners HOA’s interests in the lawsuit.

Estates HOA argued that the resolution unlawfully impaired its vested right to gate the private roads as indicated on the plat. The city asserted that Estates HOA had no vested right to a gate because the gate was subject to conditions requiring approval, including subdivision regulations and engineering standards.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to Estates HOA. The trial court found that when the city approved the plat, it granted Estates HOA a vested gate right, and the city’s resolution to prohibit gates entirely interfered with that right. Homeowners HOA appealed the intervention request denial, and the city appealed the summary judgment grant to Estates HOA.

The appeals court determined that Homeowners HOA had no right to intervene in this lawsuit because it involved different facts and different law than this dispute. The appeals court indicated that Homeowners HOA could assert its complaint against Estates HOA in a separate lawsuit.

The appeals court also found that Estate HOA’s gate rights did, indeed, vest when the city approved the final subdivision plat, which occurred after all the plat road conditions had been satisfied. Once that approval was granted, the city could not withdraw its plat approval by adopting the resolution.

The trial court’s judgment was affirmed.

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

[ return to top ]

Super-priority Lien Does Not Include Foreclosure or Collection Costs

Horizons at Seven Hills Homeowners Association v. Ikon Holdings, LLC, Case No. 63178 (Nev. Apr. 28, 2016)

State and Local Legislation and Regulations: The Nevada Supreme Court interpreted the Nevada Common Interest Ownership Act as excluding foreclosure and collection costs from an association’s super-priority lien.


Horizons at Seven Hills Homeowners Association (association) governed Horizons at Seven Hills Ranch in Clark County, Nev., in accordance with the community’s declaration of covenants, conditions and restrictions (declaration).

In 2005, Hawley McIntosh purchased a home in the community. By 2009, he was delinquent on his mortgage payments and association assessments. In June 2009, McIntosh’s lender, OneWest Bank FSB (OneWest), recorded a default notice on the property. In August 2009, the association recorded a default notice for assessments and other costs totaling about $4,300.

OneWest foreclosed on the home in June 2010 and sold the property to Scott Ludwig. Ludwig transferred the property to Ikon Holdings, LLC (Ikon). The association demanded payment from Ikon for McIntosh’s debt, arguing that Ikon acquired the property subject to the association’s super-priority lien. The association demanded about $6,000 to cancel its lien, which included $2,700 in collection and foreclosure costs. Although the association did not actually foreclose on McIntosh, it did spend money preparing for foreclosure.

Ikon acknowledged that the association’s super-priority lien had not been extinguished by the foreclosure, but it disputed the amount due. Ikon filed suit, seeking declaratory judgment (judicial determination of the parties’ legal rights) of the lien amount. In particular, Ikon sought a ruling that the association’s super-priority lien consisted of either nine months of assessments under the Nevada Uniform Common-Interest Ownership Act (act) or six months of assessments based on the declaration, but it did not include collection or foreclosure costs.

The trial court granted declaratory judgment in Ikon’s favor, ruling that, while the act provided for a super-priority lien equal to nine months’ assessments, the declaration limited the amount to six months’ assessments. The association appealed.

The appeals court noted that the act included maintenance or abatement costs in the super-priority lien, but the act defined such costs as including reasonable inspection fees, notification and collection costs and interest. These were not the type of foreclosure costs that were in dispute.

The association argued that the lien statute must be read in conjunction with the act’s foreclosure statute, which set a cap of $1,950 that applied in most foreclosure cases. The association reasoned that, since the act generally provides for foreclosure costs, such costs must be included in the association’s lien.

The appeals court found the two statutes easily reconcilable. Excluding foreclosure costs from the super-priority lien does not preclude such foreclosure costs from being included in the non-super-priority portion of the association’s lien up to the cap amount. The foreclosure statute only sets a cap on foreclosure fees; it does not discuss lien priority.

The act was based on the Uniform Common Interest Ownership Act (UCIOA). The appeals court noted that, while UCIOA was amended in 2008 to specifically include attorney’s fees and foreclosure costs in the super-priority lien, Nevada did not amend the act to include such costs. As such, the appeals court presumed that the Nevada legislature did not intend for such costs to be part of the association’s super-priority lien. Accordingly, the appeals court held that the act’s super-priority lien did not include collection and foreclosure costs.

The association argued that the declaration allowed the super-priority lien to include collection and foreclosure costs. Ikon asserted that the act superseded the declaration, capping the super-priority lien at the amount allowed by the act. However, Ikon also argued that the declaration’s super-priority lien for six months’ assessments took precedence over the act’s allowance of nine months’ assessments.

The act specifically provides that any contrary provision in a common-interest community governing document is superseded by the act’s provisions. The appeals court held that the declaration’s lien provisions were superseded by the act. Thus, the association had a super-priority lien that included nine months of assessments but did not include any collection or foreclosure costs.

The trial court erred by limiting the association’s super-priority lien to six months’ assessments and including collection and foreclosure costs in the lien. Accordingly, the trial court’s order was affirmed in part and reversed in part.

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

[ return to top ]

 

6402 Arlington Blvd. | Suite 500 | Falls Church, VA† 22042 | (888) 224-4321
This e-mail was sent to inform you of CAI products, services or events.
For more information, please visit www.caionline.org.
Change your e-mail address