August 2016
In This Issue:
Recent Cases in Community Association Law
Rulemaking Power Does Not Equate to a Rulemaking Duty
Laches Does Not Apply to Legal Claims
Fair Housing Act Requires Condominium to Accommodate Handicapped Parkers
Free Use of Property Results from Ambiguous Restriction
Fines Must Be Reasonable
Collection Letters Must Explain Additional Charges
Restrictive Covenants Must Be Interpreted Under Contract Law to Give Effect to Covenantsí Purpose
Subrogation Waiver Does Not Apply to Tenants
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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.

Rulemaking Power Does Not Equate to a Rulemaking Duty

Taticek v. Homefield Gardens Condominium Association, No. ED103852 (Mo. Ct. App. June 21, 2016)

Association Operations: The Court of Appeals of Missouri ruled that the rulemaking power in the declaration did not create a duty to create a rule; but, once a rule was adopted, the association had a duty to enforce it.

Homefield Gardens Condominium Association (association) governed the Homefield Gardens Condominiums in O’Fallon, Mo. Roy H. Smith Real Estate Company (manager) was hired by the association to manage the project.

In 2013, Mary Beth Taticek, a resident at Homefield Gardens, was attacked in the common area by a pit bull owned by another resident. Taticek suffered serious and permanent injuries. In addition to suing the pit bull’s owner, Taticek sued the association and the manager (collectively, the defendants) for premises liability and negligence, alleging that the defendants failed to enact and/or enforce pet rules.

The defendants moved for summary judgment (judgment without a trial based on undisputed facts), arguing that they did not owe any duty to Taticek under any of her liability theories. The trial court granted summary judgment to the defendants, and Taticek appealed.

To establish negligence, a plaintiff must prove the defendant had a duty to protect the plaintiff from injury. Taticek offered three theories to show that a duty existed: (1) that the declaration of condominium (declaration) imposed a duty on the defendants to create and enforce rules for the safety of residents; (2) that the association’s rules imposed a duty on the defendants to enforce such rules; and (3) that the defendants undertook a duty to enforce the rules.

Specifically, Taticek argued that the power granted to the association in the declaration to adopt reasonable rules and regulations for the health, safety, comfort and welfare of the unit owners created an obligation to actually create such rules. The appeals court disagreed, finding that the declaration’s plain language gave the association the power to enact rules but no corresponding duty to do so. Strictly construing such language, the appeals court held that the association did not have a duty to create any specific rule.

The association’s rules provided that there would be regular inspections of buildings and vehicles to ensure compliance with the rules. The appeals court determined that this affirmative statement established a duty to enforce the rules that were adopted.

One of the pet rules limited the size of dogs to 25 pounds. The pit bull was over 25 pounds, but the association claimed it did not know about the dog. The association argued that no duty to enforce the pet restriction would be triggered until the association actually knew about the dog. The appeals court found that these arguments were issues that must be considered in determining whether the defendants acted reasonably, i.e., whether the defendants breached a duty. However, they were not to be considered in determining whether a duty existed. Having found that the association had a duty to enforce the rules, the appeals court held that the trial court erred in granting summary judgment to the defendants.

The appeals court cautioned that its decision should not be viewed as requiring or even allowing associations to continually spy on residents. Rather, by adopting a rule providing that the association would regularly inspect the common areas to ensure compliance with the rules, the association was obligated to conduct such regular inspections. A question remained as to whether the association had reasonably conducted such inspections, and such unresolved factual dispute precluded summary judgment.

The association admitted that the rules were made, at least in part, for the residents’ safety. As such, the appeals court found that the association undertook to render services for the protection of the residents, and a jury must determine whether the association exercised reasonable care in rendering such services. Therefore, the trial court erred in granting summary judgment to the defendants on this issue.

The appeals court affirmed the summary judgment grant on the issue of whether the defendants had a duty to adopt certain rules, but the summary judgment grant was reversed on the issues of whether the association had a duty to enforce the adopted rules and whether the association acted reasonably in enforcing such rules.

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

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Laches Does Not Apply to Legal Claims

Association of Apartment Owners of Royal Aloha v. Certified Management, Inc., No. CAAP-15-0000445 (Haw. Ct. App. June 30, 2016)

Covenants Enforcement: The Intermediate Court of Appeals of Hawaii held that laches was a defense only to equitable claims, not legal claims.

Association of Apartment Owners of Royal Aloha (association) governed the Royal Aloha Condominium, a mixed-use project on the Island of Oahu, Hawaii. Chaney Brooks & Company, LLC (Chaney) was the association’s manager from 1995 to 2002, and Certified Management, Inc. (Certified) managed the project from 2003 to 2010 (Certified and Chaney are collectively referred to as the managers).

Michael David Bruser and Tokyo Joe’s Inc. (the C-1 owners) were the owners of commercial unit C-1. Michael McCormack and two trusts related to McCormack (the C-2 owners) were the owners of commercial unit C-2.

The association paid the electric bills for the entire condominium. A sub-metering system allowed the association to charge each unit based on actual consumption. An engineering company read each unit’s sub-meter and prepared a utility billing register (UBR), from which the manager determined each unit’s utility costs and billed the unit owners accordingly.

In April 2011, the association’s president allegedly discovered significant utility billing errors. Specifically, from January 1998 to April 2010, the C-1 owners were not billed for utility charges, and the C-2 owners were under-charged.

In April 2012, the association sued the managers, claiming they were responsible for the errors. The association also sued the C-1 and C-2 owners, alleging they owed hundreds of thousands of dollars for unbilled and incorrectly billed electricity charges.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to Certified based on the doctrine of laches. (Laches is a legal concept meaning, in this case, that the association delayed far too long to correct the billing errors retroactively.) The trial court also granted partial summary judgment to the C-1 owners because neither the association’s bylaws nor the Hawaii Condominium Property Act obligated them to indemnify the association for electricity costs. The trial court further announced that it would bar all association claims based on laches. The association appealed.

The association’s bylaws provided that all owners were obligated to pay utility charges for their units and to indemnify the association against all such charges. The appeals court agreed with the trial court that the bylaws’ indemnity obligation was not triggered until the owner was billed. However, the appeals court did not rule that the owners had no liability for the unbilled or incorrectly billed charges. Instead, the appeals court focused on the trial court’s conclusion that laches prevented the association from recovering these charges.

Laches is based on “the equitable maxim that ‘equity aids the vigilant, not those who slumber on their rights.’ ” The Hawaii Supreme Court has explained that it is sometimes more important to society to promote diligence in pursuing claims than to allow stale claims to be enforced.

The main difference between laches and the statute of limitations is that the statute of limitations establishes a clear time frame within which a claimant must act, but laches does not establish a bright-line rule. Laches is a more flexible standard that varies based on the facts of the case. Normally, a claimant will be allowed to bring a claim any time before the statute of limitations has run, but when extraordinary circumstances make it unfair to pursue a claim, laches will shorten the time to bring a claim.

However, laches is an equitable defense to equitable claims; it does not apply to legal claims. (Legal claims are based on the law; equity claims are based on fairness principles) The appeals court determined that, except for one, the association’s claims were contractual and thus, were legal claims. The one equitable claim sought declaratory judgment (judicial determination of the parties’ legal rights) that the C-1 and C-2 owners breached their contractual obligations. The appeals court held that including the declaratory judgment claim did not change the nature of the association’s contractual claims. As such, laches was not an available defense.

The appeals court affirmed the trial court’s judgment as to the indemnification claims but set aside the trial court’s remaining conclusions as well as the summary judgment grant. The appeals court did not address whether the statute of limitations prevented any of the claims since the trial court never decided the issue.

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

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Fair Housing Act Requires Condominium to Accommodate Handicapped Parkers

Weiner v. Prairie Park Condominium Association Inc., No. 16 C 1889 (N.D. Ill. June 23, 2016)

Covenants Enforcement; Federal Law and Legislation: The U.S. District Court for the Northern District of Illinois allowed Fair Housing Act claims against an association for not providing handicap parking to a handicapped owner where all handicap spaces were assigned to other owners.

Prairie Park Condominium Association Inc. (association) governed the Prairie Park Condominium in Illinois. Morris and Thelma Weiner owned a unit in the project, which included a parking space.

Sometime after purchasing the unit, Mr. Weiner’s health declined, and he had mobility problems. He obtained a handicap placard, allowing him to park in handicapped parking spaces, but the Weiners’ parking space in the condominium was not a handicap space. In June 2015, Mr. Weiner asked the association’s manager, Advantage Management Company, for a handicap space. All of the handicap spaces were assigned to units but were not necessarily being used by handicapped persons.

The Prairie Park Declaration of Condominium (declaration) provided that, if a handicapped unit owner asked the association for a handicap space that was already assigned to a non-handicapped owner, then the two owners would exchange spaces. The declaration further provided that a deed reflecting the parking exchange was to be recorded.

The association and the manager told Mr. Weiner to confer with the owners of the four handicap spaces, three of whom Mr. Weiner alleged were not handicapped. The Weiners were unable to negotiate an exchange with any of them.

The Weiners filed suit against the association and the manager (hereafter, collectively referred to as the association), alleging that they took no action to enforce the declaration’s parking provisions and did not provide alternative handicap parking for Mr. Weiner. They asserted claims for breach of contract and for violations of the Fair Housing Act (FHA) and the Illinois Condominium Property Act. The Weiners also sued all four handicap-space owners, including Pavel and Alena Basharimov. The association and the Basharimovs moved to dismiss all claims against them.

The Basharimovs argued that they were not liable under the FHA and that the parking space transfer provision was unenforceable. The association argued that it could not make an owner swap parking spaces with another owner.

The FHA made it unlawful to discriminate against any person in the provision of services or facilities in connection with a dwelling because of such person’s handicap. Under the FHA, “discrimination” includes refusing to make reasonable accommodations in rules, policies, practices or services that may be necessary to afford a person equal opportunity to use and enjoy a dwelling.

When considering a motion to dismiss, the court must take all of the plaintiff’s factual allegations as true. Mr. Weiner alleged that the association knew he had limited mobility and that he required a parking space close to the building. The court held this was sufficient to trigger a duty by the association to make a reasonable accommodation.

The court determined that a fair reading of the FHA and the case law indicated that a condominium must move beyond its existing handicap parking spaces if such spaces are unavailable for use by handicapped residents. “In other words, condominium [associations] are required to take additional action to ensure that handicapped residents who require a handicap parking space or other reasonable accommodation are, in fact, accommodated.” Therefore, the association’s motion to dismiss the FHA claims was denied.

The Basharimovs argued that they could not be forced to exchange their parking space because they owned it in the same way they owned the unit. The association argued that the declaration merely required it to facilitate negotiations for exchanges; it did not grant the association the authority to transfer an owner’s property or to force an owner to do so. A basic principle of real property law is that one cannot transfer property that one does not own.

The court did not agree, finding that, while the association may not have been able to effectuate a parking space transfer by itself, it had the authority to take action against an owner for violating the declaration’s terms. As such, the Weiners could pursue a breach of contract claim against the association for failing to enforce the declaration.

The declaration also allowed a unit owner to sue another unit owner to enforce the declaration’s terms. Therefore, the Weiners could also pursue a breach of contract claim against the Basharimovs for violating the declaration.

The court dismissed the Weiners’ FHA claims that were unrelated to handicap discrimination since there was no evidence of discrimination on the basis of race, color, religion, sex, familial status or national origin. The association’s and the Basharimovs’ motions to dismiss were denied in all other respects.

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

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Free Use of Property Results from Ambiguous Restriction

Brentwood Chase Community Association v. Truong, No. M2015-00192-COA-R3-CV (Tenn. Ct. App. June 23, 2016)

Covenants Enforcement: The Court of Appeals of Tennessee held that a descriptive term before the first word of a series of restricted items applied to each item in the series since such interpretation advanced the unrestricted use of the property.

Brentwood Chase Community Association (association) governed the Brentwood Chase subdivision in Davidson County, Tenn., where Tiffany Curtiss owned a home. The association sued Curtiss for allegedly conducting commercial activity and parking a commercial trailer on her property in violation of the Declaration of Brentwood Chase Community (declaration).

The declaration prohibited conducting commercial, industrial, recreational or professional activity, as defined by zoning ordinance, on a lot. The declaration further provided that no person could “leave any non-operating vehicle, trailer, boat, camper, commercial vehicle, any vehicle not currently registered and licensed or any vehicle having invalid and expired state motor vehicle inspection sticker” on a lot except in an enclosed garage.

Curtiss kept a large commercial trailer on her lot which she used in her catering business. She admitted to transferring food, platters and cleaning materials from her home to the trailer. She would also clean and organize the trailer while it was parked on the lot.

The trial court granted partial summary judgment (judgment without a trial based on undisputed facts) to the association, finding that Curtiss had violated the commercial use restriction but not the vehicle restriction. The trial court barred Curtiss from conducting commercial activities on her lot, and the association was awarded $12,271 in attorney’s fees. Curtiss appealed.

Relying on an earlier case that held that parking a commercial vehicle on a residential lot did not constitute commercial use, Curtiss argued that her limited activities did not amount to commercial use. The appeals court disagreed, holding that the declaration prohibited any commercial activity. Curtiss admitted that her activities involving the trailer were part of managing her catering business. As such, the trial court correctly entered summary judgment in the association’s favor on this claim.

The trial court was also correct in finding that Curtiss did not violate the vehicle restriction. Where a restrictive covenant can be reasonably interpreted in more than one way, the courts must adopt the least-restrictive meaning. The appeals court concluded that the vehicle restriction could be interpreted two ways. The term “non-operating” could be read to apply only to the first item listed or to every item listed.

Since applying the term to every item listed would produce the least-restrictive meaning, the appeals court held that only non-operating trailers were prohibited by the declaration. Everyone agreed that Curtiss’ catering trailer was operable, so there was no violation.

The trial court’s judgment was affirmed in all respects.

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

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Fines Must Be Reasonable

Brown v. Spring Valley Homeowners Association, Inc., No. 2016-UP-343 (S.C. Ct. App. June 29, 2016)

Covenants Enforcement: Evaluating an association’s fine structure under contract law, the South Carolina Court of Appeals held that fines must be reasonably proportionate to the damage caused by breaching a covenant to avoid being an unenforceable penalty.

Coley Brown owned a home in a Richland County, S.C., subdivision governed by Spring Valley Homeowners Association, Inc. (association). The association levied a $500 fine against Brown for placing a For Sale sign on his property, which violated the subdivision’s restrictive covenants. When Brown did not pay the fine, the association filed a lien against the property.

Brown sued the association, challenging the restrictive covenant’s validity as well as the association’s authority to levy the fine and file the lien. As a result, the association removed the lien.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the association, finding that the association had the authority to impose the fine but not to lien the property. The trial court also determined that the restrictive covenant prohibiting signs did not constitute an invalid restraint on alienation and that the association did not slander Brown’s title by filing the lien. Brown appealed.

Brown argued that only the government has the authority to levy fines unless a statute vests fining authority in another party and that no statute authorizes homeowners associations to levy fines. The appeals court disagreed. The SC Nonprofit Corporation Act allowed a nonprofit corporation to adopt bylaws containing provisions for regulating and managing the corporation’s affairs that were not inconsistent with the law or the corporation’s articles of incorporation. The appeals court found no statute or case law prohibiting a nonprofit corporation from fining its members, and fining also was not prohibited by the association’s governing documents.

The appeals court determined that an association may penalize its members for violating the governing documents so long as the penalties are determined according to some method to which the member has agreed, at least implicitly, by joining the association. The member’s agreement with the association is embodied in the association’s articles of incorporation or corporate organizational document and bylaws.

While Brown may not have expressly agreed to the bylaws or articles of incorporation, the covenants binding Brown’s property specifically provided that, by accepting the deed, the owner agreed to become a member of the association and to abide by its bylaws and rules.

Brown next argued that the fines were unenforceable contractual penalties because they were not based on actual damages. The appeals court disagreed. Contract law does not permit penalties to be charged against the party breaching the contract.

However, contracting parties may stipulate to the amount of liquidated damages owed in the event of a breach, particularly where the amount of actual damages would be difficult or impossible to ascertain. When the stipulated amount is plainly disproportionate to the probable damage, the stipulation is an unenforceable penalty.

The appeals court found the fine structure in the association’s rules was reasonable. Not only did it afford Brown at least 15 days to correct the violation, it also stipulated a maximum fine. The board could impose a $100 weekly fine until the violation was corrected, up to a maximum of $1,500 per year for a single violation.

The appeals court held that the $1,500 maximum per year was not disproportionate to the damage sustained by the association. The damages included primarily attorney’s fees but also possible diminished homes values. The appeals court also held that the sign restriction did not constitute an invalid restraint on alienation.

However, the appeals court found that the association’s act of filing a lien in the public records constituted the publication of a false statement for purposes of Brown’s slander of title claim. The covenants provided that unpaid assessments constituted a lien on the lot, but there was no similar authority for unpaid fines to constitute a lien. Thus, the association did not have the authority to file a lien for unpaid fines.

Despite finding that the association filed a false lien, the appeals court found that an essential element of the slander of title claim was missing, i.e., Brown could show no damages. Damages, including litigation expenses, may be recovered only if publishing a false statement directly influences a third party’s actions

In particular, the claimant normally must show that a specific person was influenced by the false publication and refused to make a purchase he or she otherwise would have made. Since the association removed the lien, there was no evidence the lien caused a third party to act.

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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Collection Letters Must Explain Additional Charges

Gomez v. Niemann & Heyer, L.L.P., No. 1:16-CV-119 RP (W.D. Tex. June 24, 2016)

Federal Law and Legislation: The U.S. District Court for the Western District of Texas denied a debt collector’s motion to dismiss claims alleging violations of the Federal and Texas Fair Debt Collection Practices Acts based on inconsistencies in the collection letters and the failure to explain the debt.

Brookfield Owners Association, Inc. (association) governed a subdivision in Pflugerville, Tex. Michael and Nora Gomez owned a home in the community.

In 2012, the association fined the Gomezes $25 for having a portable basketball goal in their driveway. The Gomezes failed to pay the fine, and the association engaged Niemann & Heyer, L.L.P. (N&H) to pursue collection. By early 2013, the $25 fine had grown to a $2,500 debt including late charges and attorney’s fees.

The Gomezes presumably paid some of the debt because on August 25, 2015, N&H sent the Gomezes a letter demanding $325.26 to bring their account current through August 15th. The letter stated that the debt included assessments and other amounts due to the association plus attorney’s fees incurred to date. The letter also informed the Gomezes that failure to pay the debt within 30 days might result in the association filing a lien, filing a lawsuit and/or foreclosing its lien and selling the property. Further, the letter provided that, if legal action became necessary, a minimum $2,500 attorney’s fee would apply, and it was possible the final amount could be much higher.

The Gomezes requested a payment plan. On September 18th, N&H sent a letter proposing a plan for paying the debt over eight months. The letter stated that the amount due as of August 15th was $414.44. The plan also included an additional $168 for future assessments and other charges due during the eight-month plan as well as a $200 administration fee, for a total due of $782.44.

The Gomezes filed suit against N&H, alleging negligent misrepresentation and violations of the Federal Fair Debt Collection Practices Act (FDCPA) and the Texas Fair Debt Collection Practices Act (TDCA). N&H moved to dismiss the case.

The FDCPA prohibits a debt collector from using unfair or unconscionable means to collect a debt. Examples of impermissible conduct include collecting interest, fees, charges or other expenses incidental to the principal obligation unless these are expressly authorized by statute or the agreement creating the debt obligation.

When examining whether a collection letter violates the FDCPA, the letter must be viewed from the perspective of an unsophisticated or a least sophisticated consumer. The unsophisticated consumer is presumed to be inexperienced in dealing with creditors, but this does not mean the debtor has to be treated as stupid or illiterate. Rather, it is an objective test of whether an unsophisticated consumer would perceive the letter as deceptive, misleading or unfair.

While the Fifth Circuit has yet to elaborate on this standard, other circuits have applied a materiality threshold. Thus, a collection communication may be false in a strict technical sense, but the false statement is not considered a FDCPA violation unless it could have actually misled an unsophisticated consumer. A statement is material if it influences a consumer’s decision or confuses the consumer.

N&H argued that the failure to itemize the debt was not material and, thus, not a FDCPA violation. The court determined that itemization would be immaterial when there was no dispute concerning the debt—the debt total was undisputed, the debtor was aware of the debt’s origin and the debtor did not challenge the accrued interest or fees.

However, it is unfair to give a false impression or to hide the true nature of a debt. Debt collectors must clearly and fairly communicate information about the amount due, including how the total was calculated if it includes add-on expenses such as attorney’s fees or collection costs.

N&H’s letters failed to state the basis for the fine or assessment on which penalties may have been applied, how much of the total was attorney’s fees, and what additional add-on charges or fees were included. Under these circumstances, an unsophisticated consumer would find it difficult to discern whether a debt was valid. In addition, the balance due, as of August 15, listed in the payment plan letter was greater than the amount listed in the first letter. The increase was not explained.

N&H argued that the second letter was simply a discussion of the payment plan and not a representation of the amount or character of a debt regulated by the FDCPA. The court was unconvinced because the letter clearly stated an amount due.

N&H asserted that the TDCA did not regulate the payment plan letter since the Gomezes did not request a payment plan within the time allowed by law. The court disagreed, finding that the TDCA provided scenarios in which an association may choose not to offer a payment plan. However, once the association decided to offer a payment plan, the statute’s debt provisions applied. In particular, an association may not charge additional penalties as part of a payment plan.

N&H’s motion to dismiss was granted in part and denied in part.

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

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Restrictive Covenants Must Be Interpreted Under Contract Law to Give Effect to Covenantsí Purpose

Fort Pierce Industrial Park Phases II, III & IV Owners Association v. Shakespeare, No. 20140137 (Utah June 22, 2016)

Powers of the Association, Covenants Enforcement: The Supreme Court of Utah held that restrictive covenants are not disfavored and should not be strictly construed; instead, they should be interpreted in the same manner as a contract.

Fort Pierce Industrial Park Phases II, III & IV Owners Association (association) governed the Fort Pierce Industrial Park in St. George, Utah. Gloria and Thomas Shakespeare owned a lot on River Road in the park.

The park’s Declaration of Covenants, Conditions, and Restrictions (declaration) specified that the park was intended to be an attractive development that was “a cut above the norm.” Accordingly, the declaration required owners to obtain approval from the association’s board of trustees (board) before constructing buildings or other structures on a lot.

The declaration gave the board wide latitude to consider the structure’s suitability, location, appearance and harmony with the surroundings. The declaration also specified that River Road property might be subject to heightened standards due to its highly visible location. In addition, the board’s written consent was required to operate more than two businesses simultaneously on a lot.

In 2008, a cell phone company approached the association about constructing a cell tower in the park. The company inquired about a River Road location, but the board would only approve a different location that was more hidden from view.

In 2009, the Shakespeares applied to the association for approval to construct a cell tower on their lot. The board denied the request because it wanted to limit the number of cell towers to the minimum needed to serve the community for aesthetic reasons and because there were already two businesses operating on the lot. Nonetheless, the Shakespeares constructed the tower.

In 2010, the association filed suit against the Shakespeares for breach of the declaration. The Shakespeares counterclaimed for damages and injunctive relief (requirement to take or refrain from taking certain action).

The trial court applied the common law presumption that restrictive covenants are disfavored and should be strictly construed in favor of free and unrestricted property use. Applying this standard, the trial court determined that the association had no authority to limit the number of cell towers in the park.

The trial court also believed that the board’s preference for a non-River Road location for cell towers was the dominant factor in denying the application. Thus, while it found the board acted in good faith, the trial court determined the board’s denial of the tower was unreasonable and arbitrary. The trial court granted partial summary judgment (judgment without a trial based on undisputed facts) to the Shakespeares and awarded the Shakespeares half of their attorneys’ fees. They were denied full attorney’s fees due to their deliberate violation of the declaration by constructing the tower without permission. The association appealed.

The appeals court held that the trial court erred in presuming that restrictive covenants were disfavored. To the contrary, the appeals court found that restrictive covenants played a valuable role in modern land development and in establishing and enforcing community development plans, even for a commercial development like the park. Further, the appeals court held that restrictive covenants in Utah are to be interpreted under the same rules applied to contract interpretation.

Generally, unambiguous covenants should be enforced as written. Any interpretation should give effect to the parties’ intent, as ascertained from the document’s language or from the circumstances surrounding the document’s creation, to carry out the document’s purpose.

Applying this standard, the appeals court held that the declaration clearly provided the board with sufficient authority and discretion to deny the Shakespeares’ application. The declaration allowed the board to consider the need for an additional cell tower, the tower’s aesthetic impact and the two-business limit. The appeals court found this broad interpretation was further supported by the declaration’s express statement that the declaration’s provisions “shall be liberally construed to effect all of their intended purposes.”

The declaration indicated that the board should be guided by the St. George ordinances, which encouraged cell towers to share facilities where feasible with up to three providers per tower. The board could consider the city’s adopted preference, even though the city had already approved the Shakespeares’ plans.

The parties also argued about how the business judgment rule should apply. The trial court found the board’s denial of the Shakespeares’ application unreasonable because it believed that aesthetics and the two-business rule were simply “cover” for the denial. The appeals court found that the trial court again applied the wrong standard. Courts are to presume the board acted reasonably, and it is the plaintiff’s burden to overcome this presumption by presenting evidence establishing reasonable doubt. The trial court erred by requiring the association to prove the reasonableness of its action instead of requiring the Shakespeares to prove the board’s unreasonableness.

In summary, the appeals court reversed the trial court’s judgment because the board’s denial was authorized by the declaration. The attorney’s fee award to the Shakespeares was struck and the case remanded for a determination of the attorney’s fees due to the association, as the prevailing party.

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

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Subrogation Waiver Does Not Apply to Tenants

Pacific Indemnity Company v. Deming, No. 15-2386 (1st Cir. July 5, 2016)

Risks and Liabilities: The First Circuit Court of Appeals held that a unit owner’s insurance company could pursue another owner’s tenant for causing damage to the unit, despite the declaration’s requirement that owner’s insurance policies contain a subrogation waiver.

John Deming rented Unit 1801 in the 1 Huntington Avenue Condominium in Boston, Mass. In May 2013, Deming fell asleep after turning on the bathtub faucet. Water from the overflowing bathtub leaked into the units below, causing significant damage. Pacific Indemnity Company (Pacific) insured Unit 1601 below Deming’s unit. Pacific paid $351,159 to Unit 1601’s owner (the insured) for damages caused by the incident.

In May 2014, Pacific brought a subrogation (succeeding to the rights of another) claim against Deming to recover the losses. Pacific’s insurance policy with the insureds specifically gave it the same rights to recover as the policy holder—up to the amount Pacific paid. The general rule is that when an insurer pays a claim, it is entitled to take the same legal actions against a third party that the policy holder might have taken.

Deming argued that the condominium documents prevented subrogation claims. The declaration of trust (declaration) required each owner to carry insurance to cover his or her own unit and personal liability coverage and that all such policies contain subrogation waivers. Although the insured’s insurance policy assigned rights to Pacific, it also provided that the insured could waive recovery rights from another person for a covered loss in writing before the loss occurred.

Deming argued that, by purchasing a unit and agreeing to the declaration’s terms, the insured obtained a policy that allowed subrogation to be waived. Pacific argued that the policy’s waiver clause permitted the waiver but did not automatically make it effective, and Deming could point to no document that actually waived Pacific’s subrogation rights.

The trial court found that, at best, the insured had breached the declaration’s requirements by not obtaining a policy that waived subrogation rights. The trial court further determined that allowing Pacific to recover from another owner or tenant because its insured did not obtain the required insurance would allow Pacific to benefit from the insured’s breach, creating an untenable result and frustrating the declaration’s intent. Accordingly, the trial court granted summary judgment (judgment without a trial based on undisputed facts) to Deming. Pacific appealed.

The appeals court focused on the fact that the declaration’s insurance provisions did not specify the scope of the subrogation rights to be waived. By comparison, the declaration specified the extent to which the condominium association was to obtain subrogation waivers for the association’s insurance policies. Specifically, the association’s insurance was to contain subrogation waivers as to any claim against the association trustees and their agents and employees as well as the unit owners and their respective employees, agents and guests.

Viewing the declaration’s insurance provisions as a whole, the appeals court concluded that either the owner was required to waive subrogation against the same parties as the association or some smaller list of parties. However, the appeals court found nothing to suggest that tenants were among the parties for which subrogation waiver was required.

Further, the appeals court found that reading the declaration together with the insured’s policy did not amount to actual waiver of subrogation. The appeals court also did not view such result as “untenable,” as suggested by the trial court. Rather, the appeals court found the result entirely consistent with the declaration since the declaration never required or even suggested that subrogation be waived for tenants.

Reversing the trial court’s order, the appeals court held that Pacific was not subject to any subrogation waiver and could pursue its claims against Deming.

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