October 2016
In This Issue:
Recent Cases in Community Association Law
Declaration’s Vague Provisions for Interest and Late Fees Creates Extra Litigation
Association Insurance Covers Attorney’s Fees Incurred Because of Property Damage
Litigation to Enforce Settlement Agreement Entitled Association to Attorney’s Fees
All Lots Must be Bound by Same Restrictions for Common Interest Community
Owner Liable for Enforcement Actions Brought by Directors and Manager
Brochure Showing Elements Outside Subdivision Created Easement Over Retained Land
Nevada’s Foreclosure Notice Provisions Found Unconstitutional
Subcontractor’s Faulty Work Covered by Developer’s General Liability Insurance
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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.



Declaration’s Vague Provisions for Interest and Late Fees Creates Extra Litigation

Northside Bank v. Mountainbrook of Bartow County Homeowners Association, Inc., Nos. A16A0005, A16A0220 (Ga. Ct. App. July 14, 2016)

Assessments; Attorney’s Fees: The Court of Appeals of Georgia held that the declaration’s late fees must be analyzed under liquidated damages principles, that the declaration must provide for clear interest calculation to avoid statutory rate, and that there is no presumption that actual attorney’s fees are unreasonable.


Northside Bank (bank) foreclosed on and acquired six lots in the Mountainbrook subdivision in Bartow County, Ga., governed by Mountainbrook of Bartow County Homeowners Association, Inc. (association).

The bank did not pay assessments for the lots, and the association eventually filed a collection action. The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the association, awarding it $190,904 for unpaid assessments, late fees, and interest plus $65,834 for attorney’s fees.

The bank appealed, arguing that the trial court erred in awarding the association 18 percent interest rather than the 7 percent allowed by statute. It complained that actual attorney’s fees were not reasonable attorney’s fees. The bank also argued a 10 percent late fee constituted an unenforceable penalty.

The statute allowed contracting parties to establish any interest rate for debts exceeding $3,000. The contract must describe the interest in simple terms by an exact figure or a computation method referencing the prime rate or other indices as the base. If the contract does not describe the interest rate, then a default 7 percent applies.

The Mountainbrook declaration provided that interest at “the maximum legal rate per annum” applied to delinquent accounts. The trial court determined that 18 percent was the maximum legal rate based on an earlier case. The appeals court held it was error to rely on the earlier case because the contract in that case stated a specific interest rate.

The appeals court held that the term “maximum legal rate” was too vague. Although a different statute set an 18 percent maximum interest rate for commercial accounts, the appeals court held that the statute did not apply because the association’s accounts did not qualify as commercial under the statute.

Therefore, the statute’s default 7 percent rate applied. The interest portion of the judgment was vacated, and the case was remanded for recalculation of the interest due.

Attorney’s fees are generally not recoverable except where provided for by contract or statute. The declaration provided that the association’s collection costs, including reasonable attorney’s fees, were the owner’s personal obligation.

The bank argued that another statute capped the amount of attorney’s fees. The statute provided that, if the note or other evidence of indebtedness provided for reasonable attorney’s fees without specifying any specific percent, then the attorney’s fees would be limited to a percentage of the outstanding principal and interest.

The association argued that the statute did not apply since the declaration was neither a note nor other evidence of indebtedness. The trial court agreed. “Evidence of indebtedness” is a signed document indicating a legally enforceable obligation to pay money.

The declaration was not evidence of indebtedness since it was not signed by the owner and it did not indicate a particular debt. Since the declaration provided that the association may levy assessments, the declaration showed only a debt obligation that might arise in the future.

The appeals court held that it was within the trial court’s discretion to determine the amount of “reasonable” attorney’s fees since the statute did not apply to cap the fees. The appeals court stated that actual fees incurred were not presumed to be unreasonable, and the bank presented no evidence that such fees were unreasonable. Accordingly, the attorney’s fee award was affirmed.

The penalties for nonpayment are analyzed under contract law. Generally, the damages recoverable for breach of contract are limited to actual damages incurred. However, the contract may specify in advance the damages that apply upon breach (liquidated damages).

For a late fee to be categorized as liquidated damages rather than as an unenforceable penalty, it must comply with three requirements. First, the injury caused by the breach must be difficult or impossible to accurately determine. Second, the parties must intend to provide for damages rather than a penalty. Third, the stipulated sum must be a reasonable pre-estimate of the probable loss upon breach.

The declaration provided that delinquent assessments would incur a late charge in an amount set by the association’s board. The appeals court held that such language provided no pre-estimate, reasonable or otherwise, of the probable loss associated with late payment. The declaration did not provide limits on the board’s authority or criteria the board must use to determine late fees.

As such, the appeals court held that the association had to prove that its late fees were liquidated damages rather than an unenforceable penalty. So, the trial court erred in granting summary judgment on this issue.

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


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Association Insurance Covers Attorney’s Fees Incurred Because of Property Damage

Association of Apartment Owners of the Moorings, Inc. v. Dongbu Insurance Co., Ltd., No. 15-00497 BMK (D. Haw. Aug. 18, 2016)

Attorney’s Fees: The U.S. District Court for the District of Hawaii held that attorney’s fees which an association became obligated to pay because of property damage were covered under the association’s insurance policy.


Jo-Anne and Brent Braden owned a unit in a Hawaii project governed by the Association of Apartment Owners of the Moorings, Inc. (association). In April 2014, the Bradens filed an arbitration demand against the association, claiming the association failed to maintain and repair their lanai roof, which caused water infiltration that damaged the unit’s interior. They asserted claims for breach of the association’s governing documents and tortious infliction of emotional distress.

The association filed a claim with its insurer, Dongbu Insurance Co., Ltd. (Dongbu). The insurance policy provided that Dongbu would pay those sums the association became legally obligated to pay as damages because of bodily injury or property damage.

The arbitrator determined that the association’s failure to maintain the roof (a common element) properly was the source of the water leaks that damaged the Bradens’ unit. The arbitrator also found that the association’s failure to address the unit interior damage was deliberately discriminatory because the association paid for interior damage to other units.

The arbitrator awarded the Bradens $6,203 for the interior repair costs they incurred, and the association was ordered to repair the roof. The arbitrator denied the Bradens’ claim for tortious infliction of emotional distress. However, the arbitrator determined that the Bradens were the prevailing parties and awarded them $85,644 in attorney’s fees and $8,515 in costs.

Dongbu notified the association that it would pay the amounts awarded for repair costs and arbitration costs, but it would not pay the attorney’s fees, asserting that attorney’s fees did not constitute bodily injury or property damage under the policy. The association sued Dongbu for reimbursement of the attorney’s fees it had to pay the Bradens. Both sides filed motions for summary judgment (judgment without a trial based on undisputed facts).

The insurance policy defined “bodily injury” and “property damage,” but not “damages.” Dongbu argued that the policy did not cover the attorney’s fees because they did not fall under bodily injury or property damage. However, the court found that the relevant question was whether the attorney’s fees could be characterized as damages that the insured became legally obligated to pay because of property damage, not whether attorney’s fees were property damage.

The court found that the association became legally obligated to pay the attorney’s fees when the state court confirmed the arbitration award. It also determined that the Bradens’ unit damage constituted “property damage” within the policy’s meaning.

Based on the Hawaii courts’ adopted definitions for synonymous terms, the court held that attorney’s fees were covered by the policy if they flowed from the Bradens’ property damage and constituted restitutive payment to the Bradens. The court concluded that the attorney’s fees were restitutive payment because the Bradens would not have incurred the attorney’s fees but for the property damage. Therefore, Dongbu was obligated to reimburse the association for the attorney’s fees it paid to the Bradens.

The court granted summary judgment to the association, awarding it $85,644 for the attorney’s fees plus prejudgment interest.

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

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Litigation to Enforce Settlement Agreement Entitled Association to Attorney’s Fees

Rancho Mirage Country Club Homeowners Association v. Hazelbaker, No. E063272 (Cal. Ct. App. Aug. 9, 2016)

Attorney’s Fees: The Court of Appeal of California held that an association’s suit to enforce a settlement constituted an action to enforce the governing documents under the Davis-Stirling Common Interest Development Act, entitling the association to recover the reasonable legal fees it incurred.


Lynn and Thomas Hazelbaker owned a home in a Riverside County, Calif., community governed by Rancho Mirage Country Club Homeowners Association (association). In November 2011, the Hazelbakers applied for and received approval from the association’s architectural committee to modify their patio.

After construction was complete, the association asserted that the Hazelbakers made alterations to the patio that exceeded the scope of the committee’s approval. In June 2012, the association proposed that the parties mediate the disputed improvements, and the Hazelbakers accepted.

During the April 2013 mediation, the parties agreed for the Hazelbakers to make certain modifications to the patio within 60 days and to pay a portion of the association’s attorney’s fees incurred to that point. However, the Hazelbakers did not complete the required modifications as agreed.

In September 2013, the association sued the Hazelbakers to enforce the settlement agreement. After suit was filed, the parties participated in another mediation, which resulted in the parties agreeing to slightly different modifications to the patio. The Hazelbakers completed the agreed-upon modifications by September 2014.

However, the parties could not reach a settlement on who should pay the association’s legal fees, so the association filed a motion seeking $31,970 in attorney’s fees and $572 in costs allowed by the Davis-Stirling Common Interest Development Act (act). The trial court refused to consider some of the legal bills submitted by the association as evidence of the fees incurred because they were so heavily redacted that the trial court could not “tell what’s going on.” The trial court awarded the association $18,991 for attorney’s fees plus $572 for costs. The Hazelbakers appealed.

The act provides for the association to be awarded reasonable attorney’s fees and costs in an action to enforce the governing documents. The Hazelbakers disputed that the association’s suit constituted an action to enforce the governing documents. The appeals court disagreed.

The appeals court found it immaterial that the association sought to enforce its governing documents through mediation instead of a lawsuit. The fact that the action the Hazelbakers were required to take to bring their property into compliance with the governing documents was specified in a settlement agreement did not change the underlying nature of the dispute or the nature of the remedy sought by the association. The appeals court held that the association’s suit was an action to enforce the governing documents within the act’s meaning.

The Hazelbakers also disputed that the association was the prevailing party entitled to its legal fees since a compromise was reached. Again, the appeals court disagreed. The association wanted the Hazelbakers to bring their property into compliance with the governing documents, and it achieved that goal. The fact that there were minor differences between the agreed-upon modifications and the Hazelbakers’ original architectural approval application did not alter the fact that the association was forced to pursue legal action to bring the Hazelbakers’ property into compliance.

Moreover, the Hazelbakers insisted that the modifications were driven by necessity; engineering standards required that some dimensions be changed, and some of the original specified materials were no longer available. The appeals court determined that the Hazelbakers could not claim success in any aspect of the litigation.

The Hazelbakers further argued that the trial court abused its discretion in awarding attorney’s fees to the association. The appeals court, however, determined that the trial court had no discretion under the act to deny the association’s request for attorney’s fees. It only had discretion as to the amount of the fees awarded, and the trial court exercised that discretion by deciding to award the association less than the amount requested.

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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All Lots Must be Bound by Same Restrictions for Common Interest Community

Khan v. Alpine Haven Property Owners’ Association, Inc., No. 15-303 (Vt. Sept. 2, 2016)

Covenants Enforcement: Rejecting the general plan development doctrine, the Supreme Court of Vermont held that non-uniform subdivision deed restrictions were insufficient to establish a common interest community under the Vermont Common Interest Ownership Act.


Sarita and Nafis Kahn, Eric and Katherine Gadpaille, Judith LaPointe, and Robert Earley (collectively, the plaintiffs) owned property in the Alpine Haven subdivision in the Towns of Montgomery and Westfield, Vermont. The owners sued Alpine Haven Property Owners’ Association, Inc. (association), asserting that they were not required to be association members. The association counterclaimed, seeking a determination of whether the plaintiffs could resign from the association and rescind their obligations to pay association fees.

In the 1960s, Hubert and Caroline Daberer assembled about 500 acres of land to create the subdivision. The Daberers never created a master plan or subdivision plat and never sought any general subdivision permit or approval. Over the next three decades, lots were conveyed to individual buyers by either the Daberers or their development company (collectively, Daberer).

Almost all of the lots depend on private roads for access from the public road. Each lot deed granted a right-of-way across the private roads to the public road. Beyond this, the deeds varied greatly. Most of the deeds obligated Daberer to maintain the private roads and supply water and garbage removal for the lot. Some of the deeds obligated Daberer to provide street lights and snow removal. However, some of the deeds provided for no services by Daberer.

Most of the deeds obligated the purchaser to pay Daberer a fee for such services, either a fixed fee or a reasonable fee. Others contained no payment obligations. Most of the deeds prohibited commercial use on the lots, but some contained no prohibition on use, and one specifically permitted commercial use.

In 1972, Daberer first created Alpine Haven Property Owner’s Association, Inc., but that entity became dormant. In the 1980s, several owners tried to establish another homeowners association, but it was never legally organized. In the 1990s, these two organizations essentially merged to form the association.

Daberer provided all the required services and collected all the service fees paid by owners until 1998. At that point, Daberer received $120,000 from the association in return for transferring all  subdivision roads and service and maintenance responsibilities to the association. This purchase cost was included in the fees charged to all subdivision owners.

Daberer also constructed and conveyed to the association recreational facilities, including a swimming pool, tennis courts, and trails. Owners who used these facilities were charged a separate fee.

In 2002, the association desired to take advantage of the Vermont Common Interest Ownership Act (VCIOA), which went into effect in 1999. The association held its first annual meeting and recorded a formal declaration unilaterally declaring that Alpine Haven was a common interest community subject to VCIOA. In 2011, the association adopted an amended and restated declaration, which prompted this lawsuit.

Portions of VCIOA applied to pre-existing communities without a declaration if other legal instruments created common, mutually beneficial restrictions or the relationship necessary to constitute a common interest community. The plaintiffs acknowledged that their deeds obligated them to pay the reasonable costs of certain services, including road maintenance, street lighting, and snow and garbage removal. However, the plaintiffs argued that they were not required to be members of the association and had no responsibility for other expenses asserted in the amended and restated declaration, such as the costs of meetings, insurance, and road expansion and improvements.

The trial court found that the deeds created a common interest community because they showed an intent to have a residential community with the necessary roads, street lights, and utilities and they established a common burden for each owner to pay for such benefits. The plaintiffs appealed.

The appeals court had previously rejected the premise that a general plan development was sufficient to bind all lots. Specifically, the appeals court declined to extend the restrictions to the lots not expressly bound, asserting that those owners interested in establishing a general plan development could either establish such a plan through a common declaration of covenants or obtain the agreement of their neighbors.

The appeals court found the Alpine Haven deeds insufficient to establish the required common burden on all owners. Although the owners who were not bound by deed restrictions may have had an equitable obligation to contribute funds toward upkeep and services based on use, such equitable obligation was not the same as an equitable servitude obligating an owner to pay regardless of use. A distinctive feature of a common interest community is an obligation by the owners to financially support the community’s common property, facilities, and activities, even if the owner does not use the facilities or participate in the activities.

Accordingly, the trial court’s judgment was reversed, and the case was remanded for consideration of how to calculate the fees for the services the association provided the plaintiffs.

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

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Owner Liable for Enforcement Actions Brought by Directors and Manager

Halverson v. Elm Creek Courthome Association, No. A15-1548 (Minn. Ct. App. July 18, 2016)

Covenants Enforcement: The Minnesota Court of Appeals upheld an association’s imposition of attorney’s fees against an owner where the association’s manager and several directors pursued harassment restraining orders against the owner’s son.


Elm Creek Courthome Association, Inc. (association) governed the Elm Creek community in Hennepin County, Minn. Janice Halverson owned and resided in a home in the community with her son, Dennis.

During 2005, Dennis sent the association’s manager harassing emails daily. The manager eventually told Janice that he would only accept verbal communications from her so that he could verify the communication was coming from Janice rather than Dennis. The harassment seemed to subside until 2010, when Dennis began continuously harassing the manager and three association board members.

Dennis would follow the manager around the property, yelling and filming him, and on one occasion tried to block the manager from getting into his vehicle. Dennis then posted the videos on the internet. He would also stalk the directors outside of their homes.

By April 2011, the board engaged an attorney to help deal with the harassment. The attorney sent Janice a letter warning that, if the harassment continued, the board would consider seeking harassment restraining orders (HROs) against Dennis and assess the costs against Janice’s unit. A warning letter was also sent to Dennis.

The harassment continued, and the board believed that Janice was acting in conjunction with Dennis. The board pursued HROs on behalf of the manager and three directors. The trial court indicated that the individuals should pursue the HROs, so the association was dismissed as party to the action, and the trial court granted the HROs to the manager and the directors.

As it had warned, the association assessed the attorney’s fees against Janice’s unit. She paid the assessment but brought two conciliation claims against the association, seeking to recover the amount paid. The conciliation court denied the claims, and Janice appealed to the trial court.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the association. The trial court found that, even though the association was not a party to the individual HRO actions, it was not barred from assessing the attorney’s fees it had incurred pursuing the HROs. Janice appealed.

The Elm Creek governing documents specifically permitted the association to charge the costs associated with enforcing the declaration or rules against the offending owner. The declaration prohibited harmful or offensive activity in the units or common elements that is an annoyance or nuisance to others or interferes with the rights, comfort, or convenience of other residents. The rules further made the owner responsible for the actions of the unit’s residents, visitors, and guests.

In addition, the Minnesota Common Interest Ownership Act (act) provides that reasonable attorney’s fees and costs incurred to enforce the act or the association’s governing documents can be assessed against the unit owner. The appeals court noted that the act does not require that the association initiate the legal action to recover attorney’s fees.

The appeals court found that the rules and declaration prohibited Dennis’ harassing behavior and made Janice responsible for Dennis’ conduct. Moreover, Janice did not dispute that she was aware of her son’s activities and failed to stop them.

Accordingly, the appeals court upheld the summary judgment grant in the association’s favor.

Editor’s Note: The Editor thanks Lance Stendal of Omega Property Management in Maple Grove, Minnesota for contributing this case.

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

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Brochure Showing Elements Outside Subdivision Created Easement Over Retained Land

Byrd v. Mahrou, No. 03-14-00441-CV (Tex. App. July 22, 2016)

Developer Liability: The Court of Appeals of Texas determined that a recreational easement was created over the developer’s retained land where the subdivision’s marketing materials depicted a creek and dam located in the retained land.


In 2000, Reba Byrd began to develop a portion of her 1,502-acre cattle ranch near Johnson City, Tex., for residential use. She created the Byrd Ranch Estates subdivision on about 440 acres (section 1) at the ranch’s north end. A declaration of covenants, conditions, and restrictions (declaration) restricted the property to residential use.

She next created section 2 on another 498 acres also in the north portion of the ranch. Byrd retained the southern portion, which contained the entrance to the ranch. Residents had to travel through the southern portion to reach sections 1 and 2, and an easement for ingress and egress was recorded against the southern portion for the benefit of sections 1 and 2.

In 2006, Byrd sold an 85-acre parcel in the southern portion. The property was burdened by a residential-use-only restriction, but it was neither subdivided into lots nor made a part of Byrd Ranch Estates.

In 2007, after all of the section 2 lots had been sold, Byrd discovered that she had never submitted section 2 to the declaration. Byrd recorded a notice indicating that the declaration applied to section 2, and she asked all section 2 owners to ratify the notice. All section 2 owners ratified the notice except for Ali and Gypsie Mahrou.

Byrd sued the Mahrous for declaratory judgment (judicial determination of the parties’ legal rights), seeking to establish that the declaration applied to section 2 based on a common development plan.

The Mahrous counterclaimed, seeking a determination that the declaration either did not apply to section 2 or that it applied to the entire 1,502-acre ranch. They also sought recreational use of a creek and dam located in the southern portion.

The trial court determined that the declaration applied to section 2 but not the entire ranch. It also determined that the Mahrous had a recreational easement by estoppel (bar against denying a fact based on the party’s own conduct) over the southern portion to use the creek and dam. Byrd appealed the recreational easement grant, and the Mahrous appealed the ruling that the southern portion was not subject to the declaration.

To create an easement by estoppel, the owner of the land to be bound by the easement must say or do something to represent the existence of an easement, and the purchaser of the land benefitted by the easement must be induced into buying that land by relying on the representation.

Byrd contended that neither she nor her agents represented, either in writing or orally, a recreational easement. The Mahrous argued that they were induced into buying the property by the marketing flyers that depicted the lots for sale and included photos of the creek and dam.

In addition, an email from a sales agent to the Mahrous described the presence of water as an attractive feature, indicating that there were several ponds and creeks. The agent also stated that Byrd Ranch Estates was one of the best live water ranches in central Texas. The creek in the southern portion was the only live creek with running water as opposed to the stagnant ponds in the northern portion.

Based on the creek’s depiction in marketing materials and the agent’s representation, the appeals court found there was sufficient evidence to support the trial court’s conclusion that the Mahrous had a recreational easement over the southern portion.

For the entire ranch to be burdened by the declaration based on a common development plan, there had to be evidence that a common grantor intended to adopt such a plan both on the land being conveyed as well as the land retained. It was clear that there was a common plan for sections 1 and 2, but there was no evidence that Byrd intended the entire ranch to become residential. The inclusion of the creek and dam in the marketing materials was insufficient to bind the entire southern portion to the declaration.

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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Nevada’s Foreclosure Notice Provisions Found Unconstitutional

Bourne Valley Court Trust v. Wells Fargo Bank, N.A., No. 15-15233 (9th Cir. Aug. 12, 2016)

Federal Law and Legislation; Assessments: The Ninth Circuit Court of Appeals held that the Nevada Uniform Common-Interest Ownership Act’s opt-in notice provision for mortgagees was unconstitutional, rendering an association’s foreclosure of its super-priority lien invalid.


Parks Homeowners’ Association (association) governed a project in North Las Vegas, Nev. In 2001, Renee Johnson purchased a home in the project with a $174,000 mortgage, which was eventually assigned to Wells Fargo Bank, N.A. (Wells Fargo).

Johnson became delinquent in paying assessments, and the association recorded a lien against the home in August 2011 for the amount of $1,298. In October 2011, the association recorded a default notice and election to sell. Horse Pointe Avenue Trust purchased the property for $4,145 at the May 2012 foreclosure sale and then transferred the property to Bourne Valley Court Trust (Bourne Valley).

Bourne Valley sued Wells Fargo to quiet title (definitively establish property ownership) and provided evidence that the association had sent all default and foreclosure notices required by the Nevada Uniform Common-Interest Ownership Act (act). Relying on the Nevada Supreme Court’s decision in SFR Investments Pool 1, LLC v. U.S. Bank, N.A. (reported in the June 2015 Law Reporter), the U.S. District Court for the District of Nevada determined that Wells Fargo’s mortgage had been extinguished by the association’s foreclosure of its super-priority lien in accordance with the act.

The district court granted summary judgment (judgment without a trial based on undisputed facts) to Bourne Valley. Wells Fargo appealed to the Ninth Circuit Court of Appeals.

Despite the fact that the mortgage was issued some 10 years after the act was adopted, Wells Fargo argued that the act unconstitutionally stripped it of its priority security rights. The appeals court agreed, finding that the act’s “opt-in” notice scheme violated Wells Fargo’s due process rights under the Fourteenth Amendment to the U.S. Constitution. Before the association could foreclose on its lien, the act required it to send a notice of default and election to sell to each security-interest holder who had notified the association of its security interest at least 30 days prior to the default notice being recorded.

Bourne Valley argued that the act required associations to send foreclosure notices to mortgagees, even where the mortgagee had not notified the association of its security interest. The appeals court rejected this interpretation, finding that it would render the act’s express notice provisions entirely superfluous.

Three years after the association’s foreclosure, the act was amended to remove the opt-in notice provisions and to mandate that associations send foreclosure notices to all lien holders whose security interests would be affected by the association’s foreclosure. The appeals court viewed this amendment as further evidence that the act did not require actual notice to Wells Fargo at the time of the foreclosure.

Bourne Valley argued that no state action was present to implicate constitutional due process concerns. Before a state takes action that will adversely affect an interest in life, liberty, or property, the state must provide “notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”

The appeals court agreed that the foreclosure sale itself was a private action, but the Nevada Legislature’s adoption of the act was a state action. Wells Fargo did not complain about the foreclosure specifically. Rather, Wells Fargo argued that, absent the act, it would have had a fully secured priority interest in the unit. The appeals court agreed, holding that the act impermissibly shifted the burden to mortgagees to request notice of possible foreclosure action.

Accordingly, the district court’s judgment was vacated 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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Subcontractor’s Faulty Work Covered by Developer’s General Liability Insurance

Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., No. A-13/14 Sept. Term 2015, 076348 (N.J. Aug. 4, 2016)

Risks and Liabilities; Construction Defects: The Supreme Court of New Jersey held that a developer’s commercial general liability insurance covered damages resulting from a subcontractor’s faulty work.


Adria Towers, LLC (Adria) developed the Cypress Point Condominium in Hoboken, N.J. In 2004, after construction was complete and control of Cypress Point Condominium Association, Inc. (association) was turned over to the unit owners, the building experienced water intrusion.

The association sued Adria and several of its subcontractors for defective construction, including faulty work in the roofs, gutters, brick facades, siding, windows, doors, and sealants. The association claimed damage in the common areas and units, including damage to steel supports, exterior and interior sheathing and sheetrock, and insulation.

Adria filed a claim with Evanston Insurance Company (Evanston), who provided commercial general liability (CGL) policies to Adria from 2002 to 2006. Evanston denied the claim, and Adria filed a declaratory judgment action (judicial determination of the parties’ legal rights) against Evanston to determine whether the association’s claims were covered by the policies. The association also filed an amended complaint to determine whether there was coverage.

Evanston’s policy provided coverage for sums the insured was legally obligated to pay because of “property damage” caused by an “occurrence” during the policy period. The policy defined “property damage” as including physical injury to property including a loss of use, and “occurrence” was defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

There was an exclusion for “your work”—work performed by or on behalf of Adria, but the exclusion did not apply if the work was performed on Adria’s behalf by a subcontractor (your work exclusion).

Evanston denied any obligation to defend or indemnify Adria. It also filed a third-party complaint against Crum & Forster Specialty Insurance Company (Crum & Forster), who issued CGL policies with the same coverage language to Adria from 2006 to 2009, asserting that if Evanston owed an obligation to Adria, then Crum & Forster’s responsibility should also be adjudicated.

Evanston and Crum & Forster (collectively, the insurers) filed motions for summary judgment (judgment without a trial based on undisputed facts), asserting that they were not liable because the subcontractors’ faulty work did not constitute an occurrence that caused property damage. The trial court agreed, finding that the “your work” exclusion applied because the damage arose entirely from faulty work performed by or on behalf of Adria. The association appealed.

The appeals court reversed, determining that unintended and unexpected consequential damages to the common areas and units caused by the subcontractors’ defective work constituted property damage and an occurrence under the policies. The insurers appealed.

The insurers argued that the appeals court improperly shifted the risks inherent in construction from the developer and general contractor, who are in the best position to control a subcontractor’s work, to their insurers. They also asserted that no “accident” occurred that would constitute an “occurrence” under the policies. The insurers argued that defective construction is not accidental because it is one of the normal, frequent, and predictable consequences of the construction business.

Since the policies did not define “accident,” the supreme court applied the dictionary definition of “unforeseen and unplanned event or circumstance.” The supreme court concluded that an “accident” under the policies included unintended and unexpected harm caused by negligent conduct, but it still needed to determine whether the damages were foreseeable. The policies did not cover the defective work itself, but they did cover unforeseen damage to the nondefective building portions caused by poor work.

The insurers argued that damage to an insured’s work caused by a subcontractor’s faulty work was a normal, predictable risk of doing business and could not constitute a covered accident. The supreme court disagreed, finding that damage caused by negligent work was an unforeseen and unplanned circumstance, making it an “accident” and an “occurrence.”

Lastly, the supreme court concluded that water damage arising from faulty subcontractor work was a covered loss because the “your work” exclusion specifically excluded work performed by a subcontractor.

The supreme court determined that the trial court erred in granting summary judgment to the insurers. Accordingly, it affirmed the appeals court’s judgment 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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