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.

Third-Party Exemption Not Limited to Builders

Moore & Associates, Memphis, LLC v. Greystone Homeowners Association, Inc., No. W2016-00721-COA-R3-CV (Tenn. Ct. App. Jan. 20, 2017)

Greystone Homeowners Association, Inc. (association) governed the Greystone community near Memphis, Tenn., which had been developed by Greystone General Partnership (declarant). In 2010, the declarant was facing bankruptcy and foreclosure and sold 27 lots to Moore & Associates, Memphis, LLC (Moore).

Immediately after purchasing the lots, Moore paid the association $25,000. Moore described the payment as a gift and denied that it was paid as assessments. Under the Greystone declaration of covenants, conditions, and restrictions (declaration), the declarant was not required to pay assessments for its lots (declarant exemption). In addition, a third party purchasing a lot from the declarant for the purpose of constructing a single-family residence for sale to the general public was also exempt from assessments so long as the third party did not occupy the property (third-party exemption).

In 2013, Moore engaged a contractor to construct one home, which it sold. It also sold two unimproved lots between 2012 and 2013. However, Moore did not construct additional homes. In January 2014, the association filed liens totaling $128,100 on Moore’s remaining lots for unpaid assessments.

The following month, Moore sued the association, seeking a declaratory judgment (judicial determination of the parties’ legal rights) regarding the liens and damages for slander of title (false and malicious statement disparaging a person’s property title). Moore asserted that it was exempt from assessment under the third-party exemption.

The association responded that Moore was not exempt from assessment because it was not the declarant and did not purchase the lots for the purpose of constructing homes. Moore admitted that it was not a contractor and could not legally construct homes itself. The association also showed that Moore was advertising 25 unimproved lots for sale.

The trial court found that, although Moore had purchased all of the declarant’s remaining lot inventory, Moore did not acquire the declarant’s rights and was not entitled to the declarant exemption. However, the trial court ruled that Moore was exempt under the third-party exemption because Moore’s intention in purchasing the lots was to construct and sell homes to the public. The trial court held that the term “constructing” did not require that a third party hold a contractor’s license to qualify as a third party constructing residences under the third-party exemption.

The trial court dismissed the association’s assessment claims. It also dismissed Moore’s slander of title claims because Moore showed no damages arising from the liens, and Moore did not present any evidence of malicious activity by the association. The association appealed.

The association argued that Moore did not qualify for the third-party exemption since it could not actually construct homes. Moore asserted that the term “constructing” should be interpreted more broadly to mean one who causes homes to be constructed.

The appeals court did not find the term “constructing” to be ambiguous or require testimony to determine the word’s meaning. The trial court allowed evidence on the matter, but the parties’ expert witnesses offered differing opinions.

Moore’s expert opined that assessment liability commenced when a person moved in, regardless of the person’s original motive. The association’s expert opined that Moore was a land speculator and not the type of builder that the typical builder exemption was designed to protect. The expert stated that builders in the Memphis area normally had homebuilding experience and a contractor’s license. However, the expert also admitted that the third-party exemption was not the usual builder exemption.

The appeals court stated that it would be wrong to interpret the third party exemption to make it comply with standard provisions that protect only builders. The appeals court further declined to adopt an interpretation that required the third party to be a builder or hold a contractor’s license, stating that such an interpretation would be an extension of the declaration’s terms.

The appeals court concluded that Moore was entitled to the third-party exemption. Accordingly, the trial court’s judgment was affirmed.

Board Members Remain in Office if Successors Not Properly Elected

Parker Estates Homeowners Association v. Pattison, No. 47402-6-II (Wash. Ct. App. Dec. 28, 2016)

Parker Estates Homeowners Association (association) governed the Parker Estates subdivision in Camas, Wash. The association’s bylaws established four elected officer positions, but not a board of directors.

Under the bylaws, the officers were to be elected at a membership meeting at which a quorum representing a majority of all lot owners was present. Since there were 195 lots, a quorum required 98 members to be present. The officers were to be elected for one-year terms or until their respective successors were elected.

In 1998, the association’s officers recorded an amendment to the bylaws that provided for a board of directors. The amendment stated that it was adopted by a majority of the officers and by a vote of 71 to 2 of the association members. Instead of creating a separate provision in the bylaws amendment for electing directors, the association simply used the bylaws’ officer election method for electing directors.

In 2006, a quorum of the association members elected directors. Later that year, the board adopted a late fee for delinquent assessments. However, since 2007, the association failed to achieve a quorum at its annual meetings, and elections did not occur. Instead, the board would elect persons to fill the vacancies, relying upon a bylaws provision providing that officers held office for one-year terms or until their successors were elected.

In 2009, William and Lesley Pattison purchased a home in the community, but they refused to pay the association assessments. After sending several demand notices to the Pattisons, the association placed a lien on the Pattisons’ property in the amount of $1,450 for unpaid assessments plus late fees. The association also filed a collection action against the Pattisons.

The Pattisons contended that the association had no authority to charge assessments or late fees or file a lien because it failed to follow Washington law and the association’s bylaws in creating a proper board. Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts).

The trial court determined that the association had failed to follow its bylaws because it had not elected officers since 2006 and that the persons serving as directors were not properly elected and had no authority to act for the association. The trial court further held that all assessments, fees and liens against the Pattisons were void. The association appealed.

The bylaws did not contain an amendment procedure, so the appeals court applied the default rules under the Washington Nonprofit Corporation Act (act), which vested the authority to amend bylaws or adopt new bylaws in the board of directors unless the bylaws or the articles of incorporation provided otherwise.

The act defined a board of directors as the group of persons vested with managing the corporation’s affairs, irrespective of the name given to such persons. The appeals court found that, prior to the bylaws amendment, the association’s officers operated as the board of directors for the act’s purposes since the bylaws gave them the authority to manage the association’s affairs.

Thus, the act gave the association’s officers the authority to amend the bylaws. The appeals court held that the bylaws amendment was properly adopted and valid since no one challenged the amendment’s statement that it had been approved by a majority of the officers.

The Pattisons insisted that the board was not properly constituted since elections had not been held for years. The appeals court disagreed, finding that the board’s process for appointing new directors in order to maintain a functional board was a proper interpretation of the bylaws. The appeals court stated that a board’s interpretation of its governing documents is to be given great deference and should be invalidated only if such interpretation is arbitrary or capricious.

Moreover, the act provided that a vacancy on the board could be filled by the remaining board members, even if less than a quorum. The act also provided that a director is elected or appointed to fill a vacancy for the unexpired term of the predecessor in office. The Pattisons argued that this meant that the statutory appointment power lasted only for the one-year term established in the bylaws.

The appeals court disagreed, holding that the effect of the bylaws provision coupled with the act was that a director’s term does not expire until a valid election is held, and the board could continue to appoint successor directors even after the initial one-year term.

Accordingly, the appeals court held that the trial court erred in determining that the board was improperly constituted and that it had no power to assess or collect fees or impose liens.

©2017 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

Recreational Vehicle Parking Restrictions Liberally Construed

Fashion Plantation Estates Property Owners Association v. Sims, No. 16-CA-237 (La. Ct. App. Dec. 21, 2016)

Fashion Plantation Estates Property Owners Association (association) governed the Fashion Plantation Estates Subdivision in Hahnville, La. Albert and Gilda Sims owned a home in the subdivision.

The original subdivision restrictive covenants prohibited parking or storing boats, campers, etc. in front of homes. In 2004, the Sims purchased a boat and parked it in their driveway next to the garage door.

The covenants were amended in 2010 to expand the parking prohibition to include recreational vehicles and trailers and to provide that such items would not be permitted within 100 feet of the street unless parked behind a six-foot privacy fence or in a garage.

In April 2015, the association sent the Sims notice that they were in violation of the covenants because the boat was parked in front of their home. The association sent three additional notices advising the Sims of the violation and warning that a $15 per day fine would be imposed, until the violation was corrected, plus costs and attorney’s fees. The Sims ignored the notices.

In August 2015, the association filed suit seeking to permanently enjoin the Sims from violating the covenants and to recover the fines, costs, and attorney’s fees. The Sims denied that the covenants were properly amended.

The evidence showed that the boat was parked 54.4 feet from the street, was not parked behind a privacy fence, and was parked in front of the furthest wall to the right that faced the street. The Sims home did not have a straight “front”; rather, there were multiple staggered walls that faced the street.

An association officer testified that the purpose of the parking restriction was to maintain the value of the subdivision property instead of allowing it to look like a junkyard. Sims admitted that the boat was parked in front of a portion of the home facing the street, but he described the location as the home’s side since the boat was parked between the side yard and the garage door that opened to the side.

The trial court entered judgment in the Sims’ favor, finding that the 2010 amendment was not effective because the covenants could not be amended until the initial 25-year term had expired. In addition, the trial court found the covenants ambiguous because there was nothing in the covenants that defined “in front of” and the covenants did not otherwise use the word “front” in a manner that could aid in interpretation. The trial court determined that placing the boat in front of the garage on the side of the home did not violate the original covenants. The association appealed.

The association contended that the house had multiple staggered front walls, but all integrated into one architectural pattern. Such pattern included the portion behind the boat. Thus, the association argued that the evidence supported the contention that the boat was parked in front of the home.

When the covenants were originally adopted, building restrictions were strictly construed in favor of the free use of the property. Since that time, however, the Louisiana Homeowners Association Act was adopted, which provided that the existence, validity, or extent of restrictions in an association were to be liberally construed to give effect to its purpose and intent.

Under such act’s liberal application, the appeals court held that the trial court erred in concluding that the boat was not parked in front of the home. Accordingly, the trial court’s judgment was reversed, and the case remanded for the trial court to issue a permanent injunction prohibiting the Sims from violating the original covenants.

Association Liable for Recording Covenants Without Authority

Van Loan v. Heather Hills Property Owners Association, Inc., No. 2D15-5430 (Fla. Dist. Ct. App. Dec. 30, 2017)

Heather Hills was created in 1967 as a 300-lot mobile home subdivision in Manatee County, Fla. Restrictive covenants were imposed on the subdivision by a recorded plat and declaration of covenants (declaration). Neither the plat nor the declaration mentioned a homeowners association.

Heather Hills Property Owners Association (association) was created in 1969 as a voluntary association to promote the recreational and charitable interests of the Heather Hills residents. Erik Van Loan, John Morelli, Charles Roodhouse and Kerry Koontz (the homeowners) were lot owners who chose not to join the association.

In 2012, the association amended its articles of incorporation (amended articles) to provide that all Heather Hills lot owners must be association members. The amendment also stated that the association’s purpose was to manage a community intended as housing for older persons under the Fair Housing Act (55+ community) and authorized the association to adopt rules to enforce the 55+ requirement.

Additionally, the association recorded an amendment to the declaration (declaration amendment) that purported to convert Heather Hills to a 55+ community. The declaration amendment required that at least one person residing in each dwelling be at least age 55 and gave the association the power to approve lot transfers after proof of a buyer’s age is provided.

The declaration amendment was ambiguous about its application. It expressly provided that the declaration amendment was binding on all Heather Hills lots, but it also stated that the declaration amendment’s covenants, conditions and restrictions were imposed on those lots whose owners consented to the amendment. The declaration amendment further stated that it was binding on all association members.

The homeowners sued the association for declaratory judgment (judicial determination of the parties’ legal rights), to quiet title (definitively establish property ownership) and for slander of title (false and malicious statement disparaging a person’s title to property). The homeowners asserted that they had not consented to becoming association members or living in a 55+ community.

The association moved to dismiss the case, arguing that the declaration amendment clearly showed it applied only to those owners who had consented. The homeowners insisted that declaratory judgment was necessary because, when the amended articles were read in conjunction with the declaration amendment, it was unclear which lots were subject to the declaration amendment. The trial court found that the declaration amendment applied only to owners who had consented and dismissed the case. The homeowners appealed.

The appeals court found the homeowners’ claim of doubt about their rights was reasonable because the declaration amendment was recorded against all Heather Hills lots. While the declaration amendment stated that it applied only to consenting owners, there was no indication as to which owners had consented or which lots were bound.

Further, the declaration amendment provided that it was binding on all association members, but there was neither an explanation as to which owners were members nor a statement that not all owners were members. The amended articles also incorrectly stated that all owners were members.

Moreover, the appeals court questioned the declaration amendment’s legitimacy since the declaration did not contemplate an association or give the association the power to amend the declaration. The appeals court held that the association placed a cloud on the homeowners’ titles when it chose to record the declaration amendment against all Heather Hills lots. Thus, the trial court erred in dismissing the homeowners’ claims for declaratory judgment and to quiet title.

The appeals court also found that the homeowners had presented enough evidence to support a claim for slander of title. Since 2008, the association had posted signs at Heather Hills’ entrance and distributed fliers stating that Heather Hills was an age-restricted community open only to persons over age 55.

The homeowners alleged their lots had lost value and their ability to sell was impaired by these false statements. The appeals court agreed that, after reading the amended articles and the declaration amendment and viewing the signs, potential buyers would not be aware that the homeowners’ lots were not part of a 55+ community. As such, the trial court incorrectly dismissed the homeowners’ claim for slander of title.

Accordingly, the trial court’s order was reversed and the case remanded.

©2017 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

Association Discriminates Against Disabled Resident by Disallowing Resident’s Large Vehicle

Kuhn v. McNary Estates Homeowners Association, Inc., No. 6:16-cv-00042-AA (D. Or. Jan. 12, 2017)

McNary Estates Homeowners Association, Inc. (association) governed an Oregon subdivision in which Renee and Gary Kuhn owned a home. The Kuhns’ daughter, Khrizma, had significant physical and mental disabilities. Khrizma was unable to use a toilet by herself and suffered from severe bladder and bowel incontinence.

In April 2015, after consulting Khrizma’s doctors, the Kuhns decided to purchase a small recreational vehicle (RV) equipped with a toilet and shower for Khrizma’s transportation. The RV would ensure that Khrizma was always close to a toilet, and the shower could be used to clean Khrizma if necessary while away from home. Khrizma’s condition also required a vehicle where she could lie down.

The McNary Estates declaration of covenants, conditions, and restrictions (declaration) prohibited parking large vehicles, including RVs, in front of homes. The RV the Kuhns wanted would not fit in their garage, so they asked the association for an accommodation to the restriction. The Kuhns submitted letters from Khrizma’s doctors and medical records explaining the medical issues and why Khrizma needed to be close to a toilet at all times.

The association suggested two alternatives—park the RV at an offsite storage facility or install a chemical toilet in a smaller van. The Kuhns explained why neither of these alternatives would work. Renee would be without means of transporting Khrizma to the storage facility while Gary was at work with the family car.  In addition, the smaller van did not have a shower or space for Khrizma to lie down, and access to the toilet would be more difficult. The association offered to mediate the issue with the Kuhns, but they rejected the offer, stating that Khrizma’s medical issues were not up for discussion.

In June 2015, the association raised safety concerns, stating that the RV would protrude into the street. The Kuhns presented photos and measurements showing that the RV was one foot shorter than the driveway and would not protrude into the street. The association said it lacked the authority to grant the request. The Kuhns purchased the RV anyway and parked it in the driveway.

The association informed the Kuhns that the RV was blocking other drivers’ sightlines. The Kuhns lived on a short, dead-end street, so the only homeowner whose view would be obstructed was their neighbor, Linda Strunk. The Kuhns purchased a parabolic mirror and offered to install it to address the visibility problem. Strunk rejected the mirror, stating that she did not want to use it.

In August 2015, the association formally rejected the Kuhns’ request, explaining that the accommodation requested related to Khrizma’s transportation and was not necessary for her use and enjoyment of the home.

The Kuhns sued the association and its president for negligence and violations of the federal Fair Housing Act (FHA) and the Oregon Fair Housing Act. Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts).

FHA prohibits discrimination in the provision of services or facilities in connection with a dwelling on the basis of disability. Discrimination includes a refusal to make reasonable accommodations in rules, policies, or practices when such accommodations may be necessary to afford the disabled person equal opportunity to use and enjoy a dwelling.

To prove necessity, the Kuhns had to show that Khrizma likely would be denied an equal opportunity to enjoy the home without the accommodation. Likening the case to those where a request for a handicapped parking space was denied, the court found that, if Khrizma had a medical need to be transported in an RV, she was effectively denied a parking space when the parking variance was denied.

Moreover, the Kuhns provided commonsense reasons why the association’s proffered alternatives were rejected. While not every accommodation chosen by a disabled person is reasonable, the association is not permitted to select which accommodation it deems most reasonable.

The court explained that it was not the Kuhns’ burden to show that they chose the best or the least burdensome accommodation. FHA does not require persons requesting an accommodation to be reasonable in discussing alternatives. It merely requires them to prove the accommodation requested may be necessary to permit use and enjoyment of the home.

The association contended that a question remained as to the accommodation’s reasonableness since it made the street unsafe for other drivers. The court found that the Kuhns had addressed the safety concerns by showing that the RV would not protrude into the street and by purchasing a parabolic mirror, which appeared to mitigate or eliminate the only documented safety issues.

It was the association’s burden to rebut this evidence, but the only evidence offered was Strunk’s statement that she was in a near accident because the RV blocked her view. Strunk did not explain why she rejected the mirror which was designed to address this particular risk. As such, the court held that the evidence was insufficient to create a material fact question about reasonableness.

The court entered summary judgment in the Kuhns’ favor on the federal and state fair housing claims.

Invalid Board Lacked Authority to Authorize Association’s Lawsuit

4934 Forrestville Condominium Association v. McKinley, No. 1-15-2519 (Ill. App. Ct. Dec. 22, 2016)

4934 Forrestville Condominium Association (association) governed a condominium in Cook County, Ill. In 2013, the association sued unit owner Nicole McKinley because she failed to pay assessments. The association sought possession of the unit (forcible entry and detainer action) and a judgment for the unpaid assessments plus costs and attorney’s fees.

McKinley moved to dismiss the case, asserting that the board of directors was invalid and lacked the authority to bring the action. She argued that the board was required to have three members, but the association admitted it had only two directors and that both directors represented the same unit, which violated the Illinois Condominium Property Act.

McKinley also contended that neither director was validly elected. She said that both directors had been serving on the board since at least 2007; however, their terms had expired, and neither had been reelected because no annual meeting or election had been held since 2007. McKinley asserted that, without having a proper board in place, the association lacked standing to sue.

Instead of addressing McKinley’s arguments as to the board’s validity, the association simply asserted that its standing to sue was not barred by McKinley’s assertions. The trial court did not consider the board’s validity, determining that this case was not the proper forum for McKinley’s arguments. The Illinois Supreme Court had previously held that matters that were not germane to a forcible entry action should not be used in a forcible entry case. Specifically, if the defense did not nullify the owner’s assessment obligation, it is not germane to the forcible entry action.

The trial court dismissed McKinley’s motion, and the case proceeded to trial. The trial court ruled in the association’s favor and awarded the association possession of the unit, $7,886 in assessments, $494 in costs, and $6,000 in attorney’s fees. McKinley appealed.

The appeals court found that the forcible entry law cited by the trial court was not applicable to this case. It determined that McKinley was not challenging her obligation to pay assessments. Rather, she questioned whether the board had the authority to initiate the lawsuit, which question was certainly germane to the case.

The appeals court also found sufficient support for McKinley’s claims that the board was invalid. Both the declaration of condominium (declaration) and the Illinois Corporation Act (Corporation Act) required that the board consist of three members. The declaration also provided that the directors were elected for two-year terms.

The Condominium Act further required the association’s bylaws to provide that, if there are multiple owners of a single unit, only one is eligible to serve on the board at one time. However, neither the declaration nor the association’s bylaws included such mandate. The declaration further obligated the association to conduct a membership meeting each year.

The appeals court ruled that the association’s authority to sue depended on the action being authorized by a valid board. The association never disputed McKinley’s allegations. While there was insufficient evidence from which the appeals court could determine definitively whether the board was valid or invalid, the appeals court ruled that such issue must be examined by the trial court.

Accordingly, the appeals court reversed the trial court’s denial of McKinley’s motion to dismiss and vacated the trial court’s judgment. The case was remanded with instructions to the trial court to conduct a hearing at which evidence would have to be presented to establish whether the board’s composition satisfied the requirements of the declaration, the Corporation Act, and the Condominium Act.

Developer Still Liable for Subdivision Infrastructure After Conveying Property

United Bank & Trust Company (bank) gave Furlong Development Company, LLC and its owner, Gordon Stacy, (collectively, Furlong) a loan to develop The Enclave, a 90-lot subdivision in Georgetown, Ken.

The Georgetown-Scott County Planning and Zoning Commission (commission) required Furlong to provide a surety bond in an amount equal to 125 percent of the estimated cost to build the roads and other subdivision infrastructure components. Platt River Insurance Company (surety) issued three bonds totaling $148,000, and Furlong indemnified the surety against any losses.

Furlong installed most of the subdivision infrastructure to the point where houses could be built, but the market crashed before any houses were built. The land was worth less than the loan amount, and Furlong defaulted on the loan. The bank agreed to accept the property by deed in lieu of foreclosure. In return, the bank released Furlong from further liability under the loan agreement.

The bank asked the commission to call the bonds and place the bond proceeds in escrow to reimburse the bank for the cost of completing the required subdivision infrastructure. The commission called the bonds, but both the surety and Furlong refused to pay.

Furlong sued the commission and the bank, arguing that the bonds were not callable. Furlong also asserted that payment under the bonds would result in the bank being unjustly enriched because the bank would end up owning the land without having to incur the infrastructure costs. In addition, Furlong contended that, by accepting the deed in lieu of foreclosure, the bank had released Furlong from further obligations with respect to the land.

The trial court found that neither the surety nor Furlong was released from liability under the bonds and granted summary judgment (judgment without a trial based on undisputed facts) in favor of the bank and the commission. Furlong appealed, and the court of appeals affirmed the trial court’s judgment. Furlong further appealed to the Supreme Court of Kentucky.

Furlong urged the supreme court to adopt the reasoning of the Florida District Court of Appeal in Westchester Fire Insurance Co. v. Brooksville. In that case, the Florida court determined that the city ordinance required a bond to be posted to ensure that future owners would be able to connect their lots to the city’s utility services. The Florida court concluded that neither the developer nor the surety was obligated to pay the bond because no homes existed. It reasoned that requiring payment on the bonds would create a cash windfall for the city because the city was not required to install utilities until a home was constructed.

The supreme court declined to follow the Westchester approach because it found that the bonds clearly provided that the surety, on Furlong’s behalf, was obligated to pay the bonds. Neither the Georgetown ordinance nor the bonds implied that home construction was required before the bond obligations were triggered. Moreover, the land had undergone significant subdivision development and was irreparably converted from rural farm land.

Further, the bank’s release documents specifically stated that the bank did not assume  Furlong’s obligations or liabilities under any third party agreements and that such obligations and liabilities remained Furlong’s responsibility. The supreme court determined that the bank’s request that the commission call the bonds did not violate the bank’s release agreement with Furlong.

Furlong maintained that it was not liable for the bonds because the commission had not suffered any damages. However, the supreme court found that damages were not a prerequisite to recovery from the surety. A performance bond is intended to guarantee completion of the improvements it covers, and the bond’s beneficiary need not incur any expense or perform any work on the improvements before collecting on the bond.

The supreme court further held that Furlong could not prevail on an unjust enrichment theory because that remedy is unavailable when the terms of an express contract control. In this case, the bond agreement expressly controlled the bond payments.

Lastly, Furlong argued that it should not be held liable for the bank’s changes to the development plan. The supreme court agreed that Furlong’s and the surety’s liability was limited to the subdivision improvements required under the original bonded plat. Infrastructure items in addition to or materially distinct from what was in the original plat were not agreed to by Furlong or the surety.

Accordingly, the decisions of the appeals court and the trial court were affirmed.

Loan Servicing Company Entitled to Protections for First Mortgagees

San Matera the Gardens Condominium Association, Inc. v. Federal Home Loan Mortgage Corporation, No. 4D15-4400 (Fla. Dist. Ct. App. Jan. 4, 2017)

San Matera the Gardens Condominium Association, Inc. (association) governed a condominium in Palm Beach County, Fla. A unit owner in the condominium gave a promissory note and mortgage to Federal Home Loan Mortgage Corporation (Freddie Mac) in return for a loan from Freddie Mac.

When the unit owner failed to make the required loan payments, Freddie Mac’s loan servicer, Bayview, initiated foreclosure proceedings. Bayview had possession of the promissory note, which had been endorsed by Freddie Mac. Bayview acquired the unit at the foreclosure sale and then transferred it to Freddie Mac. A dispute arose between Freddie Mac and the association concerning Freddie Mac’s liability for past due assessments, and litigation followed.

The Florida Condominium Act (act) provides that a unit buyer is jointly and severally liable with the previous owner for all unpaid assessments that were due at the time the buyer acquired the unit. However, the act includes a safe harbor provision that limits the liability of a first mortgagee or its successor or assignee who acquires title by foreclosure.

The trial court determined that Bayview qualified as the first mortgagee and was entitled to the safe harbor protection. The trial court ruled that Freddie Mac was liable for unpaid assessments owed by Bayview at the time Freddie Mac acquired the property, but it was not responsible for the balance due from the former unit owner. The association appealed.

The association asserted that only the note’s owner was entitled to protection under the safe harbor provision. Since Bayview was not the note’s owner, the association argued that both Bayview and Freddie Mac were jointly and severally liable for all past due assessments. Freddie Mac asserted that Bayview qualified as a first mortgagee because it had physical possession of the note.

The term “first mortgagee” is not defined in the act, but “successor or assignee” is defined as the subsequent holder of the first mortgage. However, Florida courts have generally found that “first mortgagee” is broader than just the original lender. The first mortgagee has been held to be the holder of the mortgage lien with priority over all other mortgages. The Florida courts have also defined the term “holder” as the owner or possessor of the instrument. Thus, ownership of the note is not essential for safe harbor protection.

Accordingly, the appeals court held that Bayview, as the note’s holder, qualified as the first mortgagee under the act and was entitled to the safe harbor protection. Further, Freddie Mac, as the assignee of the first mortgagee, also qualified for the safe harbor protection.

The trial court’s order granting summary judgment (judgment without a trial based on undisputed facts) in Freddie Mac’s favor was affirmed.