September 2017
In This Issue:
Recent Cases in Community Association Law
Winterizing a Unit Does Not Make Lender Liable for Association Assessments
Delaying Common Area Repair Proves Costly for Association
Designated User Is Liable for Memberís Club Debt
Association Not Authorized to Suspend Use Privileges
Failure to Reserve an Easement in a Pier Leaves Community Without Creek Access
Owners Entitled to Defense Under D&O Policy
Associationís Insurer Not Liable for Managerís Fees
Vacation Rental Was Not Commercial Activity
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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 illustrations 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. In addition, the College of Community Association Lawyers prepares a case law update annually. Summaries of these cases along with their references, case numbers, dates, and other data are available online.

Winterizing a Unit Does Not Make Lender Liable for Association Assessments

Woodlands Community Association, Inc. v. Mitchell, No. A-4176-15T2 (N.J. Super. Ct. App. Div. Jun. 6, 2017)

Assessments: The Superior Court of New Jersey, Appellate Division, held that a lender who changed the locks and winterized a unit after the borrower defaulted and vacated did not constitute a mortgagee in possession responsible for association assessments.

Woodlands Community Association, Inc. (association) governed a condominium in Atlantic County, NJ. Adam Mitchell owned a unit in the condominium.

Mitchell defaulted on his mortgage to Nationstar Mortgage LLC (Nationstar) and vacated his unit. Mitchell was also delinquent in his assessments and owed substantial amounts to the association. After Mitchell moved out, Nationstar changed the locks on the unit and winterized it by draining the pipes and turning on the heat to prevent freezing.

In 2014, the association sued Mitchell to recover the delinquent assessments. The association also sued Nationstar, alleging that it was responsible for assessments since it possessed the unit. Both the association and Nationstar filed motions for summary judgment (judgment without a trial based on undisputed facts).

Nationstar filed a foreclosure action against Mitchell, and final foreclosure judgment was entered in December 2015. However, Nationstar had not listed the property for sale at the time the summary judgment motions were heard.

The trial court determined that Nationstar was liable for assessments as a mortgagee in possession, reasoning that Nationstar had exclusive control of the property. Consequently, the trial court granted summary judgment in the association’s favor and awarded the association attorney’s fees. Nationstar appealed.

A lender does not become a unit owner until a property is sold pursuant to foreclosure. However, a mortgagee in possession of the property is liable for association assessments that accrue during the mortgagee’s possession. When the mortgagee takes the management and control of a property out of the owner’s hands, it is deemed to be a mortgagee in possession.

Nationstar did not occupy, make repairs, or collect rents for the unit. The association argued that Nationstar demonstrated control over the unit when it changed the locks. However, the appeals court stated that the term “mortgagee in possession” was misleading because more was required than simple possession to qualify as a mortgagee in possession.

Instead, dominion and control over the property was required. Examples of dominion and control included maintaining, repairing, using, and controlling the property, such as paying bills, taxes, or insurance premiums or collecting the rents. The appeals court was not persuaded that Nationstar’s minimal efforts to protect the property and its security interest were sufficient to convert it into a mortgagee in possession.

Alternatively, the association argued that it was entitled to reimbursement for services rendered to Mitchell’s unit as an equitable remedy for unjust enrichment. However, to establish unjust enrichment, the association must have expected reimbursement from Nationstar when the association provided the service. Since Nationstar was not an association member and was not entitled to participate in association affairs, the association could not have expected compensation from Nationstar.

Also, to establish unjust enrichment, the unit owner would have to receive a benefit that was unjust. However, the services and benefits the association provided to Mitchell’s unit were provided equally to all units for the upkeep of the entire condominium.

The association further urged that a mortgagee should be deemed a mortgagee in possession if it does not place the unit up for sale within a certain time following the final foreclosure judgment. The appeals court stated that there may be some merit in this argument, but it declined to take up the issue since it would not change the outcome of this case.

Accordingly, the appeals court reversed the summary judgment grant to the association and ordered that summary judgment be entered in Nationstar’s favor.

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

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Delaying Common Area Repair Proves Costly for Association

Lakeside Village Homeowners Association, Inc. v. Belanger, No. 08-15-00214-CV (Tex. App. Jun. 14, 2017)

Association Operations: The Texas Court of Appeals found an association violated the declaration by delaying common areas repairs that led to substantial unit damage.

Lakeside Village Homeowners Association, Inc. (association) governed the Lakeside Village community of 498 townhomes in Rockwell County, Tex. In 2003, Alfred Belanger purchased a townhome in a two-unit building (duplex).

An inspection report obtained by the association that same year revealed that water was standing at the corner of the home. A drainage pipe that collected water from a retaining wall located five feet behind the duplex was supposed to direct water away from the property but instead carried the water to a catch basin in the crawlspace beneath the duplex.

The seller advised Belanger that he had added a French drain and additional gutters as preventative measures. The association speculated that the French drain was directing the water to the catch basin and advised Belanger to address the issue, but he did not.

A 2005 engineering study revealed that the retaining walls were structurally failing and needed to be replaced. The next year, the association proposed a $150,000 special assessment to pay for the project, but the members voted against it. The association had sufficient funds in reserve, but the project would have exhausted the reserve account. Consequently, the association did not replace the retaining walls behind the duplex, but proceeded to replace other retaining walls in phases.

In 2009, Belanger notified the association that water appeared to be flowing through the property. The driveway was cracking and held standing water. Despite the driveway being part of the common area, the association notified Belanger that the repairs were his responsibility.

In 2010, Belanger notified the association that his air conditioner unit slid down the hill. The association provided a temporary fix by relocating the air conditioning unit onto a concrete pad surrounded by a plywood wall, but the association still did not address the failing retaining wall. Belanger asked the association to inspect the property and determine whether the problem was the association’s responsibility or his responsibility, but he received no response.

That year, a second engineering study recommended undertaking capital projects totaling $1.3 million over five years, including replacing the retaining walls by 2013. The association did not have sufficient funds to undertake all the recommended projects, so it again proposed a special assessment to increase reserve funds. Again, the members voted against it. The association proceeded with other projects it deemed more critical.

In 2011, Michael Drennan purchased the unit next to Belanger. He immediately had problems with water leaks and driveway flooding. The walls in both units were cracked, the paint was splitting, the drywall sheets were separating, and sections of the hardwood floors were raised and separating. Drennan did not contact the association about these issues.

An inspection of the duplex revealed significant structural damage, including excessive foundation cracks. The association’s engineer advised that the retaining walls, not Belanger’s gutters, were the problem. He also stated that it did not make sense for Belanger and Drennen to repair the duplex foundation until the retaining walls were corrected. The engineer’s bid to repair the retaining walls was $49,455, but the association wanted a lower price, which the engineer said he could not do without compromising the wall’s integrity.

At this point, black mold appeared in the crawl space, and the entire duplex tilted. The stucco had separated from the exterior walls, and the rear wall was cracked. Belanger and Drennan (plaintiffs) sued the association and its management company for water code violations, trespass, and negligence, asserting that the association damaged the duplex by knowingly or negligently diverting water onto their property.

The jury found in the plaintiffs’ favor. Belanger was awarded $126,300 in damages and $160,000 in attorney’s fees. Drennan was awarded $33,750 in damages and $70,000 in attorney’s fees. The trial court also found that the association breached the Lakeside Village declaration by failing to maintain the common area properly. The association was ordered to repair or replace the duplex’s retaining wall and driveways within 180 days.

The association appealed, arguing that it did not breach the declaration. However, the appeals court found sufficient evidence that it did. Although the association had sufficient funds to repair the retaining wall in 2005, after eight years it had not done so.

The association suggested that the surface water naturally drained downhill toward the duplex, but evidence showed improper drainage directed the water to the duplex’s foundation, which supported damages for trespass. Trespass does not apply only to a person; causing or permitting a thing—like water—to cross the property is also trespass.

Belanger and Drennan also sought damages for mental anguish, but the appeals court found no evidence to support this claim. Although each had invested substantial funds to repair the duplex, they failed to show the “high degree of mental pain and distress” required to prove mental anguish. The appeals court reversed on the mental anguish issue, but it affirmed the trial court’s judgment on all other claims.

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

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Designated User Is Liable for Memberís Club Debt

Club Factorage, LLC v. Wood Duck Hiding, LLC, No. CV415-264 (S.D. Ga. Jun. 26, 2017)

Contracts: The United States District Court for the Southern District of Georgia found that a club membership agreement was divisible, so the statute of limitations ran from the date each dues payment was due, and the membership designated user was personally liable for the entity member’s debts.

Hampton Island Club, LLC (club) operated a private club on Hampton Island Preserve (Preserve), a group of small islands connected by tidal marshes in Liberty County, Ga. In 2006, Timothy Petrikin contracted to purchase a lot (lot purchase agreement) in the Preserve from Hampton Island Preservation Properties, Inc. (developer).

Petrikin assigned the lot purchase agreement to a company he controlled, Wood Duck Hiding, LLC (Wood Duck). Wood Duck purchased the lot as well as a club membership as required by the lot purchase agreement. The lot purchase agreement further provided that club dues were waived until the club’s golf course was open for play.

Wood Duck also executed a club membership agreement (club agreement) with the club, which required Wood Duck to pay a $150,000 membership deposit in three installments plus annual dues. Petrikin signed the club agreement on Wood Duck’s behalf and listed himself as the designated club membership user. The club agreement specified that the designated user was personally responsible for all club dues, fees, and other amounts.

In January 2008, the club and Club Factorage, LLC (Club Factorage), a related company, notified Petrikin that the golf course would be open later that year and that all membership accounts must be in good standing before March. At that time, Wood Duck still owed $50,000 of the membership deposit.

Petrikin notified the club that he was withholding dues since the golf course was not open. The club responded that it was not bound by agreements made by the developer and that the club had not agreed to waive dues. The club also said that it was not bound by agreements made by Wade Shealy, who represented both the developer and the club when Petrikin signed the lot purchase agreement.

In March 2008, Petrikin advised the club that Wood Duck would not make the final membership deposit payment. The club responded that it could delay the dues obligation for a few months until the golf course was open if Petrikin would guarantee payment. On October 8, 2008, Wood Duck and Petrikin notified the club in writing that they would not make any further payments.

In 2014, the club assigned its rights to Club Factorage, and Club Factorage immediately demanded payment from Wood Duck. When Wood Duck failed to pay, Club Factorage sued Wood Duck and Petrikin (collectively, defendants) for breach of the club agreement, asserting they owed $135,300 for the final membership deposit installment, dues for 2009 to 2014, and interest.

The defendants moved for summary judgment (judgment without a trial based on undisputed facts), asserting that Georgia’s six-year statute of limitations for simple contracts barred the claim. The defendants insisted that the club agreement was breached no later than October 8, 2008, but Club Factorage filed suit six years and 16 days after that date.

Club Factorage responded that the club agreement was divisible and that the statute of limitations ran from the date each payment was due. Club Factorage also asserted that the 20-year statute of limitations for contracts under seal applied to the membership deposit because the lot purchase agreement (which was under seal) created the payment obligation.

A contract is divisible where “the quantity, service, or thing is to be accepted by successive performances.” In this case, the statute of limitations ran separately for each payment as it became due.

The court concluded that the club agreement was divisible. It required each lot owner to maintain a club membership in good standing while it owned a lot. Further, the club had the right to modify the dues and fee rates at will. Since the club agreement provided for payments of an indefinite amount for an indefinite time, the statute of limitations did not bar claims for dues due from 2009 to 2014. However, the court did find that the statute of limitations had run on the remaining $50,000 due on the membership deposit because Club Factorage had only sued for breach of the club agreement, not the lot purchase agreement.

The defendants also argued that Club Factorage could not recover because the club repudiated (renouncing the contract before performance is due) the contract when it said that it would not be bound by any unrecorded agreements with the developer or Shealy. The court determined there was insufficient evidence to grant summary judgment on this issue since facts remained in dispute.

Finally, Petrikin argued that he was not personally liable for the amounts due since the club agreement was with Wood Duck. The court disagreed, finding that the club agreement, which Petrikin signed, clearly stated the designated user was personally liable for all amounts due to the club.

Accordingly, summary judgment was granted to the defendants with respect to the $50,000 membership deposit but denied in all other respects.

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

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Association Not Authorized to Suspend Use Privileges

Elvaton Towne Condominium Regime II, Inc. v. Rose, No. 33, Sept. Term 2016 (Md. Jun. 23, 2017)

Covenants Enforcement: The Maryland Court of Appeals held that an association lacked the authority to suspend a delinquent owner’s common element use privileges since the condominium declaration did not give the association such authority.

Elvaton Towne Condominium Regime II, Inc. (association) governed a condominium project in Glen Burnie, Maryland. William and Dawn Rose owned a unit in the project. In September 2010, the Roses stopped paying assessments. The association notified the Roses that their rights to use the pool and to park overnight in the complex were suspended, in accordance with the association’s rules, until their delinquency was brought current.

In 2012, the association notified all owners that a new towing policy would go into effect. Delinquent owner’s whose vehicles were found on the common elements would be towed at the owner’s expense. Consequently, the Roses began parking outside the community. The Roses sued the association, seeking a determination whether the association could prohibit them from using the common elements because they were delinquent.

The Elvaton declaration granted each owner a fractional ownership interest in the common elements and stated the right to use the common elements was appurtenant to the unit. The trial court reasoned that restricting the Roses’ right to use the common elements was an unauthorized taking of the Roses’ property interest. It further held that the association could not deprive the Roses of their property rights, even temporarily, without specific authority.

The trial court determined that the governing documents did not give the association the authority to suspend privileges as a collection mechanism and ruled that the association’s rules regarding towing and suspension of privileges were invalid. The association appealed. The court of special appeals affirmed, and the association appealed further to the Maryland Court of Appeals.

The court of appeals held that the Maryland Condominium Act (act) allows an association to restrict access to the common elements to enforce assessment obligations if the declaration creates such a right. The Elvaton declaration authorized the association to adopt rules and regulations governing the common elements, but there was no specific authority to suspend use rights.

The court of appeals held that property interests are not taken when a rule applies equally to all owners, such as closing a swimming pool during the winter or during repairs, because the rule does not change an owner’s percentage interest in the common elements. However, property interests are taken when a rule revokes a property interest without affecting the rights of other owners.

The court of appeals held that the interference with the Roses’ common element use rights was sufficient to alter their percentage interest in the common elements. The association argued that the act allowed it to interfere with the Roses’ property rights without taking them. The appeals court agreed that the interference was not the sort of permanent change that would require the consent of all owners and their mortgagees.

However, the act provides that, except as provided in the declaration, the common elements are for enjoyment by all owners. The court of appeals held that restricting common element access was so significant an infringement of an owner’s property rights that it may be authorized only through a specific provision of the declaration.

The association argued that the owners had already agreed to allow their rights to be infringed through the declaration’s and bylaws’ broad language. The bylaws stated that the board could regulate vehicle parking. However, the court of appeals stated that the authority must come from the declaration to satisfy the act’s requirements, and no declaration provision allowed common element use privileges to be suspended.

The association attempted to point to various declaration provisions granting the board the power to regulate the association’s day-to-day activities. The court of appeals was not persuaded, finding the association’s reading overbroad. Since the declaration did not authorize suspending common element use rights, the court of appeals held that suspending privileges was invalid.

Accordingly, judgment was affirmed.

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

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Failure to Reserve an Easement in a Pier Leaves Community Without Creek Access

Kings Harbor Homeowners Association, Inc. v. Goldman, No. COA16-1189 (N.C. Ct. App. Jun. 6, 2017)

Documents: The North Carolina Court of Appeals held that a community member owned the community pier and could block access to it since the association was granted an easement only in the walkway leading to the pier and not over the pier itself.

Kings Harbor Homeowners Association, Inc. (association) governed the Kings Harbor subdivision in Onslow County, North Carolina, developed by Industrial Homes, Inc. (developer).

The subdivision plat identified a 10-foot pedestrian walkway easement running from the street across lot 37 to the lot boundary line, which was adjacent to a creek. The Kings Harbor declaration of restrictive covenants (declaration) gave all lot owners the right to use the walkway and made the association responsible for maintaining it.

After the declaration and the plat were recorded, the developer applied to the North Carolina Department of Environmental and Natural Resources (DENR) for a permit to construct a pier over the creek connecting to the walkway easement on lot 37. The application described the pier as a community access facility. In March 2006, the developer sold lot 38 (next to lot 37) to Willa Mae Hartley, who moved into a home on the lot.

In April 2006, the pier permit was granted. The pier was completed in 2007, and a sign was erected at the walkway’s entrance stating “Kings Harbor Pier.” After that time, the pier was continually used by the association members. The plat was not updated to show the pier or an easement extending into the creek.

In March 2011, Hartley purchased lot 37, which remained vacant except for the walkway and pier. She never blocked access to the pier. Hartley died in August 2011, and her daughter, Diana Goldman, inherited the two lots. In 2012, Mrs. Goldman and her husband, Roy Goldman, moved into the home.

In 2014, the developer transferred its interests in the pier and walkway to the association. Also in 2014, the Goldmans began to assert that they owned the pier exclusively and placed a chain across its entrance. After the association removed the chain, the Goldmans erected a locked gate across the entrance.

In October 2014, the association sued the Goldmans to determine the parties’ rights in the pier. Each party filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court determined that the association held all rights and title to the easement and the pier as common property. It granted summary judgment in the association’s favor and permanently prohibited the Goldmans from blocking the walkway or pier. The Goldmans appealed.

The appeals court found that, when the pier was constructed, the developer owned lot 37 as well as the riparian rights adjacent to it. “Riparian rights are vested property rights that arise out of ownership of land bounded or traversed by navigable water.” That is, a person who owns waterfront property has a qualified right to access the submerged land that extends from the waterfront property, including the right to construct wharfs, piers, or landings.

Lot 37 was conveyed to Hartley in 2011 by reference to the plat, which did not show an easement extending beyond the lot line or the pier. Thus, when lot 37 was sold, all riparian rights, including the pier, passed to Hartley and then to the Goldmans.

The association argued that all recorded documents, together with the DENR application and the Goldmans’ own conduct, showed that the developer intended the pier to provide community access to the water. The appeals court stated that the association’s reliance on the developer’s intent was misplaced. A court should look only to the deed for the grantor’s intentions, unless the deed is ambiguous. The appeals court found Hartley’s deed clear and unambiguous. It contained no exceptions and was subject only to the declaration and the plat, neither of which mentioned the pier or riparian rights.

Furthermore, because the easement was described precisely as ending at lot 37’s boundary line, it could not be enlarged to include the pier. Without the Goldmans’ permission, the easement could not be extended into the creek or include riparian rights or the pier.

Since the developer conveyed its interest in lot 37 to Hartley in 2011, it had no remaining interest in the pier to convey to the association in 2014. As such, the trial court erred in concluding that the association had any rights in the pier, much less owned the pier.

Accordingly, the trial court’s judgment was reversed and the case was remanded for entry of summary judgment in the Goldmans’ favor.

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

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Owners Entitled to Defense Under D&O Policy

Astor Plaza Condominium Association v. Travelers Casualty and Surety Company of America, Nos. 1-15-2546 & 1-16-0110 (Ill. App. Ct. Jun. 30, 2017)

Risks and Liabilities: The Appellate Court of Illinois held that the insurer that issued a directors and officers’ liability insurance policy was obligated to defend persons sued for an alleged breach of duty, even though they held no official association position during the policy term.

Astor Plaza Condominium Association (association) governed an eight-unit condominium in Chicago, Ill. In October 2005, unit owner Margaret Goldberg expressed concerns to the board, including problems with windows and balconies, lack of meeting notices and access to meeting minutes.

The next month, another unit owner invited all owners to a meeting at his home. One of the topics discussed at the meeting was the need to constitute a new board of directors because the previously-elected directors had all moved out of the building, and the vacancies had not been filled. In March 2006, four owners were elected to the board.

At a September 2006 meeting, a building renovation plan and financing for the renovations were discussed. Goldberg expressed concerns about whether the financing would create a lien impacting owners without mortgages. Later that month, the board informed Goldberg that it had redesignated the window frames and balconies as limited common elements, making them the owner’s responsibility to maintain and repair. The renovation and financing plans were approved by the board in November 2006.

Thereafter, Goldberg sued the association and the directors, both individually and in their official capacities. She requested an order requiring the board to pay for repairs to her window frames and balcony, prohibiting financing that created liens on the common elements or individual units, and appointing a receiver to manage the association. Goldberg also sought a determination that the condominium governing documents limited financing that resulted in an encumbrance on the property.

In December 2006, the association and the directors tendered defense of the case to Merrimack Mutual Fire Insurance Company (Merrimack), which had issued a directors and officers liability insurance policy for the period December 2004 to December 2005. The policy provided that Merrimack would cover damages the directors and officers were legally obligated to pay based on wrongful acts they committed during the policy term. It defined “wrongful act” as a negligent act, error, omission, or breach of duty while acting in the capacity of officer or director.

In January 2007, Merrimack denied coverage, concluding that Goldberg’s complaint did not seek money damages and did not allege wrongful acts.

In 2007 and 2008, Goldberg amended her complaint three times to assert additional claims. The amended complaints were submitted to Merrimack, but Merrimack never responded. The association and the directors sued Merrimack, Goldberg, another insurer, and others, seeking, among other things, a determination that Merrimack breached its duty to defend the association and the directors against Goldberg’s suit.

The trial court determined that Merrimack had no duty to defend or indemnify the association but it did have a duty to defend the directors. Accordingly, it ordered that Merrimack was obligated to pay for all reasonable defense costs incurred by the directors. Merrimack and the association appealed.

Merrimack argued that it was not obligated to defend the directors because they were not elected, and did not prompt Goldberg’s claims, until after the policy term. Merrimack further asserted that it was not obligated to pay damages since Goldberg’s original complaint only sought an order, not money damages.

If a complaint alleges facts that fall, or might fall, within a policy’s coverage, the insurer has a duty to defend against those claims, even if they are false, groundless, or fraudulent. Those who are insured must show that a claim might fall within a policy’s coverage, but then the insurer must show whether coverage is precluded by a policy exclusion or limitation.

The appeals court said the trial court was correct not to consider evidence (beyond Goldberg’s complaint) whether Merrimack had a duty to defend. Goldberg’s complaints alleged that the directors, while members of the board, ignored her requests for repairs to the common elements, failed to provide meeting notices and access to minutes, and engaged in improper board conduct.

To prevail on her claims, Goldberg ultimately must prove the directors where, in fact, on the board in 2005, but this is irrelevant for purposes of insurance coverage. The key question is whether the allegations give rise to coverage, not whether the allegations are true. The appeals court flatly rejected Merrimack’s assertion that the court need look only at the final amended complaint to determine whether Merrimack was obligated to defend against it. That complaint was filed more than two years after the original complaint, and the individuals had long since had to defend themselves in the lawsuit.

Merrimack said that it should not be prevented from asserting any defense to coverage because it did not deny coverage for the amended complaints, only the first complaint. The appeals court disagreed. An insurer may either defend under a reservation of rights or seek a declaration that there is no coverage. If it fails to take either step, the insurer is barred from asserting any policy defenses if it later turns out that the insurer wrongfully denied coverage.

The association argued that the policy was ambiguous because the association was not specifically excluded from coverage. The appeals court disagreed, finding that the policy clearly said Merrimack would pay the directors or officers obligations if their wrongful acts resulted in a claim for money damages. It did not mention claims brought against the association.

Accordingly, the trial court’s judgment was affirmed.

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

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Associationís Insurer Not Liable for Managerís Fees

Capitol Property Management Corporation v. Nationwide Property & Casualty Insurance Company, No. 1:16-cv-00664-GBL-MSN (E.D. Va. Jun. 5, 2017)

Risks and Liabilities: The United States District Court for the Eastern District of Virginia held that a condominium association’s property insurance did not provide coverage for its manager’s fees for processing insurance claims and managing construction following a fire.

Gunston Corner Condominium Association (association) governed a condominium in Lorton, Va. In 2013, the association hired Capitol Property Management Corporation (Capitol) as its manager.

Under the management agreement, Capitol was responsible for filing insurance claims for the association and cooperating with the association’s insurer. Its fee for processing a claim was 10 percent of the claim amount. The management agreement also entitled Capitol to a construction management fee for projects exceeding $20,000 equal to five percent of the construction contract.

In 2014, a fire damaged 16 units. Capitol filed a claim with the association’s insurer, Nationwide Property & Casualty Insurance Company (Nationwide). Capitol asked Nationwide to pay Capitol’s claim processing fee. Nationwide paid the association more than $2.5 million for property damage. However, it denied coverage for Capitol’s processing fee because it did not constitute direct physical loss or damage as required by the insurance policy.

In 2015, the association assigned its rights in the processing fee claim to Capitol, and Capitol again asked Nationwide to cover the processing and construction management fees. Nationwide reaffirmed that there was no coverage for the fees. In 2016, Capitol sued Nationwide for $400,000 in damages for its claim processing fee and construction management fee. Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts).

The insurance policy covered direct physical loss of, or damage to, the building. It also covered certain extra expenses to prevent or minimize loss if the association could not conduct business at the property. The court said Capitol’s fees did not amount to “extra expenses” because the tasks they covered did not keep the association operational. Instead, the fees covered reporting to, and cooperating with, the insurance company. The fact that the association decided to outsource the claims process to its manager did not bring those costs within the policy’s coverage. The policy simply did not cover the costs to process the claim.

Capitol likened its fees to the fee Nationwide paid to the general contractor for supervising the building’s repair and reconstruction. The court was unpersuaded because the general contractor’s fees were for repairing the damage and covered as part of the direct physical loss.

Accordingly, the court granted Nationwide’s motion for summary judgment and denied Capitol’s motion for summary judgment.

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

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Vacation Rental Was Not Commercial Activity

Forsheev.Neuschwander, No. 2016AP1608 (Wis. Ct. App. Jun. 13, 2017)

Use Restrictions: The Court of Appeals of Wisconsin held that a commercial use restriction did not prohibit vacation rentals.

Lee and Mary Jo Neuschwander owned waterfront property in Hayward, Wisc. Their neighbors included Richard and Jean Forshee, Judith Timmerman, Verlan Edwards, Mary Edwards, and Robert and Janet Olson (collectively, the neighbors).

In 2014, the Neuschwanders began making their home available for short-term rentals. They advertised in print and on vacation rental websites that the property was available for up to 15 guests and had a two-night minimum. During 2015, they rented the property to more than 170 people and received $55,784 in rent. They also paid nearly $5,000 to the city for room taxes.

In 2016, the neighbors sued the Neuschwanders, alleging that the short-term rentals violated the community’s restrictive covenant prohibiting commercial activity. The neighbors sought an injunction prohibiting the Neuschwanders from using their property for vacation rentals.

The trial court concluded that the Neuschwanders were using the property for commercial purposes since they profited from the rentals. The trial court relied on the developer’s testimony that commercial activity was prohibited to ensure a quiet neighborhood where owners would know their neighbors. Reasoning that many different people staying in the home violated that purpose, the trial court concluded that the restrictive covenant prohibited short-term rentals.

The trial court prohibited the Neuschwanders from renting their home on a short-term basis. They appealed.

Wisconsin’s public policy favors the free and unrestricted use of property, so restrictions must be strictly construed. When a restrictive covenant is worded ambiguously, it must be interpreted to favor the owner’s free use of the property. However, if a restrictive covenant’s intent is clear, the restriction will be enforced. The appeals court cautioned that relevant intent did not mean the drafter’s subjective intent, but the covenant’s scope and purpose as discerned from the language used.

The appeals court recognized that reasonable minds could differ about whether commercial restrictions apply to short-term rentals. No one disputed that the Neuschwanders were engaged in commerce and profiting from the rental activity. However, the vacation guests were using the home in a residential manner. Further, since no money was exchanged on the property, there was no actual commercial activity on the property.

The appeals court determined that the restriction did not clearly show that its purpose was to maintain a quiet neighborhood where people would know their neighbors. Without that, the appeals court could not conclude that the commercial activity prohibition was intended to preclude vacation rentals. As such, the appeals court concluded the restriction was ambiguous, which meant it had to favor unrestricted property use. Accordingly, the restriction could not be enforced against the Neuschwanders.

The trial court’s order was reversed, and the case was remanded with directions for summary judgment to be entered in the Neuschwanders’ favor.

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

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