June 2018
In This Issue:
Recent Cases in Community Association Law
Commercial Units in Mixed-Use Condominium Not Responsible for Residential Unit Costs
Purchaser Bears Risk by Not Asking for Resale Certificate
Court Refused to Remove Verbally Abusive Director from Office
Club Bylaws Take Precedence Over Statutory Default Provisions
Despite Occupying Common Area for Years, Owners Could Not Acquire Title
Association Not Liable for Defending Against Owner’s Allegations of Illegal Activity
Association Could Not Drop Flood 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 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.

Commercial Units in Mixed-Use Condominium Not Responsible for Residential Unit Costs

Harrison v. Casa de Emdeko, Incorporated, No. SCWC-15-0000744 (Haw. Apr. 26, 2018)

Assessments: The Supreme Court of Hawaii held that, under the Hawaii Condominium Property Act, expenses for building components that served only particular units in a mixed-use project had to be allocated as limited common expenses to the units served, even though the declaration did not assign the components as limited common elements.

Casa de Emdeko, Incorporated a/k/a Casa de Emdeko Association of Apartment Owners (association) governed a mixed-use project comprising five buildings in North Kona, Hawaii. Two buildings contained 106 residential units. Each of the remaining three buildings constituted one commercial unit.

In 1982, LaVonne Harrison purchased two of the commercial units. Harrison sued the association, alleging that, between 2010 and 2013, her units were improperly assessed expenses for elevators, lanai railings, and drains, which were limited common elements of the residential buildings. Harrison’s units did not have elevators or lanais and were physically separated from the residential buildings.

The association responded that Harrison never objected to the costs during her 30 years of ownership or her tenure on the association’s board of directors from 2001 to 2011, during which the board approved an elevator modernization expense of $82,500. However, Harrison claimed she objected once she became aware the expenses were for limited common elements. The lanai railings and drains were never an issue until replacements were needed in 2006. Also, once she complained about the elevator expense, the association relabeled it a limited common element expense in the budget.

Under the declaration of horizontal property regime (declaration), each unit owner was obligated to contribute funds to cover utilities, maintenance, and repair of the common elements. The trial court concluded that the residential building elevators, lanai railings, and drains were common elements since the declaration did not specifically assign them as limited common elements.

The trial court also held that Harrison was estopped (barred) from complaining about the expense because she acquiesced in the allocations after she should have known how the funds were applied. A party being charged with “estoppel by acquiescence” must have knowledge of the relevant facts.  It granted summary judgment (judgment without a trial based on undisputed facts) in the association’s favor. Harrison appealed.

The Hawaii Intermediate Court of Appeals also found that the elevators, lanais, and drains were common elements since the declaration did not assign them as limited common elements. The court of appeals further determined that the lanai railings were common elements under the Hawaii Condominium Property Act (act), regardless of whether they exclusively served the residential units, because they were necessary for the project’s safety. Harrison again appealed.

Since the declaration did not address who was responsible for limited common element costs, the Hawaii Supreme Court looked to the act. The act specifies that, in a mixed-use project, costs to maintain and repair limited common elements will be borne by the owner of the unit to which the limited common element is appurtenant.

The declaration designated specific building components as limited common elements and defined all portions of the project outside the individual units as common elements. However, the act defines limited common elements as including those common elements designated in the declaration as reserved for the exclusive use of certain units. The supreme court concluded that the act did not allow that only the items specified in the declaration could be limited common elements. The supreme court then examined how the components were used to determine the proper characterization.

The declaration specified that the residential building entries, stairways, hallways, and walkways were limited common elements for the building’s units. The supreme court determined that the elevators were an integral part of the entry and walkway system exclusive to the residential buildings, and neither Harrison nor her tenants had access to the residential elevators. Thus, the elevators were limited common elements of the residential buildings.

Although the declaration described each residential unit as including a lanai, the description of the unit boundaries did not include a lanai. Under the declaration’s terms, the lanai railings were part of the common elements since they fell outside the unit perimeter walls.

The supreme court agreed with the court of appeals that the lanai railings were clearly necessary for the property’s safety and acknowledged the act’s categorization of safety components as common elements. However, the supreme court held that the lanai railings had to be classified as limited common elements under the act because they were for the exclusive use of the units to which they were attached. The supreme court could not analyze the drains based on the limited information presented on the drains’ purpose and the property served.

The supreme court found the evidence insufficient to establish that Harrison possessed full knowledge of all material facts and circumstances as well as her legal rights on the expense allocations. As such, genuine issues of material fact remained which precluded summary judgment being granted.

Accordingly, the summary judgment grant in the association’s favor was vacated, but the court of appeals’ rulings on other matters were affirmed.

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Purchaser Bears Risk by Not Asking for Resale Certificate

Bridge Investments, LLC v. Lowry Ridge Townhomes Association, LLP, No. A17-1221 (Minn. Ct. App. Apr. 23, 2018)

Assessments: The Court of Appeals of Minnesota held that a unit purchaser became responsible for the unit’s preexisting delinquency because the declaration put the purchaser on notice of the association’s lien rights, and the purchaser failed to ask the seller for a resale certificate.

Lowry Ridge Townhomes Association (association) governed a condominium in Minneapolis, Minn. In August 2015, the owner of unit 1 (M.P.) stopped paying association assessments.

In November 2015, the association sent M.P. a delinquency notice, but it did not record a lien against the unit. The following month, M.P.’s mortgage company foreclosed on its mortgage and purchased the unit at the sheriff’s sale. M.P. later reacquired the unit by redeeming it from the mortgage company. Redemption annuls the sheriff’s sale, and all liens other than the foreclosed lien are reinstated.

In July 2016, the unit was transferred back to M.P., and M.P. sold the unit to Bridge Investments, LLC (Bridge) the same day. When the association became aware that the unit had sold, it notified Bridge that the unit had an outstanding account of $9,100. That same month, the association recorded a lien for the outstanding assessments, late fees, attorneys’ fees, and costs.

Bridge disputed that it was responsible for the preexisting lien on the unit since it had no notice of a lien prior to purchase. In September 2016, the association notified Bridge that its lien would be foreclosed in October if the outstanding amount was not paid. In October, Bridge sued the association to quiet title (definitively establish property ownership), for a declaratory judgment (judicial determination of the parties’ legal rights), and to prevent the foreclosure sale until the amount necessary to satisfy the lien could be determined.

The trial court ordered that the foreclosure sale could proceed as scheduled. The association foreclosed its lien and purchased the unit for the amount then owed. In April 2017, Bridge redeemed the unit for the amount the association claimed was due and then sold it to another buyer in June. However, Bridge continued to pursue the lawsuit to recoup its alleged overpayment to the association.

The trial court found that Bridge had no reason to know of the unit’s delinquency when it purchased since Bridge was not given a delinquency notice and no lien had been recorded. The trial court determined that Bridge was a good-faith purchaser entitled to protection under the Minnesota Recording Act (MRA). The MRA provides that a good-faith purchaser takes priority over a prior lienholder who failed to record its lien before the purchaser’s deed.

Accordingly, the trial court held that Bridge was not liable for any unpaid assessments prior to its purchase or for attorneys’ fees, delinquency charges, or foreclosure costs. The association appealed.

Bridge asserted that the association acted in bad faith by failing to comply with the Minnesota Common Interest Ownership Act (MCIOA) and due process requirements. The association argued that MCIOA’s requirements did not apply because Bridge failed to conduct proper due diligence.

The association asserted that, under the MCIOA, recording its declaration established the required lien notice. The appeals court agreed, noting that the MCIOA specifically provides that no further lien notice is required. As such, the MRA did not apply.

Rather, the MCIOA obligated M.P. to ensure that Bridge had notice of the preexisting lien and received the necessary documents. Under the MCIOA, a seller must obtain an association resale disclosure certificate stating the assessment rate and listing all outstanding amounts and provide it to the purchaser.

Bridge argued that it never received the resale certificate. However, no one ever requested a resale certificate from the association, and the association was unaware of the sale until after the closing. The appeals court stated that the association was not responsible for making sure Bridge received a resale certificate, particularly when it did not know a sale was pending.

The trial court focused on the association’s failure to provide monthly billing statements to Bridge for either the preexisting or ongoing assessments, but the appeals court could find nothing in the MCIOA that obligated the association to provide such statements. The MCIOA requires only that statements be provided when an owner requests them.

The appeals court also found the association was entitled under the MCIOA to recover its attorneys’ fees for the collection efforts for the unit. Thus, the trial court erred in concluding it had the discretion to deny attorneys’ fees to the association. Instead, the trial court’s analysis should have been limited to whether the attorneys’ fees were reasonable.

The appeals court reversed the trial court’s judgment, and the case was remanded for the trial court to determine whether the redemption amount paid by Bridge was appropriate considering the appeals court’s opinion.

©2018 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Court Refused to Remove Verbally Abusive Director from Office

A Pocono Country Place Property Owners Association, Inc. v. Kowalski, No. 904 C.D. 2017 (Pa. Commw. Ct. May 7, 2018)

Association Operations: The Commonwealth Court of Pennsylvania declined to remove from office an association director who constantly demeaned and insulted other directors because offensive conduct alone was insufficient to warrant judicial interference with corporate governance.

A Pocono Country Place Property Owners Association, Inc. (association) governed a community of about 4,500 homes in Monroe County, Penn. In June 2016, Zbigniew Kowalski was elected to the association’s board of directors for a three-year term without opposition. Besides Kowalski, the nine-person board included seven women and one man.

During the first two months in office, Kowalski directed numerous verbal and email insults at the female directors. He described some as cunning, conniving, vindictive, spiteful, incoherent, and accused others of having a nervous breakdown or a meltdown. He told one woman she could cook for him and told another she should not order such fattening food.

Kowalski said there were too many women on the board, and the board’s decisions reflected female control. He also described committee members as alcoholics motivated to volunteer by the free alcohol served at a volunteer dinner. Kowalski copied the association’s manager, an employee, on many of the emails. The board admonished Kowalski three times for his conduct.

In October 2016, the association’s attorney advised the board that Kowalski’s conduct could expose the association to liability for creating a discriminatorily hostile environment based on gender under the Pennsylvania Human Relations Act (act). The board then required Kowalski to attend sensitivity training within 30 days at the association’s expense.

Kowalski attended the training, but the result was that he began to insult everyone, not just women. His insults included comparing other directors to Nazis and calling them arrogant, abusive, pathological liars, control freaks, poster children for dysfunctional behavior, sociopaths, uneducated, domineering, and hypocrites.

Kowalski attended only about 60 percent of the board meetings, did not make motions at the ones he did attend, and missed board workshops. However, his absenteeism did not rise to the level required for his automatic removal under the association’s bylaws.

After fewer than six months in office, the board suspended Kowalski and petitioned the trial court to remove him as a director and bar him from future service on the board under the Pennsylvania Nonprofit Corporation Law (corporate law). The trial court determined that, although Kowalski’s comments were offensive, sexist, and boorish, they were not sexual in nature. Following the sensitivity training, his behavior did not create a hostile environment that constituted gender discrimination under the act.

The trial court concluded that Kowalski’s behavior was insufficient to satisfy the standard required for judicial removal of a director under the corporate law and denied the association’s petition. The association appealed.

Corporate law provides three methods by which nonprofit corporation directors may be removed from office. First, the corporation’s members may vote to remove a director for any or no reason. Second, the board may remove a director who has been declared mentally incompetent by a court or has been convicted of a criminal act punishable by imprisonment for more than one year. Third, a court may remove a director from office for fraudulent or dishonest acts, gross abuse of authority or discretion, or for “any other proper cause.” While the appeals court found Kowalski’s conduct deserving of criticism, it stated that judicial removal of a member-elected director is a drastic remedy that requires more than undesirable or offensive behavior.

There was no evidence that Kowalski committed fraud, dishonest acts, or gross abuse of authority or discretion; the appeals court stated that “proper cause” required misconduct beyond these grounds. “Proper cause” has not been found without showing that the director committed fraud, gross mismanagement, dishonesty, violation of the corporation law, or other conduct outside the scope of authority.

The appeals court emphasized that Kowalski was answerable to the association’s members. He was not an association employee, and the situation was not analogous to an employer’s right to discharge an employee based on the employee’s behavior.

The association complained that Kowalski’s behavior might create liability for the association if he continued on the board. The appeals court was unpersuaded, noting that, while Kowalski’s uncivil behavior continued unabated following the sensitivity training, he no longer used gender-based references. Instead, his verbal abuse was directed at males and females, and it did not violate the act.

The appeals court also stated that, had Kowalski’s gender-based insults continued, that alone was not sufficient to require court intervention under the corporation law. If the board was concerned that Kowalski’s behavior was an unacceptable risk, it could have removed him from the board using the second method without court intrusion. The board’s removal of one of its own directors does not interfere with the rights of the corporation’s members to the same degree as court action. If the members disagree with the action, they can vote the board out of office and reelect the ousted director, but the members would have no means of redress against a court action with which they disagree.

Accordingly, the trial court’s order was affirmed.

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Club Bylaws Take Precedence Over Statutory Default Provisions

Desert Mt. Club Inc. v. Graham, No. 1 CA-CV 17-0100 (Ariz. Ct. App. Apr. 12, 2018)

Documents: The Arizona Court of Appeals held that the nonprofit corporation act’s default provisions that allow a membership to be resigned at any time did not apply where a nonprofit club’s bylaws contained explicit provisions governing membership termination.

Desert Mountain Club Inc. (club) operated a nonprofit, member-owned golf and recreation club in the Desert Mountain community in Scottsdale, Ariz. Eric and Rhona Graham and Thomas and Barbara Clark (collectively, the members) purchased equity memberships in the club.

The club’s bylaws established four methods for terminating an equity membership: (1) reselling the membership through the club; (2) transferring in conjunction with the sale of the member’s Desert Mountain property; (3) transferring to a club-approved family member; or (4) the club reissuing to a new person upon the member’s death. The bylaws did not specifically address membership resignation.

To resell a membership, the member had to surrender the membership to the club and continue to pay club dues until the membership was resold. The member would receive the sale proceeds less a transfer fee kept by the club equal to the greater of $65,000 or 20 percent of the sale price.

In late 2013, the Clarks notified the club that they were resigning their membership effective January 1, 2014, and they asserted the resignation terminated their dues obligation. In May 2014, the Grahams also notified the club that they were resigning their membership and had no further obligation to the club. The members implied that their resignations relieved them of transfer fee obligations.

The club had previously expelled other members who stopped paying dues, relieving them of the obligation to pay the transfer fee. More recently, the club had entered into a settlement agreement with a member who stopped paying dues, allowing the member to pay a reduced transfer fee. However, the club decided to sue these members for nonpayment of dues. The trial court granted summary judgment (judgment without a trial based on undisputed facts) in the club’s favor. The members appealed.

The members asserted that, since the bylaws did not address membership resignation, the default resignation provisions of the Arizona nonprofit corporation act (act) applied. The act provides that a nonprofit corporation member may resign at any time, except as set forth in the corporation’s bylaws or articles of incorporation.

Although the bylaws did not use the term “resignation,” the appeals court concluded that the bylaws created a comprehensive rule that precluded applying the act’s default rule. The appeals court held that, by providing a specific list of four ways to divest membership, and by requiring a member to continue to pay dues until the membership was divested, the bylaws effectively barred a simple resignation. Any other interpretation would render the remaining bylaws provisions meaningless by allowing members to avoid the transfer fee and discontinue paying dues.

The members contended that the bylaws termination provisions were burdensome, expensive, and made the membership a non-liquid asset. However, the appeals court noted that the act did not guarantee that a member of a nonprofit corporation could resign without obligation. Rather, the act specifically allowed the articles or bylaws to restrict the default resignation rights.

The members argued that, by settling with some members and allowing others to resign, the club arbitrarily treated members differently and violated the act’s mandate to treat all members equally. The act provides that all members have the same rights in and obligations to the corporation unless the bylaws provide otherwise. The appeals court found that provision made the bylaws the higher authority with respect to club rights and obligations.

The bylaws gave the club’s board of directors discretion to enforce delinquencies, including expulsion and all other remedies allowed by law. Therefore, the board had the discretion to decide to sue some delinquent members but not others. The members argued that the fact that the board could allow some members to resign reinforced that the act’s default provisions should apply since resignation was clearly not prohibited. The appeals court disagreed, stating that the enforcement discretion granted to the board did not negate the bylaws’ clear methods for divesting membership.

The members insisted that the board acted arbitrarily by treating members differently. Although the board’s discretion must be exercised reasonably and not arbitrarily or capriciously, the fact that the club sued some members but not others was not sufficient by itself to show the board acted arbitrarily.

Accordingly, the trial court’s judgment was affirmed.

©2018 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Despite Occupying Common Area for Years, Owners Could Not Acquire Title

Cole v. Bonaparte’s Retreat Property Owners’ Association, Inc., No. COA17-492 (N.C. Ct. App. Apr. 17, 2018)

Risks and Liabilities: The North Carolina Court of Appeals held that owners could not prove adverse possession of association open space because they had not used or claimed the property for 20 years.

Bonaparte’s Retreat Property Owners’ Association, Inc. (association one) governed a subdivision along the Calabash River in Calabash, NC. In 1981, Gerald Earney purchased 1ot 18.

Earney’s deed described lot 18 by reference to the recorded plat. The plat identified a large lot lying between the rear property lines of lots 17 through 22 and the river’s edge as “reserved area.” In 1985, the developer conveyed the reserved area to association one.

The following year, association one failed to renew its corporate registration, so its corporate status was suspended by the North Carolina Secretary of State. In 1991, someone in the community realized the problem. Instead of seeking to reinstate association one, a group of owners incorporated a new association—Bonaparte’s Retreat I Property Owner’s Association, Inc. (association two).

Mistakenly believing he had purchased a waterfront lot, Earney set about improving the reserved area located immediately between his lot and the river (disputed area). He cleared and landscaped, installed a septic tank, and constructed a pier. Earney docked boats at the pier and prohibited others from using it without his permission.

In 2000, Earney advertised the lot as “waterfront property” for sale. Allan and Jennifer Cole purchased the lot. Also believing they owned the disputed area, the Coles cleared trees from and mowed the disputed area. They repaired and renovated the pier, added a gate and handrails, blocked the pier entrance, and posted “no trespassing” signs.

In 2008, the Coles hired a contractor to construct a residence on the lot. When the contractor had the property surveyed, the Coles realized for the first time that they did not own the disputed area. The contractor told them a variance would be required because the preferred homesite was within 25 feet of lot 18’s rear boundary line in violation of the town’s setback requirements.

The Coles initially sought to purchase the disputed area from association two, but association two’s board believed it lacked authority to sell the disputed area. The Coles then applied to the town’s board of adjustment for a variance to the setback requirements. The variance was approved contingent on the Coles obtaining association two’s consent. Association two provided written consent a few days later.

Construction of the home began in 2013, but the Coles continued to try to purchase the disputed area. In September 2015, after the board again determined that it did not have the authority to sell the disputed area, the Coles sued association one for adverse possession (method of acquiring title by satisfying statutory criteria) of the disputed area.

Two days later, association one’s corporate status was reinstated by the Secretary of State. Association two’s board appointed the initial officers for association one, naming Charles Hamilton as president. In October 2015, Hamilton signed a deed on association one’s behalf conveying the reserved area, including the disputed area, to association two. The Coles amended their complaint to add association two and Hamilton as defendants.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) in the defendants’ favor, rejecting the Coles’ adverse possession claim. Not only did the trial court declare that association two was the disputed area’s owner, but it also determined that association two had an easement over lot 18 to access the reserved area. The Coles appealed.

North Carolina law allows a person to acquire property title through adverse possession if he has possessed the property “under known and visible lines and boundaries” adversely to everyone else for at least 20 years. To prove that possession is adverse, the claimant must show actual, open, hostile, exclusive, and continuous possession for 20 years.

While the Coles had owned lot 18 for only 15 years, they sought to “tack” their possession to Earney’s. Tacking allows successive adverse occupiers in privity (successive relationships to the same right to property) with prior adverse users to combine their respective adverse periods to satisfy the 20-year requirement.

However, in North Carolina, privity through a deed does not extend beyond the deeded property. Since the deed from Earney to the Coles described only lot 18, the Coles could not tack the years that Earney used and occupied the disputed area to their own period. Thus, the Coles could not show they adversely possessed the disputed area for 20 years.

However, the appeals court did agree with the Coles regarding the easement over their lot. Neither side had requested an easement, and the trial court failed to describe the nature of the easement it imposed. Without notice of possibility of an easement, the appeals court determined that the Coles had insufficient notice to avoid substantial prejudice.

Accordingly, the appeals court affirmed summary judgment in the defendants’ favor on the adverse possession, but it reversed the imposition of the easement over lot 18.

©2018 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Association Not Liable for Defending Against Owner’s Allegations of Illegal Activity

Kulick v. Leisure Village Association, Inc., No. B281922 (Cal. Ct. App. Apr. 24, 2018)

Risks and Liabilities: The Court of Appeal of California held that California’s anti-SLAPP statute barred an owner’s claim that the association defamed him by disseminating a letter to the community that answered allegations he made in his independent newsletter that the association acted illegally.

Leisure Village Association, Inc. (association) governed the Leisure Village senior development in Camarillo, Cal. Robert Kulick, a unit owner, anonymously published a newsletter entitled “Leisure Village News,” which he distributed to all community residents.

The newsletter was very critical of the association and its board of directors. Some issues insulted individual directors and accused them of illegal activities and “hate mongering.” The association’s rules prohibited anonymously distributing or posting any document containing threats of physical violence, threatening language, or slanderous or defamatory remarks. In November 2013, the association sued Kulick for violating the rules, intentionally interfering with the association’s contractual relationship with its insurers, and creating a nuisance.

While the lawsuit was pending, Kulick published another newsletter under a pseudonym, accusing the board, among other things, of obstructing justice and racketeering in connection with the lawsuit. The newsletter accused the association’s manager of perjury, the association’s attorney of extortion and “hate-mongering,” and a director of lying and cheating. It also said the association elections were rigged, and the association might be forced into bankruptcy.

The association’s attorney prepared a letter answering the specific allegations, which the association distributed to all residents. The letter denied the newsletter’s allegations, characterizing them as reckless, unfounded, inaccurate, and spiteful. The letter discussed aspects of the lawsuit, explained the association’s position, and invited owners to view the courthouse filings. A jury found in the association’s favor, and the association was awarded $129,643 for compensatory and punitive damages.

Kulick then sued the association, individual directors, and the association’s manager and attorney, alleging the association’s letter defamed him. The association moved for the lawsuit to be dismissed as a SLAPP (strategic lawsuit against public participation) suit. The trial court granted the motion, dismissed the case, and granted attorneys’ fees to the association. Kulick appealed.

Kulick argued that California’s anti-SLAPP statute did not apply because the letter was not communicated in a public forum in connection with a matter of public interest. The statute provides that a claim arising from a defendant’s act furthering a constitutionally-protected right of free speech or petition regarding an issue of public interest may be dismissed unless the plaintiff establishes a probability that he will prevail on his claim.

The appeals court found the letter was sufficiently in a public forum. A statement by the governing body of a planned community can constitute a public forum for the statute’s purposes. The letter was distributed by the association to approximately 2,100 residents furthering the association’s government.

The appeals court also determined that the letter’s content was an issue of public interest. The statute broadly defines “public interest” as including private conduct that impacts a broad segment of society or that affects a community in a manner similar to a governmental entity. The appeals court held that the letter’s context warranted protection by a statute that embodies a public policy that encourages participation in matters of public significance. The letter involved the legal controversy which Kulick himself started. It discussed the association’s success in the lawsuit to that point and the mandatory settlement conference.

In addition, the letter’s characterization of the newsletter as reckless and an unwanted intrusion and Kulick’s accusations as spiteful were expressions of opinion. Opinions do not include or imply false factual assertions and are not actionable defamation.

Further, the remaining challenged statements were protected by the statute’s litigation privilege. The litigation privilege extends to any communication made by litigants or other authorized participants in judicial or quasi-judicial proceedings to achieve the litigation’s objective and that have some logical relation to the action.

The litigation privilege extends to communications made before, during, or after trial. The letter was distributed while the lawsuit was pending, and it discussed the lawsuit and invited the residents to review the courthouse filings. As such, Kulick could not establish that he would probably prevail on his defamation claim.

Accordingly, the trial court’s order dismissing the case was affirmed.

©2018 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Association Could Not Drop Flood Insurance

Porter v. Beaverdam Run Condominium Association, No. COA17-793 (N.C. Ct. App. May 1, 2018)

Risks and Liabilities: The Court of Appeals of North Carolina held that a condominium association was obligated to carry flood insurance on buildings in a flood zone unless the coverage was unavailable or unreasonably expensive.

Beaverdam Run Condominium Association (association) governed a condominium comprising 66 buildings in Buncombe County, N.C. Five of the buildings were located within a flood zone designated by the Federal Emergency Management Agency (FEMA).

The association maintained flood insurance on the five buildings until 2012, when it decided not to renew the coverage. The association notified all owners of its decision, citing concerns about the cost and the allocation of the expense among all unit owners. Ann Porter and the owners of eight other units in the five buildings (collectively, the plaintiffs) asked the association to reconsider the decision, but the association declined.

In September 2015, the plaintiffs sued the association, seeking a declaratory judgment (judicial determination of the parties’ legal rights) regarding the association’s obligation to maintain flood insurance. The trial court granted summary judgment (judgment without a trial based on undisputed facts) in the association’s favor and dismissed the case. The plaintiffs appealed.

The North Carolina Condominium Act (act) obligates a residential condominium association to maintain insurance “against all risks of direct physical loss commonly insured against including fire and extended coverage perils,” to the extent such insurance is “available.” The act provides that, if such insurance is not reasonably available, the association must promptly notify the owners of such fact.

The association argued that the phrase “all risks of direct physical loss” was limited to “fire and extended coverage perils,” which was the coverage mandated by the declaration. The appeals court disagreed, finding that the act’s definition was not so limited. The appeals court interpreted the declaration as requiring the association to carry the insurance required by the act, including fire and extended coverage. Moreover, the North Carolina Supreme Court had previously instructed that the term “all risks” was not to be given a restrictive meaning.

The appeals court further determined that flooding was a risk of direct physical loss that was commonly insured against for residential buildings in FEMA-designated flood zones. The appeals court cited the number of National Flood Insurance Program policies issued by FEMA for the state and the county. The appeals court also noted that owners of properties in flood zones who seek federally-backed mortgages are required to have flood insurance under federal lending regulations. At least one of the plaintiffs had been unable to sell her unit because the buyer could not obtain a loan without the property being covered by flood insurance.

However, the appeals court recognized that the association’s flood insurance obligation continued only so long as the flood insurance is reasonably available. Whether the coverage is reasonably available in a given year must be determined by the association’s board of directors while executing its duties with diligence and good-faith.

The Official Comment to the North Carolina Statutes indicated that the phrase “reasonably available” allowed an association to drop certain insurance coverage and still be in compliance with the act when the coverage becomes unavailable or unreasonably expensive. Although the association cited the expense as a reason for discontinuing the coverage, the question of whether the cost was unreasonable was not brought before the court.

The appeals court further indicated that the cost of the flood insurance must be charged to all units in the condominium, not just the ones in the flood zone, since the declaration required that insurance be maintained as a common expense. In addition, portions of the buildings constituted common elements, which were owned by all owners as tenants-in-common, not just the plaintiffs.

Accordingly, the summary judgment grant in the association’s favor was reversed, and the case was remanded for further proceedings.

©2018 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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