March 2019
In This Issue:
Recent Cases in Community Association Law
Association Extinguished its Lien by Nonjudicial Foreclose and Eliminated Mortgagee's Liability
Court Upholds Rule Requiring Septic Systems to be Routinely Pumped
Statute of Limitations for Claims Against Developer-Appointed Directors Was Not Tolled During Developer Control Period
Association's Refusal to Allow Service Animal in Clubhouse Proves Costly
Bank's Offer to Pay Super-Priority Lien Amount is Sufficient to Protect Mortgage
Association Entitled to Foreclose After Rejecting Owner's Checks That Violated Payment Policies
Tenants Were Implied Insureds Under Condominium Association's Fire Insurance Policy
Contractor's Lien for Association Debt Failed to Properly Account for Condominium Form of Ownership
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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.


Association Extinguished its Lien by Nonjudicial Foreclose and Eliminated Mortgagee's Liability

American Savings Bank, F.S.B. v. Association of Apartment Owners of the Hanohano Hale, No. CAAP-15-0000689 (Haw. Ct. App. Feb. 28, 2019)

Assessments:  The Intermediate Court of Appeals of Hawaii held that a condominium association's election to nonjudicially foreclose its lien extinguished the lien so a mortgagee who later foreclosed its mortgage was not required to satisfy the association's priority lien or pay any preexisting delinquency on the unit.


Association of Apartment Owners of Hanohano Hale (association) governed a condominium in Hau'cula, Hawaii.  Thomas De Luca and Marc De Luca owned a unit in the condominium.

In October 2013, the De Lucas' mortgage company, American Savings Bank, F.S.B. (ASB), initiated a judicial foreclosure action (foreclosure through the court system) against the De Lucas' unit.  In April 2014, the association filed a lien against the unit for unpaid assessments.  While ASB's judicial foreclosure action was pending, the association recorded a notice of default and intention to nonjudicially foreclose (without going through the court system) its lien.

Two months later, ASB filed a motion for summary judgment (judgment without a trial based on undisputed facts) in its judicial foreclosure case, seeking a foreclosure decree and sale order.  The association opposed the motion, asserting that it had a right to a statutory lien with priority over the mortgage for a special assessment equal to six months of assessments pursuant to the Hawaii Condominium Property Act (Condominium Act).  In October 2014, the trial court granted ASB's motion, although it held that the association had a right to a special assessment but that the amount could not be determined at that time.

In November 2014, the association conducted a nonjudicial foreclosure of its lien.  The association was the highest bidder and purchased the property for less than the delinquent amount.  The association recorded a foreclosure affidavit and foreclosure deed conveying the property to itself.  The association rented out the unit and kept the rental income.

In March 2015, ASB conducted a public auction for its judicial foreclosure, and ASB was the highest bidder.  ASB filed a motion for the trial court to confirm the sale.  The association opposed the motion, asserting that it was still due the six-month special assessment in accordance with the Condominium Act.  The trial court ruled that the amount of the special assessment to which the association was entitled was zero. 

The association appealed, arguing that its lien under the Condominium Act was not extinguished by association's foreclosure.  The Condominium Act allows an association to specially assess the amount of unpaid regular assessments against a mortgagee or other purchaser who purchases a "delinquent" unit in foreclosure.  The association asserted that the unit was still delinquent when ASB purchased it because the association had not been fully compensated for six months of assessments. 

ASB asserted that the foreclosure statutes clearly provide that the association's lien was extinguished when the association chose to foreclose its lien and that the unit was no longer delinquent.  ASB also urged that, once the association became the unit's owner, the association was obligated to pay the assessments, so there were no unpaid assessments for the association to collect.

The Condominium Act allows an association to pursue nonjudicial foreclosure through the procedures set forth in the Hawaii foreclosure statutes.  The foreclosure statutes specify that, after the foreclosure deed and a foreclosure affidavit are recorded, the association's lien is automatically extinguished from the unit.  The appeals court held that, according to the plain language of the foreclosure statutes, the association's statutory lien was extinguished when it elected to pursue nonjudicial foreclosure.

The association insisted the unit was still delinquent because it did not recover the full amount of the delinquency at the nonjudicial foreclosure sale.  The foreclosure statutes provide that the recordation of a foreclosure deed and a foreclosure affidavit does not operate as full satisfaction of the debt owed by the unit owner to the association unless the sales proceeds from the unit or the amounts paid by the purchaser to satisfy the Condominium Act special assessment are sufficient to satisfy the debt to the association.

The appeals court interpreted this language as relating only to the unit owner's personal debt to the association, not to the association's lien.  In other words, the De Lucas may still be personally liable for any remaining delinquent amounts owed to the association, but the unit was no longer subject to the association's lien.

The association also contended that the assessments continued to go unpaid while it owned the unit because the association was obligated to apply any rental income it received for the unit to the outstanding lien amount.  The Condominium Act provides that, where an association acquires a unit through foreclosure, any excess rental income it receives shall be paid to existing lien holders in the order of the lien priorities.  It also specifies that excess rental income is the net income received by the association after reimbursing the association for its lien for delinquent assessments.  The appeals court held this provision referred to the delinquency that triggered the association's lien in the first place, not to any lien that continued after foreclosure.

Accordingly, the trial court's judgment in ASB's favor was affirmed.

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Court Upholds Rule Requiring Septic Systems to be Routinely Pumped

Fritz v. Lake Carroll Property Owners Association, Inc., No. 2-18-0329 (Ill. App. Ct. Feb. 13, 2019)

Association Operations:  The Appellate Court of Illinois determined that the broad powers granted to an association by its declaration and bylaws allowed it to adopt a rule requiring septic system maintenance.


Lake Carroll Property Owners Association, Inc. (association) governed a community in Carroll County, Illinois.  Rodney Fritz (Fritz) owned a lot in the community.

The community was situated along Lake Carroll, the largest privately-owned, manmade lake in Illinois.  The community's declaration of restrictions and covenants (declaration) imposed a duty on each lot owner to maintain its lot to prevent it from becoming unsanitary or a health hazard.  The declaration established an architectural and environmental (A&E) committee with the authority to review proposed construction, septic systems, and other improvements to lots.  It also gave the A&E committee the authority to recommend building code rules and regulations for the approval of the association's board of directors (board).

In 2001, the A&E committee adopted a comprehensive set of rules intended to protect against ground water pollution due to improperly maintained septic systems.  The rules required that all lot septic systems be professionally pumped at four-year intervals, regardless of size or use.  An initial $250 fine was imposed for noncompliance and a $25 per day fine until the septic system was brought into compliance.

In 2016, Fritz was notified that his septic system was due to be pumped according to the rules.  The association repeatedly warned Fritz that he would be fined if he did not comply with the rules.  In October 2016, Fritz notified the association that it had no power over his septic systems.  In November 2016, the association notified Fritz that he had one month to comply with the rules to avoid fines.  When Fritz did not comply, the association imposed a $250 fine. 

In March 2017, Fritz sued the association for breach of fiduciary duty and breach of the declaration.  Fritz contended that neither the declaration, the association's bylaws, nor the Illinois Common Interest Community Association Act (Act) gave the association the authority to enact rules regarding septic systems.

The trial court found that the association had the authority to adopt the septic system rule and entered judgment against Fritz for $250.  Fritz appealed.

Fritz argued that it was impossible to interpret the declaration as authorizing septic systems to be pumped at four-year intervals.  He also contended that prior case law prohibited the association from limiting the use of his land, even if for some common good.

The appeals court found that the septic system rule did not limit the use of land, but instead was a mere regulation necessary to protect the lake's integrity.  The declaration clearly obligated each lot owner to maintain its lot to prevent health hazards.  The declaration also gave the association the power to enter lots to fix any unsanitary or hazardous conditions and to charge the owner for any costs incurred. 

The declaration gave the association additional powers in furtherance of the purposes set forth in the bylaws and articles of incorporation.  The bylaws specifically stated that the association's purposes included adopting rules and regulations for the general welfare of Lake Carroll and protecting and preserving the Lake Carroll eco-system.  The appeals court found that the intent expressed in the declaration and bylaws was that the A&E committee would have broad powers to enact and enforce rules regarding septic systems. 

Fritz further argued that the Act required all rules to be recorded in order to be enforceable.  The appeals court did not agree.  The Act defined "community instruments" as all documents and amendments recorded by the developer or an association, including, but not limited to, the declaration, bylaws, and rules. 

While the Act required the association to make copies of the community instruments available to owners and prospective buyers, it did not specify that rules had to be recorded in order to be enforceable.  In particular, the appeals court found that rules and regulations may be part of the recorded community instruments, but they may also exist outside of the community instruments.

Since the declaration and the bylaws gave the association the broad authority to enact rules and the Act did not prohibit the association from making rules, the appeals court concluded the septic system rule was within the association's authority.  Accordingly, the trial court's judgment in the association's favor was affirmed.

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Statute of Limitations for Claims Against Developer-Appointed Directors Was Not Tolled During Developer Control Period

Gadams v. The Nolde Bakery Condominium Association, Inc., Nos. 180397, 180398 (Va. Feb. 28, 2019)

Risks and Liabilities:  The Supreme Court of Virginia held that the statute of limitations was not tolled during the developer control period with respect to a condominium association's claims of breach of fiduciary duties against developer-appointed directors for failing to levy sufficient reserve assessments since the unit owners could have sued the directors derivatively.


Nolde Bakery, LLC (developer) developed The Nolde Bakery Condominiums at Church Hill, a 77-unit condominium in Richmond, Virginia.  The Nolde Bakery Condominium Association, Inc. (association) was organized to govern the project. 

The developer engaged Marathon Development Group, Inc. (Marathon) to manage the association.  It also appointed Frank Gadams, Craig Burns, and Judy Turner to serve as the association's initial board of directors (board).  Gadams was the developer's sole owner and Burns and Turner worked for Marathon.

The first unit was sold in July 2006, and the developer sold only 22 more units that year.  After 2006, the developer rented the remaining 54 units.  Beginning in 2013, the developer began selling the remaining units as leases expired.  The last unit was sold in December 2015.  As a consequence of the extended sale period, the developer controlled the board until November 2014.  In 2012, Gadams resigned from the board, and the developer appointed Matt Gass, another Marathon employee, as his replacement.

In January 2016, the association files suit against Gadams, Burns, Turner, and Gass (collectively, the former directors) and the developer (collectively, the defendants).  Among other claims, the association alleged the former directors breached their fiduciary duties by failing to levy sufficient assessments to adequately maintain the association's operating and reserve accounts and incurring operating deficits from 2006 to 2013.  A reserve study conducted in 2014 found the reserve account was about $335,632 below what was expected.

The association also alleged all of the former directors except for Gass authorized excessive payments to Marathon for two years, used association funds to pay their personal phone bills and those of other Marathon employees, and conspired to prevent control of the board from being turned over to the owners. 

The defendants moved for summary judgment (judgment without a trial based on undisputed facts), asserting that the association's claims were barred by the statute of limitations.  The association acknowledged that a two-year statute of limitations applied to its breach of fiduciary duty claims, but it argued that the statute of limitations was "tolled" while the developer controlled the board because the former directors would not pursue a claim against themselves. 

The association also contended the former directors' repeated wrongs constituted a continued course of conduct that ended only when the developer lost control of the board in 2014, less than two years before the association filed suit.  The former directors responded that the last breach for allegedly underfunding the association would have occurred in December 2013, when the former directors adopted the budget for 2014.

For all claims, the trial court determined that the statute of limitations was not tolled because the alleged breaches of fiduciary duties did not constitute obstruction or extraordinary circumstances.  It found that the unit owners could have sued the defendants at any time through a derivative suit (action by a member of a corporation to enforce the corporation's rights) to protect their rights, even though the developer controlled the board. 

The trial court entered judgment in the defendants' favor and dismissed the association's claims.  The former directors sought indemnification from the association for their attorneys' fees and costs, but the trial court rejected their claim.  The former directors and the association appealed.

The statute of limitations begins to run from the date an injury is first sustained.  The appeals court determined that the failure to levy adequate assessments began from the project's inception in 2006.  The fact that the alleged breach continued each year thereafter did not prevent the statute of limitations from beginning to run in 2006.  In addition, the evidence showed that the last potential breach occurred when the former directors last adopted a budget in November 2013, more than two years before the association filed suit.

Virginia law allows a statute of limitations to be tolled when the defendant directly or indirectly obstructs the filing of a lawsuit.  The plaintiff must establish that the defendant took an affirmative act designed or intended to obstruct the plaintiff's right to file suit.  Equitable principles may also toll a statute of limitations where fraud prevents the plaintiff from suing or where the defendant has taken some action to deprive the plaintiff of the power to sue. 

The appeals court found that the association was not obstructed or prevented from filing suit since the owners could have brought a derivative suit in the association's name while the developer still controlled the board.  Therefore, there was no statutory or equitable reason to toll the statute of limitations.

The association's articles of incorporation and bylaws provided that the former directors were entitled to indemnification to the fullest extent of the law.  The Virginia Nonstock Corporation Act obligated the association to indemnify a current or former director who entirely prevails in the defense of any proceeding to which he was a party because of his position as director against the reasonable expenses, including attorneys' fees, incurred by the director in connection with the proceeding.  The appeals court determined that the former directors entirely prevailed in the claims against them, so the association was obligated to indemnify the former directors for their legal expenses.

Accordingly, the appeals court affirmed the trial court's dismissal of the association's claims, but it reversed and vacated the trial court's rejection of the former directors' request for indemnification.  The case was remanded to the trial court to determine the reasonable attorneys' fees and costs to which the former directors were entitled.

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Association's Refusal to Allow Service Animal in Clubhouse Proves Costly

Sanzaro v. Ardiente Homeowners Association, LLC, No. 2:11-cv-01143-RFB-CWH (D. Nev. Feb. 25, 2019)

Federal Law and Legislation:  The United States District Court for the District of Nevada held an association, individual directors, the developer, and the manager liable for requiring a disabled resident to show proof of her disability and of her assistance animal's training before the animal could enter the clubhouse.


Ardiente Homeowners Association, LLC (association) governed the Ardiente community in North Las Vegas, Nevada.  Deborah and Michael Sanzaro owned a home in the community.

In 2004, Mrs. Sanzaro became permanently disabled such that she could not walk without a walker and experienced significant pain.  In 2008, Mrs. Sanzaro acquired a Chihuahua named Angel who helped her to cope with the pain.  Angel was later trained to retrieve things, such as the walker or car keys.

On March 11, 2009, Mrs. Sanzaro entered the Ardiente clubhouse with Angel.  Laury Phelps (Phelps) was the manager employed by the association's management company, RMI Management, LLC (RMI).  Phelps asked why a dog was in the clubhouse.  Mrs. Sanzaro explained that Angel was a service animal that assisted with her disability.  Phelps asked if she had any documentation for Angel.  When Mrs. Sanzaro said she did not, Phelps asked her to leave.  Mrs. Sanzaro initially refused to leave but complied after Phelps called security.

Two days later, Phelps sent an email to all owners on behalf of the association's board of directors, stating that persons with service animals should notify the clubhouse staff about their service animals and that any certification papers would be helpful for inclusion in the resident's file.  That same day, Mrs. Sanzaro entered the clubhouse with Angel without incident.

The association's attorney sent the Sanzaros a violation notice describing March 11th incident as a violation of the governing documents and informing them that a hearing was scheduled for March 30th.  The letter requested additional documentation from doctors to substantiate the existence of a disability and the necessity of the dog's presence in the clubhouse to accommodate that disability.

Several communications were sent by the Sanzaros and the association concerning the incident and service animals.  Phelps said legitimate service animals would be accommodated.  The association president described the Sanzaros' communications as inaccurate and characterized the Sanzaros as waging a personal vendetta against management.  On March 30th, the board conducted the hearing at an open meeting with a number of owners in attendance.  The Sanzaros chose not to attend.

The Sanzaros began receiving hate mail and even death threats.  The letters informed the Sanzaros that a group of owners calling themselves "Ardiente Residents for Solidarity" had banded together to rid the community of undesirables such as them.  They called the Sanzaros liars, the enemy, and garbage.  One expressed the hope that someone would catch Angel and drop her deep in the desert.  Someone even spray-painted a death threat on the Sanzaros' garage.

The association's attorney informed the Sanzaros that their failure to provide documentation about Angel's abilities as a service animal was a violation of the governing documents.  Fines of $100 each were imposed for Mrs. Sanzaro's two noted entries into the clubhouse with Angel.  The letter stated that the fines would be waived if there was no subsequent violation during the next six months but the Sanzaros were liable for $752 in legal fees incurred by the association in enforcing the governing documents. 

In August 2009, the association filed a lien in the amount of $2,590 against the Sanzaros' home.  In October 2009, the association initiated foreclosure proceedings by filing a notice of default and election to sell, stating that the Sanzaros owed $3,608.  The Sanzaros eventually paid the association's debt collector $4,011, but they were forced to file bankruptcy.

In July 2010, Mrs. Sanzaro tried to enter the clubhouse again with Angel to purchase a gate opener.  Again, she was not allowed entry until she provided more documentation for Angel.  Mr. Sanzaro wrote to RMI and Corona Ardiente LLC (Corona), the developer who appointed most of the board members until 2010, alleging disability discrimination by Phelps.  Mr. Sanzaro also wrote to individual board members, including Scott Harris and Ryan Smith, requesting an accommodation to allow Mrs. Sanzaro to enter the clubhouse with Angel to use the facilities, including the gym, pool, sauna, and library.  Harris worked for Corona and was its representative on the board.  Smith worked for the successor developer and was its representative on the board.  The association's attorney rejected the requests, stating that Mrs. Sanzaro still needed to provide documentation of her disability and a training certificate for Angel.

In 2011, Mrs. Sanzaro again tried to enter the clubhouse with Angel but was refused entry.  The association imposed more fines and attorneys' fees for the different attempted entries.  The Sanzaros eventually chose to move out of the community due to the ongoing harassment and threats, although they still owned the home.

In 2013, the Sanzaros filed suit against Corona, RMI, Phelps, Harris, and Smith (collectively, defendants), as well as others.  The Fair Housing Act (FHA) obligates an association to make reasonable accommodations in rules, policies, practices, or services when such accommodations may be necessary to afford a handicapped person equal opportunity to use and enjoy a dwelling.  The defendants admitted that Mrs. Sanzaro was disabled but still contended they were not required to recognize Angel as a service animal without proper documentation.

The court disagreed, finding that no documentation or specialized training was required for Angel.  The Department of Housing and Urban Development (HUD) rules implementing the FHA indicate that an association may inquire as to the need for a requested accommodation if neither the disability nor the need is readily apparent.  HUD guidance further indicates that, so long as a disabled person demonstrates a nexus between the disability and the service the animal provides, specialized training of the animal is not required.

The court found that all the defendants knew that Angel assisted Mrs. Sanzaro with retrieving her walker, providing a clear nexus between the disability and the services Angel provided.  The defendants also could not identify why accommodating Angel would have been unreasonable.  Angel was not disruptive, nor did she threaten anyone.  In fact, Angel was so inconspicuous due to her small size and quiet disposition that most people in the clubhouse never even noticed her.

The court found that Harris, Smith, and Phelps all directly refused to accommodate Mrs. Sanzaro's request to bring Angel in the clubhouse because they either directly denied the request or ratified the association's rejection of the request.  The court also determined that Corona and RMI were responsible for the acts of their agents.  Further, the board was wrong to do nothing to address or mitigate the hostility and threats made against the Sanzaros by other owners. 

The court ordered the defendants to pay $350,000 for Mrs. Sanzaro's damages, including pain, suffering, humiliation, and emotional distress.  The court also found that the defendants acted with reckless indifference to the Mrs. Sanzaro's rights and awarded the Sanzaros an additional $285,000 as punitive damages as follows:  the association - $150,000, RMI - $75,000, Phelps - $25,000, declarant - $15,000, and $10,000 each to Harris and Smith.  The Sanzaros were further awarded their attorneys' fees and court costs.

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Bank's Offer to Pay Super-Priority Lien Amount is Sufficient to Protect Mortgage

USROF IV Legal Title 2015-1 v. White Lake Ranch Association, No. 3:15-cv-00477-MMD-CBC (D. Nev. Feb. 11, 2019)

Assessments:  The United States District Court for the District of Nevada held that an association foreclosure sale of a unit did not extinguish the mortgage on the unit because the bank offered to pay whatever amount was required to discharge the association's super-priority lien on the unit.


White Lake Ranch Association (association) governed a community in Reno, Nevada.  Jose and Elva Salazar owned a unit in the community.  The Salazars purchased the property by obtaining a $140,160 loan, which was secured by a deed of trust (mortgage) on the property in favor of Bank of America, N.A. (BANA). 

The Salazars failed to pay association assessments.  In August 2011, the association's agent, Kern & Associates (Kern), recorded a lien against the property in the amount of $863.  In August 2012, Kern recorded a notice of default and election to sell against the property, stating that $2,672 was due.

Within a month, BANA's counsel sent Kern a letter asking the actual amount of the nine months of common assessments predating the 2012 recorded notice.  The letter indicated that BANA would pay such amount, "whatever it was," that BANA should rightfully be required to fully discharge its obligations to the association.  The letter further stated that BANA offered to pay such amount upon presentation of adequate proof of the same by the association.

Kern did not respond to the letter.  Instead, in April 2013, Kern recorded a notice of foreclosure sale, stating that the Salazars owed $4,043.  In May 2013, Kern sold the property to the association at a foreclosure sale for $300.  The association then sold the property to SFR Investments Pool 1, LLC (SFR). 

In the meantime, BANA assigned the mortgage to USROF IV Legal Title 2015-1, with U.S. Bank National Association (U.S. Bank) acting as legal title trustee.  U.S. Bank sued the association and SFR for declaratory judgment (judicial determination of the parties' legal rights), quiet title (definitively establish property ownership), breach of the Nevada Uniform Common-Interest Ownership Act, and wrongful foreclosure.  The mortgage was later transferred to PROF-2013-M4 Legal Title Trust IV, but U.S. Bank remained the legal title trustee.

U.S. Bank asserted that it was entitled to summary judgment (judgment without a trial based on undisputed facts) because BANA provided adequate tender (offer of money) to satisfy the association's super-priority lien and protect the mortgage from being extinguished by the foreclosure sale. 

SFR argued that there was no tender because BANA never produced any money.  It also urged that BANA's offer to pay money was not effective against a third-party purchaser since BANA did not record the tender in the land records.  The association also claimed there was no tender because BANA did not offer an actual amount of money.  The court was not persuaded.

A tender is an "offer" of money.  For a tender to be effective, it must be an offer for full and unconditional payment or with conditions on which the tendering party has a right to insist.  The court found that BANA made an offer to pay the full amount of assessments in whatever amount required to satisfy the super-priority lien.  The fact that BANA never produced a check did not render its offer insufficient since the association never responded to BANA's request as to the amount of its required payment.  BANA's only condition was that the amount be accepted as fully discharging BANA's debt to the association, a condition upon which the court found BANA had a right to insist. 

Moreover, BANA did not need to record its tender or any other document showing the super-priority lien amount had been satisfied.  As such, the court found that the association's foreclosure sale did not extinguish the mortgage.  The court granted summary judgment in U.S. Bank's favor, declaring that the mortgage continued to encumber the unit.

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Association Entitled to Foreclose After Rejecting Owner's Checks That Violated Payment Policies

Waterford Pointe Condominium Association v. Reserve Domiciles, Ltd., No. 28766 (Ohio Ct. App. Feb. 27, 2019)

Assessments:  The Court of Appeals of Ohio held that an association was not obligated to accept an owner's checks that specified payment was for assessments only where the governing documents required payments to be applied first to interest and late fees.


Waterford Pointe Condominium Association (association) governed a condominium in Twinsburg, Ohio.  Reserve Domiciles, Ltd. (Reserve) acquired a unit in the condominium in 1998.

In 2005, the association's bylaws were amended to provide that payments to the association would be applied first to interest, second to late fees, third to collection costs, and finally to the principal owed to the association for assessments.  In 2007, the association's board of directors adopted a collection policy stating that monthly assessments were due on the first day of the month and that a $25 late fee would be imposed if payments were not paid or postmarked by the 15th day of the month.

Between 2009 and early 2012, Reserve was late in making its monthly assessment payment a few times.  Reserve consistently sent checks containing the statement:  "tendered for maintenance fee (applicable month, year), only, not for any other purpose."  Nonetheless, the association routinely accepted and cashed Reserve's checks until May 2012. 

Reserve did not make the April 2012 payment on time, so the association charged a late fee to the account.  When the association received Reserve's payment on May 4, 2012, the association applied the payment first to the April late fee based on the bylaws' order of priority and then to the May assessment.  A late fee was charged on May 15th since the May assessment was partially unpaid.

When Reserve submitted a check in June 2012 for only the amount of the June assessment and with the restrictive statement noted above, the association declined to accept the payment and returned the check to Reserve.  The association informed Reserve that it could not accept payments that included qualifying endorsements or restrictions due to the account delinquency.  The association's position was that the restrictive language prevented the association from applying the payment in accordance with the bylaws.  The association believed the bylaws prohibited it from applying a payment to a fourth priority amount due when there were amounts due with higher priorities.

Each month between June 2012 and September 2014, Reserve submitted a check with the restrictive language only for the monthly amount.  Each month, the association returned the check along with an explanation of its reason for rejecting the payment and stating the amount required to satisfy the delinquency.  Some letters were sent by the association's manager and some by its attorney, and copies of the collection policies were sent to Reserve.  By 2013, the association's attorney began warning that a lien would be filed against the property if the account was not brought current.  By March 2014, the debt had grown to $6,570.  The association even offered to waive all late fees and legal costs if Reserve would submit a check that would satisfy the outstanding delinquency.  Reserve declined the offer.

In September 2014, the association filed a lien against the property, and in January 2015, the association initiated foreclosure proceedings.  Reserve responded by denying the allegations and countersuing for breach of contract and slander of title.  The trial court ruled in the association's favor and issued a foreclosure decree.  Reserve appealed.

Reserve argued that the association did not have a legal basis to refuse its monthly payments and that the association was not entitled to file a lien on its property because it never defaulted on its monthly payments.  The appeals court held that Reserve was contractually obligated to comply with the association's bylaws.  When Reserve failed to remedy its delinquency after notice from the association, the association was entitled to file a lien.  In addition, while Reserve argued it never missed a payment, it was late in paying the April 2012 assessment, which triggered the bylaws' order of priority provisions.

Reserve contended that the association could have simply accepted the checks and allocated the money appropriately, which would have greatly mitigated the association's damages and attorneys' fees.  Reserve argued that foreclosure was not an equitable remedy under the circumstances.  The appeals court was not persuaded.  It found that the association engaged in frequent communications with Reserve for more than two years in an attempt to address the problem with the restrictive language on the checks.  Reserve was the one who failed to mitigate damages, particularly after the association's offer to waive late fees and attorneys' fees if Reserve would simply cure the delinquency.

Accordingly, the trial court's judgment was affirmed.

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Tenants Were Implied Insureds Under Condominium Association's Fire Insurance Policy

Western Heritage Insurance Company v. Frances Todd, Inc. No. A152428 (Cal. Ct. App. Mar. 4, 2019)

Risks and Liabilities:  The Court of Appeal of California held that a condominium association's insurance carrier could not pursue a subrogation claim against tenants of a unit who were allegedly responsible for negligently causing the fire because the insurance policy was intended to be for the tenants' benefit.


East Shore Commercial Condominiums Owners' Association (association) governed a commercial warehouse condominium in Berkeley, California.  William de Carion owned a unit in the condominium, which he leased to Frances Todd, Inc., Eric Gellerman, and Amy Ferber (collectively, tenants).  The tenants operated a furniture manufacturing business within the unit.

In April 2014, a fire erupted in the unit.  The five-alarm fire raged for several hours, severely damaging the unit and nearby properties.  The association's insurance carrier, Western Heritage Insurance Company (Western Heritage), paid for the fire damage.  One year later, Western Heritage brought a subrogation claim (succeeding to the rights of another) against the tenants for negligence and breach of the tenants' lease with de Carion.  Western Heritage alleged the fire was caused by the tenants' negligence because they maintained flammable staining materials in the unit despite knowing about the building's faulty wiring.

Subrogation places the insurer in the position of the insured to pursue recovery from third parties legally responsible to the insured for a loss, which the insurer has both insured and paid.  The insurer succeeds only to the same rights as the insured and is subject to the same defenses as could be asserted against the insured.

The defendants responded that they could not be sued for subrogation because they were implied co-insureds under the association's policy.  Equitable principles limit an insurer's ability to bring a subrogation claim against its own insured.  Western Heritage responded that the defendants could not be co-insureds based on their lease provisions and because they were not named as insureds under the policy.

The condominium declaration of codes, covenants, and restrictions (declaration) obligated the association to maintain fire insurance for the entire condominium.  The association and the unit owners were to be named as insureds under the policy.  The declaration also specifically prohibited individual owners from obtaining fire insurance, although they could maintain individual liability insurance.  In addition, the insurance policy was to contain a waiver of subrogation as to the owners and occupants of units.  The declaration further obligated all unit tenants and occupants to comply with the declaration.

The tenants' lease with de Carion obligated the tenants to carry public liability insurance covering the unit, but it did not specify who would carry fire insurance.  The lease required the tenants to keep the unit in good repair and prohibited them from carrying on any activity, which would impair the quiet enjoyment of other occupants in the building.  The lease also required the tenants to indemnify de Carion for personal injuries or property damage resulting from the acts or omissions of the tenants.

At the end of the lease, the tenants were obligated to return the unit in substantially the same condition as at the beginning of the lease, except for reasonable wear and tear and casualty.  Either party could terminate the lease when damage due to fire or other casualty rendered 10% or more of the unit unusable.  If less than 10% was damaged, de Carion was obligated to repair the unit to the extent insurance proceeds were available.

The trial court concluded that the lease could only be interpreted as obligating de Carion to insure against both his own and the tenants' negligence with respect to fire damage.  Therefore, subrogation was inappropriate, and judgment was entered in favor of the defendants.  Western Heritage appealed.

The California courts have held that a tenant is not responsible for negligently causing a fire where the landlord and tenant intended the landlord's insurance policy to be for their mutual benefit.  In such case, the tenant is treated as an insured, despite not being named as an insured on the policy.

The appeals court concluded that the Western Heritage policy was intended to be for the tenants' benefit, so Western Heritage could not pursue a subrogation claim against them.  First, since the lease required the tenants to obtain only liability insurance, the implication was that de Carion would carry the fire insurance.  Second, the declaration prohibited both de Carion and the tenants from purchasing an individual fire insurance policy on the unit.  Thus, the association's fire insurance policy was intended to be the only fire policy on the property.

Third, the lease required the tenants to surrender the unit upon termination of the lease in substantially the same condition as at the beginning of the lease except in the case of a casualty.  Although the lease did not specifically define "casualty," it did refer to termination of the lease in the event of damage due to fire or other casualty.  This sentence showed that the lease considered fire to be a type of casualty.  Where the lease contemplated the possibility of fire without assigning responsibility for maintaining fire insurance, the lease must be read as placing the burden on the landlord for insuring against both the landlord's and the tenant's negligence with respect to fire damage.

Western Heritage insisted that the lease allowed de Carion to recover damages caused by the tenants' acts or omissions, so it should be able to pursue that claim in lieu of de Carion.  The appeals court held that the tenants were obligated only to indemnify de Carion for liability to third parties; they were not directly liable to him in all cases where he was compensated by insurance.

Accordingly, judgment in favor of the tenants was affirmed.

©2019 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Contractor's Lien for Association Debt Failed to Properly Account for Condominium Form of Ownership

Woodley v. Style Corporation, No. 77352-6-I (Wash. Ct. App. Feb. 11, 2019)

Association Operations:  The Court of Appeals of Washington held that a contractor's lien filed against several condominium units and common elements was clearly excessive because the lien did not state the value of the work associated with each property.


Denise Woodley owned a unit in the Bellevue Park Condominium in King County, Washington.  The condominium consisted of 78 units in multiple buildings. 

In September 2016, while roof work was in progress, a rainstorm occurred, causing water to leak into Woodley's unit and 19 other units.  The condominium's property management company, MacPherson's Property Management (manager), engaged Style Corporation (Servpro) to clean up the water and conduct restoration work.  The manager signed a contract with Servpro on behalf of "Bellevue Park Condos," and Servpro began placing drying equipment in the affected units. 

The condominium association did not immediately pay Servpro's bill because it was trying to obtain the money from the roofing company.  In January 2017, Servpro filed a single lien against the damaged property in the amount of $183,945.  The lien named the association as the indebted person, but it stated that the lien applied to the 20 specific units and a common storage area where Servpro provided services.  The lien also named each of the 20-unit owners, but it did not allocate a specific lien amount to each unit.

Woodley sued Servpro to release the lien.  The trial court found that the lien both frivolous and clearly excessive and ordered the lien released.  Servpro appealed.

Washington statutes allow a contractor to file a materialmen's lien for furnishing labor, professional services, materials or equipment for the improvement of real property in the amount of the contract price of such labor, professional services, materials or equipment furnished at the request of the property's owner or agent of the owner.  The statutes also establish a procedure by which an owner may contest the lien.  The trial court is to conduct a summary proceeding to determine whether the lien is frivolous and made without reasonable cause or clearly excessive.  The trial court must release the lien if it is found to be frivolous and made without reasonable cause or reduce the lien amount if it is clearly excessive.

The appeals court indicated that a high standard existed to release a lien in order to protect the rights of contractors and laborers.  A lien is frivolous if it is beyond legitimate dispute and so devoid of merit that it has no possibility of succeeding.  If there are questions of fact or law concerning the lien, then the lien is not frivolous.

The appeals court found that Woodley's arguments did not meet such a high standard.  Woodley argued that she never directly authorized any of Servpro's work, but Woodley also stated that she viewed the condominium association as having the actual authority under the condominium governance documents to arrange for emergency repairs to her unit.

Woodley contended the lien was frivolous because the contract signed by the manager did not state the actual amount to be charged.  Liens are authorized only for the "contract price."  However, the statutes define "contract price" as the amount agreed upon by the contracting parties, or if no amount is agreed upon, then the customary and reasonable charge for the services or materials. 

Woodley also claimed the lien was frivolous because it contained factual inaccuracies, such as stating that the association owned the properties and that the work was "ongoing."  The appeals court determined that such inaccuracies may be material to the lien's ultimate validity, but they did not automatically make the lien frivolous.  Since the lien presented debatable questions of fact and law, it was not frivolous.

The statutes did not define "clearly excessive," so the appeals court looked at standard dictionary definitions.  The appeals court concluded that, for a lien to be clearly excessive, it must be unquestionably characterized by being far above the usual or agreed upon amount.

The appeals court stated that there were two approaches to filing liens against condominium property.  The contractor may file a lien against an entire condominium project by naming the condominium association as the indebted person and describing the entire condominium property as the property being liened.  Any judgment enforcing such lien extends to all units and each owner's interest in the common elements.  The entire lien is released if the association pays the total amount due, but the lien against an individual unit must be released if the unit owner pays the contractor his or her proportional share of the total amount owed by the association.  Such proportional share is not based on the value of the work associated with such unit but on the owner's percentage of ownership in the common elements, as stated in the condominium declaration.

Alternatively, a contractor can file a lien against an individual unit improved by the contractor's services where the unit owner or the owner's agent expressly consents to the services.  However, such lien must not exceed the contract price associated with such unit.  The appeals court stated that Servpro erred by blending the two lien methods.

The appeals court found that the lien imposed a $183,945 cloud on Woodley's title.  The lien was filed only against the 20 units rather than the entire condominium.  The lien identified the association as the indebted party, but it also specifically named the 20-unit owners, and no information was provided as to the amount related to each unit or the amount owed by each owner. 

The evidence revealed that the value of the services provided to Woodley's unit was $6,001.  As such, the lien was clearly excessive.  The statutes make a clear distinction between a frivolous lien and a clearly excessive.  The lien may be released only where it is frivolous, and the remedy for a clearly excessive lien is a reduction of the lien's value. 

Accordingly, the appeals court reversed the trial court's ruling releasing the lien, but it affirmed the finding that the lien was clearly excessive.  The case was remanded for further proceedings to reduce the lien amount.

©2019 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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