April 2019
In This Issue:
Recent Cases in Community Association Law
Arbitrator, Not Judge, Must Decide Whether Prerequisites for Arbitration Have Been Satisfied
Lot Owners Could Not Avoid Property Taxes, Even Though They Had Few Rights in the Lots
By-Law Amendments Have to Satisfy Declaration's Amendment Requirements
Compromise Budget Methodology Enforceable Despite Deviation from Declaration
Untimely Preservation Notice was Insufficient to Prevent Covenants from Being Extinguished
One Person Does Not Make a Committee
Association Counsel Not Disqualified from Representing Association in Suit Against Former Directors
Unit Mortgagee Allowed to Keep Condominium Insurance Proceeds Without Restoring Damaged Unit
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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.

Arbitrator, Not Judge, Must Decide Whether Prerequisites for Arbitration Have Been Satisfied

Baldwin v. Woodside 05S, LP, No. E068267 (Cal. Ct. App. Mar. 18, 2019)

Risks and Liabilities:  The Court of Appeal of California held that, where the developer and homeowners agreed they were bound by a declaration's binding arbitration requirement for disputes, the trial court was obligated to compel arbitration, even though the developer disputed that the prerequisites for arbitration had been satisfied.

Woodside 05S, LP and other related entities (collectively, Woodside) developed the Sagecrest at McSweeny Farms community in Hemet, California.  In 2016, Theresa Baldwin and a number of other lot owners (collectively, owners) sued Woodside, claiming they bought homes from Woodside that were defectively designed and constructed. 

The declaration of covenants, conditions, and restrictions (declaration) required that any owner having a dispute with Woodside give written notice of the dispute to Woodside describing the nature of the dispute and any proposed remedy.  Under the declaration, Woodside had the right to meet with the owner to discuss the dispute, enter the property to inspect any issues that were part of the dispute, and conduct other inspections and testing.  The declaration also provided that the parties, by mutual agreement, could voluntarily submit the dispute to mediation before a mutually agreeable neutral mediator.  If the dispute was not resolved within 90 days after Woodside received the dispute notice, either party could submit the claim to mandatory and binding arbitration in accordance with the Federal Arbitration Act.

The owners did not give Woodside any written notice before filing litigation, but they did deliver a notice of claims to Woodside while the case was pending.  Woodside inspected some, but not all of the subject homes.  Thereafter, Woodside delivered an offer to repair to the owners.  The owners took the position that the repair offer did not comply with the California Right to Repair Act, so they were free to proceed with legal action.

The owners moved to compel either arbitration or judicial reference, which is a process established in California whereby a judge is appointed to hear and determine all issues and to issue a statement of decision.  Woodside opposed the motion, arguing that the owners had not satisfied the prerequisites established in the declaration before arbitration may be initiated, including providing Woodside with notice of the dispute, an opportunity to inspect and cure, and an opportunity to mediate.  The owners asserted that they had given adequate notice.

The trial court denied the motion, finding that the owners had failed to comply with the declaration's pre-litigation procedures, which were conditions that must be satisfied prior to arbitration.  The owners appealed.

The appeals court stated that the question of whether the parties have submitted a particular dispute to arbitration (question of arbitrability) is an issue for the courts to decide unless the parties clearly and unmistakably provided otherwise by contract.  However, procedural questions that grow out of the dispute and bear on its final disposition are presumptively for the arbitrator to decide, not the judge.

The appeals court held that the trial court was required to grant the owners' motion to compel arbitration since Woodside agreed that it was bound by the declaration's arbitration requirement and that the owners' claims constituted a dispute subject to mandatory arbitration.  Woodside merely contended that the conditions precedent to its duty to arbitrate had not been satisfied.

Woodside argued that it never agreed to submit the question of the arbitrability to an arbitrator.  Where the arbitration agreement is silent on the question of arbitrability, there is a presumption that the existence and scope of an arbitration agreement are to be decided by a court.  However, there is also a presumption that any conditions precedent and other prerequisites to arbitration are to be decided by the arbitrator.

Accordingly, the trial court's order refusing to compel arbitration was reversed, and the case was remanded.

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Lot Owners Could Not Avoid Property Taxes, Even Though They Had Few Rights in the Lots

Hinsdale County Board of Equalization v. HDH Partnership, No. 17SC862, 2019 CO 227 (Colo. Apr. 8, 2019)

Taxes and Tax Regulation:  The Colorado Supreme Court held that the record title owners of lots in a hunting and fishing project managed by a club were responsible for property taxes on the lots, even though the club retained significant control over the lots' use and all club members had recreational use rights over all the individually owned lots.

Lake Fork Hunting and Fishing Club (club) governed a 1,400-acre project in Hinsdale County, Colorado.  The project was comprised of 29 lots ranging in size from 25 to 155 acres, and lot ownership came with mandatory membership in the club in the same manner as a homeowners association. 

The declaration and establishment of covenants, conditions, reservations, and restrictions (declaration) recorded in 1979 gave the club significant control over the property.  Although the lots were individually owned, the entire project was used as a single recreation area without regard to lot boundary lines.  The declaration gave club members the right to use the entire 1,400 acres for hunting, fishing, and camping.  The club also had certain exclusive rights in the entire 1,400 acres, including the right to construct and maintain utilities, roads, lakes, bridges, fences; to pasture livestock; and to maintain easements necessary for a skeet and trap field, golf driving range and an airport runway.  In 1999, a supermajority of owners voted to amend to the declaration to prohibit the construction of a residence on any lot.

In 2015, the Hinsdale County Assessor conducted new valuations of the lots and assessed property taxes to the lot owners.  Lot owners HDH Partnership, Lawrence Ausherman, Hondros Family Real Estate, LLC, Mark Ish, Herb Marchman, and the Teresa M. Mull Revocable Trust (collectively, plaintiffs) protested the valuations to the Hinsdale County Board of Equalization (BOE), which denied their petitions. 

The plaintiffs then appealed the BOE's decision to the State of Colorado Board of Assessment Appeals (BAA).  The plaintiffs argued that, although they held title to the lots, due to the declaration's extensive restrictions on the lots' use, they did not enjoy the traditional rights of property owners.  They asserted that the club was the party that held most of the traditional property rights in the lot, and as such, it should be considered the lot owner for purposes of tax assessment and be responsible for paying the property taxes.  The plaintiffs described their property rights as more of a license to use rather than ownership of the land.

The BAA rejected the plaintiffs' arguments, finding that the plaintiffs held title to the lots by traditional deeds and had the unrestricted rights to sell their lots and keep the proceeds.  The BAA determined that the right to use the entire project property was a benefit the plaintiffs bargained for when purchasing property rights within the project.  The BAA also found the declaration's restrictions on the lots' use were entirely self-imposed since the declaration could be amended or terminated at any time by a majority vote of the owners.

The plaintiffs next appealed the BAA's decision to the Colorado Court of Appeals, which looked beyond the form of title and examined the substance of the plaintiffs' rights to use their lots.  The Court of Appeals determined that the club should be treated as the lot owner for purposes of property taxation because it held such a high degree of control over the lots and the plaintiffs could only use their lots subject to the club's control and regulation.  The Court of Appeals agreed with the plaintiffs that their property interests were more akin to licenses.  The BAA and BOE appealed to the Colorado Supreme Court.

The Supreme Court found that Colorado's tax code reflected the legislature's intent to levy property tax on the record title owner of the property.  County appraisers are required to appraise and value each parcel of land separately and mail notice of the valuation to each property owner.  The code specifies that the property owner shall be ascertained from recorded county land records.  The Supreme Court noted that the code does not permit the assessor to mail a valuation notice to a party that does not hold record title.

The Supreme Court stated that the substance-over-form doctrine was inapplicable in the current case.  It determined that the tax code's plain language dictated that the property owner for tax purposes must be determined solely based on the recorded land records, and it did not make a difference that the use, possession, or ownership of property was qualified, limited, or not subject to transfer. 

While the club did retain significant control over the lot's use, the club could not revoke a lot owner's title or ownership rights or inhibit an owner's ability to sell its lot and retain the proceeds.  The owners also had a say in the club's management and elected the club's board of governors.  Moreover, the owners chose to ensure the collective recreational use of the lots by voting to amend the declaration to prohibit the construction of residences on the lots.  The Supreme Court stated that the plaintiffs could not rely on the same use restrictions they bargained for when they purchased the lots to avoid the tax liability that flowed from their record title ownership.

Accordingly, the Supreme Court reversed the judgment of the Court of Appeals and reinstated the BAA's order.

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By-Law Amendments Have to Satisfy Declaration's Amendment Requirements

Keller v. Kay, Nos. 2016-11536, 2017-01054 (N.Y. App. Div. Mar. 20, 2019)

Documents:  The Supreme Court of New York, Appellate Division held that association by-laws had to be amended in accordance with the declaration's amendment provisions since the by-laws were expressly made a part of the declaration.

The Colony at Holbrook Home Owners Association, Inc. (association) governed a community in Suffolk County, New York.  Sheila Keller (Keller) owned a home in the community.  In 2015, Keller ran for election to the association's board of directors (board) but lost.

In 2016, Keller sued Steven Kay and other members of the board challenging the validity of amendments to the association's by-laws made in 1997 and 2002.  The amendments eliminated cumulative voting, established staggered terms for directors, utilized a "double envelope system" for proxies, and closed nominations for the board at 4:00 p.m. on election day. 

Keller asserted that the by-laws amendments were invalid because they were not adopted with the approval required under the declaration of covenants (declaration) governing the community.  The by-laws specified that they could be amended at an association meeting with the approval of at least 66 2/3% of the members.  The by-laws did not state any other requirement necessary to make the amendment effective.

The declaration stated that it could be amended by an instrument signed by members holding at least 66 2/3% of the votes in the association, and an amendment is effective upon recording.  The declaration further stated that the by-laws were attached as an exhibit to the declaration and made a part of the declaration.  Keller argued that, by making the by-laws a part of the declaration, any amendment to the by-laws had to comply with the declaration's amendment requirements to become effective.  The by-laws amendments were never recorded.

The trial court granted judgment in Keller's favor and issued a preliminary injunction (order prohibiting or mandating certain action), barring the board from proceeding with the annual election.  The board appealed.

The appeals court agreed with Keller – that is, that any by-laws amendments must be recorded to be effective.  Since the amendments were not recorded, the trial court correctly granted judgment in Keller's favor on the amendments' effectiveness.

However, the appeals court did not agree that a preliminary injunction was an appropriate remedy because Keller did not show that she would suffer irreparable harm without the injunction.  A preliminary injunction may be granted where there is:  (1) a likelihood of the plaintiff's success on the merits of the case; (2) a danger of irreparable injury in the absence of an injunction; and (3) a balance of the equities in the plaintiff's favor.

Although the amendments were not properly recorded, Keller had participated in the voting on the amendments and in elections since the amendments were adopted.  Keller could not demonstrate how she was harmed by the voting and election procedures the amendments would establish.  In particular, the appeals court stated that Keller's loss in the 2015 election was insufficient to establish irreparable harm because she could not show that she would have won the election in the absence of the amendments.  Although the amendments were not effective, the appeals court noted that the association had been operating under the amendments for nearly two decades.  So, granting the injunction would disturb the status quo rather than preserve it.

Accordingly, the trial court's judgment was reversed.

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Compromise Budget Methodology Enforceable Despite Deviation from Declaration

Lodge at Westgate Park City Resort and Spa Condominium Association Inc. v. Westgate Resorts Ltd., No. 20170544-CA (Utah Ct. App. Mar. 14, 2019)

Assessments:  The Court of Appeals of Utah held that a resort developer was bound by a budget methodology agreed to in a compromise with the unit owners, even though the methodology deviated from the declaration.

Westgate Resorts Ltd. and CFI Resorts Management Inc. (collectively, Westgate) developed and managed the Lodge at Westgate Park City Resort & Spa in Park City, Utah.  The resort included a condominium governed by the Lodge at Westgate Park City Resort and Spa Condominium Association Inc. (association).

Westgate started entering into purchase contracts with buyers before construction was complete.  Buyers were given an estimated association budget for 2007 totaling more than $1.3 million.  The purchase contracts disclosed that the budget was an estimate only and that actual costs were subject to change.  The declaration of condominium (declaration) was recorded in 2007.

The resort was completed in 2008.  In 2009, the first budget was prepared for the project in its fully operational form, which totaled more than $2.2 million.  By that time, sales had mostly come to a stop due to the recession, and many unit owners were upset by the huge increase in assessments.  A group of owners retained a lawyer and threatened to sue Westgate.

The resort general manager (GM) hired by Westgate requested that dissatisfied owners form an Owners Finance Committee (OFC), whose purpose was to work with Westgate to achieve a mutual agreement on the budget, including analyzing the cost allocation methodology.  Westgate approved the OFC and encouraged continued dialogue with the owners.

For five months, Westgate and the OFC met on an almost weekly basis.  By November 2009, the parties agreed on an expense allocation methodology that would apply to all future budget preparation.  The GM sent a letter to all owners which included a 2010 budget and the agreed-upon budget methodology (2009 budget methodology).  The letter stated that the 2009 budget methodology might be inconsistent with the declaration, but such methodology was to take precedence over the declaration.  Budgets for the next four years were distributed with the 2009 budget methodology. 

Westgate expressly approved the 2009 budget methodology and never informed the owners or the OFC that the methodology was invalid.  Once the 2009 budget methodology went into effect, not a single owner sued Westgate, and the statutes of limitations lapsed on the owners' various claims.

In 2013, new management took over the resort's operation and prepared a budget that deviated from the 2009 budget methodology in many respects.  The association sued Westgate, seeking, among other things, a determination regarding the enforceability of the 2009 budget methodology.  Westgate counterclaimed against the association. 

The trial court ruled that the 2009 budget methodology was enforceable against Westgate based on the equitable doctrines of promissory estoppel and ratification.  However, the trial court determined that the parties did not intend to limit the amenities use fees.  Both sides appealed.

For promissory estoppel, there must have been a reasonably certain and definite promise.  A plaintiff's subjective understanding of the defendant's statements, without more, is insufficient.  Westgate argued that there was no definitive agreement upon which either the association or the owners reasonably relied.  However, the appeals court found that the owners had more than a subjective understanding of Westgate's promises. 

The 2009 budget methodology was the product of intensive negotiations over five months.  Westgate's promise concerning the 2009 budget methodology was sufficiently definite for the parties to adhere to the methodology for four years.  There was also ample evidence the owners reasonably relied upon the 2009 budget methodology by refraining from suing Westgate and by paying their association assessments.  The 2009 budget methodology ultimately brought peace to the resort, precisely as Westgate intended it to do.

The association contended the trial court ignored evidence that the 2009 budget methodology was intended to limit increases for all budget categories, including amenities use fees.  The condominium did not have its own amenities, but owners could use the amenities at other projects for a usage fee.

For 2010 and 2011, the association wanted to keep the amenities use fee the same as the amount shown in the 2007 estimated budget given to purchasers and afterwards have the fee subjected to a future increases clause.  However, the future increases clause did not appear on the final 2009 budget methodology.  The association argued that the clause was not included on the final document because Westgate provided only a PDF file, and the association did not know how to insert the clause on the PDF document.  The 2009 budget methodology ratified by Westgate also did not contain such a clause.  The appeals court also determined that the final content of the 2009 budget methodology controlled, not any statement made by the GM during negotiations.

Accordingly, the trial court's judgment was affirmed.

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Untimely Preservation Notice was Insufficient to Prevent Covenants from Being Extinguished

Lyday v. Myakka Valley Ranches Improvement Association, Inc., No. 2D17-1726 (Fla. Dist. Ct. App. Mar. 15, 2019)

Covenants Enforcement:  The Court of Appeals of Florida, Second District held that subdivision covenants were extinguished by the Florida Marketable Record Titles to Real Property Act because the association failed to record a timely preservation notice.

Myakka Valley Ranches Improvement Association, Inc. (association) governed a subdivision in Sarasota County, Florida, subject to a declaration of restrictions (declaration) recorded in 1971.  In 2010, Scott and Tammy Lyday (collectively, Lydays) purchased a home in the subdivision.

The association voted to impose an assessment on the lots.  The Lydays refused to pay, so the association filed a lien against the Lydays' lot.  The Lydays sued the association, contending it had no authority to assess their lot because the restrictions contained in the declaration had been extinguished under the Florida Marketable Record Titles to Real Property Act (act).  The association countersued, seeking a determination that the declaration was enforceable and that the Lydays owed past due assessments, attorneys' fees and costs.

The trial court determined that the act had not extinguished the declaration and granted summary judgment (judgment without a trial based on undisputed facts) in the association's favor.  The Lydays appealed.

The purpose of the act is to clear property of encumbrances that are more than 30 years old by declaring such encumbrances null and void unless they fall within one of the act's exceptions.  The association acknowledged that the declaration was an encumbrance that fell within the act's purview, but it argued that the declaration had been preserved by the recording of preservation notice in accordance with the act's requirements. 

The act establishes a process by which homeowners associations can preserve and protect their declarations from extinguishment by recording a preservation notice during the 30-year period following the declaration's original recording.  The association filed a preservation notice in 2004.  Unfortunately, however, the appeals court determined that the declaration had already been extinguished by such time.  The declaration was recorded in 1971, so any preservation notice must have been recorded by 2001 to preserve it from extinguishment.

The appeals court specifically rejected the association's assertion that a recorded preservation notice could breathe life back into the already extinguished declaration.  To address the growing problem of planned communities with extinguished covenants and restrictions, the legislature enacted a mechanism in 2004 by which communities could revive their declarations.  Yet, the association did not follow such procedure, instead electing to record an ineffective preservation notice.

Since the declaration was extinguished by the act's terms, the Lydays' lot was no longer subject to the declaration or any requirement to pay assessments to the association.  Accordingly, the trial court's judgment was reversed, and the case was remanded with directions for the trial court to enter judgment in the Lydays' favor.

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One Person Does Not Make a Committee

Makar v. Mimosa Bay Homeowners Association, Inc., No. COA18-547 (N.C. Ct. App. Mar. 19, 2019)

Architectural Control:  The Court of Appeals of North Carolina held that an architectural committee was not properly constituted, and its decisions were invalid, where one individual made all the decisions because the declaration contemplated a committee comprised of more than one person.

Mimosa Bay Homeowners Association, Inc. (association) governed the Mimosa Bay subdivision in Sneads Ferry, North Carolina.  The subdivision was developed by Blue Marlin, L.L.C. (developer), which was managed by Gordon Frieze.  Richard and Teresa Makar (collectively, Makars) owned a home in the community. 

The declaration of covenants, conditions, and restrictions for Mimosa Bay (declaration) provided for an Architectural Review Committee (ARC) to approve any construction and improvements to lots.  If the ARC failed to approve or disapprove an application for proposed improvements within 45 days after plans and specifications were submitted, the application was approved by default.

During the time the developer had the right to appoint the association's board of directors (developer control period), the developer also had the right to appoint all members of the ARC.  Once the developer control period ended, the ARC was to consist of at least three members, but the declaration did not specify the ARC's size during the developer control period.  The developer control period had not ended.

The declaration stated that fences were permitted on lots, subject to the ARC's approval of the fence design, placement, and materials.  In 2014, the association adopted design guidelines, which addressed the types of permitted fencing.  The design guidelines specified that fences were discouraged to maintain the views within the subdivision's wooded, natural setting, but a four-foot solid privacy fence was permitted.  The maximum height for any fence was five feet, and any fence over four feet must be a picket-style fence. 

In March 2015, without obtaining the ARC's prior approval, the Makars constructed a wooden fence on their property that varied in height from 67 to 74 inches.  The association sent the Makars a violation notice, stating that all work on the fence must stop until an application was properly made to and approved by the ARC. 

As instructed in the violation notice, the Makars submitted an application requesting permission to keep the fence on their property to Frieze, as the ARC Chairman.  In April 2015, Frieze informed the Makars that the ARC would not grant a variance for the noncompliant fence because they completely disregarded the design guidelines by not obtaining approval before installing the fence.  The letter gave the Makars the option of reducing the fence height or removing the fence.

The Makars did not remove or alter the fence.  The association sent another violation notice, informing the Makars of a hearing before the association's board of directors (board) to determine whether a fine should be imposed.  The Makars attended the hearing and presented evidence.  In addition to Frieze, a member of the association's compliance committee and the association's manager were present.

In June 2015, the Makars were notified that the board had decided to uphold the ARC's denial of a height variance.  If the Makars did not rectify the noncompliant fence within three weeks, a daily fine would be imposed.  The letter was signed by Frieze as president of the board.

The Makars did not pay the fines and instead filed suit against the association in August 2015.  The Makars sought a determination as to the enforceability of the fence restrictions and relief from the fines imposed by the association.  In November 2015, the association filed a lien in the amount of $11,075 against the Makars' property for the unpaid fines.

The trial court found that the Makars violated the declaration by constructing the fence without approval.  It granted judgment in the association's favor, ordering the Makars to remove the fence or bring it into compliance and to pay all fines, costs and attorneys' fees.  The Makars appealed.

The Makars asserted their application should be deemed approved by default because they did not receive a decision by a duly authorized ARC within 45 days, as the declaration required.  Frieze testified that he acted as the ARC in deciding whether to grant or deny the fence application.  While having someone in his office that helped him with ARC applications, Frieze stated that he alone decided ARC matters.  Frieze also stated that, while he did discuss the hearing with the association's manager, he made the final decision on whether to impose fines.

The appeals court found that the declaration consistently used plural words when referring to the ARC's composition, whether during the developer control period or after, such as specifying that the ARC members could include lot owners as well as non-owners.  The appeals court also concluded that the ordinary meaning of the term "committee" connotes a decision-making body comprised of more than one individual.  The appeals court interpreted the declaration as requiring the ARC be comprised of more than one person, even during the developer control period.

The appeals court also determined that the arrangement whereby Frieze served as the sole decisionmaker for ARC was not permitted under the declaration, so no properly formed ARC ever considered the Makars' application within the required 45-day period.  As such, the appeals court held that the fence was deemed approved by default and the fines levied were impermissible.

Accordingly, the trial court's order was reversed, and the case was remanded for judgment to be entered in the Makars' favor.

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Association Counsel Not Disqualified from Representing Association in Suit Against Former Directors

Quatama Park Townhomes Owners Association v. RBC Real Estate Finance, Inc., No. 3:18-cv-00023-SB (D. Ore. Mar. 18, 2019)

Risks and Liabilities:  The United States District Court for the District of Oregon ruled that former association directors who worked with the association's attorney while on the board could not reasonably believe the attorney represented them and was not disqualified in representing the association in its suit against the former directors.

Quatama Park Townhomes Owners Association (association) governed a community in Washington County, Oregon.  The townhomes were constructed by companies owned by James Standring (collectively, Standring). 

As the project declarant, Standring had the right to appoint the association's board of directors until control was turned over to the owners.  It appointed Laura Wilson and Daron Anderson as the initial board.  In 2015, Anderson resigned from the board, and the declarant appointed Scott McFerran as his replacement.

In 2015, the board hired the law firm of Vial Fotheringham (VF) to provide general legal services to the association.  VF's engagement agreement was signed by Wilson on the association's behalf.  In November 2015, the association engaged VF to sue Standring and other contractors for construction defects, and McFerran signed a litigation fee agreement as the association's authorized representative.

In August 2016, Standring issued subpoenas to Wilson and the association's management company for all documents related to Quatama Park.  VF asked the directors to turn over their records to allow VF to review them for privileged communications before responding to the subpoenas.  The directors provided VF with all of their files relating to the development.  In reviewing the files, VF discovered that the directors knew about the construction defects as early as 2012.

In 2016, several owners threatened to sue the directors regarding the construction defect repair costs and for breach of fiduciary duties.  VF asked the directors whether it could respond to the owners and discussed the allegations with the directors multiple times.  The directors agreed, and VF defended the directors' actions to the disgruntled owners.

In March 2017, Wilson and McFerran resigned from the board as part of a planned transition to owner control.  In April, although Standring was still actively pursuing the litigation by scheduling depositions, it also moved for summary judgment (judgment without a trial based on undisputed facts), arguing that the statute of limitations had expired because the directors knew about the construction defects more than two years before the lawsuit was filed. 

In June, VF informed the directors the association was considering suing them based on their failure to timely sue Standring after discovering construction defects.  VF informed the directors that the association's interests were no longer aligned with theirs.  VF said it could no longer represent them in the depositions, and the directors needed to retain their own counsel.

The court granted summary judgment in Standring's favor, and the association filed a separate suit against the directors.  The directors moved to disqualify VF from representing the association, asserting that VF had previously represented them.

The Oregon Rule of Professional Conduct (RPC) prohibits an attorney from representing a client whose interests are materially adverse with those of a former client in a substantially related matter without the written consent of all parties.  The directors asserted that they turned over their files to and shared confidential information with VF, believing that VF represented them and that they were protected by the attorney-client privilege.  The association argued the directors were required to provide the files because they had been subpoenaed. 

An attorney-client relationship may be implied when the alleged client subjectively believes such a relationship exists and when a reasonable person would objectively believe the relationship exists based on the facts.  The evidence must also show that the attorney should have understood that a relationship existed or that the attorney was providing legal advice to a client.

As reported in the September 2018 Law Reporter, the magistrate judge appointed by the district court to determine pretrial matters disqualified VF from continuing to represent the association in the lawsuit and directed the association to engage new counsel.  The magistrate judge found that the directors reasonably believed the attorney, who was preparing them for and defending them in the depositions, was acting as their lawyer.  The association objected and sought a ruling from the district court judge.

The district court judge noted that attorney disqualification is a drastic remedy that is generally disfavored because a motion to disqualify opposing counsel is often a tactical move to disrupt the litigation process.  Despite the potential for abuse, a court's paramount concern must be the preservation of the public trust both in the scrupulous administration of justice and in the integrity of the legal profession.

The RPC specifically provides that an attorney representing an organization may also represent its directors and officers, provided the organization's consent to dual representation may only be given by the organization's members or by an appropriate official of the organization other than the individual who is to be represented.

The district court judge found that, at all relevant times, the association was VF's primary client, and there was no evidence that anyone other than directors being sued consented to dual representation.  Further, even if there was dual representation, the directors would have known that any information they gave to VF would be given to the association.  The directors had no reason to believe the information they gave to VF would be withheld from VF's primary and continuing client.

Accordingly, the district court judge denied the directors' motion to disqualify VF from representing the association.

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Unit Mortgagee Allowed to Keep Condominium Insurance Proceeds Without Restoring Damaged Unit

Woodland Condominiums Homeowners Association, Inc., No. 339850 (Mich. Ct. App. Feb. 28, 2019)

Risks and Liabilities:  The Court of Appeals of Michigan found that a condominium documents provision providing that nothing would give any party priority over a unit mortgagee's rights, pursuant to its mortgage, allowed a mortgagee to keep insurance proceeds from the association's master insurance policy rather than applying the funds to the restoration of the damaged unit.

Woodland Condominiums Homeowners Association, Inc. (association) governed a condominium in Genesee County, Michigan.  Mary Ann Wujciak owned a unit in the condominium.  The Federal National Mortgage Association (Fannie Mae) held a mortgage on the unit, which was serviced by Ditech Financial, LLC (Ditech).

In December 2014, Wujciak's unit was destroyed by a fire.  The association obtained a quote from a contractor in the amount of $141,000 to demolish and restore the unit.  The association submitted the quote to its insurance carrier, Farm Bureau General Insurance Company (Farm Bureau).  Farm Bureau paid $12,000 to the contractor to demolish the charred unit remains.

In April 2015, Farm Bureau issued a check in the amount of $87,900 made payable jointly to the association and Ditech.  The association endorsed the check without restriction and delivered it to Ditech.  Ditech deposited the check into its escrow account until it could obtain further information.  In July 2015, Ditech issued a check in the amount of $43,950 made payable jointly to Wujciak, the association, and the contractor.  The check was mailed to Wujciak, but it was returned to Ditech marked "undeliverable" because Wujciak's address was unknown.

Meanwhile, Wujciak failed to make her mortgage payments, leaving a balance of $106,469 due on the mortgage.  Without consulting the association, Ditech determined that restoration of the unit was not feasible because the insurance proceeds would not cover full restoration of the unit.  In December 2016, Ditech initiated foreclosure proceedings on the unit.  The proceeds from the foreclosure sale plus the insurance proceeds already in Ditech's possession were sufficient to satisfy the mortgage balance in full.

The association sued Ditech, Fannie Mae, and Wujciak for breach of contract and conversion (an unauthorized act which deprives an owner of personal property permanently or for an indefinite time).  Ditech countersued for declaratory judgment (judicial determination of the parties' legal rights). 

Wujciak's mortgage provided that, unless Ditech and Wujciak otherwise agreed in writing, any insurance proceeds were to be applied to restoration or repair of the unit so long as restoration or repair is economically feasible and Ditech's security is not lessened.  If restoration or repair is not economically feasible or Ditech's security would be lessened, the insurance proceeds would be applied to the mortgage, and any excess insurance proceeds would be paid to Wujciak.

The association's bylaws obligated the association to repair and reconstruct damaged common elements immediately after a casualty causing common element damage.  If insurance proceeds are insufficient to cover the repair or reconstruction costs, an assessment shall be made against all owners in a sufficient amount to cover such costs.  The by-laws further provided that nothing in the condominium documents would give any party priority over any rights of first mortgagees of units, pursuant to their mortgages in the case of distribution of insurance proceeds.

The association and Ditech both moved for summary judgment (judgment without a trial based on undisputed facts).  The trial court denied both motions, finding that there were factual questions which precluded summary judgment.  Ditech appealed.

The association asserted that it was the owner of the insurance proceeds and was entitled to an immediate return of the funds.  Ditech argued that it was entitled to retain the insurance proceeds under the terms of the mortgage and the by-laws.  The appeals court found that the by-laws clearly provided that they could not take priority over Ditech's rights under the mortgage.  The mortgage also plainly provided that Ditech was not required to apply any insurance proceeds to restoration or repair of the unit if the restoration or repair was not economically feasible or if Ditech's security interests were lessened. 

If the insurance proceeds were applied to the unit's restoration, there would still have been a $41,100 balance due to complete the restoration.  The appeals court found such figures supported Ditech's assertion that its security interest would be impaired because Ditech would have been required to pay a third of the restoration costs merely to return the unit to its status as security for the mortgage.  The association argued that it should have been consulted concerning the decision, but the appeals court found the mortgage imposed no such requirement on Ditech. 

The association asserted that it planned to contribute $30,000 toward the restoration, and there was an additional depreciation payment of $14,100.  These payments would have fully covered the restoration fees.  However, the evidence showed that the association expected that it would eventually get the $30,000 back from Ditech, and there was no evidence the association attempted to negotiate any cost-sharing arrangement with Ditech.  The appeals court further stated that the association could not pursue a breach of contract claim against Ditech because it was not a party to the mortgage contract between Ditech and Wujciak.

Accordingly, the appeals court reversed the trial court's judgment and remanded with instructions for the trial court to grant summary judgment in Ditech's favor.

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