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, CAI’s College of Community Association Lawyers prepares a case law update annually. Case law summaries along with their references, case numbers, dates, and other data are available online.

Oregon Condominium Act Grants Lien Priority to Association When Bank Fails to Take Action

The Bank of New York Mellon Trust Company, National Association v. Sulejmanagic, 367 Ore. 537 (Ore. Feb. 11, 2021)

Tanglewood Hills Condominium Association (association) governed a condominium in Clackamas County, Ore. Zahid Sulejmanagic owned a unit in the condominium. The Bank of New York Mellon Trust Company, National Association (bank) held a deed of trust (mortgage) on Sulejmanagic's unit.

Sulejmanagic stopped making mortgage payments in 2011. By 2013, he also stopped paying association assessments. In July 2013, the association filed a lien against the unit for the unpaid assessments. Five days later, the bank filed a foreclosure action against Sulejmanagic and later named the association as a party. In May 2014, the trial court dismissed the case for the bank's failure to prosecute it.

In October 2014, the association sent the bank written notice of Sulejmanagic's failure to pay assessments in accordance with the Oregon Condominium Act (act). The act required the bank to initiate a foreclosure proceeding within 90 days after the notice (90-day period) for the mortgage to retain its lien priority over the association's lien.

The bank took no action until May 2015, when it requested permission to reinstate the previous foreclosure action. The trial court granted permission. The association answered, asserting that its lien now had priority over the mortgage. The association argued that the bank had to reinstate the foreclosure case or file a new one within the 90-day period. The bank contended that it only had to "initiate" a foreclosure action, which it had done. The trial court agreed with the bank and granted summary judgment (judgment without a trial based on undisputed facts) and a foreclosure judgment in the bank's favor.

The association appealed to the Oregon Court of Appeals, which affirmed the trial court's judgment. The association appealed further to the Oregon Supreme Court.

The act provides that an association lien will obtain priority over a first mortgage if the lender has not initiated judicial action to foreclose the mortgage or accepted a deed in lieu of foreclosure prior to the expiration of 90 days, following written notice by the association. The association argued that the act set both a start and end date for the bank's action—that is, it had to take action after receiving the association's notice and before the end of the 90-day period.

The association, alternatively, argued that the unit had to be subject to a foreclosure action during the 90-day period—that is, a foreclosure action had to already be pending or the bank had to initiate one during the 90-day period. The association contended that the bank's later reinstatement of the foreclosure action was ineffective to retroactively make the action pending during the 90-day period. The bank asserted that the act did not set a start date for action, and its earlier filing of a foreclosure satisfied the act's requirements. It argued that nothing in the act required that foreclosure action remain pending during the 90-day period.

The state supreme court determined that the phrase "prior to" meant that the bank had to take some action prior to the expiration of the 90-day period, but the act did not limit how long before. The act's purpose was clearly to prompt action by the lender. The act was drafted to address the situation in which a lender had not started the foreclosure process. It was not expected to apply if the lender had already taken one of the actions listed in the act to preserve its lien priority.

The legislative history indicated that there was no intent to allow an association to use the notice provision to force the lender to prosecute a foreclosure action faster. If a foreclosure action is pending, then an association must protect its rights through the existing foreclosure proceeding, not through the act's other procedures.

However, in this case, the bank's foreclosure action was no longer pending when the association sent its notice. At that point in time, the prior foreclosure action was functionally equivalent to an action having never been filed. Thus, the association's notice triggered the bank's obligation to take action within the 90-day period to preserve its lien priority.

The bank argued that its later reinstatement of the foreclosure action placed it back in the same position as if the action had never been dismissed. The supreme court disagreed, finding that the act expressly gave the association's lien priority over the mortgage when the bank failed to act within the 90-day period to preserve its rights.

Accordingly, the judgments of the state court of appeals and the trial court were reversed, and the case was remanded for further proceedings.

Fines Do Not Constitute Assessments

Channel View East Condominium Association, Inc. v. Ferguson, No. 351888 (Mich. Ct. App. Feb. 25, 2021)

Channel View East Condominium Association, Inc. (association) governed a condominium comprised of 13 units that were plots of land. The initial buyer of each unit was responsible for constructing a detached home on the unit.

In 2001, Gregory Ferguson purchased a unit. By 2003, he had begun constructing a home. In September 2005, the association notified Ferguson that he was in violation of the association's bylaws by not completing the home within 12 months from the time construction started. Ferguson was notified of a hearing date and informed that the violation could result in a fine of $1,000 per month. Although the hearing was rescheduled at Ferguson's request, he did not appear for the hearing.

The association's board of directors (board) imposed an escalating fine beginning at $100 per month for a few months, then $500 for a few months, and finally $1,000 per month after April 2006. Ferguson did not pay the fines, and the association filed a lien against the unit for the unpaid amounts. Monthly fines continued to accrue, and the association amended its lien in 2017 to reflect $137,800 in unpaid assessments, comprised solely of unpaid fines.

In 2016, the association filed suit against Ferguson, seeking to foreclose its lien and for a money judgment against Ferguson that could be collected through other means, such as garnishment, if the foreclosure sale was insufficient to satisfy the lien. The trial court granted summary judgment (judgment without a trial based on undisputed facts) in the association's favor, finding that the association had validly assessed fines as a result of Ferguson's violation (in accordance with the bylaws and the condominium master deed) and was entitled to foreclose and recover unpaid fines in the amount of $135,000. Ferguson appealed.

Ferguson first argued that there was a distinction between "work" and "construction" in the bylaws. While construction had to be completed within 12 months, work only had to be completed within a reasonable time. Ferguson argued that construction of the home's exterior had been completed, but interior work continued. The appeals court found no distinction in the bylaws’ terminology, stating that all construction had to be completed within 12 months.

Ferguson argued that the association had no authority to levy fines because it failed to adopt rules or regulations establishing a fine procedure. The Michigan Condominium Act (act) provided that, upon an owner's default, an association was entitled to reasonable remedies laid out in the association governing documents including, without limitation, the levying of fines against members after notice and an opportunity for a hearing as provided in the bylaws. Consistent with this provision, the association's bylaws provided for fines after notice and an opportunity for a hearing. The appeals court found it clear that the association had fining authority.

Ferguson protested that the board needed to adopt rules before fines could be imposed. The appeals court determined that the board had the authority to adopt rules if it chose to, but it was not required to do so. The act and the bylaws required the association to provide Ferguson with an opportunity for a hearing. The board notified Ferguson of a hearing date, rescheduled the hearing at Ferguson's request, and informed Ferguson of the proposed fines. Thus, the hearing requirements were satisfied, irrespective of Ferguson's decision not to attend the hearing. The fact that the board did not adopt rules and regulations regarding fines did not divest the association of its fining authority.

Ferguson challenged the reasonableness of the fines. The act and the bylaws authorized only reasonable remedies. Reasonableness depends upon the particular facts and circumstances. The trial court did not make an express finding about the reasonableness of the fines, so the appeals court remanded the case to make such a determination.

Ferguson further argued that the association did not have the right to foreclose on a lien that was solely for unpaid fines. The act allows an association to foreclose its lien if the owner is in default in paying assessments. The appeals court determined that the act and the bylaws distinguished between fines and assessments. The bylaws authorized the association to levy assessments to cover the common expenses for the maintenance and repair of the common elements.

In addition, if an owner causes costs or damage to the common elements, the association could charge that amount to an individual owner as an assessment. However, the association did not show how Ferguson's failure to complete construction caused the association to incur $135,000 in damage costs. As such, the fines against Ferguson could not be treated as assessments, and the association could not file a lien or seek foreclosure for such amounts.

Accordingly, the trial court's judgment was affirmed in part, reversed in part, and remanded for further proceedings.

Association's Communications to Members About Discrimination Claims Were Not Retaliation in Violation of the Fair Housing Act

Hatfield v. The Cottages on 78th Community Association, No. 2:19-CV-964 TS (D. Utah Mar. 1, 2021)

The Cottages on 78th Community Association (association) governed a community in Midvale, Utah. A five-member management committee functioned as the association's board of directors (board). Wendi Hatfield owned a unit in the community.

In December 2018, the board began discussing with the association's manager what they perceived to be problems with Hatfield's behavior, including sending excessive emails to the manager, filing unsubstantiated complaints against neighbors, and acting aggressively toward various neighbors and the board. In March 2019, the manager reported that she had received a complaint about Hatfield driving recklessly in the community.

With the assistance of Douglas Shumway, the association's attorney, the board sent Hatfield a warning letter. Hatfield responded and requested extensive records from the association. In August 2019, the board notified Hatfield that she was being fined for not ceasing the offending activities. Days later, Hatfield filed a complaint with the Utah Labor Commission, alleging religious discrimination by the association. Two days later, Hatfield filed a complaint against the association in state court, alleging that it had undertaken an improper enforcement action against her.

Hatfield worked for Cincinnati Financial (Cincinnati), an insurance company. Using her work email and insurance credentials, Hatfield submitted claims for the two complaints to the association's insurance agent. Shumway contacted a Cincinnati Financial employee to clarify the company's involvement in the two cases. The association's insurance agent was confused about whether Cincinnati itself was making the claims since the demand looked like a legitimate demand from one insurance professional to another. Shumway provided Cincinnati with copies of the two complaints and explained what the dispute was about.

The association notified the owners of a special assessment to cover unbudgeted legal fees incurred in connection with recent legal disputes with an owner. The letter explained that the association would incur additional legal expenses in connection with the two actions and Hatfield's records request. The association indicated that it did not wish to incur these additional expenses and that closure to the conflict rested solely with Hatfield.

The association's annual meeting included a discussion about the special assessment. Various owners allegedly made disparaging remarks about Hatfield at the meeting, complaining that it was unfair to force them to pay for one owner's actions and asking what rights they had to stop it. Some owners said they were afraid to go outside and no longer wanted to live in the community. Shumway responded that the best way to mitigate that fear was to get to know each other and band together against whatever was bringing the community down. The manager stated that anyone who felt unsafe could call the police and/or come to a board meeting.

In December 2019, Hatfield filed suit in federal court against the association, individual board members, the manager and the management company, and Shumway and his firm (collectively, the defendants) alleging, among other things, retaliation under the Fair Housing Act (FHA). Hatfield asserted that the defendants defamed her by propagating the belief that she was dangerous, problematic, and unwelcomed, which caused her to feel ostracized and unsafe in the community.

The FHA prohibits discriminatory practices that deny housing to persons because of race, religion, sex, national origin, familial status, or disability. In particular, the FHA prohibits retaliation for exercising rights protected by the FHA. To prove retaliation, Hatfield had to show that (1) she engaged in a protected activity; (2) she suffered an adverse action in the form of coercion, intimidation, threats, or interference; and (3) a causal link between the two. Hatfield's filing of the two complaints was a protected activity.

Although the second requirement can encompass actions that are less severe or less obvious than physical violence and overt threats, isolated derogatory or false statements, trivial acts, or animus from neighbors are not sufficiently serious to constitute adverse actions. The federal court determined that the alleged conduct was not severe enough to constitute an adverse action under the FHA. Hatfield did not claim that she was pressured by the defendants' conduct to withdraw her discrimination claims or alter her actions in any way.

The statements in the assessment were substantially true because the association's legal costs were due to Hatfield's actions. The appeals court also found the statements urging owners to band together to quash the negativity were insufficient to satisfy the second requirement.

Hatfield also had to show that the defendants would have acted meaningfully differently had she not filed the two complaints. Shumway's emails to Cincinnati were clearly caused by Hatfield's emails, not by her discrimination complaints. The issues between Hatfield and the board had been going on for months before Hatfield filed the discrimination complaints. The special assessment had long been in discussion as a result of the ongoing issues with Hatfield rather than a reaction to the discrimination complaints.

Hatfield claimed that Shumway invaded her privacy by communicating with her employer. However, Shumway had a legitimate interest in finding out whether Cincinnati was involved in the legal actions. Moreover, it was Hatfield who brought her employer into the dispute by using her company credentials to file claims with the association's insurance.

Defamation involves harming the reputation of another by making a false statement to a third person. The federal court found that the statements made by Shumway in the email to Cincinnati were either clearly true based on the complaints filed by Hatfield or were opinions that could not be false. In that context, the email did not convey any false impression about Hatfield and was unlikely to elicit any serious judgment on Hatfield's character. The federal court further found that the statements in the assessment notice to the community were either true or were not about Hatfield. Nothing in the notice implied that Hatfield posed a physical threat to the community.

Finally, the association's communications to the owners were protected by the legitimate interest privilege. The owners had a legitimate interest in knowing why the association was being sued and why they were being asked to bear the legal costs.

Accordingly, the federal court granted judgment in the defendants' favor on all of Hatfield's claims.

Dispute Between Neighbors Did Not Have to be Mediated

Hunter v. Catalano, No. 2D19-2981 (Fla. Dist. Ct. App. Feb 3, 2021)

Scott and Leslie Hunter (the Hunters) and John and Susan Catalano (the Catalanos) were neighbors in a subdivision in Florida. The Hunters alleged that the Catalanos made changes to their property that altered the draining easement between their lots and, consequently, the drainage on the Hunters' lot. The properties were subject to different declaration of covenants (declaration) governed by different homeowners associations.

The Hunters sued the Catalanos and the two associations, claiming a breach of the declarations by the Catalanos and a breach of fiduciary duty by the associations. They also alleged various violations of the Florida Homeowners' Association Act (act). The Catalanos and one of the associations responded that the Hunters had failed to comply with the act's pre-suit meditation requirement. The trial court dismissed the case due to the Hunters' failure to pursue pre-suit mediation prior to filing the lawsuit. The Hunters appealed.

The act expressly lists five types of disputes that are subject to a requirement for pre-suit mediation before a lawsuit is filed. Included in the list is any dispute between an association and an owner regarding use of or changes to the lot or the common areas and other covenant enforcement disputes. Thus, the Hunters' disputes with the two associations were subject to the pre-suit mediation requirement. However, the list does not include disputes between two owners.

The appeals court found the act's language to be clear and unambiguous, and it did not require that a dispute between owners be mediated prior to filing suit. The Catalanos pointed out that the act expressed the intent that an expedited process for alternative dispute resolution would benefit associations and their members as well the court system. The Florida legislature acknowledged that alternative dispute resolution has made progress in reducing court dockets and trials and in offering a more efficient, cost-effective option to litigation. The legislature further found that associations and their members would benefit from the expedited process offered by mediation in disputes involving covenant enforcement.

However, the act's introductory language did not lead to the conclusion that a dispute between owners or members was subject to pre-suit mediation when such disputes are not included in the act's unambiguous provisions. The legislature only indicated its preference for pre-suit mediation, but it chose not to require mediation by not including owner disputes in the list of disputes subject to the mediation requirement.

The Catalanos complained that the Hunters improperly comingled claims against the three parties in one suit, with some being subject to the pre-suit mediation requirement and some not. However, the Hunters later settled their claims with the two associations, so the appeals court did not address this argument.

The trial court erred in dismissing the complaint against the Catalanos based on the Hunters' failure to comply with pre-suit mediation requirement. Accordingly, the trial court's judgment was reversed, and the case was remanded for further proceedings.

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Racially Discriminatory Covenants Amended in a Suitable Manner to Preserve Integrity of Property's Title

In re That Portion of Lots 1 & 2, No. 37179-4-III (Wash. Ct. App. Feb 23, 2021)

In 2017, Alex and Alexandra May (the Mays) purchased a home at 3010 South Post Street (the property) in the Comstock Park neighborhood of Spokane, Wash. The property was subject to a declaration of protective covenants (declaration) that prohibited any race or nationality other than the white race from using or occupying any lot, except for domestic servants of a different race or nationality employed by the owner or tenant of the property. The declaration was recorded in 1953, five years after the U.S. Supreme Court declared racially discriminatory real estate covenants unenforceable under the Fourteenth Amendment of the U.S. Constitution.

In 1987, Washington's Law Against Discrimination (anti-discrimination law) was passed, which provided a method for property owners to petition to strike racially discriminatory provisions from real property contracts. However, the courts had never examined precisely what it meant to "strike" offending language from covenants running with the land.

In 2013, Katherine Gregory conveyed the property to Aaron and Sadie Lake (the Lakes) by a deed stating that the property was subject to the covenants, conditions, restrictions and easements of record, but deleting any covenant, condition or restriction indicating a preference, limitation, or discrimination based on race, color, religion, sex, handicap, family status, or national origin to the extent it violated the federal Fair Housing Act.

The Mays purchased the property from the Lakes in 2017. The deed provided to the Mays did not include the language deleting the racial covenant and simply stated that the property was subject to the covenants, conditions, restrictions, and easements appearing in the public record. The original language in the declaration remained unaltered in the public records.

In 2018, Mr. May initiated a declaratory judgment action (judicial determination of the parties' legal rights) against the county and its elected auditor. Mr. May filed a motion for summary judgment (judgment without a trial based on undisputed facts) to have the discriminatory restrictive covenant declared void and stricken from public record. He explained that his request would require physical alteration of the recorded 1953 declaration.

The county contested the motion due to the importance of preserving the integrity of a property's chain of title. Documents in a chain of title are not to be physically altered once recorded; the indestructibility of the recorded documents depends on it. The county explained that, even when documents are recorded in error, the inappropriate document is not removed or destroyed. Instead, a corrected document is re-recorded. The trial court held that the discriminatory provision of the declaration was void and was stricken by order of the court. However, the trial court denied Mr. May's motion, stating that Washington law did not allow county auditors to physically remove void provisions from the public record. Mr. May appealed.

The anti-discrimination law provides two methods for addressing real property covenants that are declared void by the anti-discrimination law. First, the property owner may file a lawsuit in the county court. If the court finds that the covenant is void under the anti-discrimination law, the court is to issue an order striking the void provisions from the property's title.

A second option is for the property owner to record a modified document referencing the original document and stating that the original document contained discriminatory provisions that are void under the anti-discrimination law. The anti-discrimination law provides that the effective date of the modified document is the same as the original recorded document.

Mr. May contended that the two provisions of the anti-discrimination law must have different meanings. He asserted that the first option provided a broader remedy that involved physically altering the existing recorded instrument. The appeals court disagreed, finding that the only action contemplated by the anti-discrimination law under the first approach was the entry of a court order. The order would strike the void provisions from the public record and eliminate them from the property title, but it did not authorize a judge to direct a county auditor to physically alter existing public records.

The appeals court found that both approaches were intended to be self-executing by providing for both the court order and the modification document to "strike" invalid provisions. Had the legislature intended a court order to have a broader impact, it would have clearly provided for it in the anti-discrimination law. The appeals court examined the meaning of the term "strike" and determined that it did not necessarily entail the physical destruction or alteration of the original document.

The appeals court noted that Washington law provided a method for rejecting racially restrictive covenants while preserving the integrity of a property's chain of title. It also stated that a policy of whitewashing public records and erasing historical evidence of racism would be dangerous. Such a policy would risk forgetting and denying the horrible truths of racism, an outcome that did not comport with the purposes of the anti-discrimination law.

Accordingly, the trial court's judgment was affirmed.

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Owner Loses the Right to Complain About Enforceability of Covenants by Complying with Covenants for Many Years

Twin Mills, LLC v. Leisure Acres Association Inc., No. 20A-PL-1516 (Ind. Ct. App. Feb. 11, 2021)

In the 1970s, Richard and Betty Cagley (the Cagleys) created two adjacent campgrounds in Howe, Ind. Leisure Acres was a 40-lot campground without amenities. Twin Mills had a lake, swimming pool, fishing pond, parks, and a store, and sponsored activities such as holiday events. Twin Mills was open to the public, and the Cagleys created Twin Mills, Inc. (TM Inc.) to own and operate Twin Mills.

The Cagleys recorded protective covenants and beneficial property restrictions (covenants) against the Leisure Acres lots stating that all Leisure Acres lot owners were entitled to access and use of the facilities owned by TM Inc. and that such benefits ran with the land for the benefit of the Leisure Acres lots. The Leisure Acres lots were sold to individual buyers, and each lot owner became a member of Leisure Acres Association, Inc. (association).

In 1985, the covenants were amended and restated to provide that the Leisure Acres lot owners could use the TM Inc. recreational facilities subject to all usual and customary fees applicable to the general public, and the lot owners were required to register with TM Inc. prior to using the facilities. The covenants were amended and restated again in 1996 (1996 covenants) to provide that the Leisure Acres lot owners could use all the TM Inc. facilities free of charge except for the swimming pool. The 1996 covenants did not include the language about the covenants running with the land or binding successors.

In 2004, Twin Mills was sold to Twin Mills, LLC (TM LLC). In 2009, TM LLC informed the association that its members would be required to pay fees to enter Twin Mills. The association objected, asserting that the fees violated the covenants. TM LLC said that it was not a party to the covenants and not bound by the covenants. However, TM LLC later said it would follow the terms of the 1996 covenants, stating that it found there were some things for which it could charge fees and some things for which it could not.

Until 2019, the Leisure Acres owners were able to enter Twin Mills and use all the facilities for free, except the swimming pool. In 2019, TM LLC began charging Leisure Acres owners a daily fee of $5 per person to enter Twin Mills. The association sued TM LLC, asserting that the 1996 covenants guaranteed Leisure Acres owners with free access to all of Twin Mills except the swimming pool. The association asked that TM LLC be ordered to comply with the 1996 covenants and to reimburse the owners for fees paid that were not authorized.

The trial court ordered TM LLC to comply with the 1996 covenants. It held that the association had standing to pursue claims against TM LLC on behalf of its members who had suffered or were in danger of being injured by TM LLC's conduct. The association was seeking to protect the property rights of its members that were germane to the association's purpose. However, the trial court found that the association did not have standing to pursue the claims for reimbursement to individual members since it required them to show proof of what they paid to TM LLC. TM LLC appealed.

TM LLC contended that the association did not have standing to pursue claims on behalf of its members with respect to Twin Mills since the association's bylaws limited its purpose to representing the members regarding only the Leisure Acres property. However, the bylaws also provided that the association was to promote and maintain the safety, property values, and general well-being of its members. The appeals court found that the phrase "well-being" was sufficiently broad to encompass claims of overcharging with respect to Twin Mills. Allowing the association to pursue claims on behalf of its members also supported the important public policies of judicial economy and permitting the individual members to pool their financial and legal resources.

TM LLC argued that the 1996 covenants did not run with the Twin Mills land or bind TM LLC. However, for at least 13 years, TM LLC consented to the use of its facilities by the Leisure Acres owners, thereby forfeiting the right to argue that it was not bound by the 1996 covenants. The right to enforce restrictive covenants may be lost by acquiescence to prior violations.

The factors relevant to whether acquiescence should apply include the land involved, the similarity of the prior nonconforming use to the use sought to be barred, and the frequency of the prior nonconforming use. The Twin Mills property upon which TM LLC sought to bar the Leisure Acres owners’ activities was the same both at the time of TM LLC's purchase and when TM LLC sought to complain about the use. The nature of the Leisure Acres owners’ activities in Twin Mills had not changed over the years, and TM LLC had been allowing them to use all the facilities for free, except the pool, for 13 years.

Accordingly, the trial court's judgment was affirmed.

Extremely Low Sales Price at Foreclosure Sale Was Insufficient to Set Aside Sale Without Evidence of Fraud

U.S. Bank, N.A. v. White Horse Estates Homeowners Association, 987 F.3d 858 (9^th Cir. Feb. 8, 2021)

White Horse Estates Homeowners Association (association) governed a community in Las Vegas. MAT Holdings, LLC (MAT) owned a unit that was subject to a mortgage in favor of U.S. Bank, N.A. (bank).

In 2013, MAT was delinquent in paying association assessments, and the association filed a lien on the unit. Later that year, the association recorded a notice of default and election to sell, which reflected a balance due of $2,740. Although the law was later substantially revised, at the time, the Nevada Uniform Common-Interest Ownership Act (UCIOA) granted an association lien priority over the first mortgage for any portion that consisted of the last nine months of unpaid assessments or nuisance-abatement charges. A foreclosure sale of the association's superpriority lien extinguished the first mortgage.

The bank took no action to preserve its mortgage, and the unit was sold at a foreclosure sale in November 2013. SFR Investments Pool 1, LLC (SFR) was the high bidder, paying $25,000 for the property. The foreclosure deed estimated that the value of the property was $308,823.

The bank later filed suit in federal court against the association and SFR, asking the trial court to set aside the foreclosure sale based on equitable grounds. The trial court declined to set the sale aside, declared title to be held by SFR, and granted summary judgment (judgment without a trial based on undisputed facts) in favor of the association and SFR. The bank appealed.

Nevada law gives a court discretion to set aside a foreclosure sale if two circumstances were present: (1) an unreasonably low sales price; and (2) fraud, unfairness, or oppression that affected the sale. Both elements are required; a low sales price by itself is insufficient to set aside a foreclosure sale. The Nevada Supreme Court had previously emphasized that fraud, unfairness, or oppression is irrelevant if it did not affect the sale. Only where the totality of the circumstances demonstrates that the sale itself was affected by fraud, unfairness, or oppression may the court set the sale aside.

Since the foreclosure sale price was only about 8% of the property's market value, the bank had to show only slight evidence of fraud, unfairness, or oppression that affected the sale. The bank contended that a clause in the community's declaration of covenants, conditions, and restrictions (declaration) stating that a first mortgage had priority over the association's lien (mortgage-savings clause) was evidence of the unfairness of the sale.

However, the mortgage-savings clause conflicted with UCIOA, which required that a portion of the association's lien have priority over the mortgage. UCIOA further provided that the priorities could not be modified by agreement. Thus, the mortgage-savings clause was void. The declaration also stated that any provision of the declaration that conflicted with UCIOA was automatically deemed severed from the declaration.

The bank offered no evidence that the mortgage-savings clause affected this particular foreclosure sale. The bank provided no evidence that it or anyone else relied on the mortgage-savings clause when deciding whether to bid on the unit or to pay off the association's lien. Further, there was nothing to suggest that the Nevada Supreme Court would depart from its prior rulings to find that the mortgage-savings clause, by itself, constituted unfairness that affected the sale. As such, the federal appeals court was obligated to apply Nevada law as it existed at the time of the foreclosure sale and saw no need to seek guidance from the Nevada Supreme Court on how to apply state law.

Accordingly, the trial court's judgment was affirmed.

Board Acted in Bad Faith by Determining Violation Occurred Without Allowing Owner a Meaningful Opportunity to Respond

Westgate Townhome Association v. Kirsch, No. 2-20-0373 (Ill. App. Ct. Mar. 2, 2021)

Westgate Townhome Association (association) governed a townhome community in Lake County, Ill. Julene Kirsch owned a unit in the community and had lived there for more than 30 years.

The association manual stated that no pet was allowed to create a nuisance or unreasonable disturbance or to damage property. Kirsch's neighbor complained to the association's board of directors (board) that Kirsch's dog had damaged the neighbor's lawn by urinating on it. The neighbor sent the board a video of the alleged incident or incidents via an "expiring link."

The board conducted a hearing to determine whether Kirsch violated the rules. The hearing lasted about 20 minutes. Kirsch was present and was the only witness. The video was not shown during the hearing. The board determined that a violation had occurred and levied a $300 fine against Kirsch. Kirsch did not pay the fine, although she continued to pay her regular association assessments.

The association filed suit against Kirsch, seeking to collect $6,516 for the unpaid fine plus attorneys' fees and costs and to foreclose its lien and evict Kirsch from her unit. The association's president testified that, although the community was dog-friendly and it was reasonable to expect dogs to urinate on laws, the board had determined that Kirsch violated the rules. Kirsch maintained that the board denied her request to view the video, so she was prevented from presenting her side of the story.

The trial court determined that the board did not demonstrate that the fines were reasonable or that it had decided in good faith that a violation had occurred. Specifically, the trial court found that the association failed to present the video showing the damage, an invoice for yard repairs or replacement, or any other documentation showing a violation of the rules. The trial court granted judgment in Kirsch's favor.

The association appealed, arguing that the board's decision on whether a violation had occurred was protected from judicial interference by the business judgment rule. It contended that there was sufficient evidence that a violation occurred, and Kirsch did not prove that the board acted in bad faith.

Under the business judgment rule, courts are not free to interfere with the decisions of a corporate board absent evidence of bad faith, fraud, illegality, or gross overreaching. The rule is designed to protect directors who have been diligent and careful in performing their duties from being exposed to liability due to honest mistakes. The business judgment rule entitles the board to a presumption that it acted appropriately. The presumption may be overcome by presenting evidence that the board failed to inform itself, prior to making the decision, of all material information reasonably available to it or a violation of the duties of care, loyalty, or good faith.

The appeals court found that the association presented insufficient evidence of Kirsch's violation. The only evidence presented at trial was the testimony of the president and Kirsch. The president testified that he believed that Kirsch saw the video before the hearing but could provide no evidence that the video was forwarded or shown to Kirsch. Kirsch said she had never seen it. The trial court was entitled to weigh the credibility of the witnesses and found Kirsch's testimony more believable.

The video also was not provided at the trial. The association said it was unable to provide the video because the link to the video had expired. However, the billings for the association's attorneys indicated that they had reviewed the video evidence for several months prior to the hearing, including the month of the hearing. Thus, there was ample time to provide the video to Kirsch. Moreover, without being able to view the evidence presented against her, Kirsch was never given a meaningful opportunity to tell her side of the story or challenge the allegation.

The appeals court stated that, when investigating charges of misconduct by owners, the duty of candor imposes an obligation on the board of full, fair, complete, and timely disclosure of material facts. Since the board did not do so, the trial court was justified in determining the board did not act in good faith.

Accordingly, the trial court's judgment was affirmed.