CAI Law Reporter - February 2013 (Plain Text Version)
In-Home Art Studio Violates Commercial Use Restriction
Bayou Terrace Estates Home Owners Assn., Inc. v. Stuntz, 97 So. 3d 589 (La. Ct. App. July 10, 2012)
Covenants Enforcement: A Louisiana appeals court affirmed a trial court’s order that a restriction banning lots from being used for commercial purposes prohibited a homeowner from giving art lessons and holding painting parties in her residence.
Bayou Terrace Estates is a subdivision in St. Amant, La., which is managed and regulated by Bayou Terrace Estates Home Owners Association, Inc. (association). Jessica Stuntz purchased a home in the subdivision in October 2006, and immediately began providing art lessons in her home.
In July 2010, the association sued Stuntz, claiming that she was violating a building restriction that prohibited the commercial use of lots. The association asserted that Stuntz operated “Ink Girl Studio” from her home, through which she provided art lessons and painting parties for profit.
The subdivision’s restrictive covenants provide that the property could “be used only for residential and campsite purposes, all commercial or other activities incompatible with the same are prohibited.” In 2006, the restrictions were amended to include the following provision:
The trial court ruled in favor of the association, holding that Stuntz’s art lessons were “a commercial enterprise,” and barred her from further commercial activity in her home. Stuntz appealed.
Stuntz argued on appeal that the trial court erred in finding that her art lessons constituted a commercial enterprise. She admitted she was compensated for the lessons and explained that the amount she charged depended on what the person wanted to paint, since she provided the supplies. She maintained she was selling her services to teach art, and claimed that her parties were limited to no more than 16 people.
The court’s review of similar cases involving commercial use restrictions on residential property revealed that mere administrative or managerial activities or even providing unobtrusive services in the home did not violate the restriction’s intent. However, the art lessons offered by Stuntz from her home were clearly more analogous to cases in which the homeowner’s activities were found to be in violation of “residential-use-only” restrictions.
Considering the evidence presented and interpretations of similar cases, the appeals court affirmed the trial court’s order.
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Former Unit Owners Assigned Right to Sue for Potential Future Insurance Proceeds
Castellanos v. Citizens Property Ins. Corp., 98 So.3d 1180 (Fla. Dist. Ct. App. Aug. 8, 2012)
Powers of the Association/Risks and Liabilities/Covenants Enforcement: A Florida appeals court ruled that former condominium unit owners were assigned the right to prosecute a claim for potential future insurance proceeds for previous storm damage to their units.
Ocean Beach Resort Condominium is located in Miami, Fla. In 2005, Sunny Isles Resort Developers, LLP offered to purchase all 66 units comprising the condominium, intending to demolish the building and replace it with a luxury high-rise. Forty-five unit owners signed contracts with Sunny Isles before Hurricane Wilma struck Dade County in October 2005 and severely damaged the property. The remaining 21 unit owners signed contracts after the storm. A simultaneous closing on all 66 units occurred April 17, 2006.
Before the storm, Citizens Property Insurance Corporation issued a windstorm policy to Ocean Beach Resort Condominium Association, Inc. (association). The policy provided coverage for the buildings and common elements, but excluded unit owners’ personal property. The association submitted a claim to Citizens for the hurricane damage. Citizens paid part, but not all, of the claim.
Upon closing the sale on all units, Sunny Isles took control of the association as the new owner. The unit owners sued Citizens, alleging that the entire property was a total loss and demanded that Citizens pay them the property’s full insured amount. The owners claimed Sunny Isles, as the new owner and sole member of the association, had agreed to assign the right to any future insurance payout for the storm damage to the former unit owners as a condition of the sales.
In a January 2009 order, the court granted class certification (which allows a group to act as one unit in litigation, giving them the ability to file a class action suit against a party) to the former unit owners. Sunny Isles intervened in the suit, asserting it did not intend to assign its right to future insurance proceeds to the former unit owners; or alternatively, if such an assignment was made, it was under duress.
At a bench trial in March 2010, the court ruled that the association did not have authority under the declaration to assign its claim for future insurance proceeds to anyone. The court dismissed the suit and vacated the order for class certification. The unit owners appealed.
The appeal raised two questions: First, did the condominium governing documents prohibit Sunny Isles, as the party in control of the association, from assigning its potential insurance claim to the former unit owners? And, second, did the case meet the standards for class certification under Florida law?
The appeals court concluded the condominium governing documents did not bar the association from assigning a potential claim for future insurance proceeds to another party. The court held that condominium associations may freely assign insurance claims, and this association was no exception.
The appeals court reversed the trial court’s order to dismiss the case. And, finding there had been no abuse of discretion when the trial court granted the unit owners class certification in January 2009, the appeals court also reversed the trial court’s March 2010 order for the owners to vacate their class certification.
In a dissenting opinion, Judge Shepherd observed that Sunny Isles, to consummate its condominium purchase, agreed to distribute the proceeds paid thus far by Citizens. Judge Shepherd noted that a meeting supposedly took place, at which the association board assigned the right to prosecute any claim for future insurance proceeds to the unit owners; however, neither the former association’s counsel nor any former unit owner or board member was able to produce a copy of the assignment, board minutes, or any other document to support this allegation. The trial court dismissed the action in March, finding no assignment to the unit owners, and, thus, no standing for owners to sue Citizens for the alleged claims.
Further, Judge Shepherd noted that no class action can proceed unless there is a named plaintiff with standing (the legal right for said plaintiff to initiate a lawsuit) to pursue the class action. If none of the named plaintiffs purporting to represent the class establishes a case, none of those plaintiffs may seek relief on behalf of himself or any other member of the class. Here, the former owners lacked standing to sue Citizens because the declaration provides, “The association is hereby irrevocably appointed agent for each Unit Owner for the purpose of compromising and settling claims arising under insurance policies. . .” [Emphasis added.] In other words, the power to file the claim against Citizens, settle the claim, receive payment for the claim, execute and deliver a release for the claim, or sue Citizens on the claim, once awarded to the association by the declaration, could not be revoked or recalled.
Moreover, Judge Shepherd wrote that the assignment breached the association’s Articles of Incorporation, which provides, “The share of a member in the funds and assets of the association cannot be assigned, hypothecated* or transferred in any manner except as an appurtenance to his unit.” [Emphasis added.] The association’s assets included the rights under the Citizens policy and any future monies Citizens might pay pursuant to the association’s claim.
Judge Shepherd stated that the declaration and Articles of Incorporation were interrelated documents creating the association, and the assignment in this case violated both. He felt that the trial court order dismissing the case should be affirmed.
* Pledge property to another as security.
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Owner Whose Property Benefited from Sewer Easement Must Pay for Pipe Repairs
Kammerer Real Estate Holdings, LLC v. PLH Sandy Springs, LLC, 734 S.E. 2d 249 (Ga. Ct. App. Nov. 14, 2012)
Contracts: A Georgia appeals court affirmed that the owner whose property benefited from a sewer easement had a duty to maintain and repair the pipes within the easement.
Kammerer Real Estate Holdings, LLC and PLH Sandy Springs, LLC each own tracts of land in Fulton County, Ga., that were previously part of a large parcel belonging to a single owner. In 1967, the original owner platted the property (created and recorded a detailed map of the land that shows the various landmarks and divisions of the property) for use as a residential subdivision. The subdivision, however, was never built, and the tracts were sold as separate, undeveloped, commercial real estate lots.
Trowbridge Road crosses the property. Kammerer owns a portion of the original parcel located south of Trowbridge Road (Kammerer property), and PLH owns a portion of the original parcel located north of the road (PLH property). The 1967 plat shows a drainage easement running north from the Kammerer property, across the road, and across the PLH property.
In 1977, original owner of the entire parcel transferred the PLH property via warranty deed, which stated that an easement was reserved for the benefit of the remaining parcel. The pertinent language the deed provides:
When a section of the old pipe located on PLH property collapsed, Kammerer contended it was not responsible for repairs because the original owner had reserved the easement only to allow future construction of new storm and sanitary sewer lines. Accordingly, Kammerer argued, any duty to maintain the line applied only to lines constructed after 1977, not the pre-existing sewer line located on the easement.
PLH sued Kammerer to enforce the terms of the easement, alleging Kammerer had a duty to maintain and repair the easement. Both parties filed motions for summary judgment (a determination made by a court without a trial).
Neither Kammerer nor PLH claimed the easement was abandoned, and neither disputed that Kammerer property retained the benefits of the easement.
At trial, Kammerer contended that because no new pipelines had ever been constructed on the easement, it had no duty to repair the existing pipe. PLH, on the other hand, argued that the conveying deed’s plain language required Kammerer to maintain and repair any sewer line in the easement, regardless of when it was constructed.
The trial court interpreted the deed to mean that Kammerer had the obligation to maintain and repair the existing line; the issue of damages was reserved for a later hearing. The court therefore granted partial summary judgment in favor of PLH. Kammerer appealed.
The appeals court concluded that the deed provided for a “20-foot wide sewer easement” running “along the line of an existing 36-inch concrete pipe” to be used for constructing and maintaining storm or sanitary sewer lines within the tract of land and to serve Grantor’s adjacent lands. Thus, multiple sewer lines serving a variety of purposes were allowed on the easement. The deed mandated that the Grantor “maintain said sewer line[s]” and remedy “any damage done to the Grantee’s surface use of the easement area, resulting from the construction, maintenance, repair, relocation, alteration or operation of said sewer line.” Therefore, Kammerer’s duty to maintain multiple sewer lines and the easement’s surface could not be clearer.
The court concluded Kammerer property was the beneficiary of the easement, which unambiguously provided that Kammerer must maintain and repair the sewer lines contained thereon, regardless of when they were constructed.
The appeals court affirmed the trial court’s judgment.
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Association Not Liable for Child’s Fatal Injury
Kensington Place Owners Assn., Inc. v. Thomas, 734 S.E.2d 445 (Ga. Ct. App. Nov. 16, 2012)
Risks and Liabilities: A Georgia appeals court ruled that a homeowners association was not liable for fatal injuries suffered by a child who pushed a dead tree over in the subdivision common area.
Tenita Thomas lived in Kensington Place subdivision with her 13-year-old son, Christopher Baxter. On April 10, 2008, while Baxter and his friends were playing in the subdivision’s wooded common area, they came upon a dead tree. The three boys alternated pushing the tree and watching the others push it. One of the boys recorded their actions on his cell phone camera.
When some younger children gathered to watch, Baxter and his friends told them to move back for “[s]afety reasons.” After the children had pushed the tree for about ten minutes, it began to make cracking noises. Everybody moved away from the tree. Seconds later, Baxter and his two friends walked back to the tree and began pushing it again. About 18 minutes after the children started pushing it again, the tree cracked once more. Baxter was eight to ten feet from the tree when it fell and fatally injured him.
Thomas sued Kensington Place Owners Association, Inc. (association) and its maintenance company, alleging that the association knew or should have known that dead trees presented a danger to those people lawfully on the property. She also claimed that the association had failed to properly inspect the property or take action to protect the residents.
The association filed a motion for summary judgment (a determination made by a court without a trial) based on assumption of risk. Summary judgment is the appropriate course of action if the pleadings and evidence in a case show there is no genuine issue as to any material fact (meaning there is no dispute over the validity of facts that could determine the outcome of a case) and if the party that filed the motion is entitled to a judgment as a matter of law. “Assumption of risk” is an applicable defense in a negligence claim if it is established that the plaintiff, without coercion, chose to act with full knowledge of the danger of his or her act. The trial court denied the association’s motion, and the association appealed.
To establish its defense of assumption of risk, the association was required to demonstrate that Baxter: (1) had actual knowledge of the danger, (2) understood and appreciated the risks associated with such danger, and (3) voluntarily exposed himself to those risks.
To support her position that a genuine issue of material fact (that the validity of key facts in the case were uncertain) remained for a jury to determine, Thomas produced evidence that Baxter lacked experience with falling trees and, thus, did not understand the specific danger they posed. She offered evidence that children of Baxter’s age are incapable of evaluating and consenting to risks due to the fact their brain’s frontal lobe hasn’t fully developed, making them more susceptible to peer influences.
The court, however, noted that in Georgia, in assumption of risk cases involving children between the ages of seven and fourteen, issues of due care (the conduct and precautions that a reasonable person will exercise in a particular situation) and capacity hinge on the circumstances of the case and the capacity of the particular child. Evidence was presented that Baxter’s maturity level and decision-making ability was about one year below his chronological age of 13 years 11 months. The court found Thomas’ assertion that a child Baxter’s age was incapable of assuming the risk of injury was contrary to Georgia law. Although courts do not expect children always to appreciate dangers to the same extent as adults, they recognize that children as old as Baxter are quite capable of appreciating certain obvious dangers.
The fact that Baxter tried to get the younger children to move back; that he was present when the older children told the younger children to move back; that he moved away from the tree when it first started to move or rock; that he, like the other children, moved away from the tree as it began to fall; and that he commented during the incident about falling trees and injury showed that he knew, understood and appreciated the risk of injury from a falling tree.
Thomas pointed to statements of the other children to argue that they were not taking what they were doing seriously. She claimed they doubted the tree would fall, and they did not think they would get hurt. The court, however, found such testimony merely reflected the children’s assessment that injury was unlikely; it was not evidence that Baxter denied the possibility that the tree might fall and he might be injured.
Accordingly, the appeals court reversed the trial court’s judgment and remanded the case for entry of summary judgment in the association’s favor.
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Tree Encroaching on Property is Trespass
Martin v. Artis, 290 P.3d 687 (Mont. Nov. 7, 2012)
State and Local Legislation: The Montana Supreme Court reversed a trial court order dismissing a property owner’s trespass claim, finding he had in fact successfully argued that a tree encroaching on his property constituted trespass by the adjacent property’s owners.
Wilbur Martin and his neighbors, Keith and Gloria Artis, live in the South Hills Subdivision in Missoula, Mont. A boundary fence separates the two properties. Over a period of years, a tree planted on the Artises’ property grew in a way that blocked a substantial portion of the view from Martin’s property.
In 2010, Martin sued the Artises for nuisance and trespass. He claimed that the tree obstructed his view, offended his senses, infringed upon the free use of his property, interfered with the comfortable enjoyment of his property and diminished the property’s aesthetic and monetary value. He claimed the tree’s body and roots encroached on his property and the roots were causing the boundary fence to buckle. He contended that the encroachment constituted trespass onto his property. The Artises filed a motion to dismiss the suit. They contended that a naturally growing tree was not a nuisance or trespass. The court ruled in the Artises’ favor and dismissed the case. Martin appealed.
Montana law provides that, “[a]nything which is injurious to health, indecent or offensive to the senses, or an obstruction to the free use of property, so as to interfere with the comfortable enjoyment of life or property . . . is a nuisance.” The appeals court found there was extensive case law and legal commentary on the issue of whether trees and vegetation may constitute a nuisance, and various rules have been adopted to define the conditions for which a claim may be made. However, the court declined to address or adopt any specific rule in this case because it concluded that Martin’s nuisance claim did not satisfy the standards governing nuisance under Montana law.
Martin’s claim that the tree obstructed his view did not rise to “conduct of a defendant that is either intentional, negligent, reckless, or ultrahazardous,” nor was it “an inherently injurious act” or a condition which “obviously exposes another to probable injury.” Thus, the appeals court concluded that the trial court properly granted the Artises’ motion to dismiss the nuisance claim.
Under Montana law, “[a] party need not establish actual harm or damages in a traditional trespass action.” The appeals court observed that a person is considered trespassing if he intentionally enters or causes a third person or thing to enter another person’s land, or remains on the land or fails to remove from the land a thing he has a duty to remove. That person is subject to liability for trespass regardless of whether he caused harm to another person’s land.
Martin claimed more than 40 percent of the Artises’ tree extended over the shared fence and the tree’s roots grew onto his property. He alleged the Artises were fully aware of the situation, but refused to correct it. He claimed their conduct was motivated by malice and/or willful, wanton and reckless disregard for his rights.
Finding that Martin’s complaint alleged Artises’ tree roots had entered, remained on, and damaged Martin’s property, the appeals court deemed he had adequately pled a legal claim for trespass under Montana law. The court, therefore, reversed the trial court’s dismissal and remanded the case for further proceedings.
Covenant to Arbitrate Construction Defect Disputes Is Enforceable
Promenade at Playa Vista Homeowners Assn. v. Western Pacific Housing, Inc., No. B225086, (Cal. Ct. App. Dec. 6, 2012)
Covenants Enforcement/Developmental Rights: The California appeals court agreed that a developer could require binding arbitration to resolve disputes it had with the homeowners association it developed, where the declaration of covenants, conditions and restrictions contains a mandatory arbitration clause.
Promenade at Playa Vista Homeowners Assn. v. Western Pacific Housing, Inc., 200 Cal. App. 4th 849 (Nov. 8, 2011) (reported in the January 2013 issue of Law Reporter) was overturned by the California Supreme Court (287 P.3d 68 (Oct. 10, 2012)). The following is a report of the latest developments in the case.
Western Pacific Housing, Inc. and Playa Capital Company, LLC (developers) constructed, marketed and sold units in Promenade at Playa Vista, a 90-unit condominium in Playa Vista, Calif. Before Promenade at Playa Vista Homeowners Association (association) was incorporated or the first unit had been sold, the developers recorded a declaration of covenants, conditions and restrictions (CC&Rs) against the property, which included a mandatory arbitration provision requiring that any disputes between the developers and the association be submitted to binding arbitration.
On Oct. 29, 2009, the association sued the developers, alleging construction defects in the condominium’s roofs, stucco, windows and doors, as well as defects in the condominium’s structural, electrical, plumbing and mechanical components and systems. The developers filed a motion to compel arbitration (a request for the court to force resolution by arbitration), relying on the arbitration provision in the CC&Rs.
The association argued that the CC&Rs did not permit the developers to compel arbitration because the CC&Rs were considered equitable servitudes (a land use restriction that is enforceable in a court of equity), not a contract. Alternatively, the association claimed, if the CC&Rs were a contract, the contract was unconscionable.
The trial court denied the developers’ motion to compel arbitration and the developers appealed.
In its Nov. 8, 2011, decision, the appeals court affirmed the trial court’s decision, concluding that the CC&Rs, including the arbitration clause, were equitable servitudes, not a contract. Thus, only the association or a unit owner—not the developers— could compel arbitration.
In December 2011, the developers petitioned the California Supreme Court for review. The court granted their petition, but deferred further action pending consideration and disposition of a related issue in another case, Pinnacle Museum Tower Assn. v. Pinnacle Market Develop. (US), LLC, 55 Cal. 4th 223 (2012).
On Oct. 10, 2012, the Supreme Court remanded the Promenade at Playa Vista case to the appeals court with a directive to vacate its previous decision and reconsider the case in light of the Supreme Court’s ruling in Pinnacle. In Pinnacle, the Supreme Court held that, under the Federal Arbitration Act, a developer can compel arbitration of disputes with a homeowners association where there is an arbitration provision in the CC&Rs. The Supreme Court concluded that the CC&Rs, including the arbitration provision, constitute an enforceable contract, and the arbitration provision is not unconscionable.
Stating that its prior decision was inconsistent with the recent decision in Pinnacle, in an unpublished opinion, the appeals court vacated its prior opinion in the Promenade at Playa Vista case and reversed the trial court’s order that had denied the developers’ motion to compel arbitration. The appeals court remanded the case to the trial court with the directive to enter a new order granting the motion.
Dissolved and Reorganized Association Authorized to Collect Assessments
Tiffany Place Homeowners Assn. v. Fuhrer, No. 1-CA-CV 11-0671 (Ariz. Ct. App. Nov. 8, 2012)
Assessments/Association Operations: An Arizona appeals court ruled that even though a homeowners association was administratively dissolved, it was, nevertheless, authorized under the condominium act to collect assessments from owners and foreclose liens for unpaid assessments.
Rebecca Fuhrer owns a townhome in Tiffany Place, a condominium development in Maricopa County, Ariz., that was subject to the declaration of covenants, conditions and restrictions for Tiffany Place. The declaration established Tiffany Place Homeowners’ Association (association) to operate and govern the development.
The association was created in 1981 as a nonprofit corporation. The board hired a management company to handle its affairs and serve as corporate agent. However, the management company failed to file annual reports with the Arizona Corporation Commission. As a result, the association was administratively dissolved in 2000.
When the management company became aware of the dissolution, instead of seeking reinstatement, it formed a new corporation in 2004, named Tiffany Place Homeowners Association. It did not inform the board about the 2004 corporation.
Fuhrer purchased her townhome in January 2007 and served as a board member from August 2007 through March 2008. In December 2007, Fuhrer brought the issue of the corporate dissolution before the board, which then retained legal counsel to review the situation.
The board informed each homeowner about the situation and asked them to vote on a proposal to amend and restate the 2004 Articles of Incorporation to conform to the 1981 Articles of Incorporation. The amended and restated articles provided that the 2004 corporation “is and was organized to assume and succeed to all rights, responsibilities, and legal obligations, without limitation, accruing to and/or owed by the ‘Association’ formed under and defined by [the declaration], including the predecessor corporation formerly known as [the 1981 corporation], administratively dissolved by the Commission on November 1, 2000.” The amended and restated articles of incorporation were approved by a vote of 23 to 1 on April 30, 2009.
In April 2009, Fuhrer stopped paying her monthly assessments. The association sued Fuhrer to foreclose its lien for unpaid assessments. Fuhrer argued that the 2004 corporation did not have authority to collect assessments or commence foreclosure proceedings. The court ruled in the association’s favor, holding that: (1) the declaration created a covenant running with the land that required Fuhrer to pay assessments; (2) Fuhrer had not paid the assessments, creating a lien on her property; and (3) the declaration and Arizona law permitted the association to foreclose on the lien.
Fuhrer appealed the trial court’s finding that the 2004 corporation could levy assessments and enforce and seek foreclosure of the lien on her property. The appeals court observed that the recorded declaration created binding contracts, and a contract’s interpretation is generally a matter of law. Fuhrer admitted that she was bound by the declaration, as a townhome owner. She also acknowledged the declaration directed the association’s creation. She admitted that the 1981 corporation could impose assessments on owners and foreclose on units if owners failed to pay their assessments. She further admitted that the 1981 corporation had legal authority to act as the community representative, and conceded that the association remained in existence after the 1981 corporation dissolution.
The Arizona Condominium Act (condominium act) mandates that a condominium association “shall be organized” and that the association is authorized to institute, defend or intervene in litigation on its own behalf or on behalf of two or more unit owners.
Because the 1981 corporation was dissolved on Nov. 1, 2000, and was never reinstated, Fuhrer correctly assumed that it could not manage Tiffany Place from the date of dissolution to the present. However, under the condominium act, the board had management powers to act on the association’s behalf, even though the 1981 corporation could not.
Unaware of the dissolution, the board continued to hold regular meetings, obtain necessary insurance, maintain common areas, prepare annual reports and budgets, levy assessments and enforce liens. Although the board’s actions did not conform to the declaration, they were consistent with the powers granted by the condominium act. Tiffany Place homeowners voted overwhelmingly to amend and restate the articles of incorporation for the 2004 corporation to mirror those of the 1981 corporation.
Fuhrer argued she could not be compelled to be a member of the 2004 corporation. The Arizona Nonprofit Corporation Act provides that “[n]o person shall be admitted as a member [in a nonprofit corporation] without that person’s consent. Consent may be express or implied.” Fuhrer did, however, concede that, as an owner, she is bound by the declaration. The declaration, in turn, provides that: (a) the association would take the form of a not-yet-created Arizona nonprofit corporation; (b) upon purchase of a condominium unit, each owner would automatically be a member of that association; and (c) each owner agreed to be bound by the declaration. Accordingly, the court determined that Fuhrer expressly consented to membership in Tiffany Place’s governing association.
The court affirmed the trial court’s judgment that the 2004 corporation was the successor to the 1981 corporation, and the board properly exercised its rights under the condominium act. Accordingly, the assessments levied against Fuhrer were proper, and her failure to pay the assessments created a lien against her townhome that could be foreclosed.
Fraudulent Misrepresentation Claim Barred in Contract Dispute
Williamsburg Commons Condominium Assn. v. State Farm Fire and Casualty Co., No. 12-511, U.S. Dist. Ct. (E.D. Pa., Nov. 13, 2012)
Risks and Liabilities: A Pennsylvania district court dismissed an association’s claim against its property insurer for fraudulent misrepresentation, finding instead that the claim was a contract dispute based on the policy terms.
Williamsburg Commons is a condominium development in King of Prussia, Pa. It is managed and maintained by Williamsburg Commons Condominium Association (association). State Farm Fire and Casualty Company issued an insurance policy to the association that covered property damage from Oct. 19, 2009 through Oct. 19, 2010.
In June 2010, residents from seven of the development’s units noticed cracking interior drywall and other damage to their homes. The association notified State Farm, and consultants hired by the association and by State Farm each concluded that sinkhole activity was responsible for the damage.
The association paid for the recommended compaction grouting remediation to stabilize the ground beneath the homes, as well as for damage to the homes’ interiors. The remediation process caused additional damage to the homes, which the association also paid to repair.
State Farm paid the association $10,000 under the policy’s “Extension of Coverage” provision. When the association demanded additional coverage, State Farm paid $107,792.04 to repair damage to the homes’ interiors and $19,276.21 for structural loss. The association claimed that State Farm failed to compensate it for the costs of the compaction grouting remediation and for repairs it had made to the homes that had been damaged by the remediation process, which cost in excess of $350,000.
The association sued State Farm for fraudulent misrepresentation and unjust enrichment, seeking an award for the full amount of the remediation and damage caused by the remediation.
State Farm filed a motion to dismiss the claim, or alternatively, to strike parts of the claims and references to “willful and wanton conduct.” The court denied the motion to dismiss the unjust enrichment claim. State Farm challenged the association’s fraudulent misrepresentation claim on two bases: first, the association failed to plead its claim with sufficient particularity; and second, the claim should be stricken under the “gist of the action” doctrine.
Claims for fraudulent misrepresentation must allege particular, specific circumstances constituting fraud or mistake. Malice, intent, knowledge and other conditions of mind may be alleged generally. The purpose of the heightened pleading requirement is to give defendants notice of the precise misconduct with which they are charged.
The association alleged that the State Farm policy misrepresented that State Farm would pay for “accidental direct physical loss to the buildings at the premises described in the Declarations caused by an insured loss,” and only paid 3 percent of the loss. In addition, State Farm promised to cover the townhomes as separate locations as scheduled in the policy, whereas it treated the townhomes as one unit. The association claimed that State Farm made the misrepresentations with “confusing, ambiguous and contradictory language in the Policy, which it drafted with no input from the association, its policyholder.” The association also argued that State Farm never intended to pay for the losses incurred by the townhomes.
However, the association did not point to any extraneous communications, materials or efforts by State Farm to induce or coax the association into signing the insurance contract. There was no mention of the date, place or time describing how the fraud took place. The association pointed only to the policy itself.
The court ruled that the policy provisions alone were not enough to prove fraudulent misrepresentation by State Farm. In addition, by basing the fraudulent misrepresentation claim solely on the policy’s text, the association attempted to refashion its contract dispute into a tort claim, causing the association to run afoul of the “gist of the action” doctrine. This doctrine is designed to maintain the distinction between breach of contract claims and tort claims (private or civil wrongs or injuries, other than breach of contract, for which the court will provide a remedy in the form of an action for damages).
As stated in eToll, Inc. v. Elias/Savion Adver., Inc., 811 A. 26 10 (Pa. Super. 2002), the gist of the action doctrine bars tort claims: “(1) arising solely from a contract between the parties; (2) where the duties allegedly reached were created and grounded in the contract itself; (3) where the liability stems from a contract; or (4) where the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of a contract.”
The court determined that one had only to read the doctrine’s first requirement to recognize that the association’s claim could go no further. The suit’s essence was breach of contract because the alleged misrepresentations were contained in the policy’s text.