CAI Law Reporter - June 2015 (Plain Text Version)

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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 for information 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.

Associationís Foreclosure of Super-Priority Lien Extinguishes Mortgage

SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. Sept. 18, 2014)

State and Local Legislation and Regulations/Assessments: The Nevada Supreme Court resolved a split among Nevada’s state and federal district courts concerning an association lien’s priority relative to a mortgage lien.

Southern Highlands Community Association (association) governs the Southern Highlands community in Clark County, Nev., which is subject to a declaration of covenants, conditions and restrictions (declaration) recorded in 2000. In 2007, a Southern Highlands homeowner, who was not named in the suit, obtained a loan from U.S. Bank, N.A., which was secured by a deed of trust (mortgage) on the residence. By 2010, the homeowner was delinquent in payments to both the association and U.S. Bank. The association and U.S. Bank separately began nonjudicial foreclosure proceedings (without filing a foreclosure action in court) to foreclose their respective liens.

SFR Investments Pool 1, LLC (SFR) purchased the property at the association’s foreclosure sale in September 2012. U.S. Bank’s foreclosure sale had been postponed to December 2012. Days before U.S. Bank’s planned sale, SFR filed suit against U.S. Bank to quiet title (proceeding to definitively establish the plaintiff’s property ownership) and for an injunction (a court order prohibiting or requiring certain action) to prevent the sale. SFR alleged that the association’s foreclosure extinguished the mortgage, vesting clear title in SFR and leaving U.S. Bank nothing to foreclose. U.S. Bank filed a motion to dismiss the case.

The trial court denied SFR’s injunction request and granted U.S. Bank’s motion to dismiss. The trial court held that the association must proceed with a judicial foreclosure to validly foreclose its super-priority lien. Since the association had conducted a nonjudicial foreclosure sale, the trial court held that U.S. Bank’s mortgage had survived the foreclosure, and SFR’s deed was subordinate to the mortgage. SFR appealed.

The Nevada Uniform Common-Interest Ownership Act (act) is derived from the Uniform Common Interest Ownership Act (UCIOA), but it also differs in several respects. The act elevates the priority of an association’s lien over all other liens and encumbrances on a unit, except for specified liens. One of the specified exceptions is a “first security interest on the unit recorded before the date on which the assessment sought to be enforced first became delinquent” (i.e., a first mortgage). Thus, if the act’s lien provisions ended there, a first mortgage would have priority over the association’s lien.

However, the act creates a partial exception to a first mortgage’s priority. The association’s lien has priority over a first mortgage for any maintenance and nuisance-abatement charges incurred by the association on a unit pursuant to the act and association assessments “which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien, unless federal regulations adopted by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association require a shorter period of priority for the lien.”

U.S. Bank argued that the act merely created a payment priority between the association and the holder of a first mortgage (first mortgagee). U.S. Bank maintained that the nine-month assessment and nuisance-abatement lien does not acquire super-priority status until the first mortgagee forecloses, at which point, the buyer would need to pay off that portion of the association’s lien in order to obtain clear title to the property.

The supreme court did not agree, determining that the act splits an association lien into two pieces: a super-priority piece, which has priority over the first mortgage, and a sub-priority piece, which is subordinate to the first mortgage. The super-priority piece consists of the last nine months of unpaid association assessments and nuisance-abatement charges. The sub-priority piece consists of all other unpaid association assessments and charges. A valid foreclosure of the highest priority lien terminates all junior interests in the property whose holders are properly joined or notified under the law. Thus, the association’s foreclosure of its super-priority lien extinguished the first mortgage.

The supreme court acknowledged that Nevada’s state and federal district courts had been divided over whether the act established a true priority lien and, therefore, took great pains in explaining the analysis that supported its holding. The official comments to UCIOA confirmed the intent for a portion of an association’s lien to have super-priority status. The comments acknowledge that this split-lien approach represents a significant departure from the existing practice of protecting first mortgagees, but the mechanism is designed to strike an equitable balance between associations and first mortgagees.

Under the traditional rule of a first mortgage’s priority, an association’s lien continues to grow while waiting for a bank to foreclose because assessments continue to accrue. Giving some portion of the association’s lien priority over the first mortgage avoids having association members subsidize first mortgagees who delay in initiating foreclosure, whether for strategic reasons or otherwise.

The supreme court next examined whether the association’s super-priority lien must be foreclosed by a judicial rather than a nonjudicial process. As described above, the act gives super-priority status to assessments that would have become due “during the 9 months immediately preceding institution of an action to enforce the lien.” U.S. Bank argued that “institution of an action” must mean a lawsuit brought in a court. The supreme court did not agree.

Other portions of the act specifically provide for nonjudicial foreclosure and establish elaborate procedures and requirements for an association to foreclose by nonjudicial means. The supreme court found no justification for concluding that the term “action” in the lien statute was meant to limit the act’s express nonjudicial foreclosure provisions.

U.S. Bank further argued that a “mortgage savings clause” in the declaration subordinates the association’s lien to the first mortgage, despite the act. The mortgage savings clause provided that neither an association lien created under the declaration nor enforcement of the declaration would defeat or invalidate the rights of a beneficiary under a first mortgage made in good faith and for value. The clause further provides that the association’s lien for assessments, interest and costs was subordinate to the first mortgage.

However, the act specifically states that its “provisions may not be varied by agreement, and rights conferred by it may not be waived,” except as specifically provided by the act. Therefore, the mortgage savings clause does not affect the act’s application.

The supreme court reversed the trial court’s order dismissing the case, vacated the order denying SFR’s request for injunctive relief and remanded the case to the trial court for further proceedings.

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Associationís Super-Priority Lien Has Priority Over First Mortgage

In re: Pack, BAP No. NV-14-1375-KuDJu (B.A.P. 9th Cir. May 18, 2015)

Federal Law and Legislation/State and Local Legislation and Regulations/Assessments: A U.S. Bankruptcy Court Appellate Panel held that a debtor could not strip off an association’s super-priority lien on over-encumbered property.

Gwendolyne Pack owns property in a Las Vegas, Nev., planned community, which is subject to a declaration of covenants, conditions and restrictions (declaration). Bella Sera Homeowners’ Association (association) governs the community. The property became significantly over-encumbered, meaning that the total of all liens exceeded the property’s value.

The property was valued at $419,500. Wells Fargo Bank, NA (Wells Fargo) held a first mortgage  that secured about $437,285 remaining due. U.S. Bank, NA (U.S. Bank) held a second mortgage that secured an estimated $122,436 remaining due. The association also had a lien for about $12,971.

Pack filed a Chapter 11 bankruptcy that proposed modifying the rights of the lien holders. Pack reasoned that, since Wells Fargo’s mortgage was the senior lien and the property was worth less than the lien, the remaining liens were unsecured and could be “stripped off” and eliminated under the Bankruptcy Code provisions.

In asserting that the association’s lien was junior to Wells Fargo’s, Pack relied on the declaration’s “mortgage savings clause,” which provided that all association assessment liens would be subordinate to a first mortgage. Pack also relied on the Nevada Uniform Common-Interest Ownership Act (act), which is discussed above in SFR Investments Pool 1, LLC v. U.S. Bank, N.A. Pack asserted that the act afforded the association payment equal to nine months' assessments if the first lien holder foreclosed on the property.

The association filed an opposition to the strip-off motion, asserting that its lien plus collection costs had equal priority to Wells Fargo’s mortgage. The bankruptcy court determined the association’s lien and the U.S. Bank’s lien were junior to Wells Fargo’s lien and, thus, were wholly unsecured. The bankruptcy court granted the strip-off motion and assigned the association and U.S. Bank to the unsecured creditor class in the plan distribution. The association appealed.

In reviewing the bankruptcy court’s analysis of the association’s lien priority, the appeals court found that the bankruptcy court had relied on two Florida bankruptcy court opinions analyzing Florida’s association lien statute, which is considered similar to Nevada’s. Both Florida and Nevada adopted the Uniform Common Interest Ownership Act (UCIOA) in general. However, Nevada changed the UCIOA provisions regarding association liens.

So, the bankruptcy court was misguided when it relied on the Florida opinions. This became evident following the Nevada Supreme Court’s decision in SFR Investments, which occurred after the bankruptcy court’s decision and before this appeal. Federal courts are obligated to follow a state supreme court’s interpretation of state law.

Therefore, the appeals court was obligated to overturn the bankruptcy court’s decision since it was based on a faulty interpretation of Nevada law. In applying the decision in SFR Investments, the appeals court determined that a portion of the association’s lien had super-priority status over Wells Fargo’s lien. The association’s remaining subpriority lien was wholly unsecured and could be stripped off.

Accordingly, the appeals court vacated the bankruptcy court’s strip-off order and sent the case back to the bankruptcy court for further proceedings.

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Federal Law Does Not Protect Lender from Associationís Foreclosure of Its Super-Priority Lien

Freedom Mortgage Corporation v. Las Vegas Development Group, LLC, No. 2:14-cv-01928-JAD-NJK (D. Nev. May 19, 2015)

Federal Law and Legislation/State and Local Legislation and Regulations: The U.S. District Court for Nevada determined that the Nevada Uniform Common-Interest Ownership Act does not violate or conflict with federal law.

In 2009, Maria Castro purchased a home in the Tierra de las Palmas Village community in North Las Vegas, Nev. The community is subject to a declaration of covenants, conditions and restrictions (declaration), which is administered by the Tierra de las Palmas Owners Association (association). Castro obtained a loan for $98,188 from Freedom Mortgage Corporation (Freedom Mortgage), which was secured by a first deed of trust (first mortgage) on the property. The loan was insured through the Federal Housing Administration by the Department of Housing and Urban Development (HUD).

Castro became delinquent in association assessments, and the association conducted a non-judicial foreclosure of its lien. The association purchased the property at the foreclosure sale in August 2011. The association then sold the property to Las Vegas Development Group, LLC (LVDG) for $3,000.

In November 2014, two months after the Nevada Supreme Court issued the decision in SFR Investments Pool 1, LLC v. U.S. Bank, N.A. (discussed above), Freedom Mortgage filed suit against Castro, the association and LVDG for declaratory judgment (judicial determination of the parties’ legal rights) and injunctive relief (order prohibiting or mandating certain action), quiet title (proceeding to definitively establish the plaintiff’s property ownership) and an equitable lien.

Despite the SFR Investments holding that foreclosing an association’s super-priority lien can extinguish a first mortgage, Freedom Mortgage argued that the association’s foreclosure could not extinguish its first mortgage because it was insured by HUD. Freedom Mortgage asserted that the U.S. Constitution’s Supremacy and Property Clauses preempted application of the Nevada Uniform Common-Interest Ownership Act (act) to extinguish the first mortgage.

The Property Clause precludes anyone from divesting the federal government, through state laws or otherwise, of federal property without Congress’ consent. Freedom Mortgage argued that HUD’s insurance of the mortgage created a federal property interest that was extinguished by applying Nevada law.

For a federal court to have jurisdiction over a case, the plaintiff must have standing to bring the suit. Article III of the Constitution generally prohibits a litigant from raising another person’s legal rights. The federal government was not a party to this lawsuit. Instead, Freedom Mortgage sought to protect HUD’s rights from foreclosure. However, the U.S. Supreme Court has long held that “the federal government is the best advocate of its own interests.” Therefore, the court declined to extend standing to Freedom Mortgage to assert HUD’s rights.

Moreover, the court held that HUD did not have a property interest in Castro’s unit that was protected by the Property Clause. The court determined that HUD would need to hold either title to the property or a mortgage on the property for a property interest to be created. HUD’s interest as a mortgage insurer was far too attenuated to be considered a property interest.

Freedom Mortgage further argued that the act conflicted with federal law. Under the Supremacy Clause, federal law will preempt state law in the event of a conflict. Freedom Mortgage asserted that the act’s application eliminated HUD’s ability to obtain title to and resell the property after foreclosure, which impeded the purpose of HUD’s Single Family Mortgage Insurance Program.

For federal law to preempt state law, there must be an actual conflict between federal and state law. The court found no actual conflict here because nothing prevented Freedom Mortgage from complying with both state law and HUD’s insurance program. In fact, a HUD publication provided to all participating lenders warned lenders in states where associations have a super-priority lien that the lender has an obligation to satisfy the association lien.

“When a HUD-insured mortgage goes into default, the lender may make a claim for the remaining principal amount owed under loan.” The lender may either assign the mortgage to HUD or foreclose and then acquire title to the property and make a claim to HUD for the deficiency. The lender has the obligation to protect its security interest so that it can convey good and marketable title to HUD. This includes ensuring that all taxes and association assessments are paid to prevent liens from attaching to the property. The lender must obtain a release of any such lien, and HUD will reimburse the lender for any amounts it has to pay to satisfy the lien. Freedom Mortgage took none of these actions and lost the right to make a claim to HUD under the insurance program.

Accordingly, the court granted LVDG’s motion to dismiss the case.

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Developer Required to Convey Adjacent Property to Association

Foxwood Estates Homeowner’s Association, Inc. v. Foxwood Estates, LLC, No. 2013AP1103 (Wis. Ct. App. May 13, 2015)

Developer Liability: The Wisconsin Court of Appeals upheld an order requiring a subdivision developer to convey to the association a 30-acre tract that the developer had misrepresented to buyers would be common area.

In 1995, Foxwood Estates, LLC (developer) purchased a large tract of land in Waukesha County, Wis., and created the 38-lot Foxwood Estates subdivision on a portion of the property. The adjacent property was a 30-acre undeveloped parcel (disputed property). Foxwood Estates Homeowners Association, Inc. (association) was created to govern the subdivision.

A setback map was given to prospective buyers and attached to the Foxwood Estates declaration of covenants, conditions and restrictions (declaration). This map showed the numbered lots and identified the disputed property as either “Outlot 1” or “ ‘Outlot 1’ and ‘Outlot 2.’ ” The declaration was made a part of each purchaser’s contract. The declaration provided that the common area owned by the association would include all outlots, conservancy areas, storm water detention areas and other common area as shown on the plat.

The developer also provided prospective buyers with a brochure that included an aerial view of the subdivision and the disputed property bordered in red. The brochure referred to the subdivision’s secluded, natural feel and described a community lifestyle “amidst the grandeur of nature” for those who “appreciate the preservation of this natural habitat.”

In 1998, a newspaper reported that the disputed property had been approved for multifamily housing. The association investigated and discovered that the map attached to the declaration differed significantly from the recorded plat. The disputed property was identified on the plat as “Unplatted Land—Owned by Developer.” The plat showed Outlots 1 and 2 as narrow slivers of land that had previously been identified “Open Area” on the setback map. The recorded plat was never given to any homeowner.

The association filed suit against the developer in 1999 for, among other things, breach of contract, misrepresentation, estoppel and declaratory judgment to quiet title (proceeding to definitively establish the plaintiff’s property ownership). The crux of the association’s claims was that the developer had represented both orally and in writing that the association owned the disputed property and breached that promise by retaining ownership.

The trial court divided the case into three phases. Phase 1 would be a jury trial to determine liability. Phase 2 would be a determination by the judge of available remedies. Phase 3, if necessary, would determine damages. The jury trial was conducted in 2001, but before the verdict could be read in open court the parties reached a contingent settlement. The jury’s verdict was sealed and remained sealed for more than 10 years as the parties tried to reach a final settlement agreement. Unfortunately, they failed, and the association asked that the verdict be unsealed.

The verdict was unsealed in June 2012. The jury unanimously found that the developer had breached the purchase contracts with 11 homeowners, made fraudulent representations to 10 homeowners, made untrue statements to a majority of the homeowners concerning the disputed property under circumstances in which the developer should have known that the homeowners believed and relied on the untrue statements and committed intentional misrepresentation to one homeowner.

In Phase 2, the trial court determined the association was entitled to specific performance (exact performance of a contract according to the precise terms agreed upon) by conveyance of the disputed property and attorney’s fees. The developer appealed, arguing there was insufficient evidence to support the jury’s verdict.

The appeals court found the evidence overwhelmingly supported a finding that the developer represented orally and on the setback map that the disputed property was owned by the association. The evidence also overwhelmingly established that the representations materially induced the homeowners’ decisions to purchase lots.

Many homeowners testified at trial that the developer told them the outlots were unbuildable, reserved for ownership or use by the association and/or would not be developed. Several homeowners specifically asked about the disputed property and were told it was unbuildable and environmentally sensitive, would be owned by the association or would serve as a buffer.

Prior to closing, one homeowner asked for a copy of the “final plat” mentioned in his contract. At closing, he was provided with a large map with “Final Plat” handwritten at the top, which showed the disputed property as outlots. The association’s forensic expert testified there was a reasonable certainty the handwriting was that of the developer’s principal.

The appeals court also determined the trial court exercised appropriate discretion in ordering specific performance as the remedy. The trial court rejected monetary damages as the remedy because money is not necessarily what the homeowners bargained for; rather, it was a quality-of-life issue.

The trial court’s judgment was affirmed.

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Declaration Amendment Void

Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., No. 14CA1154 (Colo. Ct. App. May 7, 2015)

Documents: The Colorado Court of Appeals found an association’s attempt to amend its declaration to remove a mandatory arbitration clause was void since the declarant’s consent was not obtained, even though all units had been sold.

Metropolitan Inverness, LLC (developer) created the Vallagio at Inverness condominiums in Arapahoe County, Colo., in 2007. It is governed by the Vallagio at Inverness Residential Condominium Association, Inc. (association). Metropolitan Homes, Inc. (Metropolitan Homes) was the general contractor.

Under the condominium declaration, the developer had the right to appoint all members of the association’s board of directors for a period of time. Peter Kudla and Greg Krause were appointed by the developer to the board until control was transferred to the unit owners in 2010. The developer sold the last unit in 2012.

Section 13.1 of the declaration provided that it could be amended by the vote of 67 percent of the owners. An amendment also required the developer’s consent, but this right expired after the last unit was sold.

Section 16.6 of the declaration mandated arbitration for construction defect claims and stated that Section 16.6 could not be amended without the developer’s written consent—even if the developer no longer owned any portion of the condominium.

In September 2013, at least 67 percent of the owners voted to amend the declaration to remove Section 16.6 entirely. They did not obtain the developer’s consent.

Shortly thereafter, the association filed suit against the developer, Metropolitan Homes, Kudla and Krause (collectively, the defendants), alleging a number of claims related to construction defects.

The defendants moved to compel arbitration based on the original Section 16.6, arguing that the attempted amendment was invalid because the developer’s consent was not obtained. The association argued that the requirement for developer consent violated the Colorado Common Interest Ownership Act (CCIOA) and that Metropolitan Homes, Krause and Kudla lacked standing to enforce the arbitration provision.

The trial court denied the defendants’ motion, concluding that the developer’s consent was not required. First, the trial court determined there was a conflict between Section 13.1 and Section 16.6 that created ambiguity. Ambiguity must be construed against the drafter, the developer. Second, the trial court determined the consent requirement violated CCIOA and was, therefore, void. The defendants appealed.

The appeals court held that the developer’s consent was required to amend Section 16.6. It determined that Section 13.1 set forth the general procedure for amending the declaration. However, Section 16.6 carves out a specific exception to the provision that the developer’s consent right ends when the last unit is sold. The appeals court found that to conclude otherwise would ignore Section 16.6’s plain language.

The appeals court found no ambiguity between Section 13.1 and Section 16.6. As a matter of law, the specific prevails over the general. Thus, Section 16.6 controls over the more general Section 13.1.

CCIOA provides: “The declaration may not impose limitations on the power of the association to deal with the declarant that are more restrictive than the limitations imposed on the power of the association to deal with other persons.” This prohibits association actions that are “unique to the declarant.” The appeals court held that Section 16.6 did not violate this standard because it was not limited to disputes with the declarant.

In addition, Section 16.6 did not relate to association power. The declaration stated the unit owners, not the association, had the power to amend the declaration.

CCIOA further provides that a declaration that purports to require more than 67 percent owner approval for a declaration amendment is void. The association argued that Section 16.6 required more than 67 percent by also requiring the developer’s vote or consent. The appeals court disagreed, finding that the CCIOA provision related only to the unit owner percentage, not to other approvals that may be required.

CCIOA prohibits a developer from using any device to evade CCIOA’s limitations or prohibitions. The appeals court was not persuaded that the requirement for developer consent contravened CCIOA’s specific limitations or its purpose. Requiring developer consent did not allow the developer to control owners’ votes or to amend the declaration unilaterally without owners’ consent. Moreover, CCIOA specifically endorses alternative dispute resolution, including arbitration. Further, the appeals court held that requiring developer consent did not allow the developer to control the association after the developer-control period expired in violation of CCIOA.

The association further argued that Metropolitan Homes, Krause and Kudla lacked standing to enforce the arbitration provision because they were not parties to the declaration. “A third-party beneficiary may enforce a contract only if the parties intended to confer a benefit on the third party when contracting.” The declaration specified that the developer, the association or an authorized agent of either may enforce the declaration’s provisions. The appeals court found it unclear whether Metropolitan Homes, Krause or Kudla was an authorized agent of the developer.

The trial court’s order was reversed in part and affirmed in part (with respect to other matters not discussed above). The case was sent back to the trial court to enter an order compelling arbitration of the claims against the developer and for further proceedings to determine whether the claims against the other defendants were subject to the arbitration requirement.

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Association Office is a Private Facility Exempt from the ADA

Pappion v. R-Ranch Property Owners Association, No. 2:13-cv-01146-TLN-CMK (E.D. Cal. May 21, 2015)

Federal Law and Legislation: The U.S. District Court for the Eastern District of California determined that conducting membership sales at an association office did not convert the property into a public accommodation for purposes of the Americans with Disabilities Act.

R-Ranch is a 5,000-acre recreational property in Siskiyou County, Calif., operated by R-Ranch Property Owners Association (association). The property belongs to 2,500 owners, each of whom has an undivided ownership interest (share). At the time of the case, there were about 1,700 individual owners, and the association owned the remaining shares. Owners can access the property with key cards and identification cards. Amenities include camping facilities, horseback riding, fishing, swimming, hunting and tennis.

A central building on the property, referred to as “Ranch Headquarters,” serves as the association’s principal office and is usually staffed by at least one association employee. At Ranch Headquarters, owners may pay assessments and fees, register guests, purchase souvenirs and obtain association records. The association also uses Ranch Headquarters to conduct business and sell shares in the property.

Chante Pappion is a wheelchair-bound owner in R-Ranch. There are no handicap parking spaces at Ranch Headquarters. Also, to travel from the parking area to the restroom near Ranch Headquarters requires going over at least one step without a ramp. In June 2013, Pappion filed suit against the association and its board members, alleging she had been denied full and equal access to the R-Ranch facilities. She claimed violations of the Americans with Disabilities Act (ADA) and state law, including the Unruh Act and California Disabled Persons Act.

The association moved for summary judgment (judgment without a trial based on undisputed facts) on all claims, and Pappion moved for partial summary judgment on her ADA claim.

The ADA prohibits discrimination “on the basis of disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation.” To prevail on her ADA claim, Pappion must show that the association is a public entity that owns, leases or operates a public accommodation and that she was denied public accommodations because of her disability. She must also show that the facility presents an architectural barrier prohibited under the ADA and that the barrier can readily be removed.

Pappion argued that, because the association sold shares at Ranch Headquarters, it was a sales establishment under the ADA and, therefore, a public accommodation. A facility must be open “indiscriminately to other members of the general public” to be a public accommodation. The ADA lists a number of private facilities that are considered public accommodations, including places of public gathering, sales or rental establishments, spas, gyms, parks and other places of exercise or recreation.

Occasional use of a private facility by the general public is “not sufficient to convert that facility into a public accommodation under the ADA.” Regular use of a facility by nonmembers is contrary to public status, but allowing members to bring guests does not contradict private accommodation status. However, allowing guests unfettered facility use negates private status.

R-Ranch guests are not allowed unrestricted facility use; owners must supervise guests at all times and are responsible for guests’ actions. Each owner is allowed 210 overnight stays per year, but guests are limited to 30 overnight stays.

The association occasionally invites potential buyers to tour the property. They are registered as guests and allowed to use the property for the same fees other guests pay. In 2014, the association earned revenue of about $1,400,000 from owners compared to about $42,000 from guests. The association does not hold Ranch Headquarters out as being a sales office, and there is no visible evidence (such as a sign) that it is used to conduct sales.

Pappion asserted that the association advertised share sales on its website and at trade shows. “[A]dvertising designed to invite the public to patronize or increase the patronage of an entity’s facility is typically inconsistent with private exempt status.” On its website, the association provides information about how to learn more about the property and to register as a guest. The association attended a couple of outdoor and recreation shows for the first time in 2014 in an attempt to sell more shares, but persons interested in purchasing shares must be invited to Ranch Headquarters. The court determined that it is merely fiscal responsibility to increase membership in an effort to increase revenue so long as selective membership practices are not abandoned.

The court viewed sales as being ancillary to R-Ranch’s main purpose, which is to provide recreational property to its owners. The limited extent to which the association allowed non-owners to use the property weighed in favor of private status. The court held that R-Ranch is a private facility exempt from the ADA, resolving all federal claims. The federal court declined to exercise its discretionary jurisdiction for the remaining state law claims. Accordingly, the case was dismissed.

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Association Not Responsible for Insuring Condominium Interior

State Farm Fire and Casualty Company v. Chardonnay Village Condominium Association, Inc., No. 14-CA-959 C/W 14-CA-960 (La. Ct. App. May 21, 2015)

Risks and Liabilities: The Louisiana Court of Appeal determined an association had properly exempted itself from the Louisiana Condominium Act’s requirement that the association insure unit interiors.

Chardonnay Village Condominiums, located in Kenner, La., are managed by Chardonnay Village Condominium Association, Inc. (association). In November 2010, a fire occurred in the kitchen of the unit owned by Theodora Lourie. Lourie’s insurer, State Farm Fire and Casualty Company (State Farm) paid Lourie $28,200 for damage to the unit, $34,330 for damage to the unit’s contents and $16,645 for living expenses.

In November 2011, Lourie filed suit against the association and its insurer, Underwriters at Lloyd’s, London (Lloyd’s), alleging that the Louisiana Condominium Act (act) required the association to insure her unit. Therefore, the association and/or Lloyd’s must reimburse Lourie for the additional damages not covered under the State Farm policy and reimburse State Farm for the payments it made to Lourie. Lourie also claimed that, if the association’s insurance did not cover the unit, the association was negligent and breached a duty to her by failing to obtain the required insurance.

Also in November 2011, State Farm filed a separate suit against the association and Lloyd’s, in its capacity as Lourie’s subrogee (a person who succeeds to the rights of another regarding a debt or claim). The two cases were consolidated.

The association filed a motion to dismiss all of State Farm’s claims, which was granted in November 2013. Lloyd’s filed a peremptory exception (defense which challenges the claim’s basis) against both Lourie and State Farm. The trial court granted Lloyd’s motion and dismissed Lloyd’s from the suit. The association filed a motion for summary judgment (judgment without a trial based on undisputed facts), alleging it was not liable for the damages caused by the fire.

The act requires an association to maintain property insurance on the common elements and units, exclusive of improvements and betterments made by owners, to the extent reasonably available. The act further requires that, if the insurance coverage described in the act is not maintained by the association, “the association promptly shall cause notice of that fact to be hand-delivered or sent prepaid by United States mail to all unit owners.”

The association argued it had properly exempted itself from insuring the unit’s interior by sending owners multiple notices that it would not be carrying insurance for the interior. The association alleged notice was provided in the condominium declaration and the 2009 revised rules, which were hand-delivered to owners.

The trial court granted the association’s motion, finding that Lourie had notice that the association would not provide unit interior insurance coverage. Lourie appealed.

The bylaws attached as an exhibit to the declaration provide:

The Association holds hazard, property damage and liability insurance policies as required by the Declaration. It is suggested that each Unit Owner obtain his own insurance covering property damage to his Unit (not covered by the Association policy) and personal property contained therein as well as insurance covering personal liability.” (Emphasis added).

The rules in effect when Lourie purchased the unit also stated that the association was not responsible for interior damage to the unit and that it was the responsibility of each owner to insure the “owner’s property and contents.”

The appeals court determined that the condominium documents clearly provided that the association would not be responsible for insuring the unit’s interior. Lourie acknowledged receipt of the condominium documents when she purchased the unit.

There was a dispute as to whether the association hand-delivered the 2009 revised rules to Lourie. The revised rules provided that “[u]nit owners are responsible for the interior of their unit, including all cabinets, appliances, floor, sheetrock, etc. Each unit owner should obtain insurance in his/her name for proper coverage of your dwelling.” The appeals court determined the revised rule did not affect the outcome because it merely restated the previous practice of not covering unit interiors and reminded owners of their responsibility to insure the interior.

The appeals court affirmed the grant of summary judgment to the association.

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Strict Enforcement of Pet Restriction Upheld

The Villas in Whispering Palms v. Tempkin, No. D065232 (Cal. Ct. App. May 18, 2015)

Use Restrictions/Powers of the Association: The California Court of Appeal held that a board’s decision to strictly enforce a pet restriction after years of granting variances was reasonable and entitled to judicial deference.

The Villas in Whispering Palms (association) governs a 98-unit planned community in San Diego, Calif., that was created in 1979. The community is subject to a declaration of covenants, conditions and restrictions (declaration) that restricts pets to one dog per unit. The declaration allows the association’s board of directors to grant variances to the use restrictions.

In 2003, the board notified owners that it had become aware of a number of units with two dogs. The board decided that the current dogs could remain, but once one of the dogs in a two-dog household died or was no longer in the home, the owner would not be allowed to replace it.

In 2005, the board became aware of additional two-dog households. Since the dog restriction appeared to be violated with some frequency, the board surveyed the community to see if owners wanted to keep the restriction. A majority of owners indicated they still wanted a one-dog restriction.

Those owners with two dogs were allowed to request a variance, and the board granted conditional variances to four owners, each with two dogs. As before, once one of the dogs died or was no longer in the unit, the owner was not allowed to bring in a second dog. In addition, the owners had to agree to remove one of the dogs if the board received three complaints within a year about the dogs.

The board notified all owners that, from that point forward, the one-dog rule would be strictly enforced. The board took enforcement action against one owner in 2008 and one in 2009 for violating the rule.

In 2010, Richard Tempkin and a friend moved into the community with one dog. The next year, Tempkin got a second dog to have a transition period for the older dog to “mentor” the new, younger dog. The board sent Tempkin several violation notices. Tempkin was invited to a board meeting to discuss the matter. He asked for a variance, but the board said no additional variances would be given. The association began fining Tempkin in January 2012.

In May 2012, the association filed suit against Tempkin, seeking a permanent injunction (requiring a party to act or not act) requiring Tempkin to remove one dog and pay the fines. After a nonjury trial (trial before the judge), the trial court determined that Tempkin had violated a valid and enforceable declaration restriction. Tempkin appealed.

Tempkin argued that the board acted unreasonably by not granting him a variance when variances had been given in the past. He said he would agree to the same conditions imposed on others who received variances. Tempkin claimed the board’s decision was unreasonable, arbitrary and capricious and in bad faith.

The test for determining the reasonableness of an association’s action is: “(1) whether the reason for withholding approval is rationally related to the protection, preservation or proper operation of the property and the purposes of the Association as set forth in its governing instruments; and (2) whether the power was exercised in a fair and nondiscriminatory manner.” Courts will generally uphold a board’s decision so long as the board made good faith efforts to further the community’s purposes, the decision is consistent with the community’s governing documents and it complies with public policy.

When applying these standards, the appeals court found no reason to overturn the trial court’s decision. The evidence showed that the board used fines to compel compliance. In some cases, the matter was resolved when tenants moved or a dog was removed. When a unit was sold, the fines would be paid out of the sale proceeds or the board waived the fines. If an owner promised to comply, the board would waive the fines if the owner removed one dog. In another case, the board advised a violator that it could proceed with a lawsuit.

In the appeal court’s view, the fact that the association had granted variances more freely in the past did not impact its ability to deny Tempkin a variance. Once the board decided to strictly enforce the dog rule, evidence showed it applied the rule uniformly and treated Tempkin the same as other violators.

The declaration gave the board complete discretion to grant or deny a variance. The appeals court determined the board’s “decision to strictly enforce the pet restriction was a reasonable and informed decision of the board entitled to judicial deference.” The trial court’s judgment was affirmed.

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