CAI Law Reporter - November 2015 (Plain Text Version)
Recent Cases in Community Association Law
Unapproved Construction Leads to Foreclosure
Carriage House I-Enfield Association, Inc. (association) manages a condominium in Enfield, Conn. In June 2010, the association’s board of directors adopted a resolution permitting an owner to expand the deck attached to his or her unit using one of four pre-approved plans. Carol Johnston, a unit owner, decided to expand her deck using one of those plans.
The association submitted an application on Johnston’s behalf for a special use permit to the Enfield Planning and Zoning Commission (commission). In July 2010, the commission granted a special use permit for Johnston’s deck expansion.
In April 2011, Johnston and the association entered into a contract regarding the deck expansion which required Johnston to construct a privacy wall on one side of her new deck as well as stairs leading from the deck to the common area behind the units.
Johnston applied to the commission for a building permit, but the commission said it would not approve a privacy wall because it was not included in the special use permit. Johnston deleted the privacy wall from her permit application, and the commission issued a building permit in May 2011. The association informed Johnston and the commission that it would not approve the deck expansion without the privacy wall. The association further stated that proceeding without the privacy wall would be a breach of the contract and warned Johnston that it could impose fines and remove the new construction.
Undeterred, Johnston began the deck expansion. In June 2011, in the midst of Johnston’s construction, the association applied to the commission for a special use permit for deck privacy walls. The commission approved the privacy wall special use permit in July 2011. Johnston completed the deck expansion sometime before August 3, 2011 without installing a privacy wall and without complying with several of the contract’s construction specifications.
On August 3rd, the association informed Johnston of the privacy wall special permit and that she had until August 12th to install the privacy wall as agreed or return the deck to its original, pre-construction condition. The association asked Johnston to attend a meeting to discuss the matter on August 31st. On August 30th, Johnston informed the association that she would not attend the meeting and that “the only resolution of this matter lies in the courts.”
The association wrote to Johnston again, informing her that she had until October 5th to either install the privacy wall or restore the deck to its original condition. If she did not comply, a $25 fine would be imposed for each day she remained in violation. Johnston did not comply, and the association began fining her.
The association filed a foreclosure action against Johnston for her failure to pay the accrued fines. Johnston argued that the association had coerced her to enter into a deck contract that was illegal because it contained provisions that violated Enfield’s zoning regulations. The trial court found that the contract was valid and enforceable and entered a foreclosure judgment.
Johnston filed a motion for reconsideration, again arguing that the contract was illegal because it required her to perform acts which were not within her legal authority. The trial court denied the motion, and Johnston appealed.
The appeals court agreed that the contract was legal and enforceable because the association obtained a special use permit for the privacy wall, which cured any alleged illegality. The underlying purpose of the contract was not to violate the law. In fact, the association did not realize the commission had not approved the privacy wall when it entered into the contract. When the association learned of the oversight, it promptly sought a special use permit for the privacy wall. The appeals court found that the zoning discrepancy at issue was not of sufficient magnitude as to render the contract void on public policy grounds.
The appeals court upheld the foreclosure judgment.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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Six-Month Assessment Liability Can Be Relieved by Paying Less than Six Months
Cornell Columbian Condominium Association (association) governed a condominium in Chicago, Ill. In 2010, the association needed to make some repairs but lacked the funds to pay for the work. In September 2010, the association’s board of managers (board) obtained a loan to pay for the repairs and adopted a special assessment to repay the loan.
Owners were notified that they could opt to pay the special assessment in full by December 31, 2010, with no interest or they could finance the special assessment over five years by making monthly payments plus interest. The assessment notice stated that, for owners that elected the financed option, if the unit was sold during the five-year period then the unpaid portion of the special assessment must be paid in full at closing; the special assessment was not transferable to a new owner. In March 2011, the board adopted a resolution allowing buyers to assume the sellers’ special assessment obligation rather than requiring the seller to pay the remaining assessment at closing.
Unit 1’s owner did not pay the special assessment in full at the end of 2010 and stopped paying all assessments (regular and special) in February 2011. In June 2011, the association initiated a collection action by serving the owner with a demand letter. In mid-2011, the owner surrendered possession of the unit to the association. The association took possession and rented the unit from October 2011 through January 2013, collecting a total of $16,600 in rent.
Meanwhile, the owner’s lender pursued foreclosure on the unit. The association was notified of the foreclosure and named as a defendant in the case. Cassandra Smith was a member of the board and aware of the scheduled foreclosure sale. The notice of sale stated that the purchaser would be obligated to pay assessments and legal fees in accordance with the Illinois Condominium Property Act (act). In December 2012, Smith purchased Unit 1 at the foreclosure sale.
In January 2013, the board began charging Unit 1’s account both the regular assessment as well as the special assessment monthly installment. From February to September 2013, Smith paid the regular assessments but not the special assessment. In September 2013, the association filed legal action against Smith, asserting that the association was entitled to possession of the unit and $8,766.48 for the unpaid special assessment.
Smith argued that she could not be responsible for the special assessment because she never agreed to assume the former owner’s obligation, as required by the board resolution. However, the board president testified that the board never contemplated that the resolution would be applied to a foreclosure sale, only a traditional sales transaction.
The trial court determined that Smith was not liable for the special assessment because it accrued in 2010 when the board adopted it, and it was subsequently wiped out by the foreclosure action. The association appealed.
The act provides that a purchaser at a judicial foreclosure sale has the obligation to pay the unit’s share of the common expenses assessed beginning on the first day of the month after the foreclosure sale date. The act specifies that, where the judicial foreclosure sale has been confirmed by a court order, such payment extinguishes the lien created by the former owner’s failure to pay assessments. Further, a foreclosure sale purchaser has the duty to pay the unit’s unpaid share of common expenses which became due during the six months before collection action was taken.
The appeals court held that the unpaid portion of Unit 1’s special assessment attached as a lien on the unit, which could have been extinguished only by Smith paying the special assessment for the first month after her purchase. Since she did not make the special assessment payment, the lien was not extinguished, and Smith remained liable for the special assessment.
However, with regard to the obligation to pay the six months of regular assessments that became due before the collection action, the appeals court found that the act did not specify how much of the outstanding assessments must be paid to relieve the purchaser of the obligation. The appeals court reasoned that “the requirement cannot be that the outstanding assessments must be paid in full so as to absolve the purchaser of her obligation, because if it were, the purchaser would clearly not be obligated to pay any assessments, since there would be none remaining to pay (i.e., none would be ‘outstanding’).”
Therefore, the appeals court held that a foreclosure purchaser’s obligation for six months of unpaid regular assessments is wiped out as soon as the purchaser pays any portion of the outstanding assessments. In addition, the board should have credited the rents received on the unit to the former owner’s outstanding assessments, which means that at least some of the outstanding assessments were paid during a collection action. Accordingly, the appeals court held that Smith was not liable for the six months of unpaid regular assessments prior to her acquisition of title.
The appeals court reversed the summary judgment in Smith’s favor with respect to the special assessment, affirmed the summary judgment in Smith’s favor with respect to the regular assessments, and awarded attorney’s fees and costs to the association in accordance with the act.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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Attorney Not Disqualified from Opposing Developer
Centex Homes (Centex) developed the Legacy Villas Condominium in La Quinta, Calif., and created Legacy Villas at La Quinta Homeowners Association (association) in 2004 to govern the project.
Centex’s employees served on the association’s board of directors while Centex controlled the association. In 2006, the association hired the law firm of Peters & Freedman, LLP to represent it. Peters & Freedman had regular communications with the directors, including the Centex employees serving as directors.
In May 2008, control of the association was turned over to the unit owners. That same month, the association filed two lawsuits in state court against Centex. The association alleged construction defects in one case and breach of fiduciary duty in the other, arguing that the Centex-controlled board mismanaged the association’s budget and finances. Peters & Freedman represented the association in both suits. Centex removed the breach of fiduciary duty case to federal court.
In 2012, Centex moved to disqualify Peters & Freedman in the federal case, arguing that a conflict of interest existed. The trial court granted the motion and disqualified Peters & Freedman. Meanwhile, Peters & Freedman continued to represent the association in the state court case.
During discovery (period during which a party can obtain facts, documents and information from the other party to assist with trial preparation) in the federal case, Centex subpoenaed records from the association’s management company. The management company provided all of the association’s records to Centex, including a significant amount of privileged materials related to both the state and the federal cases.
Peters & Freedman contacted Centex’s attorney about the privileged documents, and Centex’s attorney complained to the trial court. The trial court found Peters & Freedman in contempt (willful disregard or disobedience) of the disqualification order and imposed sanctions on Peters & Freedman. Peters & Freedman appealed both the disqualification order and the contempt order.
Under the California Rules of Professional Conduct, an attorney may not represent one client if he or she formerly represented the opposing party because he or she may have confidential information material to the new client’s case.
The appeals court determined that the evidence presented by Centex did not support a finding of an attorney-client relationship between Peters & Freedman and Centex. Rather, the evidence showed that Peters & Freedman communicated with Centex employees solely in their capacities as association directors and not as Centex employees.
The communications between the Centex employees and Peters & Freedman were limited in nature and quantity. There was also no evidence that the Centex employees divulged any confidential information about Centex to Peters & Freedman or that Centex ever paid any legal fees to Peters & Freedman. While one of the former directors testified that she understood that Peters & Freedman was giving her advice in her capacity as a Centex employee, the appeals court was unconvinced. The appeals court stated that, as an experienced developer, Centex could not have reasonably believed that Peters & Freedman represented it.
The appeals court held that Peters & Freedman should not have been disqualified under the conflict of interest rule. The appeals court reversed the disqualification order and vacated the contempt order and sanctions.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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Unbuilt Units Subject to Assessment, Taxation and Foreclosure
High Point at Lakewood Condominium Association, Inc. (association) governed the High Point Condominium in Lakewood, N.J. The condominium consisted of 260 units within a 25-acre parcel. The original 1971 condominium master deed contemplated constructing an additional 136 units on 9.8 acres within the condominium parcel.
The master deed granted the original developer the right to remove unbuilt units and the land on which they were to be built from the condominium. Recognizing that the New Jersey Condominium Act (act) in effect at the time required the unanimous consent of all unit owners to remove property from the condominium, the master deed provided that each unit owner granted the developer an irrevocable power of attorney to act for the owner to approve such removal.
The last 136 units were never built, and the developer failed to pay the property taxes on the unbuilt units or remove them from the condominium. Lakewood Township (Lakewood) eventually foreclosed on the tax liens in 1980. In describing the property being transferred to Lakewood, the foreclosure judgment listed each unbuilt unit by building and unit number and noted that the property consisted of vacant land.
The foreclosure judgment remained unchallenged for more than 30 years, and Lakewood never took possession of the property. However, in 2012, the association became concerned that the status quo would change and filed suit to quiet title (proceeding to definitively establish property ownership) in the 9.8-acre parcel. The association urged the court to find that the undeveloped parcel remained part of the condominium common area and was not subject to taxation. In the alternative, the association argued that Lakewood had been liable for assessments since 1980.
The trial court ruled that the foreclosure removed the 9.8 undeveloped acres from the condominium and transferred ownership to Lakewood. The association appealed.
Under the act, a unit consists of “a part of the condominium property designed or intended for any type of independent use, having a direct exit to a public street or way or to a common element . . . leading to a public street.” The act also provides that each unit is taxed separately. A unit does not have to be completed before it becomes taxable or subject to condominium assessments. Therefore, foreclosure on the unbuilt units was proper.
However, the appeals court disagreed with the trial court that the foreclosure judgment was equivalent to a revocation deed removing the property from the condominium. While the act currently prohibits using a power of attorney to evade statutory requirements, this prohibition was not in effect at the time the master deed was recorded, and the courts had not ruled on whether such power was enforceable. Further, it was not clear whether the powers of attorney ran with the land such that Lakewood succeeded to the powers. The appeals court held that, even if the powers of attorney were enforceable and were acquired by Lakewood, the powers were not self-effectuating. The act requires a revocation deed to be filed to effectuate the land’s removal. No such deed was ever filed, and the appeals court held that the foreclosure judgment was not a substitute for a revocation deed.
The appeals court held that Lakewood was liable for assessments on the unbuilt units but its liability for past assessments was limited due to the statute of limitations and perhaps waiver by the association. If Lakewood chose to file a revocation deed, then the issues surrounding the revocation could be challenged at that time—whether Lakewood succeeded to the powers of attorney granted under the master deed and whether the powers were enforceable.
The trial court’s judgment was affirmed in part and reversed in part.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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Management Company Is Not Debt Collector
River Ridge Homeowners Association, Inc. (association) governed a subdivision in Indiana. Richard Gonon was a member of the association.
In 2010, the association hired Community Management Services, Inc. (CMS) as its manager. At the time CMS was hired, Gonon was current on his association dues, but by 2014 Gonon had failed to make a number of his dues payments. In November 2014, the association sent Gonon a lien notice stating that it held a $7,043 lien on Gonon’s property. The letter was on the association’s letterhead but signed by CMS’ president under a power of attorney for David Compton, an association board member.
In January 2015, Gonon filed a class action lawsuit against CMS, arguing that CMS had violated the Federal Fair Debt Collection Practices Act (act) by failing to make certain required disclosures about the debt. CMS asserted that it was not a debt collector and, therefore, not subject to the act.
The act defines a debt collector as “any person who . . . regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” Excluded from this definition is any person who attempts to collect money that is due to himself and any person who attempts to collect a debt that “was not in default at the time it was obtained by such person.”
The Seventh Circuit Court of Appeals previously ruled that a management company “obtains” the debts owed to the association for whom it works when it becomes the association’s agent. Therefore, a manager is not a debt collector, within the meaning of the act, unless the debt was delinquent when the manager first assumed its role with the association.
Since Gonon was not delinquent when CMS was hired, the court ruled that CMS was not deemed a debt collector under the act with respect to Gonon’s debt. Accordingly, the court granted summary judgment (judgment without a trial based on undisputed facts) to CMS. The court also denied as moot Gonon’s motion for class action certification.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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E-mail Addresses and Phone Numbers Not Subject to Disclosure
Sunpeak Association, Inc. (association) governed a subdivision in Park City, Utah. Walker I Investments, LLC (Walker) owned property in the subdivision. In July 2013, Walker sent the association a written request to inspect and copy various association records under the Utah Revised Nonprofit Corporation Act (act).
Among the records requested were the association’s membership list, meeting records, insurance policies, and contracts. Walker stated several reasons for its request, including facilitating the sale of Walker’s property, verifying the association’s compliance with legal requirements and the subdivision governing documents, and investigating the cost and nature of services the association procured.
The association produced some records but refused to produce others. In September 2013, Walker filed suit against the association requesting that the association be ordered to produce the records and seeking attorney’s fees and costs under the act. The association responded that Walker lacked a proper purpose to access some records. In particular, Walker demanded the e-mail addresses and phone numbers for all association members. Walker’s stated purpose for such information was to communicate efficiently and cost-effectively with other association members regarding the association’s operations. The association argued that the e-mail addresses and phone numbers were private information it was not required to disclose.
The trial court granted partial relief to Walker and ordered the association to produce several records previously withheld. However, the trial court found the association was not required to produce the e-mail addresses or phone numbers because Walker did not have a proper purpose for such information. The trial court reasoned that the list of names and mailing addresses of association members, which the association did produce, provided a sufficient method for contacting other members.
The trial court also denied Walker’s request for attorney’s fees, finding that the association had a reasonable basis for doubting Walker’s right to the records. As such, the association’s refusal was made in good faith. Walker appealed. Walker argued that the act granted an association member access to any association record that the member had a proper purpose to inspect and copy.
The act identifies three categories of records a nonprofit corporation must keep, and a member’s right to access the records varies depending upon the category. Under the first category, the corporation must maintain an alphabetical list of the members’ names, addresses and number of votes. This list must be provided to any member upon request. In the second category, a corporation must keep copies of its articles, bylaws, resolutions, minutes and financial statements. A member is allowed to inspect these records at the corporation’s principal office upon at least five business days’ written notice.
The third category includes all other corporate records. A member’s demand for access to these records must be made in good faith and for a proper purpose, and the records demanded must be directly connected to the described purpose.
The appeals court found that the association satisfied Walker’s demand for the membership list when it produced a list with its members’ names and mailing addresses. The appeals court affirmed that the association was not required to produce the members’ e-mail addresses and phone numbers. Since the appeals court determined the association had satisfied Walker’s request, it was not necessary to examine whether Walker had a proper purpose for such records.
The act provides that, if a court ordered a nonprofit corporation to provide records to one of its members, the court should also order the corporation to pay the member’s reasonable attorney’s fees incurred to obtain the order. However, the corporation would not be liable for such attorney’s fees if it had a reasonable basis for doubting the member’s right to the records demanded.
Since the act granted the trial court the discretion to decide the party’s subjective intent, the appeals court reviewed the trial court’s decision only for clear error—that is, whether the facts were legally insufficient to support the trial court’s decision. The appeals court found that Walker failed to demonstrate that the finding of the association’s good faith was not supported by the evidence. Accordingly, it was not error for the trial court to deny Walker attorney’s fees. The trial court’s judgment was affirmed.
In a dissenting opinion, Judge Voros asserted that the majority opinion only analyzed Walker’s rights under the first and narrowest category of corporate records. Voros argued that the appeals court should have examined Walker’s rights under the other categories. More specifically, it was Voros’ opinion that Walker was entitled to the members’ e-mail addresses and phone numbers under the third category.
Voros believed that the act did not authorize the level of judicial scrutiny that the trial court exercised when it ruled that Walker did not need the members’ e-mail addresses or phone numbers because it could effectively communicate with other members through their mailing addresses. Voros stated that it was not for the courts to choose between communication methods so long as the e-mail addresses and phone numbers satisfied the statutory test of being “directly connected” to Walker’s purpose of communicating with other members. Moreover, Voros felt it unduly restrictive to limit Walker to letter communication, an obsolete mode of communication.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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Leasing Cap Requires Supermajority Vote
Unit Owners Association of Centre Pointe Condominium (association) governed the Centre Pointe Condominium in Bellingham, Wash. The association wanted to restrict leasing.
The Washington Condominium Act (act) allows a declaration to be amended with at least 67 percent of all association votes. However, if an amendment would restrict how units are used, the act requires 90 percent approval and the consent of owners whose units would be particularly affected.
In May 2011, Filmore LLLP purchased an unfinished portion of the Centre Pointe complex as well as the related development and declarant rights. Filmore’s property was subject to the declaration.
In October 2011, owners representing at least 67 percent of the association votes approved a declaration amendment providing that no more than 30 percent of the units could be leased. In October 2012, Filmore filed suit against the association challenging the amendment. The trial court found that the amendment was void because it was not adopted by 90 percent of the votes. The association appealed.
The appeals court considered whether the amendment changed the uses to which the units were restricted. The act does not define “use,” but the appeals court determined that it did not need to interpret the act because the declaration itself identified a number of uses that come within the supermajority voting requirement. Under “Permitted Uses,” the declaration included a subsection labeled “Leasing Restrictions.” The appeals court determined this indicated leasing was permitted.
Moreover, the Leasing Restrictions section specifically provided that there was no restriction on an owner’s right to lease his or her unit other than those specified, including requiring written leases and imposing a minimum one-year lease term. The appeals court found that nothing in the Leasing Restrictions section limited the percentage of units that could be leased. Therefore, an amendment on leasing required a 90-percent vote.
Accordingly, the appeals court affirmed that the declaration amendment was invalid due to it receiving an insufficient number of votes.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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Daycare Centers Allowed as Incidental Home Business
Neufairfield Homeowners Association (association) governed the Neufairfield subdivision in Joliet, Ill. Neufairfield consists of about 500 lots, and there is only one entrance into the subdivision.
Kevin and Melissa Wagner purchased a home in Neufairfield in September 2013. Mrs. Wagner operated a daycare facility out of the home from 6:00 a.m. to 6:30 p.m., Monday through Friday. She was licensed by the state to care for up to seven children.
Steven Gurley also owned a home in Neufairfield, and his wife also operated an all-day daycare center in the home during weekdays. She was licensed to provide daycare for up to eight children.
The Neufairfield declaration of covenants, conditions and restrictions (declaration) restricted the lots’ use to single family dwellings only. However, the declaration provided an exception for a home-based business if “(i) the business is conducted within the residence, (ii) the business is not prohibited by the ordinances or regulations of the City and (iii) no motor vehicle with business markings is parked on the Lot or Common Area overnight.” The declaration further provided that such home-based businesses were customarily incidental to the principal residential use and did not violate the single-family residential restriction.
Another declaration section labeled “Other Commercial Activities” prohibited using a lot for commercial activities of any kind except as provided in the single-family residential restriction. However, this section specifically provided that commercial activities shall not allow the public to frequent the subdivision.
In 2013 and 2014, the association filed suit against the Wagners and the Gurleys (collectively, the owners) for violating the declaration by operating businesses in their homes. The association alleged that the daycare businesses resulted in frequent commercial traffic in and around the residences.
The owners filed motions for summary judgment (judgment without a trial based on undisputed facts), arguing that they were licensed by the state, no special use permit was required by the city, and they did not violate any city ordinance or resolution. In response, the association’s manager testified that he had received multiple complaints from other association members about the businesses. Another association member testified that she had observed four to six cars going to and from Gurley’s property, both morning and evening, Monday to Friday.
In both cases, the trial court determined that the small number of children that attended the daycare businesses would not result in the public “frequenting” the subdivision. Accordingly, the trial court found that the owners were not violating the declaration and granted summary judgment to the owners. The association appealed in both cases, and the appeals court consolidated them.
The association did not dispute that the daycare operations qualified for the residential use restriction’s home-based business exception, but the association argued the customer traffic created by the businesses violated the commercial activities prohibition. The dictionary defined “frequent” as “given to some practice: habitual, persistent.” The appeals court reached the same conclusion as the trial court that seven or eight cars entering and leaving the subdivision twice a day were insufficient to create “habitual, persistent” commercial activity to violate the commercial activities prohibition or frustrate the subdivision’s residential purpose.
The appeals court affirmed the trial court’s grant of summary judgment to the owners.©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.
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