CAI approved and filed an amicus brief in this original matter in the Alabama Supreme Court in April of 2020. On June 30, 2021, the Alabama Supreme Court issued an opinion reversing and remanding the case for further proceedings. The opinion consists of four different writings indicative of conflict within the Court. The primary opinion holds that reformation was not an appropriate remedy because the developer did not violate the Act and/or that a trial court should not disturb the terms of a recorded declaration based upon the complaints of a single unit owner (Montgomery). The primary opinion will result in substantial judicial changes in the Act as the result of the Court misapprehending the existence and importance of constraints within the Act on developers as to developer rights, creation of units, and use restrictions; the consumer protection purpose of the Act; the relationship of the offering statement to the obligations of a developer in protecting unit buyers; and that the Association has standing to bring claims on behalf of all Unit owners. This opinion leaves the Association in an untenable position with a developer that the Act was designed to protect against. The remand directs the trial court to address the alternative claims for damages and injunctive relief. Neither of those remedies will resolve the existing conflicting provisions in the declaration or how the Association is to administer the use of commercial units with a condominium restricted exclusively to single family residential use. The association has now filed an application for rehearing.
Phoenix on the Bay II is a condominium created in 2007 ("Condominium") pursuant to the Alabama Uniform Condominium Act of 1991 ("Act") found at Ala. Code§§ 35-BA-101, et seq. (2014 Repl. Vol.). The Condominium is situated in a resort community on the Alabama Gulf Coast and consists of a free-standing house and one eight-story building with an attached parking garage, marina, and other amenities common in a coastal condominium. The Developer of the Condominium was three individuals, who have developed 18 other condominiums. Through "Affiliates," Developer develops, constructs, sells Units pre construction, and provides post completion rental and management services. Developer formed the Association in 2007 simultaneously with the creation of the Condominium to maintain, operate, and manage the Condominium common elements pursuant to the Act. The Association was managed by an Affiliate under a written Management Agreement from inception until May of 2015. Montgomery, along with her spouse, contracted with Developer to buy Unit 2G1 pre-construction. She has owned Unit 2G1 since shortly after completion of the Condominium. She has been President of the Association since May of 2015.
Undisputedly, Developer represented to pre-construction purchasers and all permitting agencies that the Condominium was restricted to single family use and would contain only 104 residential Units. An offering statement, along with all the exhibits thereto, inclusive of a proposed declaration with plats and plans, is a mandatory statutory disclosure required by Article 4 of the Act pursuant to which a developer must truthfully disclose the number of units that can exist within a condominium and any non-residential uses that could be made of units. Developer's offering statement and the proposed declaration, plats and plans attached thereto represented that the Condominium was to consist of 104 Units; that the Condominium was restricted to single family residential use; that ownership of the common elements was allocated to only 104 Units; and that any areas to be reserved were as indicated on the plats and plans attached thereto. The plats and plans did not indicate any reserved areas.
Despite the offering statement representations, Developer undisputedly intended at the time it issued the offering statement to ensure that its Affiliates could operate in the Condominium in perpetuity. Without any disclosure, Developer made changes to the Condominium building and declaration to convert common area to four commercial Units and included illegal easements for the purpose of reserving areas in the building for Affiliates to operate its condominium rental management business or such "other business" in perpetuity. Developer's conduct violated the Act in the following ways: the lack of timely and truthful disclosure violated Article 4; the changes purporting to create the four commercial Units shortly before recording the declaration failed to comply with Article 2 and caused internal conflicts within the document; the changes in the building resulted in violations of Article 3 regarding operations of the Association; and negated the Section 35-SA-305 power of an association to terminate service contracts entered into by a declarant in an effort to prevent a declarant from creating "sweetheart transactions" benefitting itself or its affiliates.
Developer thus effectively thwarted the ability of the Association to contract with a third-party management agent of its choice. Since Developer constructed critical infrastructure that a management agent must necessarily utilize and maintain to provide management services for the Condominium in these areas and claimed ·to reserve exclusively to the use of Developer either by illegal easements or as claimed commercial Units, it is practically impossible for the Association to hire another management agent with Developer/Affiliates occupying the areas from which a management agent would naturally stage its operations. To alter the status quo, the Association would be forced to recreate the spaces and relocate infrastructure needed for the operation and management of the Condominium at significant expense and further loss of common element space to the detriment of the Condominium as a whole. Further, Developer's conduct resulted in unresolvable conflicts within the declaration that make it impossible for the Association to efficiently and consistently manage and operate the Condominium. For example, the creation of commercial Units contradicts the residential use restriction imposed upon all Units; thus, the Association is uncertain in its ability to regulate uses of the property.
Litigation was filed shortly after termination of the Management Agreement by Affiliate asserting tort claims against Association and Montgomery for entering the check-in desk area. The Association/Montgomery counterclaimed and sued Developer and Affiliate real estate company pursuant to the Act, common law fraud, and equity seeking equitable relief in the form of declaratory judgment, injunction, and reformation that the four areas were common areas and not commercial units, that the Condominium was restricted to residential use only, and that the 2015 deed purporting to convey the spaces as commercial Units was a nullity. After a bench trial, the trial court ruled in favor of the Association and Montgomery and granted equitable relief that struck the provisions from the recorded declaration purporting to create perpetual easements or commercial Units, declared the 2015 deed a nullity, and permanently enjoined Developer/Affiliates from attempting to assert any rights appertaining the four areas at issue.
Brief Author: Steven Casey, Esq., of Jones Walker LLP
CAI Amicus Review: Amicus Committee Co-Chairs: Mr. Robert Diamond, Esq. (VA), Mr. Stephen Marcus (MA)
This case stems from a 2014 lawsuit in the Superior Court of the State of Washington for the County of Snohomisi. A homeowner, Matt Surowiecki Sr, sued the community association, Hat Island Community Association, in which he owns 270+ lots, both individually as a lot owner and derivatively on behalf of the association, arguing that the community association was in violation of their governing documents for failing to levy assessments on an equitable basis and a number of other claims, which were largely dismissed via summary judgment. The trial court eventually dismissed Surowiecki's claim and cited the business judgment rule for their reasoning. Surowiecki then appealed the decision to the Washington Court of Appeals, Division One who reversed the trial court decision “that the business judgment rule limits only personal liability of individuals" and that the trial court applied judgment for a board absent evidence of fraud, dishonesty, or incompetence (ie. Failure to exercise proper care, skill and diligence).
Now, both Hat Island Community Association and Surowiecki are seeking review of the Court of Appeals opinion. HICA sought review arguing that trial court properly applied the law in Washington, giving deference to a board's discretionary decision absent evidence of fraud, dishonesty, or incompetence (ie. Failure to exercise proper care, skill and diligence.) Surowiecki sought review arguing that the court of appeals inappropriately limited the issues on remand to a review of board's decision for its “reasonableness" and “whether a homeowner association's decision to adopt any particular assessment structure is reasonable depends not on the substance of the decision but rather on the “process employed and the facts considered." The Washington Supreme Court granted review of the business judgment rule issue and the assessment claim.
The Court of Appeals holding that the business judgment rule applies only to limit the liability of individual directors calls that fundamental rule into question and creates significant liability for all Washington community associations. It could set bad precedent on a national level regardless of the state law being applied. The two principal issues addressed in the brief are whether the business judgment rule applies to the association (and not just the board members) and whether the business judgment rule requires that the boards' decisions be “reasonable."
Court: Washington State Supreme Court
Topic: Business Judgment Rule
Brief Author: Anthony Rafel, Esq., CCAL and Terry Leahy, Esq., CCAL
Filed: April 12, 2021
CAI Amicus Review Panel: Mr. Robert Diamond, Esq. (VA), Mr. Stephen Marcus Esq. (MA), Mr. Ed Allcock, Esq., CCAL (MA), Mr. Steven Sugarman, Esq., CCAL (PA), Mr. Anthony Rafel, Esq. CCAL (WA), Mr. Elia Ellis, Esq., and Mr. Russell Robbins, Esq. (FL)