CAI's Community Association Law Reporter newsletter 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. Cases deal with developer liability, powers of the association, use restrictions, covenant enforcement, assessment collection, and much more. Law Reporter is published electronically 12 times a year and delivered by email to CAI members only.
©2019 Community Associations Institute
White Oak Medical Properties, LLC (White Oak) developed Premier Medical Center as a 10-unit commercial condominium in Asheboro, N.C. White Oak sold one unit to Ironman Medical Properties, LLC (Ironman), and it retained the other nine units. Premier Medical Center Condominium Association, Inc. (association) was organized to govern the project.
Dr. Tanvir Chodri (Chodri) and his wife owned White Oak, and Chodri served as the sole officer and director of the association. Chodri practiced medicine and had no experience managing real estate or condominium associations. He also relied upon the officer manager for his medical practice, Julie Trollinger, to handle the financial affairs of White Oak and the association. Like Chodri, Trollinger was inexperienced and had no knowledge about managing associations.
In 2010, Ironman leased its unit to Hodges Family Practices, Inc. (HFP). In June 2012, Ironman quit paying its association assessments. In December 2012, HFP requested a breakdown of the association's expenses. Ironman also requested all of the financial documentation available for the association.
The investigation by HFP and Ironman into the association's finances revealed numerous improprieties. The association had never held elections or annual meetings and kept no separate corporate records. The association had no bank account, and the association's money was intermingled with White Oak's money in a White Oak account. The association had never prepared any financial reports and did not set aside funds for reserves.
Assessments were improperly calculated, being based on the occupied square footage rather than the total project square footage as required by the declaration of condominium (declaration). White Oak never paid assessments to the association. Instead, Trollinger deposited the rents from White Oak's leased units into the comingled account. As such, no separate payments were made for White Oak's vacant units. Trollinger paid both the association's and White Oak's expenses from the comingled account.
The result of the financial mismanagement was that Ironman initially overpaid assessments but subsequently owed $37,582 to the association after it quit paying assessments. In addition, the improper accounting caused an underpayment by White Oak to the association of approximately $207,345.
In 2015, Ironman and HFP (collectively, plaintiffs) sued the association, White Oak, and Chodri (collectively, defendants), alleging breach of the declaration, breach of fiduciary duty, and constructive fraud (breach of fiduciary duty with an intent to benefit from the wrongdoing). The defendants filed a counterclaim seeking to collect the unpaid assessments from Ironman. The trial court entered a directed verdict (order preventing jury consideration of a claim because the plaintiff failed to present the evidence necessary to proceed with the claim) in favor of the defendants on all of the plaintiffs' claims except for breach of the declaration.
The jury found that both the plaintiffs and the defendants breached the declaration. It awarded plaintiffs $1 in damages and defendants $51,472 in damages due to Ironman's suspension of its payment obligations. However, the trial court denied the defendants' motion for attorneys' fees and costs. Both sides appealed.
The defendants argued that any claims of breach of fiduciary duty and constructive fraud were claims accruing to the association and could not be enforced by Ironman, an association member, or HFP, a party with no rights in the association. The North Carolina Condominium Act (act) establishes a fiduciary duty owed by association officers and directors to both the association and the unit owners.
The appeals court stated that the act imposes a very high standard of duty because the association's board of directors has great power over the owners' property interests and because there is great potential for conflicts between the developer and the owners. As such, Ironman had standing to claim a breach of fiduciary duty against Chodri, but HFP could not pursue such claim because neither the act nor any contract established a fiduciary duty owed by any of the defendants to HFP.
To prove constructive fraud, the plaintiff must show the defendant sought to benefit himself in the transaction in addition to proving that a breach of fiduciary duty occurred. The appeals court could not discern from the evidence whether Chodri intended to benefit personally from the financial mismanagement or whether he was merely negligent in his duties. In any event, Ironman presented sufficient evidence that the claim should have been decided by the jury rather than the judge.
The act requires that any judgment related to the collection of assessments include an award of costs and reasonable attorneys' fees to the prevailing party. With respect to the assessment collection claim, the trial court must determine whether the association was the prevailing party and, if so, award the association its attorneys' fees and costs in pursuing the collection.
Accordingly, the trial court's orders were affirmed in part and reversed in part, and the case was remanded for further proceedings.
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