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Fourth District Court of Appeal Enunciates Two-Pronged Test to Evaluate Decisions Made by the Board of Directors of a Community Association.

The officers and directors of community associations have a fiduciary relationship to the members (owners), as stated in §718.111(1)(a) and §720.303(1), Florida Statutes.  The directors are obligated to discharge their responsibilities in good faith.  Board decisions are generally protected by the "business judgment rule".  The theory behind this rule is that Courts should not substitute their judgment for the judgment of the elected or appointed board members, so long as the members of the board acted in compliance with established standards of conduct.   Florida Statutes, Section 718.111(1)(d), provides:

 (d) As required by s. 617.0830, an officer, director, or agent shall discharge his or her duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he or she reasonably believes to be in the interests of the association. An officer, director, or agent shall be liable for monetary damages as provided in s. 617.0834 if such officer, director, or agent breached or failed to perform his or her duties and the breach of, or failure to perform, his or her duties constitutes a violation of criminal law as provided in s. 617.0834; constitutes a transaction from which the officer or director derived an improper personal benefit, either directly or indirectly; or constitutes recklessness or an act or omission that was in bad faith, with malicious purpose, or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.

The new test to determine whether the board's decision should be protected by the business judgment rule comes from a case where an owner prevented the association from extending balcony concrete repairs into her unit.   The engineer for the project said to remove the concrete four inches beyond the corrosion, which necessitated work in the unit, not just the balcony.  The owner hired her own engineer who said the extra work wasn't necessary.

The association sued to gain access to the unit to perform the repairs recommended by the project engineer.  The appellate court explained that its review of the board's decision was limited by the business judgment rule and held:

...courts must give deference to a condominium association's decision if that decision is within the scope of the association's authority and it is reasonable - that is, not arbitrary, capricious, or in bad faith [emphasis added]

The case was sent back to the trial court for analysis pursuant to the new test, to wit:

• Does the board have authority to invade the unit to perform common element repairs?
• and, if so
• Is the decision to do so reasonable or, in other words, was the board decision to invade the unit arbitrary, capricious or made in bad faith?

This case is hot off the press and therefore not final if the parties file motions for rehearing.

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I talked about the distinction between a carrier's duty to defend and the duty to indemnify early in the year in connection with the U.S. District Court's ruling that a D&O policy did not provide coverage for claims of breach of fiduciary duty, breach of contract and negligence. In Eastpointe Condominium I Asn. Inc. v. Travelers Casualty & Surety Company an owner sued the association claiming the board of directors failed to adequately maintain the roof and other portions of the property.  The carrier took the position that the "property damage" exclusion in the policy controlled.  The Court agreed.

The 11th Circuit Court of Appeal recently affirmed that decision in an unpublished opinion issued on May 20, 2010.

These types of claims are pretty typical.  A unit owner (or several unit owners) feels that the board is not "doing its job" and files suit seeking various remedies often including:

• injunctive relief (demanding that work, repairs, maintenance or improvements, be performed);
• reimbursement for costs sustained as a result of damages to property that would not otherwise exist if the board appropriately attended to the needs of the property;
• damages for the loss in property value, loss of enjoyment of the property, loss of use and the like; and
• reimbursement of attorney's fees and costs for bringing the claim.

Many of these cases involve differences in opinion as to whether maintenance/repairs were or are necessary, what products and methods to use for the repairs or maintenance, which contractor is better, etc.  In many cases the amount of money sought by the unit owner or owners is less than what it costs to defend the claims.   Defense costs can easily eat into the association's cash flow.

Isn't the association's board of directors protected against claims of negligence or breach of fiduciary duty?  If the D&O policy has a similar property damage exclusion, maybe not.

The Traveler's D&O policy excluded coverage for loss in connection with any claim "for or arising out of any damage, destruction, loss of use or deterioration of any tangible property including ... mold, toxic mold, mildew, fungus, or wet or dry rot."

The Eleventh Circuit departs from an earlier ruling that required a carrier to cover claims brought by homeowners against the association.  In Lumbermens Mutual Casualty Co. v. Dadeland Cove Section One Homeowners Asn. Inc., the District Court found that the D&O policy covered property damage losses based upon claims of breach of fiduciary duty, regardless of the tangible property exclusion.

What does your policy cover?  What does it exclude?  If you're not sure, please speak to your agent and/or have your attorney review and compare the policies before you renew because it seems coverage denials (and disputes) are becoming more prevalent.

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Fourth District Court of Appeal Rules that Lender Cannot be Compelled to Pay Assessments Prior to Acquisition of Title.

Deutsche Bank National Trust v. Coral Key Condominium Association (at Carolina), Inc. and Luna, Opinion April 14, 2010.

An earlier post discussed the Third District's appellate ruling in the U.S. Bank National Ass'n v. Tadmore case which held that the Court cannot require a lender to pay condominium assessments before its completes its foreclosure case and obtains a Certificate of Title or otherwise acquires title to the unit.  The Fourth District ruled the same way in a case involving the Coral Key Condominium Association.  The ruling is hot off the press, so its not final yet.  If anything changes we will report it on this site.

Do these rulings mean the Association is powerless when a bank is foreclosing against a property within the community?  No - not at all.

The Motion to Compel filed in both cases asked the Court to require the lender to pay assessments immediately, reportedly since the mortgage foreclosure cases were taking so long.  The Associations supported their request for relief upon notions of equity and fairness.  Sure, it is unfair.  The Association has to insure the property, pay for common utilities, pay for maintenance and repair of the property, etc. all while the unit owner isn't paying assessments.  The lender derives a benefit from the Association's actions - its collateral is preserved and insured at the expense of all the paying unit owners. But, as my Dad used to say, life just isn't fair sometimes.

That doesn't mean Association's are without options when a bank is foreclosing against a property in the community, especially when there is a feeling that the bank is 'dragging its feet'.  The Florida Rules of Civil Procedure allow the Courts to establish deadlines or schedules for certain actions to take place.  Any party is entitled to request a case management conference at which the judge may (among other things):

• Set deadlines for service of motions, pleadings or other papers;
• Limit, schedule, order or expedite discovery;
• Require preliminary stipulations to narrow the issues; and
• Set a date for trial.

Any party to the case can advise the Court that the case is ready for trial.  Basically, once the pleadings are closed (all motions concerning the pleadings have been resolved or withdrawn or 20 days after the last pleading is served), the case is eligible for placement on the Court's trial calendar.   

The Court has the power to award sanctions against a party that fails to comply with its scheduling orders and our Firm has had success showing that the lack of action on the part of the bank (and/or its counsel) justified sanctions.  

That is not to imply that every bank in every case has done something wrong, even if the case takes what seems to be an extraordinarily long time. There are legitimate reasons that a foreclosure case can be on 'hold'  Owners/borrowers may be trying to modify their mortgages, there may be an offer for a short sale on the property, and/or a bankruptcy filing may prevent the bank from moving forward, etc.   You know, there is a pretty big load on the Courts right now as well.

Nonetheless, we have learned that some lenders deliberately allow some foreclosure cases to linger for various reasons.  Those are the cases that Associations should address - first with the lender (actually, lender's counsel) and then with the Court.  It is important to discuss your options in each of the cases involving property in your community with counsel.  The board can't be expected to make reasonable strategy decisions unless it is fully advised.

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Appellate Court Allows Owner to Seek Injunctive Relief and Reverses Award of Attorney's Fees and Costs.

In Mitchell v. Beach Club of Hallandale Condominium Association, Inc., 17 So.3d 1265 (Fla. 4th DCA 2009), the Fourth District Court of Appeal ruled that a condominium owner has the right to proceed with a lawsuit aimed at preventing the association from collecting a special assessment.

The association levied an assessment for close to $1.3 million and sought to collect $4,194 from each unit owner.  One of the unit owners objected to the process and filed a lawsuit to prevent the association from collecting the assessment.  The association's attorney filed a motion to dismiss the case and ultimately convinced the trial court to rule in its favor.  The trial court later awarded the association attorney's fees and costs as the 'prevailing party' in the lawsuit.

The appellate court totally disagreed and reversed the trial court ruling.  It found:

1. Mandatory non-binding arbitration pursuant to Section 718.1255, Florida Statutes was not necessary, as the statute itself excludes any disputes relating to the imposition or collection of an assessment;
2. The Court had jurisdiction to address the claim even though the amount of the assessment against this particular owner was less than $5,000, since the owner sought injunctive relief, not any monetary relief; and
3. Injunctive relief was appropriate to prevent or to challenge a violation of the Condominium Act pursuant to Section 718.303, Florida Statutes.

The complaint filed by the owner alleged that the association failed to give proper notice of the meeting, failed to obtain a quorum and it used expired proxies.  Since the special assessment would be invalid if those claims were true, the complaint was sufficient "to warrant a permanent injunction".

This case shows that every association needs to maintain the records necessary to prove it adopted assessments (whether special or annual) properly.  Otherwise it may lose the ability to collect those assessments and create expensive, time consuming and acrimonious legal disputes if some owners pay and others do not.  Thus, records indicating which and how many owners participated in a meeting (in person or by proxy) are important, as is a verifiable registration procedure.  All voting documents, ballots, proxies and sign-in sheets must be retained for at least one (1) year and notices, affidavits or proof of mailing and the minutes of those meetings retained for seven (7) years. 

Please contact us if your association needs assistance creating a records retention policy or procedures governing unit owner inspection and photocopying of official records.

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Developer's Challenge to Notice of Meeting not Proper Defense to Construction Defect Claim

Lake Forest Master Community Association, Inc. v. Orlando Lake Forest Joint Venture, et al., Case No. 5D08-2096

Lake Forest Master Community Association, Inc. ("Lake Forest") filed a lawsuit for construction defects against the Developer, after the membership voted in favor of doing so as required by Section 720.303(1), Florida Statutes. 

The Developer claimed that Lake Forest shouldn't be permitted to continue its lawsuit since it failed to properly notice the meeting.  The trial court agreed and entered Summary Judgment against Lake Forest.

Section 720.303(1), Florida Statutes, provides, in relevant part:

After control of the association is obtained by members other than the developer, the association may institute, maintain, settle, or appeal actions or hearings in its name on behalf of all members concerning matters of common interest to the members, including, but not limited to, the common areas; roof or structural components of a building, or other improvements for which the association is responsible; mechanical, electrical, or plumbing elements serving an improvement or building for which the association is responsible; representations of the developer pertaining to any existing or proposed commonly used facility; and protesting ad valorem taxes on commonly used facilities. The association may defend actions in eminent domain or bring inverse condemnation actions. Before commencing litigation against any party in the name of the association involving amounts in controversy in excess of $100,000, the association must obtain the affirmative approval of a majority of the voting interests at a meeting of the membership at which a quorum has been attained.

Lake Forest appealed the ruling.  While it could have re-filed, re-filing would have impacted its case tremendously due to a change in Section 95.11(c)(3), Florida Statutes, which is the statute of repose.  The statute of respose changed from 15 to 10 years.  Re-filing the lawsuit would have eliminated any claims associated with latent construction defects that existed in excess of ten (10) years.

The appellate court evaluated the procedures utilized by Lake Forest to call the annual meeting, as well as the procedures utilized to recess and reconvene the meeting. The court noted:

• Notice of the annual meeting was furnished by mail to all owners and posted as required by law.  The mailing included a general proxy;
• Minutes of the annual meeting indicated that the members agreed to recess the meeting and reconvene it for specific date. There was testimony indicating that the President likewise announced the time and place for reconvening the meeting;
• At the reconvened meeting, the President announced the annual meeting would be reconvened again at a specific date, place and time.  That information is reflected in the minutes;
• A Motion was made, seconded and the majority of members participating voted in favor of filing legal action against the developer when Lake Forest reconvened the meeting the second time.

The Court relied on both Section 720.306(7), Florida Statutes and the Association's bylaws when concluding it was not necesary for Lake Forest to send written notice of reconvening the meeting to the entire membership, since the date, time and place were announced before it went into recess.  

Moreover, the Court also concluded that dismissal of the case by Summary Judgment was not appropriate even if the Association failed to comply with technical procedural rules.  Rather, it said the case should have been abated for a period of time to enable the Association to correct procedural deficiencies.

This case clarifies several important points of law for community associations.

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Court Rules in Favor of Association After Board Requests More Information Regarding Need for Service Animal

U.S. District Court, Northern District of Florida
Case No.: 3:07-cv-97-RV/EMT

On March 12, 2009 the United States District Court for the Northern District of Florida entered Summary Judgment in favor of a condominium association sued for purportedly violating the Fair Housing Acts. Summary Judgment was also granted in favor of the association on a claim of Intentional Infliction of Emotional Distress.

The issue? A request to keep a pet, oops, not a pet, but a certified service animal, on the condominium property.

Shoreline Towers Phase I had a long-standing “no pet” policy. Mr. Hawn knew that at the time he purchased his unit in 2004. However, in 2005, he urged the Board to allow owners to keep pets on the property after he adopted a puppy. The Association took no action in response to that plea.

Over a year later, Mr. Hawn requested permission for a reasonable accommodation due to a disability. As noted elsewhere, the Fair Housing laws require community associations to make reasonable accommodations in policies or practices and allow reasonable modifications to the physical property if necessary to afford a disabled person the equal opportunity to use and enjoy the dwelling. Mr. Hawn claimed he was disabled (within the meaning of the law) and his dog ‘Booster’ was a trained, certified service animal. He also provided the Board with two (2) letters, one from a psychologist who indicated Mr. Hawn suffered from severe panic attacks and prescribed a service animal to help him cope with his disability. The other letter was from a chiropractor who said a service animal would assist Mr. Hawn with mobility issues.

Mr. Hawn likewise addressed this issue again with the board at a meeting, describing how important ‘Booster’ was to him.

The Board requested documentation to support Mr. Hawn’s claim. It also asked for the qualifications of the medical providers that supplied the two letters. There was no response.

A few weeks later the Board requested more information specifically about 1.) the nature of the impairments; 2.) how the pet was necessary to overcome the impairments; and 3.) whether there were other corrective measures that would serve the same or functionally equivalent purpose. The request for permission to keep the pet was denied pending receipt of further information.

Instead of providing additional information, Mr. Hawn filed a complaint with the Florida Commission on Human Relations (FCHR). The investigator issued a finding of “Reasonable Cause” to believe a discriminatory act occurred which prompted Mr. Hawn to file a lawsuit in Federal Court for discrimination in violation of both the Federal and Florida Fair Housing Acts. Mr. Hawn also sought damages for Intentional or Reckless Infliction of Emotional Distress and Injunctive Relief.

Someone is entitled to damages, injunctive relief, or both, from a housing provider for discrimination if they show:

1. They are disabled (as defined by the law) & the housing provider knew or should have known of the disability; and
2. An accommodation (or modification) is necessary to afford the disabled person the equal opportunity to use and enjoy the dwelling; and
3. The requested accommodation (or modification) is reasonable; and
4. The housing provider denied or refused to make the requested accommodation.

The Court found that the Board was perfectly well-within its right to question the disability claim, especially since Mr. Hawn obtained the dog a year earlier, lobbied to change the rules without any mention of a disability and failed to provide further information upon request. Once discovery took place, the Association learned that Mr. Hawn only had two appointments each with the psychologist and chiropractor that wrote the initial letters. The Court found that the information initially provided was not sufficient to prove that the Board “knew or should have known” that Mr. Hawn was disabled and therefore failed to show that the Board knew the accommodation was reasonably necessary. The Court stressed the requests for additional information and the temporary nature of denial, concluding that Mr. Hawn could not show the Board wouldn’t make an accommodation if he was able to show the accommodation was necessary to ameliorate the effects of the disability.

Community associations should learn important lessons from this favorable case. First, it is important for all community leaders and members of the management team to be aware of the obligations of housing providers pursuant to Federal, State and local fair housing laws. Second, requests for reasonable accommodations or modifications cannot be ignored and must be addressed in a logical way. Finally, it is important to consult with legal counsel as these are highly charged and sensitive issues.

We will report on any updates or appellate decisions regarding this case. If you haven’t done so already, please consult with your Community Association Attorney about creating fair housing policies and procedures for consideration of requests for accommodations and/or modifications.

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A.    Facts:
In this case, the Cypress Bend IV Condominium Association (“Association”) filed a petition for arbitration against unit owners Cheryl Pepper and Richard Frisbie (“Respondents”). The Association alleged that the Respondents violated Article XIII, Section E of the Declaration of Condominium (“Declaration”) and Federal Law by installing a satellite dish on the common element roof of the condominium building. As relief, the Association sought the removal of the satellite dish from the common element roof. The Respondents admit they have installed the satellite dish upon the common elements, however, they claim that the Association has allowed other unit owners to install satellite dish antennas on the roof. Thus, the Respondents assert several defenses, including the affirmative defenses of selective enforcement and estoppel. The Respondents also argued t hat the Association, in prohibiting the placement of the satellite dish upon the common element roof, frustrated the purpose and intent of the Federal Telecommunications Act of 1996. The Association denied that it has ever allowed satellite dish antennas to be placed upon the condominium roof and submitted photographs of the roof showing no such satellite dishes. The Respondents claimed that satellite dish antennas did previously exist but that the unit owners had removed them in response to the Association’s attorney’s demands for removal.

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