Author: trisha

Being a lawyer whose practice concentrates almost exclusively on the representation of community associations throughout the State of Florida, I thought I had seen it all. These days, it is becoming harder and harder to surprise me with stories about association living. But, every now and then, admittedly, I find myself shocked. Sadly, today’s column will describe one such event.

“Condominium living” – the term denotes living on top of one another, literally. It is the great social experiment of the Twentieth Century. Pragmatically, condominium living makes all the sense in the world. Instead of one person enjoying the beautiful ocean view in a single family home, the condominium allows sometimes hundreds of families to enjoy that same ocean view, albeit stacked on top of one another like sardines.

The condominium building is a complex building of various degrees. It can cost tens, if not hundreds of millions of dollars to construct. In many ways it could be compared to a cruise ship complete with HVAC systems, boilers, restaurants, elevators, swimming pools, and in South Florida, the building must weather ocean conditions and storms. Like any ship, the condominium needs a good crew. We call the condominium’s crew, the ever revered board of directors. It is a thankless and time consuming job. Everyone is an expert at what the board members should have done. The association member should be ever grateful to their board members for stepping up to the plate and giving themselves so selflessly.

Unless you yourself have served on the board, then you really can’t imagine the countless hours and aggravation you will sometimes experience. In the utopian association, members serve on the board because they truly care and want to help maintain what is no doubt a fabulous way of living. In the not so utopian association, members want to serve on the board for a whole host of other reasons such as ego, Napoleonic syndrome and power trips. It is to those board members that today’s column is directed.

Board members have a fiduciary duty to their association to exercise their reasonable business judgment. Over the past couple of weeks several regular readers of Rembaum’s Association Roundup have shared an exchange between themselves and their association’s president. The entire association is experiencing a troubling issue with a commercial neighbor. The association members are looking to their board president for information, guidance, support and peace of mind in knowing that their elected “captain” is guiding the ship through the turbulent waters. As you read the verbatim dialogue below between the members and the president, you should know that the association members live out of town most of the year and are a respected doctor and clergyman. Both are well published in their field and have national reputations.

Owner(s) to the President: “I recently sent an email to you and a follow up when I did not hear back. Could you let me know if you received them? I would be happy to meet with you directly regarding the ongoing issue if you prefer.”

President to the Owner(s): “If you want an update go to the board meetings like everyone else… or read the minutes of the meeting… That is what they are for… My job is not to respond on an individual basis to unit owners who make up stories of selling their apartment and are too lazy to attend board meetings!”

Having looked at the minutes from the past year and not seeing much about the issue, the owners write back to the president.

Owner(s) to the President: “I am not sure what to make of your recent email to me except to attempt to impune my character and avoid the issue about which we have previously communicated. Perhaps you are not aware that I reside in New York and work full time as, frankly, a nationally recognized physician… As the problem continued unresolved, as you know, we became stressed and frustrated to the point of considering a sale, of which we informed you. We indicated this to you in earnest… If you would take a moment to re-read your email to me and reflect on whether it went, let us say, overboard, I would appreciate your response.”

President to the Owner(s): “I REALLY DON’T CARE WHAT YOU DO OR ARE… YOUR ROOMMATE TOLD ME DAY ONE THAT YOU WOULD BE A PAIN AND HARASS ME. GO TO THE MEETINGS AND OR READ THE MINUTES!”

Owner(s) to the President: “Are you confusing me with someone else? I own the unit with my spouse of many years and we have never had a roommate…”

President to the Owners: “I DO NOT TAKE EMAILS FROM RESIDENTS… ALL YOURS WILL BE GOING TO SPAM… FOLLOW PROPER PROCEDURES… IF YOU WOULD HAVE ATTENDED THE MEETINGS YOU WOULD KNOW THIS. FEEL FREE TO READ ANY MINUTES OR COME TO ANY MEETING TO ASK QUESTIONS AND EXPRESS YOUR CONCERNS… I HAVE ALWAYS OPENED UP THE MEETINGS TO QUESTIONS AND STAYED UNTIL ALL WHERE ANSWERED!!!! BELIEVE ME I AM VERY PREPARED!!!!”

Clearly, this president is reacting… to what, we may never know. Why does this president feel the need to yell (evidenced by the all caps in the emails) at these members asking for information? Why won’t he take the time to be responsive to the members’ simple request for a status update? Why does a president not take emails from members? Why is this president so rude and callous? Maybe this president will do the ship a favor and disembark at the port!

A community association is a corporation, in many ways similar to any other corporation, be it a for-profit or not-for-profit company. In exercising decisions, for the most part, the community association’s board members must adhere to the “business judgment rule.” As I like to explain it, this means that the board member’s decisions might be right or might be wrong. However, the ultimate question is, “did the board member act reasonably?” In other words, did the board member exercise his or her discretionary decisions in a reasonable manner? It should be obvious that, in making such decisions, the director must owe some type of duty to the association, too.
In a recent case, McCoy v. Durden, decided on December 31, 2014, the Florida’s First District Court of Appeal had occasion to answer this question, albeit in a slightly different context than that of a community association. Nevertheless, in a generic sense, the First DCA examined the duty of care and loyalty owed by a director to his or her corporation that they serve and provided some interesting historical context, too.
The First DCA in McCoy quickly pointed out that Florida courts have long since recognized that corporate officers and directors owe both a duty of loyalty and a duty of care to the corporation that they serve. As early as 1907, in a case styled, Jacksonville Cigar Co. v. Dozier, the Florida Supreme Court recognized that, under the Florida common law, a director is in a fiduciary relationship with the corporation. In 1932, in Orlando Orange Groves Co. v. Hale, the Florida Supreme Court described the relationship between a corporation and its directors and officers. The Florida Supreme Court explained in the Orlando Orange Groves Co. case that “[t]hey are required to act in the utmost good faith, and in accepting the office they impliedly undertake to give to the enterprise the benefit of their best care and judgment, and to exercise the powers conferred solely in the interest of the corporation.”
Later, in 1980, in Snead v. U.S. Trucking Corp, the First DCA explained that “[a] director’s… acts are subject to be tested by the rules governing the relation of a trustee to his cestui que trust… He is bound to act with fidelity, the utmost good faith, and with his private and personal interests subordinated to his trust duty whenever the two come in conflict.” By way of explanation (and because I had to look it up, too) a “cestui que” is the person for whom a benefit exists, and a “cestui que trust” is a person for whose benefit a trust is created.

Under Florida’s common law, the Florida Supreme Court has defined the concept of fiduciary duties broadly reflecting its historical origin in equity. In other words, even if a legal duty was not codified in the statutory law, a common law duty exists, too. In 1927 in Quinn v. Phipps, a case involving allegations that a real estate broker had violated his fiduciary duty, the Florida Supreme Court explained the basis of the duty: “The term ‘fiduciary or confidential relation,’ is a very broad one. It has been said that it exists, and that relief is granted, in all cases in which influence has been acquired and abused – in which confidence has been reposed and betrayed. The origin of the confidence is immaterial. The rule embraces both technical fiduciary relations and those informal relations which exist wherever one man trusts in and relies upon another… Stripped of all embellishing verbiage, it may be confidently asserted that every instance in which a confidential or fiduciary relation in fact is shown to exist will be interpreted as such. The relation and duties involved need not be legal; they may be moral, social, domestic or personal. If a relation of trust and confidence exists between the parties… that is sufficient as a predicate for relief.” (Emphasis added.)
So, does a director of a community association owe his or her association a duty of care and loyalty? You bet they do! Now that we have established that a board member owes a duty of care and loyalty, what exactly are they? It is a fiduciary duty to act in the best interests of the association by acting with loyalty, honesty, and in good faith. Put simply, a director owes a duty to exercise good business judgment and to use ordinary care and prudence in the operation of the association. A director should perform his or her actions in good faith and in the best interest of the association, exercising the care an ordinary person would use under similar circumstances. A director’s decisions are typically protected under the “business judgment rule” unless they breach one of these duties. So, if you are a board member, remember the duty of care and loyalty that you owe to the association you serve.

Timing is everything – in love, in life and in lawsuits. Unlike timing in love and in life, timing in lawsuits is governed by certain laws including those referred to as the statute of limitations. Determining when the statute of limitations’ clock begins to tick can be tricky. For example, and as further discussed in today’s article, in Florida, a lender has five years from the date of default to foreclose on its mortgage and note. If the lender fails to file a foreclosure action within five years of the date of default upon which its lawsuit is based, the lender is barred from filing the foreclosure action.

This was the issue before the Third District Court of Appeal in the very recent case of Snow v. Wells Fargo Bank, N.A., decided on January 14, 2015. In this case, on May 25, 2007, the Snows executed a mortgage note with Wells Fargo for property located in Miami, Florida. Pursuant to the terms of the mortgage, Wells Fargo had the option to accelerate the debt in the event of a default.

Prior to accelerating the remainder of the debt upon default, Wells Fargo was required to provide the Snows with notice specifying the default, providing an opportunity for the Snows to cure the default within thirty days of the notice and informing the Snows that the failure to cure the default may result in acceleration of the mortgage debt. Upon the Snows’ default on October 1, 2007, Wells Fargo sent a notice to the Snows on December 6, 2007 which provided the Snows with thirty-five days to cure the default by paying off the amount of the default. However, the Snows failed to cure the default within the thirty-five day period (by January 10, 2008). It’s important to note that Wells Fargo’s notice did not provide notice that the remainder of the note would be accelerated if the default was not cured.

Then, on March 12, 2008, Wells Fargo filed a foreclosure action against the Snows. However, on June 28, 2011, Wells Fargo voluntarily dismissed their lawsuit against the Snows, without prejudice. The term “without prejudice” in a judgment of dismissal ordinarily indicates the absence of a decision on the merits and leaves the parties free to litigate the matter in a subsequent action, as though the dismissed action had never existed.

On March 5, 2013, Wells Fargo filed its second foreclosure action against the Snows. The Snows argued that the second foreclosure action was barred by the five-year statute of limitations because the limitations period began to run on January 10, 2008 (the date by which the Snows were required to cure the default). Therefore, the Snows asserted the statute of limitations expired on January 10, 2013, three months prior to the filing date of the second foreclosure action.

Wells Fargo argued that the date the statute of limitations began to run was not January 10, 2008, but rather March 12, 2008, the date the first foreclosure complaint was filed. Therefore, Wells Fargo asserted the five-year limitations period had not yet expired when Wells Fargo filed the second foreclosure lawsuit on March 5, 2013. The trial court agreed with Wells Fargo and determined that the second foreclosure action was filed prior to the expiration of the statute of limitations.

On appeal, the Third District Court of Appeal affirmed the trial court’s decision and held that the second foreclosure lawsuit was timely filed. In its discussion, the Court noted the difference in the calculation of the statute of limitations with regard to mortgage notes with an automatic acceleration clause and those with an optional acceleration clause.

When an acceleration clause is automatic, the entire indebtedness becomes due immediately upon default, and the five-year statute of limitations begins to run without notice. When an acceleration clause is optional, the lender must exercise this option and give notice to the borrower of the election, making the entire indebtedness due. It is when the lender exercises the acceleration option and notifies the borrower of its exercise that the five-year statute of limitations begins to run.

In this case, the statute of limitations began to run on March 12, 2008, when Wells Fargo filed its first foreclosure action. The Court found that the December 6, 2007 notice of default from Wells Fargo was not Wells Fargo’s exercise of its option to accelerate the mortgage note because the notice did not provide that the full amount of the indebtedness was immediately due nor did it demand payment of the full amount of indebtedness. Wells Fargo did not make such a demand for the full amount due (i.e., the accelerated amount) until it filed its first foreclosure complaint on March 12, 2008. Therefore, the Court determined that the statute of limitations would have expired on March 12, 2013, a week after the second foreclosure action was filed. Timing is everything.

In this December 3, 2014 case, Bethany Trace Homeowners Association, Inc. v. Whispering Lakes I LLC and Waterman-Pinnacle, Inc., the association’s subsequent developer, Waterman-Pinnacle, sold lands designated in the Bethany Trace HOA’s declaration as common areas. As a result, when the Bethany Trace HOA found out, it sued Waterman-Pinnacle to get its common areas back.

In 1990, Leigh Corporation started building out the Bethany Trace HOA. As a part of the initial development, Leigh Corporation drafted and recorded Bethany Trace HOA’s declaration. In the declaration, the common areas were identified as “those tracts, easements or areas of land shown on any recorded subdivision plat of the property which are intended to be devoted to the general common use and enjoyment of the Owners in the Property,” and included certain designated items such as “fences surrounding the property, a maintenance area, a conservation area, an entranceway along with all of the improvements located thereon.” There was one small problem, however. The plat was never recorded. (Does this mean that the common areas were never actually created?)

Eleven years later, Leigh Corporation sold its rights and obligations under the Bethany Trace HOA declaration to Waterman-Pinnacle, the subsequent developer. In the assignment, Waterman-Pinnacle agreed to convey the common areas to Bethany Trace HOA “for no further consideration and free and clear of any liens or encumbrances.” Nevertheless, Waterman-Pinnacle sold the lands designated as common areas to another developer which bulldozed them in anticipation of building additional homes. When Bethany Trace HOA learned of this, it sued to get its common areas back.

In summary, Waterman-Pinnacle argued that, because the plat was never recorded, the common areas identified in the declaration weren’t actually common areas and, therefore, the property could be sold. Bethany Trace HOA argued that the lack of a recorded plat did not affect its interest in the identified common areas as the common areas were identified by name and included metes and bounds legal descriptions in the declaration itself. Interestingly, the trial court agreed with Waterman-Pinnacle’s arguments. As a result, Bethany Trace HOA appealed.

When an appellate court reviews a trial court’s interpretation of a contract, the style of its review is referred to as “de novo.” This means that, because the interpretation of a contract is a question of law, the appellate court is free to reach a different interpretation than that of the trial court.

The appellate court found that the language of the Bethany Trace HOA, when taken in the entirety, provided that Bethany Trace HOA has ownership rights in its common areas. The appellate court further found that the interpretation adopted by the trial court resulted “in portions of the declaration being meaningless” in that the trial court ignored certain portions of the declaration that provided Bethany Trace HOA would own and maintain certain identified common areas. The appellate court held that Bethany Trace HOA’s interpretation of the provisions of the declaration was reasonable and gave meaning to all of the provisions in its declaration. The case was then remanded (returned) back to the trial court for further proceedings consistent with the ruling of the appellate court.

When the trial court proceedings take place Bethany Trace HOA will no doubt ask the trial court to order that its common areas be formally returned and to award it applicable financial damages.

The moral of this case is simple. At its core, an association’s declaration is a contract between the association and its members. When interpreting a contract, one sentence or phrase, when read in a vacuum, cannot be used in favor of one party when doing so is contrary to the remainder of the contract when read in its entirety.

Did you read that contract and fully understand your obligations before signing it? Almost every day, we are faced with new terms and conditions for the mobile app we can’t live without. Most people do not take the time to read every word before we hit “I agree” to those new terms and conditions. While the impact of these terms and conditions may not be felt on a daily basis, upon your acceptance, you are bound by these newer terms and conditions as if you read and understood them. While there are certain instances where the terms of a contract cannot be enforced, such as when a contract is unconscionable, when the terms of a contract are clear and unambiguous, the plain language of the contract will be enforced accordingly. This was the subject of a December 5, 2014 opinion of the Fifth District Court of Appeal of Florida in Thyssenkrupp Elevator Corp. v. Hampton Manor at Deerwood, LLC.

In this very recent case, Thyssenkrupp and Hampton Manor had entered into an elevator maintenance contract for a term of five years. Thyssenkrupp provided the services for the entire five-year term. At the end of the five-year term, the contract automatically renewed for an additional five years and continued to automatically renew for additional five year terms thereafter, which is when the trouble began.

During the second five year renewal period, Hampton Manor failed to pay for work performed by Thyssenkrupp in the amount of $1,157.14. The contract provided that upon failure to pay an overdue invoice, Thyssenkrupp could either: 1) suspend all service until all amounts due had been paid in full or 2) declare all sums for the unexpired term of the contract due immediately and terminate the contract. Thyssenkrupp selected option two and filed a lawsuit against Hampton Manor for the unpaid invoices and for all sums due for the unexpired term of the contract.

At summary judgment, Thyssenkrupp provided the elevator maintenance contract, the unpaid invoices and an affidavit of its corporate representative who testified as to all the amounts due and owing to Thyssenkrupp from Hampton Manor totaling $30,259.71, which included the remaining amount due for the unexpired term. Harbor Manor argued that Thyssenkrupp’s corporate representative’s affidavit did not comply with Florida Rules of Civil Procedure 1.510(e), which requires that affidavits must (i) be made on personal knowledge, (ii) set forth facts as would be admissible in evidence and (iii) affirmatively show that the affiant (the person providing the testimony) is competent to testify to the matters provided in the affidavit.

The trial court disagreed with Hampton Manor, finding that Thyssenkrupp’s corporate representative’s affidavit complied with Rule 1.510(e), and ruled in favor of Thyssenkrupp. However, the trial court only awarded Thyssenkrupp $1,157.14, the amount of the outstanding invoices and did not award damages for the unexpired term of the contract in the amount of $29,102.57. Disappointed with the result, Thyssenkrupp appealed the trial court’s award. The Fifth District Court of Appeal of Florida found that the clear and unambiguous language of the elevator maintenance contract entitled Thyssenkrupp to recover the monthly fee for the remaining term of the contract upon Hampton Manor’s default.

When the terms of a contract are clear and unambiguous, a court has no right to give it a meaning other than what is expressed. Quoting a Florida Supreme Court case, the Court provided that “[t]o hold otherwise would be to do violence to the most fundamental principle of contracts.”

Because Thyssenkrupp and Hampton Manor had contractually agreed that Thyssenkrupp could cancel the contract and accelerate the remaining term in the event Hampton Manor failed to pay an outstanding invoice, Thyssenkrupp was entitled to damages for the unpaid invoices in the amount of $1,157.14 and damages for Hampton Manor’s breach in the amount of $29,102.57.

The moral of this story is to make sure that, as an association board member, you read and understand every term of a contract before casting your vote in favor of that contract. To do otherwise can cause significant monetary damages.

A long, long time ago, in a land far, but not too far, away, England, there were two distinct court systems – the court of law, the Court of the King’s Bench, which followed the letter of the law, and the Court of Chancery, which was a court of equity and had the ability to do what was fair and equal. Although these two courts have had a sordid past, they continue to exist today in our very own court system; however, now the same judge may hear both legal and equitable claims. In general, when the law provides a remedy, the principles of equity cannot be employed by the court.

A core principle in the court of law is inclusio unius est exclusio alterius. It means that the inclusion of one thing is the exclusion of another, meaning that if the law says you can have apples, you can’t have oranges. While this is a general statutory interpretation principal, the Supreme Court of Florida held in the case of Granada Lakes Villas Condominium Association, Inc. v. Metro-Dade Investments Company that the enumerated instances in which a court could appoint a receiver for a condominium association as provided for by Florida Statutes did not limit the court’s power to appoint a receiver but actually expanded upon the court’s inherent equitable powers to do so, which turned out to be pretty good for Florida’s community associations.

In Granada Lakes Villas, the developer, Metro-Dade Investments Company, and the community’s master association, sued the condominium association, Granada Lakes Villas Condominium Association, Inc., for the its failure to pay the developer and the master association their share of the related expenses after collecting the fees and assessments from the condominium’s unit owners. As a result of the condominium association’s failure to pay, it was argued by the developer and the master association that they were unable to pay for utilities and maintenance expenses for the common areas, which resulted in ongoing health nuisances on the property.

At trial, the developer filed an emergency motion for the appointment of a receiver over the condominium association in order to facilitate the collection of the fees and assessments from the unit owners and to perform a proper accounting. Although the trial court had determined that a receivership would be helpful to the court, the trial court held that it had no power under Chapter 718, Florida Statutes, to appoint a receiver because Chapter 718, Florida Statutes, enumerates certain instances when the court may appoint a receiver, including failure of the association to elect enough directors to establish a quorum, failure of the association to act after a natural disaster and the need to liquidate and close a non-profit corporation as found in Chapter 617, Florida Statutes, which governs non-profit corporations. The trial court reasoned that because the statute itemized only these few grounds for appointment of a receiver, the court could not appoint a receiver unless one of these grounds was applicable.

However, on appeal, the Second District Court of Appeals reversed and remanded the case back to the trial court, concluding that the court’s power in these circumstances was “inherent in a court of equity, not a statutorily created right.” The Second District also found that the enumerated instances in Chapter 718 and Chapter 617, Florida Statutes, do not “restrict a trial court’s broad, equitable authority to appoint a receiver; rather, the statutes merely cite to specific instances when a receiver may be appointed.”

The Supreme Court of Florida, which took jurisdiction because of a conflicting ruling in a 2009 case in the Third District Court of Appeals, agreed with the Second District’s findings. The Supreme Court of Florida provides that the fact that the Florida Statutes lists certain grounds for the appointment of a receiver does not mean that appointment of a receiver is unavailable unless one of those grounds is applicable. The Supreme Court noted that the receivership remedy is available in equity – typically in cases of fraud, self-dealing, waste or destruction or loss of property – even without statutory authority, and that the principles of equity would authorize the court to appoint a receiver under a broader range of circumstances other than those specified by Florida Statutes. The Supreme Court also provided that “nothing in the statutory language of these sections expressly prohibits or even implies that these enumerated circumstances are the only instances in which a court may appoint a receiver in cases involving a non-profit condominium association.”

Many associations rely on these cases to seek appointment of a court appointed receiver in an effort to derive rental income over otherwise vacant and abandoned units where, but for the appointment of a receiver, the units would continue to be a drain on the association’s financial resources.

In Bank of America, N.A. v. Caulkett, the United States Supreme Court granted certiorari, and thus has agreed, to address whether the Bankruptcy Code permits a Chapter 7 debtor to “strip off,” or void, a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral, an issue on which the Courts of Appeal are divided.

Imagine: Your association is owed thousands of dollars from a delinquent member who has not paid their mortgage either. The lender, being “on the ball,” begins to foreclose its mortgage. At some point, the board authorized an association assessment lien to be recorded against the property, too. Six to nine months later, the lender’s lawsuit is almost over. Then, without warning, the association is placed on notice that the debtor filed a Chapter 7 bankruptcy in Federal court. By operation of law, the lawsuit grinds to a screeching halt much like a racecar slamming into a concrete wall.

No further action can be taken until either the bankruptcy is discharged (the case is over) or the lender receives the express permission from the bankruptcy court to continue foreclosing the property in exchange for an agreement that the lender only seeks to acquire the delinquent member’s property and will not seek monies due and owing on the mortgage. Meanwhile, the association still has its assessment lien recorded against the property, meaning that there is still a chance the association can receive the monies it is still owed, especially if a third party purchaser acquires the property. Right? Well, not if during the bankruptcy the debtor “strips” the association’s assessment lien; a process referred to as “lien stripping.”

Lien stripping occurs when the court grants a request to wipe out all liens that are inferior to a superior lien. In the association’s case, it means that if the bankruptcy court were to allow lien stripping, the association would have no chance whatsoever of recovery of back assessments due and owing which, without going out on a limb, is extremely unfair to the association. Not all bankruptcy courts permit lien stripping. Some do, and some don’t. In such cases, where Federal Circuit Courts acting in their capacity as appellate courts disagree with one another, the United States Supreme Court has the right to examine the differing lower appellate court decisions; a process referred to “certiorari.”

Previously, the Supreme Court held that Section 506(d) of the Bankruptcy Code, which provides that a lien is not valid to the extent that it secures a claim against the debtor that is not an “allowed secured claim,” does not allow a Chapter 7 debtor to “strip down” a mortgage lien to the current value of the collateral. This will become VERY important for reasons explained below.

On the other hand, the Eleventh Circuit (with jurisdiction over the Middle District of Alabama, Northern District of Alabama, Southern District of Alabama, Middle District of Florida, Northern District of Florida, Southern District of Florida, Middle District of Georgia, Northern District of Georgia and Southern District of Georgia) held that a Chapter 7 debtor may “strip off” a valid junior lien on the debtor’s house when the debt owed to a senior lienholder exceeds the house’s current value, relying on controlling precedent that the Eleventh Circuit believed distinguishes its decisions from the Supreme Court’s rationale. Similarly, in other cases, the bankruptcy court, in unpublished decisions, entered orders voiding wholly unsecured second priority liens on residential property owned by the Chapter 7 debtors which, in unpublished orders, the district court has affirmed.

In its petitions for certiorari to the Supreme Court, a junior lienholder argued that the Eleventh Circuit’s position is irreconcilable with the Supreme Court’s decision that the Bankruptcy Code does not allow a Chapter 7 debtor to “strip down” a mortgage lien. The petition asserted that, because the junior lienholder had valid claims for the money loaned to the debtors, the Bankruptcy Code provided no basis for the debtors to “strip off” the subject liens. Furthermore, the petition continued, the fact that a mortgage is underwater matters only to the treatment of the creditor’s claim as “secured” or “unsecured” and has no effect on the treatment of the creditor’s lien under Section 506(d) of the Bankruptcy Code.

Hopefully, the United States Supreme Court will explain that lien stripping is not permitted, keeping association liens alive after bankruptcy proceedings and thereby providing the association a better chance of collecting past due assessments!

Not too long ago, Briny Beezes, Inc., a cooperative association (the “Association”) sought a declaratory statement from the Division of Florida Condominiums, Timeshares, and Mobile Homes (the “Division”) as to whether the Association’s Board of Directors (the “Board”) could use its more than adequate reserve funds to repair a seawall to prevent flooding where the Association’s Bylaws required a majority of the membership vote to approve any expenditure greater than $30,000.00. At the heart of the Association’s request was its engineer’s opinion that the expenditure was necessary for maintenance to the seawall to prevent further flooding. The orders of the Division do not have precedential value similar to district court of appeal cases, but rather its orders are specific to the parties involved in the arbitration petition. While the petitioner in this case is a cooperative, the Division’s resulting May 31, 2013 Order remains both useful and instructive to condominiums, and due to the Order’s logic and common sense approach, perhaps also to homeowners’ associations.

The arbitrator noted that the Florida Statutes regarding cooperative associations and condominium associations provide that the Association has the power to make and collect assessments and to maintain, repair and replace the common areas. (The author notes that so do homeowners associations.) The arbitrator looked to a bankruptcy case, In re Colony Beach and Tennis Club Association, Inc., where the court held that that, “in fulfilling the duty to maintain the common elements, the board may assess members for common expenses without a vote of the unit members.” It was noted that the Board’s statutory duty and authority to maintain the common elements trumps any provisions in the Association’s governing documents requiring member approval for expenditures that are necessary for maintenance. Then the arbitrator looked to state court cases.

In Tiffany Plaza Condominium Association v. Spencer, a 1982 Second District Court of Appeals case, the Court held that, “the board had the authority to authorize the construction of a rock revetment necessary to protect the common elements without the consent of unit owners.” In Ralph v. Envoy Point Condominium Association, Inc., another Second District Court of Appeals case, the Court stated, “[s]imply because necessary work for maintenance may also constitute alterations or improvements does not nullify a condominium board’s authority and duty to maintain a condominium common elements.” The arbitrator also noted that, as recognized in Ralph, “even if expenditures result in alterations or improvements to the common elements, it is within the board’s authority to authorize those expenditures without member approval when they are necessary to protect the common elements.” Finally, the arbitrator referred to guidance from A. N. Inc. v. Seaplace Association, Inc., a 1998 Division Arbitration Order that held, “expenditures which are reasonably necessary for maintenance do not require a vote of the members.”

The arbitrator wisely pointed out that “if the contemplated upgrades to the seawall constitute a material alteration to the common elements that go beyond the necessary repair to protect the common elements, the board’s decision is open to challenge an arbitration or court where the question of fact as to the extent of the changes may be determined.”

PRACTICE TIP: Prior to relying on these cases, if your association requires membership approval before spending thousands on necessary repairs, the board should at least explain the situation to the members at a properly noticed membership meeting and try to obtain the membership vote in favor of the repairs. If the membership does not approve the expenditure, then the board should consult with the association’s attorney to plan the proper course of action. Under no circumstances should the board decide, on its own, to circumvent the requirements of the association’s governing documents.

Did you know that, according to section 718.111(5)(a), Florida Statutes, your condominium association has “the irrevocable right of access to each unit during reasonable hours, when necessary for the maintenance, repair, or replacement of any common elements or of any portion of a unit to be maintained by the association pursuant to the declaration or as necessary to prevent damage to the common elements or to a unit?”

In Small v. Devon Condominium B Association, Inc. (a 4th DCA case), Small, suffering from a breathing disorder, discontinued her condominium association’s optional pest control services in 2005. In 2009, the association demanded to access the unit to perform pest control services. Small refused. The association filed a petition for condominium arbitration seeking access to her unit. A default judgment was entered in favor of the association which provided it with monthly access to her unit to perform pest control services. However, a condominium arbitration order is not final and binding until 30 days have passed from the date of the arbitrator’s order.

During this 30 day period, the losing party can appeal to the circuit court for a trial “de novo”, (which essentially means holding a new trial) and that is exactly what Small did. In response, the condominium association counterclaimed against her for injunctive relief, breach of contract and for a request to uphold the arbitrator’s award.

During the proceedings, the association argued that it had the irrevocable right to enter all units for necessary maintenance. In response, Small presented testimony from her physician who provided that “it would be deleterious to her health to be exposed to any chemicals.” Small also questioned whether the association’s demands were “reasonable and necessary”. Small’s arguments failed. The trial court’s order provided that, amongst other things, the association would have access to the unit on the third Monday of every month to perform pest control services.

Small appealed the trial court’s decision. In response, the association moved for contempt when she prevented the association from performing pest control services until she could have someone inspect the spray to be used. She continued to refuse access to her unit because her expert found that the spray was harmful to her breathing condition and that there was no evidence of insects. The Court then found Small in contempt of court. Thereafter, when Small was still not compliant, the association sought an enforcement order against her, which was decided in the association’s favor. By this time there was both an order of contempt and enforcement against Small.

Small appealed the enforcement order, but not the court’s contempt order issued against her. She argued that an issue of material fact existed as to whether the association’s demands were reasonable and necessary. The association argued that its actions were necessary and reasonable to prevent a pest infestation that may spread to the condominium’s common elements. The Court explained that for access to a unit, the association’s actions must be (1) within the association’s authority and (2) reasonable. Further, a mere “claim” of necessity is not sufficient.

The Court reversed the trial court’s enforcement order. However, the Court affirmed the contempt order because Small failed to appeal it, thereby waiving any challenge on the merits of the contempt order. Furthermore, the Court explained that “a contempt order may stand even if it is based on an erroneously entered order.”

As to Small, it would have been interesting to see if her situation would have turned out differently had she made a request for a reasonable accommodation to her association’s pest control policy under the Federal Fair Housing Act.

For those readers who are members of a homeowners’ association, you can breathe a sigh of relief (pun intended). Unlike condominium associations, homeowners’ associations do not have a statutory right to access an owner’s lot. However, a homeowners’ association’s declaration of covenants may grant the association a right to access an owner’s lot, but not the home, in emergency circumstances or for purposes of undertaking an owner’s maintenance obligations on the lot in the event the owner fails to properly maintain his or her lot.

Whether the revamping of the condominium termination procedures began in 2003 due to known problems in Florida’s termination procedures or whether the revamping occurred in 2007 as a result of several prior horrific storm seasons which led to distressed, fractured and unsustainable condominium projects throughout the State of Florida, the obvious fact is that, in 2007, the Florida legislature completely revamped the condominium termination process in an effort to simplify the termination process. But, is the cure even worse than the disease?

Prior to July 1, 2007, to terminate the condominium, a condominium association needed to obtain the approval of 100% of both the condominium unit owners and mortgage lienholders, unless otherwise provided in the declaration of condominium. In the off chance that such a vote was obtained, the condominium property became owned by the unit owners as “tenants in common” which would then require the filing of an “equitable partition” lawsuit – a lengthy process – so the condominium property could be sold and the proceeds distributed. At risk of pointing out the obvious, one sole disgruntled owner could prevent a justifiable and necessary termination necessitated by extreme damage to the condominium incurred as a result of casualty.

After the 2007 amendment, the new condominium termination procedures provide that the affirmative vote of only 80% of the unit owners, unless otherwise provided in the declaration of condominium, is needed to approve, what Chapter 718, Florida Statutes calls, a “plan of termination”, so long as not more than 10% of the unit owners vote to object the “plan of termination”. In this new termination regime, mortgage lienholders consent is not needed and thus irrelevant. According to attorney Martin A. Schwartz, “there is a lack of clarity in the statute on whether a mortgagee has to receive the full amount of its mortgage or only the value of the underwater unit. Lenders have generally accepted less than their principal amount since they are receiving the full current value of their collateral.” This could lead to continued liability for the borrower to satisfy the shortfall.

While these relaxed procedural hurdles to condominium termination have helped numerous real estate projects get back on their feet in one manner or another, a disturbing trend has arisen in which developers are using these termination provisions as a means of taking over condominiums and forcing unit owners out of their homes to turn these fledgling condominiums into rental properties, or to perhaps build newer, more dense condominium projects. After the condominium bubble burst and the condominium recession in Florida grew, investors, like sharks sensing blood in the water, sensed opportunities to purchase condominium units at incredibly low prices, sometimes purchasing the majority or all of the units in a condominium project, otherwise known as a “bulk purchase”. Having purchased a majority, if not all, of the units in a condominium, the developer, or “bulk buyer”, then had control over the condominium association. An owner of more than 50% of the units can legitimately control the board of directors and thus control the condominium association, too.

With control of the condominium association, the bulk buyer could commence the termination of the condominium. In this new termination process, governed by section 718.117, Florida Statutes, a termination trustee – typically, the condominium association itself – records a “plan of termination” which meets the requirements of Chapter 718, Florida Statutes. Once the “plan of termination” is recorded, title to all of the units automatically transfers to the termination trustee, and all liens automatically transfer to the sale proceeds. The “plan of termination” typically grants the termination trustee the power to sell the condominium property, including all of the units, at fair market value as determined by an independent appraisal, which amount can be below the amount borrowed by the owner.

The proceeds of the sale then get distributed in the following manner: (1) to the termination trustee for its reasonable fees and costs; (2) to any lienholders of liens recorded prior to the declaration of condominium; (3) to any purchase money lienholders, (aka, lenders- but the amount of their share could be less than the amount borrowed by individual owners); (4) to any lienholders of liens entered into by the condominium association which have been consented to by the unanimous consent of unit owners; (5) to any creditors of the condominium association; and finally (6) to the unit owners as set out in the “plan of termination”.

This trend of condominium take over and termination which, in today’s market, is likely the conversion of condominiums into rental properties, has the practical and real world possibility of forcing unit owners to sell their homes at depressed prices, likely for less than what is owed to their lenders, leaving them without a home, with the remaining debt on their mortgage liens, and with no money for a down payment on a new home. Can you think of worse situation?

This is a very unfortunate turn of events to what was created as a panacea to save otherwise defunct properties. In fixing the problem, the Legislature could at least ensure that no condominium owner will be left owing money to their lender as a result of their condominium’s termination when the termination is the result of a bulk buyer acquiring control as compared against a termination necessitated by a casualty event.

Although amendments to the condominium termination provisions of section 718.117, Florida Statutes, failed during the 2014 Florida Legislative Session, change must be made to avoid, or at the very least, curb, the incidences of abuse of its procedures. Will Floridians be harmed before the Legislature acts?