Raising Assessments, Conflict Between Declaration and By-Laws, and the Business Judgment Rule - Weiss Attorneys at Law

Maxiumum AssessmentsIn a decision handed down less than two weeks ago by the Missouri Court of Appeals, the court was confronted with a case involving the proper method for calculating a maximum annual assessment by the subdivision’s board of directors absent a vote of the homeowners. In Davis v. Lakewood Property Owners Association, Inc., three property owners appealed the methodology used by the board of directors of the association in calculating the amount that could be assessed against lot owners by the board without a vote of the lot owners.

In that case, the Lakewood Property Owners Association, Inc.’s (“Lakewood”) Declaration of Covenants, Conditions and Restrictions (“Declaration”), filed in 1973 in Jackson County, provided for both the calculation of a “maximum annual assessment,” and separately, the “actual annual assessment.” The Declaration provided that commencing Jan. 1, 1974, and annually thereafter, the maximum annual assessment could be increased without a vote of the membership in an amount equal to 150 percent of the increase, if any, in the Consumer Price Index (CPI) for the preceding July. The Declaration also provided that, alternatively, the maximum annual assessment could be increased without resort to the CPI if the proposal received the minimum required votes of different categories of membership. After establishing the maximum annual assessment, the Lakewood Board was tasked with establishing the actual assessment.

The By-Laws, as amended sometime prior to 1980, provided a fractional formula that utilized, as the numerator, the CPI for July 1973.

In 2015, the Lakewood Board computed the maximum annual assessment by relying upon the formula in the By-Laws. Computation in such a manner resulted in establishing the maximum annual assessment without regard to the immediately preceding year’s actual annual assessment, essentially allowing all the CPI increases since 1973 to be aggregated to allow for a significant maximum annual assessment amount without regard to the prior year’s actual assessment.

In 2015, the Board raised the actual annual assessments by $84, from $1,236 to $1,320, an increase of 6.8 percent. The CPI increased for the applicable period was only 1.7 percent. The calculation was within the maximum annual assessment allowable by the By-Laws formula, a formula that had been used since at least 1979 and, since the creation of Lakewood, the actual annual assessment had never exceeded the maximum annual assessment as computed using the CPI-based formula.

Members of Lakewood filed suit seeking a declaratory judgment that the increase of $84 in the actual annual assessment exceeded the permitted maximum annual assessment, and because it was not approved by a vote of the members, was unauthorized.

The Lakewood Board counterclaimed seeking a declaratory judgment that its “longstanding practice and business judgment” in computing the calculation set forth in the By-Laws to determine the maximum annual assessment for a given year and then setting the actual annual assessment at a rate lower than the computed maximum was proper. Furthermore, the Lakewood Board sought confirmation that it had properly “exercised its business judgment” in setting the actual annual assessment at the rate of $1,320, well below the permitted maximum annual rate.

The trial court found that the Lakewood Board has acted in good faith, uninfluenced by any consideration other than an honest belief that the actions promoted Lakewood’s best interests, consistent with historical practice and within the Board’s authority, and thus its determination of the actual annual assessment was protected by operation of the business judgment rule.

The appellate court, in reversing the lower court’s decision, held that:

The business judgment rule protects the directors and officers of a corporation from liability for intra vires1 decisions within their authority and made in good faith, uninfluenced by any consideration other than an honest belief that the action promotes the corporation’s best interest. The rule precludes courts from interfering with the decisions of corporate officers and directors absent a showing of fraud, illegal conduct, an ultra vires2 act, or an irrational business judgment. The term ‘ultra vires’ has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited. (Footnote added)

The property owners who filed suit argued that the Declaration’s provision allowing increases in the actual annual assessment not in excess of 150 percent of the increase in the CPI, without a member’s vote, was to be calculated year to year, not, as the By-Laws seemed to authorized and as Boards had followed for many years, by calculating the maximum annual assessment in reference to the 1973 actual assessment.

The appellate court relied on a very similar case that also had a CPI adjustment clause in its declaration, but in that case, the appellate court had earlier held that the board was “not authorized to accumulate previous unused increases of the CPI,” finding that such an interpretation is clear and obvious from the language of the declaration.

The fact that the Lakewood Board calculated the maximum annual assessment each year, and only after such calculation did it set the actual annual assessment, did not save the Board from the appellate court’s holding that the maximum annual assessment is to be determined solely from recourse to the application of the CPI increase to the prior year’s actual annual assessment.

The By-Laws expressly provided that in the case of a conflict with the Declaration, the Declaration controls.3 Such a holding would likely be the case, even without an express provision in the Declaration, and in the case of a condominium, would be the holding because of a statutory requirement.

The formula in Lakewood’s By-Laws permits accumulation of previously unused increases in the CPI, contrary to what the appellate court found to be the clear and obvious language of the Declaration. The Declaration “limits the amount of the increase in the maximum annual assessment without a vote of the membership to the increase in the CPI over the preceding year,” so the appellate court reversed the trial court’s judgment.

Because the Declaration did not authorize the Lakewood Board’s calculation of the maximum annual assessment pursuant to the By-Laws’ formula, the Board’s calculation of the actual assessment based on its calculation of the maximum annual assessment was also not authorized. The court found that Board’s calculations were ultra vires and, therefore, not protected by the business judgment rule.

1The Latin term “intra vires” means “within the powers.”
2The Latin term “ultra vires” means “in excess of granted powers.”
3Such a holding would likely be the case, even without an express provision in the Declaration, and in the case of a condominium, would be the holding because of a statutory requirement.

Providing guidance to homeowner associations and condominium owners’ associations in all facets of governance, declaration and by-law interpretation, application and amendment, and other legal issues that confront community associations is what Weiss Attorneys at Law, P.C. does. Please contact us at law@weisslawstl.com if we may be of service to you and your association.

 

David Weiss Business Attorney

 

David Weiss counsels business owners, associations and individuals in a variety of legal matters central to business and nonprofit organizations, including corporate law, real estate, homeowner and condominium associations, tax and employment law matters. David also represents clients in business litigation involving business disputes, shareholder and corporate governance matters, and homeowner and condominium disputes. He can be reached at 314-588-9500 or dweiss@weisslawstl.com.

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