Opinion
Nos. 2003-CA-001495-MR, 2003-CA-001793-MR.
December 10, 2004.
Appeal from Fayette Circuit Court, Honorable Laurance B. Vanmeter, Judge, Action No. 02-CI-01795.
Richard A. Getty, Jason L. Hargadon, Ben T. Keller, Lexington, Kentucky, Briefs for Appellant.
Alex L. Scutchfield, Lexington, Kentucky, Brief and Oral Argument for Appellee.
Richard A. Getty, Lexington, Kentucky, Oral Argument for Appellant.
OPINION
Graoch Associates #73 Limited Partnership has appealed from a judgment entered by the Fayette Circuit Court on July 24, 2003, which granted summary judgment to the appellee, Lakeview Estates Lake Association, Inc. Having concluded that there is no genuine issue as to any material fact and that the Association is entitled to judgment as a matter of law, we affirm.
The Association is a non-profit, non-stock private corporation organized pursuant to KRS 273.161 et seq., for the purpose of maintaining certain common areas in the Lakeview Estates Subdivision, which is located in Lexington, Fayette County, Kentucky. Membership in the Association is restricted to those individuals and entities that own an interest in any lot or property in Lakeview Estates Subdivision. Graoch is a member of the Association by virtue of its ownership interest in a 331-unit apartment complex located within Lakeview Estates Subdivision. The Association was created by the developer of the subdivision, Lakeview Estates, Inc., in 1967 pursuant to a document entitled "Covenants and Restrictions Applicable to Lakeview Estates[.]" In sum, the covenants and restrictions empower the Association to levy assessments against its members for the "improvement and maintenance of properties, services, and facilities . . . related to the use and enjoyment by the Members of the [c]ommon [p]roperties[.]" Specifically, Article VI of the incorporating document provides, in relevant part, as follows:
Kentucky Revised Statutes.
The document was recorded in the Fayette County Clerk's Office.
Section 3. BASIS AND MAXIMUM OF ANNUAL ASSESSMENTS. Beginning January 1, 1967, or later as determined by the Board of Directors, the annual assessment shall be Sixty Dollars ($60.00) per lot. The annual assessment may be increased by vote of the Members . . . and may be for three-year periods and shall be automatically extended unless changed or reduced as herein provided.
The Board of Directors . . . may, after consideration of current maintenance costs and future needs of the Association, fix the actual assessment . . . ata lesser amount.
Section 4. SPECIAL ASSESSMENTS FOR CAPITAL IMPROVEMENTS. In addition to the annual assessments authorized by Section 3 hereof, the Association may levy in any assessment year a special assessment, applicable to that year only, for the purpose of defraying, in whole or in part, the cost of any construction, reconstruction, or maintenance of improvements to the Common Properties, including the necessary fixtures and personal property related thereto, provided that any such assessment shall have the assent of two-thirds of the authorized votes of the Members[.]
Section 5. CHANGE IN BASIS AND MAXIMUM OF ANNUAL ASSESSMENTS. The Association may increase the maximum and basis of the assessments fixed by Section 3 hereof prospectively for any such period provided that any such change shall have the assent of two-thirds of the authorized votes of the Members voting in person or by proxy[.]
In 1976 the Association executed a document entitled "Second Amendment to the Covenants and Restrictions applicable to [the Association,]" which delineated the membership rights for owners of multi-family properties, such as Graoch, located within the subdivision. Section 3 of the "Second Amendment" provides, in relevant part, as follows:
The owners of the multi-family properties shall pay one annual assessment . . . for each four (4) dwelling units upon its respective properties each year and shall pay one special assessment for capital improvements . . . for each ten (10) dwelling units upon its respective properties at such times as such special assessments may be authorized.
In 2001 the Association's Board of Directors proposed a $250.00 increase in the annual assessment its members were required to pay, thereby raising the total annual assessment to $350.00. The purpose of the proposed increase was to generate revenue to fund several projects designed to clean up and improve the lakes which serve as part of the common area in the subdivision. On December 19, 2001, the Association's members approved the proposed increase by a vote of 105 in favor and 47 against. As a result, an annual assessment was levied against Graoch in the amount of $28,962.50 (331/4 × $350.00).
At the time of the proposed increase, the annual assessment was set at $100.00.
Graoch voted against the proposed increase. Pursuant to Article IX, Section 2 of the "Second Amendment" Graoch is afforded seven votes. It is important to note that the majority of the Association's members are individual, single-family lot owners. Pursuant to Article III, Section 2 of the original covenants and restrictions, each individual lot owner is "entitled to one vote for each [l]ot in which they hold the interest required for membership."
On April 30, 2002, Graoch filed a petition for declaratory judgment in the Fayette Circuit Court, in which it alleged, inter alia, that the annual assessment levied against it was "disproportionately burdensome, unfair, unlawful and otherwise unconstitutional" and that the Association "improperly and unlawfully classified [the assessment] as an `annual assessment' as opposed to a `special assessment[.]'" Graoch maintained that the Association was required to fund all capital improvements by way of a special assessment as opposed to an annual assessment. The Association counterclaimed, asserting that Graoch owed the amount assessed against it for 2002 ($28,962.50), plus late fees.
Graoch further alleged that the voting scheme set forth in the original covenants and restrictions and the "Second Amendment" was "arbitrary, capricious and unconstitutional under both the federal and state constitutions as well as applicable Kentucky common law and statutory law governing proportional voting requirements."
The Association further alleged that Graoch still owed $2,068.75 for the annual assessment applicable to 2001.
On June 19, 2003, the trial court entered an opinion and order granting summary judgment to the Association. The trial court reasoned that the Association "has the discretion to use annual or special assessments or some combination thereof to make the desired capital improvements under the Covenants." The trial court further reasoned that it lacked the authority to review the propriety of the Association's decision to levy an annual assessment against its members for the purpose of funding capital improvements. In closing, the trial court concluded that Graoch's arguments concerning the Association's voting scheme were foreclosed by KRS 273.201, which provides, in relevant part, that "[t]he right of the members [of a non-profit non-stock corporation], or any class or classes of members, to vote may be limited, enlarged or denied to the extent specified in the articles of incorporation or the bylaws." On July 24, 2003, the trial court entered a final judgment against Graoch for the amount of the annual assessment it owed for 2001 and 2002, plus late fees and interest. This appeal followed.
The trial court cited Hartung v. Audubon Country Club, Inc., Ky.App., 785 S.W.2d 501 (1990), in support of its ruling. In Hartung, this Court held that judicial review of the actions of a voluntary private club "is limited to enforcement of the organization's own rules." Id. at 503.
Graoch essentially raises two issues on appeal. First, Graoch contends that the trial court erred in its determination that the Association is not required to fund capital improvements exclusively through special assessments. Second, Graoch asserts that the trial court erred in concluding that it lacked the authority to review the propriety of the Association's decision to levy an annual assessment against its members for the purpose of funding capital improvements.
Since Graoch is appealing from an order granting summary judgment, we begin our analysis by setting forth the appropriate standard for an appellate court to follow when reviewing a trial court's ruling on a motion for summary judgment. In sum, we must determine whether the trial court erred in concluding that there was no genuine issue as to any material fact and that the moving party was entitled to a judgment as a matter of law. Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In Paintsville Hospital Co. v. Rose, the Supreme Court of Kentucky held that for summary judgment to be proper the movant must show that the adverse party cannot prevail under any circumstances. The Court has also stated that "the proper function of summary judgment is to terminate litigation when, as a matter of law, it appears that it would be impossible for the respondent to produce evidence at the trial warranting a judgment in his favor." Since factual findings are not at issue, there is no requirement that the appellate court defer to the trial court. "The record must be viewed in a light most favorable to the party opposing the motion for summary judgment and all doubts are to be resolved in his favor" [citation omitted]. Furthermore, "a party opposing a properly supported summary judgment motion cannot defeat it without presenting at least some affirmative evidence showing that there is a genuine issue of material fact for trial."
Scifres v. Kraft, Ky.App., 916 S.W.2d 779, 781 (1996).
Kentucky Rules of Civil Procedure (CR) 56.03.
Ky., 683 S.W.2d 255, 256 (1985).
Steelvest, Inc. v. Scansteel Service Center, Inc., Ky., 807 S.W.2d 476, 480 (1991).
Goldsmith v. Allied Building Components, Inc., Ky., 833 S.W.2d 378, 381 (1992).
Steelvest, 807 S.W.2d at 480.
Id. at 482. See also Philipps, Kentucky Practice, CR 56.03 (5th ed. 1995).
With these principles in mind, we turn to Graoch's assertion that the trial court erred in its determination that the covenants and restrictions applicable to the Association's members do not require that all capital improvements be paid exclusively through special assessments. It is well-established that "covenants are contractual in nature and are, therefore, interpreted in accordance with principles of contract law." "[T]he interpretation of a contract, including determining whether a contract is ambiguous, is a question of law for the courts and is subject to de novo review." Moreover, one of the cardinal rules of contract interpretation is that "all words and phrases in the contract are to be given their ordinary meanings." In addition, it is a universal rule that a "`[a]ny contract or agreement must be construed as a whole, giving effect to all parts and every word in it if possible.'"
Stevens v. Elk Run Homeowners' Association, Inc., 90 P.3d 1162, 1165-66 (Wyo. 2004).
Cantrell Supply, Inc. v. Liberty Mutual Insurance Co., Ky.App., 94 S.W.3d 381, 385 (2002).
Fay E. Sams Money Purchase Pension Plan v. Jansen, Ky.App., 3 S.W.3d 753, 757 (1999). See also 17A Am.Jur.2d, Contracts, § 359 (1991).
Cantrell Supply, 94 S.W.3d at 384-85 (quoting City of Louisa v. Newland, Ky., 705 S.W.2d 916, 919 (1986)). See also 17A Am.Jur.2d, Contracts, § 385 (1991).
Article VI, Section 3 of the original covenants and restrictions provides that the amount of the annual assessment applicable to the Association's members " may be increased by vote of the Members" [emphasis added]. Article VI, Section 3 further provides that "[t]he Board of Directors . . . may, after consideration of current maintenance costs and future needs of the Association, fix the actual assessment . . . at a lesser amount" [emphasis added]. Article VI, Section 4 states that the Association " may levy in any assessment year a special assessment, applicable to that year only, for the purpose of defraying, in whole or in part, the cost of any construction, reconstruction or maintenance of improvements to the Common Properties" [emphases added]. In addition, Article VI, Section 5 provides that the Association " may increase the maximum and basis of the assessments fixed by Section 3 . . . provided that any such change shall have the assent of two-thirds of the authorized votes of the Members voting in person or by proxy" [emphasis added]. The use of the term "may" in each of these provisions clearly indicates that the Association has the discretion to fund projects related to the maintenance and improvement of the property and/or facilities located in the common area of the subdivision by means of either an annual assessment or a special assessment. The use of the phrase "in whole or in part" in Article VI, Section 4 lends further support to such an interpretation. Contrary to Graoch's assertions, nothing in the covenants suggests that the Association is required to fund "capital improvements" exclusively by way of a special assessment. To hold otherwise would require a tortured interpretation of the covenants at issue. In sum, we agree with the trial court that the Association "has the discretion to use annual or special assessments or some combination thereof to make the desired capital improvements under the Covenants."
See Preserve the Dunes, Inc. v. Department of Environmental Quality, 655 N.W.2d 263, 297 (Mich.App. 2002) (stating that "[t]he word `may' designates discretion"); Flynn v. Indiana Bureau of Motor Vehicles, 716 N.E.2d 988, 991 (Ind.App. 1999) (stating that "[u]se of the term `may' ordinarily connotes discretion"); and McMaster v. McIlroy Bank, 654 S.W.2d 591, 594 (Ark.App. 1983) (stating that "`may' is usually employed as implying permissive or discretional, rather than mandatory, action or conduct, and is construed in a permissive sense unless necessary to give effect to an intent to which it is used").
Graoch further contends that the trial court erred in concluding that it lacked the authority to review the propriety of the Association's decision to levy an annual assessment as opposed to a special assessment against its members for the purpose of funding capital improvements. In sum, Graoch urges us to adopt the "reasonable test" applied by other jurisdictions when reviewing the decisions of condominium associations. "Under the reasonableness test, a rule [or decision] which is unreasonable, arbitrary, or capricious is invalid." "This requires, among other things, that there be some rational relationship of the decision or rule to the safety and enjoyment of the condominium."
See Hutchens v. Bella Vista Village Property Owners' Association, Inc., 110 S.W.3d 325, 330 (Ark.App. 2003); Buckingham v. Weston Village Homeowners Association, 571 N.W.2d 842, 844-46 (N.D. 1997); Villas at Hidden Lakes Condominiums Association v. Geupel Construction Co., Inc., 847 P.2d 117, 125-26 (Ariz.App. 1992); and Worthinglen Condominium Unit Owners' Association v. Brown, 566 N.E.2d 1275, 1277-78 (Ohio.App. 1989).
Hutchens, 110 S.W.3d at 330.
Worthinglen, 566 N.E.2d at 1277.
As we are of the opinion that a greater degree of deference is necessary when courts are asked to review the decisions made by self-governing bodies such as homeowners' associations, we decline to adopt the "reasonable test." We are persuaded that the wisdom or advisability of a particular assessment made by a homeowners' association is not an issue for the courts to determine, absent allegations of fraud, bad faith or gross mismanagement. We do agree with Graoch that this case is distinguishable from Hartung, supra, in that Hartung concerned the right of a voluntary private club to choose its own members. We further agree with Graoch that closer judicial scrutiny is warranted when dealing with the actions of a private association whose membership is compulsory as compared to a private club whose membership is voluntary. Thus, where the Court in Hartung held that judicial review of the actions of a voluntary private club "is limited to enforcement of the organization's own rules[,]" we hold that judicial review of the actions of a private association whose membership is compulsory is limited to whether the acts complained of constitute fraud, bad faith, or gross mismanagement.
See Apple II Condominium Association v. Worth Bank Trust Co., 659 N.E.2d 93, 98 (Ill.App. 1995) (expressly rejecting the "reasonableness test").
See Mulrine v. Pocono Highland Community Association, Inc., 616 A.2d 188, 190 (Pa.Commw.Ct. 1992).
Hartung, 785 S.W.2d at 503. The Association is not entirely a voluntary membership organization. Pursuant to Article III, Section 1 of the original covenants and restrictions, membership in the Association is required of "[e]very person or entity who is the owner of record of a fee simple or undivided interest in any lot [located within the subdivision]."
Id.
A thorough review of the record in this case reveals no evidence of fraud, bad faith, or gross mismanagement on the part of the Association's Board of Directors in submitting the proposed increase to the voters as an annual assessment as opposed to a special assessment. Likewise, there is no evidence of fraud, bad faith, or gross mismanagement on the part of the Association's members in approving the proposed increase. Consequently, we cannot conclude that the trial court erred by granting summary judgment to the Association.
Graoch further contends that the trial court should have reviewed the voting scheme set forth in the original convents and restrictions and the "Second Amendment" under the "reasonableness test." In sum, we agree with the trial court that any arguments concerning the proportionality of the Association's voting scheme are foreclosed by KRS 273.201.
Based on the foregoing reasons, the order of the Fayette Circuit Court entered on July 24, 2003, is affirmed.
MILLER, Senior Judge, Concurs.
TAYLOR, Judge, Dissents and Files Separate Opinion.
I respectfully dissent. I believe the majority has misconstrued the purpose and intent of the "Covenants and Restrictions Applicable to Lakeview Estates" (Covenants), as amended, and, thus, has not properly applied the Covenants in this case.
Kentucky Courts have long held that "[t]he fundamental rule in construing restrictive covenants is that the intention of the parties governs." Colliver v. Stonewall Equestrian Estates Ass'n, Inc., Ky.App., 139 S.W.3d 521, 522 (2003), citing Glenmore Distilleries v. Fiorella, 273 Ky. 549, 554, 117 S.W.2d 173, 176 (1938). Accordingly, the interpretation of the Covenants is a question of law and our review is de novo. Id.
The Covenants were declared and filed of record by the developer of Lakeview Estates (Lakeview) in June of 1967. At that time, Lakeview was strictly a residential subdivision in Fayette County. Article VI (Section 1) of the Covenants creates annual assessments (for maintenance and Association expenses) and special assessments for capital improvements. Section 3 of Article VI provides that annual assessments (which originally were set at $60.00 per lot) can be increased by a vote of members of the Association for a three-year period. However, this section permitted the Board of Directors (the Board) to reduce the annual assessment, if needed, if the current maintenance costs and future needs of the Association so warranted. The language in Section 3 can be only interpreted that annual assessments were to be used for maintenance expenses of the Association. Section 4 of Article VI authorized the Association to levy a special assessment on an annual basis only for the purpose of defraying in whole or part the cost of any capital improvement to the "common properties." A plain reading of these Covenants together clearly reflects the intent of the developer and the Association to make annual assessments for the purpose of commons area maintenance and payment of other ordinary expenses incurred in the operation of the Association (i.e. insurance, security, etc.). Special assessments were permitted for the purpose of making capital improvements to the commons areas. If, as the majority concludes, annual assessments may be used for capital improvements under Article VI, there would have been no necessity whatsoever for the developer to set out a separate section authorizing special assessments for capital improvements.
I agree with the majority that covenants are contractual in nature and the words therein should be given their ordinary meaning. However, under Kentucky law, it is axiomatic that a contract is to be interpreted as a whole and all writings that are part of the same agreement are construed together. ABCO-Bramer, Inc. v. Markel Ins. Co., Ky.App., 55 S.W.3d 841 (2000). Accordingly, construction of a contract must not be based on a particular word or phrase as the majority appears to do in this case. See Elliott v. Pikeville Nat. Bank Trust Co., 278 Ky. 325, 128 S.W.2d 756 (1939).
In June of 1976, the Covenants were amended by the members of the Association, adding a new Article IX and amending Article VI. The purpose of this amendment was to add two adjacent properties to the Association, which were to be developed as multi-family properties, such as townhomes and apartments. Again, the intent regarding the distinction between annual assessments for maintenance and routine association expenses and special assessments for capital improvements is reflected in the amendment. Section 3 of Article IX provides that the owners of multi-family properties would pay one annual assessment for each four dwelling units owned and would pay one special assessment for capital improvements for each ten dwelling units owned. The clear purpose and intent of this amendment looks to protect multi-family property owners from paying a disproportionate share of capital improvements to the commons areas. Yet, this is exactly what has occurred in this case.
By creating an annual assessment for capital improvements that would effectively be in place for five years (as opposed to a one-time special assessment for capital improvements), the multi-family property owners were assessed $28,963.00 per year under the annual assessment as opposed to $11,585.00 had the assessment been approved as a capital improvement assessment. The Board recommended to the members of the Association that they approve the annual assessment to make the capital improvements while acknowledging that the individual residential unit owners were disproportionately shifting the costs of the capital improvements to the multi-family property owners. Since the unit owners control the necessary votes to approve any assessment, approving an annual assessment for capital improvements is discriminatory on its face, in my opinion, and in total contravention of the Covenants that were designed to protect the multi-family property owners from such an occurrence.
As the majority notes, the Association is a nonprofit, non-stock, private corporation created under KRS 273.161 et seq. The Board's actions are also governed by these statutes. However, the record reflects that the Board recommended the annual assessment be made (in lieu of a special assessment) for the purpose of capital improvements, knowing the multi-family property owners would bear a disproportionate burden of the expense. KRS 273.215 requires that directors of non-profit corporations perform their duties in good faith, on an informed basis, and in the best interest of the corporation. Here, as clearly indicated in the record, the directors' actions have been in the best interest of the residential unit owners only. Such conduct would appear to be in bad faith and a breach of the directors' statutory duties.
For the foregoing reasons, I would reverse the judgment of the Fayette Circuit Court and remand for entry of judgment on appellant's cross-motion for summary judgment.