Opinion
Index No. EF2020-68068
12-01-2022
John B. Zollo and Kathryn Zollo, et al. at least 5% of the members of the Adirondack Lodges Homeowners Association, Inc. and in The Right of, the Adirondack Lodges Homeowners Association, Inc. and on Behalf of All Other Members of Corporation Similarly situated, Plaintiffs, v. Adirondack Lodges Homeowners Association, Inc. and ADIRONDACK LODGES HOMEOWNERS ASSOCIATION BOARD OF DIRECTORS, Defendants.
Law Offices of John B. Zollo, P.C., Smithtown (John B. Zollo of counsel), for plaintiffs. Wilson Elser Moskowitz Edelman & Dicker LLP, Albany (Peter Lauricella and Christopher A. Priore of counsel), for defendants.
Unpublished Opinion
Law Offices of John B. Zollo, P.C., Smithtown (John B. Zollo of counsel), for plaintiffs.
Wilson Elser Moskowitz Edelman & Dicker LLP, Albany (Peter Lauricella and Christopher A. Priore of counsel), for defendants.
ROBERT J. MULLER, J.S.C.
The facts of this matter are fully set forth in the prior decisions of this Court (71 Misc.3d 1222[A], 2021 NY Slip Op 50462[U] [Sup Ct, Warren County 2021]; 68 Misc.3d 1205[a], 202 NY Slip Op 50866[U] [Sup Ct, Warren County 2020]). Briefly, defendant Adirondack Lodges Homeowners Association, Inc. (hereinafter the HOA) is a residential community of 54 townhouse units and 24 single-family units located on Schroon Lake in the Town of Horicon, Warren County. The HOA is 90 acres in size with roughly 800 feet of waterfront, including a beach and three boat docking facilities: (1) the right of way docks (hereinafter the ROW docks); (2) the outer docks; and (3) the harbor. Each unit owner has deeded rights to a slip in one of these three facilities. Plaintiff John B. Zollo and his wife, plaintiff Kathryn Zollo, own a single-family unit in the HOA with deeded rights to a slip in the ROW docks.
All units in the HOA are subject to a certain "Restated Declaration of Protective Covenants, Conditions, Restrictions, Easements, Charges and Liens" (hereinafter Declaration) enforced by defendant Adirondack Lodges Homeowners Association Board of Directors (hereinafter the Board). The Declaration provides that the HOA shall be responsible for the maintenance and repair of all common areas, including the harbor. In May 2018, the Board began discussing restoration of the harbor, which has undisputedly fallen into disrepair. Proposals were received from two engineering firms and, in April 2019, the Board approved the proposal of C.T. Male & Associates (hereinafter C.T. Male). C.T. Male subsequently completed its field work and presented its findings and recommendations to the Board in October 2019, quoting a price of $1,200.000.00 for the project. All HOA members were invited to attend this meeting, at which time the project was approved.
On October 18, 2019, the Board sent correspondence to all HOA members advising that a bank loan was being pursued for 75% of the project costs and - to demonstrate the HOA's ability to raise the required equity contribution - each member was being charged an assessment of $3,500.00. On May 1, 2020, the Board sent an invoice to all members of the HOA for this assessment. Plaintiffs refused to pay it, however, contending that the Board violated the terms of the Declaration.
As relevant here, § 5.01 of the Declaration provides that the owner of each residential lot and townhouse unit is responsible for paying "[a]nnual [a]ssessments of charges for the maintenance and operation of the [p]roperty; and [sp]ecial assessments for capital improvements." § 5.03 of the Declaration - which pertains to maintenance assessments - further states as follows:
"The purpose of the [m]aintenance [a]ssessments shall be to fund the maintenance, repair, replacement and improvement of the [p]roperty and the promotion of the recreation, safety and welfare of the [o]wners, including but not limited to [t]he facilities included in [§] 6.01 hereof...; [l]egal, architectural, engineering and other professional fees and disbursements; and [s]uch other needs as may arise and which the Board... deems appropriate or desirable."§ 6.01 of the Declaration then provides that "all maintenance, repair and replacement of the [b]uildings... and the maintenance, repair and replacement of the roadways, walkways, signage, if any, septic and water systems, tennis courts, beach, harbour [sic] and all property up to the exterior foundations of the [u]nits, and the exterior of the [t]ownhouse [u]nits, including the decks and roofs and all other [HOA p]roperty shall be the responsibility of... the [HOA]."
§ 5.06 of the Declaration - which pertains to special assessments - provides as follows:
"[T]he [HOA] may levy a [s]pecial [a]ssessment for the purpose of defraying, in whole or in part, the cost of any capital improvements, including without limitation, the construction, reconstruction, replacement or repair of a capital nature to the [p]roperty, including the necessary fixtures and personal property related thereto. Any [s]pecial [a]ssessment for the construction (rather than reconstruction or replacement[)] of any capital improvement, or for any [s]pecial [a]ssessment amounting to more than twenty-five percent (25%) of the then current amount of annual [m]aintenance [a]ssessments, the consent of [o]wners by an affirmative vote of sixty percent (60%) of the [a]uthorized [v]otes cast in person or by proxy by those owners to be subject to such [s]pecial [a]ssessment at a meeting duly called for this purpose, must be obtained. Written notice of such meeting shall be sent to all [o]wners to be subject to such [s]pecial [a]ssessment at least thirty (30) days in advance, setting forth the purpose of the meeting."
According to plaintiffs, the harbor restoration project constitutes a capital improvement and the $3,500.00 a special assessment amounting to more than 25% of the annual maintenance assessment - thus requiring an affirmative vote of 60% of the HOA members under § 5.06 of the Declaration. According to defendants, on the other hand, even if the harbor restoration project is a capital improvement, it nonetheless constitutes a repair or replacement which can be funded using maintenance assessments under § 5.03 of the Declaration.
Plaintiffs commenced this action on July 22, 2020 seeking, inter alia, a judgment declaring the $3,500.00 assessment invalid. Plaintiffs simultaneously moved by Order to Show Cause for a preliminary injunction prohibiting defendants from imposing an assessment or late fees on HOA members for harbor restoration pending the conclusion of the action. Plaintiffs also sought a Temporary Restraining Order (TRO) pending the return date of the motion. The TRO and preliminary injunction were granted by decisions dated July 28, 2020 and May 19, 2021, respectively. Plaintiffs were directed to post an undertaking in the amount of $20,000.00, which bond was posted on June 14, 2022.
To the extent that the complaint initially failed to allege that plaintiffs represent at least 5% of the HOA membership - as required under N-PCL 623 (a) - plaintiffs filed a motion for leave to file and serve a supplemental summons and amended complaint, which motion was granted by decision dated March 11, 2022. Presently before the Court is (1) plaintiffs' motion for an Order granting summary judgment with respect to their first, second, and third causes of action, severing their fourth, fifth, and sixth causes of action, and awarding them counsel fees, together with costs and disbursements; and (2) defendants' cross motion for an Order granting summary judgment with respect to their first, second, and third counterclaims.
Both the motion and cross motion were filed prior to issuance of the March 2022 decision granting plaintiffs' motion for leave to file and serve a supplemental summons and amended complaint and, as such, both attach and incorporate the original pleadings. That being said, once issue was joined relative to the amended pleadings, the parties filed a stipulation agreeing that the amended pleadings do not differ substantively from the original pleadings and, further, consenting to consideration of the motion and cross motion. The Court notes that the aspect of the cross motion seeking summary judgment relative to defendants' third and fifth affirmative defenses - both of which allege a failure to comply with N-PCL 623 (a) - has been rendered moot by the March 2022 decision.
Turning first to plaintiffs' motion for summary judgment, their first cause of action seeks a declaratory judgment that the harbor restoration project is a capital improvement requiring a vote and consent of 60% of the members of the HOA and, further, that the $3,500.00 assessment is invalid and unenforceable. Their second and third causes of action then seek to permanently enjoin defendants from imposing any special assessments against members of the HOA without complying with the Declaration. Plaintiffs fourth, fifth and sixth causes of action - which they seek to sever - allege that the Board breached its fiduciary duty to the HOA.
Plaintiffs have submitted the affirmation of John Zollo in support of the motion, which attaches copies of the pleadings, the Declaration, and the May 2021 decision granting their motion for a preliminary injunction. Plaintiffs appear to base their entire motion on the Court's finding of a likelihood of success on the merits - but the inquiry made on a motion for a preliminary injunction is entirely different from that made on a motion for summary judgment. Indeed, as explained by this Court in the May 2021 decision:
"[In considering] the likelihood of success on the merits, 'it is not for this court to determine finally the merits of an action...; rather, the purpose of the interlocutory relief is to preserve the [s]tatus quo until a decision is reached on the merits' (Tucker v Toia, 54 A.D.2d 322, 326 [1976]). To that end, 'the showing of a [l]ikelihood of success on the merits required before a preliminary injunction may be... issued must not be equated with the showing of a [c]ertainty of success' (Tucker v Toia, 54 A.D.2d at 326; see Cooperstown Capital, LLC v Patton, 60 A.D.3d 1251, 1252-1253 [2009]). 'It is enough if the moving party makes a prima facie showing of his right to relief; the actual proving of [a] case should be left to the full hearing on the merits' (Tucker v Toia, 54 A.D.2d at 326)" (71 Misc.3d 1222[A], 2021 NY Slip Op 50462[U] at *3).
In contrast, "[t]he movant seeking summary judgment has the initial burden to 'establish its prima facie entitlement to judgment as a matter of law by presenting competent evidence that demonstrates the absence of any material issue of fact'" (Hope v Hadley-Luzerne Pub. Lib., 169 A.D.3d 1276, 1277 [2019], quoting Aretakis v Cole's Collision, 165 A.D.3d 1458, 1459 [2018] [internal quotation marks and citations omitted]).
In opposing plaintiffs' motion for a preliminary injunction, defendants argued that their decision to impose the $3,500.00 assessment was subject to the business judgment rule, "which 'bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes'" (Laker v Association of Prop. Owners of Sleepy Hollow Lake, Inc., 172 A.D.3d 1660, 1662 [2019], quoting (Auerbach v Bennett, 47 N.Y.2d 619, 629 [1979]; see M & M Country Store, Inc. v Kelly, 159 A.D.3d 1102, 1103 [2018]). The Court, however, observed that the rule does not apply where corporate directors have acted in bad faith and breached their fiduciary duty to the corporation (see 71 Misc.3d 1222[A], 2021 NY Slip Op 50462[U] at *5) - as alleged by plaintiffs in their fourth, fifth, and sixth causes of action. The Court further observed that - in their reply in further support of the motion for a preliminary injunction - plaintiffs "submitted the affidavits of several HOA members... contend[ing] that the Board 'operates under a veil of secrecy' and has essentially wrested control over the HOA from its members" (71 Misc.3d 1222[A], 2021 NY Slip Op 50462[U], at *5).
Here, however, plaintiffs have submitted nothing to support their allegations that the Board acted in bad faith and breached their fiduciary duty to the HOA. Even if the Court were to consider the affidavits previously submitted by HOA members in support of the motion for a preliminary injunction, they do not contain sufficient detail to find the business judgment rule inapplicable as a matter of law - as would be necessary to grant summary judgment to plaintiffs on their first, second, and third causes of action. Indeed, conclusory allegations that the Board operates under a veil of secrecy are woefully insufficient to establish a prima facie breach of fiduciary duty. To prevail on a breach of fiduciary duty claim against the Board, plaintiffs must demonstrate a fiduciary relationship, misconduct by the individual Board members, and damages directly caused by the misconduct (see Loch Sheldrake Beach & Tennis Inc. v Akulich, 141 A.D.3d 809, 811 [2016]). Here, there clearly exists a fiduciary relationship - but no proof whatsoever has been submitted relative to misconduct by individual Board members or resulting damages. The absence of any such proof is particularly striking given that more than one year has passed since issuance of the May 2021 decision and it appears that discovery has been exchanged between the parties.
The Court notes that plaintiffs' fourth and sixth causes of action allege that Michael Sposili - former President of the Board - had a professional relationship with C.T. Male, having served as Executive Director of Alumni Relations and College Events for Skidmore College while C.T. Male apparently "worked on major projects" there. According to plaintiffs, the Board accepted C.T. Male's proposal without securing other competitive bids because of this relationship. Again, however, no proof was submitted in this regard. Further, the record demonstrates that two proposals were considered by the Board before that of C.T. Male was accepted.
Under the circumstances, the Court finds that plaintiffs have failed to satisfy their initial burden of establishing entitlement to summary judgment on their first, second, and third causes of action. As such, there is no need to consider defendants' opposition (see Framan Mech., Inc. v State Univ. Constr. Fund, 182 A.D.3d 947, 948 [2020]; Alvarez v Prospect Hosp., 68 N.Y.2d 320, 324 [1986]). Plaintiffs' motion is hereby denied in its entirety, with no need to consider the remaining relief requested.
Turning now to the cross motion, defendants' first counterclaim seeks to enforce the $3,500.00 assessment as against plaintiffs, plus interest at 18% per year as provided in the Declaration. Their second counterclaim seeks to impose a lien upon defendants for the unpaid assessment, and their third counterclaim seeks counsel fees.
In support of the cross motion defendants have submitted the affidavit of Bradley Koehler, President of the Board. As set forth above, defendants contend that even if the harbor restoration project is a capital improvement, it nonetheless constitutes a repair or replacement and as such, can be funded using a maintenance assessment. According to defendants, under § 6.01 (a) of the Declaration replacement of the harbor "shall be the responsibility" of the HOA, with § 5.03 (d) providing that the purpose of the maintenance assessments "shall be to fund the... replacement" of the harbor. § 5.02 of the Declaration then provides that the Board "shall... at least annually, fix and determine the budget for the continued operation of the [HOA]" and "shall determine the total amount required, including the operational items such as insurance, repairs, reserves, maintenance and other operating expenses, as well as charges to cover any deficits from prior years and capital improvements approved by the Board."
In contrast to the mandatory language of §§ 6.01 (a), 5.03 (d) and 5.02, § 5.06 provides that the HOA "may levy a Special Assessment for the purpose of defraying... the cost of any capital improvements." Defendants thus contend that a special assessment may be used to defray the cost of a capital improvement - but it is not required - and it is well within their discretion to instead impose a maintenance assessment for a capital improvement. As stated by Kohler, it would "produce[] an absurd result to make [the $3,500.00 a]ssessments subject to an [o]wner vote under [§] 5.06, because that would effectively render the [a]ssessments optional to the [o]wners and leave the Association with no practical way to fulfill its duty to repair or replace the harbor." Kohler further outlined the Board's concerns that - if put to a vote - the project would not receive an affirmative vote of 60% of the HOA members. In this regard, he notes that of the 52 members with slips in the harbor, 15 do not have boats and thus do not use the slips on a regular basis. To the extent that these statements respond to certain dicta included by the Court in its May 2021 decision, the responses are appreciated and help clarify the factual underpinnings of the dispute.
To the extent that these statements respond to certain dicta included by the Court in its May 2021 decision, the responses are appreciated and help clarify the factual underpinnings of the dispute.
Under the circumstances, the Court finds that defendants have succeeded in establishing their prima facie entitlement to summary judgment relative to their first counterclaim. While plaintiffs' interpretation of the Declaration is reasonable, so too is that of defendants - and under the business judgment rule, their interpretation is entitled to deference (see Tsui v Chou, 135 A.D.3d 597, 598 [2016]; Simpson v Berkley Owner's Corp., 213 A.D.2d 207, 207-208 [1995]). The Court further finds that plaintiffs have failed to raise a triable issue of fact in opposition. As set forth above, plaintiffs have submitted nothing with respect to defendants' alleged bad faith and breach of fiduciary duty.
Briefly, to the extent that the May 2021 decision stated that "[d]efendants' interpretation of § 5.06 of the Declaration appears to contradict § 5.01" (71 Misc.3d 1221[A], 2021 NY Slip Op 50462[U], at *4), this inquiry is no longer appropriate given that defendants have established the applicability of the business judgment rule as a matter of law.
With respect to defendants' second counterclaim, § 5.01 of the Declaration provides that "the Board of Directors, on behalf of all [o]wners, shall have a lien on each Unit for unpaid Assessments, with interest thereon, assessed against such Unit, subject to foreclosure." The Court thus finds that defendants have established their prima facie entitlement to summary judgment relative to their second counterclaim. Insofar as the third counterclaim is concerned, § 11.08 of the Declaration provides that "[a]ny party to a proceeding who succeeds in enforcing the covenants and [r]estrictions set forth herein, or enjoining the violation of any of the [c]ovenants and [r]estrictions against an owner..., shall be entitled to reasonable attorneys' fees against such [o]wner" [Declaration, at p 24]. As such, defendants have established their prima facie entitlement to summary judgment relative to their third counterclaim as well. Once again, plaintiffs have failed to raise a triable issue of fact relative to either the second or third counterclaim.
Based upon the foregoing, defendants' cross motion is granted in its entirety. The preliminary injunction granted in the May 2021 decision is hereby vacated, with the undertaking posted by plaintiffs to remain in place pending a hearing on the damages suffered by defendants during the pendency of the restraint (see CPLR 6315; Canales v Finger, 147 A.D.3d 549, 550 [2017]). Counsel for the parties are hereby directed to appear virtually via Microsoft Teams for a conference on January 10, 2023 at 10:00 A.M.
Therefore, having considered NYSCEF document Nos. 97 through 101, 109 through 115, 124, 126 through 128, and 139, and oral argument having been heard on November 2, 2022 with John B. Zollo, Esq. appearing on behalf of plaintiffs and Christopher Priore, Esq. appearing on behalf of defendants, it is hereby
ORDERED that plaintiffs' motion for an Order granting summary judgment with respect to their first, second, and third causes of action, severing their fourth, fifth and sixth causes of action, and awarding them counsel fees, together with costs and disbursements, is denied; and it is further
ORDERED that defendants' cross motion for an Order granting summary judgment with respect to their first, second, and third counterclaims is granted; and it is further
ORDERED that the preliminary injunction granted in the May 2021 decision is vacated, with the undertaking posted by plaintiffs to remain in place pending a hearing on the damages suffered by defendants during the pendency of the restraint; and it is further
ORDERED that counsel for the parties shall appear virtually via Microsoft Teams for a conference on January 10, 2023 at 10:00 A.M.
The original of this Decision and Order has been e-filed by the Court. Counsel for defendants is hereby directed to serve a copy of the Decision and Order with notice of entry in accordance with CPLR 5513.