Opinion
EF2020-68068
05-19-2021
John B. ZOLLO and Kathryn Zollo, 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.
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.
The facts of this matter are set forth in the Decision and Order of this Court dated July 28, 2020 and will not be repeated at length ( 68 Misc 3d 1205[A], 2020 NY Slip Op 50866[U] [Sup Ct, Warren County 2020] ). As relevant here, 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 ROW docks) located directly on Schroon Lake; (2) the "outer docks" located on a dredged channel extending into the Lake from Mill Creek; and (3) the "harbor," a man-made facility which holds 52 boats in slips, with the boats gaining access to the Lake by passing under a bridge via Mill Creek, and then traversing the dredged channel along the Outer Docks before entering the Lake. 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), which Declaration provides that the HOA shall be responsible for the maintenance and repair of all common areas, including the harbor and other boat docking facilities. In May 2018, the Board began discussing restoration of the harbor, which has undisputedly fallen into disrepair. The Board thereafter received proposals from two engineering firms, Thornton Thomasetti in Newark, New Jersey and C.T. Male & Associates (hereinafter CT Male), located in the Capital Region. In April 2019, CT Male's proposal was approved and a contract was signed on behalf of the HOA for $22,500.00, plus expenses. CT Male subsequently completed its field work and, in October 2019, presented its findings and recommendations to the Board. All HOA members were invited to this meeting, at which time a price of $1,200,000.00 was quoted for the restoration project — described as a "replacement in kind." This recommendation was approved by the Board, with correspondence then sent to all HOA members advising as follows:
"The Board is pursuing a bank loan for 75% of project costs on the premise that the bulk of the expense would be paid by the future users benefited by the restored harbor....
"Under [the HOA's] bylaws, mortgaging the common areas requires a 70% vote of owners. If we receive an acceptable commitment for a bank loan, the Board will ask the owners to vote for granting the mortgage. If not enough owners vote for the mortgage, [the HOA] will need to raise project costs entirely by assessment.
"To show the banks our ability to raise the required equity contribution, [the HOA] will be charging an assessment of $3,750[.00] per unit for A3 capital in May 2020. This amount represents $250[.00] for ‘normal’ A3 capital requirements and $3,500[.00] for harbor restoration. This $3,500[.00] is an initial step, with full project funding to be determined based on available financing and terms."
The Board thereafter sent an invoice to all members of the HOA on May 1, 2020 for the $3,750.00 assessment. Plaintiffs refused to pay it, however, contending that the Board violated the terms of the Declaration by approving CT Male's findings and recommendations without securing an affirmative vote of 60% of the HOA members. Plaintiffs then commenced this action on July 22, 2020 for a judgment declaring the $3,500.00 assessment invalid.
Presently before the Court is plaintiffs’ motion by Order to Show Cause — filed simultaneously with the summons and complaint — seeking a preliminary injunction prohibiting defendants from imposing an assessment or late fees on HOA members to repair and reconstruct the boat harbor wall until this action is concluded. Plaintiffs also sought a Temporary Restraining Order (TRO) pending the return date of the motion, which TRO was granted to the extent that counsel for defendants was directed to hold the $3,500.00 assessments collected in escrow pending determination of the motion. Oral argument was held on February 24, 2021 and the Court then conducted a site inspection of the harbor on April 26, 2021, with both counsel and the parties present.
Specifically, John Zollo, Esq., Christopher Priore, Esq. and Michael Sposilli, a Director on the Board, were present for the site inspection.
"To establish entitlement to a preliminary injunction, plaintiff[s are] required to demonstrate a likelihood of success on the merits, irreparable harm if the injunction is not granted and that the balance of the equities is in [their] favor" ( Sync Realty Group, Inc. v Rotterdam Ventures, Inc. , 63 AD3d 1429, 1430 [2009] ; see CPLR 6301 ; Nobu Next Door, LLC v Fine Arts Hous., Inc. , 4 NY3d 839, 840 [2005] ; Emerald Green Prop. Owners Assn., Inc. v Jada Developers, LLC , 63 AD3d 1396, 1397 [2009] ).
Beginning with the likelihood of success on the merits, "it is not for this court to determine finally the merits of an action upon a motion for preliminary injunction; 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 AD2d 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 AD2d at 326 ; see Cooperstown Capital, LLC v Patton , 60 AD3d 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 AD2d at 326 ).
Here, the Court finds that plaintiffs have succeeded in demonstrating a likelihood of success on the merits. Pursuant to § 5.01 of the Declaration, 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 — 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."
Plaintiffs contend that restoration of the harbor constitutes a "capital improvement" under § 5.06 of the Declaration and, as such, requires an affirmative vote of 60% of the HOA members. Defendants, on the other hand, contend that restoration of the harbor constitutes "maintenance, repair, [and] replacement" under § 6.01 of the Declaration and must therefore be financed using maintenance assessments — without the necessity of a vote.
While the Declaration does not define the term "capital improvement," Tax Law § 1101 (b) (9) (i) defines it as follows:
"An addition or alteration to real property which:
(A) [s]ubstantially adds to the value of the real property, or appreciably prolongs the useful life of the real property; and
(B) [b]ecomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or article itself; and
(C) [i]s intended to become a permanent installation."
Given this definition — and defendants’ position that the restoration is a "replacement in kind," necessary because "[t]he [h]arbor is three decades old and nearing the end of its useful life" — it is certainly reasonable to characterize the $1,200,000.00 project as a capital improvement.
Defendants further contend that — even if the restoration is a capital improvement — § 5.06 of the Declaration states that the Board "may" levy a special assessment to defray the cost of a capital improvement, thus implicitly recognizing that there may be capital improvement projects which may be properly funded directly through ... [m]aintenance [a]ssessment[s]." The Court cannot help but question, however, whether the initial drafters of the Declaration envisioned funding a $1,200,000.00 restoration project "directly through maintenance assessment[s]. " Indeed, § 5.01 of the Declaration provides as follows:
"[E]ach owner of [a u]nit, by acceptance of a deed therefor, whether or not it shall be expressed in any such deed or other conveyance, shall be deemed to covenant and agree to pay to the Association:
"a. [a]nnual [a]ssessments of charges for the maintenance and operation of the [p]roperty; and
"b. [s]pecial assessments for capital improvements."
Defendants’ interpretation of § 5.06 of the Declaration appears to contradict the language of § 5.01, which expressly states that special assessments should be used for capital improvements.
In any event, it is undisputed that where a special assessment is levied by the Board to defray the cost of a capital improvement, § 5.06 of the Declaration applies. Here, plaintiffs argue that the $3,500.00 assessment is a special assessment — notwithstanding defendants’ characterization — and the requirements of § 5.06 thus apply.
Defendants next contend that — even if the restoration constitutes a capital improvement — an affirmative vote of 60% of the HOA members is not necessary because the project entails "reconstruction or replacement" of an existing structure. In so doing, however, defendants ignore the latter half of § 5.06, which provides that a vote must also be held "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" — irrespective of whether the project entails reconstruction or replacement of an existing structure. In this regard, defendants conceded during oral argument that the $3,500.00 assessment charged for the harbor restoration was more than 25% of the then current annual maintenance assessment.
Finally, defendants contend that plaintiffs are without standing because they have failed to allege in the complaint that they represent at least 5% of the HOA membership, as required under N-PCL 623 (a). While this contention is not wholly without merit, it appears that the defect may easily be cured by a motion for leave to amend the complaint under CPLR 3025 [b]. Indeed, five HOA members have submitted affidavits in support of plaintiffs’ motion, and one other HOA member has submitted a letter. It thus appears that plaintiffs represent at least eight HOA members — themselves included — which is more than five percent of the 78 total members.
Briefly, inasmuch as defendants contend that their decision to impose the $3,500.00 assessment is subject to the business judgment rule, the Court notes that "[t]he rule does not apply where ... breach of fiduciary duty ... is alleged" ( Armentano v Armentano , 70 Misc 3d 1215[A], 2021 NY Slip Op 50096[U], *15 [Sup Ct, Westchester County 2021]; see Nainan v 715-723 Sixth Ave. Owners Corp. , 177 AD3d 489, 490 [2019] ), which allegations are discussed hereinbelow.
Turning now to the second factor which must be considered, irreparable harm will not be found where a party has "an adequate remedy at law and can be fully compensated by monetary damages" ( Norton v Dubrey , 116 AD3d 1215, 1216 [2014] ). Here, the Court previously stated as follows in its Decision and Order relative to the TRO: "[T]he immediate and irreparable injury sought to be avoided appears to be largely monetary" ( 2020 NY Slip Op 50866[U], at *3). Defendants have understandably seized upon this finding in their opposition papers, contending that plaintiffs will not be irreparably harmed because there exists an adequate remedy at law. The record has been further developed since issuance of the TRO, however, with plaintiffs having now submitted the affidavits of several HOA members who contend that the Board "operates under a veil of secrecy" and has essentially wrested control over the HOA from its members — who will ultimately bear responsibility for the cost of the project. While plaintiffs concede that the harbor must be repaired, they contend that the Board must be more transparent with respect to the entire cost of the project and how it will be funded. Plaintiffs are concerned that — by charging piecemeal assessments over the course of several years as opposed to putting the project to a vote with an expected budget — the project is "open-ended" with the Board essentially asking them "for a blank check." In this regard, the complaint alleges breaches of fiduciary duty and seeks to "permanently enjoin [d]efendants, their agents, servants and/or employees from taking any actions with respect to the [harbor restoration project] and [from] imposing [the $3,500.00 s]pecial [a]ssessment ... without first complying with the Declaration."
In Greenhaus v Gersh (64 Misc 3d 1222[A], 2019 NY Slip Op 51230[U] [Sup Ct, Suffolk County 2019] ), the Court observed as follows: "The gravamen of ... plaintiffs’ complaint is to recover damages for ... defendants’ alleged breach of fiduciary duty. Although the complaint contains causes of action for equitable relief, a money judgment is the true object of the action" ( id. at *4; see Credit Agricole Indosuez v Rossiyskiy Kredit Bank , 94 NY2d 541, 548-549 [2000] ). The Court thus declined to find irreparable harm. Here, however, plaintiffs have stressed on numerous occasions that this action "has never been about the money, [but] is about the Board's refusal to abide by the plain and clear language of the Declaration[.]" Indeed, plaintiffs have offered to pay their $3,500.00 assessment to counsel for defendants "[i]n an effort to put the issue of the money to rest." Under these circumstances, the Court finds that the true object of the action is to enjoin the Board from proceeding with the harbor restoration project in violation of the Declaration — and not to obtain a money judgment. The Court therefore finds that plaintiffs have succeeded in demonstrating irreparable harm ( compare Credit Agricole Indosuez v Rossiyskiy Kredit Bank , 94 NY2d 541, 548-549 Greenhaus v Gersh (64 Misc 3d 1222[A], 2019 NY Slip Op 51230[U] ).
Finally, insofar as the third factor is concerned, where "there is no proof of prejudice and the injunction preserves the status quo, the equities balance in favor of plaintiff" ( Green Harbour Homeowners’ Assn., Inc. v Ermiger , 67 AD3d 1116, 1117 [2009] ). Here, there is no question that the injunction will preserve the status quo. The issue of prejudice, however, is more complicated. Plaintiffs concede that the harbor must be restored and all other members of the HOA have paid their $3,500.00 assessments toward the restoration project. According to defendants, all these members are prejudiced, as their assessments have been paid but the project remains stalled with the harbor "in its current unsafe condition." The site inspection was in fact conducted so the Court could ascertain the extent to which the harbor is currently unsafe. While the Court was able to observe the need for repairs, it was likewise able to observe that the harbor — in its current state — does not pose an immediate threat of harm. Under the circumstances, the Court finds that defendants will not suffer any prejudice as the result of a brief delay in the restoration project and the balance of the equities thus lies with plaintiffs.
Based upon the foregoing, plaintiffs’ motion for a preliminary injunction is granted to the extent that defendants are prohibited from imposing any further assessments or late fees on HOA members to repair and reconstruct the boat harbor wall until this action is concluded. Counsel for defendants shall continue to hold the $3,500.00 assessments in escrow until further Order of the Court.
In accordance with CPLR 6312 (b), this preliminary injunction is contingent upon plaintiffs posting an undertaking in the amount of $20,000.00 within thirty (30) days of the date of this Decision and Order, with a copy to both the Court and counsel for defendants. Defendants contend that plaintiffs should post an undertaking in the amount of $331,300.00, which amount is comprised of the $61,800.00 in engineering costs incurred by the Board from 2019 to date, together with the $269,500.00 in assessments being held in escrow. The Court, however, is not persuaded that this amount is rationally related to the damages defendants will sustain if the injunction is ultimately deemed unwarranted ( see Sardino v Scholet Family Trust , 192 AD3d 1433, 1435 [2021] ; Cooperstown Capital, LLC v Patton , 60 AD3d at 1253 ; Bonded Concrete, Inc. v Town of Saugerties , 42 AD3d 852, 854-855 [2007] ). Indeed, if deemed unwarranted then defendants can proceed with the harbor restoration, thus utilizing the $61,800.00 worth of engineering services. Insofar as the $269,500.00 in assessments are concerned, these remain in escrow at this juncture; if the funds are released then the amount of the undertaking may be subject to change. At this time the only quantifiable damages for which plaintiffs may be liable appear to be attorney's fees under § 11.08 of the Declaration, and the Court finds $20,000.00 to be more than sufficient in this regard.
By way solely of dicta, the Court is somewhat perplexed by this dispute. Defendants indicated during oral argument that they do not want to put the harbor restoration project to a vote because they are concerned about the precedent that will set. More specifically, they do not want to set a precedent whereby a vote must be held for each and every repair to be performed — understandably, as § 6.01 of the Declaration does not require a vote for "maintenance, repair and replacement." That being said, the parties agree that the harbor restoration project — with an estimated cost of $1,200,000.00 — is the largest project ever undertaken by the HOA. To that end, holding a vote on the project prior to imposition of the $3,500.00 assessment merely sets the precedent that a vote must be held prior to the imposition of any assessment on the next capital improvement with a $1,200,000.00 price tag. Furthermore, the record suggests that if the Board simply presented the project to all HOA members for a vote, it would likely pass. In this regard, the Court notes that of the 78 HOA members, 52 have boat slips in the harbor. Assuming arguendo that these 52 members vote in favor of the project, that would be an affirmative vote of 67% of all members — more than the requisite number under § 5.06 of the Declaration. Under the circumstances, the Court is hopeful for a swift resolution in this matter.
Plaintiffs are encouraged to promptly file a motion for leave to amend the complaint to comply with the requirements of under N-PCL 623 (a), as discussed hereinabove.
To the extent not addressed herein, the parties’ remaining contentions are either academic in light of this decision or have been considered and found to be without merit.
Counsel for the parties are hereby directed to appear for a preliminary conference on June 4, 2021 at 10:30 A.M. at the Warren County Courthouse, with the conference to be conducted virtually using Microsoft Teams. In addition to establishing a discovery schedule, the Court intends to discuss alternative dispute resolution with the parties in the hope that this matter can be resolved without further delay.
Therefore, having considered NYSCEF documents 3-11, 28-48, 52-60 and 65-66, and oral argument having been heard on February 24, 2021 with John B. Zollo, Esq. appearing on behalf of plaintiffs and Peter Lauricella, Esq. and Christopher A. Priore, Esq. appearing on behalf of defendants, it is hereby
ORDERED that plaintiffs’ motion for a preliminary injunction is granted with defendants prohibited from imposing an assessment or late fees on HOA members to repair and reconstruct the boat harbor wall until this action is concluded; and it is further
ORDERED that this preliminary injunction is contingent upon plaintiffs posting an undertaking in the amount of $20,000.00 within thirty (30) days of the date of this Decision and Order, with a copy to both the Court and counsel for defendants; and it is further
ORDERED that counsel for defendants shall continue to hold the $3,500.00 assessments in escrow until further Order of the Court, with the amount of the undertaking subject to change if and when the assessments are released from escrow and returned to the HOA members; and it is further
ORDERED that counsel for the parties are hereby directed to appear for a preliminary conference on June 4, 2021 at 10:30 A.M. at the Warren County Courthouse, with the conference to be conducted virtually using Microsoft Teams.
The above constitutes the Decision and Order of this Court.
The original of this Decision and Order has been e-filed by the Court. Counsel for plaintiffs is directed to obtain a filed copy of the Decision and Order for service with notice of entry upon counsel for defendants in accordance with CPLR 5513.