MICHIGAN COURT OF APPEALS RULES AGAINST CONDO ASSOCIATION AND INVALIDATES SPECIAL ASSESSMENT TO FUND LITIGATION WITHOUT A CO-OWNER VOTE AS CONTRARY TO BYLAWS

In a recent unpublished Michigan Court of Appeals case entitled Nottingham Village Condominium Association v. John and Jane Doe Pensom, the Court ruled against the condominium association, and affirmed the co-owners’ right to have a condominium lien invalidated because the association failed to levy a disputed assessment in accordance with the association’s bylaws. The Court also upheld an award of costs and attorney fees of $7,739.00 granted to the co-owners.

The controversy arose after the association’s Board of Directors authorized the filing of a lawsuit against the condominium developer for construction defects. To fund the lawsuit, the Board passed a resolution levying a $3,000.00 assessment on each condominium owner. John and Jane Doe Pensom failed to pay the assessment. The association thereafter recorded a lien against the Pensom’s unit, and filed a lawsuit to enforce the lien and collect the unpaid assessment.

The Pensoms defended the lawsuit, asserting that the assessment was wrongfully levied because Article XXIII of the association’s bylaws required a vote with approval of at least two-thirds of the co-owners prior to levying an assessment to fund developer litigation. The association argued that Article XXIII of its bylaws was unenforceable because it violated the Michigan Condominium Act and the Michigan Nonprofit Corporation Act.

The association also argued that the assessment was actually levied under Article II, Section 3(a) of the bylaws “for the expenses of administration, maintenance and repair of common element.” Initially, the association prevailed in the lawsuit, as the trial court agreed that Article XXIII was unenforceable because it “unreasonably restricted plaintiff’s right to pursue litigation” and that the assessment was actually an “additional assessment” authorized under Article II, Section 3(a) of the association’s bylaws.

The trial court’s initial decision in favor of the Association was overturned by the Michigan Court of Appeals in a prior appeal filed by the Pensoms. In support of its decision to reverse the trial court, the Court of Appeals ruled that the disputed assessment was indeed a “special assessment” under Article XXIII of the association’s bylaws, thus requiring a vote and authorization of two-thirds of the association’s members. The appellate court also concluded that Article XXIII did not violate the Michigan Condominium Act or the Michigan Nonprofit Corporation Act. As a result, the case was remanded to the trial court from the Court of Appeals with the direction to enter judgment in favor of the Pensoms and to award attorney fees to the Pensoms. The association filed an application to appeal the matter to the Michigan Supreme Court; however, the application was denied except as to the award of fees and costs to the Pensoms, which was vacated without prejudice.

Following remand to the trial court, the association asked the trial court for leave to amend its complaint to show that the requisite number of association members ratified the developer litigation after the fact. The trial court denied the association’s request to amend, and granted the Pensom’s motion for an award of attorney fees and costs against the association in the amount of $7,739.00. The award was premised on the determination that the association’s lawsuit was frivolous as the association had no basis to believe that it had “duly assessed the Subject Premises for the expenses of administration, maintenance and repair of common element.”

The association appealed both the trial court’s denial of its request to amend the complaint to show ratification of the assessment and the award of attorney fees in favor of the Pensoms. The instant decision resulted, denying the association’s appeal on all grounds.

The Court of Appeals’ decision in this case is consistent with its 2015 published decision in Tuscany Grove Association v. Kimberlly Peraino, where the court considered similar arguments and upheld the enforceability of a bylaw provision containing litigation restrictions, including a pre-suit requirement for a super-majority vote to authorize litigation. The recent trend by the Court of Appeals in upholding litigation restrictions in bylaws diverges from some past trial court rulings which had favored the association’s argument that bylaw provisions restricting litigation and requiring a super-majority vote to authorize litigation were unenforceable under the Michigan Condominium Act and the Michigan Nonprofit Corporation Act.

In the wake of this recent court trend upholding the enforcement of “anti-suit” clauses in bylaws, House Bill 4446 was introduced in the Michigan House of Representatives earlier this year to amend the Michigan Condominium Act. As currently drafted, the Bill would nullify any provision in an association’s governing documents that requires a vote of the association members to “assert, defend, or settle claims on behalf of all co-owners in connection with the common elements or the enforcement of the condominium documents,” with some limited exceptions. The Bill has received some scrutiny and may undergo further revisions to address a carve-out exception that it currently contains for condominium developers. The carve-out would, in effect, uphold the legality of anti-suit clauses in relation to legal actions against developers while making such clauses in bylaws void and unenforceable for all other types of litigation that an Association might commence (or defend against).

These recent court cases emphasize that, under current law, associations must follow their bylaws in authorizing or levying any special assessment. If an association’s bylaws contain “anti-suit” clauses or restrictions that require a membership vote to authorize litigation, the association’s board of directors should strongly consider whether or not an amendment effort is warranted to either eliminate such clauses or to amend them as might be reasonably necessary to reduce any undue burdens the provisions might impose on the association’s ability to bring and defend legal actions that are in the association’s best interests.

Christene M. Richter is an associate with the firm. She has extensive experience in mortgage lending and real estate litigation, as well as in the handling of residential and commercial real estate transactions.

You can reach Christene at our Plymouth office at 734-459-0062 or via email at crichter@zdfattorneys.com.

Sharing is caring!

This entry was posted in Amendments, Court Opinions, Litigation. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *