3.13 Litigation and the Council of Co-owners

• Library: South Carolina Community Association Law: Condominiums and Homeowners Associations (SCBar) (2019 Ed.)

3.13 Litigation and the Council of Co-Owners

A. Council Standing

The standing of a condominium council of co-owners to bring suit has long been a matter of controversy. While councils and associations have been considered to have standing to bring actions when their own rights or obligations are at issue, standing with regard to matters of common interest of the owners has been more problematic. One court³⁵⁸ in reviewing the law on association standing has said in summary that in those states that statutorily authorize an association or council to bring suit as a representative of the owners, courts have found standing and held the council is the real party in interest in suits for damages to common elements even though it does not own the common elements.³⁵⁹However, in jurisdictions without any statutory authorization, unless the council holds title to common areas, courts generally rule that the council is not the real party in interest and lacks standing.³⁶⁰

The SCHPA does not authorize a council to bring suit on behalf of owners with regard to the common elements. The South Carolina Supreme Court, however, said in Queen's Grant Villas Horizontal Property Regimes I-V v. Daniel Internat'l Corp.³⁶¹ that "[a] property regime [i.e., council of co-owners] has standing to bring an action for construction defects in common elements that the regime has the duty to maintain."³⁶² The court has also explicitly overruled a lower court decision that ". erroneously stated that a regime had no standing to maintain an action unless it owns the common elements."³⁶³ In light of these decisions, does a council have standing to bring an action involving something other than construction defects? Is standing lost if the council does not have responsibility for maintenance of some or all common elements?

There is one section of the SCHPA which does mention litigation:

Failure to comply with any of the [bylaws and administrative rules] shall be grounds for a civil action to recover sums due for damages or injunctive relief, or both, maintainable by the administrator or the board of administration, or other form of administration specified in the bylaws, on behalf of the council of co-owners, or in a proper case, by an aggrieved co-owner.³⁶⁴

Is the council a proper plaintiff under the statute? A North Carolina court³⁶⁵ considering a nearly identical statute held it was not. The association brought an action for an injunction to stop an owner from violating certain bylaws. The court said the association never "... alleged that the action is maintained by its board of directors or manager; no aggrieved unit owners are involved."³⁶⁶ The court concluded the trial judge properly dismissed the action because the association was not a proper party under the statute. In opposition the association argued that the statutory listing was merely illustrative. Unmoved, the court responded that to hold as the association requested would "make the statutory designation meaningless and contrary to both its implication and the rules of construction."³⁶⁷ The South Carolina cases are of no help to the council in this regard as they are arguably limited to construction defects in the common elements where the council has a duty to maintain the common elements. It would then appear that a council of co-owners would not be a proper plaintiff under the statute or pursuant to the Supreme Court cases. The North Carolina opinion is distinguishable on the basis that the SCHPA contains a catch all phrase "or other form of administration specified in the bylaws" in listing potential plaintiffs that does not appear in the North Carolina statute. Could the council be another form of administration specified in the bylaws? If it can, why did the legislature follow the catchall phrase with the clause "on behalf of the council of co-owners?" Evidently, the South Carolina Supreme Court believes the council could be "another form of administration specified in the bylaws" because in dicta it said, apparently referring to § 27-31-170, "...the [council] can sue a member for failure to adhere to the bylaws, rule or regulations..."³⁶⁸

Despite statutory grants of standing to bring class actions, courts have held that fraud claims are perpetrated on individuals, not classes of people, and are therefore inherently diverse and must be brought individually.³⁶⁹

Developers concerned about litigation understandably fear the collective financial resources of councils more than those of individual owners. It is not surprising to learn that attempts have been made to limit standing in condominium documents. In the Georgia case of Piedmont Arbors Condominium Ass'n v. BPI Construction Co. ,³⁷⁰ the declaration stipulated that each owner had agreed the association would not be entitled to institute legal actions against anyone on behalf of any or all unit owners for alleged defects in any unit or in the common elements. The court upheld the limitation despite an argument that it violated public policy. In F.O. Bailey Co. v. Ledgewood, Inc.,³⁷¹ however, a declaration purported to waive the right of a unit owner to sue the developer in tort. The Maine Supreme Judicial Court said the declaration "... absent other evidence, cannot be construed as a matter of law to constitute a waiver or voluntary relinquishment of rights to sue in tort for damages... ."³⁷²

B. Apartment Owner Standing

Another standing question is, may an owner bring suit against the council? In Murphy v. Yacht Cove Homeowners Ass'n,³⁷³ the owners in an unincorporated condominium sued the council for negligence. The council argued:

. [owners] as members of an unincorporated association, are engaged in a joint enterprise. Each member is both principle and agent for other members. The negligence of each member, therefore, must be imputed to every other member.³⁷⁴

The South Carolina Supreme Court disagreed that owners were thus prohibited from maintaining a negligence action against a council of co-owners. The court found owners may bring actions in contract or tort. ³⁷⁵ However, it may be possible for the master deed or bylaws to successfully limit the right of an apartment owner to bring suit against the council.³⁷⁶ Additionally, former owners may be precluded from bringing certain actions,³⁷⁷ and when the council has brought an action to assert the rights of the owners, the owners will be blocked by res judicata from relitigating the issue.³⁷⁸

C. Judgment Creditors

The SCHPA provides:

No lien arising subsequent to the recording of the master deed or lease ... shall be effective against the property. During such period liens or encumbrances shall arise or be created only against each apartment and the percentage of undivided interest in the common elements appurtenant to such apartment, in the same manner and under the same conditions in every respect as liens or encumbrances may arise or be created upon or against any other separate parcel of real property subject to individual ownership ....³⁷⁹

This, according to one federal court, presents an obstacle that prevents enforcement of a tort judgment against a council of co-owners.³⁸⁰ The court in that case said that a judgment creditor could execute separately against each of the owners³⁸¹ and would be limited to collecting from each co-owner only the portion of the judgment attributable to his or her unit because the liability was not joint. In the case of a mechanic's lien concerning labor performed or materials furnished for common areas that was authorized by the council or its governing board, the statute gives the judgment creditor an assist by making that authorization constitute the "express consent" of each co-owner and the basis for filing a lien against each of the apartments.

Can a council be forced by a judgment creditor to levy a special assessment to pay a judgment? A California court decided that in order to acquire funds to pay for work performed for its benefit, an association could be required to impose a special assessment.³⁸²

D. Construction Defects

A council of co-owners may have an duty to pursue recovery for alleged construction defects in the property.³⁸³ In Queen's Grant Villas Horizontal Property Regimes I-V v. Daniel Internat'l Corp.,³⁸⁴ the South Carolina Supreme Court held that in effect, if a council has the duty to maintain common elements, it also has an obligation to pursue recovery for any alleged construction defects in them, and it could be liable for failure to pursue recovery. Governing boards need to be aware that any potential construction defect litigation can be barred by the applicable statute of limitations and the statute can begin to run when the board is on inquiry notice of defects that would have been discoverable through additional actions.³⁸⁵

The council may be required to submit a claim to arbitration either because of a contractual agreement to arbitrate or a master deed clause. However, where the council is not a party to an agreement to arbitrate it can generally not be required to do so, but may be estopped from refusing to comply with an arbitration clause when it seeks or receives a direct benefit from a contract containing an arbitration clause.³⁸⁶ Similarly, although the master deed may require arbitration of disputes, a party who is neither referred to — directly or indirectly — in the master deed, nor intended to be provided with a direct benefit by the master deed will not be able to force the council to arbitrate.³⁸⁷

Actions based on a defective or unsafe condition³⁸⁸ of an improvement to real property must be brought no more than eight years after "substantial completion"³⁸⁹ of the improvement.³⁹⁰ The South Carolina Supreme Court held that, where windows installed in a condominium were at issue, the statutorily prescribed period began to run with substantial completion of installation of the windows, not substantial completion of the building as a whole.³⁹¹

E. Condominium Counsel

Litigation by a council of...