Pool Houses and Public Policy: The Uncollectability of Contractual Attorney Fees in Missouri.

• Author: Miller, Evan

Arrowhead Lake Ests. Homeowners Ass'n, Inc. v. Aggarwal, 624 S.W.3d 165

(Mo. 2021) (en banc)

1. INTRODUCTION

   Homeowners associations ("HOAs") are a foundational piece of life in the United States for people of all socioeconomic backgrounds. (1) These planned communities provide stable living arrangements that many homeowners desire, (2) and protect buyers' expectations of a neighborhood's character. (3) Despite the ostensibly beneficial goals of HOAs, they have generated substantial controversy. (4) Columbia, Missouri, was the backdrop of a garden-variety HOA dispute between Ajay Aggarwal and Megha Garg ("the Homeowners") and the Arrowhead Lake Estates Homeowners Association ("Arrowhead"). (5) The Homeowners submitted a plan for several outdoor improvements but failed to include a small shed that would cover pool equipment. (6) After a trial judge's denial of a substantial sum of attorney fees, the parties litigated whether the HOA should receive its attorney fees. (7) What originally seemed like a petty dispute over a small shack became a four-year march through all three levels of Missouri's judicial system to arrive at a result that may frustrate future litigants and harm homeowners. (8)

   Part II of this Note examines the details and procedural posture that gave rise to this dispute. Part III provides context to governance and dispute resolution in HOAs and the role courts play in interpreting contracts that award attorney fees. Part IV details the majority's reasoning for overriding the lower court's award of attorney fees in the instant case and focuses on how the majority and the dissenting opinions approached interpretation of the declaration. Part V addresses the extent to which the majority's approach contrasts with that taken by the weight of case authority and discusses the broader policy implications of the majority's opinion on HOA governance and attorney fee provisions.

2. FACTS AND HOLDING

   The Homeowners own property in Arrowhead Lake Estates, (9) which is subject to the "Declaration of Covenants, Easements, and Restrictions of Arrowhead Lake Estates Subdivision" ("the Declaration"). (10) Among other things, the Declaration has an attorney-fee clause for any disputes that arise under the Declaration. (11) Arrowhead enforces the Declaration through a committee, (12) and requires homeowners to submit plans for lot improvements to a separate committee before executing them. (13) As expected, when the Homeowners wanted to improve the property, they submitted a plan with several outdoor improvements to the proper committee for approval. (14) The plans the committee received did not contain a shed for pool equipment. (15) The committee approved the Homeowners' plans within twenty-four hours, (16) but warned the Homeowners that if they made any other improvements to the original submission, the committee would need to approve the changes before any construction could begin. (17) Shortly thereafter, the Homeowners began building the shed,. (18)

   In August 2017, Arrowhead learned of the shed and told the Homeowners that the committee had not approved it and the Homeowners must remove it. (19) After ten days, the Homeowners had not complied, (20) prompting a letter from Arrowhead's attorney requesting that the Homeowners comply with HOA policy. (21) The Homeowners did not comply with the letter. (22) Arrowhead filed a petition in the circuit court of Boone County for a temporary restraining order to enjoin the construction of the structure, a permanent injunction, and for an award of their attorney fees on September 8, 2017. (23)

   On October 23, 2017, the court granted Arrowhead Lake's temporary restraining order. (24) Following an eight-day bench trial spanning several months, the circuit court awarded permanent injunctive relief to Arrowhead. (25) At the close of the trial, the circuit court ordered both sides to pay their own attorney fees. (26) Both parties filed motions for amendment, clarification, and reconsideration. (27) The final judgement bore a series of small "x"s across the attorney fee provision. (28) Arrowhead Lake appealed the refusal of an attorney fee award to the Missouri Court of Appeals, Western District. (29)

   A three-judge panel treated the Declaration as a contract, so its meaning was treated as a question of law requiring a de novo review. (30) The court of appeals held that the trial court was required to award attorney fees and could only exercise its discretion regarding the amount of attorney fees. (31) The court of appeals, therefore, reversed the circuit court and remanded the case for determination the appropriate amount of attorney fees as required by the plain reading of the contract. (32)

   On December 29, 2020, the Supreme Court of Missouri granted transfer. (33) Without mentioning the decision from the court of appeals, the Supreme Court of Missouri upheld the circuit court's decision not to award attorney fees to Arrowhead. (34) The provision in the Declaration stating "the prevailing party shall be entitled to receive an aware [sic] of attorney's fees and court costs as deemed appropriate by a court of competent jurisdiction" allowed the circuit court to exercise its discretion in not awarding any attorney fees. (35)

3. LEGAL BACKGROUND

   The first half of this Part surveys the ecosystem of HOAs, including their mechanisms for enforcing covenants and financing their services. The second half examines how courts interpret attorney fee provisions in contracts.

   1. Framing the Debate: Homeowners' Associations in the United States

      Property owners living in common interest communities ("CICs") governed by HOAs purchase their property subject to covenants governing the use of the land within the HOA's boundaries. (36) Elected boards are required to enforce the declarations governing CICs. (37) These declarations can be very restrictive. (38) While HOA stories range from amusing to disturbing, membership in an HOA is quickly becoming the norm in American life. (39) Finding a home outside of a CIC has become increasingly difficult. (40) Nevertheless, property owners do not always agree with the enforcement of the Covenants, Conditions, and Restrictions ("CC&Rs") (41) and these disagreements frequently lead to litigation. (42) To meet the expectations of homeowners and quash CC&R violations, declarations typically provide two distinct functions: a governance and enforcement structure and an ability to finance the association. (43)

      The HOA must prudently consider many priorities when budgeting resources for the coming year to avoid shortfalls. (44) Homeowners living in a CIC expect that the HOA will maintain common areas and fulfill other functions as stated in the CC&Rs. (45) Additionally, economically-stressed municipalities assign duties such as road care and utilities, like sewer and trash disposal, to HOAs. (46) The HOA raises funds to discharge these duties by levying assessments against each property owner. (47) Assessments are a function of the HOA's expenses spread evenly across its members and are typically the only form of income for the HOA. (48) HOAs are often financially vulnerable because they only collect the minimum amount of assessments to fund the HOA regime. (49) Thus, when property owners do not pay their assessments, the HOA may not have adequate operating funds and may therefore not offer expected amenities. (50)

      Declarations also often limit property use within a CIC, creating contention between the HOA and individual homeowners. (51) Courts have interpreted declarations as contracts and require board members to act reasonably in enforcing CC&Rs. (52) As HOAs resolve these disputes, courts have traditionally applied the "business judgment rule," native to reviewing corporate governance decisions, to HOA board actions. (53) Thus, so long as board members exercise honest judgment and do not act out of self-interest, their decisions are insulated from judicial second-guessing. (54) For example, when an architectural committee denies an improvement to a lot, the disappointed lot owner seeking to overturn the decision must prove that the board acted with bad faith. (55) While this standard may seem like "common sense," (56) board members are not always prepared to govern their neighbors benevolently. (57) In one infamous case, an HOA informed a boy, sick with leukemia, that the tree house he built with his father as a symbol of hope violated the CC&Rs. (58) The HOA retreated from its position only after intense public backlash. (59)

      While telling a boy with a serious illness that his treehouse is diminishing property values might seem unfathomable, HOAs may feel compelled to enforce the restrictions absolutely because lax enforcement may lead to a judicial determination that the HOA abandoned the covenants and cannot enforce them. (60) Therefore, to preserve the objectives of the declaration and their enforcement authority, HOAs may litigate solely on principle. (61) Because litigating on principle may not return large settlements, courts have stated HOAs should receive attorney fee awards in their efforts to enforce the covenants, pursuant to relevant fee-shifting provisions in the CC&Rs. (62)

      Homeowners disappointed with their HOA's governance may be limited to running for a position on the board of directors or changing the declaration through the amendment process. (63) Amending the CC&Rs is not easy and usually requires a supermajority of lot owners to vote in favor of the amendment. (64) Some friction between HOAs and homeowners occurs because the CC&Rs are drafted by the developer, whose interests are not always congruent with those of homeowners. (65) Commentators accuse developers of "dead hand control" of the HOA that mires residents in "draconian" restrictions that are "remarkably resistant" to any amendment. (66) In addition, procedural roadblocks can stifle homeowners' ability to adapt declarations to changing circumstances in CICs. (67)

      ...