Michigan Ct. Says HOA Assessment to Fund Construction Defect Litigation was Invalid

UNPUBLISHED Michigan Appellate decision (March 24 2015)

This case involved a dispute between a homeowners association (“Association”) and husband and wife owners of a condominium (“Owners”) over the validity of a $3,000 assessment levied on all owners to fund a construction defect lawsuit that the Association’s board of directors decided to pursue against the developer of the project. The Owners contended that the assessment by the Association was improper and after paying a portion of the assessment, refused to pay the balance. The Association then recorded a lien against the Owners’ condominium and subsequently filed the initial lawsuit seeking foreclosure of the lien, money damages, costs and attorney fees. The Owners admitted non-payment of a portion of the assessment, but argued that the special assessment of the $3,000 to fund the litigation was invalid under the Association’s Bylaws.

The Bylaw provisions at issue contained “pre-suit” requirements that included a super-majority approval by Association members of the commencement and conduct of any civil action, except actions to enforce the Bylaws or collect delinquent assessments. The Bylaws further required that all legal fees that were incurred in the civil actions that required member approval “shall be paid by special assessment of the members.”

The trial court ruled that the portion of the Association’s Bylaws that the Owners were relying on was an unreasonable restriction on the Association’s right to undertake litigation and granted summary judgment in favor of the Association. The trial court also awarded the Association costs and attorney fees as the prevailing party. The Owners then appealed the trial court’s judgment.

On appeal, the Owners argued that the assessment in question was a “special assessment for litigation” which, under the Bylaws of the Association, had to authorized by 60% of the members of the Association. The appellate court found that an association’s bylaws are a binding contract between the association and its members , the validity and application of which is governed by the principals applied to contract interpretation. In reviewing the provision in question, the appellate court found that the plain language of the Bylaw provision in question requires the characterization of a levy for legal fees as a special assessment. As such, the appellate court reversed the trial court’s judgment and stated that, unambiguous contractual provisions “are not open to judicial construction and must be enforced as written.” Because the Bylaws clearly provided that the owners must approve the commencement of litigation and a special litigation assessment, the Association’s assessment was invalid and its actions against the Owners for nonpayment of the assessment were improper. Furthermore, because the assessment was invalid, the trial court’s award of costs and attorney fees to the Association was improper and constituted an abuse of discretion and was also reversed, with a finding that the Owners were entitled to recover their reasonable attorney fees and costs as the prevailing party.

See case decision: Nottingham_Vill._Condo._Ass’