Missouri Ct. Says Actions of Improperly Constituted HOA Board are “Null and Void.”

Missouri Appellate Court decision (October 28, 2014).

This case involved numerous disputed issues pertaining to an 18 home subdivision where the original developer (“Developer”) went out of business after selling 5 homes and the remaining 13 undeveloped lots were acquired by Developer’s lender (“Lender”) through foreclosure proceedings following defaults on loans made by Lender to Developer. As a consequence of the foreclosure of the 13 lots, Lender acquired majority voting power among the lot owners. The original declaration for the subdivision (“Declaration”) required the creation of a homeowners association in which board members were residents of the subdivision.

After Lender acquired title to the 13 lots, it entered in an option agreement with another developer (“New Developer”) for the purchase and construction of homes on the 13 lots. Under the terms of the agreement, Lender agreed to designate and appoint directors to the subdivision’s neighborhood association and then cause association to review a master set of New Developer’s architectural plans for the homes to be constructed and either approve such plans, or advise of any objections, and propose revisions that would then cause the plans to be approved. The agreement further provided that Lender and New Developer would split the profits (25% to Lender and 75% to New Developer) when the homes were ultimately sold.

To carry out its agreement with New Developer, over the objections of Homeowners, Lender exercised its newfound control by amending the Declaration to remove the residency requirement for board membership, as well as the requirement that the association’s board be composed of directors “other than Declarant.” Lender then exploited its change to the Declaration by appointing its own non-resident executives as the directors for the association, to insure the ability to obtain approval of New Developer’s plan to develop the remaining 13 lots.

When New Developer began advertising its construction plans, Homeowners formed their own neighborhood association and appointed a “Design Review Committee” to review the plans depicted in New Developer’s marketing materials. Following the Committee’s review of the plans, Homeowners notified Lender and New Developer that the Design Review Committee had determined the construction plans were in violation of the Declaration’s architectural covenants. After New Developer and Lender refused to alter the construction plans, Homeowners brought suit seeking, among other things, a judicial declaration that Lender’s actions were in violation of the Declaration’s architectural covenants and restrictions in numerous respects.

After the trial court found in favor of Lender and New Developer, the appellate court reversed the decision. The appellate court concluded that Lender’s executives that were appointed to the board of directors were not residents of the subdivision and Lender violated the subdivision’s implied covenant of good faith and fair dealing when it amended the original Declaration by removing the board member residency requirements. The court stated that the Declaration insured participatory governance by specifying that the board of directors would consist entirely of residents of the subdivision after the initial period of Declarant control expired. The court further found that, when Homeowners purchased their homes and Lender subordinated its deeds of trust to the Declaration, all parties held a reasonable expectation that the neighborhood association would ultimately be governed by a board composed solely of the subdivision’s residents.

The appellate court found that by amending the Declaration to appoint its own non-resident executives as directors, Lender relied on its acquisition of majority voting power to unilaterally deny Homeowners the benefit of self-governance that they received under the original Declaration. In response to Lender’s argument that it had the right to amend the Declaration as the holder of more than 67% of the association’s voting power, the court stated that it did not believe that the original parties to the Declaration intended that a lot owner could unilaterally circumvent the requirement that those who actually reside in the subdivision govern the subdivision’s affairs and that Homeowners could not have reasonably foreseen the turn of events that resulted in Lender acquiring the voting power that it had.

The appellate court further ruled that, because Lender violated the implied covenant of good faith and fair dealing by amending the Declaration and removing the residency requirement for the association’s board members so that it could appoint its own executives to the board, the current board of directors of the association was wrongly comprised of non-resident Bank employees and therefor, all of the board’s subsequent actions were “null and void”. As a result, decisions that were made by that improperly constituted board were invalid and those issues that had been improperly decided would have to be addressed by a new properly constituted board.

See case decision: Arbors_At_Sugar_Creek_Homeow