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Important New Case on the Rights of Home Owners in HOAs

In a case brought by two home owners against their home owners association (“HOA”), against the HOA directors, and against a bank that stacked the HOA board with directors which were its employees, the Court of Appeals of Tennessee recently issued an important and insightful opinion in the case of Urbanavage et. al. v. Capital Bank, et. al. Home owners frequently face an uphill battle when trying to assert their rights or when pursued by an HOA.  This opinion gives home owners some ammunition. It also reiterates how difficult it can be for a home owner to prevail on claims against directors of an HOA.

A crucial dichotomy in the case was that the Home Owner Plaintiffs brought claims not only against the HOA and its directors, but also, against a Bank which had stepped into the shoes of the Developer when the Developer went belly up.

Here are the key facts:

  • Developer developed a residential subdivision called Carothers Crossing
  • Developer defaulted on its loans with the Bank which financed the project
  • As the result of an agreement between the Bank and Developer, Bank was assigned all of Developer’s rights under the Master Deed Restrictions and Declaration (‘Master Deed”)
  • As with most master deeds and declarations governing residential developments, the one in this case gave the Developer the right to appoint all members of the board of directors of the HOA until a very substantial portion of the planned units had been constructed and sold
  • The Master Deed, as most, if not all, do, required the HOA to maintain the common areas (sometimes called “common elements”) and to enforce the provisions in the Master Deed
  • The Bank requested that the Directors relieve it of its obligations under the Master Deed (although the opinion does not specify what those obligations were, the trial court record establishes that the Bank, having stepped into the shoes of the Developer, was obligated to expend funds for common area maintenance)
  • The Directors refused the Bank’s request
  • The Bank then replaced all of the Directors of the HOA Board with persons who were its employees
  • The Plaintiff Home Owners alleged that, once installed as the new Directors, the Bank employees prevented the HOA from fulfilling its obligations to maintain the common areas
  • Before they filed suit, the Plaintiff Home Owners stopped paying their HOA dues

The Plaintiffs filed suit against the HOA directors for breach of fiduciary duty and against the Bank for tortious interference with contract (sometimes also called “intentional interference with contract”). The basis of the Plaintiffs’ tortious interference claim against the Bank was their allegation that it had caused the HOA to breach the terms of the Master Deed (which was unquestionably a contract) by appointing directors who refused to cause the HOA to carry out the maintenance obligations in the Master Deed or to enforce the terms of the Master Deed.  The HOA filed a counterclaim against the Plaintiffs for their refusal to pay HOA dues.

The Defendants filed motions for summary judgment. The trial court dismissed the Plaintiff Home Owners’ claim for interference with contract against the Bank.  The trial court also dismissed the Plaintiffs’ claims for breach of fiduciary duty against the HOA directors and granted the HOA a summary judgment on its breach of contract counterclaim against the Plaintiffs for their failure to pay HOA dues.

The Court of Appeals reversed the trial court on the first and third of the above holdings. It determined that the Plaintiffs’ claims for interference with contract against the Bank should not have been dismissed on summary judgment. One of the elements of a tortious interference with contract claim is malice. Under Tennessee law, a defendant acts with malice when it interferes with a contract without justification or for “the indirect purpose of injuring the plaintiff or benefitting the defendant at the plaintiff’s expense.” The trial court held that the Plaintiffs’ proof of malice was insufficient for their intentional interference with contract claim to survive summary judgment.  The Court of Appeals held that, based on the facts related to the Bank’s actions, there was sufficient evidence from which a reasonable jury could conclude that the Bank acted with malice.

The Court of Appeals, however, upheld the decision of the trial court granting summary judgment to the directors of the HOA on the Plaintiffs’ breach of fiduciary duty claims. Since HOAs in Tennessee are always (to my knowledge) established as non-profit corporations, directors of HOAs are immune from liability except when their conduct is “willful,” or “wanton” or when it amounts to gross negligence. In this case, the court of appeals agreed with the trial court that the conduct of the directors did not meet that very high threshold.

Perhaps the most useful part of this case to Tennessee lawyers who handle home owner association cases is the court’s ruling on the HOA’s counterclaim against the Plaintiff Home Owners for unpaid HOA dues. In response to the counterclaim of the HOA, the Plaintiffs asserted the affirmative defense that the HOA had committed the first material breach of the Master Deed by failing to maintain the common areas.  In Tennessee, if the party suing for breach of contract committed a material breach of the contract before the party being sued, the suing party cannot hold the other party responsible for its breach.  The court of appeals held that the HOA should not have been granted a summary judgment for unpaid dues because the Plaintiffs were entitled to try to prove their first material breach defense at trial.