Daily Development for
Tuesday, July 8, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

ASSOCIATIONS; DISCRETIONARY DECISIONS; LIABILITY OF UNINCORPORATED ASSOCIATION MEMBERS: Members of unincorporated homes association are jointly and severally liable for damages caused by unreasonable interpretations of the association Board concerning architectural review matters if such members "participated in, or ratified" the decision of the Board.

Riss v. Angel, 934 P.2d. 669 (Wash. 1997)

Other aspects of this important opinion are summarized in the DD for July 7, 1997.

In brief, the Declaration for this association vested the Board with discretion to refuse consent to proposed modifications of existing structures subject to the Declaration. Homeowners whose proposals were rejected by the Board had the right to seek review by the whole association. In this case, the Board rejected a homeowner's proposal, and the homeowner did seek review. The association voted overwhelmingly to affirm the Board's decision, although most of the association members, pursuant to provisions in the bylaws, voted by proxy. The court stipulated that the information provided to the association members concerning the proposed construction, which information was prepared by certain Board members, was incorrect or misleading.

The trial court had found that the association's rejection of the proposed construction was an unreasonable exercise of discretion and was based upon unreasonable and inadequate evaluation of the issues involved. It awarded damages and attorney's fees in excess of $200,000, and undoubtedly following the appeal these costs likely ran to $300,000 or more. The trial court ruled also that all homeowners within the unincorporated association, thus all homeowners, were jointly and severally liable for these damages. The court of appeals affirmed, but the Washington Supreme Court affirmed the decision only in part. The supreme court's attempt at Solomonic reasoning is an important milestone in the common law development of the liability issues in this area.

The association members first argued that the covenants provide for a damages award only in the event that property owners "violate or attempt to violate" the covenants. Here, they reasoned, they simply exercised their good faith judgment when deciding the appeal from the Board's decision. The supreme court stated, however, that good faith is not the sole criteria for exercise of discretion under a consent to construction covenant. It concluded that the rejection of the proposal was unreasonable and arbitrary and in violation of the covenants.

The homeowners also relied upon the business judgment rule, under which, they argued, personal liability will not be found based upon a decision made within the authority of the association and made without bad faith or corrupt motive. Here, however, the court ruled that the business judgment rule, even if part of Washington law, would not protect against liability for a discretionary decision negligently made. The court stated: "[Like their corporate counterparts, condominium directors have a fiduciary duty to exercise ordinary care in performing their duties and to act reasonably and in good faith." their failure to adequately investigate would remove them from the rule's insulating effect.

The homeowners also argued that under the Declaration, neither damages nor attorney fees and costs were awardable except where individual lot owners violate the covenants, and that the unincorporated association of homeowners is not a lot owner. The covenants provide that "if any of the lot owners . . . shall violate or attempt to violate any of the provisions of these restrictive mutual easements" it shall be lawful for "any other person or persons owning real property" [in the subdivision] or the [developer]" to sue to enforce the covenants. But the court pointed out that the members of the unincorporated association are lot owners and may be liable for their actions in violation of the covenants.

Finally, and most importantly, the homeowners argued that the judgment should not have been entered jointly and severally against all of the individual defendant homeowners because not all of the defendant homeowners voted to reject Plaintiffs' proposal when the Plaintiff appealed to the association. They contend that only those who did so vote should be liable, and that the burden is on Plaintiff to establish who voted which way.

The court acknowledged that at common law the members of an unincorporated association were liable for claims against the association itself. It noted what it called "considerable authority" however, to the effect that a member of a nonbusiness nonprofit unincorporated association is liable on contracts of the association only insofar as the member assented to or ratified the contract, and is liable for torts only if the member participated in or ratified the action resulting in liability. It pointed out that when the law of business organizations is "transferred to other forms of voluntary associations, where individual members may have little or no authority in the day-to-day operations of the association, 'reality is apt to be sacrificed to theoretical formalism.'

The court instead concluded that agency principles should apply in determining the liability of the individual members of a nonprofit, nonbusiness, unincorporated association. Here, emphasizing the special character and function of this association, the court, in a holding that may or may not be circumscribed by those special factors, concluded that "joint and several liability will be limited to those members who violated the covenants by participating in or ratifying the unreasonable, arbitrary decision to reject Plaintiffs' proposed residence under the consent to construction covenant.

In analyzing whether the association members in fact ratified the Board's actions, the court turned to the law of agency: "Under agency law, ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him. . . (citing Restatement (Second) of Agency 82 (1958)). To be charged by ratification with the unauthorized act of an agent, the principal must act with full knowledge of the facts, accept the benefits of the acts, or without inquiry assume an obligation imposed. The court then remanded to case for a determination on the issue of which homeowners did ratify the decision of the Board.

Perhaps ironically, those homeowners who had elected not to participate in the appeal of the court of appeals decision will not get the benefit of this remand determination. Even if they did vote not to reject Plaintiffs' proposal, they will be jointly and severally liable. (It is possible, of course, that the Plaintiff has already settled with these individuals).

The court noted the possibility on remand that if any of the appealing homeowners are determined not to be liable, the issue may arise as to whether those homeowners are also prevailing parties for purposes of attorney fees and costs from the Plaintiffs.

A thoughtful dissenting opinion, joined in by three members of the court, would have affirmed the court of appeals decision that all members of the association were jointly and severally liable.

The dissent points out that an association "can take action only collectively." A single member can neither require the association to act nor restrain it therefrom. The members of the association act in concert in all matters, and the individual acts of component association members are simply irrelevant for the purpose of establishing association liability, which, as a matter of law, is also the liability of every constituent member.

In place of the clear rule and the reasons which support it, the dissent, argues, the position of the majority "promotes chaos by inviting a factual inquiry into the individual actions, or inactions, of every association member. By consensually entering into the association, however, each association member is bound, by his own previous consent, to all legal rights and liabilities which may flow to him by virtue of association action.

Comment 1: This opinion is, in the words of a Gulf War general, a "target rich environment." Consider the many unanswered questions that the court's conclusion raises. Most prominent among them is what constitutes "ratification" of the Board's decision in this context.

Here are several difficult questions:

(1) Are all association members "ratifiers" who accept the benefits of the Board's decision and do not vote to reverse it? Or are the only ratifiers those association members who actually chose to vote to affirm?

(2) Are association members who never had actual knowledge of the appeal, because they were out of town or otherwise failed to become aware of the appeal proceeding, "ratifiers" or not?

(3) Are association members who voted to ratify because they were misled as to the facts due to the admittedly misleading materials provided to them by Board members "ratifiers" or not?

Comment 2: While we're on the topic of the misleading information distributed to the association members, how can we evaluate the court's discussion of the "business judgment rule" in this context. As noted above, the courts states specifically that the business judgment rule is no defense because the association members - the homeowners themselves - negligently reviewed the proposed construction project. It is one thing to say this about the Board members, but quite another to say this about the homeowners. Under the bylaws, association members could vote by proxy. Did these association members have to become familiar with the issues in the case prior to casting their proxy vote? How would they be able to do that?

Comment 3: As the dissent points out, the majority decision to get into the question of ratification opens a can of worms that will squirm forever. It is unlikely that realistic and fair distinctions among association members ever will arise. Isn't the best approach just to leave the issue alone entirely and impose liability upon all members of the association, relying upon insurance and settlement negotiations to protect against really disastrous outcomes?

Comment 4: As pointed out in yesterday's DD, it is not enough for a homeowner simply to vote against every Board decision denying an architectural change. If, indeed, other homeowners are aggrieved by the proposed change, then a vote to reverse a Board decision could itself be actionable, and an individual association member might be forced to demonstrate that he or she was reasonable in evaluating that vote. Note that in California (and perhaps other states) certain "consumer advocate" lawyers are starting to build new careers out of suing associations for actions they did not take in pursuing reimbursement from builders for construction defects.

Comment 5: Can we say that the short answer is that all associations will be incorporated? Remember that incorporation, and continued good standing, require money and effort. Not all associations are up to the task. Further, even incorporated associations may be found to be undercapitalized. The issues raised in this case will always be with us, whether we like it or not, unless there is a legislative fix. Don't ask the editor what the fix is. He's better at throwing brickbats than dodging them.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.