Friday, October 11, 2019

Steele v. Diamond Farm Homes Corp. (Ct. of Appeals)

Filed: June 26, 2019

Opinion by: Judge Michele D. Hotten

The Court of Appeals held that a homeowner's assertion of an offset against a homeowner's association's ("Association") claim for nonpayment of dues was rooted in the premise that the Association lacked the power or capacity to raise assessment dues in a manner that conflicted with an express provision in the Association’s Declaration of Covenants, Conditions and Restrictions. The Court held that the assertion the Association lacked power or capacity fell under the guidelines for bringing ultra vires claims pursuant to Md. Code Ann., Corps. & Ass'ns § 1-403. Because the statute has specific criteria for bringing ultra vires claims that the homeowner failed to observe, the Court held that Petitioner’s defense of an offset was precluded.

The Petitioner owned a home in the Diamond Farm development of Montgomery County, which was managed by a homeowners association (“Association”). In accordance with the Association’s Declaration of Covenants, Conditions and Restrictions (“Declaration”), the Association must obtain at least two-thirds of the total votes of all classes of members voting in person or by proxy to increase annual assessments. Through a letter, the Petitioner discovered that assessment increases in 2007, 2011, and 2014 did not receive the requisite two-thirds vote for approval. As a result, the Petitioner calculated her over-payment in assessment dues, determined that she was entitled to an offset, and ceased making payments. The Association noted the Petitioner's payment delinquency in October 2016 and brought suit against her regarding the unpaid assessments and attorney’s fees. Thereafter, the District Court entered judgment in the Petitioner's favor because the Association had failed to establish the amount of dues owed. The Association subsequently noted a de novo appeal to the Circuit Court for Montgomery County, which ruled in favor of the Association. The Petitioner appealed and the Court of Appeals granted certiorari. The Court reviewed whether the Petitioner's defense for non-payment of dues was invalid due to a statute restricting the use of the ultra vires defense or laches. [The court's consideration of of attorney's fees and the doctrine of equitable estoppel is omitted.]

The Court analyzed the ultra vires statute, Md. Code Ann., Corps. & Ass’ns. § 1-403. Ultra vires acts are those that exceed the express or implied powers of a corporation, and shareholders may challenge ultra vires acts to preclude corporations' unchecked powers. Section 1-403 specifies that: "(a) Unless a lack of power or capacity is asserted in a proceeding described in this section, an act of a corporation or a transfer of real or personal property by or to the corporation is not invalid or unenforceable solely because the corporation lacked the power or capacity to take the action . . . (b)(1) Lack of corporate power or capacity may be asserted by a stockholder in a proceeding to enjoin the corporation from doing an act or from transferring or acquiring real or personal property." The plain language of the statute required the Petitioner to raise an argument regarding lack of power or capacity “in a proceeding to enjoin the corporation,” which she failed to do so.

After noting the Association as a corporation, the Court analyzed the situations in which a corporation’s actions are considered ultra vires and whether the Association’s declaration operated as a document establishing a corporation’s power and capacity, such that exceeding the scope of a declaration constitutes an ultra vires action. The Court referenced the Court of Special Appeals precedence explaining that “[a]n ultra vires act ‘is one not within the express or implied powers of the corporation as fixed by its charter, the statutes, or the common law.’” So far, Maryland case law has not considered whether a declaration can operate as one of the documents under which a corporation can exceed its powers.

Thus, the Court next considered the functionality of the Association’s declaration. The Court found that the Association’s declaration prescribed its capacity and certain powers—the central concern regarding whether to apply the ultra vires statute. The Court also considered the Association’s articles of incorporation, which is synonymous with a charter and is subject to the ultra vires statute. The Association’s articles of incorporation specified that: “The purpose[] for which the corporation is formed [is] . . . [t]o enforce any and all covenants, restrictions and agreements[.]” Those covenants, restrictions and agreements were explicitly outlined in the Association’s declaration, such that the declaration operated as a key governing document outlining the Association’s powers and capacity.

After its review of the declaration of the Association and its interaction with the Association’s articles of incorporation, the Court was persuaded that both documents prescribed the parameters of the Association’s authority and power. Therefore, the Petitioner's argument had to follow the procedural guidelines specified in the ultra vires statute. Here, the ultra vires statute did not provide the Petitioner with a defense under the circumstances because she did not first pursue a derivative action, and the court found she may not defend on the basis of the ultra vires statute.

The full opinion is available in PDF.

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