Court Upholds Seattle Condominium Association's Default Judgment Against Insurance Company

In 2005, the Lakewest Condominium Owners Association in Seattle discovered that several of its buildings required major repairs due to rain damage. The Association filed and pursued claims against numerous insurers to pay for the damage, which culminated in lawsuits against some of them. The Association was granted a default judgment in the amount of 7.5 million dollars against Tokio Marine & Fire Insurance Company, Ltd. in October of 2007. A default judgment is entered when a person is served with a lawsuit and does not respond within the time allowed by law. Tokio argued to the court more than one year after the judgment (the applicable deadline) that the judgment should be vacated. The court agreed with Tokio, but this ruling was reversed on appeal in an unpublished decision issued earlier this month. The association's default judgment is thus valid and enforceable against the insurance company.

Washington condominium and homeowners association boards should not be hesitant to file claims with their insurance companies when serious property damage occurs, and they should encourage owners to proactively contact their insurers as well. This is sometimes the only way to avoid major special assessments. It is sometimes necessary to sue insurance companies if they will not respond or if they deny claims that appear to be covered by the policy. Such litigation can obviously turn out very well indeed for the association if the insurer drops the ball and is found in default. The Lakewest case demonstrates that default judgments have value and will be upheld by the courts in some circumstances.

How Broad Is Your Association's Entitlement to Attorney Fee Awards?

An unpublished opinion by the Washington Court of Appeals earlier this month dealt with a homeowners association’s attempt to enforce a restrictive covenant limiting tree height. The trial and appellate courts both ruled in favor of the association. However, the trial court refused to award the association its attorney fees, and the appellate court upheld that decision. The reasons why these courts reached those conclusions are too complicated to adequately address here, but one important lesson (associations might not recover their attorney fees even if they prevail in litigation) is much easier to explain.

In a lawsuit concerning a violation of the Washington Homeowners' Associations Act or the Washington Condominium Act, the court "may" award “reasonable” attorney fees to the prevailing party "in an appropriate case". The quoted portions of the last sentence give judges discretion to award less than all (and perhaps none) of the attorney fees that associations incur during lawsuits that they eventually win. While it may be true that judges often award prevailing parties all of their attorney fees pursuant to these laws, it is unwise for board members to view this as a guarantee.

Some condominium and homeowners associations have additional rights to collect attorney fees built into their governing documents. Such provisions typically state that the prevailing party in a lawsuit concerning the governing documents or collection of delinquent assessments is entitled to an award of its “reasonable” attorney fees. This is broader protection for victorious litigants, but it still leaves the door open for partial awards if judges decide that attorney fee requests are too large.

Court Requires Washington Condominium Associations to Submit Construction Defect Claims to Binding Arbitration

The Washington Supreme Court ruled last week that Washington condominium associations are bound by arbitration clauses contained in purchase and sale agreements between developers and original unit owners even though the Washington Condominium Act guarantees them a day in court. Since such arbitration clauses are almost always present in those agreements, this decision means that most Washington condominium associations no longer have the ability to successfully sue developers for construction defects. They must instead submit those claims to binding arbitration.

Arbitration is a less favorable forum than litigation for condominium associations asserting construction defect claims for at least three reasons. First, the expansive right of associations to obtain information and documents from developers during litigation is significantly curtailed in the arbitration process. Second, arbitrators are not explicitly required to decide matters in accordance with the law (much of which is designed to protect consumers). Third, there is anecdotal evidence that juries of ordinary citizens are more inclined to identify with condominium associations than professional arbitrators selected by developers.

Washington condominium associations still have the right to hold developers accountable if the initial construction of their buildings did not meet applicable standards. However, it is unfortunately difficult to avoid the conclusion that it just got harder for associations to win those claims and obtain enough money to perform necessary repairs.

Conflicting Covenants Result in Victory for Owner in Roof Litigation

The covenants that govern condominium and homeowners associations sometimes contain provisions that are inconsistent, and those imperfections can spark disagreements about board decisions and costly litigation. The Washington Court of Appeals issued an unpublished opinion last month that discussed the problem of conflicting covenants in a homeowners association. The owners prevail over the association in that case, and the reason why might surprise you.

In 2003, James and Janice Geary purchased a lot in the Flying H Ranch subdivision in Buckley, Washington. In late 2005, their house’s composition roof began to leak. The Gearys learned that their house could not support the tile roofing material permitted by the covenants. Another composition roof appeared to them to be the best available option. The Gearys’ proposal to the architectural control committee was rejected because the covenants do not allow composition roofs. The Gearys installed a composition roof anyway. The Flying H Ranch Homeowners’ Association filed a lawsuit against them nine months later.

Flying H Ranch’s covenants state that construction does not require committee approval and complies with the covenants if the association has not started a lawsuit by the time of its completion. However, the covenants also provide for an automatic $10 per day fine on lots that violate the covenants. The trial court concluded that these two provisions contradict each other and make the meaning of the covenants unclear. Since the developer (the source of the uncertainty) was actively involved in this dispute, the trial court strictly interpreted the covenants in the Gearys’ favor. The appellate court agreed with this result, but it also pointed out that covenants are more liberally interpreted in favor of restrictions once developers are no longer involved.

The Geary case demonstrates how inconsistencies in covenants can disrupt enforcement efforts. Identifying conflicting provisions and amending the covenants to fix those problems can prevent many headaches down the road. This case also shows how important it is for boards to be familiar with the portions of the covenants that are time sensitive.