Fate and Fortune: Unauthorized Acts of the Board Cannot Be Challenged by Non-Owner Third Parties but Can Be Retroactively Cured by the Membership
In a decision that has renewed the faith of condominium law practitioners in our state’s judicial system, the New Jersey Appellate Division recently issued a strongly worded opinion in Port Liberte II Condo. Ass'n v. New Liberty Residential Urban Renewal Co. et. al., 2014 N.J. Super. LEXIS 19 (App. Div. Jan. 21, 2014) (approved for publication on January 31, 2014), that has prevented a grave injustice and allowed unit owners to control their own fates by having the power to validate unauthorized decisions of the board.
In what has been exclaimed as a “big win” for condominium associations and unit owners, the Appellate Division has determined that a condominium board’s decision to file suit without taking a pre-litigation vote, required by the association’s bylaws, can be affirmed at a later time by the membership and cannot be challenged by the defendants. Designed to protect the financial interests of the unit owners, the bylaws cannot be used by defendant developers and contractors to suppress those very same interests. Non-homeowners, therefore, do not have standing to challenge unauthorized or procedurally defective decisions of the board to start suit.
Faced with widespread construction defects in the common elements of its 225-unit community with a price tag in excess of thirty million dollars for repairs, the Port Liberte II Condominium Association filed suit in 2008 against those responsible, the Developer and the contractors that built the development. Several years into the law suit, the defendants sought dismissal of the entire action because the Association had not obtained a community vote to approve the filing of the suit, as required by a provision of the bylaws drafted by the Developer. To rectify that oversight, the Association held two separate votes to ratify the original filing of the suit, the first in October of 2009, which was approved by the community 72 votes to 3, and a second in October of 2011, which was approved by a vote of 65 to 1. Armed with these two examples of overwhelming support in the community for the lawsuit, the Association opposed the defendants’ motions to dismiss the case arguing that the defendants, as outsiders who owned no units in the community, had no standing to enforce the bylaws, and, even if they had such standing, the original filing of the suit was overwhelmingly ratified by the unit owners.
With an opinion that barely filled a single page and devoid of any legal precedent, the trial court allowed the defendants to use the Association’s bylaws, designed to protect the unit owners, as a weapon against them and dismissed the Association’s entire case, and with it the unit owners’ hopes for fixing their community.
The Appellate Division, however, reversed the court’s flawed decision. Specifically, the Appellate Division found that the “trial court misconstrued the bylaws – and disserved the unit owners’ interests – in holding that the owners could not ratify the Association’s action after the lawsuit was filed.” Additionally, the Court held that the defendants had no standing to enforce the voting provision of the bylaws.
Interpreting the Condominium Act and the spirit and purpose of the community’s bylaws, the Court found that the voting provision of the bylaws was intended to protect the unit owners' financial interests by requiring their approval of possibly expensive litigation. The Court, however, then noted that the unit owners in the Port Liberte II community also had “an equally great - if not greater - financial interest in recovering damages to repair the common areas, because otherwise they will have to pay for the repairs themselves through assessments.” The Court then concluded that it would “not enforce a statute or regulation in a manner that would produce an absurd result, contrary to its purpose. Here, it would be absurd to construe [the bylaws] in a way that would strip the owners of a cause of action designed to recoup payment for construction defects, if they are willing to authorize the litigation after it was filed.”
While provisions of the bylaws may provide a process by which a board obtains authorization to file suit i.e. an affirmative vote of the membership, unauthorized actions of the board may be cured through ratification, such as a subsequent vote, and are not deemed null and void. This means that pre-litigation voting requirements included in the bylaws by the developer cannot preclude an informed board from filing suit when time is of the essence and a community vote is impractical. A later vote of the membership ratifying the decision of the board will suffice; and while not technically a “pre-litigation” vote, it will nevertheless, according to the Appellate Division, comply with the spirit and intent of the bylaws and the Condominium Act.
The Court went a step further and found that the defendants, strangers to the relationship between the unit owners and the Association, lacked standing to enforce the voting provision in the bylaws. To that end, the Court observed that “because defendants' interests were adverse to the unit owners, letting them enforce the unit owners' interests would be akin to letting the proverbial fox protect the interests of the chickens.”
Turning its attention to the cases relied on by the judge in support of his decision to dismiss, the Appellate Court had no trouble distinguishing them as lacking any relevance and legal significance. Ascribing error to the trial court’s decision to dismiss the Association’s entire case on a curable procedural hyper-technicality, the Appellate Division reversed and revived the original complaint to proceed on the merits.
Following the court’s dismissal of the Port Liberte II Condominium Association’s suit, word spread quickly through the defense bar about a new avenue to avoid liability for construction defects. The Appellate Division has now spread a new word – Developers and contractors cannot intrude into the affairs of a condominium association and its unit owner members by forcing strict compliance with un-amendable, onerous pre-litigation voting requirements in the bylaws.