Recently, the Oregon Court of Appeals issued a decision that may have far reaching impacts for communities looking at whether a particular project constitutes a “capital improvement” under their Covenants, Conditions and Restrictions (more commonly known as CC&Rs). The case, known as Eagle-Air Estates Homeowners Ass’n, Inc. v. Haphey, 272 Or App 651 (2015), involved whether an assessment levied by a homeowners association to pay for certain attorney fees incurred in a prior litigation constitutes a “capital improvement,” and therefore a “special assessment” under the HOA’s CC&Rs.
Relying on Black’s Law Dictionary, the Court of Appeals found that the term capital improvement “is commonly understood to mean a permanent structural improvement to property.” (Emphasis added). The Court also cited to Webster’s Dictionary’s definition of “capital expenditure,” as further explanation of the phrase, noting that a “capital expenditure” refers to “long-term additions or betterments properly chargeable to a capital assets account.”
After analyzing the above two definitions, along with the language in the HOA’s CC&Rs regarding other types of specific capital improvements, the Court of Appeals held that “[a]n assessment to pay for attorney fees in litigation. . . is not the type of expense that an ordinary person would regard as a ‘capital improvement’.” As a result, the assessment did not constitute a “special assessment” under the HOA’s CC&Rs and was therefore not subject to any temporal limits as to how long the assessment may be issued.
The above ruling provides some much needed clarity to a question that has long plagued homeowner associations throughout Oregon, namely, does a major repair, for example re-siding buildings or installing a new roof, qualify as a capital improvement? Under most CC&Rs in Oregon, an association looking to fund a “capital improvement” must achieve special voting or funding requirements from its membership in order to proceed (although every set of CC&Rs is different). The definition of a “capital improvement” provided in Eagle-Air suggests that these types of building envelope repairs likely will not qualify as a “capital improvement” unless there is a “structural improvement,” “long-term addition” and/or “betterment” involved. Of course, every situation is unique and an association faced with potential building envelope repairs should carefully study its own governing documents, along with the definition provided in Eagle-Air, to determine for itself whether the nature of a proposed repair is one that constitutes a “capital improvement” under its CC&Rs.
In addition to the above, the Court of Appeals also addressed whether a judgment against an HOA in a prior lawsuit has preclusive effect on the HOA’s board of directors and individual members. According to the Court:
Plaintiffs cite no authority for the proposition that an individual is in “privity” with a corporation, for purposes of issue preclusion, merely by virtue of being a director of that corporation. Relevant authority is to the contrary.
The Court went on to note that relevant authority states that absent certain exceptions, a judgment against an HOA is not traditionally binding on the HOA’s board of directors, officers, and individual members. This holding is somewhat troubling given its potential impact to HOAs seeking to bring a construction defect or other lawsuit on behalf of its owners/membership. Until now, both Oregon statutes and common law suggest that an HOA has appropriate standing to bring a claim for defects on behalf of its membership, and that any judgment reached in such lawsuits is binding on the individual members. See ORS 100.405(e); ORS 94.630(1); Ass’n of Unit Owners of Bridgeview Condominiums v. Dunning, 187 Or App 595, 612 (2003). Notwithstanding this statutory and common law authority, defendants in construction defect cases often argue that HOAs are not the real party in interest and/or lack standing to bring a claim for property damages on behalf of their membership and that they, as defendants, face the very real threat of a secondary lawsuit from individual members/owners.
While the Court’s decision in Eagle-Air seems to confirm defendant contractor fears of secondary lawsuits from individual owners, the case also references and relies on the Restatement (Second) of Judgments § 59 (1982), which may provide a savings to both sides on this issue. The Restatement (Second) of Judgments § 59 (1982) notes that where a relationship exists between a corporation and its members, “such as that of principal and agent, indemnitee and indemnitor, or successor in interest to property,” then a judgment against the corporation will have preclusive effect on its members.
Although the Court declined, based on unique facts in Eagle-Air, to apply the above principle, it seems that such exceptions would be directly appropriate in the context of an HOA seeking to make a construction defect claim on behalf of its membership. In other words, because the HOA is acting as an agent of its membership, any judgment the HOA reaches in a construction defect lawsuit will (and should) have preclusive effect on the association’s individual members. There is no doubt that Eagle-Air has muddied the waters when it comes to standing and real party in interest issues for HOAs. Ultimately, the issue will be one for the trial courts to sort out.