Condo. Serv. Inc. v. First Owners' Ass'n of Forty Six Hundred Condo. Inc.

• Decision Date: 21 April 2011
• Docket Number: Record No. 100303.
• Citation: 709 S.E.2d 163,281 Va. 561
• Parties: CONDOMINIUM SERVICES, INC.v.FIRST OWNERS' ASSOCIATION OF FORTY SIX HUNDRED CONDOMINIUM, INC.
• Court: Virginia Supreme Court

281 Va. 561

709 S.E.2d 163

CONDOMINIUM SERVICES, INC.

v.FIRST OWNERS' ASSOCIATION OF FORTY SIX HUNDRED CONDOMINIUM, INC.

Record No. 100303.

Supreme Court of Virginia.

April 21, 2011.

Michael E. Barnsback (Hillary J. Collyer; DiMuro Ginsberg, on briefs), Alexandria, for appellant.Michael S. Dingman (Robert M. Diamond; Helenanne Connolly; Reed Smith, on brief), Falls Church, for appellee.Present: KINSER, C.J., LEMONS, GOODWYN, MILLETTE, and MIMS, JJ., and KOONTZ, S.J.Opinion by Justice S. BERNARD GOODWYN.

In this appeal, we consider whether the circuit court erred in its interpretation of a management agreement (the Management Agreement) between First Owners' Association of Forty Six Hundred Condominium, Inc. (FOA) and Condominium Services, Inc. (CSI). We also consider whether the circuit court erred in granting summary judgment on FOA's conversion claim, in permitting certain expert testimony into evidence, and in upholding the jury's award of punitive damages.

I. Background

FOA filed a complaint against CSI in the Circuit Court of the City of Alexandria, alleging that CSI had breached the terms of the Management Agreement and had wrongfully converted FOA's funds. CSI filed a counterclaim and an amended counterclaim for breach of contract. The circuit court sustained FOA's demurrers to the counterclaim and amended counterclaim. FOA's claims proceeded to trial before a jury. The jury returned a verdict in favor of FOA on both claims, and the circuit court entered judgment in favor of FOA consistent with the jury's verdict. CSI appeals.

II. Facts

FOA is a Virginia nonstock corporation that is a condominium unit owners' association under the Virginia Condominium Act, Code § 55–79.39 et seq. In August 2005, FOA's Board of Directors (the Board), on FOA's behalf, entered into a Management Agreement with CSI for a term of two years from November 1, 2005 to October 31, 2007. FOA was to pay CSI a monthly fee of $6,075 in exchange for CSI acting as FOA's management agent. The Management Agreement provided that either party could terminate the Management Agreement without cause upon ninety days written notice, and FOA could terminate the Management Agreement with cause upon thirty days written notice to CSI.

On July 1, 2006, the Board sent CSI a letter constituting thirty days notice of termination for cause effective August 1, 2006. FOA believed the termination was justified because CSI failed to provide FOA with correct financial documents, failed to file necessary tax returns, failed to pay payroll taxes, and prepared incorrect W–2 forms for FOA's employees. FOA received notifications from the IRS and the Commonwealth that penalties and interest were being assessed as a result of these failures. FOA retained a certified public accountant, Isaac Reitberger, to prepare and file the various documents that CSI should have filed, and hired a new management agent.

On August 1, 2006, CSI's chief executive officer sent a letter to all of FOA's unit owners directing them to continue sending their assessment payments to CSI. CSI opened a new bank account, purportedly in FOA's name, in which to keep the assessment money it collected from the unit owners. CSI opened the account by having its president and controller falsely represent in documents filed with the bank that they were officers of FOA. FOA did not authorize the opening of the account or have any signatory authority on it.

After August 1, 2006, CSI continued to collect assessment payments due FOA and paid itself a monthly management fee of $6,075 out of funds deposited into the new bank account. CSI paid itself fees totaling $91,125.¹ CSI asserts that it was entitled to the management fees because FOA's termination of CSI was in violation of FOA's Bylaws (the Bylaws) which, according to CSI, were incorporated into the Management Agreement and required a vote of the unit owners prior to termination of the Management Agreement.

Section 2 of the Management Agreement states:

The documents governing this relationship consist of this Agreement, the Virginia Condominium Act, the Association's Declaration, the Bylaws, Rules and Regulations, and Board of Director Resolutions, including all modifications, amendments, and changes issued subsequent to the execution of this Agreement.

FOA's Bylaws contain various provisions concerning the rights and obligations of FOA's members, FOA's Board and FOA itself. Article I identifies FOA as the “Owners' Association.” Article V addresses the formation of FOA's Board and the Board's duties and responsibilities. Section 1 of Article V states that “the affairs of the Owners' Association shall be governed” by the Board, and Section 3 of Article V states that the Board “shall have all the powers and duties necessary for the administration of [FOA's affairs] and the Condominium Project and may do all such acts and things as are not by law or by these By–Laws directed to be exercised and done by the members.” Section 4 of Article V of the Bylaws permits the Board to delegate any of its duties, powers or functions to a management agent by written contract.

In support of its position, CSI relies upon Article VIII, Section 2 of the Bylaws, which states:

The Board of Directors shall employ for the Owners' Association a management organization (the “Management Agent”) at a rate of compensation and such other terms and conditions as shall be established by the Board of Directors to perform such duties and services as the Board of Directors shall from time to time authorize in writing,.... The Owners' Association shall not change Management Agents or undertake self-management, without the prior affirmative vote of members representing three-fourths (3/4ths) of the votes of the Residential and Commercial Unit owners present at any meeting of the members duly called for such purpose....

On January 5, 2009, FOA initiated this action against CSI. CSI filed its answer to the complaint, raising the affirmative defense that its termination was invalid because, prior to terminating CSI, FOA did not obtain the necessary votes required under Article VIII, Section 2 of the Bylaws, which CSI alleged was incorporated into the Management Agreement. CSI also filed a counterclaim and later an amended counterclaim, alleging that FOA breached the Management Agreement by attempting to terminate CSI without the prior affirmative vote of the unit owners, and that the Management Agreement could never be terminated without such a vote.

FOA filed a demurrer to CSI's counterclaim and to the amended counterclaim, contending that the Management Agreement merely referenced rather than incorporated the Bylaws. Further, it asserted that even if the Bylaws were incorporated into the Management Agreement, the Bylaws did not require a vote of the unit owners for FOA to terminate its Management Agreement with CSI. The circuit court sustained the demurrers and dismissed the amended counterclaim with prejudice.

Prior to trial, FOA filed a motion in limine seeking to exclude any testimony or argument by CSI relating to its affirmative defense that the termination was invalid because FOA did not obtain the necessary votes of the unit owners allegedly required by Article VIII, Section 2 of the Bylaws. The circuit court granted FOA's motion in limine and excluded CSI's affirmative defense at trial.

In response to CSI's interrogatories concerning expert witnesses, FOA identified Reitberger as an expert witness. FOA, in its interrogatory response, disclosed that Reitberger would opine that the failures of CSI resulted in the underpayment of taxes and that FOA would incur interest and penalties as a result of those failures. It also stated that Reitberger's opinions would be based upon his experience and expertise and his review of relevant documents. It did not state the amount of the interest and penalties Reitberger believed FOA would incur. Reitberger was deposed by CSI approximately six weeks before trial, and he testified regarding the specific amount of the taxes and penalties at issue and the bases for his opinions regarding those amounts.

The Thursday before the Monday trial date, CSI filed a motion in limine to exclude the testimony of Reitberger about the potential tax penalties and interest FOA could face due to CSI's failure to pay certain taxes on FOA's behalf. CSI asserted that the testimony should be excluded because FOA's response to CSI's expert witness interrogatory failed to identify the amount of the penalties and interest claimed and failed to state the basis for any such damages. The circuit court denied CSI's motion in limine.

The parties then proceeded to a jury trial. At the conclusion of FOA's case, CSI moved to strike FOA's evidence on three grounds: (1) Reitberger's testimony on the tax penalties and interest was speculative and not offered to a reasonable degree of accounting certainty; (2) the conversion claim was improper because it arose from the alleged breach of contract and was not an independent tort; and (3) FOA presented insufficient evidence to support a claim for punitive damages. The circuit court denied the motion as to these grounds.² At the conclusion of all the evidence, CSI renewed its motion to strike on the same grounds. The circuit court again denied the motion.

At the conclusion of all the evidence, FOA moved for summary judgment on its conversion claim. The circuit court granted FOA summary judgment on the conversion claim in the amount of $91,125. On the remaining issues, the jury returned a verdict in favor of FOA. With respect to the breach of contract claim concerning payroll administration and taxes, the jury awarded damages in the amount of $70,667. On the conversion claim, the jury awarded prejudgment interest beginning on October 1, 2007 and punitive damages in the amount of $275,000.

CSI filed a motion to strike the jury verdict and for judgment notwithstanding the verdict with regard to punitive damages...