LITTLE WHALE COVE HOMOWNERS v. Harmon

• Decision Date: 11 August 1999
• Citation: 986 P.2d 616,162 Or. App. 332
• Parties: LITTLE WHALE COVE HOMEOWNERS ASSOCIATION, INC., an Oregon corporation, Appellant-Cross-respondent, v. Stanley D. HARMON and Bette G. Harmon, Trustees of the Harmon Living Trust, Respondents-Cross-appellants and First American Title, an Oregon corporation, Trustee of a Deed of Trust dated September 11, 1995; and Chase Manhattan Personal Financial Services, a division of Chase Manhattan Mortgage Corporation, Beneficiary of said Deed of Trust, Defendants. Stanley D. Harmon and Bette G. Harmon, Third-party Plaintiffs, v. Carl Halvorson, Judith Harkness and Lillan Crom, Third-party Defendants.
• Court: Oregon Court of Appeals

986 P.2d 616

162 Or. App. 332

LITTLE WHALE COVE HOMEOWNERS ASSOCIATION, INC., an Oregon corporation, Appellant-Cross-respondent, v. Stanley D. HARMON and Bette G. Harmon, Trustees of the Harmon Living Trust, Respondents-Cross-appellants and First American Title, an Oregon corporation, Trustee of a Deed of Trust dated September 11, 1995; and Chase Manhattan Personal Financial Services, a division of Chase Manhattan Mortgage Corporation, Beneficiary of said Deed of Trust, Defendants.

Stanley D. Harmon and Bette G. Harmon, Third-party Plaintiffs, v. Carl Halvorson, Judith Harkness and Lillan Crom, Third-party Defendants.

(973640; CA A102208)

Court of Appeals of Oregon.

Argued and Submitted February 5, 1999.

Decided August 11, 1999.

Garry P. McMurry, Portland, argued the cause and filed the briefs for appellant-cross-respondent.

James L. Murch, Salem, argued the cause for respondents-cross-appellants. With him on the briefs was Sherman, Sherman & Murch.

Before EDMONDS, Presiding Judge, and ARMSTRONG and KISTLER,¹ Judges.

KISTLER, J.

Plaintiff, a homeowners association, fined defendants, two of its members, for applying to the city for a variance. Plaintiff placed a lien on defendants' property in the amount of the fine and then brought this action to foreclose the lien. On cross-motions for summary judgment, the trial court ruled that the applicable covenants did not prevent defendants from asking the city for a variance. It also ruled that defendants could not recover their attorney fees. The court entered judgment accordingly. Plaintiff appeals from the court's judgment on the merits. Defendants cross-appeal from the judgment on attorney fees. We affirm on the appeal and reverse on the cross-appeal.

Little Whale Cove subdivision is a planned development. Recorded covenants, codes, and restrictions (CC & Rs) bind the land owners in the subdivision. Among other things, the CC & Rs establish an Architectural Committee and provide that "[n]o owner shall construct, reconstruct, alter, refinish or maintain any improvement upon, under or above any parcel or residential unit * * * unless the owner has first obtained the consent thereto of the Architectural Committee." The CC & Rs also provide that the "Architectural Committee may in its sole discretion withhold consent to any proposed work if the Committee finds that the proposed work would be inappropriate for the particular parcel or incompatible with the high design standards that Developer intends for the Project." Finally, the CC & Rs authorize the Committee to promulgate Architectural Guidelines that have the same force as the CC & Rs.

Defendants Stanley and Bette Harmon were considering buying a home in Little Whale Cove. In August 1995, Stanley approached the Architectural Committee with some of his own sketches to show how he would expand the second floor of the home he and his wife were considering. At the meeting, the committee offered its tentative opinion that his planned expansion would not be acceptable. Shortly afterwards, the committee wrote defendants that it had rejected their proposed modifications to the home. Although defendants received the committee's letter, they believed the committee's decision might be different if it were asked to review an architect's proposal rather than their own sketches. Defendants were also aware that they needed to obtain a variance from the City of Depoe Bay before they could remodel the second floor of the home, but their realtor had told them that that should be easy to do. Defendants accordingly purchased the home in Little Whale Cove.

After defendants bought their home, they asked the city for a variance before they asked the Architectural Committee to approve their proposed remodel. Stanley explained why they took that route: "Nothing would be gained by going to the trouble and expense of obtaining a full set of plans, submitting them to the Architectural Review Committee and then, if they approved them, thereafter applying to the City of Depoe Bay for a variance." "[R]ather, the obvious order would be to request the variance" first. If the city denied it, then there would be no reason to apply to the Architectural Committee. "[I]f [the city] approved, then [they would] go ahead and obtain the blueprints and submit them to the Architectural Review Committee for approval and then apply to the City of Depoe Bay's Building Department for a building permit."

After defendants applied for a variance, the attorney for plaintiff, the Little Whale Cove Homeowners Association, wrote them. He explained that he had been asked to review their application and that, in his opinion, they had no right to a variance. He said that even if they obtained a variance, they could not remodel their home until they obtained the Architectural Committee's consent. Finally, he told them that if they attempted to remodel their home without first getting the Architectural Committee's consent, plaintiff would bring an action to enjoin them from remodeling and would seek to recover its costs in opposing the variance as part of that action. The attorney's letter did not say that, in his opinion, defendants could not seek a variance until the Architectural Committee had approved their plans.

At the hearing on the variance, plaintiff objected to defendants' application, and the city denied it. On February 1, 1997, the chair of the Board of Directors for the Homeowners Association wrote defendants. He told them that they had violated the CC & Rs and the Architectural Guidelines when they applied for a variance without first getting the Architectural Committee's approval of their proposed remodel. After recounting the events that had occurred, the chair's letter stated: "Since the record clearly shows a willful violation of the procedures adopted by the Homeowners Association, the Board of Directors of the Association finds you in violation of the Declaration and the Guidelines and assess[es] a fine in the amount of $11,025.95."² The letter also stated that plaintiff was filing a lien in that amount on defendants' property and that if the full amount of the fine were not paid within 30 days, plaintiff would foreclose its lien.

Defendants did not pay, and plaintiff filed this action against them to foreclose its lien. Before the trial court, both plaintiff and defendants agreed that the dispositive issue was whether the CC & Rs and the Architectural Guidelines prohibited defendants from applying for a variance without first getting the Architectural Committee's approval. Plaintiff argued that the trial court was required to defer to the Architectural Committee's interpretation of the CC & Rs and the Guidelines, while defendants responded that because the rules were unambiguous, the trial court was free to interpret them as a matter of law. On cross-motions for summary judgment, the trial court ruled that the restrictive covenants did not require defendants to get the Architectural Committee's approval before they applied for a variance. Plaintiff has appealed from that ruling.

We start with the standard of review. When the parties to a contract agree that a neutral third party will decide any dispute that arises under the contract, the courts have respected their agreement. See Valenti v. Hopkins, 324 Or. 324, 334-35, 926 P.2d 813 (1996)

(summarizing cases). They have deferred to the third-party's decision unless the person challenging that decision establishes that it was the result of fraud, bad faith, or a failure to exercise honest judgment. Id. at 335, 926 P.2d 813. The Supreme Court explained in Valenti that the same principle applies when an architectural committee is charged with applying and enforcing restrictive covenants in a subdivision. Id. at 334-35, 926 P.2d 813.

Relying on Valenti, plaintiff argues that we should defer to the Architectural Committee's interpretation of the CC & Rs and Architectural Guidelines. The difficulty with plaintiff's argument is that the record does not show that the Architectural Committee ever decided that the CC & Rs and the Guidelines required defendants to get its approval before they applied for a variance.³ Rather, the record shows that the Board of Directors of the Homeowners Association made that decision. On February 1, 1997, the chair of the Board of Directors for the Homeowners Association told defendants that they had violated the CC & Rs and Guidelines by applying for a variance without first getting the Architectural Committee's approval.⁴ His letter states: "Since the record clearly shows a willful violation of the procedures adopted by the Homeowners Association, the Board of Directors of the Association finds you in violation of the [CC & Rs] and the Guidelines and assess[es] a fine in the amount of $11,025.95."

The decision that gave rise to the lien foreclosure (and the decision we are asked to review) was a decision by the Board of Directors of the Homeowners Association. The CC & Rs do not give the Homeowners Association or its Board the authority to resolve disputes arising under the CC & Rs or the Architectural Guidelines. They give that authority to the Architectural Committee. Whatever deference might be owed to the Architectural Committee's decision, none is owed to the Board's. We accordingly follow the standard of review generally applicable to contracts; the interpretation of the CC & Rs and the Architectural Guidelines presents initially a question of law. See Valenti, 324 Or. at 331,

926 P.2d 813 (describing general standard of review); accord Yogman v. Parrott, 325 Or. 358, 361, 937 P.2d 1019 (1997) (same).

The terms of the CC & Rs are clear. As noted above, section 3.4 of the CC & Rs lists a series of acts that an owner may not take "unless the owner has first obtained the consent thereto of the Architectural Committee." The list is both exhaustive and detailed. It provides in part that an owner may not "construct, reconstruct, alter, refinish or...