North Oakes Manor Condominium Association v. 2nd Half LLC

• Citation: 11 Wn.App.2d 1012
• Decision Date: 05 November 2019
• Docket Number: 51616-1-II
• Parties: NORTH OAKES MANOR CONDOMINIUM ASSOCIATION, Appellant, v. 2nd HALF LLC; JEFFREY ALAN GRAHAM; STEPHEN ROY DAWSON; JOHN STAFFORD MILLS AND JULIE M. MILLS, Respondents.
• Court: Court of Appeals of Washington

11 Wn.App.2d 1012

NORTH OAKES MANOR CONDOMINIUM ASSOCIATION, Appellant, v. 2^nd HALF LLC; JEFFREY ALAN GRAHAM; STEPHEN ROY DAWSON; JOHN STAFFORD MILLS AND JULIE M. MILLS, Respondents.

No. 51616-1-II

Court of Appeals of Washington, Division 2

November 5, 2019

UNPUBLISHED OPINION

GLASGOW, J.

North Oakes Manor Condominium consisted of eight units in Tacoma. The owners collectively agreed to terminate their condominium and sell the property. All of the owners signed and recorded a written condominium termination agreement as required by the statute governing condominium terminations. Both that statute and the termination agreement provided that after closing, proceeds of the sale together with all other assets of the North Oakes Manor Condominium Association would be held by the association "as trustee" for the association's creditors and unit owners. Pursuant to the association's articles of incorporation, the termination agreement also provided that any "payment and disbursement" of the post-closing proceeds and assets were subject to a vote of the owners "to which at least [80] percent of the votes in [the] Association are allocated."

The association sued 2^nd Half LLC, an owner of two of the condominium units and a member of the association, thus bringing claims and incurring litigation expenses without the agreement of 80 percent of the unit owners. The superior court found that 80 percent of the owners had not voted to authorize any cause of action and dismissed the association's lawsuit. The association appeals. We affirm.

FACTS

The association's articles of incorporation and bylaws specified that a board of directors comprised of three members would govern the association. The association's articles of incorporation provided that the association could be dissolved "with the assent given in writing and signed by unit owners of units to which at least [80] percent of the votes in the Association are allocated." Clerk's Papers (CP) at 183; see also CP at 256 (condominium declaration).^[1] The articles of incorporation also provided that in the event of an approved dissolution "unless otherwise authorized by law and by a vote of members . . . having at least [80] percent of the total votes in the Association," the association's assets "shall be owned by all members of the Association as tenants in common according to their percentages of undivided interest." CP at 183 (emphasis added). Thus if the assets were to be distributed, rather than held as tenants in common, the articles of incorporation provided that 80 percent of the total votes in the association had to approve the plan.

There has been a contentious history between North Oakes's unit owners and varying configurations of the condominium association board of directors. 2^nd Half owned two units, or 25 percent. Geraldine Ward owned 2^nd Half, and it was managed by her son, Jeff Graham. Ward borrowed money from Stephen Dawson and another lender in order to purchase the two North Oakes units, which were encumbered by deeds of trust. In March 2014, Graham became the president of the North Oakes Manor Condominium Association board, and John Mills provided legal representation.

After a series of disputes, the association removed Graham and the other members from the board in late 2014. The association accused Graham of using approximately $14, 050 in association funds for personal use. The association then elected George and Heather Rankos, who owned three units, and Heather Webster, who owned one unit, to the board. The association's new board hired Douglas Schafer to provide legal representation for the association. Schafer alleged to the board that Mills had inappropriately taken $7, 267 in association funds as attorney fees.

Starting in 2015, 2^nd Half stopped paying association dues and other assessments for repairs to the building foundation. The unpaid assessments resulted in a statutory lien on 2^nd Half's units. See RCW 64.34.364. In February 2017, the association filed a complaint to collect condominium assessments and foreclose liens against 2^nd Half and Dawson. At the time, the association alleged 2^nd Half owed it $23, 475.48 for delinquent assessments on one of the units and $21, 144.60 for delinquent assessments on the other unit. The association asked the court to appoint a receiver to collect rents and filed a corresponding motion. Graham filed a declaration opposing the appointment of a receiver. The court denied the motion for appointment of a receiver without prejudice.

After ongoing controversy between Graham and Mills on one side and the board members and Schafer on the other, all of the owners decided to terminate the condominium association and sell each of their respective units.

RCW 64.34.268 required that the owners execute and record a termination agreement. The owners negotiated the precise language of the agreement. The first draft did not provide that the sale would occur free of all of the association's liens, nor did it provide that the condominium owners had to approve payments and disbursements from the proceeds. Mills and Graham objected to an agreement without these clauses. No unit owner agreed to sign the contract as first drafted.

After negotiations, all of the owners agreed to dissolve the association and all signed the termination agreement, which provided, in part:

2. Procedure. RCW 64.34.268 prescribes the procedure for terminating a condominium and selling the former units and common elements of the condominium. Consistent with that statute, effective upon the recording of this Termination Agreement, title to the NOM Real Property will vest in North Oakes Manor Condominium Association, a Washington nonprofit corporation (hereafter "NOM Association"), as trustee for the holders of all interests in the units. Thereafter, NOM Association will have all powers necessary and appropriate to effect the sale of the NOM Real Property upon the minimum terms described herein, and shall do so free of any liens claimed by it. The escrow agent closing the sale shall pay from the proceeds the amounts due to the holders of mortgages, deeds of trust, and real estate contracts on individual units judgments and property taxes that constitute liens, and customary closing costs. The remaining proceeds of the sale and all other assets of NOM Association will be held by it as trustee for its creditors and the unit owners. Pursuant to a payment and disbursement plan that is agreed to by the unit owners to which at least eighty percent of the votes in NOM Association are allocated, NOM Association shall pay its creditors and disburse its remaining assets to the unit owners as their interests may appear, after which it shall dissolve.

CP at 119 (emphasis added). The termination agreement also set forth the minimum terms of sale.

The termination agreement was recorded with the county auditor in July 2017.

In September 2017, the North Oakes condominium building was sold for $1.35 million. The escrow agent paid from the proceeds the amounts due to the holders of mortgages, deeds of trust and real estate contracts on individual units, judgments and property taxes that constituted liens, and customary closing costs. In particular, the escrow agent made a payoff to Dawson- who held deeds of trust on 2^nd Half's two units-in the amount of $244, 869.55. The association's attorney, Schaefer, became aware of this claimed payoff amount just before the sale was finalized, but neither Schaefer nor the other condominium unit owners halted the sale. After the escrow agent fulfilled his duties, $773 768.13 in proceeds remained, which were transferred to the association. Schafer received these funds and put them in his IOLTA account.

With regard to the large escrow payout to Dawson, Schaefer suspected that 2^nd Half, Mills, and Dawson had colluded to inflate Dawson's lender payoff amount. Schafer decided that by doing so they had "repudiated" the negotiated termination agreement. CP at 311. A day later, Schafer made a plan for payment and disbursement. Schafer claimed that he received e-mail approval from six of the unit owners (or 75 percent of the association's allocated votes). The plan was not agreed to by the unit owners to which at least 80 percent of the votes in the association were allocated because 2^nd Half, which owned 25 percent of the units, did not approve the plan.

Nevertheless, Schafer first disbursed to himself his accumulated legal fees in the amount of $121, 770.25. It appears he then made payments and disbursements to all of the unit owners except for 2^nd Half.^[2] The ledger indicates that the association was claiming as assets three pending legal claims: (1) a claim for assessments against 2^nd Half in the amount of $51, 978.49; (2) a claim against Graham in the amount of $14, 050; and (3) a claim against Mills in the amount of $7, 267. After all of the payments had been made and disbursed, it appears the balance was $30, 687.68; Schafer reserved $5, 000 from each of the six unit owners (not including 2^nd Half) for litigation expenses.

The association then amended its preexisting complaint against 2^nd Half and Dawson, adding Graham and John and Julie Mills as defendants in October 2017. It amended its complaint a second time in January 2018. Relevant here, the association's second amended complaint maintained its claims that 2^nd Half wrongfully failed to pay dues and assessments that were due to the association and sought recovery of the amount due plus interest. It also added allegations that John Mills breached his fiduciary and ethical duties to the association, including the duty of loyalty; Graham breached his fiduciary duties to the association by misappropriating funds; and Dawson's deeds of trust were junior to the...