Santoro v. Eagle Crest Estate Homesite Owners Ass'n

• Decision Date: 25 May 2022
• Docket Number: A171260
• Parties: Alfred P. SANTORO and Joan E. Santoro, TRUSTEES OF the SANTORO AND SMITH FAMILY TRUST, DATED 12/23/1996, Plaintiffs-Appellants, v. EAGLE CREST ESTATE HOMESITE OWNERS ASSOCIATION, an Oregon nonprofit corporation, Defendant-Respondent.
• Court: Oregon Court of Appeals

319 Or.App. 793

512 P.3d 828

Alfred P. SANTORO and Joan E. Santoro, TRUSTEES OF the SANTORO AND SMITH FAMILY TRUST, DATED 12/23/1996, Plaintiffs-Appellants,

v.EAGLE CREST ESTATE HOMESITE OWNERS ASSOCIATION, an Oregon nonprofit corporation, Defendant-Respondent.

A171260

Court of Appeals of Oregon.

Argued and submitted March 23, 2021.

May 25, 2022

J. Christian Malone argued the cause for appellants. Also on the briefs were Peterkin Burgess and Megan K. Burgess.

Ashleigh Edwards argued the cause for respondent. On the brief were Tracy J. Frazier and Chock Barhoum, LLP.

Before Mooney, Presiding Judge, and Joyce, Judge, and DeVore, Senior Judge.^*

JOYCE, J.

Plaintiffs, who own properties at the Eagle Crest Estate Homesites (Eagle Crest) sued defendant, Eagle Crest Estate Homesite Owners Association, after defendant's architectural review committee denied plaintiffs’ request to construct an oversized garage door to accommodate a recreational vehicle (RV). On appeal, plaintiffs assign error to the trial court's ruling that the committee acted within its authority to deny plaintiffs’ request. Plaintiffs also challenge the trial court's judgment permitting certain application processing fees and a pavement damage assessment. We vacate and remand the trial court's decision respecting the committee's denial of the construction plans because the court failed to examine whether the committee exercised its discretion in good faith as required by the contract. We affirm, however, as to the trial court's judgment allowing the disputed fees.

BACKGROUND FACTS

The relevant facts on appeal are undisputed. Plaintiffs purchased their first lot in Eagle Crest in 2011. Eagle Crest is a planned residential community. As a planned residential community, the homeowners are bound by a recorded declaration of covenants, conditions, and restrictions for Eagle Crest Estate Homesites (CC&Rs). Among other things, those CC&Rs establish a homeowner's association (HOA). The HOA has a sub-group architectural review committee (committee). The CC&Rs require all homeowners to submit their proposed construction plans to the committee for approval before construction.

In compliance with that requirement, in 2012, plaintiffs submitted their proposed plans and built a home after they obtained an approval from the committee. During that process, plaintiffs paid an $825 application processing fee and a $500 pavement assessment. In 2016, plaintiffs purchased a second lot in Eagle Crest. Plaintiffs again submitted their proposed construction plans to the committee and paid defendant the required fees, including an $825 application processing fee and a $500 pavement damage refundable deposit. The 2016 construction plans included a garage with a 12-foot door capable of accommodating a RV.

The committee notified plaintiffs that it conditionally approved their plans with two modifications: (1) replacing the over-sized garage door with a standard one no taller than eight feet; and (2) reducing the proposed paving in the back-out area of the driveway. The committee cited section 5.2(a) of the CC&Rs as authority for its decision and explained that it denied plaintiff's proposed oversized garage for aesthetic reasons. Section 5.2(a) gives the committee broad authority to consider "style, design, appearance, harmony of external design" in determining whether to approve any construction proposal.

Plaintiffs appealed the committee's decision, arguing that neither the CC&Rs nor the committee's Policies and Guidelines (guidelines)¹ expressly prohibit oversized garages and noting that other homes in Eagle Crest have RV-sized garages. The committee unanimously denied plaintiffs’ appeal.

Plaintiffs then filed this action for breach of contract and for a declaratory judgment. Plaintiffs argued that the unambiguous terms of the CC&Rs imposed an affirmative duty of good faith on the committee and that it failed to fulfill that obligation by denying plaintiffs’ proposal to build an RV garage. Plaintiffs also challenged defendant's authority to charge them the two application processing fees they paid in 2012 and 2016 as well as the pavement assessment fee in 2012.²

Central to both parties’ arguments—and ultimately to the trial court's decision—was the Supreme Court's decision in Valenti v. Hopkins , 324 Or. 324, 926 P.2d 813 (1996). Because that case is fundamental to understanding the trial court's ruling and the arguments on appeal, we pause our factual recitation briefly to describe it. In Valenti , the plaintiffs brought an action against a neighbor who proposed to build a house that would obstruct the plaintiffs’ view in violation of certain restrictive covenants. Id. at 327, 926 P.2d 813.

The CC&Rs specified that any new construction has to be approved by the architectural control committee. Id. at 328, 926 P.2d 813. The CC&Rs authorized the committee to make final decisions and withhold consent "at its discretion."³ Id. at 328-29, 926 P.2d 813. The committee eventually approved the defendants’ plans, concluding that, under the operative view protection provision of the CC&Rs, the plaintiffs’ lot was not "adjacent" to the defendants’ lot. Id. at 330, 926 P.2d 813.

On appeal, the Supreme Court held that where restrictive covenants unambiguously authorize certain disputes to be resolved by a third party, "the appropriate standard of review" of the court is to "review for fraud, bad faith, or failure to exercise honest judgment" of the HOA's interpretation of the language in the CC&Rs. Id. at 335, 926 P.2d 813. Because the plaintiffs had not proved that the committee's decision was so tainted, the committee's decision approving the defendants’ plans was final and binding. Id.

In this case, and based on Valenti , defendant argued that, absent any showing of fraud, bad faith, or failure to exercise honest judgment, the trial court had to uphold defendant's decision. Plaintiffs, relying on the CC&R's text, argued that Valenti was not the standard under which the trial court was required to review defendant's actions.

After a bench trial, the trial court entered a judgment for defendant. Citing section 5.1 and 5.2(a) of the CC&Rs, the court found that defendant, "like the [committee] in Valenti ," had broad authority under the CC&Rs to deny plaintiffs’ application. The court further found that the committee denied the application because "the RV/ oversized garage was not consistent with the overall aesthetic and character of the community." The court then concluded that, because plaintiffs presented no evidence at trial establishing fraud, bad faith, or a lack of honest judgment, defendant acted within its authority and did not breach the contract. The court also found that the CC&Rs and ORS 94.704(6) allowed defendant to collect application processing fees and the pavement assessment from plaintiffs.

DENIAL OF CONSTRUCTION PLANS

In the first through third assignments of error, plaintiffs argue that the trial court erred in upholding the committee's denial of plaintiffs’ proposal to construct an RV garage, because the committee failed to comply with the CC&Rs’ requirement that the committee act in good faith. In response, defendant argues that, because the CC&Rs grant the committee broad authority to approve or disapprove homeowners’ construction plans, under Valenti , the court should defer to the committee's decision as long as there is no fraud, bad faith, or failure to exercise honest judgment.

At the outset, we clarify that, contrary to what defendant argues and the trial court appeared to conclude, a court's deferential review of contractual terms under Valenti does not apply in every case involving disputes arising from an authorized third party's construction of the CC&Rs. The threshold question, as the court confirmed in Valenti , is still one of contract interpretation, i.e. , how the CC&Rs restrict the authority of the committee to make final decisions as to homeowners’ proposed construction plans. If the CC&Rs grant the committee broad discretion to make final decisions without further limitation, then Valenti applies; if the CC&Rs restrict the committee's discretion, then we apply that standard under the CC&Rs.

We thus start with the CC&Rs. Contract interpretation presents a question of law that we review for legal error. Eagle-Air Estates Homeowners Assn., Inc. v. Haphey , 272 Or. App. 651, 656, 354 P.3d 766 (2015), rev den , 359 Or. 166, 376 P.3d 278 (2016). In interpretating a contract, the court first "examines the text of the disputed provision, in the context of the document as a whole," inquiring whether the provision at issue is ambiguous. Yogman v. Parrott , 325 Or. 358, 361-64, 937 P.2d 1019 (1997) ; see also Batzer Construction, Inc. v. Boyer , 204 Or. App. 309, 315-17, 129 P.3d 773, rev den , 341 Or. 366, 143 P.3d 239 (2006) (explaining that, in determining whether a contract term is ambiguous, a court must consider evidence of the circumstances of contract formation, if provided by the parties, and that Yogman omitted that step only because no such evidence was presented in Yogman ). In the absence of an ambiguity, the court construes the words of a contract as a matter of law, and the analysis ends. May v. Chicago Insurance Co. , 260 Or. 285, 292, 490 P.2d 150 (1971) ; see also Valenti , 324 Or. at 331, 926 P.2d 813 ("Unambiguous contracts must be enforced according to their terms.").

We therefore start with the text and context of the relevant CC&Rs provisions to determine whether the Valenti deferential standard applies here. Yogman , 325 Or. at 361-64, 937 P.2d 1019. Section 5.1 of the CC&Rs vests power in the committee to "control and approve" all building plans. Section 5.2(a) further provides that "[b]efore commencing any building * * * written approval must be obtained from the Committee covering all aspects of such proposed activity, including building and plot plans for all structures erected * * * [and] garages and fences[.]" In determining whether...