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Meritage Homeowners' Association v. Bank of New York Mellon

United States District Court, D. Oregon, Eugene Division

April 13, 2018

KURT FREITAG, Third-Party Defendant.


          Ann Aiken United States District Judge.

         In this diversity action, plaintiff Meritage Homeowners' Association ("Meritage") alleges that defendant Bank of New York Mellon ("BNYM") owes more than one million dollars in dues, assessments, fees, and interest associated with a property located in a planned community on the Oregon Coast, Meritage at Little Creek. BNYM initially had a secured interest in the property; its purported liability to Meritage stems from the fact that it briefly took title to the property in connection with the former owners' Chapter 13 bankruptcy proceeding and later purchased the property in a § 363 sale under the Bankruptcy Code. BNYM asserts that it is current on all liabilities to Meritage and counterclaims for nuisance and failure to maintain common property, alleging that such failure has caused substantial damage to the property. BNYM also contends that third-party defendant Kurt Freitag ("Freitag"), the developer of Meritage at Little Creek who is in administrative control of Meritage, breached his fiduciary duty to members of Meritage.

         All parties now move for partial summary judgment. Meritage also seeks a preliminary injunction restraining BNYM from filing an action in state court to appoint a receiver to take over control of Meritage. The Court heard oral argument on the motions on April 4, 2018.

         For the reasons set forth below, (1) Meritage and Freitag are entitled to summary judgment with respect to the portions of the third-party claim against Freitag related to failure to maintain an adequate reserve balance, failure to provide required financial disclosures, and the placement of fitted and unfitted plywood boards over windows; and (2) BNYM is entitled to summary judgment on the issue of Freitag's authority to act on behalf of Meritage. The parties' motions are otherwise denied.


         Meritage at Little Creek is a planned community of townhouses on the Oregon coast developed by Freitag in his capacity as managing partner of Big Fish Partners I ("Big Fish"). In 2003, Freitag made a Declaration of Covenants, Conditions, and Restrictions ("the Declaration") in connection with their development of Meritage at Little Creek. The Declaration established a set of rules for the planned community: it defined Meritage's membership, allocated maintenance responsibilities, and set procedures for passing bylaws and levying dues and assessments. It also provided that Freitag, as Declarant, would retain administrative control over Meritage until a certain portion of the units were sold and conveyed to new owners.[1] Freitag retained administrative control of Meritage at all times pertinent to this lawsuit.

         Meritage at Little Creek was developed in phases, with construction on the first six units commencing in late December 2003. By October 2006, the community had grown to eighteen units, which sold for between $300, 000 and $400, 000. In 2006, Patricia and Nicholas Watt ("the Watts") took out a loan to purchase one of those units.[2] That loan was secured by a deed of trust and promissory note.

         2008 kicked off a long, tangled series of lawsuits in state and federal court related to Meritage at Little Creek. First, Meritage and Big Fish filed a construction defect action in state court, alleging defective installation of windows in all eighteen Meritage at Little Creek units ("the window litigation"). Meritage alleged that defective windows had caused substantial water damage to individual units as well as to common areas of Meritage at Little Creek. In 2011, the Watts and other Meritage at Little Creek owners sued Freitag, Big Fish, and Meritage in state court ("the HOA litigation"). The plaintiffs in the HOA litigation alleged claims for breach of fiduciary duty and negligence against Freitag and attempted to force Freitag to turn over control of Meritage to the unit owners. The plaintiffs in the HOA litigation also intervened in the window litigation. Later in 2011, Meritage sued the Watts and other unit owners in individual collection actions in state court ("the collection litigation") for failure to pay assessments, dues, and other fees.

         While those state court actions were pending, Freitag informed the unit owners by email that a window had blown out of one of the units and crashed to the ground, Freitag stated that, because other windows were at risk of falling in similar fashion, owners would be required to cover the windows until they were repaired or replaced. The owners objected, disputing whether the windows in fact needed to be covered. They threatened to seek a temporary restraining order to stop Meritage from covering the windows.

         In the midst of that dispute, a coastal storm blew out two more windows, including a window in the Watts' unit. At that point (February 2012), fitted plywood boards were placed over the windows in the Watts' unit and other units. Those boards were removed in October 2012 after the Watts signed an agreement indemnifying Meritage from liability if another window fell.[3]

         In 2012, the Watts defaulted on their mortgage payments. BNYM had by then acquired the beneficial interest in the Watts' loan and was the holder of the promissory note and deed of trust on the property. Also in 2012, the HOA litigation settled. Through a written agreement, the Watts agreed to release any claims against Meritage and Freitag arising from the same events underlying the HOA litigation.

         In September 2013, Freitag, in his capacity as Declarant, approved a resolution imposing a fine of $500 per day, up to $5, 000 per month, against any unit owner that failed to repair the windows or deposit money to begin the window replacement process.

         In 2013, the window litigation settled. The contractor who installed the windows in the Watts' unit and other units in that same phase of Meritage at Little Creek offered a financial settlement to unit owners in exchange for a promise to either replace their windows right away or re-cover the windows with plywood. The Watts agreed and a second set of plywood coverings were placed over the windows. However, for reasons unclear from the record, the windows were not re-covered until February 2014. The Watts promised to use window litigation settlement proceeds to replace the windows and released any future claims against Meritage or Freitag related to the events underlying the window litigation. The Watts also stipulated that the windows were defective and caused water damage to the property.

         In February 2014, Meritage obtained a stipulated judgment of $175, 504 against the Watts in the collection litigation. That amount reflected unpaid dues as well as special assessments levied against the Watts due to their failure to replace the windows. One month later, and without having made any window repairs, the Watts filed a petition for relief under Chapter 13 of the Bankruptcy Code. In June 2014, after Meritage objected to the Watts' first two plans, the Watts proposed a second amended Chapter 13 plan. That plan included a nonstandard provision vesting the Watts' unit in BNYM upon confirmation, in satisfaction of the Watts' secured debt to BNYM. BNYM objected to that forced vesting provision because, among other reasons, owning the property would make BNYM responsible for the ongoing obligations associated with the property-including dues and assessments. Those obligations were and are substantial. Dues for the property now exceed $25, 000 per year and, as noted, assessments for failure to replace the windows ran as high as $60, 000 per year.

         On October 15, 2014, the bankruptcy court confirmed the plan over BNYM's objection, and BNYM took title to the property. BNYM appealed. On April 22, 2015, this Court vacated and remanded, holding that the bankruptcy court lacked statutory authority to force an objecting creditor to assume a debtor's interest in and ongoing liabilities associated with a piece of property. Bank of N.Y. Mellon v. Watt, 2015 WL 1879680, *7 (D. Or. Apr. 22, 2015).[4] Title to the property transferred back to the Watts, who began work on a new Chapter 13 plan. On August 12, 2015, BNYM purchased the property through a sale under 11 U.S.C. § 363. Consistent with that statute, BNYM acquired the property "free and clear" of "any interest" in the property. Storti Decl. Ex. M, Oct. 20, 2017. The § 363 sale order made clear, however, that BNYM would be required to comply with the Declaration going forward-an obligation that included paying quarterly dues and any assessments levied by Meritage under the authority of the Declaration.

         In late 2015, Freitag convened Meritage's annual meeting. Freitag and Meritage's lawyer were the only people present at the meeting. Freitag determined, in his capacity as head of Meritage, that any fines or assessments related to the replacement of windows were "essentially self-renewing upon any event that would otherwise abrogate them" -for example, "in the event of a bankruptcy filing, . . . whereas the prior fines and assessments might be discharged, a new assessment and continuing fines would effectively apply beginning immediately after the filing." Freitag Decl. Ex. 11 at 4-5, July 17, 2017. Freitag further concluded that "even if a sale free and clear did affect [a] prior assessment, a new assessment would attach immediately after the sale." Id. at 5.

         In January 2016, Freitag sent BNYM invoices stating that it was required to pay approximately $300, 000 in assessments, fines, dues, and fees arising from pre- and post-§ 363 sale events. Jonas Decl. Ex. 1. The invoice listed a payment due date of February 15, 2016. When BNYM did not pay by that date, Meritage filed this lawsuit, seeking to recover the money it alleges BNYM owes. In its Answer, Meritage asserted counterclaims against Meritage for failure to maintain common property, unlawfully placing boards over the windows of BNYM's unit, and nuisance. Meritage also asserted a thirty-party claim against Freitag for bad faith breach of fiduciary duty.

         On March 14, 2016, BNYM paid Meritage $6, 685.70, the amount necessary to cover dues for the first quarter of 2016, interest on those dues (because the payment was late), and a late fee. Jonas Decl. Ex, 4 at 2. BNYM disputed that it owed any additional money at that point. Because BNYM did not pay the full amount demanded in the January invoices, Freitag applied the payment to reduce the overall amount due, declared BNYM in default, and accelerated the remaining dues payments for 2016. That pattern has repeated with each quarterly invoice: Freitag bills BNYM for dues, assessments, fines and fees; BNYM pays its quarterly dues amount; and Freitag applies that payment against the total owed rather than specifically against BNYM's dues obligation.

         BNYM has not replaced the windows at the property and they remain covered with plywood. BNYM had an architect examine the property during discovery; it now contends, citing that architect's expert opinion, that the windows at Meritage at Little Creek were not defective when installed. Rather, BNYM contends that it was Meritage's failure to maintain common property such as the exterior and chimney of the units that caused water intrusion and created the risk that windows would blow out. That theoiy echoes claims the Watts and other unit owners made in the HO A litigation.

         The windows have now been replaced in seventeen of the eighteen units at Meritage at Little Creek, with BNYM as the only holdout. In many of the seventeen other units, the new window system was installed only after Meritage obtained money and/or title to the unit through litigation with the unit owners. Pursuant to his unilateral authority as administrative head of Meritage, Freitag required uniform replacement that amounts to a substantial upgrade; the new window system increases the glass area of the units' ocean-facing facades from sixty percent to ninety-five percent. The upgrade costs approximately $175, 000, or roughly half what the typical units in Meritage at Little Creek sold for in 2006. Meritage and Freitag contend that Meritage has the authority under the Declaration to require BNYM to install a conforming window system for aesthetic reasons, regardless of whether the windows are in fact defective.

         The most recent invoice in the summary judgment record is dated October 2017. That invoice demanded that BNYM pay Meritage more than one million dollars. The total billed includes, among other items, more than $60, 000 in dues and associated fees and interest; the $175, 000 special assessment for failure to replace the windows; more than $80, 000 in window fines and interest; a $25, 000 "lost discount" assessment (levied because BNYM could have installed the new window system at a reduced rate had it acted sooner); a $206, 250 "economic loss assessment" related to an appraisal Meritage obtained regarding how the plywood over windows at the property has devalued the neighboring units; and more than $300, 000 in attorney's fees.[5] Jonas Decl. Ex. 4 at 29.

         The parties' versions of the facts in this case could hardly be more different. Meritage and Freitag contend that Freitag did what was necessary in his capacity as head of the HOA to ensure that a dangerous condition was eliminated, unit owners' investments were protected, and Meritage remained solvent. They argue that BNYM is, without legal or factual justification, simply refusing to bear its fair share of costs. BNYM, by contrast, argues that Freitag illegally maintained control over the HOA long after the time when control should have passed to the unit owners under the Declaration and Oregon law. It avers that Freitag both failed to live up to his obligations to maintain common property in a way that caused the damage he now attributes to defective windows and used aggressive, manipulative tactics to bully unit owners until they acquiesced to his demands, resulting in extravagant upgrades that have dramatically enhanced the value of his own investment. Unsurprisingly, and as set out in more detail below, such a dramatic dispute about the facts means that most of the parties' claims cannot be resolved at the summary judgment stage.


         Summary judgment is appropriate if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party has the burden of establishing the absence of a genuine issue of material fact. Id.; Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine issue of material fact, the nonmoving party must go beyond the pleadings and identify facts which show a genuine issue for trial. Id. at 324. "Summary judgment is inappropriate if reasonable jurors, drawing all inferences in favor of the nonmoving party, could return a verdict in the nonmoving party's favor." Diaz v. Eagle Produce Ltd. P'ship, 521 F.3d 1201, 1207 (9th Cir. 2008).


         There are four motions before me. First, Meritage and Freitag move for summary judgment on all BNYM's counterclaims and third-party claims. Second, Meritage and Freitag move for summary judgment on a portion of Meritage's first claim for relief, related to BNYM's liability for dues, assessments, and related fees and interest. Third, BNYM moves for summary judgment on the issue of Freitag's authority to carry out the actions giving rise to Meritage's claims. Finally, Meritage seeks a preliminary injunction to prevent BNYM from filing a receivership action in state court during the pendency of this case. Below, I address each motion in turn.

         I. BNYM's Counterclaims Against Meritage and Third-Party Claims Against Freitag

         Meritage and Freitag contend that they are entitled to summary judgment on all of BNYM's counterclaims and third-party claims for five reasons. First, they argue that BNYM is bound by the Watts' release of claims through the settlement agreements in the HO A litigation and the window litigation. Second, they aver that BNYM is bound by a separate covenant, recorded in Lincoln County, in which the Watts agreed not to sue over facts and circumstances alleged in the window litigation. Third, they assert that BNYM is judicially estopped from taking any factual position inconsistent with the facts to which the Watts stipulated in the settlement agreements and the covenant, including that the windows at the property are defective and cause water intrusion. Fourth, they argue that BNYM's claims against Freitag are derivative actions, and thus must fail due to pleading deficiencies and because Oregon law does not authorize derivative actions against homeowners' associations. Finally, Meritage and Freitag assert that BNYM has produced insufficient evidence in support of its claims.

         A. Releases in Settlement Agreements

         First, Meritage and Freitag argue that BNYM's counterclaims and third-party claims are barred by the Watts' promise to release claims in two contracts between the Watts and Meritage: the settlement agreement from the window litigation and the settlement agreement from the HOA litigation. Both agreements, in broad terms, released present and future claims arising out of the facts underlying lawsuits. Both agreements also purported to bind the "successors" and "assigns" of the contracting parties. See Bundy Decl. Ex. 4 at 1 & Ex. 8 at 4, Aug. 1, 2017. BNYM appears to be both the Watts' successor and assignee with respect to the property. See Assignee, Black's Law Dictionary (10th ed. 2014) (defining "assignee" as "someone to whom property rights or powers are transferred by another"); Successor, Black's Law Dictionary (10th ed. 2014) (defining "successor" as "someone who succeeds to the office, rights, responsibilities, or place of another; one who replaces or follows a predecessor").

         As an initial matter, BNYM cites Erection Co., Inc. v. W & W Steel, LLC, 2011 WL 5008325, *9-*10 (D. Or. Oct. 20, 2011) for the proposition that the settlement agreements are unenforceable because not all parties to the litigation signed the agreements. In Erection Co., two businesses sent various drafts of an agreement back and forth. They finally reached an agreement on terms, but the deal fell apart before both parties signed a final version of the contract, A letter of intent signed by both parties before the negotiations began provided that the contract "shall be effective only . .. when signed by all parties." Id. at *2 (emphasis in original). This Court held that the agreement was not enforceable. Ultimately, Erection Co. is not on point. Here, although some parties to the litigation did not sign the final agreements, both the Watts and Meritage did sign them. The Watts were therefore bound by their promise to abide by the terms of the agreements.

         The question, then, is whether the Watts' promises bind BNYM. "The interpretation of a settlement agreement is governed by principles of state contract law." Botefiir v. City of Eagle Point, Or., 7 F.3d 152, 156 (9th Cir. 1993). It is plain from the language of the agreements that the Watts intended to release the claims of their successors and assignees. But, as a general rule, parties to a contract have no power to bind third parties without their consent. Cf. Drury v. Assisted Living Concepts, Inc., 262 P.3d 1162, 1165-66 (Or. Ct. App. 2011) (holding that requiring a third-party beneficiary to arbitrate a contractual claim without first determining whether that beneficiary assented to the agreement would "allow contracting parties to alter the rights of a third party, based on whatever consideration the contracting parties intend to provide to the third party, and without regard for whether the third party deems that consideration to be an adequate exchange for the contractual obligations").

         BNYM cites several cases from other jurisdictions holding that when a corporation's assets are sold in an arms-length transaction, the purchasing entity is not liable for the corporation's debts or obligations as a successor or assignee. See, e.g., Cargo Partners v. Albatrans, Inc., 352 F.3d 41, 44-15 (2d Cir. 2003). Meritage and Freitag correctly point out that those cases are about the de facto merger doctrine, which is specific to corporate law. Nevertheless, I find the reasoning of those cases useful in adjudicating the question presented here. The de facto merger doctrine provides that, "when one corporation purchases all of the assets of another corporation, the purchasing corporation does not become liable for the debts and liabilities of the selling corporation." Tyree Oil, Inc. v. Bureau of Labor & Indus., 7 P.3d 571, 573 (Or. Ct. App. 2000). There are four exceptions to that rule:

(1) Where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts.

Id. at 573-74. In other words, the de facto merger doctrine asks whether there is some special reason to depart from the general rule and hold a successor corporation liable for the debts of its predecessor.

         Analogous reasoning can be applied here. There is no special reason in this case to depart from the baseline rule that contracting parties generally cannot bind absent third parties and hold BNYM to the promises the Watts made. Meritage and Freitag have failed to carry their burden to convince me that BNYM should be so bound. Their argument rests entirely on their assertion that the contract language plainly covers successors and assigns, and BNYM is both a successor and an assign. I agree on both points, but that argument simply misses the mark; BNYM was not a party to the agreements, and nothing in the summary judgment record suggests that I should depart from the usual rule and require BNYM to abide by promises it did not make. Thus, the releases of claims in the agreements do not bind BNYM.[6]

         B. Covenant Not to Sue

         Meritage and Freitag next argue that BNYM's counterclaims and third-party claims are barred by a release contained in a restrictive covenant signed by the Watts and recorded in Lincoln County on February 24, 2014. In Oregon, "[c]ovenants running with the land are binding upon and enforceable against subsequent purchasers with notice." Texas Co. v. Butler, 256 P.2d 259, 263 (Or. 1953). For a covenant to run with the land, "(1) there must be privity of the estate between the promisor and his successors; (2) the promisor and promisee must intend that the covenant run; (3) the covenant must touch and concern the land of the promisor; and (4) the promisee must benefit in the use of some land possessed by him as a result of the performance of the promise." Nordbye v. BRCP/GM Ellington, 266 P.3d 92, 101 (Or. Ct. App. 2011) (quoting Johnson v. Highway Division, 556 P.2d 724 (Or. Ct. App. 1976)). Even if the technical requirements for a restrictive covenant are not met, the release of claims in the covenant may be enforceable as an equitable servitude. In Oregon, a "promise is binding as an equitable servitude if (1) the parties intend the promise to be binding; (2) the promise concerns the land or its use in a direct and not a collateral way; and (3) the subsequent grantee has notice of the covenant." Ebbe v. Senior Estates Golf& Country Club, 657 P.2d 696, 700 (Or. Ct. App. 1983).

         The Watts agreed that they, and their "successors and assigns[, ] . . . shall not bring any future claims . . . arising out of, or related to, or in any way caused by the facts and circumstances alleged in the Window Litigation or related lawsuits . . . which could have been alleged [in those lawsuits.]" Bundy Decl. Ex. 10 at 2-3, Aug. 1, 2017. It is undisputed that there is privity of estate between the Watts and BNYM and that BNYM had constructive notice of the covenant, which was recorded before the § 363 sale. See Huff v. Duncan, 502 P.2d 584, 585 (Or. 1972). It is also clear from the use of the terms "successors and assigns" that the parties intended the covenant to run with the land. See Butler Family Ltd. P'ship v. Butler Brothers, LLC, 388 P.3d 1135, 1141 (Or. Ct. App. 2017). Thus, the parties' dispute over enforceability boils down to whether the covenant touches and concerns the land (the third prong of the restrictive covenant test) or concerns the land or its use in a direct way (the second prong of the equitable servitude test).

         At first glance, those two requirements appear somewhat different. However, the Oregon Court of Appeals has stated that "an equivalent formulation of the 'touch and concern' requirement is whether the promise is one respecting the use of the land of the promisor." Ebbe, 657 P.2d at 700 (quoting Huff, 502 P.2d at 584 n.2). Oregon courts eschew "applying the rule of touching and concerning in an overtechnical manner, " and ask whether non-lawyers "would naturally regard the covenant as intimately bound up with the land, aiding the promisee as landowner or hampering the promisor in similar capacity[.]" Abbott v. Bob's U-Drive, 352 P.2d 598, 604 (Or. 1960). In light of that case law, I see no principled distinction between the third prong of the restrictive covenant test and the second prong of the equitable servitude test.

         Whether the promise here touches and concerns the land presents a difficult and novel question of state law. In Huff, the Oregon Supreme Court held that a restriction requiring land to be used for residential purposes touched and concerned the land. 502 P.2d at 585. In Abbott, the court held that, because a covenant to pay rent touches and concerns the land, a covenant to arbitrate rent disputes also touched and concerned the land. 352 P.2d at 604. In Ebbe, the court held a restrictive covenant related to fees for maintaining an adjacent golf course did not touch and concern the land because subsequent purchasers had neither the right nor the obligation to become members with rights to use the golf course. 657 P.2d at 702. Finally, in Summer Oaks Limited Partnership v. McGinley, 55 P.3d 1100, 1105 (Or. Ct. App, 2002), the Oregon Court of Appeals held that "system development charge" credits available from the city to offset the costs of certain land improvements did not touch and concern the land because the credits were not tied to any particular parcel of land.

         In Summer Oaks, the Oregon Court of Appeals began

by acknowledging that the resolution to that question, or more specifically how to resolve it in the unique context of this dispute, is not obvious. That, largely, is due to the fact that, legally, the thing underlying this dispute-SDC credits-are 'neither fish nor fowl;' they relate neither to the title of the land nor are they neatly categorized as covenants or equitable servitudes that are more typically susceptible to the 'run with the land'-type analysis.

Id. at 1104-05. This case presents a similar "neither fish nor fowl" conundrum. Id. at 1105. The covenant in question is connected to the land because it relates to a promise not to sue over issues that were or could have been litigated in a construction defect lawsuit related to the property. But the connection to land is somewhat attenuated; the covenant does not directly restrict what a subsequent purchaser can or cannot do with the property. In sum, the Oregon cases on the scope of "touch and concern" do not resolve whether the covenant in this case touches and concerns the land. Accordingly, I turn to other jurisdictions for guidance.

         The Washington Supreme Court has held that a promise not to sue may be a covenant that runs with the land. 1515-1519 Lakeview Blvd. Condominium Ass'n v. Apartment SalesCorp.,43 P.3d 1233, 1239 (Wash, 2002). In that case, the covenant in question required owners of a particular piece of property to warn prospective purchasers that the property was a potential "slide area" and released any claims against the city relating to soil movement. Id. at 1235-36. The court noted the dearth of on-point case law and concluded that it was "an open question whether a covenant warning of risk and exculpating liability for that risk touches and concerns the land." Id. at 1238. The court then concluded that the covenant satisfied Washington's touch and concern doctrine because "the covenant [wa]s limited to the ...

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