Bosco v. Arrowhead by the Lake Ass'n., Inc.

Full title: ROBERT A. BOSCO ET AL. v. ARROWHEAD BY THE LAKE ASSOCIATION, INC

Court: Connecticut Superior Court Judicial District of Waterbury at Waterbury

Date published: May 8, 2008

2008 Ct. Sup. 7641 (Conn. Super. Ct. 2008)

Opinion

No. CV05-4007579S

May 8, 2008

MEMORANDUM OF DECISION RE MOTION FOR SUMMARY JUDGMENT

VINCENT E. ROCHE, JUDGE.

FIRST ISSUE:

Presently before the court is the defendant's motion for summary judgment. The issue presented for the court is whether the plaintiff, Alan Needleman, then president of the defendant Association, was authorized in his execution of the promissory note in question. The Court finds that the execution of said note by Needleman was not authorized by the Board of Directors of the defendant Association nor approved by the unit owners as required by the Declaration and Bylaws of the Association, and therefore, is ultra vires, and not valid.

FACTS

In August 1995, the defendant, Arrowhead by-The-Lake Association, Inc. (the Association), brought an action against the then developers of the condominium development, seeking to enjoin the developers from making changes to the Declaration that would have altered the rights of the existing unit owners. On December 31, 1996, Judge Reifberg granted the Association's application for temporary injunction, conditioned on the Association's posting of a $300,000 bond to protect the interests of the developers. Unable to obtain a bond on its own, the Association looked inwards to its own unit members for assistance. Twenty-two unit owners agreed to pledge personal assets totaling $230,000 to secure the $300,000 bond. On December 22, 2000, the court, West, J., granted the Association's permanent injunctive relief and ordered the $300,000 bond to be released. At that time an appeal was filed by the developers.

On April 24, 2001, the Board of Directors (the Board) met in executive session following a Board of Directors Meeting.¹ During this executive session, the Board approved a resolution that would be used to disburse the funds from a potential settlement with the developers. In this resolution it was agreed that upon the completion of the sale of the Building rights,² the Association would pay a sum of $200,000 to their attorney, Pat Ayers, to be distributed as the resolution reflects. Relevant to the present action is the language of the resolution which provided that Ayers would distribute $120,000 of the $200,000 to the twenty-two unit owners as "[r]eimbursement of losses in income and compensation for the risk associated with the $300,000 bond." On August 6, 2001, Ayers sent out a letter to all Unit Owners informing them that the Association's suit against the developers had settled, and suggested what the Association should do with their "cash windfall. "³

1 The minutes of the April 24, 2001 Board of Directors' Meeting reflect that there was talk of a potential agreement between the Association and the developers to resolve their pending lawsuit.

2 These are the Building Rights the Association was to obtain as part of the resolution of the case between the Association and the developers.

3 Ayers wrote that she had suggested to the Board and the Board had endorsed the concept that the Association should return funds to those who advanced funds to continue the litigation and should compensate those people who pledged their property for the surety bond for lost income during the four years the bond was in place.

On September 1, 2001, Alan Needleman, then president of the Board, executed a Note and Indenture (the Note) requiring the Association, the obligor of the note, to pay $120,000 to twenty-two unit owners as set forth in the resolution. On March 5, 2002, the Board voted to temporarily overturn the decision to reimburse these unit owners, and in October 2002, after conferring with an attorney, refused to pay the "compensation" claimed by the plaintiffs.⁴ This lawsuit ensued. The Association argues that the Board was not authorized in passing the resolution and as a result, Needleman's executing of the note was ultra vires.

4 The plaintiffs in the present action are Robert Bosco, Alan Needleman and Florence Bosco, obligees of the Note in question.

ARGUMENT AND FINDINGS

According to Black's Law Dictionary, ultra vires is defined as "[u]nauthorized [acts]; beyond the scope of power allowed or granted by a corporate charter or by law." Black's Law Dictionary (8th Ed. 2004). "The expression `ultra vires' is one of broad application. [Courts] have designated as ultra vires a corporate act which is not within the power of the corporation to perform . . . The term has been applied to transactions prohibited by law as well as those in excess of powers granted." (Citations omitted.) Community Credit Union v. Connors, 141 Conn. 301, 305, 105 A.2d 772 (1954). "When a court is called upon to assess the validity of [an action taken] by a board of directors, it first determines whether the board acted within its scope of authority and, second, whether the [action] reflects reasoned or arbitrary and capricious decision making." (Internal quotation marks omitted.) Weldy v. Northbrook Condominium Assn., 279 Conn. 728, 734, 904 A.2d 188 (2006).

"The statutory scheme in Connecticut governing condominium developments is the Common Interest Ownership Act [(the Act), General Statutes § 47-200 et seq.] . . . [The Act] entails the drafting . . . of a declaration, . . . the enactment of bylaws, . . . the establishment of a unit owners' association . . . and [the establishment of] an executive board to act on behalf [of the association] . . . [The Act] anticipates group decision-making relating to the development of a budget, the maintenance and repair of the common elements, the placement of insurance, and the provision for common expenses and common liabilities." (Citations omitted; internal quotation marks omitted.) Id., 735-36.

In determining whether Needleman acted within his scope and authority in executing the Note, the actions of the Board in passing the resolution must first be analyzed. If the Board was authorized to pass the resolution during Executive Session, it would provide some credence for the actions of Needleman. The powers and duties of the Board are governed by the Act, as well as by the Declaration and the Bylaws of the Association and even within the common law. Celentano v. Rocque, 282 Conn. 645, 665 (2007).

Article XXV of the Association's Declaration governs meetings of the Association's Executive Board and provides in relevant part: "All meetings of the Executive Board, at which action is to be taken by vote at such meeting shall be open to the Unit Owners, except . . . [m]eetings of the Executive Board may be held in executive session, without giving notice and without the requirement that they be open to Unit Owners, but only if either: (a) No action is taken at the executive session requiring the affirmative vote of Directors; or (b) The action taken at the executive session involves personnel, pending litigation, or enforcement actions." Declaration of Arrowhead by-The-Lake, Article XXV, §§ A and C(a)(b).

The plaintiffs argue that the action taken at the executive session on April 24, 2001 involved pending litigation. They claim that as of April 24, the lawsuit had not settled and was still pending.⁵ The Association argues that this resolution did not involve pending litigation because during the Board of Directors' Meeting held immediately prior to the executive session it was discussed that the case was about to settle.⁶ To dispute the Mid-November settling date suggested by the plaintiffs, the Association has offered an August 6, 2001 letter from the Association's attorney, Ayers, in the "developer suit." The opening line of this letter, addressed to all Unit Owners, declared that suit had settled and that all claims have been dropped. This letter further states that Ayers had already instructed the Board on how to proceed with the "cash windfall" and that the Board had endorsed the concept. It is from this letter that one can infer that when the Board voted in a private session on April 24, 2001, they did so with the knowledge that the lawsuit was no longer pending, under the advice that it had settled. Assuming that the legal action was still pending the Board still acted in an inappropriate manner when it voted in an executive session.

5 Mutual withdrawals of the "three lawsuits" were submitted to the court in Mid-November 2001.

6 The minutes of the April 24, 2001 Board of Directors' Meeting indicate that the Association's attorney was scheduled to be back in court during the week to hopefully reach an agreement.

Looking to the Bylaws of the Association, the powers and duties of the Board of Directors is set out in Article III, § 3. It provides in relevant part that: "The Board of Directors may act in all instances on behalf of the Association, except as provided in the Declaration, these Bylaws or the Act. The Board of Directors shall have the powers and duties necessary [to] . . . [m]ake contracts and incur liabilities . . . [and to] [a]ssign its right to future interests." (Emphasis added.) Bylaws of Arrowhead by-The-Lake Association, Inc., Article III, § 3(f). An exception to this Bylaw is found in Article XX of the Declaration.

The resolution and the Note provided that the $200,000 amount would be paid from monies received from the Association's sale of the development rights of the once disputed property, after such sale occurred. The Association's Declaration in Article XX provides for the means to assign the rights to future income. It provides in relevant part: "Upon an affirmative majority vote of the Unit Owners in attendance at a meeting at which quorum is present . . . the Association may assign its future income, including its right to receive Common Expense⁷ assessments." Declaration of Arrowhead by-The-Lake. Article XX. No such meeting or vote occurred.

7 "The term `Common Expenses' shall mean expenditures made by, or financial liabilities of, the Association . . ." (Emphasis added.) Declaration of Arrowhead by-The-Lake, Article I, § F.

Further evidence that the resolution passed in the executive session was not within the scope and the authority of the Board can be found in Article XIX of the Declaration. Article XIX, § D, involving budget adoption and ratification, provides in relevant part that: "Within thirty (30) days after adoption of any proposed budget for the Condominium, the Executive Board shall provide a summary of the budget to all the Unit Owners, and shall set a date for a meeting of the Unit Owners to consider ratification of the budget . . ."⁸ This budgetary process has been broken down into a two-step process. "First, the executive board of a unit owners' association must adopt a budget for the upcoming year . . . Second, the unit owners must either reject or ratify the proposed budget at an annual meeting." (Citations omitted.) South End Plaza Ass'n., Inc. v. Johnson, 62 Conn.App. 462, 467, 767 A.2d 1267 (2001). At the Annual Unit Owners' Meeting held on November 27, 2001, there was no mention of the Note or the resolution and how it would impact the budget. The budget contains no language about the Association's indebtedness to the plaintiffs.

8 Looking to § 47-245 of the Act we find identical language to that of the Declaration.

It appears that the actions of board in passing this resolution were not within the scope and authority of the Board. While they may have had the ability to pass such a resolution, they went about it improperly. As such when Needleman signed the Note on September 1, he did so without the proper authority of the Board. It was not within his or the Board's power to cause the Association to become indebted to the plaintiffs in the manner that they did.

SECOND ISSUE:

What is the proper mode for calculation of lost profits?

FACTS

The only factual add-on to this portion is that the $120,000 figure provided by Ayers for "reimbursement of losses in income" was based on the twenty-two unit owners having missed out on a potential ten percent interest when their money was tied up in the bond.⁹

9 Ayers wrote that the Unit Members would have received fifteen percent if their money had not been used for the bond where it was only earning approximately five percent.

ARGUMENT AND FINDINGS

This fifteen percent figure came from Ayers's analysis of the DOW, NASDAQ and SP during the time of the bond. She concluded that the average percentage increase of these three indexes during that time was 171.87 percent. She determined that the average yield on the CDs compounded was 21.6 percent. From this difference of 150 percent Ayers conservatively calculated a percent loss of only ten (10%) percent, with no compounding of interest.

When asked to forecast future interest rates, the court in Towns of New Hartford v. Connecticut Resources Recovery Authority, Superior Court, complex litigation docket at Waterbury, Docket No. X02 CV 04 0185580 (October 25, 2007, Eveleigh, J.) held that the party had "a good faith belief in its estimate of interest rates . . . [and] [i]n the absence of some expert testimony to the contrary, the court cannot speculate on this item. Public policy may even enter in preventing usury from occurring." The Philadelphia Loan Co. v. Towner, 13 Conn. 249, 255 (1839); 43 CBJ 251 (1969).

The plaintiffs have provided some documentation of how Ayers calculated the figure, but the Court cannot assume these lost interest amounts without speculating as to their validity or about the process used to arrive at such a figure.

The plaintiffs have been made whole in an equitable sense and equity holds that is done which should be done. Pomeroy Equity Jurisprudence, Vol. 2., Chapter I, Sect. I. Therefore, based on the above findings and the more credible evidence, the defendant's summary judgment motion is granted.

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