Justice Hearn

Facts of HOA-Developer dispute called “not for the weary”

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On February 8, the South Carolina Supreme Court issued an opinion* in a real estate case involving the I’On development in Charleston County. Justice Hearn’s opening sentence is revealing: “This case involves promises made and broken to homeowners by a developer and its affiliated entities.” The first sentence describing the facts is equally telling: “The facts of this case are complicated, and, (in the words of a prior Supreme Court opinion, citation omitted) are “not for the weary.”

I’On is described as a high-density residential development that comprises public squares, restaurants, shops, and homes designed to imitate historic urban housing, including a replica of downtown Charleston’s Rainbow Row. The opinion recites that after the Court rejected a referendum effort to restrict multi-use zoning, construction of I’On Phase II began around 2000.

In 2010 two individual homeowners sued the developer entities and individuals for various causes of action related to the nonconveyance of certain real property and community amenities within the neighborhood. A mistrial was ordered to realign the homeowner’s association as a plaintiff. A subsequent trial resulted in a jury verdict in favor of the HOA in the amount of $1.75 million for breach of fiduciary duty and in favor of an individual owner in the amount of $20,000 for negligent misrepresentation.

The history of the development includes a 1998 Property Report filed with the U.S. Department of Housing and Urban Development to comply with the Interstate Land Sales Full Disclosure Act. The report contained a paragraph in all caps promising that “recreational facilities” would be conveyed to the HOA upon completion of construction. But the report warned that certain recreational facilities may be owned and operated by persons other than the HOA.

The Court recited that shortly after the Report was issues, the developers began a pattern of conduct altering their initial promise to convey ownership of the disputed properties to the HOA. Later, an easement agreement was executed and signed by the same person in three different roles, as manager of the I’On Club, as president of the HOA, and as general manager of the I’On Company. A property owner expressed the concern that this agreement was “sort of shaking hands with yourself.”

The Court of Appeals waffled, first upholding the lower’s court’s verdicts, then, on rehearing, practically nullifying the verdicts.

I am not going to get down into the weeds on the complex facts, but I do want to make a couple of points for your information.

First, the statute of limitations issues were thorny, and the Supreme Court upheld the Circuit Court’s submission of these issues to the jury and stated that the facts supported the jury’s determination of the question of when the statute of limitations began to run.

Second, please pay attention to footnote 7. It states that the developer conceded on appeal that one individual owner’s contract to purchase his lot was a sealed instrument and thus has a twenty-year statute of limitations under S.C. Code §15-3-520. Please pay particular attention to whether your clients signed “sealed instruments” because liability under those instruments may be much longer than anticipated.

Otherwise, the Court was adamant that the verdicts were appropriate because of the “plethora of evidence presented of the Developers’ bad faith, broken promises, and self-dealing.”

Represent your developer clients well, dirt lawyers, to avoid losing cases like this one.  Read this case carefully and share it with your developer clients as an excellent lesson of what not to do!

*Walbeck v. The I’On Company, LLC, South Carolina Supreme Court Opinion 28134 (February 8, 2023)

Welcome to The Hotel California*

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You can resign; but you can never stop paying dues

 

hotel california

A recent South Carolina Supreme Court case deals with whether the governing documents of a Beaufort County development, Callawassie Island, unambiguously require equity members to continue paying expenses after resignation.** The trial court and Supreme Court found no ambiguities. The Court of Appeals and Supreme Court Justice Hearn disagreed.

In 1999, Ronnie and Jeanette Dennis purchased a home on Callawassie Island for $590,000 and joined a private club known as the Callawassie Island Club, paying $31,000 to become “equity members”. The governing documents in place at the time of the purchase provided that an equity member who resigns will be obligated to continue to pay dues and food and beverage minimums to the Club until the equity membership is reissued.

In 2010***, Mr. and Mrs. Dennis decided to resign their membership in the club but to retain ownership of their home. They sent a letter of resignation to the club and stopped making all payments. At that time, the required payments included $634 monthly as membership dues, $100 monthly in special assessments, and $1,000 yearly in food and beverage minimums.

The governing documents were amended many times over the years, and the dissent argued that the controlling documents at issue in the case could not even be identified by the Club. The Supreme Court held, however, that all versions of the documents contained the language requiring the continued payments.

Mr. and Mrs. Dennis argued, and the Court of Appeals agreed, that the Club’s interpretation violates §33-31-620 of the South Carolina Nonprofit Corporation Act which provides that a member of a nonprofit corporation may resign at any time. The Supreme Court pointed to subsection (b) of that statute, however, which states that a resignation does not relieve the member from any obligations incurred prior to the resignation. The dissent said the majority’s interpretation effectively eliminates any meaningful right of resignation.

The dissent called the majority’s result “harsh” and stated that taking the majority’s view to its “logical end”, the monetary obligations to the club would extend beyond a member’s lifetime. The majority stated that they were not deciding whether the governing documents could support perpetual liability. The emphasis was provided by the Court.

The Supreme Court suggested that Mr. and Mrs. Dennis could have eliminated their obligations to the Club by selling their home. In footnote 7, the dissent countered that the majority “blithely” suggests selling the house, which may be easier said than done.

The footnote refers to a news article included in the record that reveals the Club’s membership scheme has significantly chilled potential buyers. **** According to this article, one member failed to sell her property for more than two years, despite listing it for $1. As of July of 2016, according to the article, eight lots were listed at less than $10,000 each. The footnote asserts that these facts bely the use by the majority of the description of Callawassie Island property as “exclusive.”

The circuit court had awarded the Club summary judgment, and the Supreme Court reinstated that order. What an interesting case! I hope some of my lawyer friends from Beaufort County will let me know whether the homes in this development are selling better in 2018.

 

*Not my joke.  See footnote 4 of the case:  “Although we disagree with the court of appeals’ legal reasoning here, we do applaud the reference to the Eagles’ hit Hotel California.”  Who said justices aren’t funny?

**The Callawassie Island Members Club, Inc. v. Dennis, South Carolina Supreme Court Opinion 27835 (August 29, 2018).

***Keep in mind how dismal the economy continued to be in South Carolina in 2010.

****Kelly Meyerhofer, Callawassie Club ruling: Court sides with members, cited Eagles song, The Beaufort Gazette (August 5, 2016).