.

Estelle Kokales McGrath

Supervisor, Professional Liability - Western Pennsylvania

Chair, Real Estate E&O Liability Practice Group

EKMcgrath@mdwcg.com

Portrait of Estelle Kokales McGrath

Defense Digest

HOA Living - It Is Not For Everyone

Defense Digest, Vol. 27, No. 2, March 2021

March 1, 2021

by Estelle Kokales McGrath

Key Points:

  • HOAs are self-governing entities that enact rules and regulations that each member must follow.
  • There are risks to being a member of an HOA, including litigation.

Have you seen that GEICO commercial where “Cynthia,” the over-the-top HOA (homeowner association) board member, advises the new neighbors of certain HOA violations? To correct the violations, Cynthia cuts hanging plants from their home and chainsaws off part of their mailbox because it was two inches over regulation. HOAs are self-governing entities that enact rules and regulations that each member must follow. For example, HOA rules and regulations can restrict the types of fences and sheds that can be erected and limit the color of an exterior door or home. Some homeowners believe that the rules and regulations enacted by HOAs help keep a tidy neighborhood. Homeowners also find associations appealing because they can provide amenities such as a pool, clubhouse, greenspace or walking trail. While there are perks associated with being a member of an HOA, there can also be risks, including litigation, which can certainly hamper the next neighborhood barbeque.

Litigation commonly arises after a homeowner experiences a dispute with their neighbor that the homeowner does not believe was handled appropriately by the HOA board. The Uniform Planned Community Act (UPCA), 68 Pa.C.S. §§ 5101-5414, governs homeowner associations in townhome and other planned communities, while the Pennsylvania Uniform Condominium Act (PUCA), 68 Pa.C.S. §§ 3101-3414, governs only condominium associations. HOAs are typically governed by a declaration and by-laws.

Homeowners often misinterpret the law in relation to the duties of volunteer board members and name them as defendants under a breach of fiduciary theory. Regardless of whether the board member was appointed by the declarant or elected by the unit owners, board members do not have a duty to an individual homeowner. Instead, their duty is to the association. The UPCA provides that executive board members appointed by the declarant “shall stand in a fiduciary relation to the association . . . .” 68 Pa.C.S. § 5303(a) (emphasis added). In contrast, board members who are elected by the other unit owners are only required to exercise “ordinary and reasonable care.” 68 Pa.C.S. § 5303, Uniform Law Comments n. 1. The UPCA comments provide that this “lower standard of care should increase the willingness of unit owners to serve as officers and members of the board.”

Moreover, the UPCA provides that any action in tort “alleging a wrong done by the association or by an agent of the association, or on behalf of the association, must be brought against the association.” 68 Pa.C.S. § 5311(2)(1) (emphasis added). Further, the governing documents of each HOA almost always provide for indemnification of its board members unless there was willful conduct. Additionally, some associations are governed by Pennsylvania’s nonprofit corporation law, which provides that a director shall not be personally liable for any monetary damages unless the director has failed to perform his duties and that failure to perform constitutes self-dealing, willful misconduct or recklessness. 15 Pa. C.S. § 5713. Even if a board member fails to adhere to the formalities of the UPCA and/or governing documents of the HOA, such does not constitute a breach of fiduciary duty. Lanzisera v. North Slope III Owners Ass’n, 2019 WL 1471265, at *7 (Pa. Cmwlth. April 2, 2019) (“The UPCA does not set forth a remedy much less mandate a conclusion that a violation is a per se fiduciary duty breach.”).

Pennsylvania courts have explained that individual homeowners lack standing to assert breach of fiduciary duty claims. In Carlson v. Fawn Ridge Estates Homeowners’ Ass’n, 2012 WL 1358573 (Pa. Cmwlth. 2012), a husband and wife sued their homeowners’ association and the director and officer of the HOA. One of plaintiffs’ claims was a breach of fiduciary duty. The trial court held that the plaintiffs could not bring such a claim because they lacked standing. On appeal, the Commonwealth Court explained that, under the Nonprofit Corporation Law, claims for breach of duty against a director or officer may only be brought by the corporation itself or in a derivative action on behalf of the corporation. Carlson, at 2012 WL 1358573, at *3 (citing 15 Pa.C.S. §§ 5717, 5782). The court noted that the plaintiffs did not state a derivative cause of action for a breach of fiduciary duty because they sought judgment in their favor and not on behalf of the HOA. Thus, the court explained that the plaintiffs could not assert a legally valid breach of fiduciary duty claim.

In Cooley v. Lofts at 1234 Condo. Ass’n, 2020 WL 1231394 (Pa. Cmwlth. Ct. 2020), an individual condominium owner filed a complaint individually and derivatively on behalf of the association against elected board members and the association. In regard to the plaintiff’s individual claims for breach of fiduciary, bad faith and self-dealing, the trial court found that the plaintiff lacked standing to assert them because the executive board member’s fiduciary duty was owed to the Association, not to the unit owner individually. The trial court noted that PUCA, 68 Pa. C.S. § 3303(a), provided that “officers and members of the executive board shall stand in fiduciary relation to the association.” Cooley, at *7 (quoting 68 Pa. C.S. § 3303(a)). The trial court also noted that the association’s declaration provided that “the officers and members of the Executive Board shall stand in a fiduciary relation to the Association.” The Commonwealth Court agreed with the trial court and found that the plaintiff’s individual breach of fiduciary duty claim was properly dismissed for lack of standing.

A breach of fiduciary duty claim is meant to enforce the rights of the association against self-dealing or disloyal board members. Under Pennsylvania law, an essential element of a breach of fiduciary duty claim is that the “wrong-doing directors must have been unjustly enriched.” Pink Lady, Inc. v. William Penn Loan Co., 150 A.2d 154, 156 (Pa. Super. 1959). (Emphasis added.) Most homeowners that sue under a breach of fiduciary duty theory complain that the board member failed to follow a particular regulation or did not rule in their favor. However, this is simply not enough to meet the elements of a breach of fiduciary claim, as such does not explain how a board member has been unjustly enriched. Another frequent error by homeowners in these suits is a claim of some speculative damage to their property value versus actual damage to the association.

A lawsuit against a HOA board member is different than other litigation because the parties live next to one another. Regardless of how or why the dispute began, it is always beneficial to attempt an amicable resolution with your board-member neighbor. No one ever truly wins in such litigation. Win or lose, litigation will surely lead to awkward neighborhood interactions in the future.

*Estelle is a shareholder and works in our Pittsburgh, Pennsylvania office. She can be reached at 412.803.1186 or ekmcgrath@mdwcg.com.

Defense Digest, Vol. 27, No. 2, March 2021 is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2021 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.

Firm Highlights

Thought Leadership

Florida Supreme Court Rules Florida Statute §627.70152 Does not Apply Retroactively

In a decision that resolves years of appellate uncertainty and confirms that insurers and insureds alike can rely on the legal framework in place when a policy is issued, the Supreme Court of Florida last week found that Florida Statute §627.70152, which involves an insured’s requirement to provide an insurer with pre-suit notice before filing a suit, cannot be applied retroactively. In Universal Property & Casualty Insurance Company v. Hughes, the Court was presented with the issue of whether the statutory pre-suit notice requirement applied retroactively and whether it would apply to a breach of contract of an insurance policy that was issued before the statute went into effect. Before the Court was an appeal from a homeowner, Ms. Hughes, who sued her insurance carrier, Universal Property & Casualty Insurance Company (Universal) for breach of contract under an insurance policy that was in effect from April 24, 2019 through April 24, 2020. During the policy period, Ms. Hughes suffered a loss and, on May 29, 2019, made a claim for water damage. The carrier investigated the loss and issued payment; Ms. Hughes disputed the payment, finding the amount insufficient for repairs. On July 1, 2021, Florida Statute §627.70152 went into effect, which required insureds to provide notice of intent to initiate litigation against the carrier prior to filing a lawsuit; if an insured filed the lawsuit without complying with §627.70152, a court must dismiss the case without prejudice. On August 4, 2021, Ms. Hughes filed her lawsuit against Universal for breach of contract. Universal moved to dismiss based on her failure to comply with §627.70152. Ms. Hughes contended the notice requirement could not be applied retroactively. The trial court disagreed and dismissed the lawsuit without prejudice, and Ms. Hughes appealed. During the appeal, the Fourth District Court of Appeal, in Cole v. Universal Property & Casualty, 363 So. 3d 1089 (Fla. 4th DCA 2023), ruled that Florida Statute §627.70152 did apply retroactively to policies issued before the effective date of §627.70152. However, the Sixth District Court agreed with Ms. Hughes and overturned the trial court’s ruling, finding the statute could not retroactively apply to policies issued prior to the statute effective date. Thereafter, the other district courts weighed in, with the Third District Court agreeing with the Fourth District Court, and the First, Second and Fifth District Courts agreeing with the Sixth District Court. In resolving the conflict amongst the district courts, the Supreme Court advised “as a general rule, ‘the statute in effect at the time an insurance contract is executed governs substantive issues arising in connection with that contract.’ Hassen v. State Farm Mut. Auto. Ins. Co., 674 So. 2d 106, 108 (Fla. 1996). The Court applied the two-step test when deciding whether a statute has retroactive application: “First, the Court must ascertain whether the Legislature intended for the statute to apply retroactively. Second, if such an intent is clearly expressed, the Court must determine whether retroactive application would violate any constitutional principles.” Menendez v. Progressive Exp. Ins. Co., 35 So. 3d 873, 877 (Fla. 2010). In analyzing the Legislature’s intent, the Court must determine whether the Legislature has manifested a clear command for retroactivity in the statutory text.  In review of the statutory text, the Court found nothing in the language of the statute to indicate that the phrase “all suits” was serving another purpose of expanding its reach to suits based on policies that both predate and postdate the enactment of the statute. Buis v. Universal Prop. & Cas. Ins. Co., 394 So. 3d 738, 741 (Fla. 2d DCA 2024). Further, the Court noted the statute has an effective date, which has long been considered to be evidence against retroactive application of a statute. The Court concluded that, on its face, no provision of §627.70152 speaks to application of the statute to insurance policies issued before the statute’s effective date and therefore, the Legislature did not clearly command retroactivity of the statute to include insurance policies issued prior to the enactment of the statute. The Court briefly reviewed Universal’s argument that the presuit notice requirement was procedural, not substantive, and therefore should be applied retroactively; however, the Court agreed with the Sixth District Court’s finding that, in its entirety, §627.70152 transformed an insured’s ability to sue an insurance company under a property insurance policy and an insurer’s obligations to respond to and pay insurance claims, thus making the requirement a substantive change. The Court thereby upheld the decision of the Sixth District and disapproved the decision of the Fourth District in Cole.

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Commonwealth Court Reaffirms the Constitutionality of Act 111's IRE Provisions

In this case, the claimant sustained a work injury of January 6, 1994, which was acknowledged by Notice of Compensation Payable (NCP). After the claimant’s receipt of 104 weeks of temporary total disability benefits, the employer filed a Request for an Impairment Rating Examination (IRE). The IRE was performed in May 2023 and the IRE physician found that the claimant had a 5% whole person impairment, under the AMA Guides. The employer filed a Petition based on the IRE results, and the Petition was granted by the WCJ. During litigation, the claimant argued that the IRE provisions of Act 111 (Section 306(a.3) of the Act) were not applicable to her injury, since it predated June 24, 1996, the date Act 57 went into effect, and that the IRE provisions were unconstitutional. The Workers’ Compensation Judge (WCJ)) granted the Petition and the Board affirmed. On appeal to the Commonwealth Court, the claimant argued that Act 111 violated the nondelegation doctrine and that its retroactive application to the claimant’s injury was unconstitutional. The court rejected the arguments on the basis that they had already found the same arguments without merit in multiple, prior cases. The court also addressed an argument made by the claimant that Act 111 was procedurally defective under the Pennsylvania Constitution because it was only considered on two days in each House after having undergone amendments and reassignments. The court noted that the Pennsylvania Constitution requires every bill to be considered on three different days in each House. The claimant maintained that, according to the legislative history, the bill did not receive three separate days of consideration from each House when it was assigned a new bill number. The court pointed out, however, that the bill number, H.B. 1840 remained constant and was considered on three occasions by the House. Further, the court concluded that minor amendments to the bill were germane to its original subject, which was to modify the Act’s IRE process, in accordance with Protz II.

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The Tolling Trap: Filing Alone Will Not Toll the Statute Without Good-Faith Service

The Eastern District of Pennsylvania recently reinforced a critical limitation on bad faith claims, holding that a timely filing alone will not preserve a cause of action absent a good-faith effort to serve the original process. The plaintiff had presented a claim for underinsured motorist benefits to his auto insurer. The insurer evaluated the claim and determined that the plaintiff’s accident-related damages did not exceed the bodily injury liability insurance limits of the at-fault driver and denied his claim. Among other claims, the plaintiff sought to present a claim for insurance bad faith under 42 Pa. C.S.A. § 8371, to which a two year statute of limitation applies. He first filed a praecipe for writ of summons before the expiration of the statute of limitation. However, the plaintiff did not attempt to serve the praecipe or writ until after the statute of limitations had expired. Additionally, the service failed as the plaintiff had mailed the original process to an incorrect address. Despite receipt of the Postal Service’s failure to deliver the original process, the plaintiff did not attempt to re-serve the writ. Two months later, the plaintiff filed a complaint and then successfully served that complaint. The insurer sought to dismiss the plaintiff’s bad faith claim as time-barred by the statute of limitations. The district court agreed. Though the plaintiff had filed a praecipe for a writ of summons prior to the expiration of the statute of limitations, the statute is only tolled if there is a good faith effort to serve that original process. In this case, the court determined that the plaintiff had failed to perform a “good faith effort to serve the original process”. Additionally, though the filing and service of a complaint can serve as alternative original process when the lawsuit is commenced by the filing of a praecipe for a writ of summons, the plaintiff filed his complaint after the statute of limitations had expired. The plaintiff’s bad faith claim was therefore determined to be barred by the statute of limitations and dismissed by the court, with prejudice. A key takeaway for the defense is not to assume that the statute of limitations has been successfully tolled by a plaintiff merely because a praecipe for a writ of summons or complaint has been filed prior to the expiration of the statute. A filed complaint or writ is only part of the equation. The defense should carefully review the docket and filings to confirm that the plaintiff also performed the requisite good faith effort to serve that original process. A thorough review of the docket may reveal that the plaintiff failed to make the good-faith service efforts necessary to toll the statute of limitations.

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