DAVIS v. LAKEWOOD PROPERTY OWNERS ASSOCIATION INC (2017)

Roger J. Davis, Robert Kronschnabel, and Timothy McCraw (collectively, “Appellants”) appeal from the circuit court's judgment declaring that the calculation of assessments by the Lakewood Property Owners Association, Inc.'s (“Lakewood”) Board of Directors (“Board”) is protected by the business judgment rule. Appellants contend that the Board's calculation of assessments is ultra vires and, therefore, not protected by the business judgment rule. For reasons explained herein, we reverse and remand the cause for entry of judgment in accordance with this opinion.

Factual and Procedural History

Lakewood subdivision is a real estate development in Lee's Summit. In August 1973, a Declaration of Covenants, Conditions, and Restrictions (“the Declaration”) pertaining to the development was filed. Article VI, Section 4 of the Declaration provides for annual assessments on lots and sets out a procedure for determining the amount to assess. Specifically, the Declaration provides for the Board to calculate a maximum annual assessment amount and then to set an actual annual assessment in an amount not in excess of the maximum annual assessment. After stating that the initial maximum annual assessment through January 1, 1974, would be $200 for each lot, the Declaration explains how to calculate the maximum annual assessment and the actual annual assessment going forward:

(a) From and after January 1, 1974, the maximum annual assessment in each of the heretofore enumerated categories may be increased effective January 1 of each year without a vote of the membership in an amount equal to 150% of the rise, if any, of the Consumer Price Index (published by the Department of Labor, Washington, D.C.) for the preceding month of July.

(b) From and after January 1, 1974, the maximum annual assessment for any or all categories may be increased without regard to the Consumer Price Index formula by a vote of the members for the next succeeding year, and at the end of each such period of one year, for each succeeding year, provided that any such change shall have the assent of a majority of the votes of Class A, B and D members and the approval of all Class D members who are voting in person or by proxy at a meeting duly called for this purpose, written notice of which shall be sent to all members not less than 30 days nor more than 60 days in advance of the meeting setting forth the purpose of the meeting. The limitations hereof shall not apply to any change in the maximum and basis of the assessments undertaken as an incident to a merger or consolidation in which the Association is authorized to participate under its Articles of Incorporation.

(c) After consideration of current maintenance costs and future needs of the Association, the Board of Directors may fix the annual assessment at any amount not in excess of the maximum, provided, however, the actual assessments for each of the heretofore identified categories must bear the same ratio to the assessments imposed in other categories as the maximum annual assessment for each such category bears to the maximum annual assessments for other categories.

Under these provisions, the Board is permitted to increase the maximum annual assessment in an amount equal to 150% of the rise, if any, of the Consumer Price Index (“CPI”) for the preceding month of July without a vote of the membership. If the Board wishes to increase the maximum annual assessment without regard to the CPI, it must obtain a vote of the membership. After calculating the maximum annual assessment and considering the current maintenance costs and future needs, the Board may then fix the actual annual assessment in an amount that does not exceed the maximum annual assessment.

The Board held its first meeting in September 1973. During that meeting, the Board adopted Bylaws. The Bylaws address many of the topics set forth in the Declaration, including the calculation of assessments. The Bylaws specifically state, however, that, in the case of conflict between the Declaration and the Bylaws, the Declaration controls.

Article XI, Section 5 of the Bylaws explains how to calculate the increase in the maximum annual assessment subject to the “applicable provision of the Declaration:”

The Consumer Price Index for All Urban Consumers, U.S. City Average for July 1967 (U.S. Department of Labor, Bureau of Labor Statistics) was 125.5; this will be the base rating. To determine the maximum annual assessment for each subsequent year, the following formula shall be employed:

where CPI-U is the Consumer Price Index for All Urban Consumers, U.S. City average for the month of July preceding the proposed assessment year.¹

Since 1979, the Bylaws have provided that the Board has a duty to calculate the maximum annual assessment in accordance with this formula and then set the actual annual assessment for each lot. Consequently, each November, the Board takes up for consideration whether to increase the assessments for the coming year. Since 1992, the minutes of the Board's meetings reflect an amount that the Board considers to be the maximum annual assessment for each year. Although the Board's minutes of meetings before 1992 do not reflect maximum annual assessment amounts for each year, the minutes do indicate that the Board had discussions regarding the maximum annual assessment, and the minutes reference schedules regarding assessments. Since 1973, the actual annual assessment set by the Board for a particular year has never exceeded the maximum annual assessment calculated for that year pursuant to the formula in the Bylaws.

In December 2015, Appellants, all owners of lots in the Lakewood subdivision, filed a petition for declaratory judgment against Lakewood. In their petition, Appellants alleged that, in November 2015, the Board increased the actual annual assessment by $84, from $1236 to $1320. Appellants argued that this increase exceeded the maximum increase permitted by the Declaration without a vote of the membership. Appellants asked the court to declare whether Lakewood could adjust the actual annual assessment by $84 without a vote of the membership.

In response, Lakewood filed a counterclaim for declaratory judgment. Lakewood alleged that it was its “longstanding practice and business judgment” to complete the calculation set forth in the Bylaws to determine the maximum annual assessment for a given year and then adopt an actual annual assessment at a lower rate than the maximum annual assessment for the same period. Lakewood further alleged that, at the November 2015 meeting, the Board calculated the maximum annual assessment to be $1622.65. Lakewood alleged that the Board then “exercised its business judgment” to set the actual annual assessment for 2016 at $1320. Lakewood asserted that, because the actual annual assessment was “well under” the maximum annual assessment, no vote of the membership was required. Lakewood asked the court to declare that the Board exercised sound business judgment in calculating, determining, and authorizing the maximum annual assessments and actual annual assessments.

The court held a hearing, during which both parties offered testimony and evidence regarding how the maximum annual assessment and actual annual assessment should be calculated each year. Appellants contended that, pursuant to the Declaration, the maximum annual assessment is to be calculated based upon the most recent annual increase in the CPI. If the CPI has increased over the course of the past year, then 150% of that CPI increase would be the amount of the authorized increase in the maximum annual assessment.

In response, Lakewood argued that the Bylaws' formula for calculating the maximum annual assessment is the correct way to calculate the maximum annual assessment under the Declaration. The Bylaws' formula calculates the increase in the CPI from 1973, which was 125.5, to the CPI for the month of July preceding the proposed assessment year, then applies 150% of that increase to the original 1973 maximum annual assessment of $200 to determine the new maximum annual assessment. Lakewood asserted that the Board has been using this formula since its inception and that there is no conflict between the Declaration and the Bylaws concerning the calculation of the maximum annual assessment.

Following trial, the court entered judgment in favor of Lakewood. In its judgment, the court declared that the Board's interpretation of the Declaration and Bylaws, as it relates to the calculation of the maximum annual assessment and actual annual assessment, was made within the Board's authority, in good faith, uninfluenced by any consideration other than an honest belief that the actions promoted Lakewood's best interests, consistent with historical practice and, therefore, is protected by operation of the business judgment rule. Appellants appeal.

Standard of Review

We review a declaratory judgment as we review any other court-tried case. City of Kansas City, Missouri v. Chastain, 420 S.W.3d 550, 554 (Mo. banc 2014). “The judgment will be affirmed unless there is no substantial evidence to support it, it is against the weight of the evidence, or it erroneously declares or applies the law.” Id. (citation omitted). The dispositive issue in this case is the interpretation of the Declaration. This is an issue of law, which we review de novo. Executive Bd. of Mo. Baptist Convention v. Carnahan, 170 S.W.3d 437, 447 (Mo. App. 2005).

Analysis

In their sole point on appeal, Appellants contend the circuit court erred in declaring that the Board's calculation of the maximum annual assessment and actual annual assessment is protected by the business judgment rule. They argue that the calculation conflicts with the calculation set forth in the Declaration and, therefore, is ultra vires and not protected by the business judgment rule.

“The business judgment rule protects the directors and officers of a corporation from liability for intra vires decisions within their authority and made in good faith, uninfluenced by any consideration other than an honest belief that the action promotes the corporation's best interest.” Virgil Kirchoff Revocable Trust Dated 06/19/2009 v. Moto, Inc., 482 S.W.3d 834, 841 (Mo. App. 2016). “The rule precludes courts from interfering with the decisions of corporate officers and directors absent a showing of fraud, illegal conduct, an ultra vires act, or an irrational business judgment.” Id. at 842 (citation omitted). “The term ‘ultra vires' has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited.” State ex rel. Supreme Temple of Pythian Sisters v. Cook, 136 S.W.2d 142, 146 (Mo. App. 1940) (citation omitted).

Appellants argue that, in calculating the maximum annual assessment and actual annual assessment, the Board is acting in excess of its powers because the formula it uses to calculate the maximum annual increase is not authorized by the Declaration. They assert that the Declaration does not allow the Board to apply the cumulative increase in the CPI since 1973 but, rather, allows the Board to apply only the increase in the CPI over the past year in calculating the maximum annual assessment.

In support of this interpretation, Appellants rely on Marshall v. Pyramid Development Corporation, 855 S.W.2d 403 (Mo. App. 1993). Marshall involved a similar dispute, between the Raintree Lake Property Owners Association (“Raintree Lake”) and lot owners in the subdivision, over an increase in assessments made without a vote of the membership. Id. at 408-09. At the trial of this case, a copy of Raintree Lake's declaration and its brief on appeal in the Marshall case were admitted into evidence. Raintree Lake's declaration shows that the language concerning the maximum annual assessment and the actual annual assessment in the declaration at issue in that case was virtually identical to the language of Lakewood's Declaration in this case. In fact, the only differences between Raintree Lake's declaration and Lakewood's Declaration is the commencement date of the assessments (Raintree Lake's commencement date was “From and after January 1, 1978”; Lakewood's commencement date is “From and after January 1, 1974”), and the amount of the permissible increase in the maximum annual assessment (Raintree Lake's permissible increase was “in conformance with the rise, if any, of the [CPI] for the preceding month of July”; Lakewood's permissible increase is “in an amount equal to 150% of the rise, if any, of the [CPI] for the preceding month of July”).

The Marshall opinion and Raintree Lake's brief in that case indicate that, for many years, the Raintree Lake board interpreted its declaration the same way Appellants in this case interpret Lakewood's Declaration, which was that any increase in the maximum annual assessment was to be based solely on the increase in the CPI for the preceding year. Id. at 409. In November 1991, however, the Raintree Lake board decided to raise the actual annual assessment in an amount equal to the full CPI increase plus an additional $84. Id. at 408.

The Raintree Lake board justified this increase by claiming that its bylaws permitted it “to raise the annual assessments on a cumulative basis on the property.” Id. Raintree Lake argued in its brief that former members of the Raintree Lake board had misinterpreted the declaration in prior years by calculating the maximum annual assessment based only on the preceding year's CPI increase. Like Lakewood in this case, Raintree Lake asserted that its bylaws, which contained a formula that is virtually identical to the formula set forth in Lakewood's Bylaws, allowed the board to calculate the increase in the maximum annual assessment by taking into account the increase in the CPI rate since the inception of the association. Raintree Lake argued that, when the maximum annual assessment was calculated using the cumulative formula set forth in the bylaws, the amount of the maximum annual assessment was greater than the actual annual assessment that the Raintree Lake board proposed in November 1991; therefore, the proposed increase in the actual annual assessment was permissible.

We disagreed with the Raintree Lake board's “new” interpretation of its declaration concerning the calculation of the maximum annual assessment and actual annual assessment. Id. at 409. We found that Raintree Lake's declaration “limits the amount of the annual assessment without a vote of the membership to the CPI for the preceding month of July and the [b]oard is not authorized to accumulate previous unused increases of the CPI.” Id. Indeed, we held that “[s]uch an interpretation is clear and obvious from the language of the [d]eclaration.” Id. We explained that, “[w]here no ambiguity on a contract exists, [the] intent of the parties is to be garnered from the contract itself, and it becomes the duty of the court to state its clear meaning.” Id. Therefore, we affirmed the circuit court's ruling that the Raintree Lake board's increase in the annual assessment was limited to the CPI rise for the preceding year. Id.

Despite Marshall's clear holding that virtually identical language in the declaration in that case required the Raintree Lake board to calculate the maximum annual assessment based solely on the increase in the CPI from the preceding year and not on the increase in the CPI since the association's inception, Lakewood argues that Marshall is distinguishable. Lakewood contends that, because its Board calculates the maximum annual assessment each year pursuant to the Bylaws' formula, previous increases in the CPI rate have not been “unused.” According to Lakewood, by recognizing the annual increase in the CPI each year through its calculation of the maximum annual assessment, its Board has preserved its ability to rely on those previous CPI increases to set actual annual assessments in later years, so long as those actual annual assessments are lower than the maximum annual assessments. We disagree.

In all material respects, this case is indistinguishable from Marshall. Like the formula in Raintree Lake's bylaws, the formula in Lakewood's Bylaws allows the Board to “accumulate previous unused increases of the CPI,” which is exactly what our decision in Marshall prohibits. Id. Like Raintree Lake's declaration, the unambiguous language of Lakewood's Declaration limits the amount of the increase in the maximum annual assessment without a vote of the membership to the increase in the CPI over the preceding year. Id. The Declaration does not authorize the Board to increase the maximum annual assessment based on the cumulative increases in the CPI since Lakewood's inception. That the Board is using a formula set forth in the Bylaws to calculate the maximum annual assessment in this manner does not make the calculation authorized, as the Bylaws expressly state that, where the Declaration and Bylaws conflict, the Declaration controls.

Because the Declaration does not authorize the Board's calculation of the maximum annual assessment pursuant to the Bylaws' formula, the Board's calculation of the actual annual assessment based on its calculation of the maximum annual assessment is also not authorized. The Board's calculations are ultra vires and, therefore, not protected by the business judgment rule. The circuit court erred in holding otherwise. Point I is granted.

Conclusion

The judgment is reversed, and the cause is remanded for entry of judgment in accordance with this opinion.

FOOTNOTES

1.   In the initial Bylaws, the formula for calculating the assessment was written as a narrative and not as a mathematical equation, and the base CPI rating was 126.2. At some point between 1974 and 1979, the Bylaws were amended to express the formula as a mathematical equation, and the base CPI rating was changed to 125.5.

Lisa White Hardwick, Judge

All Concur.