Watson v. Leisure World ( 2021 )

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
GENE D. WATSON, et al., Plaintiffs/Appellees/Cross-Appellants,
v.
LEISURE WORLD COMMUNITY ASSOCIATION,
Defendant/Appellant/Cross-Appellee.
No. 1 CA-CV 20-0592
FILED 12-2-2021
Appeal from the Superior Court in Maricopa County
No. CV2017-055942
The Honorable Andrew J. Russell, Judge
The Honorable Cynthia J. Bailey, Judge (retired)
AFFIRMED IN PART, VACATED IN PART, REMANDED
COUNSEL
Carpenter, Hazlewood, Delgado & Bolen, LLP, Tempe
By Chad P. Miesen, Kate J. Merolo
Counsel for Defendant/Appellant/Cross-Appellee
Jones, Skelton & Hochuli, P.L.C., Phoenix
By Eileen Dennis GilBride
Davidson & Funkhouser, PLLC, Scottsdale
By Frederick E. Davidson (argued), Josh G. Funkhouser
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants
WATSON, et al. v. LEISURE WORLD
Decision of the Court
MEMORANDUM DECISION
Judge Paul J. McMurdie delivered the Court’s decision, in which Presiding
Judge Peter B. Swann and Judge David D. Weinzweig joined.
M c M U R D I E, Judge:
FACTS AND PROCEDURAL BACKGROUND
¶1 Leisure World Community Association (“Association”)
serves as the property owners’ association for nearly two dozen
single-family platted communities, including the Plat 24 community. Each
community is governed by its Declaration of Covenants, Conditions, and
Restrictions (CC&Rs). Plat 24’s original CC&Rs required that at least
three-quarters of Plat 24 record owners approve any amendments to the
CC&Rs. The Watson-McKinley Residence Revocable Trust (“Trust”) owns
a unit in Plat 24.
¶2 In 2013, without obtaining the owners’ approval, the
Association recorded the first document at issue, the “2013 Consolidated
Declaration,” which purported to “consolidate and restate” the declarations
of the other platted communities served by the Association.
¶3 In 2014, the Association recorded the second document at
issue, the “Amendment to the Declarations of Covenants, Conditions and
Restrictions for Leisure World Plats 6 Through 15, Plat 16F and Plats 17
Through 27” (“2014 Amendment”), which expressly modified the voting
requirements of every platted community so amendments could be
adopted by three-quarters of record owners across the platted
neighborhoods rather than within each community. After requesting that
each record owner consent to the proposed amendment, the Association
received permission from 47 of 54 units in Plat 24.
¶4 In February 2017, the Trust’s attorney wrote to the
Association demanding the release of the Consolidated Declaration and the
2014 Amendment. The Association refused. Nine months later, the Trust
filed a complaint seeking the documents’ release and asserting claims of
quiet title and violation of A.R.S. § 33-420, a statute governing the recording
of or failure to release documents asserting invalid claims of interest in real
property.
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¶5 The Trust argued that (1) the Consolidated Declaration was
an amendment and as such required certification by three-quarters of the
record owners of each affected platted community under the Plat
Declaration; (2) the Consolidated Declaration constituted a cloud on the
Trust’s title; (3) the Association failed to certify the 2014 Amendment as
required by the Plat 24 Declaration or A.R.S. § 33-1812; and (4) both
documents required the unanimous consent of each affected platted
community because their terms were unforeseeable. See Dreamland Villa
Cmty. Club, Inc. v. Raimey, 224 Ariz. 42, 43, ¶¶ 33–38 (App. 2010) (addressing
conditions under which unanimity is required). In its answer, the
Association conceded the Consolidated Declaration was not certified but
claimed it did not need certification because it was not an amendment. The
Association denied the Trust’s other claims. The parties moved for
summary judgment, raising the same arguments and arguing whether the
2014 Amendment constituted a cloud on the Trust’s title.
¶6 The court found numerous disputes of material fact and
ultimately denied both motions. After the Trust deposed several of the
Association’s witnesses, the parties again moved for summary judgment to
resolve all issues. The court granted summary judgment for the Trust.
¶7 The court determined that (1) the Consolidated Declaration
was an amendment; (2) the 2014 Amendment’s consent forms were
insufficient in form and number to comply with the existing CC&Rs; (3) the
2014 Amendment’s provision requiring amendments to be voted on across
plats was “an unforeseeable shift in benefits from one group of members to
another” requiring a unanimous vote; (4) both recorded documents were
groundless and invalid under A.R.S. § 33-420; (5) when recording both
documents, the Association knew or had reason to know they were
groundless and invalid; (6) knowing the documents were groundless and
invalid, the Association willfully refused to release them; and (7) the
Association claimed an interest adverse to the plaintiffs by recording each
document.
¶8 The court determined that because both recorded documents
were not adopted per A.R.S. § 33-1817(A)(2), they could not be released
solely as to the Trust’s property but must be released on all lots in the
Association. The court granted judgment for the Trust, barring and forever
estopping the Association from claiming rights, title, or interests arising out
of the documents against the Trust or the Property. The court ordered the
release and extinguishment of the documents. Following A.R.S.
§ 33-420(A), the court awarded $5000 in statutory damages for the wrongful
recordation of each document. Under A.R.S. § 33-420(C), the court awarded
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Decision of the Court
$1000 in statutory damages for the Association’s willful refusal to release
each document. Finally, the court awarded the Trust around $116,000 in
attorney’s fees and $4000 in costs.
¶9 The Association moved for a new trial, challenging all
adverse rulings. See Ariz. R. Civ. P. 59(a).
¶10 The original judge retired from the superior court and was
replaced. The newly constituted court concluded the Association did not
violate A.R.S. § 33-1812 because the statute’s ballot requirements did not
apply to the consent forms about the 2014 Amendment.
¶11 The court determined that the Consolidated Declaration was
a mere restatement and struck the order invalidating it. Despite concluding
that the judgment misapplied § 33-1812 to the 2014 Amendment’s voting
requirements, the court found that the consent forms were still insufficient
in form and number and did not disturb the judgment’s statutory damages
stemming from the 2014 Amendment. The court did not alter the Trust’s
attorney’s fees award entered as part of the original judgment but declined
to award the Trust attorney’s fees incurred in defending the Association’s
motion for a new trial. Both parties appealed, and we have jurisdiction
under A.R.S. §§ 12-120.21(A)(1), -2101(A)(1), and -2101(A)(5)(a).
DISCUSSION
¶12 The parties challenge all adverse rulings, disputing the effect
and legitimacy of the Consolidated Declaration, the legitimacy of the 2014
Amendment voting process both by law and under the existing CC&Rs,
and the applicability of A.R.S. § 33-420.
¶13 We will not overturn a decision to grant a motion for a new
trial absent a “clear abuse of discretion.” Pullen v. Pullen, 223 Ariz. 293, 296,
¶ 10 (App. 2009); See also Reyes v. Town of Gilbert, 247 Ariz. 151, 157, ¶ 21
(App. 2019) (“We generally review the grant of a new trial more liberally
than an order denying one.”). But “[b]ecause a trial court abuses its
discretion if it commits an error of law, we review de novo the superior
court’s rulings on questions of law presented in the motion for new trial.”
Id.¶14 A recorded declaration that contains restrictive covenants
common to all properties in a development is a contract between the
property owners as a whole and the individual lot owners. Johnson v. Pointe
Cmty. Ass’n, Inc., 205 Ariz. 485, 489, ¶ 23 (App. 2003). Thus, such a
declaration’s interpretation is a question of law. Id. In construing CC&Rs,
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Decision of the Court
we read the language in its ordinary sense and read restrictions “in light of
the circumstances surrounding [their] formulation, with the idea of
carrying out [their] object, purpose and intent.” Cypress on Sunland
Homeowners Ass’n v. Orlandini, 227 Ariz. 288, 297, ¶ 31 (App. 2011) (quoting
Powell v. Washburn, 211 Ariz. 553, 557, ¶ 16 (2006)).
A. The Consolidated Declaration Was an Invalid Amendment.
¶15 The parties do not dispute that an amendment to the CC&Rs
requires a vote from the record owners and that the Consolidated
Declaration was recorded without such a vote. An amendment that does
not follow the requirements of a community’s governing documents is
invalid. La Esperanza Townhome Ass’n, Inc. v. Title Sec. Agency of Arizona, 142
Ariz. 235, 239–40 (App. 1984). Thus, the Consolidated Declaration can only
be valid if it was not an amendment. We conclude it was an amendment
and invalid.
¶16 Before the Consolidated Declaration’s recording, the Plat 24
Declaration provided that no amendment could “eliminate or alter the
rights of the Association with respect to the Community Facilities” and
required that amendments be approved by at least three-quarters of the
record owners in the “Project.” “Project” was defined as “property
described on Exhibit ‘A,’” a single-page document containing only the full
name of Plat 24. The Consolidated Declaration includes the same
amendment provision, except it omits the limiting language “with respect
to the Community Facilities” and redefines the term “Project” by including
additional residential platted communities in Exhibit A.
¶17 A plain reading of the Consolidated Declaration reveals two
significant alterations to the CC&Rs governing Plat 24. First, by omitting
“with respect to Community Facilities,” the CC&Rs now provide that no
amendment may eliminate or alter any rights of the Association without its
written consent, increasing the Association’s control over the voting
process and strengthening its ability to protect its interests. Second, by
including several residential platted communities in Exhibit A and by
continuing to define Project as the property described in Exhibit A, the
CC&Rs as written permit amendments by a vote of three-quarters of the
record owners across the residential communities, instead of three-quarters
of record owners within Plat 24. This alteration to the CC&Rs eliminates
Plat 24’s ability to amend its governing documents autonomously.
¶18 The Association argues the Consolidated Declaration’s
recitals and a supplemental text show that the drafters cannot have
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Decision of the Court
intended to make substantive changes to the CC&Rs. To support this
argument, the Association points to the Consolidated Declaration’s recitals,
which state that “the Association and its members desire to consolidate and
restate” the governing documents. The Association also points to the
testimony of a former president and board member who said it did not
intend to create changes. And the Association notes it never sought to apply
this new voting procedure when passing the 2014 Amendment.
¶19 But none of this extrinsic evidence allows us to come to an
interpretation consistent with the Consolidated Declaration’s plain
language. The Consolidated Declaration’s recitals do not allow for a
reading contradicted by its operative provisions. See Fugate v. Town of
Payson, 164 Ariz. 209, 210–11 (App. 1990) (Where a contract’s recitals and
operative provisions are clear but contradict each other, the operative
provision governs.). And “[s]elf-serving assertions without factual support
in the record will not defeat a motion for summary judgment.” Florez v.
Sargeant, 185 Ariz. 521, 526–27 (1996) (quoting Jones v. Merchants Nat’l Bank
& Tr. Co. of Indianapolis, 42 F.3d 1054, 1057–58 (7th Cir. 1994)).
¶20 Finally, the Association asserts that the omission of the phrase
“with respect to Community Facilities” was a clerical error. Some evidence
supports this claim. A supplemental document meant to help interpret the
Consolidated Declaration provides how alterations to the original CC&Rs
should be read. It provides that bracketed and bolded text denotes editorial
content and bracketed text not in bold font denotes a change in the
operating text, either to keep internal references consistent or provide
language indicating where a text only applies to specific properties. The
omission of the language “with respect to Community Facilities” is not
denoted by any change to the font. But the Association identifies no
authority suggesting that this alleged mistake changed the effect of the
Consolidated Declaration, and no ambiguity in the document itself gives
notice to the reader that the apparent change to the operative text should
be disregarded. See A.R.S. § 33-416 (The recording of an instrument notifies
“all persons” of the instrument’s existence.).
B. The 2014 Amendment Is Invalid.
¶21 The Association argues the superior court erred by
concluding the consent forms used to pass the 2014 Amendment were
insufficient in form and number. We disagree because we conclude the
Association did not receive consent from enough record owners to comply
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with the Amendment provision of the Plat 24 Declaration.1 Thus, we
conclude the 2014 Amendment is also invalid. See La Esperanza Townhome
Ass’n, 142 Ariz. at 239–40.
¶22 An association may amend a declaration by an affirmative
vote or written consent of the number of owners specified in the
declaration. A.R.S. § 33-1817(A)(1). Amendments are effective immediately
on recordation. A.R.S. § 33-1817(A)(4). A nonprofit corporation may
approve an action without a meeting if the action is supported by written
consents signed by members representing the amount of “voting power”
required by the nonprofit corporation’s articles of incorporation or bylaws.
A.R.S. § 10-3704(A). These forms must “describ[e] the action taken.” Id.
Similarly, a nonprofit corporation may take any action that it could take at
an annual, regular, or special meeting of members without a meeting if it
delivers “a written ballot to every member” that “[s]et[s] forth each
proposed action.” A.R.S. § 10-3708(A), (B).
¶23 The parties do not dispute that an amendment to the Plat 24
declaration required the approval of three-quarters of Plat 24’s record
owners. Plat 24 contains 54 units. To obtain the consent of three-quarters of
the community, the Association must have at least 41 consents. The
Association obtained 47 consents, but 21 did not refer to amending the Plat
24 declaration or summarize the 2014 Amendment’s effect on voting rights.2
The Association asserts that it made both representations in the Leisure
World News. But such representations do not comply with the
requirements that the forms themselves describe the amendment. A.R.S.
§ 10-3704(A).
1 Because we conclude the 2014 Amendment is invalid because it
lacked the consent of three-quarters of Plat 24’s record owners, we do not
address the parties’ arguments about whether the 2014 Amendment
required the record owners’ unanimous approval.
2 On appeal, the Association maintains that the consent forms provide
notice of both changes. But the parties agreed that only 25 of the forms
expressly refer to the record owner’s consent to amending the Plat 24
Declaration or the other CC&Rs. The Association makes no comment about
the list of forms attached to the Trust’s separate statement of facts in
support of its motion for summary judgment, in which 21 of the consents
omit this language.
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C. The Association Violated A.R.S. § 33-420(A) and (C) by Recording
and Refusing to Release the Consolidated Declaration, but Not by
Recording or Refusing to Release the 2014 Amendment.
¶24 Arizona Revised Statutes § 33-420 penalizes those responsible
for recording a document that reflects an “interest in, or a lien or
encumbrance against, real property” that is “forged, groundless, contains a
material misstatement or false claim or is otherwise invalid,” and who
know or should know of the document’s invalidity. Subsection (A)
penalizes those who cause the document to be recorded, and subsection (C)
penalizes those named in the document who willfully refuse an owner’s or
beneficial title holder’s request to release or correct the document. In
addition, subsection (D) provides that “[a] document purporting to create
an interest in, or a lien or encumbrance against, real property not
authorized by statute, judgment or other specific legal authority is
presumed to be groundless and invalid.”
¶25 The Association recorded the Consolidated Declaration and
the 2014 Amendment and refused to release or correct both documents at
the Trust’s request. We have concluded that both the Consolidated
Declaration and the 2014 Amendment lacked legal authority for their
recordation. But A.R.S. § 33-420 requires that two more conditions be met:
(1) the documents must constitute “interests in, or liens or encumbrances”
against the Trust’s property; and (2) the Association knew or should have
known that the documents were invalid, either when recording them or
when willfully refusing to release them within 20 days of the Trust’s request
that it do so. We conclude that, for the Consolidated Declaration, both
conditions were met.
1. The Dilution of the Trust’s Voting Power and the
Expansion of the Association’s Veto Power Each
Constitutes an “Encumbrance” under A.R.S. § 33-420.
¶26 “The primary principle of statutory interpretation is to
determine and give effect to legislative intent.” Wyatt v. Wehmueller, 167
Ariz. 281, 284 (1991). The text of A.R.S. § 33-420 is unambiguous, so we need
only apply the text’s plain meaning to understand the legislature’s intent.
Stauffer v. U.S. Bank Nat’l Ass’n, 233 Ariz. 22, 25, ¶ 10 (App. 2013).
¶27 In its briefing, the Trust asserted that the Consolidated
Declaration and the Amendment created an encumbrance. At oral
argument, the Trust claimed that they created an interest. According to the
Trust, both documents purport to create two changes to the CC&Rs that
result in either an encumbrance or an interest: the authorization of
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amendments by three-quarters approval across platted communities rather
than from each plat, and the authorization of the Association to veto any
amendment that would eliminate or alter any of its rights, rather than its
rights to community facilities. We conclude that each change by both
documents creates an encumbrance.
¶28 This court has relied on the Uniform Commercial Code to
define “encumbrance” as used in A.R.S. § 33-420. Baumgartner v. Timmins,
245 Ariz. 334, 336, ¶ 9 (App. 2018). According to the Code, an encumbrance
is a “right, other than an ownership interest, in real property.” A.R.S.
§ 47-9102; see Baumgartner, 245 Ariz. at 336, ¶ 9 (“§ 33-420(A) & (C) do not
apply unless the recorded document purports to create or claim a right or
liability of some kind attached to the property.”). We recognize that this
definition, as considered here, requires an inquiry into whether the
expansion of the Association’s veto power and the dilution of the Trust’s
voting power within Plat 24 relate to property directly enough to create a
right to property, rather than solely a contract right that contemplates
property.
¶29 To that end, we note that the legislature considered it
necessary to exclude CC&Rs, easements, rights-of-way, and other property
rights from the definition of “lien or encumbrances” in a statute governing
property sales. A.R.S. § 33-438(A). And Arizona courts have acknowledged
easements and CC&Rs to be encumbrances. See, e.g., First Am. Title Ins. Co.
v. Johnson Bank, 239 Ariz. 348, 353, ¶ 24 (2016) (undisclosed CC&Rs that
prevented the commercial development of property); Dunlap Invs. Ltd. v.
Hogan, 133 Ariz. 130, 132–33 (1982) (easement). And we have acknowledged
encumbrances when applying A.R.S. § 33-420 that could not have been
identified under A.R.S. § 33-438. See, e.g., Summit Int’l LLC v. Rees, No. 1
CA-CV 15-0116, 2016 WL 4046954, at *3–4, ¶¶ 13–16 (Ariz. App. July 28,
2016) (right-of-way that constituted an easement). Given that the
documents at issue each signal a reduction in the control the Trust could
have over its property, we consider these documents to be among those
CC&Rs that create an encumbrance under A.R.S. § 33-420. Moreover,
because these documents would cause potential buyers to underestimate
the legal control the Trust has over its property, applying A.R.S. § 33–420
here furthers its purpose of protecting property owners from actions that
cloud title to their property. Wyatt, 167 Ariz. at 286.
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2. The Association Had Reason to Know that the
Consolidated Declaration, but not that the 2014
Amendment, was Invalid.
¶30 Arizona Revised Statutes § 33-420 requires proof that the
wrongdoer knew or had reason to know of the document’s invalidity. See
Wyatt, 167 Ariz. at 286 (“[T]he language of a statute that allows for a
monetary award over and above actual damages incurred . . . necessitates
interpreting the words ‘knowing or having reason to know’ as requiring
scienter on the part of the wrongdoer.”). The statute does not penalize a
party with a reasonable and good-faith belief in a document’s validity.
Fagerlie v. Markham Contracting Co., 227 Ariz. 367, 376, ¶¶ 51–52 (App. 2011).
But a subjective belief alone is insufficient. Delmastro & Eells v. Taco Bell
Corp., 228 Ariz. 134, 143, ¶ 31 (App. 2011). Thus, while we concluded that
A.R.S. § 33-420 did not apply when a developer timely corrected the lien
after receiving notice that the lien required additional attachments, Fagerlie,
227 Ariz. at 376, ¶¶ 49–52, we did apply A.R.S. § 33-420 where no such
correction was made and where a lien’s description of the developed
property was insufficient for compliance with a mechanic’s lien statute,
despite the recording party’s alleged ignorance of the error. Delmastro &
Eells, 228 Ariz. at 142–45, ¶¶ 14, 26–37.
¶31 Here, the Association explains that it did not have reason to
know of either document’s invalidity because the Consolidated Declaration
“was never intended to be” an amendment and that it attempted to comply
with its CC&Rs when recording and refusing to release the 2014
Amendment. The Association’s explanation does not persuade us. As
discussed above, the plain language of the Consolidated Declaration
substantially differs from earlier CC&Rs in their governance of Plat 24.
Thus, we affirm the superior court’s conclusion that the Association had
reason to know that the Consolidated Declaration is invalid.
¶32 But given the apparent confusion concerning which statute
governed the content of the Association’s consent forms, and given the
undisputed evidence that the Association informed property owners of the
substance of the 2014 Amendment through its website, we conclude that
the trial court erred by concluding that the Association had reason to know
of the 2014 Amendment’s invalidity.
¶33 Thus, the superior court erred by vacating the February 2020
order awarding statutory damages for violating A.R.S. § 33-420(A) and (C)
for the wrongful recordation and failure to release the Consolidated
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Declaration, and for awarding the same statutory damages for the wrongful
recording and refusal to release the 2014 Amendment.
ATTORNEY’S FEES
¶34 The parties request attorney’s fees and costs as the prevailing
parties on appeal. See A.R.S. § 12-341, -341.01, -1103. We conclude that the
Trust is the successful party and award its costs and fees upon compliance
with ARCAP 21.
CONCLUSION
¶35 We vacate the portion of the September 2020 judgment
finding that the Consolidated Declaration did not amend the recorded
CC&Rs or warrant the resulting statutory damages under A.R.S. § 33-420.
We vacate the part of the April 2020 judgment awarding statutory damages
under A.R.S. § 33-420 stemming from the recordation of the 2014
Amendment. We remand for a recalculation of attorney’s fees and costs
considering this decision.
AMY M. WOOD • Clerk of the Court
FILED: AA
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