Robert Oberbillig and Patricia Oberbillig and Frank Scaglione and Melba Scaglione v. West Grand Towers Condominium Association , 2011 Iowa Sup. LEXIS 102 ( 2011 )

IN THE SUPREME COURT OF IOWA
No. 09–1097
Filed December 16, 2011
ROBERT OBERBILLIG and PATRICIA OBERBILLIG
and FRANK SCAGLIONE and MELBA SCAGLIONE,
Appellees,
vs.
WEST GRAND TOWERS CONDOMINIUM ASSOCIATION,
Appellant.
Appeal from the Iowa District Court for Polk County, Joel D.
Novak, Judge.
Nonprofit condominium owners association appeals ruling denying
special assessment against plaintiffs for repairs to parking garage and
declining to apply business judgment rule. REVERSED AND
REMANDED.
Thomas G. Fisher, Jr. of Parrish Kruidenier Dunn Boles Gribble
Parrish Gentry & Fisher, L.L.P., Des Moines, for appellant.
Robert C. Oberbillig, Des Moines, for appellees.
2
WATERMAN, Justice.
Several condominium owners brought this test case to enforce
their interpretation of the condominium association’s bylaw requiring the
preapproval of a supermajority of owners to authorize certain
expenditures exceeding $25,000. We review the resulting district court
ruling that voided a unanimous decision of the elected board of directors
of the nonprofit West Grand Towers Condominium Association. The
board approved necessary but nonemergency repairs to the Association’s
parking garage without a full vote by its members. The board action
followed much study, a series of meetings over several years to which all
member condominium owners were invited, and a legal opinion that no
member vote was required. The repairs were completed at a cost of over
$200,000, eight times greater than the $25,000 threshold in the bylaw.
The owners of eighty-three of the eighty-seven condominium units
voluntarily paid their respective shares of the assessment for the garage
repairs. Plaintiffs, Robert and Patricia Oberbillig and Frank and Melba
Scaglione, owners of the remaining four units and 4.8% of the common
area, withheld payment to preserve their right to challenge the
expenditure. The plaintiffs sued for a judicial declaration that the
board’s violation of the bylaw’s preapproval requirement excused their
obligation to pay. All member-owners, including the plaintiffs, have
continued to use the parking garage. The Association counterclaimed
against plaintiffs to collect their share of the completed repairs and for
attorney fees. The case was submitted on stipulated facts for a nonjury
trial. The district court accepted plaintiffs’ interpretation of the bylaw,
rejected the Association’s defenses, declined to uphold the board’s
actions under the business judgment rule, and denied the counterclaim.
The Association appealed.
3
We hold the business judgment rule applies to the governance
decisions of the board of this nonprofit condominium owners association
when the board acts within its authority. We conclude the bylaw at
issue is ambiguous and defer to the board’s authority under the
governing declaration to decide questions of interpretation or application
of the bylaws. Accordingly, we reverse the district court and remand for
entry of judgment for the Association and for further proceedings on its
counterclaim.
I. Background Facts and Proceedings.
This case concerns the West Grand Towers, an eleven-story
building with eighty-seven residential condominium units at 3663 Grand
Avenue in Des Moines. Its common areas include a pool, attached
clubhouse, and a two-level heated parking garage. The defendant, West
Grand Towers Condominium Association, is a nonprofit corporation
organized under Iowa Code chapter 504 as a membership corporation for
the “maintenance, repair, replacement, administration, and operation” of
West Grand Towers. West Grand Towers is a horizontal property
(condominium) regime formed under Iowa Code chapter 499B. The
Oberbilligs own Unit 506 and an undivided 1.310% interest in the
common areas. Robert Oberbillig is an attorney who has lived in West
Grand Towers since 1981. Frank and Melba Scaglione own Units 906–
907 and Unit 108; they live in Units 906–907 and rent out Unit 108. The
Scagliones own an undivided 3.491% interest in the common areas.
The governing documents for the Association are its “declaration”
and bylaws. The owners of the condominium units are voting members
of the Association and own undivided percentages of the common areas,
including the pool, clubhouse, and parking garage. The members elect a
six-person board of directors who must be unit owners or the spouse of a
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unit owner. The directors have enumerated powers and duties that
include providing “for the maintenance, repair, and replacement of the
Common Elements and payments therefor . . . .” Common elements are
defined to include the parking garage.
Article V of the Bylaws governs assessments and spells out the
board’s obligation to prepare annual budgets and determine assessments
for common-element expenditures. The crux of this case is the
interpretation of Section 6 entitled “Expenditures”:
Except for the management agreement described in Article II,
Section 8(c) hereof and expenditures and contracts
specifically authorized by the Declaration and Bylaws, the
board shall not approve any expenditure in excess of Twenty-
five Thousand Dollars ($25,000), unless required for
emergency repair, protection or operation of the Common
Elements or Limited Common Element, nor enter any contract
for more than five (5) years without the prior approval of two-
thirds (2/3) of the total ownership of the Common Elements.
(Emphasis added.) Also at issue is the meaning and effect of paragraph
6(g) of the Declaration entitled “Board’s Determination Binding”:
In the event of any dispute or disagreement between any
Unit Owners relating to the Property, or any questions of
interpretation or application of the provisions of the
Declaration or Bylaws, such dispute or disagreement shall be
submitted to the Board. The determination of such dispute or
disagreement by the Board shall be binding on each and all
such Unit Owners, subject to the right of Unit Owners to seek
other remedies provided by law after such determination by
the Board.
(Emphasis added.) 1
Paragraph 13(a) of the Declaration requires unit owners to pay
their proportionate share of the common expenses. This requirement is
implemented by Article V, Section 7 of the Bylaws, which begins, “It shall
1Article XI of the Bylaws provides, “In the event of any conflict between the terms
and provisions of these Bylaws and the Declaration, the provisions of the Declaration
shall control.”
5
be the duty of every Unit Owner to pay his proportionate share of the
common expenses . . . .” This bylaw further provides that unpaid
common expenses plus interest constitute a lien and that the board may
sue to foreclose the lien and recover reasonable attorney fees.
The condition of the parking garage had been a concern of the
board since at least March 2003. In July of that year, the board
requested an engineering study of the lower garage after large pieces of
cement were dislodged. Less than two months later, the board received a
report that cracks in the upper floor of the garage should be repaired to
stop leaks to the lower floor. Board discussions concerning how to repair
the garage continued for several years. Anticipating costly repairs, the
board commissioned a financial study on funding in 2006 by Financial
Advisors, Inc. The “Reserve Study” was shared with the membership in
the spring of 2007.
In August 2007, consulting engineers, Shuck-Britson, provided a
“parking garage structural condition study.” The study detailed
problems with “numerous cracks” as well as “areas of spalling and
delamination” and corrosion of the steel reinforcing the concrete. The
report recommended a combination of removal of “the deteriorated,
unsound concrete and replacement with a dense concrete mix,” and
“repairs to the concrete beams, concrete joints, and concrete columns
[which] will consist of concrete patching and epoxy crack injection. The
deteriorated concrete will be chipped out and replaced with a dense
concrete mix.” This study included a preliminary cost estimate of
$191,188. The board received three bids for garage repairs ranging
between $150,000 and $200,000.
Garage repairs were discussed by Association members and the
board at a meeting on November 26. Members expressed differing views
6
of whether garage repairs exceeding $25,000 required a membership
vote. Accordingly, before the December board meeting, the board
president sought a legal opinion from an attorney and former board
member who owned units in the building—Thomas G. Fisher, Sr. 2 Based
on Fisher’s legal opinion, the board concluded it need not ask for a vote
on the garage repair, “since the garage (by definition in the Declaration)
is a Common Element, and the protection and operation of the Common
Elements are exempt from the requirement of a vote by members of the
Association under Article V, Section 6, the Bylaws of the Board.”
Members were informed at the December 16 meeting that garage repairs
would begin in the spring and that the board “will be moving ahead with
bids and letting of contracts.” The requirement for a vote was again
discussed at this meeting. Mr. Oberbillig stated, “[W]hen the heat
exchanger failed and was replaced at a cost of $380,000, which was
clearly an emergency, a membership vote was taken.” Melba Scaglione
objected to a further assessment.
The board provided an update to the members at a meeting on
February 25, 2008. The board reported it had received firm bids in the
range of $160,000 plus a fifteen percent contingency. The minutes of the
meeting stated in part:
There was discussion about the need for resident vote
on the garage expenditure. Duane Jones [board president]
indicated that the bylaws indicate, and it was a unanimous
view of the board, that no vote is needed on this because it is
maintenance of common areas. Stahl moved and
Grundleger seconded and it was unanimously approved that
we proceed with letting of the contracts for this project. . . .
2Mr. Fisher, a legal aid volunteer and retired corporate attorney, is the father of
the attorney who represents the Association in this litigation. The parties raised no
claim of conflict and stipulate that the father is not otherwise “connected in any way”
with the law firm for the Association.
7
Barbara Grundleger then moved for a special assessment to
fund the garage and this was passed unanimously.
The garage repairs began that spring and were completed that
summer. The assessment levied for the garage repairs was $200,000.
All members of the Association fully paid their proportionate share for
the garage costs, except plaintiffs. The parties stipulated that the
amount assessed for the Oberbilligs is $2620 plus interest; the amount
assessed for the Scagliones is $6982 plus interest. At oral argument
Oberbillig noted he had paid every other assessment, but did not pay this
one out of a concern that doing so would waive plaintiffs’ right to
challenge the expenditure and would result in precedent for bypassing a
membership vote.
On November 24, 2008, the board voted unanimously to spend
over $25,000 for elevator repairs, with $50,000 to be paid from reserves
and the remainder to be by special assessment, without submitting the
matter to a membership vote. The elevator is defined as a common
element, and the repairs were not an emergency.
A membership vote was taken previously to approve the
Association’s purchase of Unit G3 to be used as a fitness room and guest
quarters at a cost exceeding $70,000. This was a voice vote of the
members attending the meeting; no one present voted against the
expenditure. Since June of 1981, five other expenditures with special
assessments exceeding $25,000 were put to a vote of members attending
the meeting when the board took the action. Two involved replacement
of failed heat exchangers at $80,000 each; a third was for the emergency
replacement of a heating system noted by Oberbillig at the December
2007 board meeting; the fourth was an earlier repair to the garage roof
for approximately $80,000; and the fifth was for enclosure of balconies
8
on the northwest corner of the building to address heating problems at a
cost of approximately $48,000. 3
The Oberbilligs filed a petition for declaratory judgment on June 5,
2008, while the garage repairs at issue were underway. An amendment
to the petition filed June 30 added Frank and Melba Scaglione as
plaintiffs. The Association filed its answer, affirmative defenses, and
counterclaim on July 15, seeking judgment against plaintiffs for their
proportionate share of the garage repairs and for reimbursement of the
Association’s attorney fees. The matter was submitted to the district
court on stipulated facts on April 27, 2009. Plaintiffs contended the
special assessment against them was void because of the board’s failure
to obtain preapproval of the garage repair from two-thirds of the
membership, as required by Article V, Section 6 of the Bylaws. Plaintiffs
relied on the bylaw language and the Association’s five previous decisions
to submit expenditures exceeding $25,000 to a membership vote. The
Association contended the garage repair was repair to a “Common
Element” that did not require a membership vote. The Association
argued the record evidence established the board “acted in good faith,
the decision was reasonably prudent and the board believed the decision
to be in the corporate interest” such that the business judgment rule
required judgment to be entered against plaintiffs. The Association
further argued the doctrine of laches barred relief for plaintiffs because
they waited too long to sue.
The district court filed its ruling on June 23, 2009. The district
court made the following findings relevant to the business judgment rule:
3TheDeclaration defines “Common Elements” to include the “exterior walls of
each apartment and of the buildings.”
9
There is no doubt that the Board was open and honest
with its members in addressing the necessity of repairs to
the garage. There were several meetings where the repairs
and the costs regarding same were discussed where
members were allowed to voice their opinions. There was
nothing clandestine in the way the Board handled bringing
this matter to the membership.
While the court agrees with the Association’s analysis
of the record that shows the directors acted in good faith, the
decision was reasonably prudent and that the Board believed
the decision to be in the corporate interest the court doesn’t
agree that the Business Judgment Rule allows the Board to
ignore restrictions and limitations in the Bylaws even though
the board sought legal advice in the interpretation of the
Bylaws, thought their interpretation was reasonable, acted
prudently and in the corporate interests. To hold otherwise
would allow a board to disregard the limitations placed upon
it by the Bylaw language.
The court, without relying on extrinsic evidence, went on to reject the
Association’s interpretation of the bylaw, stating as follows:
The court does not believe that the provision is
ambiguous. The court believes that the “emergency” in the
relevant provision modifies not only the word repair but also
the words protection and operation. Therefore the only time
the Board does [not] need to seek the prior approval of the
ownership is if there is an emergency that brings about the
need for repair, protection or operation of the Common
Elements. The parties have stipulated that there was no
emergency. Therefore the court concludes that prior
approval was needed.
Assuming arguendo that the provision is ambiguous
the court’s conclusion would be the same. As Plaintiff points
out any other construction could make the language “shall
not approve any expenditure in excess of Twenty-five
Thousand Dollars ($25,000.00)” useless and unnecessary
because in general there are no expenditures other than
normal repairs to the Common Elements. It would be
unreasonable to interpret the Bylaw provision so as to give
no affect [sic] to the Twenty-five Thousand Dollar
($25,000.00) limitation.
The court made further findings rejecting the Association’s “laches”
defense and ruled “the special assessment as applied to the plaintiffs is
void and of no effect.” The district court dismissed the Association’s
counterclaim. The Association appealed.
10
II. Scope of Review.
This declaratory judgment action was tried at law, and both sides
agree our review is for correction of errors at law. “A declaratory
judgment action tried at law limits our review to correction of errors at
law.” Am. Family Mut. Ins. Co. v. Petersen, 679 N.W.2d 571, 575 (Iowa
2004). “We are bound by well-supported findings of fact, but are not
bound by the legal conclusions of the district court.” Id. The district
court decided the meaning of the bylaw at issue without resort to
extrinsic evidence. Accordingly, the construction and interpretation of
the bylaw and declaration of this condominium owners association is a
matter of law for the court, and we are not bound by the interpretation
and ruling of the district court. Peak v. Adams, 799 N.W.2d 535, 543
(Iowa 2011) (“ ‘Interpretation is reviewed as a legal issue unless it
depended at the trial level on extrinsic evidence. Construction is always
reviewed as a law issue.’ ” (quoting Fashion Fabrics of Iowa, Inc. v. Retail
Investors Corp., 266 N.W.2d 22, 25 (Iowa 1978))); Phillips v. Nat’l
Trappers Ass’n, 407 N.W.2d 609, 611 (Iowa Ct. App. 1987) (“Corporate
articles and bylaws are construed according to the general rules
governing contracts.”); Schaefer v. Eastman Cmty. Ass’n, 836 A.2d 752,
755 (N.H. 2003) (interpretation of articles and declaration of
homeowner’s association is question of law).
III. Analysis.
The Association argues the district court erred by failing to apply
the business judgment rule and by misinterpreting the bylaw governing
expenditures. We first address whether the district court correctly
determined Article V, Section 6 of the Bylaws unambiguously required a
membership vote. If this bylaw is ambiguous, we must decide whether to
give effect to the board’s interpretation pursuant to its interpretative
11
authority in paragraph 6(g) of the Declaration. In answering that
question, we consider whether the district court erred in declining to
apply the business judgment rule. We begin with a review of the
applicable law.
A. Applicable Law. Our court has not previously adjudicated
disputes over the meaning of the bylaws of a condominium owners
association. The Association is a nonprofit corporation formed under
Iowa Code chapter 504. In general, the articles of incorporation and
bylaws “create a contractual relationship between the parties.”
Bradshaw v. Wakonda Club, 476 N.W.2d 743, 745 (Iowa Ct. App. 1991)
(citing Swanson v. Shockley, 364 N.W.2d 252, 255 (Iowa 1985); see also
Berger v. Amana Soc’y, 250 Iowa 1060, 1066, 95 N.W.2d 909, 912
(1959)). Accordingly, we apply the general rules for contracts to construe
a corporation’s governing documents. Phillips, 407 N.W.2d at 611.
The Association’s governing documents are its declaration and
bylaws, which are to be construed as a whole. Id.; Carney v. Donley, 633
N.E.2d 1015, 1020 (Ill. App. Ct. 1994) (declaration and bylaws of
condominium association to be construed as a whole); see also 1 Gary A.
Poliakoff, Law of Condominium Operations § 1:24 (2011), available at
http://www.westlaw.com (“A declaration of condominium and the
condominium by-laws will be interpreted together, at least where the
declaration and the by-laws were executed as part of the same
transaction and cross-reference one another, and the by-laws are
incorporated as an exhibit to the declaration.”). Here, the Association’s
declaration and bylaws were executed simultaneously and cross-
reference each other. The bylaws specifically provide that the provisions
of the declaration control in the event of any conflict. This is consistent
with the view “that the declaration is the association’s ‘constitution.’ ”
12
Schaefer, 836 A.2d at 755. The Schaefer court, relying on the
Restatement (Third) of Property, noted the Association’s “power should be
interpreted broadly.” Id. at 756 (citing Restatement (Third) of Property
§ 6.16 cmt. b, at 289 (2000)). The Schaefer court elaborated:
Thus, the declaration should not be so narrowly construed
so as to eviscerate the association’s intended role as the
governing body of the community. Rather, a broad view of
the powers delegated to the association “is justified by the
important role these communities play in maintaining
property values and providing municipal-like services. . . . If
unable to act, the common property may fall into
disrepair . . . .”
Id. (quoting Restatement (Third) of Property § 6.4 cmt. a, at 90). These
principles guide our analysis of the Association’s declaration and bylaws
in this case.
B. The Meaning of the Bylaw on Expenditures. The parties
disagree over the meaning of the language we italicize in Article V,
Section 6 of the Bylaws entitled “Expenditures”:
Except for the management agreement described in Article II,
Section 8(c) hereof and expenditures and contracts
specifically authorized by the Declaration and Bylaws, the
board shall not approve any expenditure in excess of Twenty-
five Thousand Dollars ($25,000), unless required for
emergency repair, protection or operation of the Common
Elements or Limited Common Element, nor enter any contract
for more than five (5) years without the prior approval of two-
thirds (2/3) of the total ownership of the Common Elements.
(Emphasis added.) Specifically, the parties disagree whether
“emergency” modifies only the word “repair” (the Association’s position)
or, whether it modifies the entire phrase “repair, protection or operation
of the Common Elements” as plaintiffs contend. The district court
concluded “emergency” unambiguously modifies “repair, protection or
operation of the Common Elements” such that a nonemergency
13
expenditure for protection of the parking garage required prior approval
of two-thirds of the membership.
Although we agree the plaintiffs’ interpretation is a reasonable one,
we disagree that this bylaw is unambiguous. “The test for ambiguity is
an objective one: Is the language fairly susceptible to two
interpretations?” Nationwide Agri-Bus. Ins. Co. v. Goodwin, 782 N.W.2d
465, 470 (Iowa 2010) (internal quotation marks omitted). We conclude
another reasonable interpretation of the bylaw is the one urged by the
Association—that emergency modifies only repair and that nonemergency
expenditures for the “protection or operation of the Common Elements”
are not subject to the two-thirds voting requirement.
The district court relied on a false premise in rejecting the
Association’s interpretation. Specifically, the district court accepted
plaintiffs’ argument that, under the Association’s interpretation, the
$25,000 threshold for a supermajority vote would be eviscerated
“because in general there are no expenditures other than normal repairs
to the Common Elements.” This is untrue. The district court overlooked
the prior fitness room expenditure noted in the stipulation paragraph
21(d) (“The board recommended and the owners approved the purchase
of Unit G3 to be used as a physical fitness room and guest quarters at a
cost of more than $70,000.”). Buying a unit to add a fitness room is not
a “repair” to the common elements. This example alone illustrates that
the $25,000 threshold for a required membership vote is not a nullity
under the Association’s interpretation. We do not believe the exceptions
in the bylaw swallow the rule.
The Association also correctly observes that its interpretation is
supported by the “doctrine of the last preceding antecedent.” We have
utilized that doctrine to interpret contracts. Cairns v. Grinnell Mut. Reins.
14
Co., 398 N.W.2d 821, 824 (Iowa 1987) (“[W]e have consistently reasoned
that qualifying words and phrases ordinarily refer only to the
immediately preceding antecedent.”). As the Association observes:
In section 6, the referential term “repair” immediately follows
“emergency” thus each refers to the other. The words
“protection” and “operation” are separated from “emergency
repair” by a comma, but are not separated from each other
by a comma and thus are separate from that phrase.
Indeed, in State v. Lohr, we observed, “Normally, however, referential,
relative, or qualifying words and phrases refer only to the immediately
preceding antecedent.” 266 N.W.2d 1, 3 (Iowa 1978). “The rule is now
thought to extend generally to the placement of all modifiers next to the
term to be modified.” Shelby Cnty. State Bank v. Van Diest Supply Co.,
303 F.3d 832, 836 (7th Cir. 2002) (citing Bryan A. Garner, Guidelines for
Drafting and Editing Court Rules, 169 F.R.D. 176, 195 (1997) (“To avoid
ambiguity, place a modifier next to the word or phrase it modifies.”))
(applying Iowa law).
The Association notes the board may be required to make
“emergency” repairs within a condominium unit whose owner is
travelling or unavailable. Thus, “emergency” need not be read as
applying exclusively to “Common Element” repairs. Yet, the Association
asserts the district court effectively rewrote the operative language of the
bylaw to read: “unless required for emergency repair, emergency
protection or emergency operation of the Common Elements . . . .” We
should not rewrite bylaws in the guise of interpretation.
Under the plaintiffs’ interpretation, a minority of owners could
block necessary, but nonemergency, expenditures favored by sixty-five
percent of the owners to maintain the existing common areas and
thereby undermine the board’s ability to prevent common areas from
15
falling into disrepair. See Schaefer, 836 A.2d at 756 (favoring a broad
view of powers for association because, if the board is “unable to act, the
common property may fall into disrepair” (quoting Restatement (Third) of
Property § 6.4 cmt. a, at 90)).
Plaintiffs contend that past voting practices on major expenditures
support their position that the garage repairs required a membership
vote. The district court did not rely on the evidence of other votes, but,
rather, confined its analysis to the four corners of the bylaws. We can
look to the conduct of the parties as placing a practical construction on
the meaning of a term. Van Diest Supply Co., 303 F.3d at 837 (citing
Ackerman v. Lauver, 242 N.W.2d 342, 347 (Iowa 1976)). The record
evidence of prior membership votes in this case does not compel
acceptance of the plaintiffs’ interpretation. The record supports a finding
that at least five earlier expenditures for common elements were put to
an informal membership vote: three involved repair or replacement of
heat exchangers, the fourth was a repair to the garage roof, and the fifth
was to enclose balconies. Of course, the fact the board allowed prior
membership votes on those matters does not mean it was required to do
so. Significantly, these were not formal votes by all members as
contemplated in the bylaw, but rather simply a voice vote by those
attending the meeting when the board took the action—akin to a
plebiscite. Indeed, Oberbillig acknowledged “it clearly was an emergency”
when the heat exchanger failed and was replaced at a cost of $380,000.
That matter was put to the informal vote even though emergency
expenditures are exempt from the two-thirds member preapproval
requirement under each side’s interpretation of the bylaw.
In any event, other record evidence supports the Association’s
interpretation. For example, no membership vote was taken when the
16
board in November 2008 approved nonemergency expenditures for the
elevator exceeding the $25,000 threshold. Strong evidence of the
practical construction placed on the bylaw by the West Grand Towers
unit owners is the fact that the owners of eighty-three out of eighty-seven
units voluntarily paid the assessment at issue for the nonemergency
garage repairs without a membership vote. In effect, the members voted
with their pocketbooks. Owners of ninety-five percent of the common
elements effectively approved the board’s action by paying the special
assessment. That is well above the two-thirds approval required under
plaintiffs’ interpretation of the bylaw. We view payment by ninety-five
percent of the owners as supporting the Association’s interpretation.
Moreover, their payment of the assessment may be regarded as a
ratification. See Lanza v. Bd. of Dirs. of Providence Point Umbrella Ass’n,
No. 44947–8–I, 2000 WL 264019, *2 (Wash. Ct. App. Mar. 6, 2000)
(subsequent ratification by seven condominium owner associations cured
any procedural error when Umbrella Board proceeded with repairs to
common area swimming pool); see also 7A William Meade Fletcher,
Fletcher Cyclopedia of the Law of Corporations § 3401, at 5 (Cumulative
Supp. 2011–2012) (“While the shareholders cannot by ratification render
valid an act that is beyond the powers of the corporation, they may ratify
an act that is within its powers but beyond the powers of the directors.”).
In an appropriate case, we will construe ambiguous language
against the drafter. Peak, 799 N.W.2d at 548. This is not such a case.
The bylaws and declaration were drafted by the developers, not the
Association, which acts on behalf of its members, the condominium
owners. Moreover, as we explain below, paragraph 6(g) of the
Declaration grants the Association board interpretive authority over the
bylaws, which trumps the doctrine of contra proferentem. See Kimber v.
17
Thiokol Corp., 196 F.3d 1092, 1100 (10th Cir. 1999) (doctrine of contra
proferentem inapplicable when contract vests party with interpretive
authority).
We conclude it is ambiguous whether “emergency” modifies solely
the term next to it—“repair”—or the entire phrase “repair, protection or
operation of the Common Elements . . . .” See Cairns, 398 N.W.2d at 824
(“Ambiguity exists if, ‘after the application of pertinent rules of
interpretation to the face of the instrument, a genuine uncertainty
results as to which one of two or more meanings is the proper one.’ ”
(quoting Fraternal Order of Eagles v. Ill. Cas. Co., 364 N.W.2d 218, 221
(Iowa 1985))). To resolve which meaning controls, we must read the
bylaws and declaration as a whole and, in so doing, address the board’s
authority to decide disputes over the interpretation and application of a
bylaw. See Phillips, 407 N.W.2d at 611 (articles and bylaws to be
construed as a whole).
C. The Board’s Interpretive Authority. We now consider
whether to defer to the board’s interpretive authority under paragraph
6(g) of the Declaration, entitled “Board’s Determination Binding,” which
provides:
In the event of any dispute or disagreement between any
Unit Owners relating to the Property, or any questions of
interpretation or application of the provisions of the
Declaration or Bylaws, such dispute or disagreement shall be
submitted to the Board. The determination of such dispute or
disagreement by the Board shall be binding on each and all
such Unit Owners, subject to the right of Unit Owners to seek
other remedies provided by law after such determination by
the Board.
(Emphasis added.) This constitutes an express grant of authority to the
board to interpret bylaws and decide disputes over the interpretation and
application of bylaws.
18
We have relied on grants of interpretive authority to administrative
agencies to defer to the agency’s interpretation of a statute or regulation.
See generally Sherwin-Williams Co. v. Iowa Dep’t of Rev., 789 N.W.2d
417, 423 (Iowa 2010) (clarifying and refining analysis for “deciding when
an agency has been granted interpretative authority with respect to a
statute”). Other courts have relied on an association or country club
board’s equivalent authority to interpret bylaws in resolving disputes
with members. See, e.g., Susi v. St. Andrews Country Club, Inc., 727
So. 2d 1058, 1061 (Fla. Dist. Ct. App. 1999) (upholding board’s
reasonable interpretation; noting “the By-laws do give the Board of
St. Andrews the right to interpret the By-Laws and all parts thereof”);
Boca W. Club, Inc. v. Levine, 578 So. 2d 14, 16 (Fla. Dist. Ct. App. 1991)
(“Since the bylaws provide that the Board has the final interpretive
authority regarding doubtful or conflicting portions of the bylaws, and
their interpretation is neither arbitrary [n]or unreasonable, we will not
interfere with its authority to construe them.”); Finn v. Beverly Country
Club, 683 N.E.2d 1191, 1193–94 (Ill. App. Ct. 1997) (upholding board
decision based on “the separate bylaw giving the Board the power to
interpret the bylaws”). But see Riverwatch Condo. Owners Ass’n v.
Restoration Dev. Corp., 980 A.2d 674, 683 n.19 (Pa. Commw. Ct. 2009)
(board’s interpretive authority in declaration not binding on court). In
Ticor Title Insurance Co. v. Rancho Santa Fe Ass’n, the court held the
board’s interpretive authority did not allow it to ignore express language
in covenant. 223 Cal. Rptr. 175, 179–80 (Ct. App. 1986).
We agree a grant of interpretive authority in an association’s
governing documents does not permit its board to violate unambiguous
bylaws. We hold that paragraph 6(g) gives the Association board the
power to interpret and apply ambiguous bylaws. The district court
19
erroneously concluded the bylaw unambiguously required a membership
vote and therefore did not address the board’s interpretive authority.
Because we conclude Article V, Section 6 of the bylaws is ambiguous and
the board’s interpretation is reasonable, we will defer to that
interpretation if doing so is consistent with the business judgment rule.
D. The Business Judgment Rule. Finally, we consider the
application of the business judgment rule. The “heart of the business
judgment rule” is “judicial deference to business decisions by corporate
directors.” Matthew G. Doré, 6 Iowa Practice: Business Organizations
§ 28:6, at 94 (2011 ed.). The business judgment rule applies “[w]hen
directors act in good faith in making a business decision, when the
decision is reasonably prudent, and when the directors believe it to be in
the corporate interest . . . .” Hanrahan v. Kruidenier, 473 N.W.2d 184,
186 (Iowa 1991). The rule would not permit directors to violate an
unambiguous bylaw; rather, the rule (if applicable) would provide judicial
deference to board action authorized by the Association’s governing
documents.
The district court declined the Association’s invitation to apply the
rule. We have not previously held whether the rule applies to the actions
of the board of a nonprofit condominium owners association. “The
business judgment rule, universally applied as a part of corporate law,
has long been codified in Iowa.” Hanrahan, 473 N.W.2d at 186 (citing
Iowa Code § 490.830 (1991)). Hanrahan applied the rule codified in the
Iowa Business Corporation Act, Iowa Code chapter 490. The Association
is a nonprofit corporation formed under chapter 504, the Revised Iowa
Nonprofit Corporation Act. Section 504.831 contains language identical
to section 490.830 codifying the business judgment rule. 4 Compare Iowa
4Iowa Code section 504.831 (2007) provides in pertinent part:
20
Code § 490.830 (2007), with id. § 504.831. Accordingly, the legal
predicate exists for applying the business judgment rule to the nonprofit
Association board’s actions in this case.
Other courts have applied the business judgment rule or its
equivalent to uphold the actions of condominium or homeowners
association boards. See, e.g., Lamden v. La Jolla Shores Clubdominium
_________________________
1. Each member of the board of directors of a corporation, when
discharging the duties of a director, shall act in conformity with all of the
following:
a. In good faith.
b. In a manner the director reasonably believes to be in the best
interests of the corporation.
2. The members of the board of directors or a committee of the
board, when becoming informed in connection with their decision-
making functions or when devoting attention to their oversight functions,
shall discharge their duties with the care that a person in a like position
would reasonably believe appropriate under similar circumstances.
3. In discharging board or committee duties, a director who does
not have knowledge that makes reliance unwarranted is entitled to rely
on the performance by any of the persons specified in subsection 5,
paragraph “a”, to whom the board may have delegated, formally or
informally by course of conduct, the authority or duty to perform one or
more of the board’s functions that are delegable under applicable law.
4. In discharging board or committee duties, a director who does
not have knowledge that makes reliance unwarranted is entitled to rely
on information, opinions, reports, or statements, including financial
statements and other financial data, if prepared or presented by any of
the persons specified in subsection 5.
5. A director is entitled to rely, in accordance with subsection 3
or 4, on any of the following:
a. One or more officers or employees of the corporation whom the
director reasonably believes to be reliable and competent in the functions
performed or the information, opinions, reports, or statements provided
by the officer or employee.
b. Legal counsel, public accountants, or other persons as to
matters involving skills or expertise the director reasonably believes are
either of the following:
(1) Matters within the particular person’s professional or expert
competence.
(2) Matters as to which the particular person merits confidence.
21
Homeowners Ass’n, 980 P.2d 940, 950 (Cal. 1999) (holding “courts
should defer to the board’s authority and presumed expertise” when it
discharges its duty to repair a common area after a “reasonable
investigation, in good faith and with regard for the best interests of the
community association and its members”); Colorado Homes, Ltd. v.
Loerch–Wilson, 43 P.3d 718, 724 (Colo. App. 2001) (“We perceive no
reason why [the business judgment rule] should not apply in this case
insofar as the issue for resolution is whether the [homeowners
association] fulfilled its obligation to enforce the covenants.”); Weldy v.
Northbrook Condo. Ass’n, 904 A.2d 188, 192 (Conn. 2006) (noting the
court reviews “whether the [action] reflects reasoned or arbitrary and
capricious decision making”); Papalexiou v. Tower W. Condo., 401 A.2d
280, 286 (N.J. Super. Ct. 1979) (“If the [condominium] directors’ conduct
is authorized, a showing must be made of fraud, self-dealing or
unconscionable conduct to justify judicial review.”); Levandusky v. One
Fifth Ave. Apartment Corp., 553 N.E.2d 1317, 1322 (N.Y. 1990) (“So long
as the board acts for the purposes of the cooperative, within the scope of
its authority and in good faith, courts will not substitute their judgment
for the board’s.”); Agassiz W. Condo. Ass’n v. Solum, 527 N.W.2d 244,
248 (N.D. 1995) (“We hold the business-judgment rule applies to a
board’s actions regarding repairs to the common areas of a
condominium.”); Schwarzmann v. Ass’n of Apartment Owners of
Bridgehaven, 655 P.2d 1177, 1181 (Wash. Ct. App. 1982) (“Absent a
showing of fraud, dishonesty, or incompetence, it is not the court’s job to
second-guess the actions of [condominium] directors.”). We hold the
business judgment rule as codified in section 504.831 applies to the
actions of directors of nonprofit corporations organized under chapter
504.
22
The business judgment rule is usually applied as a defense to
claims a director is personally liable for corporate actions. See
Hanrahan, 473 N.W.2d at 186. However, without invoking the business
judgment rule by name, we refused to enjoin efforts to amend the articles
of incorporation of an insurance company over the objection of some of
its members. Wolf v. Lutheran Mut. Life Ins. Co., 236 Iowa 334, 341–42,
18 N.W.2d 804, 809 (1945) (“[C]ourts [will not] interfere in the internal
management or policy of a corporation except in cases of fraud, bad
faith, breach of trust, gross mismanagement or ultra vires acts . . . .”).
Our court of appeals, citing Wolf, applied the rule by name to affirm an
order rejecting a challenge to bylaw amendments. Cent. Iowa Power
Coop. v. Consumers Energy, No. 06–1060, 2007 WL 2710841, *3 (Iowa
Ct. App. Sept. 19, 2007) (“We believe the decision here to amend and
tighten the qualifications for membership to the board of directors fits
squarely within the protections afforded by the business judgment
rule.”). Similarly, we conclude the rule applies to the board’s exercise of
its interpretive authority over the bylaw in this case to proceed with the
garage repairs without a membership vote.
We have noted “[t]he purpose of the [business judgment] rule is to
severely limit secondguessing of business decisions which have been
made by those whom the corporation has chosen to make them.”
Hanrahan, 473 N.W.2d at 186. We will not substitute our judgment for
the interpretation of the Association board if the factual predicates for
the rule are present. In this case, there is no claim that any of the
Association board members were self-dealing or had a conflict of interest.
The rule applies when the directors act in good faith and in a manner
they reasonably believe to be in the best interest of the corporation. Iowa
Code section 504.831(1); see also Hanrahan, 473 N.W.2d at 186. The
23
directors are entitled to rely on the advice of legal counsel on matters
within their professional competence. Iowa Code § 504.831(5)(b). They
did so here, relying on the legal opinion of Attorney Thomas G. Fisher,
Sr. that no membership vote was required for the garage repair and
assessment.
The board thoroughly investigated the need for repairs to the
garage and the proposed special assessments, commissioning studies by
engineers and financial experts. The board’s deliberations spanned
several years and numerous board meetings to which members were
invited. The board secured multiple estimates and firm bids before
contracting for the repairs. Plaintiffs do not challenge the necessity for
the repairs or the reasonableness of the ultimate cost. The challenge
concerns only the lack of a vote of preapproval by two-thirds of the
membership. We conclude substantial evidence supports the factual
predicates for the business judgment rule reflected in the district court’s
findings:
There is no doubt that the Board was open and honest
with its members in addressing the necessity of repairs to
the garage. There were several meetings where the repairs
and the costs regarding same were discussed where
members were allowed to voice their opinions. There was
nothing clandestine in the way the Board handled bringing
this matter to the membership.
While the court agrees with the Association’s analysis
of the record that shows the directors acted in good faith, the
decision was reasonably prudent and that the Board believed
the decision to be in the corporate interest . . . .
The district court stopped short of applying the business judgment
rule because it concluded the rule does not permit the board to disregard
a bylaw the court found unambiguously required the membership vote.
As explained above, we believe the bylaw is ambiguous, and the board
24
properly exercised its authority to interpret the bylaw. We apply the
business judgment rule to defer the board’s interpretation. Accordingly,
we hold the board was entitled to proceed with the garage repairs and
special assessment without the preapproval of two-thirds of the
membership. We therefore do not need to reach the issue of laches.
IV. Disposition.
For these reasons, we reverse the ruling of the district court and
remand for entry of judgment in favor of the Association dismissing
plaintiffs’ declaratory judgment action and entering judgment against
plaintiffs on the counterclaim for their respective shares of the special
assessment including interest. The district court shall determine the
reasonable attorneys fees incurred by the Association (including
appellate fees) in this litigation and enter judgment in its favor and
against plaintiffs, jointly and severally, for those fees and costs.
REVERSED AND REMANDED.
All justices concur except Wiggins and Mansfield, JJ., who take no
part.