Santoro v. Eagle Crest Estate Homesite Owners Assn. ( 2022 )

793
Argued and submitted March 23, 2021; portion of judgment on claim for denial
of construction plans vacated and remanded, otherwise affirmed May 25, 2022
Alfred P. SANTORO
and Joan E. Santoro,
Trustees of the
Santoro and Smith Family Trust,
dated 12/23/1996,
Plaintiffs-Appellants,
v.
EAGLE CREST ESTATE
HOMESITE OWNERS ASSOCIATION,
an Oregon nonprofit corporation,
Defendant-Respondent.
Deschutes County Circuit Court
16CV39203; A171260
512 P3d 828
Plaintiffs, who own properties at the Eagle Crest Estate Homesites, sued
defendant, Eagle Crest Estate Homesite Owners Association, after defendant’s
architectural review committee (committee) denied plaintiffs’ request to con-
struct an oversized garage door to accommodate a recreational vehicle. On
appeal, plaintiffs assign error to the trial court’s ruling that the committee acted
within its authority to deny plaintiffs’ request. Plaintiffs also challenge the trial
court’s judgment permitting defendant’s charge of certain application processing
fees and a pavement damage assessment. Held: The Court of Appeals concluded
that the trial court erred in upholding the committee’s denial of plaintiffs’ pro-
posed construction plans without examining whether the committee exercised its
discretion in good faith as required by the contract. However, the trial court did
not err in concluding that defendant had authority to collect application process-
ing fees and the pavement assessment from plaintiffs.
Portion of judgment on claim for denial of construction plans vacated and
remanded; otherwise affirmed.
Beth M. Bagley, Judge.
J. Christian Malone argued the cause for appellants. Also
on the briefs were Peterkin Burgess and Megan K. Burgess.
Ashleigh Edwards argued the cause for respondent. On
the brief were Tracy J. Frazier and Chock Barhoum, LLP.
794 Santoro v. Eagle Crest Estate Homesite Owners Assn.
Before Mooney, Presiding Judge, and Joyce, Judge, and
DeVore, Senior Judge.*
JOYCE, J.
Portion of judgment on claim for denial of construction
plans vacated and remanded; otherwise affirmed.
______________
* Joyce, J., vice DeHoog, J. pro tempore.
Cite as 319 Or App 793 (2022) 795
JOYCE, J.
Plaintiffs, who own properties at the Eagle Crest
Estate Homesites (Eagle Crest) sued defendant, Eagle Crest
Estate Homesite Owners Association, after defendant’s
architectural review committee denied plaintiffs’ request to
construct an oversized garage door to accommodate a rec-
reational vehicle (RV). On appeal, plaintiffs assign error to
the trial court’s ruling that the committee acted within its
authority to deny plaintiffs’ request. Plaintiffs also chal-
lenge the trial court’s judgment permitting certain appli-
cation processing fees and a pavement damage assessment.
We vacate and remand the trial court’s decision respecting
the committee’s denial of the construction plans because the
court failed to examine whether the committee exercised
its discretion in good faith as required by the contract. We
affirm, however, as to the trial court’s judgment allowing
the disputed fees.
BACKGROUND FACTS
The relevant facts on appeal are undisputed. Plain-
tiffs purchased their first lot in Eagle Crest in 2011. Eagle
Crest is a planned residential community. As a planned
residential community, the homeowners are bound by a
recorded declaration of covenants, conditions, and restric-
tions for Eagle Crest Estate Homesites (CC&Rs). Among
other things, those CC&Rs establish a homeowner’s associ-
ation (HOA). The HOA has a sub-group architectural review
committee (committee). The CC&Rs require all homeowners
to submit their proposed construction plans to the commit-
tee for approval before construction.
In compliance with that requirement, in 2012, plain-
tiffs submitted their proposed plans and built a home after
they obtained an approval from the committee. During that
process, plaintiffs paid an $825 application processing fee
and a $500 pavement assessment. In 2016, plaintiffs pur-
chased a second lot in Eagle Crest. Plaintiffs again submit-
ted their proposed construction plans to the committee and
paid defendant the required fees, including an $825 applica-
tion processing fee and a $500 pavement damage refundable
deposit. The 2016 construction plans included a garage with
a 12-foot door capable of accommodating a RV.
796 Santoro v. Eagle Crest Estate Homesite Owners Assn.
The committee notified plaintiffs that it condition-
ally approved their plans with two modifications: (1) replac-
ing the over-sized garage door with a standard one no
taller than eight feet; and (2) reducing the proposed paving
in the back-out area of the driveway. The committee cited
section 5.2(a) of the CC&Rs as authority for its decision
and explained that it denied plaintiff’s proposed oversized
garage for aesthetic reasons. Section 5.2(a) gives the com-
mittee broad authority to consider “style, design, appear-
ance, harmony of external design” in determining whether
to approve any construction proposal.
Plaintiffs appealed the committee’s decision, argu-
ing that neither the CC&Rs nor the committee’s Policies
and Guidelines (guidelines)1 expressly prohibit oversized
garages and noting that other homes in Eagle Crest have
RV-sized garages. The committee unanimously denied plain-
tiffs’ appeal.
Plaintiffs then filed this action for breach of con-
tract and for a declaratory judgment. Plaintiffs argued that
the unambiguous terms of the CC&Rs imposed an affirma-
tive duty of good faith on the committee and that it failed to
fulfill that obligation by denying plaintiffs’ proposal to build
an RV garage. Plaintiffs also challenged defendant’s author-
ity to charge them the two application processing fees they
paid in 2012 and 2016 as well as the pavement assessment
fee in 2012.2
Central to both parties’ arguments—and ultimately
to the trial court’s decision—was the Supreme Court’s deci-
sion in Valenti v. Hopkins, 324 Or 324, 926 P2d 813 (1996).
Because that case is fundamental to understanding the
trial court’s ruling and the arguments on appeal, we pause
our factual recitation briefly to describe it. In Valenti, the
plaintiffs brought an action against a neighbor who pro-
posed to build a house that would obstruct the plaintiffs’
view in violation of certain restrictive covenants. Id. at 327.
1
The CC&Rs authorize the HOA board of directors to promulgate a set of
committee policies and guidelines that further outline the policies and proce-
dures for projects within the committee’s scope of approval authority.
2
In 2016, plaintiffs paid a $500 “pavement damage refundable deposit”
rather than an assessment. Plaintiffs did not contest that deposit.
Cite as 319 Or App 793 (2022) 797
The CC&Rs specified that any new construction has to be
approved by the architectural control committee. Id. at 328.
The CC&Rs authorized the committee to make final deci-
sions and withhold consent “at its discretion.”3 Id. at 328-29.
The committee eventually approved the defendants’ plans,
concluding that, under the operative view protection provi-
sion of the CC&Rs, the plaintiffs’ lot was not “adjacent” to
the defendants’ lot. Id. at 330.
On appeal, the Supreme Court held that where
restrictive covenants unambiguously authorize certain
disputes to be resolved by a third party, “the appropriate
standard of review” of the court is to “review for fraud, bad
faith, or failure to exercise honest judgment” of the HOA’s
interpretation of the language in the CC&Rs. Id. at 335.
Because the plaintiffs had not proved that the committee’s
decision was so tainted, the committee’s decision approving
the defendants’ plans was final and binding. Id.
In this case, and based on Valenti, defendant argued
that, absent any showing of fraud, bad faith, or failure to
exercise honest judgment, the trial court had to uphold
defendant’s decision. Plaintiffs, relying on the CC&R’s text,
argued that Valenti was not the standard under which the
trial court was required to review defendant’s actions.
After a bench trial, the trial court entered a judg-
ment for defendant. Citing section 5.1 and 5.2(a) of the
CC&Rs, the court found that defendant, “like the [commit-
tee] in Valenti,” had broad authority under the CC&Rs to
deny plaintiffs’ application. The court further found that
the committee denied the application because “the RV/
oversized garage was not consistent with the overall aes-
thetic and character of the community.” The court then
concluded that, because plaintiffs presented no evidence
at trial establishing fraud, bad faith, or a lack of hon-
est judgment, defendant acted within its authority and
did not breach the contract. The court also found that the
CC&Rs and ORS 94.704(6) allowed defendant to collect
3
The covenants also provided that the committee and any member could not
be liable for damages for any action or inaction “provided only that the member,
in accordance with actual knowledge possessed by him/her, has acted in good
faith.” Id. at 328.
798 Santoro v. Eagle Crest Estate Homesite Owners Assn.
application processing fees and the pavement assessment
from plaintiffs.
DENIAL OF CONSTRUCTION PLANS
In the first through third assignments of error,
plaintiffs argue that the trial court erred in upholding the
committee’s denial of plaintiffs’ proposal to construct an RV
garage, because the committee failed to comply with the
CC&Rs’ requirement that the committee act in good faith. In
response, defendant argues that, because the CC&Rs grant
the committee broad authority to approve or disapprove
homeowners’ construction plans, under Valenti, the court
should defer to the committee’s decision as long as there is
no fraud, bad faith, or failure to exercise honest judgment.
At the outset, we clarify that, contrary to what
defendant argues and the trial court appeared to conclude, a
court’s deferential review of contractual terms under Valenti
does not apply in every case involving disputes arising from
an authorized third party’s construction of the CC&Rs. The
threshold question, as the court confirmed in Valenti, is still
one of contract interpretation, i.e., how the CC&Rs restrict
the authority of the committee to make final decisions as
to homeowners’ proposed construction plans. If the CC&Rs
grant the committee broad discretion to make final deci-
sions without further limitation, then Valenti applies; if the
CC&Rs restrict the committee’s discretion, then we apply
that standard under the CC&Rs.
We thus start with the CC&Rs. Contract interpre-
tation presents a question of law that we review for legal
error. Eagle-Air Estates Homeowners Assn., Inc. v. Haphey,
272 Or App 651, 656, 354 P3d 766 (2015), rev den, 359 Or 166(2016). In interpretating a contract, the court first “exam-
ines the text of the disputed provision, in the context of the
document as a whole,” inquiring whether the provision at
issue is ambiguous. Yogman v. Parrott, 325 Or 358, 361-64,
937 P2d 1019 (1997); see also Batzer Construction, Inc. v.
Boyer, 204 Or App 309, 315-17, 129 P3d 773, rev den, 341 Or
366 (2006) (explaining that, in determining whether a con-
tract term is ambiguous, a court must consider evidence of
the circumstances of contract formation, if provided by the
parties, and that Yogman omitted that step only because no
Cite as 319 Or App 793 (2022) 799
such evidence was presented in Yogman). In the absence of
an ambiguity, the court construes the words of a contract
as a matter of law, and the analysis ends. May v. Chicago
Insurance Co., 260 Or 285, 292, 490 P2d 150 (1971); see also
Valenti, 324 Or at 331 (“Unambiguous contracts must be
enforced according to their terms.”).
We therefore start with the text and context of the
relevant CC&Rs provisions to determine whether the Valenti
deferential standard applies here. Yogman, 325 Or at 361-
64. Section 5.1 of the CC&Rs vests power in the committee
to “control and approve” all building plans. Section 5.2(a)
further provides that “[b]efore commencing any building
* * * written approval must be obtained from the Committee
covering all aspects of such proposed activity, including
building and plot plans for all structures erected * * * [and]
garages and fences[.]” In determining whether to approve
any proposal, the committee is given broad authority to con-
sider aesthetic factors, such as “style, design, appearance,
[and] harmony of external design[.]” Section 5.4 further
states:
“The decision of a majority of the Committee * * * acting in
good faith in its sole discretion, upon any matters submitted
or referred to it, shall be final; provided, however, that such
decision may not violate any of the provisions set out in this
Declaration.”
(Emphasis added.) Thus, the committee’s discretion to make
final decisions here is limited by a requirement that the
committee act “in good faith.” By contrast, the committee in
Valenti was granted “discretion” to make decisions without
an affirmative duty to act in good faith.4 Valenti, 324 Or
at 328. As a result, the parties here reasonably expect that
the committee’s decision will be final only if it has met its
express obligation to act in good faith under the CC&Rs.
We thus conclude that the trial court erred in applying the
deferential standard under Valenti.
Because we conclude that the trial court applied an
incorrect legal standard, we must next determine whether
4
As noted, in Valenti, the committee could not be liable in damages if acting
in good faith. Although noteworthy, the good-faith provision did not appear in the
provision governing the discretion to make decisions.
800 Santoro v. Eagle Crest Estate Homesite Owners Assn.
the error was harmless. State v. Zamora-Skaar, 308 Or App
337, 353, 480 P3d 1034 (2020). A court’s erroneous applica-
tion of a legal standard is harmless if “there is little likeli-
hood that the erroneous self-instruction affected the court’s
verdict.” Id. at 354.
The error here was not harmless. The trial court’s
conclusion that defendant did not act in bad faith or with
a lack of honest judgment does not necessarily mean that
defendant fulfilled its affirmative duty to act in good faith.
As observed with regard to contract claims for breach of the
implied duty of good faith, it is not necessarily sufficient just
to act honestly. See generally Best v. U. S. National Bank, 303
Or 557, 564, 739 P2d 554 (1987) (“It is therefore not neces-
sarily sufficient, as the Bank contends, that the Bank acted
honestly in setting its [non-sufficient funds (NSF)] fees[.]”).
The Supreme Court offered examples of breaches of good
faith, other than outright dishonesty or clear-cut bad faith:
“ ‘Subterfuges and evasions violate the obligation of
good faith in performance even though the actor believes
his conduct to be justified. But the obligation goes further;
bad faith may be overt or may consist of inaction, and fair
dealing may require more than honesty. A complete cata-
logue of types of bad faith is impossible, but the following
types are among those which have been recognized in judi-
cial decisions: evasion of the spirit of the bargain, lack of
diligence and slacking off, willful rendering of imperfect
performance, abuse of power to specify terms, and inter-
ference with or failure to cooperate in the other party’s
performance.’ ”
Id. at 563 (quoting Restatement (Second) of Contracts § 205
comment d (1979)). To summarize, the court observed:
“When one party to a contract is given discretion in the
performance of some aspect of the contract, the parties
ordinarily contemplate that that discretion will be exer-
cised for particular purposes. If the discretion is exercised
for purposes not contemplated by the parties, the party
exercising discretion has performed in bad faith.”
Id. In short, the potential remains, beyond the potential of
fraud or a failure to exercise honest judgment, that a deci-
sion breached a duty of good faith because it was exercised
for purposes not contemplated by the parties.
Cite as 319 Or App 793 (2022) 801
Absent extrinsic evidence to the contrary, we con-
strue the “good faith” limitation on the committee’s dis-
cretion similarly. Accordingly, as a matter of law, the trial
court’s conclusion that defendant’s conduct lacked bad faith,
dishonesty, or fraud does not necessarily equate to a con-
clusion that defendant acted in good faith and we conclude
that the trial court’s error was not harmless. We thus vacate
the trial court’s judgment against plaintiffs on defendant’s
denial of the construction plans with an RV garage and
remand this case to the trial court to reconsider its decision
in light of this opinion.
LEVIED FEES AND ASSESSMENTS
In their final assignments of error, plaintiffs con-
tend that the trial court erred in concluding that defendant
was authorized to impose certain fees and assessments: a
$500 pavement assessment in 2012; a $825 application pro-
cessing fee in 2012; and a $825 application processing fee in
2016. Plaintiffs argue that the fees are not permitted under
the CC&Rs and ORS 94.704. On appeal from a bench trial,
“we review the trial court’s findings of fact for any evidence
to support them, and its legal conclusions for errors of law.”
State ex rel Rosenblum v. Living Essentials, LLC, 313 Or App
176, 201-02, 497 P3d 730, rev allowed, 368 Or 787 (2021)
(internal citations and quotation marks omitted).
We first address plaintiffs’ contention that defen-
dant is not authorized to charge the pavement assessment.
Plaintiffs argue that the assessment does not meet the defi-
nition of “common expense” under ORS 94.704(6),5 because
the record contains no evidence showing that defendant
actually incurred costs to repair roadways due to plaintiffs’
2012 new home construction.
Our legal analytical framework begins with ORS
94.704(6)’s text and context. State v. Gaines, 346 Or 160, 171,
206 P3d 1042 (2009). That subsection of the statute provides:
“Unless otherwise provided in the declaration or bylaws,
any common expense or any part of a common expense
5
Eagle Crest is a planned community, subject to the Oregon Planned
Community Act, ORS 94.550 to 94.783.
802 Santoro v. Eagle Crest Estate Homesite Owners Assn.
benefiting fewer than all of the lots may be assessed exclu-
sively against the lots or units benefited.”
For purposes of that statute, “common expense” means
“expenditures made by or financial liabilities incurred by
the homeowners association and includes any allocations
to the reserve account under ORS 94.595.” ORS 94.550(6)
(emphasis added). ORS 94.595(2)(a), in turn, provides that
a homeowners association “shall establish a reserve account
to fund major maintenance, repair or replacement of all
items of common property which will normally require major
maintenance, repair or replacement, in whole or in part[.]”
The statutory text defeats plaintiffs’ argument that
the HOA must incur expense before it can levy assessments
under ORS 94.704(6). The reserve account statute expressly
permits associations to assess the potential costs and to
maintain a reserve account to fund for expenses that “will
normally require major maintenance, repair or replace-
ment[.]” ORS 94.595(2)(a) (emphasis added). The legislature’s
use of the future verb tense suggests that the statute allows
an association to levy assessments for future “maintenance,
repair or replacement” expenses before they actually occur.
See Martin v. City of Albany, 320 Or 175, 181, 880 P2d 926(1994) (“The use of a particular verb tense in a statute can
be a significant indicator of the legislature’s intention.”). We
thus conclude that ORS 94.704(6) permits an association to
levy a pavement assessment and put it in a reserve account
to defray the costs associated with improving or maintain-
ing the community roads in the future.
In light of that legal conclusion, we must then
determine whether the facts in the record support the
trial court’s findings that defendant charged the pavement
assessment as reserves for the repair and maintenance of
community roads in the future, consistent with ORS 94.595.
We conclude that they do. The 2011 architectural review
committee guidelines allow defendant to charge the assess-
ment and to deposit the money “into the Estate Homesite
Owners Association Reserve Fund for roadway wear and
tear incurred during periods of construction.” Jim Prehoda,
defendant’s prior property manager, testified that defendant
levied the assessment to offset the increased wear and tear
Cite as 319 Or App 793 (2022) 803
on the common roadways, because new home construction
“was a stress on the association’s road.” Defendant put those
collected assessments in its reserve fund specifically for
repair and maintenance of roads. Given that evidence, the
trial court correctly concluded that defendant could levy the
pavement assessment under ORS 94.704(6).
In arguing to the contrary, plaintiffs point to the
prefatory language in ORS 94.704(6), “[u]nless otherwise
provided in the declaration or bylaws[.]” In plaintiffs’ view,
even if ORS 94.704(6) permits the assessment, the CC&Rs
do not. We disagree. Again, we begin our analysis of the
relevant contract provisions here under the template estab-
lished in Yogman, 325 Or at 361-64. The CC&Rs allow
defendant “to levy assessments” against homeowners in
accordance with article 3. Article 3 enumerates five types
of assessments, i.e., annual, special, emergency, remedial,
and property tax assessments.6 Even assuming a pavement
assessment does not fit within any of the specified assess-
ment types, nothing in the CC&Rs expressly prohibit defen-
dant to levy such assessments. In short, the CC&Rs do not
“otherwise provide” that defendant cannot levy a pavement
assessment against plaintiffs.
We turn to plaintiffs’ challenge to the application
processing fees. We again conclude that the plain text of
the CC&Rs and committee guidelines, in context, unam-
biguously provide defendant authority to charge plaintiffs
the application processing fees. Yogman, 325 Or at 361.
Specifically, section 2.5(i) of the CC&Rs permit defendant
“in its sole discretion” to create “various classes of service”
and “to make appropriate charges.” The architectural review
committee is a sub-group of the HOA board and is estab-
lished to receive, review and approve proposed construction
plans for the community. The committee guidelines, pro-
mulgated by the HOA board, in turn, require homeowners
seeking approval of construction plans to pay $825 for
reviews of their proposed plans. Read in conjunction with
those provisions, the CC&Rs authorize defendant to act in
6
Defendant did not argue that the pavement assessment qualifies as a “spe-
cial assessment” under the CC&Rs and the trial court therefore did not address
that question.
804 Santoro v. Eagle Crest Estate Homesite Owners Assn.
its sole discretion to charge plaintiffs application processing
fees for the committee to perform its duties of reviewing and
approving construction plans.
Moreover, imposition of the fees, contrary to plain-
tiff’s argument, is consistent with ORS 94.704(6). That stat-
ute expressly allows a homeowner association to charge
common expenses against individual owners to cover any
“expenditures made by or financial liabilities incurred.”
Here, the trial court found that the processing fee “cov-
ers expenses related to the time and supervision that the
[committee], together with the Management Company
would need to spend on new construction.” That finding is
supported by the record. The trial court thus correctly con-
cluded that defendant has authority to charge plaintiffs the
disputed application processing fees.
Portion of judgment on claim for denial of construc-
tion plans vacated and remanded; otherwise affirmed.