Barsomian v. Mountainside Condominium Association ( 2018 )

Barsomian v. Mountainside Condominium Association, 174-3-16 Wncv (Teachout, J., May 17, 2018)
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
STATE OF VERMONT
SUPERIOR COURT CIVIL DIVISION
Washington Unit Docket No. 174-3-16 Wncv
JOHN BARSOMIAN et al.,
Plaintiffs
v.
MOUNTAINSIDE CONDOMINIUM ASSOCIATION,
Defendant
DECISION
Motion for Appointment of Receiver
Defendant Mountainside Condominium Association is the condominium association for a
90 unit condominium complex in Warren, Vermont in the Sugarbush ski community. The
complex was built as three separate buildings. Plaintiffs are some, but not all, owners of the 36
individual units in Building 3.
Plaintiffs seek the appointment of a receiver for the Association based on claims that the
Board of Directors has mismanaged its obligation to reconstruct Building 3 following a fire. A
hearing was held on the motion on May 15 & 16, 2018, but by agreement of counsel, all
evidence previously admitted at hearings on October 21 & 28, 2016 and January 4, 5 & 6, 2017
was also evidence for this hearing.1 Plaintiffs are represented by Attorney Christopher D. Roy.
Defendant is represented by Attorney Robert S. DiPalma.
Findings of Fact
The Mountainside complex was built nearly 40 years ago. Many of the units are vacation
second homes for owners who reside elsewhere. For many years up to approximately 2010, the
governance of the Association was stable under the leadership of a single individual who served
as President of the Board for thirty years. Since his departure, there have been several changes
in the membership of the Board.
In February of 2014, a fire completely consumed Building 3. Under the condominium
Declaration, the Board had the obligation to “promptly reconstruct . . . in substantial conformity
with plans of record and the original plans and specifications for Mountainside Condominium
with the proceeds of insurance available for that purpose, if any.” (Section 10.1). If proceeds of
insurance “are insufficient for that purpose, the Association may raise the remainder of the
necessary funds by levying one or more special assessments in the same manner in which
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Evidence on all of those dates is evidence in the final hearing on the merits in Plaintiffs’ claims for equitable relief,
which has been separated from Plaintiffs’ claims for damages, which will be heard at a later time.
assessments to meet ordinary common expenses are levied.” (Section 11.2).
The circumstances were complicated. Over the years, many of the Building 3 unit
owners had renovated, upgraded, and customized their units with significant betterments. Since
original construction, building codes and land use regulations and construction technology have
all undergone changes that would call for changes in what was to be built, making it impossible
to rebuild exactly what had been lost. While the Association had insurance that included
replacement coverage, it was initially unknown whether there would be a gap between
reconstruction costs and insurance proceeds, although that was likely as there was a cap of
$105,000 on costs attributable to upgrades required by codes and ordinances. Some, but not all,
Building 3 owners had some forms of coverage of their own. Building 3 owners were obligated
to continue to pay dues and in many cases mortgage payments even though they had no units.
Building 1 and 2 owners had reservations about having to pay anything toward reconstruction of
Building 3. Some, but not all, of all owners had loss assessment coverage (in differing amounts)
to reimburse them for special assessments of the Association.
The Board initially went to work on the various issues involved. By June of 2014, there
was a letter of intent with Engelberth Construction to rebuild the building on a design-build
basis. The Board got legal advice on both reconstruction obligations and insurance issues and
hired World Claim as its own private adjuster. To determine the costs of rebuilding the
betterments of unit owners, World Claim gathered information and compiled a detailed inventory
of what had been in each unit before the fire. An Act 250 land use permit was going to be
needed, and an application was filed in September.
The Minutes of the Annual Meeting of October 12, 2014 include a lengthy description of
details concerning progress on the multiple dimensions of the project. Besides being informed of
the status of the many tasks and the work of Engelberth, World Claim, the project manager, and
others, owners were also informed that “[i]f there is a significant difference between the re-build
and insurance company offer, borrowing money or a special assessment would have to be
considered.” Owners were further informed that if there were to be a shortfall, owners in all
buildings would be responsible for the rebuild, “exclusive of betterments and improvements
inside units.” The project seemed to be underway with the anticipation of starting construction
in the spring of 2015. By January of 2015, Engelberth had completed preliminary plans.
Progress slowed down considerably in 2015. One factor was the necessity of obtaining
Act 250 approval, which took time as the permit was initially denied and there was an appeal. In
addition, there was considerable turmoil in the governance of the association. There were
changes in Board membership, changes in attorneys, requests for changes in bylaws and for
meetings and special meetings. The insurance claim against Vermont Mutual was in dispute.
Construction itself could not really begin because of the status of the Act 250 permit, but during
this period, considerable tension, suspicions, and mistrust, as well as disagreements over
strategy, developed between board members and owners. Communication was poor.
The portion of the Minutes of the Annual Meeting of October 11, 2015 attributable to
“Building 3 update” is short. The status of what insurance proceeds would be available was very
unclear. Owners asked what the shortfall would be and “what each owner’s financial exposure
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would be.” The Board said it was unknown.
In March of 2016, the Plaintiffs were frustrated and filed this suit and sought the
appointment of a receiver. In April of 2016, the Act 250 permit was issued, so the project could
proceed, but it remained stalled. No progress was being made in determining the amount of
insurance proceeds that would be available. It was becoming clear that there would likely be a
shortfall in available funds. Vermont Mutual was taking the position that Engelberth’s plan was
too expensive. Engelberth had been paid $440,000 and had preliminary plans, but Board
members began considering whether to use a different builder and seek different plans, perhaps
to reduce costs and pursue a more energy efficient design, but there would also be a cost to sever
the relationship with Engelberth. Building 3 owners were nervous about changing plans from
the Engelberth design, which they supported. There was also discussion about suing Vermont
Mutual concerning its insurance obligation. Communication between the Board and the owners
remained poor.
The Minutes of the Annual Meeting of October 9, 2016 demonstrate vagueness as to any
plan for progress. There was the possibility of suing Vermont Mutual, and the Board was
considering changing contractors, but there was no clear plan or timetable. The one concrete
action that was taken was that the members approved a special assessment in the amount of $1.5
million to address the likelihood of a shortfall in available funds. Despite that approval and the
ongoing recognition of a likelihood of a shortfall, the Board has never taken steps to proceed
with the special assessment that was approved.
The hearing on the request for the appointment of a receiver took place on the dates
described above. On the last day of hearing, January 6, 2017, the parties stipulated to the court
deferring a ruling on the motion because at that time it appeared that progress was being made
and that it would be possible to move forward with the project in a manner that would result in
construction in the summer of 2017.
The Board changed contractors. It hired Naylor and Breen as contractor and an architect
to revise plans. One result was a dispute with Engelberth over drawings and financial
obligations, and the Association is now in a lawsuit brought by Engelberth seeking $325,000.
Vermont Mutual paid $4.9 million for the value of the burned building, but there was no clarity
as to what would be available for the reconstruction component and it appeared that Vermont
Mutual was not likely to agree to the amount that would cover costs. Although construction
started in the summer of 2017, the Board did not take any steps to cover a possible shortfall.
As of the time of the Annual Meeting in October of 2017, no action had been taken to
implement the $1.5 million special assessment authorized the year before. Given that
construction was underway, it was time to address the design and specifications for the rebuild of
the individual Building 3 units. A specific board member was appointed to update all the unit
owners’ betterment claims.
In fact, that board member became unavailable, and that never occurred. Instead, a
different board member began emailing Building 3 owners informing them of the choices
available for flooring, fixtures, etc. and asking for information that many of them claimed they
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had previously provided, sometimes on multiple occasions, and that such information is in the
detailed World Claim inventory. The communication that occurred between the Board and
owners on this issue over the next few months was very poor and contributed to increasing
frustrations, mistrust, suspicions, and hostility. This atmosphere has continued unabated and was
palpable in the courtroom.
Another contributor to the distrust was the owners’ dissatisfaction with the way the Board
has handled insurance funds. Instead of putting them in a segregated fund at the beginning, some
such funds have been used to pay expenses such as the World Claim fees and other expenses that
were clearly never covered by insurance. Owners believe there should have been budgeting and
assessment for such costs and the insurance money should have been saved for building. The
Board apparently took the position that these were fire-related expenses and it was not required
to do so. It may not have been (the court takes no position in this decision), but the outcome was
inevitable that at some point replacement money would be needed, and no steps have been taken
to provide such funds. On the Board side, a board member began seeking loan financing in early
2018 without good results, and blames the inability to obtain adequate loan financing on this
lawsuit, together with the fact that some owners have placed their dues in escrow.
On March 10, 2018, while construction was underway, the Board held an informational
meeting for owners at which it presented some financial information. The figures are somewhat
confusing but it showed the likelihood of a shortfall of at least $1.1 to $1.4+ million. The Board
had gotten the Association into this position, despite knowing since 2014 that there could be a
shortfall and despite not having acted on the authority for a $1.5 million assessment. Shortly
thereafter, the Board learned from Vermont Mutual that it was not willing to release any more
money without sufficient showing that prior funds had been spent on the building and that work
had been incurred that called for such funds. The Board also was notified by the contractor,
Naylor and Breen, that it was not willing to continue to the next phase of construction because of
the lack of assurance that it would be paid and be able to pay subcontractors.
An important Board meeting was held on April 23, 2018. There was a real crisis at hand.
The project was partially built but no money was available to continue and construction was
about to stop. The transcript of that meeting shows that the first part of the meeting was spent
discussing whether billing of dues should shift from quarterly to monthly in order to pay
expected but unbudgeted attorneys’ fees in the amount of $130,000. This might have been
appropriate for a follow-up topic, but did not address the urgent needs of the Association, which
was to address a shortfall of $1.3 to $1.9 million.
The discussion that followed about what to do about the financial crisis demonstrates a
lack of ability on the part of the Board as a group to address the serious and complicated
problems the Board faces. There was very little factual information presented. It did not appear
that any meaningful homework had been done in preparation to establish priorities, assemble
facts, obtain professional advice, identify options, or develop proposals. The discussion about
whether to do an assessment was at such a level of generality that tough decisionmaking was not
possible and did not occur. The transcript demonstrates that although the members of the Board
are well-meaning and would like to fulfill their obligations, the group is simply not capable of
handling the difficult circumstances that the Association now faces, and that have been created
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by the actions or inactions of the Board over the last year.
The situation now is the following:
• Construction is about to stop midway due to lack of available funds
• The building has been framed; the doors are being installed; roofing materials
have been ordered but are not installed
• There is a shortfall of $1.3 to $1.9 million to complete the project
• The members authorized an assessment of $1.5 million 19 months ago but the
Board has taken no action to pursue it
• In over 4 years, the Board has never increased dues or made a special assessment
to pay for expenses such as the World Claim fee ($160,000) that were not covered
by insurance
• One bank has indicated a willingness to loan no more than $700,000 which would
not be enough to complete the project
• It is over 4 years since the fire and 2 years since the necessary permits were in
place, and there is no realistic completion in sight
• The Association is now involved in, and required to devote attention and funds to,
three lawsuits related to the project: this one, the Engelberth suit, and one related
to insurance
• The Board is now considering the possibility of simply building out the project to
the “tenant level,” which was not clearly defined but seems to mean that only the
walls and structural elements would be done and the owners would be left to
finish their units themselves
• The Board has demonstrated a lack of capacity to engage in effective
decisionmaking in the context of a difficult multi-party, multi-faceted challenge
• There is a high degree of mistrust and hostility between the Board and many
owners; much energy is spent on blaming and communication is dysfunctional
• Building 3 owners have had no units for over 4 years, yet remain responsible to
the Association
• It appears that the actions of the Board over time have only increased rather than
decreased costs, without achieving results, to the detriment of not only Building 3
owners but potentially all owners
The court finds that in order for the Association to fulfill its obligations to Building 3
owners and to manage the assets of the Association responsibly on behalf of all owners, the
governance of the organization must be in the hands of decisionmaker(s) who have knowledge
and experience with real estate construction, financing, organizational financial responsibilities,
and insurance negotiation, and who have the necessary authority and willpower to make difficult
decisions that will no doubt have a more painful effect on some owners than on others but are
necessary to avoid loss to all owners. The court finds that the Board as currently constituted
does not have the capacity to fulfill these obligations.
Thomas Lauzon has been proposed as a receiver, and has credentials that make him an
appropriate person for the task. Moreover, he is independent of any personal interest or
allegiance that could affect his decisionmaking. It is unnecessary to review his qualifications, as
both parties accept him as qualified for the role. The Association would like to hire him as an
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independent consultant in order to take advantage of his expertise. The court finds that the
Board has had the benefit of many well qualified professionals over the past several years, but
has been unable to function as a group to use the input of professionals in an effective and
efficient manner for the benefit of the owners. For the Board to hire him would leave decision-
making in the hands of the Board, and the facts set forth above demonstrate that in such a
situation, the prospects for a successful outcome would be poor.
Conclusions of Law
This court has the authority to appoint a receiver as recognized by V.R.C.P. 66,
which is modeled on Fed.R.Civ.P. 66.
The appointment of a receiver is considered to be an extraordinary remedy
that should be employed with the utmost caution and granted only in cases of
clear necessity to protect plaintiff’s interests in the property. Factors that courts
have considered relevant to establishing the requisite need for a receivership
include the following: fraudulent conduct on the part of defendant; the imminent
danger of the property being lost, concealed, injured, diminished in value, or
squandered; the inadequacy of the available legal remedies; the probability that
harm to plaintiff by denial of the appointment would be greater than the injury to
the parties opposing appointment; and, in more general terms, plaintiff’s probable
success in the action and the possibility of irreparable injury to his interests in the
property.
12 Fed. Prac. & Proc. Civ. § 2983 (2d ed.)
In this case, based on the facts set forth above, the court concludes that the appointment
of a receiver is necessary to prevent the Plaintiffs from ending up with the loss of any usable
condominium unit at all, or with a partially finished unit that is worth significantly less than the
unit they were entitled to if the Board had exercised its responsibilities properly under the
Declaration, or potentially with liability associated with an interest in an unfinished and unusable
building. Without decisive action in the near future, there is significant risk of substantial
diminution in the value of their property, and no ability to occupy owned real estate.
Therefore, the motion is granted in part in that the court will appoint Thomas Lauzon as
Receiver for the Mountainside Condominium Association with the full powers of the Board of
Directors. He will be authorized payment at the hourly rate of $180, and he will be authorized to
hire agents to assist him. He will be required to give a bond, and to submit quarterly reports to
the court.
Plaintiffs also seek an order that the appointment last until Building 3 is completed, the
financial affairs of the Association are “in order,” and a new Board has been elected. The court
declines at this time to set conditions or limits on the duration of the appointment.
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ORDER
For the foregoing reasons, the Motion for Appointment of a Receiver is granted and Mr.
Lauzon will be appointed.
The court will schedule a hearing to review with the attorneys and Mr. Lauzon the exact
terms of the order of appointment.
The attorneys and Mr. Lauzon are encouraged to communicate in advance to determine
whether terms can be agreed upon and develop a draft proposed order, or at least narrow any
terms of disagreement.
Dated at Montpelier, Vermont this 17th day of May 2018.
_____________________________
Mary Miles Teachout
Superior Judge
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