Bangerter v. Hat Island Cmty. Ass'n

14 Wash.App.2d 718

472 P.3d 998

Larry BANGERTER; Alex and Elena Borromeo; Camp Fire Snohomish County; Carol Britten; James Waak, individually and as lot owners and derivatively on behalf of Hat Island Community Association, a Washington non-profit corporation, Plaintiffs,

Matt Surowiecki, Sr., Appellant,

v.HAT ISLAND COMMUNITY ASSOCIATION, a Washington non-profit corporation; and Chuck Motson, an individual, Respondents,Karen Conner, an individual; Alan Dashen, an individual; Susan Dahl, an individual; and John Does 1-10, individuals, Defendants.

No. 79264-4-I

Court of Appeals of Washington, Division 1.

FILED September 21, 2020

Philip Albert Talmadge, Aaron Paul Orheim, Talmadge/Fitzpatrick, 2775 Harbor Ave. Sw, Third Floor Ste. C, Seattle, WA, 98126-2138, George Allen Mix, Mix Sanders Thompson, PLLC, 1420 5th Ave., Ste. 2200, Seattle, WA, 98101-1346, for Appellant.

Jeremy L. Stilwell, Marlyn Kathryn Hawkins, Barker Martin PS, 701 Pike St., Ste. 1150, Seattle, WA, 98101-3946, Mark Preston Scheer, Jennifer Lynn Crow, Scheer.Law PLLC, 600 University St., Ste. 2100, Seattle, WA, 98101-4161, for Respondents.

Hozaifa Y. Cassubhai, Bailey Duquette, 500 Union St., Ste. 800, Seattle, WA, 98101-4051, for Other Parties.

PUBLISHED OPINION

Andrus, A.C.J. ¶ 1 Matt Surowiecki, Sr.—the owner of several lots on Hat Island, a private island located off Everett, Washington—appeals the dismissal of his claims against Hat Island Community Association (HICA), the nonprofit entity that maintains the roads and other amenities on Hat Island.

¶ 2 As a member of HICA, Surowiecki pays an annual operating assessment levied by the association. Historically, HICA has levied assessments based on a uniform, per lot structure. Surowiecki brought this declaratory judgment action, seeking a judicial determination that HICA's uniform, per lot assessment structure violates HICA's governing documents, which mandate that annual operating assessments be "equitable."¹ He also brought derivative claims on behalf of HICA against the board of trustees and its manager, Chuck Motson, alleging they breached fiduciary duties owed to HICA by mismanaging the association's financial affairs. Finally, Surowiecki sought to invalidate a settlement agreement he entered into with HICA in 2012, alleging he had been fraudulently induced to enter into that agreement.

¶ 3 Surowiecki argues the trial court erred in dismissing his challenge to HICA's assessment structure, erred in concluding he lacks standing to bring derivative claims, erred in dismissing his breach of fiduciary duty claim against HICA, and erred in awarding attorney fees to HICA.²

¶ 4 Because the trial court applied an incorrect legal standard when ruling on Surowiecki's assessment claim, we reverse the order granting summary judgment on that claim only. We vacate in part the award of attorney fees to HICA.³ We otherwise affirm the trial court.

FACTS

A. Background of Dispute

1. HICA's Governance

¶ 5 HICA is a nonprofit homeowner association that owns and maintains the common areas on Hat Island—including platted roads, a golf course, a marina, a ferry, and a water treatment and distribution facility. Lots within HICA are subject to Restrictive Covenants Running with Land and Easements (Covenants), originally recorded in 1962. HICA operates pursuant to its articles of incorporation and bylaws as well as the Washington Nonprofit Corporation Act⁴ (WNCA) and the Homeowners’ Association Act.⁵

¶ 6 Under HICA's articles of incorporation, the association is required to maintain the island's infrastructure, including roads, recreational facilities, transportation, and water system "in a fiscally responsible manner." Anyone owning a lot subject to HICA's Covenants is automatically a member of the association and responsible for "dues or assessments for the construction or reconstruction, or capital additions to or capital improvements of any of the facilities to be administered by [HICA], or monthly or annual charges for the upkeep thereof." Each member, regardless of the number of lots owned, has one vote.

¶ 7 HICA, which has the powers granted to nonprofit corporations and homeowner associations under Washington law, is managed by a board of trustees. HICA's bylaws provide that it has "the power to levy and collect assessments against its members," for the purposes set out in the articles of incorporation. The board of trustees is responsible for managing and controlling the affairs of the association, including charging or assessing parcels of land and their owners.

¶ 8 HICA's board manages the association's revenue and expenses. Under the Covenants, the company that originally developed the island agreed to provide roads for ingress and egress, a golf course, water supply, electric service, and ferry transportation to the island. When these facilities were turned over to the Hat Island Country Club, HICA's predecessor, the Covenants granted the club

the power to charge and assess its members on an equitable basis for the operation and maintenance of said facilities ... and to charge and assess its members on an equitable basis for such additional recreational and other facilities as shall be duly authorized by its membership for the mutual benefit of all its members.

¶ 9 Between 2002 and 2010, article VIII of HICA's bylaws, entitled "Assessments and Charges," provided in pertinent part:

SECTION 1. The Board of Trustees shall annually establish an assessment against each and every lot on a uniform basis. The amount of such assessment levied shall in no event, except as hereinafter provided, exceed in any one month the sum of [t]wenty one dollars and twenty five cents ($21.25) per lot. Assessments will be established and levied upon all properties following the affirmative vote of a simple majority (50% plus 1) of all members in good standing. Assessments shall be collected and expended pursuant to the Articles of Incorporation and these By-Laws. Members shall be liable for the payment of any and all assessments applicable to their respective lots. ....

Special assessments may be levied upon the affirmative vote of a majority of members in good standing voting at a meeting of members of the corporation. Special assessments do not need to be uniform, and may apply only to those lots specially benefited; provided, that in such cases the special assessments must be authorized by a vote of a majority of the members in good standing who own lots which will be subject to the special assessments.

¶ 10 In 2010, HICA's members amended section 1 of article VIII to remove the uniformity requirement. Section 1, in pertinent part, now provides:

SECTION 1. The Board of Trustees shall annually determine the proposed amount of the annual operating assessment against each and every lot for the subsequent year. Such proposed annual operating assessment, if changed from the prior year assessment amount, will be presented to the community for approval during the annual meeting of the Association as provided in Article V, Section 3....

The paragraph regarding special assessments remained substantially the same, including the language that special assessments need not be uniform.

2. Levying Assessments

¶ 11 Each year HICA's board meets to develop a budget for the upcoming year. It estimates operating expenses and the total estimated income from use-based fees, such as green fees charged for the golf course, moorage fees for the marina, fees paid for water use, fees for annual water hook-up, and ferry ticket sales (Use-Based Fees). HICA deems Use-Based Fees to be a fair way to allocate the expenses of operating and maintaining these amenities to only those HICA members who use them. In recent years, Use-Based Fees have covered about 50 percent of HICA's total operating expenses.

¶ 12 After HICA's board determines the amount of money HICA can anticipate from Use-Based Fees, it then evaluates the remaining income it will need to generate from HICA members through annual operating assessments. The board submits the budget to the association members for ratification. The trustees have recommended, and the members have voted to approve, the levying of uniform, per lot annual operating assessments against all lots since at least 1967. If the members do not approve a proposed increase in assessments, the assessments continue to be levied at the rate approved the previous year. Between 2008 and 2015, the members voted to increase the assessments four times. Annual per lot assessments were $339 in 2008 and 2009, and increased to $472 per lot for the years 2013 through 2015.

¶ 13 The largest expense HICA has had in the recent past is a marina renovation and expansion project. HICA members have, over the years, approved two special assessments totaling $4,210 per lot for the improvement project.

3. Hat Island Lots and Surowiecki's Membership

¶ 14 There are 974 lots on Hat Island, and 946 lots are currently owned and assessed. There is some evidence that 249 of these lots are not buildable. Only 268 lots currently have houses, with roughly 40 as full-time residences. While there are water connections for 461 lots, the island's current infrastructure is "not capable of producing sufficient water for the simultaneous, fulltime occupancy of all 461 residences allowed." Because HICA must add new water production sources to raise the state-mandated cap on water hookups, residential development is stalled at roughly 460 lots. Thus, under current regulations, the remaining 512 lots without water connections cannot be developed.

¶ 15 Surowiecki and more than 100 entities he manages (limited liability companies, limited partnerships, corporations, and a living trust) own over 271 of the 974 lots on Hat Island. In 2012, Surowiecki challenged the marina improvement special assessments. In a settlement agreement arising out of that dispute, the parties identified the lots Surowiecki controls, reached a resolution of the amount of assessments he would pay for these lots,...