Bangerter v. Hat Island Cmty. Ass'n

504 P.3d 813

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., Petitioner,

v.HAT ISLAND COMMUNITY ASSOCIATION, a Washington non-profit corporation; 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. 99138-3

Supreme Court of Washington.

Argued May 27, 2021

Filed: February 24, 2022

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 Petitioner(s).

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, 2101 4th Ave., Ste. 830, Seattle, WA, 98121-2309, for Respondent(s).

Anthony L. Rafel, Rafel Law Group PLLC, 4126 E. Madison St., Suite 202, Seattle, WA, 98112, for Amicus Curiae on behalf of Community Associations Institute.

Gonza´lez, C.J.

¶ 1 Matt Surowiecki Sr. sued the Hat Island Community Association (HICA), arguing, among other things not before us, that HICA violated its governing documents by not charging assessments on an equitable basis.¹ We conclude that HICA's governing documents grant the association broad discretion in setting assessments and that the association's decision on assessments is entitled to substantial deference. Here, the association's elected board of trustees made the decision to raise funds through a combination of use-based fees and per-lot assessments as authorized in its governing documents. This decision was ratified by a vote of the members. Surowiecki's evidence established, at most, that there may be more than one equitable way to distribute the costs of maintaining the community's obligations. He has not, however, shown as a matter of law that either the process used, or the result reached, was not equitable. Accordingly, we affirm in part, reverse in part, and remand to the trial court for reinstatement of its summary judgment order in favor of HICA and for any further proceedings necessary consistent with this opinion.

BACKGROUND

¶ 2 Hat Island is a private island in the Puget Sound in Snohomish County. HICA is a nonprofit corporation and homeowners’ association that owns and maintains the common areas and amenities on Hat Island—including platted roads, a golf course, a marina, a ferry, and a water treatment and distribution facility. Lots on Hat Island are subject to restrictive covenants and easements (Covenants) originally recorded in 1962. HICA operates under its articles of incorporation and bylaws as well as the Washington Nonprofit Corporation Act, ch. 24.03 RCW, and the homeowners’ associations act, ch. 64.38 RCW.

¶ 3 HICA, which has the powers granted to nonprofit corporations and homeowner associations under Washington law, is managed by a board of trustees (Board) elected by the community members. The Board is responsible for managing and controlling the affairs of the association, including setting the amounts of charges and assessments against individual lots.

¶ 4 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 the said facilities ... and to charge and assess [i]ts members on an equitable basis for such additional recreational or other facilities as shall be duly authorized by its membership for the mutual benefit of all [i]ts members.

4 Clerk's Papers (CP) at 1984; 10 CP at 4891.

¶ 5 HICA's bylaws provide for two types of assessments—annual operating assessment and special assessments. The annual operating assessment is against "each and every lot," while special assessments may be imposed on those lots specially benefited. 4 CP at 1728. The bylaws do not specify how assessments should be allocated to each lot, other than to say that special assessments do not need to be uniform.

¶ 6 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 hookup, and ferry ticket sales (Use-Based Fees). The Board has decided that Use-Based Fees are a fair way to allocate the costs of operating and maintaining these amenities to the HICA members who use them. In recent years, Use-Based Fees have covered about 50 percent of HICA's total operating expenses.

¶ 7 After HICA's Board determines the amount of money it anticipates generating from Use-Based Fees, it calculates the amount it will need to meet its remaining obligations. Those funds must be raised from its members through assessments. The Board then submits the proposed budget and its proposed assessments to the association members for ratification. Since at least 1967, the Board has recommended, and the members have voted to approve, levying uniform, per lot annual operating assessments for the amount not covered by Use-Based Fees.

¶ 8 Surowiecki owns a number of lots on Hat Island, most of which are undeveloped. He contends that HICA's practice of equally allocating the assessments for expenses not covered by Use-Based Fees is a breach of the Covenant requiring that assessments be made on an "equitable basis."² 2 CP at 788. The trial court initially found that genuine issues of material fact prevented summary judgment on the question of whether the assessments were equitable. Later, the trial court granted summary judgment to HICA, holding (relevantly) that Surowiecki had not submitted admissible evidence that HICA's decision was unreasonable and that HICA's assessment-setting was shielded by the business judgment rule.

¶ 9 The Court of Appeals held, among many other things, that the business judgment rule limits only personal liability of individuals and "does not immunize corporations." Bangerter v. Hat Island Cmty. Ass'n , 14 Wash. App. 2d 718, 737, 472 P.3d 998 (2020). The court also held that judicial deference is not owed to a homeowners’ association's interpretation of its governing documents and applied a reasonableness standard of review of the Board's discretionary decisions. Id. at 737, 738-41, 472 P.3d 998. We granted review limited to the assessment and the related business judgment rule issue. Am. Order, 196 Wash.2d 1037, 479 P.3d 1162 (2021).

ANALYSIS

¶ 10 We review a trial court's order on a motion for summary judgment de novo. Wilkinson v. Chiwawa Cmtys. Ass'n , 180 Wash.2d 241, 249, 327 P.3d 614 (2014) (citing Davis v. Baugh Indus. Contractors, Inc. , 159 Wash.2d 413, 416, 150 P.2d 545, 150 P.3d 545 (2007) ). A court may grant summary judgment if the evidence, viewed in the light most favorable to the nonmoving party, establishes that there is no genuine issue of any material fact and that the moving party is entitled to judgment as a matter of law. CR 56(c) ; Wilkinson , 180 Wash.2d at 249, 327 P.3d 614 (quoting Dowler v. Clover Park Sch. Dist. No. 400 , 172 Wash.2d 471, 484, 258 P.3d 676 (2011) ). "We may affirm the trial court on any grounds established by the pleadings and supported by the record." Truck Ins. Exch. v. VanPort Homes, Inc. , 147 Wash.2d 751, 766, 58 P.3d 276 (2002) (citing Mountain Park Homeowners Ass'n, Inc. v. Tydings , 125 Wash.2d 337, 344, 883 P.2d 1383 (1994) ).

I. The Covenants grant HICA broad discretion in allocating assessments "on an equitable basis"

¶ 11 This case turns on the meaning of the Covenant that authorizes HICA to charge and assess its members "on an equitable basis." Interpretation of covenants is a question of law based on the rules of contract interpretation. Wilkinson , 180 Wash.2d at 249, 327 P.3d 614. The court's primary objective is to determine the intent of the original parties that established the covenants. Riss v. Angel , 131 Wash.2d 612, 621, 934 P.2d 669 (1997) (citing Metzner v. Wojdyla , 125 Wash.2d 445, 450, 886 P.2d 154 (1994) ); ROBERT G. NATELSON , LAW OF PROPERTY OWNERS ASSOCIATIONS § 2.5, at 61 (1989). "In determining intent, language is given its ordinary and common meaning." Riss , 131 Wash.2d at 621, 934 P.2d 669 (citing Metzner , 125 Wash.2d at 450, 886 P.2d 154 ).

¶ 12 The Covenant at issue grants HICA

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

4 CP at 1984; 10 CP at 4891.

¶ 13 This Covenant grants HICA the power to recoup the costs of operating and maintaining the original facilities and any additional facilities from the members. HICA can do this through charges (Use-Based Fees) and assessments. Implicit in "the power to charge and assess" is a broad grant of discretion in deciding the method of allocating costs to its members. The phrase "on an equitable basis" serves only to limit the range of options available to HICA; it does not imply that there is one equitable basis that is better than another.

¶ 14 "Equitable" has been defined as " ‘characterized by equity: fair to all concerned.’ " Ackerman v. Sudden Valley Cmty. Ass'n , 89 Wash. App. 156, 164, 944 P.2d 1045 (1997) (quoting...