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Recording Invalid Documents Gets VERY Expensive

Facts

Defendant, Leisure World Community Association (“Association”), consists of nearly two dozen single-family platted communities.  One of those is the Plat 24 community.  “Each community is governed by its Declaration of Covenants, Conditions, and Restrictions (CC&Rs).  Plat 24’s original CC&Rs required that at least three-quarters of Plat 24 record owners approve any amendments to the CC&Rs.  The Watson Trust (“Trust”) owned a unit in Plat 24.

In 2013, the Association recorded the “2013 Consolidated Declaration,” which allegedly only restated the declarations of the other platted communities served by the Association.  In actuality, it did more than just restate.  In 2014, the Association recorded an Amendment to the Declarations of CC&Rs (“2014 Amendment”), “which modified the voting requirements of every platted community…. the Association received permission from 47 of 54 units in Plat 24.”  In February 2017, the Trust demanded the release of the Consolidated Declaration and the 2014 Amendment alleging they were invalid because they were improperly adopted contrary to the applicable statute.  The Association refused to release them.  Shortly thereafter, the Trust filed a complaint seeking to quiet title and, under a statute “governing the recording of or failure to release documents asserting invalid claims of interest in real property,” seeking other damages.

Trial Court

The Trust argued that the 2013 Consolidated Declaration and the 2014 Amendment were not properly passed under the applicable statute and that the Association knew it.  The Association denied the Trust’s claims.  The parties moved for summary judgment.  The court initially found numerous disputes of fact and denied both motions, but after some discovery, the parties renewed their summary judgment motions and the court granted the Trust’s summary judgment.  In the end, the most damaging part of the court’s decision was a finding that the Association knew or had reason to know the [recorded documents] were groundless and invalid; [and] knowing the documents were groundless and invalid, the Association willfully refused to release them…”  As a result, the court ordered the “release and extinguishment of the documents…. $5,000 in statutory damages for the wrongful recordation of each document…. $1,000 in statutory damages for the Association’s willful refusal to release each document [and] $116,000 in attorney’s fees and $4,000 in costs [to the Trust].”  The Association then moved for a new trial, and because the original judge retired, the new judge changed some of the rulings, but did not alter the award of the attorney’s fees to the Trust.  Both parties appealed.

Appellate Court Decision

The appeals court reversed a couple of the rulings of the trial court, but ultimately found that the 2013 Consolidated Declaration was an amendment to the original CC&R’s and therefore invalid. It based this decision on the fact that a “plain reading of the Consolidated Declaration reveals two significant alterations to the CC&Rs…”  The Association tried to convince the appeals court that “it did not have reason to know” of the invalidity of the amendment, but the court held to the contrary.  Because of this finding, it also concluded that the Trust was entitled to a recalculated amount of attorney’s fees and costs and as the successful party on appeal, was also entitled to an award of costs and fees for the appeal.

LESSONS LEARNED
  1. If you didn’t properly amend your documents, when you learn of that fact, admit it and then do what you need to do to correct the problem.
  2. When you find that you or your association is heading down the wrong path, STOP and go back. The further you travel down the wrong path, the worse (read MORE EXPENSIVE) things will get.
  3. Attorney fees are often the largest portion of any trial, therefore, before proceeding with litigation or very far down that path, make certain to discuss with your attorney:
    1. All options that exist.
    2. Which option he or she recommends and why.
    3. What is the likely cost of each option. Litigation can easily exceed $100,000 in fees and is rarely less than $15,000 even with a quick settlement.

Watson v. Leisure World Community Association, Not Reported in Pac. Rptr., 2021 WL 5710011 (Arizona, 2021)

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