IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF OREGON 

MERITAGE HOMEOWNERS' 

ASSOCIATION, 

Plaintiff, 

v. 

BANK OF NEW YORK MELLON, 

Defendant. 

BANK OF NEW YORK MELLON, 

Third-Party Plaintiff, 

v. 

KURT FREITAG, 

EUGENE DIVISION 

Third-Party Defendant. 

Page I - OPINION AND ORDER 

Case No. 6:16-cv-00300-AA 

OPINION AND ORDER 
AIKEN, Judge: 

In this diversity action, plaintiff Meritage Homeowners' Association ("Meritage") alleges 

that defendant Bank of New York Mellon ("BNYM") owes more than one million dollars in 

dues, assessments, fees, and interest associated with a property located in a planned community 

on the Oregon Coast, Meritage at Little Creek. BNYM initially had a secured interest in the 

property; its purported liability to Meritage stems from the fact that it briefly took title to the 

property in connection with the former owners' Chapter 13 bankruptcy proceeding and later 

purchased the property in a § 363 sale under the Bankruptcy Code. BNYM asserts that it is 

current on all liabilities to Meritage and counterclaims for nuisance and failure to maintain 

common property, alleging that such failure has caused substantial damage to the property. 

BNYM also contends that third-party defendant Kurt Freitag ("Freitag"), the developer of 

Meritage at Little Creek who is in administrative control of Meritage, breached his fiduciary duty 

to members of Meritage. 

All parties now move for pattial summary judgment. Meritage also seeks a preliminary 

injunction restraining BNYM from filing an action in state court to appoint a receiver to take 

over control of Meritage. The Court heard oral argument on the motions on April 4, 2018. 

For the reasons set forth below, (1) Meritage and Freitag are entitled to summary 

judgment with respect to the portions of the third-party claim against Freitag related to failure to 

maintain an adequate reserve balance, failure to provide required financial disclosures, and the 

placement of fitted and unfitted plywood boards over windows; and (2) BNYM is entitled to 

summary judgment on the issue of Freitag's authority to act on behalf of Meritage. The parties' 

motions are otherwise denied. 

Page 2 - OPINION AND ORDER 
BACKGROUND 

Meritage at Little Creek is a planned community of townhouses on the Oregon coast 

developed by Freitag in his capacity as managing partner of Big Fish Partners I ("Big Fish"). In 

2003, Freitag made a Declaration of Covenants, Conditions, and Restrictions ("the Declaration") 

in connection with their development of Meritage at Little Creek. The Declaration established a 

set of rules for the planned community: it defined Meritage's membership, allocated 

maintenance responsibilities, and set procedures for passing bylaws and levying dues and 

assessments. It also provided that Freitag, as Declarant, would retain administrative control over 

Meritage until a certain portion of the units were sold and conveyed to new owners. 1 Freitag 

retained administrative control of Meritage at all times pertinent to this lawsuit. 

Meritage at Little Creek was developed in phases, with construction on the first six units 

commencing in late December 2003. By October 2006, the community had grown to eighteen 

units, which sold for between $300,000 and $400,000. In 2006, Patricia and Nicholas Watt ("the 

Watts") took out a loan to purchase one of those units.2 That loan was secured by a deed of trust 

and promissory note. 

2008 kicked off a long, tangled series of lawsuits in state and federal court related to 

Meritage at Little Creek. First, Meritage and Big Fish filed a construction defect action in state 

court, alleging defective installation of windows in all eighteen Meritage at Little Creek units 

("the window litigation"). Meritage alleged that defective windows had caused substantial water 

1 The Declaration initially identified both Freitag and a second Big Fish paitner, Rita 

Schaefer, as Declarants. Schaefer's status as Declarant is not relevant to the issues in this 

lawsuit. 

2 The sequence of events in this case is quite complex. In this opinion, the unit the Watts 

purchased is variously referred to as "the property," "the Watts' unit," or "BNYM's unit," 

depending on who owned the unit at the time being discussed. 

Page 3 - OPINION AND ORDER 
damage to individual units as well as to common areas of Meritage at Little Creek. In 2011, the 

Watts and other Meritage at Little Creek owners sued Freitag, Big Fish, and Meritage in state 

court ("the HOA litigation"). The plaintiffs in the HOA litigation alleged claims for breach of 

fiduciary duty and negligence against Freitag and attempted to force Freitag to turn over control 

of Meritage to the unit owners. The plaintiffs in the HOA litigation also intervened in the 

window litigation. Later in 2011, Meritage sued the Watts and other unit owners in individual 

collection actions in state court ("the collection litigation") for failure to pay assessments, dues, 

and other fees. 

While those state court actions were pending, Freitag infonned the unit owners by email 

that a window had blown out of one of the units and crashed to the ground. Freitag stated that, 

because other windows were at risk of falling in similar fashion, owners would be required to 

cover the windows until they were repaired or replaced. The owners objected, disputing whether 

the windows in fact needed to be covered. They threatened to seek a temporary restraining order 

to stop Meritage from covering the windows. 

In the midst of that dispute, a coastal storm blew out two more windows, including a 

window in the Watts' unit. At that point (February 2012), fitted plywood boards were placed 

over the windows in the Watts' unit and other units. Those boards were removed in October 

2012 after the Watts signed an agreement indemnifying Meritage from liability if another 

window fell. 3 

In 2012, the Watts defaulted on their mortgage payments. BNYM had by then acquired 

the beneficial interest in the Watts' loan and was the holder of the promissory note and deed of 

3 The window manufacturer made repairs to the windows and the fitted plywood boards 

were removed. Meritage refused to remove the boards without an indemnification agreement, 

taking the position that the repairs (re-glazing windows with failed seals) had not addressed the 

conditions that led to the windows blowing out. 

Page 4 - OPINION AND ORDER 
trust on the property. Also in 2012, the HOA litigation settled. Through a written agreement, 

the Watts agreed to release any claims against Meritage and Freitag arising from the same events 

underlying the HOA litigation. 

In September 2013, Freitag, in his capacity as Declarant, approved a resolution imposing 

a fine of $500 per day, up to $5,000 per month, against any unit owner that failed to repair the 

windows or deposit money to begin the window replacement process. 

In 2013, the window litigation settled. The contractor who installed the windows in the 

Watts' unit and other units in that same phase of Meritage at Little Creek offered a financial 

settlement to unit owners in exchange for a promise to either replace their windows right away or 

re-cover the windows with plywood. The Watts agreed and a second set of plywood coverings 

were placed over the windows. However, for reasons unclear from the record, the windows were 

not re-covered until February 2014. The Watts promised to use window litigation settlement 

proceeds to replace the windows and released any future claims against Meritage or Freitag 

related to the events underlying the window litigation. The Watts also stipulated that the 

windows were defective and caused water damage to the property. 

In February 2014, Meritage obtained a stipulated judgment of $175,504 against the Watts 

in the collection litigation. That amount reflected unpaid dues as well as special assessments 

levied against the Watts due to their failure to replace the windows. One month later, and 

without having made any window repairs, the Watts filed a petition for relief under Chapter 13 

of the Bankruptcy Code. In June 2014, after Meritage objected to the Watts' first two plans, the 

Watts proposed a second amended Chapter 13 plan. That plan included a nonstandard provision 

vesting the Watts' unit in BNYM upon confirmation, in satisfaction of the Watts' secured debt to 

BNYM. BNYM objected to that forced vesting provision because, among other reasons, owning 

Page 5 - OPINION AND ORDER 
the property would make BNYM responsible for the ongoing obligations associated with the 

property-including dues and assessments. Those obligations were and are substantial. Dues 

for the property now exceed $25,000 per year and, as noted, assessments for failure to replace 

the windows ran as high as $60,000 per year. 

On October 15, 2014, the bankruptcy court confirmed the plan over BNYM's objection, 

and BNYM took title to the property. BNYM appealed. On April 22, 2015, this Court vacated 

and remanded, holding that the bankruptcy court lacked statutory authority to force an objecting 

creditor to assume a debtor's interest in and ongoing liabilities associated with a piece of 

property. Bank of NY Mellon v. Watt, 2015 WL 1879680, *7 (D. Or. Apr. 22, 2015).4 Title to 

the property transferred back to the Watts, who began work on a new Chapter 13 plan. On 

August 12, 2015, BNYM purchased the property through a sale under 11 U.S.C. § 363. 

Consistent with that statute, BNYM acquired the property "free and clear" of "any interest" in 

the property. Storti Deel. Ex. M, Oct. 20, 2017. The§ 363 sale order made clear, however, that 

BNYM would be required to comply with the Declaration going forward-an obligation that 

included paying quarterly dues and any assessments levied by Meritage under the authority of 

the Declaration. 

In late 2015, Freitag convened Meritage's annual meeting. Freitag and Meritage's lawyer 

were the only people present at the meeting. Freitag determined, in his capacity as head of 

Meritage, that any fines or assessments related to the replacement of windows were "essentially 

self-renewing upon any event that would otherwise abrogate them" -for example, "in the event 

of a bankruptcy filing, ... whereas the prior fines and assessments might be discharged, a new 

assessment and continuing fines would effectively apply beginning immediately after the filing." 

4 The Watts appealed that decision, but the Ninth Circuit dismissed the appeal for lack of 

jurisdiction. Bank of NY Mellon v. Watt, 867 F.3d 1155, 1158 (9th Cir. 2017). 

Page 6 - OPINION AND ORDER 
Freitag Deel. Ex. 11 at 4-5, July 17, 2017. Freitag further concluded that "even if a sale free and 

clear did affect [a] prior assessment, a new assessment would attach immediately after the sale." 

Id. at 5. 

In January 2016, Freitag sent BNYM invoices stating that it was required to pay 

approximately $300,000 in assessments, fines, dues, and fees arising from pre- and post-§ 363 

sale events. Jonas Deel. Ex. I. The invoice listed a payment due date of February 15, 2016. 

When BNYM did not pay by that date, Meritage filed this lawsuit, seeking to recover the money 

it alleges BNYM owes. In its Answer, Meritage asserted counterclaims against Meritage for 

failure to maintain common property, unlawfully placing boards over the windows of BNYM' s 

unit, and nuisance. Meritage also asserted a thirty-party claim against Freitag for bad faith 

breach of fiduciary duty. 

On March 14, 2016, BNYM paid Meritage $6,685.70, the amount necessary to cover 

dues for the first quarter of 2016, interest on those dues (because the payment was late), and a 

late fee. Jonas Deel. Ex. 4 at 2. BNYM disputed that it owed any additional money at that point. 

Because BNYM did not pay the full amount demanded in the January invoices, Freitag applied 

the payment to reduce the overall amount due, declared BNYM in default, and accelerated the 

remaining dues payments for 2016. That pattern has repeated with each quarterly invoice: 

Freitag bills BNYM for dues, assessments, fines and fees; BNYM pays its quarterly dues 

amount; and Freitag applies that payment against the total owed rather than specifically against 

BNYM's dues obligation. 

BNYM has not replaced the windows at the property and they remain covered with 

plywood. BNYM had an architect examine the property during discovery; it now contends, 

citing that architect's expert opinion, that the windows at Meritage at Little Creek were not 

Page 7 - OPINION AND ORDER 
defective when installed. Rather, BNYM contends that it was Meritage's failure to maintain 

common property such as the exterior and chimney of the units that caused water intrusion and 

created the risk that windows would blow out. That theory echoes claims the Watts and other 

unit owners made in the HOA litigation. 

The windows have now been replaced in seventeen of the eighteen units at Meritage at 

Little Creek, with BNYM as the only holdout. In many of the seventeen other units, the new 

window system was installed only after Meritage obtained money and/or title to the unit through 

litigation with the unit owners. Pursuant to his unilateral authority as administrative head of 

Meritage, Freitag required uniform replacement that amounts to a substantial upgrade; the new 

window system increases the glass area of the units' ocean-facing fac;:ades from sixty percent to 

ninety-five percent. The upgrade costs approximately $175,000, or roughly half what the typical 

units in Meritage at Little Creek sold for in 2006. Meritage and Freitag contend that Meritage 

has the authority under the Declaration to require BNYM to install a conforming window system 

for aesthetic reasons, regardless of whether the windows are in fact defective. 

The most recent invoice in the summary judgment record is dated October 2017. That 

invoice demanded that BNYM pay Meritage more than one million dollars. The total billed 

includes, among other items, more than $60,000 in dues and associated fees and interest; the 

$175,000 special assessment for failure to replace the windows; more than $80,000 in window 

fines and interest; a $25,000 "lost discount" assessment (levied because BNYM could have 

installed the new window system at a reduced rate had it acted sooner); a $206,250 "economic 

loss assessment" related to an appraisal Meritage obtained regarding how the plywood over 

Page 8 - OPINION AND ORDER 
windows at the property has devalued the neighboring units; and more than $300,000 in 

attorney's fees. 5 Jonas Deel. Ex. 4 at 29. 

The parties' versions of the facts in this case could hardly be more different. Meritage 

and Freitag contend that Freitag did what was necessary in his capacity as head of the HOA to 

ensure that a dangerous condition was eliminated, unit owners' investments were protected, and 

Meritage remained solvent. They argue that BNYM is, without legal or factual justification, 

simply refusing to bear its fair share of costs. BNYM, by contrast, argues that Freitag illegally 

maintained control over the HOA long after the time when control should have passed to the unit 

owners under the Declaration and Oregon law. It avers that Freitag both failed to live up to his 

obligations to maintain common property in a way that caused the damage he now attributes to 

defective windows and used aggressive, manipulative tactics to bully unit owners until they 

acquiesced to his demands, resulting in extravagant upgrades that have dramatically enhanced 

the value of his own investment. Unsurprisingly, and as set out in more detail below, such a 

dramatic dispute about the facts means that most of the parties' claims cannot be resolved at the 

summary judgment stage. 

STANDARD OF REVIEW 

Summary judgment is appropriate if "there is no genuine dispute as to any material fact 

and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving 

party has the burden of establishing the absence of a genuine issue of material fact. Id.; Celotex 

Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine 

5 The attorney's fees amounts are not visible on the exhibit, apparently because those line 

items were printed in yellow ink, a color that does not show up on the black-and-white copy 

included in the summary judgment record. Compare Jonas Deel. Ex. 4 at 26 (color copy of the 

July 2017 invoice) with Jonas Deel. Ex. 4 at 29 (black and white copy of the October 2017 

invoice). However, the attorney's fee total can be discerned by and subtracting all other line 

items from the final "pay this amount" line. 

Page 9 - OPINION AND ORDER 
issue of material fact, the nonmoving party must go beyond the pleadings and identify facts 

which show a genuine issue for trial. Id. at 324. "Summary judgment is inappropriate if 

reasonable jurors, drawing all inferences in favor of the nonmoving party, could return a verdict 

in the nonmoving party's favor." Diaz v. Eagle Produce Ltd. P'ship, 521 F.3d 1201, 1207 (9th 

Cir. 2008). 

DISCUSSION 

There are four motions before me. First, Meritage and Freitag move for summary 

judgment on all BNYM's counterclaims and third-party claims. Second, Meritage and Freitag 

move for summary judgment on a portion ofMeritage's first claim for relief, related to BNYM's 

liability for dues, assessments, and related fees and interest. Third, BNYM moves for summary 

judgment on the issue of Freitag's authority to carry out the actions giving rise to Meritage's 

claims. Finally, Meritage seeks a preliminary injunction to prevent BNYM from filing a 

receivership action in state court during the pendency of this case. Below, I address each motion 

in turn. 

I. BNYM's Counterclaims Against Meritage and Third-Party Claims Against Freitag 

Meritage and Freitag contend that they are entitled to summary judgment on all of 

BNYM's counterclaims and third-party claims for five reasons. First, they argue that BNYM is 

bound by the Watts' release of claims through the settlement agreements in the HOA litigation 

and the window litigation. Second, they aver that BNYM is bound by a separate covenant, 

recorded in Lincoln County, in which the Watts agreed not to sue over facts and circumstances 

alleged in the window litigation. Third, they assert that BNYM is judicially estopped from 

taking any factual position inconsistent with the facts to which the Watts stipulated in the 

settlement agreements and the covenant, including that the windows at the property are defective 

Page 10 - OPINION AND ORDER 
and cause water intrusion. Fourth, they argue that BNYM's claims against Freitag are derivative 

actions, and thus must fail due to pleading deficiencies and because Oregon law does not 

authorize derivative actions against homeowners' associations. Finally, Meritage and Freitag 

assert that BNYM has produced insufficient evidence in support of its claims. 

A. Releases in Settlement Agreements 

First, Meritage and Freitag argue that BNYM's counterclaims and third-party claims are 

barred by tbe Watts' promise to release claims in two contracts between the Watts and Meritage: 

the settlement agreement from the window litigation and the settlement agreement from the 

HOA litigation. Both agreements, in broad terms, released present and future claims arising out 

of the facts underlying lawsuits. Both agreements also purported to bind the "successors" and 

"assigns" of the contracting parties. See Bundy Deel. Ex. 4 at I & Ex. 8 at 4, Aug. 1, 2017. 

BNYM appears to be both the Watts' successor and assignee with respect to the property. See 

Assignee, Black's Law Dictionary (10th ed. 2014) (defining "assignee" as "someone to whom 

property rights or powers are transferred by another"); Successor, Black's Law Dictionary (I 0th 

ed. 2014) (defining "successor" as "someone who succeeds to the office, rights, responsibilities, 

or place of another; one who replaces or follows a predecessor"). 

As an initial matter, BNYM cites Erection Co., Inc. v. W & W Steel, LLC, 2011 WL 

5008325, *9-*10 (D. Or. Oct. 20, 2011) for the proposition that the settlement agreements are 

unenforceable because not all parties to the litigation signed the agreements. In Erection Co., 

two businesses sent various drafts of an agreement back and forth. They finally reached an 

agreement on terms, but the deal fell apart before both parties signed a final version of the 

contract. A letter of intent signed by both parties before the negotiations began provided that the 

contract "shall be effective only . .. when signed by all parties." Id. at *2 (emphasis in original). 

Page 11 - OPINION AND ORDER 
This Court held that the agreement was not enforceable. Ultimately, Erection Co. is not on 

point. Here, although some patties to the litigation did not sign the final agreements, both the 

Watts and Meritage did sign them. The Watts were therefore bound by their promise to abide by 

the terms of the agreements. 

The question, then, is whether the Watts' promises bind BNYM. "The interpretation of a 

settlement agreement is governed by principles of state contract law." Botefi1r v. City of Eagle 

Point, Or., 7 F .3d 152, 156 (9th Cir. 1993). It is plain from the language of the agreements that 

the Watts intended to release the claims of their successors and assignees. But, as a general rule, 

parties to a contract have no power to bind third parties without their consent. Cf Drury v. 

Assisted Living Concepts, Inc., 262 P.3d 1162, 1165-66 (Or. Ct. App. 2011) (holding that 

requiring a third-party beneficiary to arbitrate a contractual claim without first determining 

whether that beneficiary assented to the agreement would "allow contracting parties to alter the 

rights of a third party, based on whatever consideration the contracting parties intend to provide 

to the third party, and without regard for whether the third party deems that consideration to be 

an adequate exchange for the contractual obligations"). 

BNYM cites several cases from other jurisdictions holding that when a corporation's 

assets are sold in an arms-length transaction, the purchasing entity is not liable for the 

corporation's debts or obligations as a successor or assignee. See, e.g., Cargo Partners v. 

Albatrans, Inc., 352 F.3d 41, 44-45 (2d Cir. 2003). Meritage and Freitag correctly point out that 

those cases are about the de facto merger doctrine, which is specific to corporate law. 

Neve1theless, I find the reasoning of those cases useful in adjudicating the question presented 

here. The de facto merger doctrine provides that, "when one corporation purchases all of the 

assets of another corporation, the purchasing corporation does not become liable for the debts 

Page 12 - OPINION AND ORDER 
and liabilities of the selling corporation." Tyree Oil, Inc. v. Bureau of Labor & Indus., 7 P.3d 

571, 573 (Or. Ct. App. 2000). There are four exceptions to that rule: 

(1) Where the purchaser expressly or impliedly agrees to assume such debts; (2) 

where the transaction amounts to a consolidation or merger of the corporations; 

(3) where the purchasing corporation is merely a continuation of the selling 

corporation; and ( 4) where the transaction is entered into fraudulently in order to 

escape liability for such debts. 

Id. at 573-74. In other words, the de facto merger doctrine asks whether there is some special 

reason to depart from the general rule and hold a successor corporation liable for the debts of its 

predecessor. 

Analogous reasoning can be applied here. There is no special reason in this case to 

depart from the baseline rule that contracting parties generally cannot bind absent third parties 

and hold BNYM to the promises the Watts made. Meritage and Freitag have failed to carry their 

burden to convince me that BNYM should be so bound. Their argument rests entirely on their 

assertion that the contract language plainly covers successors and assigns, and BNYM is both a 

successor and an assign. I agree on both points, but that argument simply misses the mark; 

BNYM was not a party to the agreements, and nothing in the summary judgment record suggests 

that I should depart from the usual rule and require BNYM to abide by promises it did not make. 

Thus, the releases of claims in the agreements do not bind BNYM.6 

B. Covenant Not to Sue 

Meritage and Freitag next argue that BNYM' s counterclaims and third-party claims are 

barred by a release contained in a restrictive covenant signed by the Watts and recorded in 

Lincoln County on February 24, 2014. In Oregon, "[c]ovenants running with the land are 

6 Because BNYM is not bound by the agreements, it is unnecessary for me to decide 

whether either agreement contains an anticipatory release of claims that violates public policy. 

See Bagley v. Mt. Bachelor, Inc., 340 P.3d 27, 36-37, (Or. 2014) (invalidating a contractual 

anticipatory release on the ground of unconscionability). 

Page 13 - OPINION AND ORDER 
binding upon and enforceable against subsequent purchasers with notice." Texas Co. v. Butler, 

256 P.2d 259, 263 (Or. 1953). For a covenant to run with the land,"(!) there must be privity of 

the estate between the promisor and his successors; (2) the promisor and promisee must intend 

that the covenant run; (3) the covenant must touch and concern the land of the promisor; and ( 4) 

the promisee must benefit in the use of some land possessed by him as a result of the 

performance of the promise." Nordbye v. BRCPIGM Ellington, 266 P.3d 92, 101 (Or. Ct. App. 

2011) (quoting Johnson v. Highway Division, 556 P.2d 724 (Or. Ct. App. 1976)). Even if the 

technical requirements for a restrictive covenant are not met, the release of claims in the 

covenant may be enforceable as an equitable servitude. In Oregon, a "promise is binding as an 

equitable servitude if (1) the parties intend the promise to be binding; (2) the promise concerns 

the land or its use in a direct and not a collateral way; and (3) the subsequent grantee has notice 

of the covenant." Ebbe v. Senior Estates Golf & Country Club, 657 P.2d 696, 700 (Or. Ct. App. 

1983). 

The Watts agreed that they, and their "successors and assigns[,] ... shall not bring any 

future claims . . . arising out of, or related to, or in any way caused by the facts and 

circumstances alleged in the Window Litigation or related lawsuits ... which could have been 

alleged [in those lawsuits.]" Bundy Deel. Ex. 10 at 2-3, Aug. 1, 2017. It is undisputed that there 

is privity of estate between the Watts and BNYM and that BNYM had constructive notice of the 

covenant, which was recorded before the§ 363 sale. See Huffv. Duncan, 502 P.2d 584, 585 (Or. 

1972). It is also clear from the use of the terms "successors and assigns" that the parties intended 

the covenant to run with the land. See Butler Family Ltd. P 'ship v. Butler Brothers, LLC, 388 

P.3d 1135, 1141 (Or. Ct. App. 2017). Thus, the parties' dispute over enforceability boils down 

to whether the covenant touches and concerns the land (the third prong of the restrictive 

Page 14- OPINION AND ORDER 
covenant test) or concerns the land or its use in a direct way (the second prong of the equitable 

servitude test). 

At first glance, those two requirements appear somewhat different. However, the Oregon 

Court of Appeals has stated that "an equivalent formulation of the 'touch and concern' 

requirement is whether the promise is one respecting the use of the land of the promisor." Ebbe, 

657 P.2d at 700 (quoting Huff, 502 P.2d at 584 n.2). Oregon courts eschew "applying the rule of 

touching and concerning in an overtechnical manner," and ask whether non-lawyers "would 

naturally regard the covenant as intimately bound up with the land, aiding the promisee as 

landowner or hampering the promisor in similar capacity[.]" Abbott v. Bob's U-Drive, 352 P.2d 

598, 604 (Or. 1960). In light of that case law, I see no principled distinction between the third 

prong of the restrictive covenant test and the second prong of the equitable servitude test. 

Whether the promise here touches and concerns the land presents a difficult and novel 

question of state law. In Huff, the Oregon Supreme Coutt held that a restriction requiring land to 

be used for residential pmposes touched and concerned the land. 502 P.2d at 585. In Abbott, the 

comt held that, because a covenant to pay rent touches and concerns the land, a covenant to 

arbitrate rent disputes also touched and concerned the land. 352 P.2d at 604. In Ebbe, the court 

held a restrictive covenant related to fees for maintaining an adjacent golf course did not touch 

and concern the land because subsequent purchasers had neither the right nor the obligation to 

become members with rights to use the golf course. 657 P.2d at 702. Finally, in Summer Oaks 

Limited Partnership v. McGinley, 55 P.3d 1100, ll05 (Or. Ct. App. 2002), the Oregon Court of 

Appeals held that "system development charge" credits available from the city to offset the costs 

of certain land improvements did not touch and concern the land because the credits were not 

tied to any particular parcel of land. 

Page 15 - OPINION AND ORDER 
In Summer Oaks, the Oregon Court of Appeals began 

by acknowledging that the resolution to that question, or more specifically how to 

resolve it in the unique context of this dispute, is not obvious. That, largely, is 

due to the fact that, legally, the thing underlying this dispute-SOC credits-are 

'neither fish nor fowl;' they relate neither to the title of the land nor are they 

neatly categorized as covenants or equitable servitudes that are more typically 

susceptible to the 'run with the land' -type analysis. 

Id. at 1104-05. This case presents a similar "neither fish nor fowl" conundrum. Id. at 1105. 

The covenant in question is connected to the land because it relates to a promise not to sue over 

issues that were or could have been litigated in a construction defect lawsuit related to the 

property. But the connection to land is somewhat attenuated; the covenant does not directly 

restrict what a subsequent purchaser can or cannot do with the property. In sum, the Oregon 

cases on the scope of "touch and concern" do not resolve whether the covenant in this case 

touches and concerns the land. Accordingly, I turn to other jurisdictions for guidance. 

The Washington Supreme Court has held that a promise not to sue may be a covenant 

that runs with the land. 1515-1519 Lakeview Blvd. Condominium Ass'n v. Apartment Sales 

Corp., 43 P.3d 1233, 1239 (Wash. 2002). In that case, the covenant in question required owners 

of a particular piece of property to warn prospective purchasers that the property was a potential 

"slide area" and released any claims against the city relating to soil movement. Id. at 1235-36. 

The court noted the dearth of on-point case law and concluded that it was "an open question 

whether a covenant warning of risk and exculpating liability for that risk touches and concerns 

the land." Id. at 1238. The court then concluded that the covenant satisfied Washington's touch 

and concern doctrine because "the covenant [wa]s limited to the reasonable enjoyment of the 

land and limits rights normally associated with ownership" and "few things touch and concern 

land more than the soil itself." Id. at 1239. 

Page 16 - OPINION AND ORDER 
The Fifth Circuit Court of Appeals reached the opposite conclusion in In re El Paso 

Refinery, LP, 302 F.3d 343 (5th Cir. 2002). That case concerned an oil refinery. The court had 

to decide whether, under Texas law, a covenant not to "assert any claims for contribution and/or 

indemnity ... for environmental liability" against the owner of the refinery's bankruptcy estate 

was enforceable against a subsequent purchaser. Id. at 347. The court began by explaining that 

a covenant may run with the land when it "affects the nature, quality or value of the thing 

demised, independently of collateral circumstances, or if it affects the mode of enjoying it." Id. 

at 356 (quoting Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 911(Tex.1982)) 

(internal quotation marks omitted and alterations normalized). It distinguished such covenants 

from personal covenants, which "affect[] the grantor personally and [are] unrelated to the use of 

the land." Id. Applying those tests, the Fifth Circuit held that the covenant in question did not 

touch and concern the land. 

Any burden or benefit credited by the [covenant] affects only [the debtor] 

personally and has no direct impact upon the land itself. The Refinery's owner 

may, in accordance with the [covenant]'s provisions, take remedial action or not 

take remedial action, pollute or not pollute, as long as contribution is not sought 

from [the debtor]. The covenant does not compel nor preclude the promisor or 

any subsequent owner from doing anything on the land itself. 

Id. at 356-57. 

Finally, in Calabrese v. McHugh, 170 F. Supp. 2d 243, 254 (D. Conn. 2001), the United 

States District Court for the District of Connecticut held that a promise not to sue did not touch 

and concern the land. In that case, a former manufacturer of brass products sold off portions of a 

thitty-acre landfill. Id. at 249. The recorded warranty deed in one of those sales purported to 

release the manufacturer from all claims for loss or damage related to the landfill's prior use "as 

a dump for fly-ash, cinders, and other refuse[.]" Id. Applying Connecticut law, the court held 

that the release "confer[red] a personal benefit" on the manufacturer but neither "conferred a 

Page 17 - OPINION AND ORDER 
benefit on the remaining land" nor "impose[ d] any burden" on the parcel itself. Id. at 254. Even 

though the text of the warranty deed made clear that the parties had intended the covenant to run 

with the land, its connection to the land was too tenuous to make it enforceable against 

subsequent purchasers. Id. at 255. 

I find the reasoning of the Fifth Circuit and District of Connecticut persuasive and adopt 

it here. The release of claims in the covenant the Watts signed does not directly concern the 

windows at the property; rather, it purports to prevent subsequent owners from suing Meritage or 

Freitag in particular disputes related to those windows. In other words, the covenant's primary 

purpose is not to promote or prevent any particular use of the land, but to protect cettain entities 

and individuals from liability. The release therefore is not enforceable as a restrictive covenant 

because it does not touch and concern the land. Similarly, it is not enforceable as equitable 

servitude because it does not concern the land or its use in a direct way. The covenant does not 

bar BNYM's counter-claims or third-party claims.7 

C. Judicial Estoppel 

Meritage and Freitag next contend that the settlement agreements and covenant contain 

stipulated facts that bind BNYM in this litigation. As explained above, (1) BNYM was not a 

party to the settlement agreements and there are no special circumstances that support requiring 

BNYM to honor the terms of those agreements and (2) the covenant does not run with the land 

and is not enforceable as an equitable servitude against BNYM. Nevertheless, Meritage and 

7 Because BNYM is bound by neither the settlement agreements nor the covenant not to 

sue, I need not decide whether obligations under those agreements were cut off by the § 363 

sale-a novel and difficult question of statutory interpretation that turns on whether Meritage's 

rights under the settlement agreements and the covenant constitute "claims" within the meaning 

of the Bankruptcy Code. See In re Motors Liquidation Co., 829 F.3d 135, 155 (2d Cir. 2016) 

(acknowledging the breadth of the phrase "free and clear of any interest" but holding that a 

bankruptcy court's authority to cut off liabilities via a § 363 is no broader than its authority to 

extinguish debts through the bankruptcy process generally). 

Page 18 - OPINION AND ORDER 
Freitag contend that BNYM is judicially estopped from taking factual positions contrary to the 

stipulations in the settlement agreements and covenant. Specifically, Meritage and Freitag argue 

that BNYM cannot take the position in this lawsuit that the windows were not defective and did 

not cause water intrusion. 

Judicial estoppel is an equitable doctrine that protects the integrity of the judicial process 

by precluding a party from gaining an advantage by asserting one position, and then later seeking 

an advantage by taking a clearly inconsistent position. Rissetto v. Plumbers & Steamfitters Local 

343, 94 F.3d 597, 600-01 (9th Cir. 1996). It applies only in cases where a court "relied on, or 

'accepted,' the party's previous inconsistent position." Hamilton v. State Farm Fire & Cos. Co., 

270 F.3d 778, 783 (9th Cir. 2001). Obtaining a "favorable settlement constitutes the success 

required" for judicial estoppel to apply. Rissetto, 94 F.3d at 605. Even when the claim at issue 

arises under state law, "federal law governs the application of judicial estoppel in federal court." 

Id. at 603. 

Judicial estoppel does not apply here. BNYM never agreed to the stipulated facts in the 

settlement agreements or the covenant; it therefore cannot possibly take an inconsistent position 

in this lawsuit. Meritage and Freitag insist that judicial estoppel nonetheless applies because the 

Watts and BNYM were in privity with one another. But in the context of judicial estoppel, 

privity means that "one of the parties to the earlier suit is so closely aligned with the non-party's 

interests as to be its virtual representative." Milton H Greene Archives, Inc. v. Marilyn Monroe 

LLC, 692 F.3d 983, 996 (9th Cir. 2012). That is plainly not the case here; the Watts and BNYM 

have been at odds over many issues related to this dispute, including when the Watts defaulted 

on their loan and when the Watts included a forced vesting provision in their bankruptcy plan. 

Page 19 - OPINION AND ORDER 
BNYM is not judicially estopped from arguing that the windows are functioning and that water 

damage to the unit was caused by something else. 

D. Derivative Action 

Meritage and Freitag also challenge BNYM's third-patty claims against Freitag on the 

ground that BNYM cannot proceed with a derivative action in this case. A derivative action is a 

suit brought by an individual shareholder to enforce "a right that the corporation . . . may 

properly assert but has failed to enforce." Fed. R. Civ. P. 23.l(a). "Devised as a suit in equity, 

the purpose of the derivative action is to place in the hands of the individual shareholder a means 

to protect the interests of the corporation from the misfeasance and malfeasance of faithless 

directors and managers." Rosenbloom v. Pyatt, 765 F.3d 1137, 1147--48 (9th Cir. 2014) (internal 

quotation marks omitted). Ordinarily, a party seeking to bring a derivative action must go to the 

corporation's board of directors to demand that it file a lawsuit or take other action to protect its 

own interests. Sommers ex rel. FLIR Sys., Inc. v. Lewis, 641 F. Supp. 2d 1151, 1156 (D. Or. 

2009). Alternatively, a derivative-action plaintiff may plead "demand futility," which requires 

alleging that "the particularized factual allegations of the derivative ... complaint create a 

reasonable doubt that the board of directors could have properly exercised its independent and 

disinterested business judgment in responding to a demand." Id. (quoting Ra I es v. Blasband, 634 

A.2d 927, 934 (Del. 1993)) (alterations normalized). Federal courts look to the law of the state 

in which the company was incorporated in order to determine whether a derivative action may 

proceed. In re Silicon Graphics Inc. Sec. Litig., 183 F .3d 970, 989-990 (9th Cir. 1999), 

abrogated on other grounds, S. Ferry L.P., No. 2 v. Killinger, 542 F .3d 776, 784 (9th Cir. 2008). 

BNYM appears to have intended to plead its third-party claim against Freitag both as an 

individual claim and as a derivative action. Compare Am. Answer ~ 70 ("As a consequence of 

Page 20 - OPINION AND ORDER 
Mr. Freitag's breaches of fiduciary duties and bad faith, Meritage HOA has been and continues 

to be damaged in an amount to be proven at trial[.]") with id. ii 71 ("As a consequence of Mr. 

Freitag' s breaches of fiduciary duty and bad faith, BNYM has been and continues to be directly 

damaged in an amount to be proven at trial."). BNYM alleges both shared hatms (e.g., failure to 

maintain common property) and individual harms (e.g., receipt of inferior maintenance because 

it is involved in litigation with Meritage). Because BNYM alleges it has been harmed 

individually by Freitag's actions, it has individual standing to asse1t its third-party claim against 

Freitag. See Noakes v. Schoenborn, 841P.2d682, 687 (holding that minority shareholders could 

proceed with individual claims against majority shareholders because they had "allege[d] harm 

to themselves distinct from the harm to the corporation"); cf Gubitosi v. Zegeye, 28 F. Supp. 2d 

298, 306 (E.D. Pa. 1998) ("Where ... the alleged harm being sued upon was suffered directly by 

the individual limited partners, it is not necessary that a derivative claim be asserted-the limited 

partners have standing to sue on their own behalf for damages which they themselves 

individually suffered."). 

BNYM also may proceed with its claim as a derivative action. Meritage and Freitag 

argue that Oregon law does not authorize derivative actions against homeowners' associations. 

But homeowners' associations are nonprofit corporations. Or. Rev. Stat. § 94.625(1). Under 

Oregon law, any member with more than two percent voting power and any director of the 

nonprofit may bring a derivative action in the nonprofit's name. Id. § 65.174(1). The Oregon 

Court of Appeals has held, in a different context, that when "nothing in [the Planned Community 

Act] purport[s] to preclude or qualify the application" of Oregon's statute governing nonprofits 

to homeowners' associations, the law applies to the homeowners' association as it would to any 

other nonprofit. Goodsell v. Eagle-Air Estates Homeowners Ass'n, 278 P.3d 133, 137 (Or. Ct. 

Page 21 - OPINION AND ORDER 
App. 2012). The Planned Community Act is silent with respect to whether a derivative action 

may be brought to enforce the rights of a homeowners' association. Accordingly, a derivative 

action is available under the Oregon statutes governing nonprofit corporations. 

The only remaining question is whether BNYM has adequately pleaded a derivative 

action under Federal Rule of Civil Procedure 23.1. Because Freitag is the sole administrator of 

Meritage and obviously would not agree to bring a claim against himself, BNYM has adequately 

pleaded demand futility. Meritage and Freitag nevertheless argue that two of Rule 23.l 's 

requirements are not met. First, they argue that BNYM cannot satisfy the requirement of being a 

shareholder at the time of the transactions alleged. Fed. R. Civ. P. 23.l(b). I am not persuaded. 

Because BNYM alleges breach of fiduciary duty, its claim against Freitag-whether asserted 

individually or derivatively-is limited to the period of time during which Freitag owed it such a 

duty, i.e., the time when BNYM was a member of Meritage. That BNYM only become a 

member of Meritage after the§ 363 sale is therefore not a reason to dismiss its derivative claim. 

Meritage and Freitag also argue that BNYM is not a fair and adequate representative of 

the other members of Meritage, in violation of Federal Rule of Civil Procedure 23.l(a). The 

burden is on Meritage and Freitag to show that BNYM does not meet that requirement. 

Guenther v. Pac. Telecom, Inc., 123 F.R.D. 341, 344 (D. Or. 1987). For the purposes of Rule 

23.l(a), "[a]n adequate representative must have the capacity to vigorously and conscientiously 

prosecute a derivative suit and be free from economic interests that are antagonistic to the 

interests of the class." Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990). Courts 

considering adequacy of representation under Rule 23 .I should consider: 

(I) indications that the party advancing the derivative claims is not the true party 

in interest, (2) the claimant's unfamiliarity with the litigation and unwillingness to 

learn about the suit, (3) the degree of control exercised by the attorney over the 

litigation, ( 4) the degree of support received by the claimant from the other 

Page 22 - OPINION AND ORDER 
shareholders, (5) the lack of any personal commitment to the action on the part of 

the representative claimant, ( 6) the remedy sought by the claimant in the 

derivative action, (7) the relative magnitude of the claimant's personal interests as 

compared to the derivative action itself, and (8) the claimant's vindictiveness 

toward the opposing party. 

Field Turf Builders, LLC v. FieldTurf USA, Inc., 2010 WL 817628, *3 (D. Or. Mar. 4, 2010) 

(citing Larson, 900 F.2d at 1367). "[T]he most important element to be considered is whether 

[the purported representative's] interests are antagonistic to those plaintiff is seeking to 

represent." Puri v. Khalsa, 674 F. App'x 679, 682 (9th Cir. 2017) (unpublished) (quoting 7C 

Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1833 (3d ed. 2016)). 

There is no per se rule against maintaining simultaneous individual and derivative claims; rather, 

courts must "look behind the surface duality of the two types of actions, and ... allow them to 

proceed unless an actual conflict emerges." In re Tarcyznski, 2015 WL 728410, *6 (9th Cir. 

B.A.P. Feb. 19, 2015). 

Whether BNYM can fairly and adequately represent the interests of Meritage's other 

owners is a close question. On the one hand, there is ample vindictiveness between BNYM and 

Freitag. In addition, now that seventeen of the eighteen units in Meritage at Little Creek have 

the new window system, it arguably disadvantages the other owners if BNYM prevails in its 

argument that the windows do not need to be replaced. That is because a single unit that is 

different aesthetically may reduce the other units' property value. On the other hand, BNYM is 

the true paity in interest and it has deep familiarity with and personal commitment to this case. 

Moreover, BNYM's interests are aligned with the other unit owners in other ways. BNYM 

challenges Freitag' s authority on many of the some grounds raised by other unit owners in the 

failed HOA litigation. Unit owners who were plaintiffs in that case presumably still want to see 

control of Meritage taken away from Freitag. And if BNYM is correct that Freitag has shirked 

Page 23 - OPINION AND ORDER 
his responsibility to maintain common property, all unit owners would benefit from a judgment 

in BNYM's favor. 

In November 2015, Freitag emailed fourteen of Meritage's other members the following 

message: "As we all know, the windows [in BNYM's unit] must be replaced. The real question 

here is who will pay. [BNYM] argues, in effect, that it should not have to pay but rather it 

should be the financial obligation of the homeowners' group as a whole." Bundy Deel. Ex. 28 at 

3, Aug. I, 2017. The email went on to request other owners' feedback regarding whether 

Meritage members should share the expense of replacing the windows in BNYM's unit or 

BNYM should fund that replacement. Unsurprisingly, four people responded to say that they 

believed BNYM should pay for the window replacement; nobody responded to say that Meritage 

should foot the bill. Freitag and Meritage seem to think that this is powerful evidence that 

BNYM and the other Meritage members have divergent interests, but I am not convinced. Of 

course other unit owners do not want to be held financially responsible for replacing the 

windows in a unit that is not their own. But that is not what would happen if BNYM were to 

prevail on its claims in this lawsuit. The relevant evidence of suppmt (or opposition) of other 

Meritage owners in this case relates to whether those owners suppmt removing Freitag from his 

position of authority in the homeowners' association. The best evidence on that point is the 2011 

HOA litigation, in which nearly all unit owners sought that same remedy-though due to the 

passage oftime, the power of that evidence has weakened. 

On balance, I conclude that Freitag and Meritage have failed to can-y their burden to 

show that BNYM has a real conflict that will prevent it from vigorously and conscientiously 

prosecuting its derivative claims. BNYM may proceed both individually and derivatively with 

its claim against Freitag. 

Page 24 - OPINION AND ORDER 
E. Adequacy of Evidence 

Finally, Meritage and Freitag contend that they are entitled to summary judgment 

because there is insufficient evidence in the summary judgment record to support the conclusion 

that they are liable on any ofBNYM's counterclaims or third-party claims. 

1. Counterclaims Against Meritage 

BNYM asse1ts three counterclaims against Meritage. First, BNYM seeks declaratory and 

injunctive relief relating to Meritage's alleged failure to "uphold its maintenance obligations" 

under the HOA's governing documents. Am. Answer ~ 44. Specifically, BNYM asse1ts that 

Meritage has "failed to maintain siding, trim, exterior chimney, and other elements" of common 

property and that Meritage has "provided lower levels of maintenance to unit owners while those 

unit owners were or are in active litigation with Meritage HOA." Id. Substantial questions of 

material fact remain with respect to this counterclaim. BNYM submitted the declaration of 

David York, an architect who has been licensed in Oregon for thirty-three years. In his 

declaration, York states that it is his professional opinion that "lack of exterior maintenance" is 

the source of water intrusion and damage to the property; that the windows were code-compliant 

when installed and do not need to be replaced; and that the units that had newer window systems 

"also had visibly better newer, fully maintained exteriors built of newer materials, while the unit 

exteriors with older window systems - like BNYM's Unit - were visibly weathered, unkept and 

in need of basic maintenance and material replacement." York Deel. ~~ 5-6, Oct. 20, 2017. 

York's declaration provides support for concluding both that Meritage failed to maintain 

common property in a way that caused the damage it now attributes to defective windows and 

that Meritage has given preferential maintenance services to unit owners with whom it was not 

engaged in litigation. Of course, the record also contains contrary evidence tending to show that 

Page 25 - OPINION AND ORDER 
defective windows caused the damage and explaining that upgrades to exterior elements of the 

units are made only after the defective windows are replaced. But that evidence merely 

establishes disputed questions of material fact. Meritage's first counterclaim cannot be resolved 

at the summary judgment stage. 

Second, BNYM seeks declaratory and injunctive relief relating to Meritage's placement 

of plywood boards over certain windows at the property. BNYM contends that the windows in 

the unit "are performing" and that "there is no safety or other valid reason to require that 

plywood remain over the windows." Am. Answer~ 53. Moreover, BNYM alleges that Meritage 

initially placed "relatively inconspicuous" fitted plywood boards over the windows, but later 

replaced those fitted boards with "conspicuous and unattractive" unfitted plywood boards. Id. ~~ 

51-52. Once again, substantial questions of material fact remain with respect to this 

counterclaim. Meritage leans heavily on the fact that the Watts conceded to the placement of the 

plywood boards over the windows through the settlement agreement in the window litigation. I 

agree that the Watts' consent shields Meritage from liability on this claim during the Watts' 

ownership of the property, and likely for a reasonable period of time thereafter.8 However, 

because BNYM never consented to having the plywood over the windows and has asked to have 

it removed and because there is conflicting evidence in the summary judgment record regarding 

whether the windows are defective or need to be replaced, there necessarily are disputed 

questions of material fact regarding whether Meritage has continuing authority to require the 

plywood boards to remain over the windows. 

8 Meritage and Freitag argue that, ifBNYM is not the Watts' "successor and assign" such 

that it is bound by the settlement agreements, it lacks standing to assert its counterclaims and 

third-party claims with respect to the period of time when the Watts owned the prope1ty. But 

BNYM has voluntarily limited its claims to events occurring during the period of time after the 

§ 363 sale, with respect to which it clearly has standing. 

Page 26 - OPINION AND ORDER 
Third, BNYM asserts a claim for nuisance against Meritage. It contends that Meritage 's 

alleged failure to maintain common property pursuant to its obligations under the HOA 

governing documents "is causing moisture intrusion and other property damage to the exterior of 

the building that has begun or will soon begin to migrate into the interior of the building." Am. 

Answer ~ 58. BNYM seeks damages to cover the cost of investigation, repair, and remediation 

of the property. Reasonable jurors could rely on York's expert opinion to conclude that Meritage 

is liable for damages on this third counterclaim. Meritage is therefore not entitled to summary 

judgment on any of BNYM' s counterclaims. 

2. Third-Party Claims Against Freitag 

BNYM asserts a single third-party claim against Freitag, for bad faith breach of fiduciary 

duty. BNYM alleges that Freitag owes a fiduciary duty to the Meritage HOA and to individual 

Meritage homeowners, including to BNYM. BNYM further contends that Freitag has "grossly 

negligently or recklessly" breached that duty by incurring significant expenses that are not in the 

best interests of the Meritage HOA or its owners; failing to provide unit owners with the 

disclosures required under Oregon law; failing to fully fund and maintain adequate reserve 

account balances; wrongfully asserting fines and penalties for allegedly defective windows; 

wrongfully asserting authority to require plywood boards to be placed over functioning windows, 

wrongfully placing first fitted and then unfitted plywood boards over those windows; failing to 

hire adequate management and maintenance staff; failing to maintain common prope1ty and 

providing lower quality service to BNYM's unit; and retaliating against unit owners who engage 

in litigation with the HOA.9 Am. Answer~ 69. 

9 The Amended Answer also alleges that Freitag wrongfully assessed owners for 

expenses attributable to him personally and approved conflict-of-interest transactions. Am. 

Answer~~ 69(i)-(ii). At its 30(b)(6) deposition, BNYM voluntarily withdrew those allegations. 

Page 27 - OPINION AND ORDER 
There is insufficient evidence in the summary judgment record to proceed on two of the 

allegations outlined above: the allegation that Freitag failed to provide required disclosures 

(subsection iv of Paragraph 69 of the Amended Answer) and the allegation that Freitag failed to 

maintain adequate reserve funds (subsection v). In response to Meritage and Freitag's motion 

for summary judgment, BNYM cites (1) Freitag's deposition testimony that, in March 2015, the 

HOA's reserve account was about half the size it previously had been; (2) Freitag's admission 

that he has not made it a practice to distribute the mandatory reserve study reports to all owners; 

and (3) BNYM's attestation that it never has received an updated reserve study or budget since it 

took title to the property. That evidence is insufficient. First, that a reserve account is fifty 

percent of what it once was is not useful information in a vacuum; BNYM has not explained 

what an adequate reserve balance would be for the HOA or cited any evidence comparing 

reserve balances to that standard. Second, the status of the HOA's reserve account in March 

2015 does not provide sufficient information to support a claim that the account was 

inadequately funded five months later, when BNYM acquired the property. With respect to the 

disclosures, BNYM filed its initial Answer in this lawsuit in April 2016, about nine months after 

it acquired the property in the § 363 sale. It has not cited specifically which budgets or reserve 

studies it should have received but did not receive, and Freitag's testimony that it was not his 

regular practice to distribute those documents to all owners is insufficient to create a question of 

material fact on this issue. Moreover, a stipulation of facts filed October 19, 2017, establishes 

that BNYM had in fact received budget documents related to the years 2013, 2014, 2015, and 

2016, through discovery prior to the May 2017 filing of its Amended Answer. Accordingly, 

Freitag is entitled to summary judgment on the theories outlined in subsections iv and v of 

Meritage Homeowners' Ass'n & Third-Patty Def. Kmt Freitag's Reply Supp. Mot. Summ. J. Ex. 

30 at 6-7 (doc. 88-2). 

Page 28 - OPINION AND ORDER 
Paragraph 69 of the Amended Answer. Freitag is also entitled to summary judgment on 

subsections ix and x of that paragraph, which relate to the placement of the fitted and unfitted 

plywood boards over the windows, as those boards were placed during the Watts' ownership of 

the unit. 

There is, however, sufficient evidence to support the conclusion that Freitag took (or 

failed to take) the remaining actions listed above. The evidence supporting the allegations 

regarding failure to maintain common property (subsection xii), failure to hire adequate 

management and maintenance staff (subsection xi), providing lower quality maintenance service 

to certain unit owners (subsection xiii), requiring plywood boards to remain over the windows 

(viii), and retaliating against certain unit owners (subsection xiv) is sufficient for the reasons set 

forth in Section l.E.l, supra. With respect to the alleged incursion of expenses not in the interest 

of the HOA (subsection iii) and wrongful assertion of fines and penalties for allegedly defective 

windows (subsections vi and vii), the summary judgment record establishes that Meritage and 

Freitag have required unit owners not only to replace but to substantially upgrade the windows in 

their units. Freitag has also presided over the decision to levy assessments of thousands of 

dollars per month against unit owners who did not replace the windows. In addition, Freitag was 

in charge of the decision to incur hundreds of thousands of dollars in legal fees-in this lawsuit 

and in other lawsuits. Those facts are sufficient evidence to permit the allegations contained in 

subsections iii, vi, and vii to stand. 

There is also a genuine dispute of material fact as to whether Freitag acted in bad faith or 

in a grossly negligent or reckless manner. Whether Freitag's actions rose to the level of gross 

negligence or recklessness is a question of fact. Oregon Auto. Ins. Co. v. Fitzwater, 531 P .2d 

894, 898 (Or. 1975). As explained in Section III, infra, Freitag lacked legal authority to retain 

Page 29- OPINION AND ORDER 
administrative control of Meritage beyond June 5, 2004; that conclusion, while not dispositive to 

BNYM's third-party claim, is relevant to the determination of whether Freitag acted recklessly or 

with negligence. 

The evidence here is capable of supporting dramatically different conclusions regarding 

whether Freitag breached his fiduciary duty and whether any such breach was in bad faith. One 

possible reading of the record is that Freitag, faced with a dangerous construction defect and a 

subgroup of owners who refused to step up to their obligations to address a pressing safety issue, 

zealously used the authority of the HOA in an attempt to responsibly and promptly resolve the 

problem, thereby protecting the owners who wanted to do the right thing and equitably 

distributing costs across all members of the HOA. But another plausible inference from the 

summary judgment evidence is that Freitag used a construction defect lawsuit and his powers 

under the HOA's governing documents to consolidate his own power and increase the value of 

his own investments by forcing owners to pay for upgrades that were unnecessary and incredibly 

costly when compared to the value of the underlying units. 

In sum, Freitag is entitled to summary judgment on the portion of BNYM's third-party 

claim that relates to his alleged failure to maintain adequate reserve funds, provide required 

financial disclosures, and place fitted and unfitted plywood boards over the prope1ty's windows. 

Otherwise, Freitag's motion for summary judgment on the third-party claim is denied. 

II. Meritage 's Claim for Damages and Injunctive Relief under the Planned Community Act 

Meritage and Freitag next move for summary judgment with respect to money damages 

from (I) dues that accrued while BNYM had title to the property pursuant to the Bankruptcy 

Comt's confirmed plan, from October 17, 2014 through April 22, 2015 ("Vacated Plan Period"); 

(2) dues that accrued after BNYM took title in the 3 63 sale, from August 12, 2015 to the present 

Page 30 - OPINION AND ORDER 
("Post-§ 363 Sale Period"); (3) an assessment for failure to replace the windows in BNYM's unit 

after BNYM took title in the§ 363 sale; and (4) fines and interest associated with each. 

A. Dues During Vacated Plan Period 

Plaintiffs first seek summary judgment on the question of BNYM's liability for dues, 

interest, and collection/late fees assessed during the Vacated Plan Period. BNYM responds that 

because the plan was vacated, it has no ownership liabilities that predate the § 363 sale. 

I agree with BNYM. The term "vacate" means "to nullify or cancel; make void; 

invalidate[.]" Black's Law Dictionary (10th ed. 2014). In a host of legal contexts, the Ninth 

Circuit has held that vacatur retroactively invalidates the prior decision. See, e.g., Massachi v. 

Astrue, 486 F.3d 1149, 1154 (9th Cir. 2007) (holding that when the Appeals Council vacates an 

ALJ's original decision, "the ALJ's original finding no longer exist[s]."); United States v. 

Crowell, 374 F.3d 790, 792 (9th Cir. 2004) (distinguishing expungement from vacatur, and 

noting that, "[ w ]hen a court vacates a conviction, it sets aside or nullifies the conviction and its 

attendant legal disabilities[.]"); Wiedersperg v. lN.S., 896 F.2d 1179, 1182 (9th Cir. 1990) 

(holding that a state court order vacating a criminal conviction that had triggered depotiation 

retroactively rendered that deportation unlawful). When I vacated the order confirming the 

bankruptcy plan, the legal effect as to the forced vesting provision was that it never existed. 

BNYM's failure to seek a stay under Federal Rule of Bankruptcy Procedure 8007 was a 

gamble-had it lost on appeal, it would have been liable not only for dues but for interest and 

fees associated with those dues. But it was a gamble that paid off. Cf In re Brown, 563 B.R. 

451, 454 (D. Mass. 2017) (stating that a creditor who decided to go ahead with a foreclosure sale 

without seeking a stay ran "the risk that this comi would uphold the forced vesting provision"). 

Page 31 - OPINION AND ORDER 
Plaintiffs insist that this result is unfair because it effectively bars them from recovering 

dues for the vacated plan period from anyone. They cite my statement in Watt, 2017 WL 

1364209 at * 1, that "[t]he practical effect of th[ e] complex procedural history" in that case was 

that, "after they filed for bankruptcy, the Watts were the owners of the property for two periods 

of time:" from "the date of the Chapter 13 filing" to "the date of plan confirmation, when BNYM 

took title," and from "the date of this Court's order vacating the order confirming plan" to the 

"date of the§ 363 sale to BNYM[.]" Plaintiffs argue that this statement necessarily implies that 

the Watts had no ownership responsibilities during the Vacated Plan Period. 

I am not persuaded. First and most impottantly, in Watt, I never decided who owned the 

property during the Vacated Plan Period. That is because Meritage never raised the issue. 

Meritage did not seek dues or assessments from the Watts for that period of time; both 

Meritage's adversarial complaint, filed initially in bankruptcy court, and its summary judgment 

briefs expressly addressed only the pre-confirmation and vacatur-to-§ 363 sale periods of time. 

See Complaint, Meritage Homeowners' Ass'n v. Watt, Case No. 3:17-cv-00267-AA (doc. 1-1); 

Mem. Supp. Pis.' Am. Mot. Part. Summ. J. 3 & 5, Meritage Homeowners' Ass'n v. Watt, Case 

No. 3:17-cv-00267-AA (doc. 19). Any limits on Meritage's ability to recover dues and 

assessments from the Watts for the Vacated Plan Period, therefore, flow from its own prior 

litigation decisions. 

Second, the statement that the Watts owned the property for the pre-confirmation and 

vacatur-to-§ 363 sale periods does not necessarily lead to the conclusion that they were not liable 

for dues during the vacated plan period. The prior opinion states that BNYM was "in title" but 

never concludes that it was the owner of the property or that it owed dues. Third, even if the 

prior opinion could fairly be interpreted as stating that BNYM was liable for dues in the vacated 

Page 32 - OPINION AND ORDER 
plan period, it would have no preclusive effect in this case because the issue was not actually 

litigated in the prior action. See State ex rel. English v. Multnomah Cty., 238 P.3d 980, 988 (Or. 

2010). Relatedly, the prior decision would not bind the court here because principles of stare 

decisis do not apply to decisions of district courts. See Camreta v. Greene, 563 U.S. 692, 709 

n.7 (2011) ("A decision of a federal district court judge is not binding precedent in either a 

different judicial district, the same judicial district, or even upon the same judge in a different 

case.") (internal quotation marks omitted). 

BNYM is not liable for any dues, interest, or fees from the Vacated Plan Period. 

B. Dues Post-§ 363 Sale 

Plaintiffs next seek summary judgment on the question of BNYM's liability for dues, 

interest, and late fees from after the § 363 sale. BNYM agrees that it owes dues for this period of 

time, but insists that it has paid those dues, as well as applicable late fees and interest, in full. It 

contends that Meritage has unlawfully applied those dues payments to liabilities it does not 

actually owe, and that any deficiency arises from Meritage's refusal to apply the payments 

correctly. Meritage's calculation of what BNYM owes rests in part on its application of 

Meritage' s payments to fees associated with dues assessed for the Vacated Plan Period. BNYM 

is not liable for those dues, as explained in Section II.A, supra. Meritage's calculation of what 

BNYM owes also rests in pait on its application ofMeritage's payments to fees associated with 

the $175,000 window assessment. As explained in Sections II.C and Ill, infra, plaintiffs are not 

entitled to summary judgment with respect to BNYM's obligation to pay that assessment 

because Freitag lacked legal authority to act on behalf of Meritage when he levied the 

assessment. Accordingly, it cannot be detennined at this stage whether BNYM has paid its post-

§ 363 sale dues in full or whether it still owes dues and related fees. 

Page 33 - OPINION AND ORDER 
C. Windows Assessment 

Plaintiffs also seek summary judgment on the question of BNYM's liability for the 

$175,000 assessment (plus associated fines and interest) Meritage levied against BNYM for 

refusing to replace the windows. Plaintiffs are not entitled to summary judgment with respect to 

liability for this assessment because, as explained in Section III, infra, Freitag lacked legal 

authority to act on behalf of Meritage both in 2013, when the resolution permitting the monthly 

assessments for failure to replace the windows was passed, and in 2016, when Meritage first 

began its attempts to collect the windows assessment from BNYM. 

D. Attorney's Fees 

Because Meritage is not entitled to summary judgment with respect to BNYM's 

obligation to pay dues during the Vacated Plan Period, dues during the Post-§ 363 Sale period, or 

the windows assessment, it cannot be determined at this stage whether BNYM is liable to pay 

any ofMeritage's attorney's fees. Meritage's motion for partial summary judgment is denied. 

III. Freitag's Authority to Act on Behalf of HOA 

Finally, BNYM moves for partial summary judgment regarding whether Freitag had the 

legal authority to levy assessments (and related interest, fines, and fees) related to the windows at 

the property, take other action related to the windows and window replacements, and choose to 

apply BNYM's quarterly dues payments to the total (disputed) balance owed ratherthan solely to 

dues. 10 BNYM's argument rests on its contention that Freitag failed to turn over administrative 

control of Meritage to the unit owners at the time mandated by the Declaration and Oregon law. 

10 Jn their response brief, Meritage and Freitag take issue with BNYM's motion; they 

assert that "it is unclear exactly which sections of BNYM's counter-claims and Third-Party 

Complaint th[e] motion references" and suggest that BNYM's argument is "better couched as a 

'motion for declaratory dete1mination' of sorts." Meritage Homeowners' Ass'n and Third-Party 

Def. Kurt Freitag's Resp. BNYM's Mot. Part. Summ. J. 2 (doc. 92). I do not find BNYM's 

Page 34 - OPINION AND ORDER 
As a threshold matter, Meritage and Freitag contend that BNYM cannot proceed on the 

theory that Freitag violated the Declaration by retaining administrative control of Meritage for 

two reasons. First, they contend that BNYM's 30(b)(6) witness expressly disclaimed reliance on 

any such theory. Having reviewed the excerpts of deposition testimony provided by the parties, I 

am unconvinced. Witnesses answer only the questions they are asked; nowhere does the 

30(b)(6) witness disclaim reliance on a lack-of-authority theory. 

Second, Meritage and Freitag argue that it is inherently contradictory to pursue claims for 

breach of fiduciary duty while simultaneously contending that Freitag lacked legal authority to 

take action on Meritage's behalf. According to that theory, if Freitag violated the Declaration by 

failing to turn over control of Meritage, he owed Meritage's members no fiduciary duty during 

any time period after turnover was required. Once again, I am not persuaded. First, it is wellestablished that parties may proceed to trial on alternative theories of liability even if they 

ultimately cannot prevail simultaneously on both theories. Cf, e.g., Hamlin v. Wilderville 

Cemetery Ass'n, 313 P.3d 360, 367 n.3 (Or. Ct. App. 2013) (allowing claims for negligence and 

intentional infliction of emotional distress based on the same conduct to proceed to trial). 

Second, when Oregon courts assess whether a relationship triggers a heightened duty of care 

(such as fiduciary duty), the question is whether "the party who is owed the duty effectively has 

authorized the party who owes the duty to exercise independent judgment in the former party's 

behalf and in the former party's interests." Shin v. Sunriver Preparatory Sch., Inc., 111 P.3d 

762, 771 (Or. Ct. App. 2005) (internal quotation marks omitted). Whether or not Freitag's 

motion confusing. Whether the assessments and fees were levied with or without lawful 

authority is at the heart of the parties' dispute; it bears particular relevance to BNYM's thirdparty claim against Freitag and to whether Meritage has a right to recover most of the money it 

assetts BNYM owes. Accordingly, plaintiffs motion is an appropriate request for summary 

judgment on a pait of a claim or defense, as expressly authorized by Federal Rule of Civil 

Procedure 56(a). 

Page 35 - OPINION AND ORDER 
control of the Meritage was authorized under the Declaration, he in fact retained control of 

Meritage throughout the events giving rise to this litigation; during that time, he was legally 

bound to act in the interest of Meritage and its members. Whether Freitag acted without legal 

authority does not affect whether he owed Meritage's members a fiduciary duty; instead, it goes 

to whether he breached that duty recklessly or with gross negligence, as required for BNYM to 

hold him personally liable under Oregon law. 

A. Effect of Or. Rev. Stat. § 65. 084 

In a statement of supplemental authorities, Meritage cites Or. Rev. Stat. § 65.084. That 

statute, titled "Challenge of Corporate Authority," provides: 

(1) Except as provided in subsection (2) of this section, the validity of corporate 

action may not be challenged on the ground that the c01poration lacks or lacked 

power to act. 

(2) A corporation's power to act may be challenged: 

(a) In a proceeding by a member or members, a director or the Attorney 

General against the corporation to enjoin the act; 

(b) In a proceeding by the corporation, directly, derivatively or through a 

receiver, a trustee or other legal representative, including the Attorney 

General in the case of a public benefit corporation, against an incumbent 

or fonner director, officer, employee or agent of the corporation ... 

(3) In a proceeding under subsection (2)(a) of this section to enjoin an 

unauthorized corporate act, the court may enjoin or set aside the act, if equitable 

and if all affected persons are parties to the proceeding, and may award damages 

for loss other than anticipated profits suffered by the corporation or another party 

because of enjoining the unauthorized act. 

Or. Rev. Stat. § 65.084. Meritage argues that BNYM's challenge to Freitag's authority to act 

does not fall within subsection (2)(a) or (2)(b), and thus any ofBNYM's claims or defenses that 

rest on Freitag' s purported lack of authority must fail. 

Page 36 - OPINION AND ORDER 
BNYM responds that its wrongful assessment argument does not constitute a challenge to 

the corporation's power to act. BNYM concedes that it is "assuredly within the scope of 

[Meritage's] power to levy assessments consistent with the Declaration and Bylaws[.]" Reply 

Supp. BNYM's Mot. Part. Summ. J. 26-27 (doc. 108). BNYM contends that it is challenging 

not Meritage's authority to levy assessments, but the legality of the particular assessments levied 

by Freitag in this case; if those assessments were not levied "according to specific procedures set 

forth in [Meritage's] governing documents," BNYM argues, they are "a legal nullity." Id. 26-

Meritage's argument is foreclosed by Dischinger Orthodontics, PC v. Regence Bluecross 

Blueshield of Oregon, 405 P.3d 164 (Or. Ct. App. 2017), the only Oregon case to address the 

meaning of§ 65.084. In Dischinger, policyholders brought a putative class action against the 

defendant insurance company, claiming that the defendant "breached insurance contracts with its 

policyholders by retaining excessive earnings and distributing them as compensation to 

executives, in violation of defendant's contracts, articles of incorporation, and state law." 405 

P.3d at 165. The plaintiffs sought a declaration that the defendant had violated its articles of 

incorporation. Id. The trial court held that the plaintiffs lacked standing to assert their claims. 

On appeal, the plaintiffs argued that "their claims [we ]re not made on the ground that [the] 

defendant lacked the power to act, but rather that, in so acting--contrary to its status as a 

nonprofit public benefit corporation through its retention and distribution of profits---<lefendant 

breached its contracts, atticles of incorporation, and state law." Id. at 167 (emphasis in original). 

The Oregon Court of Appeals affirmed the trial court's dismissal, explaining 

On this record, and based on the allegations of the complaint, plaintiffs' attempted 

distinction escapes us. . . . If, as plaintiffs contend, defendant had the power to act 

as it did, then it did not violate its articles. Plaintiffs' complaint alleges, in 

essence, that the retention of profits and the payment of generous bonuses to 

Page 37 - OPINION AND ORDER 
Id 

defendant's executives are contrary to defendant's status as a nonprofit 

corporation for the public benefit as stated in its articles, and that those profits 

should be shared with defendant's policyholders in the form of premium 

reductions .... We, like the trial court, conclude that plaintiffs' contention that 

defendant's actions are not within the corporation's purposes as defined in its 

articles is a claim that defendant lacked the power to act. 

I see no ground for distinguishing this case from Dischinger. In both cases, the argument 

is that a challenge to corporate action as unauthorized by the corporation's governing document 

is not a challenge to corporate action based on lack of authority. The Dischinger court, 

interpreting the text of§ 65.084, rejected that argument; I am bound to do the same. BNYM's 

argument is a challenge to corporate action on the ground of lack of authority, and so it is batTed 

unless it falls under subsection (2)(a) or (2)(b). 

As explained in Section ID, supra, BNYM has stated both individual and derivative 

claims. As a result, its claims qualify under both subsections of the Oregon law: they are proper 

claims for injunctive relief under subsection (2)(a) and proper derivative actions against an 

officer under subsection (2)(b). Although Or. Rev. Stat.§ 65.084 applies to BNYM's argument 

regarding Freitag's lack of authority, it does not bar that argument because the requirements of 

the statute are satisfied. 

B. Interpretation of the Declaration 

In analyzing a document like the Declaration, a court's task is to discern "the meaning 

... that was most likely intended by the parties." Andrews v. Sandpiper Villagers, Inc., 170 P.3d 

1098, 1102 (Or. Ct. App. 2007). Oregon courts employ a multi-step process to achieve that goal. 

"First, the court examines the text of the disputed provision, in the context of the document as a 

whole." Yogman v. Parrott, 937 P.2d 1019, 1021 (Or. 1997). The purpose of that inquiry is to 

determine whether the text is ambiguous; if it is not, "the comt construes the words of a contract 

Page 38 - OPINION AND ORDER 
as a matter of law." Id. If, on the other hand, the "provisions ... have no definite meaning or 

are capable of more than one sensible and reasonable interpretation[,]" Andrews, 170 P.3d at 

1103, the parties' intended meaning becomes a question of fact, and the court proceeds to the 

subsequent steps in the analysis. As the party seeking summary judgment on this issue, BNYM 

has the burden of proving that Freitag's failure to tum over control of Meritage to the other unit 

owners violated the Declaration. 

I begin at step one, by analyzing the text of the Declaration. Article 7 of the Declaration 

provides that each unit owner is a member of Meritage. Storti Deel. Ex. A § 7 .1. The 

Declaration establishes two classes of voting members: Class A members, defined as all owners 

of lots other than the declarant, and Class B members, defined as "the Declarant." Id. §§ 7.3.1 & 

7.3.2. Pursuant to those provisions, Freitag was a Class B member and all other unit owners 

were Class A members. As a Class B member, Freitag was entitled to enhanced voting rights 

compared to Class A members. Id. §§ 7.3.1 & 7.3.2. The Declaration further states: 

The Class B membership shall cease and be converted to Class A membership 

upon the earlier of the following dates (the "Termination Date"): 

(a) The date on which seventy-five percent (75%) of the total number of 

Lots in Meritage have been sold and conveyed to Owners other than Declarant; 

(b) The date on which Declarant elects in writing to terminate Class B 

membership. 

Id. § 7.3.2. 

Article 8 of the Declaration governs control of the homeowners' association. Initially, 

the Declarant (Freitag) has "administrative control[,]" including the right to appoint and remove 

members of an interim board invested with "all powers and rights" to run the association. Id. 

§ 8.1. The Declaration further requires the Declarant to tum over administrative control of the 

association to the Class A members by convening a turnover meeting within sixty days of the 

Page 39 - OPINION AND ORDER 
earlier of the following dates: (I) "[t]he date on which Lots representing seventy-five percent 

(75%) of the total number of votes of all Lots in the final Phase of Meritage have been sold and 

conveyed to persons other than Declarant" or (2) "[t]he date on which Declarant has elected in 

writing to terminate Class B membership." Id. §§ 8.2.1 & 8.2.2. 

Article 2 of the Declaration elaborates on the declarant's right to annex additional 

property. The Declarant has the right to annex adjacent property to the development through a 

"Supplemental Declaration not later than ten (I 0) years from the date the Declaration is 

recorded." Id. § 2.2. Article I of the Declaration contains a number of definitions relevant to 

interpreting the above provisions. "Meritage" is defined as "Lots 1 through 6 of the Property and 

Tract 'A', as designated on the Plat of Meritage, and any future phases annexed to the 

development." Id. § 1.17. "Phases" is defined as "any group of Lots and Common Area Tracts 

which are subject to this Declaration at a specific time." Id. at§ 1.20. Finally, "Property" means 

Lots 1 through 6 and Tract 'A', "together with such additional Lots and Common Areas as may, 

from time to time, be annexed to the Association." Id. § 1.23. 

Meritage and Freitag argue that the text of the Declaration is unambiguous and that the 

turnover meeting requirement has not yet been triggered. They note that because Freitag has not 

voluntarily terminated his Class B membership, the turnover requirement is tied to the date on 

which Lots representing seventy-five percent "of the total number of votes of all Lots in the final 

Phase of Meritage have been sold or conveyed" to persons other than Freitag. Id. § 8.2.1 

(emphasis added). They further note that the Declaration was initially recorded on December 19, 

2003, and that Freitag-consistent with his authority under § 2.2 of the Declaration-annexed a 

fourth set of six Lots to Meritage through a Supplemental Declaration recorded December 11, 

2013, just inside § 2.2's ten-year time limit. Accordingly, Freitag and Meritage contend that "all 

Page 40 - OPINION AND ORDER 
Lots in the final Phase of Meritage" refers to the six most recently-annexed Lots, and that the 

turnover requirement will not be triggered until seventy-five percent of the voting rights 

associated with those six Lots have been sold to someone other than Freitag. Put more simply, 

under this interpretation, the "final Phase of Meritage" means the last Phase annexed to the 

development inside of the ten year period identified under § 2.2 of the Declaration. 

In response, BNYM counters that it does not make any sense to read the Declaration in 

the way Freitag and Meritage urge. BNYM contends that the only sensible way to read the 

Declaration is to interpret the phrase "all Lots in the final Phase of Meritage" from § 8.2. l and 

the phrase "the total number of Lots in Meritage" from § 7.3.2(a) to mean the same thing. 

BNYM further notes that because annexation was not required under the Declaration, the 

meaning of "final Phase of Meritage" necessarily changed as new Phases were annexed. At any 

given time, the "final Phase of Meritage" was the Phase most recently established or annexed. 

Under that interpretation, mandatory turnover was triggered on June 5, 2004, when five of the six 

Phase I Lots-the only Lots then in existence, which meant that at that time Phase I was the 

"final Phase ofMeritage"-were sold to people other than Freitag. 

I find BNYM's reasoning persuasive. Under the reading proffered by Freitag and 

Meritage, the "final Phase of Meritage" is inextricably linked to the Declarant' s right to annex. 

Because the Declarant has the authority to annex for ten years, the final Phase would exist only 

as an ever-elusive possibility, to be identified in hindsight after the ten year period had run. 

Moreover, because mandatory turnover is tied to the "final Phase," the triggering event could 

never be defined until the end of the same ten-year period. That is not a reasonable interpretation 

when considered within the in the context of the Declaration as a whole, as it would produce the 

absurd result of allowing the Declarant (Freitag) to ensure and maintain unencumbered control of 

Page 41- OPINION AND ORDER 
Meritage for a period of ten years or longer, even if no additional Phases were annexed to 

Meritage at Little Creek within ten years. Accordingly, I find that BNYM presents the only 

reasonable reading of the Declaration, and under the terms of the Declaration, mandatory 

turnover was triggered on June 5, 2004, the first date on which seventy-five percent of the Lots 

then subject to the Declaration were sold to people other than Freitag. 11 

C. Effect of Mandatory Turnover 

Meritage at Little Creek is subject to the provisions of Oregon's Planned Community 

Act. See Or. Rev. Stat. § 94.550(3) (providing that as a planned community containing at least 

thirteen lots and having an estimated annual assessment exceeding $10,000 is a Class I planned 

community). That statute requires the declarant to call a turnover meeting within ninety days of 

the expiration of the "period of declarant control." Id. § 94.609(1 ). At the turnover meeting, 

"the declarant shall turn over to the homeowners association the responsibility for the 

administration of the planned community, and the association shall accept the administrative 

responsibility from the declarant." Id. § 94.616(1). The law contemplates turnover happening 

before development of a planned community is complete, and states that, after the turnover 

meeting, "the declarant may continue to hold special declarant rights, other than a right of 

11 Meritage and Freitag argue that mandatory turnover could not have been triggered in 

2004, when Meritage at Little Creek had only six lots, because the development did not become 

a Class I planned community until Phase Ill was annexed, increasing the total number of lots to 

eighteen. They contend that such classification matters because different provisions of the 

Planned Community Act apply depending on whether a development is classified as a Class I, 

Class II, or Class III planned community. See Or. Rev. Stat.§ 94.570(1). I am not persuaded; in 

relevant part, the Planned Community Act defines a "Class I planned community" as a planned 

community that"[ c ]ontains at least 13 or lots or in which the declarant has reserved the right to 

increase the total number of lots beyond 12[.]" Id.§ 94.550(3)(a) (emphasis added). It appears, 

based on that definition, that Meritage at Little Creek was a Class I planned community from its 

inception. But it is not necessary to determine when Meritage at Little Creek become a Class I 

planned community in order to rule on BNYM's summary judgment motion; even if Meritage 

and Freitag are correct on this point, mandatory turnover was triggered on July 12, 2007, when 

all the lots in Meritage's first three phases had been sold to people other than Freitag. 

Page 42 - OPINION AND ORDER 
declarant control, reserved under the declaration." Id. § 94.621. Even the in absence of a 

turnover meeting, the law provides that, when the period of declarant control expires, "the rights 

automatically shall pass to the lot owners[.]" Id. § 94.600(3). 

The parties dispute whether a 2009 meeting at which turnover was addressed qualifies as 

the turnover meeting discussed in the Planned Community Act and the Declaration. Freitag also 

asserts that he wanted to begin the turnover process by f01ming transition committees that would 

allow unit owners to "take part of the management of the HOA [and] gain experience" in 

preparation for "the responsibility of turnover." Freitag Deel. 'if II, Nov. 13, 2017. He reports 

that those committees ended disastrously: the first committee "dissolved after meetings resulted 

in tearful implosions" while the second dissolved when the committee members did not want to 

assess their fellow unit owners for a shottfall after one unit owner failed pay dues. Freitag Deel. 

'if'if 15 & 18, Nov. 13, 2017. In the end, disputes related to those facts are immaterial; once 

mandatory turnover was triggered under the Declaration, the rights to administrative control 

passed automatically to the owners, who became responsible for choosing Meritage's governing 

board. If Meritage's unit owners were unwilling to accept responsibility for administering the 

homeowners' association or otherwise "fail[ed] to fill vacancies on the board of directors 

sufficient constitute a quorum," Oregon law provides a remedy: the appointment of a receiver "to 

manage the affairs of the association." Or. Rev. Stat. § 94.642(1). Neither Oregon law nor the 

Declaration contemplates the Declarant remaining in administrative control of a homeowners' 

association beyond the mandatory turnover date simply because the other members of the 

association are uninterested in assuming responsibility. 12 

12 Meritage argues that Freitag retains legitimate administrative control even if the 

mandatory turnover date has passed because, by the terms of the Declaration, control does not 

pass to the other unit owners until the turnover meeting. As noted, however, the Planned 

Page 43 - OPINION AND ORDER 
Under the unambiguous tenns of the Declaration, mandatory turnover was triggered on 

June 5, 2004. Oregon law provides that once mandatory turnover is triggered, the period of 

declarant control ends and the rights and responsibilities associated with the management of the 

homeowners' association pass to the owners. Freitag therefore lacked legal authority to act on 

behalf of Meritage after June 5, 2004. BNYM is entitled to summary judgment on the issue of 

Freitag's legal authority. 

IV. Motion for a Preliminary Injunction 

BNYM has notified Meritage that it plans to file an action in state court seeking 

appointment of a receiver to manage Meritage, pursuant to Or. Rev. Stat. § 94.642(1). Meritage 

seeks a preliminary injunction to prevent BNYM from filing that receivership action while this 

case is pending. 13 I agree with Meritage that litigating this dispute on two fronts-in state and 

federal court-is a waste of judicial resources and creates a substantial risk of inconsistent 

judgments. Nevertheless, I am compelled to deny Meritage's motion because it has not met the 

demanding standard to justify the extraordinary relief of a preliminary injunction. 

To obtain a preliminary injunction in federal court, the party seeking the injunction 

generally must establish that (I) it is likely to succeed on the merits; (2) it will suffer irreparable 

harm in the absence of injunctive relief; (3) the balance of equities tips in its favor; and (4) an 

Community Act makes the transfer of administrative rights and responsibilities automatic upon 

expiration of the period of declarant control. Id § 94.600(3). To the extent that provision 

conflicts with the Declaration, the Planned Community Act controls, both by terms of the statute 

and because Meritage's bylaws expressly provide that the Planned Community Act "shall control 

over ... the Articles and Declaration[.]" Storti Deel. Ex. B § 11. 

13 Federal courts generally cannot enjoin state court proceedings. 28 U.S.C. § 2283. 

However, federal courts do have authority to enjoin a party in a federal case from commencing a 

new proceeding in state court. See Dombrowski v. Pfister, 380 U.S. 479, 484 n.2 (1965) ("This 

statute and its predecessors do not preclude injunctions against the institution of state court 

proceedings, but only bar stays of suits already instituted.") 

Page 44 - OPINION AND ORDER 
injunction is in the public interest. Winter v. Nat'! Resources Def Council, 555 U.S. 7, 21 

(2008). The Ninth Circuit also employs a "sliding scale" variant of that test. All. for the Wild 

Rockies v. Pena, 865 F.3d 1211, 1217 (9th Cir. 2017). Under the sliding scale variant, "if a 

plaintiff can only show that there are serious questions going to the merits-a lesser showing that 

likelihood of success on the merits-then a preliminary injunction may still issue if the balance 

of hardships tips sharply in the plaintiffs favor,and the other two Winter factors are satisfied." 

Id. (internal quotation marks omitted) (emphasis in original). 

Meritage does not meet the standard under either variant of the preliminary injunction 

test. As explained in more detail above, the majority of the claims at issue in this lawsuit cannot 

be resolved at the summary judgment stage-however, to the extent any party has shown likely 

success on the merits, that party is BNYM. Meritage makes a number of arguments relevant to 

whether BNYM would be likely to succeed in its contemplated receivership action in state court. 

But that is not the relevant success-on-the-merits inquiry. In detennining whether to enter a 

preliminary injunction, the question is whether Meritage is likely to prevail on the merits on the 

claims before this Court. If BNYM moves ahead with its plan to file a receivership action, 

Meritage can present its estoppel, waiver, and claim preclusion arguments to the state court. 

Meritage has shown serious questions going to the merits of many of its claims. But it 

falls short under the sliding scale variant of the test as well, because I cannot find that the 

balance of hardships tips sharply in Meritage's favor; indeed, the hardships seem quite wellbalanced in this case. Because Meritage cannot meet the preliminary injunction standard, its 

motion must be denied. 

Page 45 - OPINION AND ORDER 
CONCLUSION 

Meritage and Freitag's motion for summary judgment (doc. 46) is GRANTED IN PART 

and DENIED IN PART as follows: the motion is granted with respect to the portions of the 

third-party claim against Freitag related to failure to maintain an adequate reserve balance, 

failure to provide required financial disclosures, and the placement of fitted and unfitted plywood 

boards over windows, and is denied in all other respects. Meritage's motion for paitial summary 

judgment (doc. 50) is DENIED. BNYM's motion for partial summary judgment (doc. 84) is 

GRANTED. Meritage's motion for a preliminary injunction (doc. 114) is DENIED. 

IT IS SO ORDERED. 

Dated this /..3$of April 2018. 

AnnAiken 

United States District Judge 

Page 46 - OPINION AND ORDER