Opinion ID: 2593799
Heading Depth: 1
Heading Rank: 7

Heading: Validity of Original Management Agreement and Subsequent Amendments

Text: The interpretation and legal effect of written instruments are matters of law, and an appellate court exercises unlimited review. Regardless of the construction given a written contract by the trial court, an appellate court may construe a written contract and determine its legal effect. City of Topeka v. Watertower Place Dev. Group, 265 Kan. 148, 152-53, 959 P.2d 894 (1998). KBRS manages the Association under the terms of a management agreement, which was created on November 22, 1989, and was originally for a term of 10 years. The parties to the agreement are KBRS and the Association. The agreement is signed by Thomas C. Wentz, as President of both organizations. The management agreement was approved by action of both the KBRS and the Association's boards. Paragraph 8 of the 1989 management agreement provides: Compensation. It is understood and agreed that the cost and expenses incurred by the Manager in the furnishing and providing the services which are the subject of this agreement may fluctuate from time to time and that the management fee shall be adjusted as hereinafter provided during the term of this agreement. Manager's fee for the period commencing April 1, 1989, and ending March 31, 1990, shall be $165.00 per month per apartment. In the event of any increase in the cost of living index during any year as herein defined, from this base or floor then and in such an event, the $165.00 monthly fee to the Manager shall be increased proportionately with the increase in the cost of living. The cost of living for the period from January 1 to December 31 of the [preceding] year as reflected by the Wholesale Price Index for All Commodities of the U.S. Department of Labor's Bureau Statistics, with the year 1989 as the base year and equal to 100 % shall be the base or floor. Prior to November 6, 1990, the Owners' monthly fees were raised. The fees charged from November 1990 through December 1991 were $225 (single) and $285 (double). In November 6, 1990, in the minutes of a special meeting of the boards of KBRS, and Kidron Inc., state: The raising of the monthly fees of the Townhouse residents. Tom Wentz reported that the residents of the Townhouses have circulated a petition regarding the raising of the monthly fees and would like a description of the additional services, facilities and care that have been implemented recently to justify a raise of nearly 73% in their monthly fees. They feel as though the proposed raise is premature. Dom Schmidt reported that he has visited with several of the residents of the Townhouses about the increase in fees. Suggested that the residents should have been brought together to discuss the increase in a group meeting before implementing the increase. There are also other issues along with this, including the mailboxes, lawn services, etc. Edwin Regier stated that the residents feel as though they shouldn't be paying for the Wellness Center, Swimming Pool, etc. if the facilities are not ready for use. Max Graber asked if we are guilty of not informing the residents of matters that will take place and [affect] them? On April 24, 1991, paragraph 8 of the management agreement was amended, omitting all references to increases in management fees due to cost-of-living increases. The First Amendment to Management Agreement provides in paragraph 8: Compensation. It is understood and agreed that the cost and expenses incurred by the Manager in providing the services which are the subject of this agreement may fluctuate from time to time and that the management fee shall be adjusted annually by the Board of Directors of the Association, based upon the Board of Director's advance budget of the cash requirements needed by the Manager to provide for the administration and performance of its duties during the following year, adopted in accordance with Paragraph 8.3 of the Declaration of Kidron Bethel Condominiums. The management fee may be adjusted at any time if the Board of Directors determines that an adjustment is necessary for the purpose of defraying the unbudgeted costs, fees and expenses incurred by the Manager in carrying out its duties as set forth in this agreement, and if a special assessment is approved by the Board in accordance with paragraph 8.5 of the Declaration. (Emphasis added.) The amendment was signed by Thomas C. Wentz, as President of KBRS and President of the Association. In December 1991, the Board proposed to institute a $20 increase for management of facilities that were not included in 1989-90, and an additional $50 for items which were unforseen in the original agreement. This increase was approved by the Boards of both the Association and KBRS, and, commencing in January 1991, the fees were assessed at $295 and $375. In January 1993, the assessments were increased 3 percent to cover cost-of-living adjustments, and property taxes were taken out of the monthly assessments because the units were valued differently and because residents needed to show they had paid their taxes. From January 1993 through June 1994, the monthly fees were $265 and $330. In June 1994, the assessment rate was again increased by 2.6 percent to $271 and $338 to reflect social security cost-of-living increases. In May 1995, the assessment rate was increased by 2.8 percent to $278.59 and $347.46 to cover cost-of-living increases. In April 1996, the assessment rate was increased by 2.6 percent to $286 and $356 to cover cost-of-living increases. In April 1997, the assessment rate was increased by 2.9 percent to $294 and $366 to cover cost-of-living increases. In April 1998, the assessment rate was increased by 1.6 percent to $299 and $372 to cover cost-of-living increases. The trial court found that all increases and assessments from 1990 were approved by the Boards of both KBRS and the Association. The Owners contend that the original management agreement limited the monthly assessment fee to $165 plus cost-of-living increases. They assert that the subsequent amendment to the agreement whereby limitations on the monthly assessment were removed is invalid because (1) there is a lack of consideration for the amendment and (2) it was not approved by the membership that (3) the amendments meant the contract contained no limitation of time to create a management contract. The Board contends that the Owners have no standing to invoke the provisions of the original agreement because (1) the Owners were neither parties nor third-party beneficiaries to the contract, (2) the management agreement does not place a limit on monthly assessments to residents, (3) the management agreement was validly amended to conform the management fee to the amount of monthly assessments made to Owners, and (4) the Owners claim for breach of management agreement is barred by laches. First, the trial court found that the Owners had no standing to challenge the amended management agreement because they were not parties to the agreement between KBRS and the Association. The management agreement states that the [a]ssociation is a notfor-profit corporation of owners of condominium apartments in the Kidron Bethel Village and it deems it to be in its best interest and that of its members to enter into the contract. The agreement states that the purpose of the agreement is to relieve individual unit owners of the responsibility of managing condominium common areas. As provided in the declaration, the Owners are assessed for expenses, costs, and fees of management. Under the agreement, the Owners have an interest in the management fees sufficient to charge their directors with breach of fiduciary duty in entering into the contract, even if they have no standing to void the contract. Here, the Boards of the Association and of KBRS are identical. The President of each Board, the same person, signed both contracts. The Boards are self-dealing. K.S.A. 17-6304 provides: (a) No contract or transaction between a corporation and one or more of its directors or officers, or between a corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorized the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board of directors, a committee thereof or the shareholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorized the contract or transaction. Because there are no disinterested board members to affirm the amended management agreement, the transaction must comply with subsection (2) or (3) to withstand a challenge by one with standing to challenge the contract. The amended agreement was not put to a vote of the shareholders, who are, by analogy, the owners; therefore, subsection (2) is not applicable. Subsection (3) applies to the amended agreement if the agreement is fair. The original agreement provided for increases in the management fee commensurate with the cost of living. The original agreement is silent as to increases in the fee for other reasons. However, the Board amended the agreement by removing the cost-of-living limitations and providing for annual adjustments of the fee by the Board. The amended agreement does not provide that KBRS may adjust the fee periodically; it provides that the Association may do so. Therefore, the amended agreement does not give KBRS an additional benefit which would require that KBRS provide additional consideration. Under both the original management agreement and the amended agreement, the Association controls management fee non-cost-of-living adjustments. Of course, this conclusion assumes an arms-length transaction rather than a self-dealing transaction. The trial court found: While the original management agreement between KBRS and [the Association] limited fee increases to cost-of-living increases from year to year, no similar restriction was included in the Declarations or in any of the residency agreement[s] signed by the plaintiffs. The cost-of-living restriction on management fee increases was deleted when the First Amendment to management agreement was duly approved by the Board of Directors of both KBRS and [the Association], in order to eliminate confusion between the Declarations and the terms of the management agreement regarding increases and monthly assessments. The practices of KBRS and the Association were closely scrutinized. The trial court determined that the amended management agreement was supported by sufficient consideration, was fair and equitable, and was not, therefore, void. Where the trial court has made findings of fact and conclusions of law, the function of an appellate court is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law. Substantial evidence is evidence which possesses both relevance and substance and which furnishes a substantial basis of fact from which the issues can reasonably be resolved. Tucker v. Hugoton Energy Corp., 253 Kan. 373, Syl. ¶ 1, 855 P.2d 929 (1993). The trial court's finding that the amendment is supported by sufficient consideration and was fair and equitable is affirmed.