Court Opinion

ID: 4249632
Source: CourtListenerOpinion
Date Created: 2018-02-28 21:20:00.742994+00
Date Added: 2024-06-11T07:48:12.523271
License: Public Domain

IN THE SUPREME COURT OF IOWA
                               No. 09–1097

                          Filed December 16, 2011

ROBERT OBERBILLIG and PATRICIA OBERBILLIG
and FRANK SCAGLIONE and MELBA SCAGLIONE,

      Appellees,

vs.

WEST GRAND TOWERS CONDOMINIUM ASSOCIATION,

      Appellant.

      Appeal from the Iowa District Court for Polk County, Joel D.

Novak, Judge.

      Nonprofit condominium owners association appeals ruling denying

special assessment against plaintiffs for repairs to parking garage and

declining   to   apply   business   judgment   rule.     REVERSED   AND

REMANDED.

      Thomas G. Fisher, Jr. of Parrish Kruidenier Dunn Boles Gribble

Parrish Gentry & Fisher, L.L.P., Des Moines, for appellant.

      Robert C. Oberbillig, Des Moines, for appellees.
                                        2

WATERMAN, Justice.

      Several condominium owners brought this test case to enforce

their interpretation of the condominium association’s bylaw requiring the

preapproval    of   a   supermajority       of   owners   to   authorize   certain

expenditures exceeding $25,000. We review the resulting district court

ruling that voided a unanimous decision of the elected board of directors

of the nonprofit West Grand Towers Condominium Association.                   The

board approved necessary but nonemergency repairs to the Association’s

parking garage without a full vote by its members.             The board action

followed much study, a series of meetings over several years to which all

member condominium owners were invited, and a legal opinion that no

member vote was required. The repairs were completed at a cost of over

$200,000, eight times greater than the $25,000 threshold in the bylaw.

      The owners of eighty-three of the eighty-seven condominium units

voluntarily paid their respective shares of the assessment for the garage

repairs. Plaintiffs, Robert and Patricia Oberbillig and Frank and Melba

Scaglione, owners of the remaining four units and 4.8% of the common

area, withheld payment to preserve their right to challenge the

expenditure.    The plaintiffs sued for a judicial declaration that the

board’s violation of the bylaw’s preapproval requirement excused their

obligation to pay.      All member-owners, including the plaintiffs, have

continued to use the parking garage.             The Association counterclaimed

against plaintiffs to collect their share of the completed repairs and for

attorney fees. The case was submitted on stipulated facts for a nonjury

trial. The district court accepted plaintiffs’ interpretation of the bylaw,

rejected the Association’s defenses, declined to uphold the board’s

actions under the business judgment rule, and denied the counterclaim.

The Association appealed.
                                    3

      We hold the business judgment rule applies to the governance

decisions of the board of this nonprofit condominium owners association

when the board acts within its authority.     We conclude the bylaw at

issue is ambiguous and defer to the board’s authority under the

governing declaration to decide questions of interpretation or application

of the bylaws. Accordingly, we reverse the district court and remand for

entry of judgment for the Association and for further proceedings on its

counterclaim.

      I. Background Facts and Proceedings.

      This case concerns the West Grand Towers, an eleven-story

building with eighty-seven residential condominium units at 3663 Grand

Avenue in Des Moines.      Its common areas include a pool, attached

clubhouse, and a two-level heated parking garage. The defendant, West

Grand Towers Condominium Association, is a nonprofit corporation

organized under Iowa Code chapter 504 as a membership corporation for

the “maintenance, repair, replacement, administration, and operation” of

West Grand Towers.       West Grand Towers is a horizontal property

(condominium) regime formed under Iowa Code chapter 499B.             The

Oberbilligs own Unit 506 and an undivided 1.310% interest in the

common areas. Robert Oberbillig is an attorney who has lived in West

Grand Towers since 1981. Frank and Melba Scaglione own Units 906–

907 and Unit 108; they live in Units 906–907 and rent out Unit 108. The

Scagliones own an undivided 3.491% interest in the common areas.

      The governing documents for the Association are its “declaration”

and bylaws. The owners of the condominium units are voting members

of the Association and own undivided percentages of the common areas,

including the pool, clubhouse, and parking garage. The members elect a

six-person board of directors who must be unit owners or the spouse of a
                                            4

unit owner.       The directors have enumerated powers and duties that

include providing “for the maintenance, repair, and replacement of the

Common Elements and payments therefor . . . .” Common elements are

defined to include the parking garage.

       Article V of the Bylaws governs assessments and spells out the

board’s obligation to prepare annual budgets and determine assessments

for common-element expenditures.                 The crux of this case is the

interpretation of Section 6 entitled “Expenditures”:

       Except for the management agreement described in Article II,
       Section 8(c) hereof and expenditures and contracts
       specifically authorized by the Declaration and Bylaws, the
       board shall not approve any expenditure in excess of Twenty-
       five Thousand Dollars ($25,000), unless required for
       emergency repair, protection or operation of the Common
       Elements or Limited Common Element, nor enter any contract
       for more than five (5) years without the prior approval of two-
       thirds (2/3) of the total ownership of the Common Elements.

(Emphasis added.) Also at issue is the meaning and effect of paragraph

6(g) of the Declaration entitled “Board’s Determination Binding”:

       In the event of any dispute or disagreement between any
       Unit Owners relating to the Property, or any questions of
       interpretation or application of the provisions of the
       Declaration or Bylaws, such dispute or disagreement shall be
       submitted to the Board. The determination of such dispute or
       disagreement by the Board shall be binding on each and all
       such Unit Owners, subject to the right of Unit Owners to seek
       other remedies provided by law after such determination by
       the Board.

(Emphasis added.) 1
       Paragraph 13(a) of the Declaration requires unit owners to pay

their proportionate share of the common expenses. This requirement is

implemented by Article V, Section 7 of the Bylaws, which begins, “It shall

       1Article XI of the Bylaws provides, “In the event of any conflict between the terms
and provisions of these Bylaws and the Declaration, the provisions of the Declaration
shall control.”
                                     5

be the duty of every Unit Owner to pay his proportionate share of the

common expenses . . . .”     This bylaw further provides that unpaid

common expenses plus interest constitute a lien and that the board may

sue to foreclose the lien and recover reasonable attorney fees.

      The condition of the parking garage had been a concern of the

board since at least March 2003.         In July of that year, the board

requested an engineering study of the lower garage after large pieces of

cement were dislodged. Less than two months later, the board received a

report that cracks in the upper floor of the garage should be repaired to

stop leaks to the lower floor. Board discussions concerning how to repair

the garage continued for several years. Anticipating costly repairs, the

board commissioned a financial study on funding in 2006 by Financial

Advisors, Inc. The “Reserve Study” was shared with the membership in

the spring of 2007.

      In August 2007, consulting engineers, Shuck-Britson, provided a

“parking garage structural condition study.”          The study detailed

problems with “numerous cracks” as well as “areas of spalling and

delamination” and corrosion of the steel reinforcing the concrete.   The

report recommended a combination of removal of “the deteriorated,

unsound concrete and replacement with a dense concrete mix,” and

“repairs to the concrete beams, concrete joints, and concrete columns

[which] will consist of concrete patching and epoxy crack injection. The

deteriorated concrete will be chipped out and replaced with a dense

concrete mix.”    This study included a preliminary cost estimate of

$191,188.    The board received three bids for garage repairs ranging

between $150,000 and $200,000.

      Garage repairs were discussed by Association members and the

board at a meeting on November 26. Members expressed differing views
                                            6

of whether garage repairs exceeding $25,000 required a membership

vote.    Accordingly, before the December board meeting, the board

president sought a legal opinion from an attorney and former board

member who owned units in the building—Thomas G. Fisher, Sr. 2 Based

on Fisher’s legal opinion, the board concluded it need not ask for a vote

on the garage repair, “since the garage (by definition in the Declaration)

is a Common Element, and the protection and operation of the Common

Elements are exempt from the requirement of a vote by members of the

Association under Article V, Section 6, the Bylaws of the Board.”

Members were informed at the December 16 meeting that garage repairs

would begin in the spring and that the board “will be moving ahead with

bids and letting of contracts.”          The requirement for a vote was again

discussed at this meeting.            Mr. Oberbillig stated, “[W]hen the heat

exchanger failed and was replaced at a cost of $380,000, which was

clearly an emergency, a membership vote was taken.” Melba Scaglione

objected to a further assessment.

        The board provided an update to the members at a meeting on

February 25, 2008. The board reported it had received firm bids in the

range of $160,000 plus a fifteen percent contingency. The minutes of the

meeting stated in part:

              There was discussion about the need for resident vote
        on the garage expenditure. Duane Jones [board president]
        indicated that the bylaws indicate, and it was a unanimous
        view of the board, that no vote is needed on this because it is
        maintenance of common areas.              Stahl moved and
        Grundleger seconded and it was unanimously approved that
        we proceed with letting of the contracts for this project. . . .

       2Mr. Fisher, a legal aid volunteer and retired corporate attorney, is the father of

the attorney who represents the Association in this litigation. The parties raised no
claim of conflict and stipulate that the father is not otherwise “connected in any way”
with the law firm for the Association.
                                     7
      Barbara Grundleger then moved for a special assessment to
      fund the garage and this was passed unanimously.

      The garage repairs began that spring and were completed that
summer.    The assessment levied for the garage repairs was $200,000.

All members of the Association fully paid their proportionate share for

the garage costs, except plaintiffs.     The parties stipulated that the

amount assessed for the Oberbilligs is $2620 plus interest; the amount

assessed for the Scagliones is $6982 plus interest.        At oral argument

Oberbillig noted he had paid every other assessment, but did not pay this

one out of     a concern that doing so would waive plaintiffs’ right to

challenge the expenditure and would result in precedent for bypassing a

membership vote.

      On November 24, 2008, the board voted unanimously to spend

over $25,000 for elevator repairs, with $50,000 to be paid from reserves

and the remainder to be by special assessment, without submitting the

matter to a membership vote.     The elevator is defined as a common

element, and the repairs were not an emergency.

      A   membership    vote   was   taken    previously   to   approve   the

Association’s purchase of Unit G3 to be used as a fitness room and guest

quarters at a cost exceeding $70,000.        This was a voice vote of the

members attending the meeting; no one present voted against the

expenditure.   Since June of 1981, five other expenditures with special

assessments exceeding $25,000 were put to a vote of members attending

the meeting when the board took the action. Two involved replacement

of failed heat exchangers at $80,000 each; a third was for the emergency

replacement of a heating system noted by Oberbillig at the December

2007 board meeting; the fourth was an earlier repair to the garage roof

for approximately $80,000; and the fifth was for enclosure of balconies
                                        8

on the northwest corner of the building to address heating problems at a

cost of approximately $48,000. 3

       The Oberbilligs filed a petition for declaratory judgment on June 5,

2008, while the garage repairs at issue were underway. An amendment

to the petition filed June 30 added Frank and Melba Scaglione as

plaintiffs.   The Association filed its answer, affirmative defenses, and

counterclaim on July 15, seeking judgment against plaintiffs for their

proportionate share of the garage repairs and for reimbursement of the

Association’s attorney fees.     The matter was submitted to the district

court on stipulated facts on April 27, 2009.          Plaintiffs contended the

special assessment against them was void because of the board’s failure

to obtain preapproval of the garage repair from two-thirds of the

membership, as required by Article V, Section 6 of the Bylaws. Plaintiffs

relied on the bylaw language and the Association’s five previous decisions

to submit expenditures exceeding $25,000 to a membership vote. The

Association contended the garage repair was repair to a “Common

Element” that did not require a membership vote.               The Association

argued the record evidence established the board “acted in good faith,

the decision was reasonably prudent and the board believed the decision

to be in the corporate interest” such that the business judgment rule

required judgment to be entered against plaintiffs.            The Association

further argued the doctrine of laches barred relief for plaintiffs because

they waited too long to sue.

       The district court filed its ruling on June 23, 2009. The district

court made the following findings relevant to the business judgment rule:

       3TheDeclaration defines “Common Elements” to include the “exterior walls of
each apartment and of the buildings.”
                                     9
            There is no doubt that the Board was open and honest
      with its members in addressing the necessity of repairs to
      the garage. There were several meetings where the repairs
      and the costs regarding same were discussed where
      members were allowed to voice their opinions. There was
      nothing clandestine in the way the Board handled bringing
      this matter to the membership.
             While the court agrees with the Association’s analysis
      of the record that shows the directors acted in good faith, the
      decision was reasonably prudent and that the Board believed
      the decision to be in the corporate interest the court doesn’t
      agree that the Business Judgment Rule allows the Board to
      ignore restrictions and limitations in the Bylaws even though
      the board sought legal advice in the interpretation of the
      Bylaws, thought their interpretation was reasonable, acted
      prudently and in the corporate interests. To hold otherwise
      would allow a board to disregard the limitations placed upon
      it by the Bylaw language.

The court, without relying on extrinsic evidence, went on to reject the

Association’s interpretation of the bylaw, stating as follows:

            The court does not believe that the provision is
      ambiguous. The court believes that the “emergency” in the
      relevant provision modifies not only the word repair but also
      the words protection and operation. Therefore the only time
      the Board does [not] need to seek the prior approval of the
      ownership is if there is an emergency that brings about the
      need for repair, protection or operation of the Common
      Elements. The parties have stipulated that there was no
      emergency.     Therefore the court concludes that prior
      approval was needed.
            Assuming arguendo that the provision is ambiguous
      the court’s conclusion would be the same. As Plaintiff points
      out any other construction could make the language “shall
      not approve any expenditure in excess of Twenty-five
      Thousand Dollars ($25,000.00)” useless and unnecessary
      because in general there are no expenditures other than
      normal repairs to the Common Elements. It would be
      unreasonable to interpret the Bylaw provision so as to give
      no affect [sic] to the Twenty-five Thousand Dollar
      ($25,000.00) limitation.

      The court made further findings rejecting the Association’s “laches”

defense and ruled “the special assessment as applied to the plaintiffs is

void and of no effect.” The district court dismissed the Association’s

counterclaim. The Association appealed.
                                     10

      II. Scope of Review.

      This declaratory judgment action was tried at law, and both sides

agree our review is for correction of errors at law.            “A declaratory

judgment action tried at law limits our review to correction of errors at

law.” Am. Family Mut. Ins. Co. v. Petersen, 679 N.W.2d 571, 575 (Iowa

2004).   “We are bound by well-supported findings of fact, but are not

bound by the legal conclusions of the district court.”          Id. The district

court decided the meaning of the bylaw at issue without resort to

extrinsic evidence.    Accordingly, the construction and interpretation of

the bylaw and declaration of this condominium owners association is a

matter of law for the court, and we are not bound by the interpretation

and ruling of the district court. Peak v. Adams, 799 N.W.2d 535, 543

(Iowa 2011) (“ ‘Interpretation is reviewed as a legal issue unless it

depended at the trial level on extrinsic evidence. Construction is always

reviewed as a law issue.’ ” (quoting Fashion Fabrics of Iowa, Inc. v. Retail

Investors Corp., 266 N.W.2d 22, 25 (Iowa 1978))); Phillips v. Nat’l

Trappers Ass’n, 407 N.W.2d 609, 611 (Iowa Ct. App. 1987) (“Corporate

articles and bylaws are construed according to the general rules

governing contracts.”); Schaefer v. Eastman Cmty. Ass’n, 836 A.2d 752,

755   (N.H.   2003)    (interpretation    of   articles   and   declaration   of

homeowner’s association is question of law).

      III. Analysis.

      The Association argues the district court erred by failing to apply

the business judgment rule and by misinterpreting the bylaw governing

expenditures.    We first address whether the district court correctly

determined Article V, Section 6 of the Bylaws unambiguously required a

membership vote. If this bylaw is ambiguous, we must decide whether to

give effect to the board’s interpretation pursuant to its interpretative
                                     11

authority in paragraph 6(g) of the Declaration.         In answering that

question, we consider whether the district court erred in declining to

apply the business judgment rule. We begin with a review of the

applicable law.

      A. Applicable Law.      Our court has not previously adjudicated

disputes over the meaning of the bylaws of a condominium owners

association.   The Association is a nonprofit corporation formed under

Iowa Code chapter 504.      In general, the articles of incorporation and

bylaws   “create   a   contractual   relationship   between   the   parties.”

Bradshaw v. Wakonda Club, 476 N.W.2d 743, 745 (Iowa Ct. App. 1991)

(citing Swanson v. Shockley, 364 N.W.2d 252, 255 (Iowa 1985); see also

Berger v. Amana Soc’y, 250 Iowa 1060, 1066, 95 N.W.2d 909, 912

(1959)). Accordingly, we apply the general rules for contracts to construe

a corporation’s governing documents. Phillips, 407 N.W.2d at 611.

      The Association’s governing documents are its declaration and

bylaws, which are to be construed as a whole. Id.; Carney v. Donley, 633
N.E.2d 1015, 1020 (Ill. App. Ct. 1994) (declaration and bylaws of

condominium association to be construed as a whole); see also 1 Gary A.

Poliakoff, Law of Condominium Operations § 1:24 (2011), available at

http://www.westlaw.com (“A declaration of condominium and the

condominium by-laws will be interpreted together, at least where the

declaration and the by-laws were executed as part of the same

transaction and cross-reference one another, and the by-laws are

incorporated as an exhibit to the declaration.”). Here, the Association’s

declaration and bylaws were executed simultaneously and cross-

reference each other. The bylaws specifically provide that the provisions

of the declaration control in the event of any conflict. This is consistent

with the view “that the declaration is the association’s ‘constitution.’ ”
                                     12

Schaefer, 836 A.2d at 755.         The Schaefer court, relying on the

Restatement (Third) of Property, noted the Association’s “power should be

interpreted broadly.” Id. at 756 (citing Restatement (Third) of Property

§ 6.16 cmt. b, at 289 (2000)). The Schaefer court elaborated:

      Thus, the declaration should not be so narrowly construed
      so as to eviscerate the association’s intended role as the
      governing body of the community. Rather, a broad view of
      the powers delegated to the association “is justified by the
      important role these communities play in maintaining
      property values and providing municipal-like services. . . . If
      unable to act, the common property may fall into
      disrepair . . . .”

Id. (quoting Restatement (Third) of Property § 6.4 cmt. a, at 90). These

principles guide our analysis of the Association’s declaration and bylaws

in this case.

      B. The Meaning of the Bylaw on Expenditures.              The parties

disagree over the meaning of the language we italicize in Article V,

Section 6 of the Bylaws entitled “Expenditures”:

      Except for the management agreement described in Article II,
      Section 8(c) hereof and expenditures and contracts
      specifically authorized by the Declaration and Bylaws, the
      board shall not approve any expenditure in excess of Twenty-
      five Thousand Dollars ($25,000), unless required for
      emergency repair, protection or operation of the Common
      Elements or Limited Common Element, nor enter any contract
      for more than five (5) years without the prior approval of two-
      thirds (2/3) of the total ownership of the Common Elements.

(Emphasis       added.)   Specifically,   the   parties   disagree   whether

“emergency” modifies only the word “repair” (the Association’s position)

or, whether it modifies the entire phrase “repair, protection or operation

of the Common Elements” as plaintiffs contend.            The district court

concluded “emergency” unambiguously modifies “repair, protection or

operation of the Common Elements” such that a nonemergency
                                       13

expenditure for protection of the parking garage required prior approval

of two-thirds of the membership.

      Although we agree the plaintiffs’ interpretation is a reasonable one,

we disagree that this bylaw is unambiguous. “The test for ambiguity is

an   objective   one:    Is   the     language   fairly   susceptible   to   two

interpretations?” Nationwide Agri-Bus. Ins. Co. v. Goodwin, 782 N.W.2d
465, 470 (Iowa 2010) (internal quotation marks omitted). We conclude

another reasonable interpretation of the bylaw is the one urged by the

Association—that emergency modifies only repair and that nonemergency

expenditures for the “protection or operation of the Common Elements”

are not subject to the two-thirds voting requirement.

      The district court relied on a false premise in rejecting the

Association’s interpretation.       Specifically, the district court accepted

plaintiffs’ argument that, under the Association’s interpretation, the

$25,000 threshold for a supermajority vote would be eviscerated

“because in general there are no expenditures other than normal repairs

to the Common Elements.” This is untrue. The district court overlooked

the prior fitness room expenditure noted in the stipulation paragraph

21(d) (“The board recommended and the owners approved the purchase

of Unit G3 to be used as a physical fitness room and guest quarters at a

cost of more than $70,000.”). Buying a unit to add a fitness room is not

a “repair” to the common elements. This example alone illustrates that

the $25,000 threshold for a required membership vote is not a nullity

under the Association’s interpretation. We do not believe the exceptions

in the bylaw swallow the rule.

      The Association also correctly observes that its interpretation is

supported by the “doctrine of the last preceding antecedent.” We have

utilized that doctrine to interpret contracts. Cairns v. Grinnell Mut. Reins.
                                     14

Co., 398 N.W.2d 821, 824 (Iowa 1987) (“[W]e have consistently reasoned

that   qualifying   words   and   phrases   ordinarily   refer   only   to   the

immediately preceding antecedent.”). As the Association observes:

       In section 6, the referential term “repair” immediately follows
       “emergency” thus each refers to the other. The words
       “protection” and “operation” are separated from “emergency
       repair” by a comma, but are not separated from each other
       by a comma and thus are separate from that phrase.

Indeed, in State v. Lohr, we observed, “Normally, however, referential,

relative, or qualifying words and phrases refer only to the immediately

preceding antecedent.” 266 N.W.2d 1, 3 (Iowa 1978). “The rule is now

thought to extend generally to the placement of all modifiers next to the

term to be modified.” Shelby Cnty. State Bank v. Van Diest Supply Co.,

303 F.3d 832, 836 (7th Cir. 2002) (citing Bryan A. Garner, Guidelines for

Drafting and Editing Court Rules, 169 F.R.D. 176, 195 (1997) (“To avoid

ambiguity, place a modifier next to the word or phrase it modifies.”))

(applying Iowa law).
       The Association notes the board may be required to make

“emergency” repairs within a condominium unit whose owner is

travelling or unavailable.     Thus, “emergency” need not be read as
applying exclusively to “Common Element” repairs. Yet, the Association

asserts the district court effectively rewrote the operative language of the

bylaw to read:       “unless required for emergency repair, emergency

protection or emergency operation of the Common Elements . . . .” We

should not rewrite bylaws in the guise of interpretation.

       Under the plaintiffs’ interpretation, a minority of owners could

block necessary, but nonemergency, expenditures favored by sixty-five

percent of the owners to maintain the existing common areas and

thereby undermine the board’s ability to prevent common areas from
                                    15

falling into disrepair. See Schaefer, 836 A.2d at 756 (favoring a broad

view of powers for association because, if the board is “unable to act, the

common property may fall into disrepair” (quoting Restatement (Third) of

Property § 6.4 cmt. a, at 90)).

      Plaintiffs contend that past voting practices on major expenditures

support their position that the garage repairs required a membership

vote. The district court did not rely on the evidence of other votes, but,

rather, confined its analysis to the four corners of the bylaws. We can

look to the conduct of the parties as placing a practical construction on

the meaning of a term.     Van Diest Supply Co., 303 F.3d at 837 (citing

Ackerman v. Lauver, 242 N.W.2d 342, 347 (Iowa 1976)).          The record

evidence of prior membership votes in this case does not compel

acceptance of the plaintiffs’ interpretation. The record supports a finding

that at least five earlier expenditures for common elements were put to

an informal membership vote:      three involved repair or replacement of

heat exchangers, the fourth was a repair to the garage roof, and the fifth

was to enclose balconies.     Of course, the fact the board allowed prior

membership votes on those matters does not mean it was required to do

so.   Significantly, these were not formal votes by all members as

contemplated in the bylaw, but rather simply a voice vote by those

attending the meeting when the board took the action—akin to a

plebiscite. Indeed, Oberbillig acknowledged “it clearly was an emergency”

when the heat exchanger failed and was replaced at a cost of $380,000.

That matter was put to the informal vote even though emergency

expenditures are exempt from the two-thirds member preapproval

requirement under each side’s interpretation of the bylaw.

      In any event, other record evidence supports the Association’s

interpretation. For example, no membership vote was taken when the
                                    16

board in November 2008 approved nonemergency expenditures for the

elevator exceeding the $25,000 threshold.         Strong evidence of the

practical construction placed on the bylaw by the West Grand Towers

unit owners is the fact that the owners of eighty-three out of eighty-seven

units voluntarily paid the assessment at issue for the nonemergency

garage repairs without a membership vote. In effect, the members voted

with their pocketbooks.    Owners of ninety-five percent of the common

elements effectively approved the board’s action by paying the special

assessment. That is well above the two-thirds approval required under

plaintiffs’ interpretation of the bylaw.   We view payment by ninety-five

percent of the owners as supporting the Association’s interpretation.

      Moreover, their payment of the assessment may be regarded as a

ratification. See Lanza v. Bd. of Dirs. of Providence Point Umbrella Ass’n,

No. 44947–8–I, 2000 WL 264019, *2 (Wash. Ct. App. Mar. 6, 2000)

(subsequent ratification by seven condominium owner associations cured

any procedural error when Umbrella Board proceeded with repairs to

common area swimming pool); see also 7A William Meade Fletcher,

Fletcher Cyclopedia of the Law of Corporations § 3401, at 5 (Cumulative

Supp. 2011–2012) (“While the shareholders cannot by ratification render

valid an act that is beyond the powers of the corporation, they may ratify

an act that is within its powers but beyond the powers of the directors.”).

      In an appropriate case, we will construe ambiguous language

against the drafter. Peak, 799 N.W.2d at 548. This is not such a case.

The bylaws and declaration were drafted by the developers, not the

Association, which acts on behalf of its members, the condominium

owners.    Moreover, as we explain below, paragraph 6(g) of the

Declaration grants the Association board interpretive authority over the

bylaws, which trumps the doctrine of contra proferentem. See Kimber v.
                                   17

Thiokol Corp., 196 F.3d 1092, 1100 (10th Cir. 1999) (doctrine of contra

proferentem inapplicable when contract vests party with interpretive

authority).

      We conclude it is ambiguous whether “emergency” modifies solely

the term next to it—“repair”—or the entire phrase “repair, protection or

operation of the Common Elements . . . .” See Cairns, 398 N.W.2d at 824

(“Ambiguity exists if, ‘after the application of pertinent rules of

interpretation to the face of the instrument, a genuine uncertainty

results as to which one of two or more meanings is the proper one.’ ”

(quoting Fraternal Order of Eagles v. Ill. Cas. Co., 364 N.W.2d 218, 221

(Iowa 1985))).    To resolve which meaning controls, we must read the

bylaws and declaration as a whole and, in so doing, address the board’s

authority to decide disputes over the interpretation and application of a

bylaw.      See Phillips, 407 N.W.2d at 611 (articles and bylaws to be

construed as a whole).

      C. The Board’s Interpretive Authority.          We now consider

whether to defer to the board’s interpretive authority under paragraph

6(g) of the Declaration, entitled “Board’s Determination Binding,” which

provides:

      In the event of any dispute or disagreement between any
      Unit Owners relating to the Property, or any questions of
      interpretation or application of the provisions of the
      Declaration or Bylaws, such dispute or disagreement shall be
      submitted to the Board. The determination of such dispute or
      disagreement by the Board shall be binding on each and all
      such Unit Owners, subject to the right of Unit Owners to seek
      other remedies provided by law after such determination by
      the Board.

(Emphasis added.) This constitutes an express grant of authority to the

board to interpret bylaws and decide disputes over the interpretation and

application of bylaws.
                                     18

      We have relied on grants of interpretive authority to administrative

agencies to defer to the agency’s interpretation of a statute or regulation.

See generally Sherwin-Williams Co. v. Iowa Dep’t of Rev., 789 N.W.2d
417, 423 (Iowa 2010) (clarifying and refining analysis for “deciding when

an agency has been granted interpretative authority with respect to a

statute”).    Other courts have relied on an association or country club

board’s equivalent authority to interpret bylaws in resolving disputes

with members.       See, e.g., Susi v. St. Andrews Country Club, Inc., 727
So. 2d 1058, 1061 (Fla. Dist. Ct. App. 1999) (upholding board’s

reasonable interpretation; noting “the By-laws do give the Board of

St. Andrews the right to interpret the By-Laws and all parts thereof”);

Boca W. Club, Inc. v. Levine, 578 So. 2d 14, 16 (Fla. Dist. Ct. App. 1991)

(“Since the bylaws provide that the Board has the final interpretive

authority regarding doubtful or conflicting portions of the bylaws, and

their interpretation is neither arbitrary [n]or unreasonable, we will not

interfere with its authority to construe them.”); Finn v. Beverly Country

Club, 683 N.E.2d 1191, 1193–94 (Ill. App. Ct. 1997) (upholding board

decision based on “the separate bylaw giving the Board the power to

interpret the bylaws”).     But see Riverwatch Condo. Owners Ass’n v.

Restoration Dev. Corp., 980 A.2d 674, 683 n.19 (Pa. Commw. Ct. 2009)

(board’s interpretive authority in declaration not binding on court). In

Ticor Title Insurance Co. v. Rancho Santa Fe Ass’n, the court held the

board’s interpretive authority did not allow it to ignore express language

in covenant. 223 Cal. Rptr. 175, 179–80 (Ct. App. 1986).

      We agree a grant of interpretive authority in an association’s

governing documents does not permit its board to violate unambiguous

bylaws.      We hold that paragraph 6(g) gives the Association board the

power to interpret and apply ambiguous bylaws.          The district court
                                           19

erroneously concluded the bylaw unambiguously required a membership

vote and therefore did not address the board’s interpretive authority.

Because we conclude Article V, Section 6 of the bylaws is ambiguous and

the   board’s     interpretation     is   reasonable,    we    will     defer   to   that

interpretation if doing so is consistent with the business judgment rule.

      D. The Business Judgment Rule.                    Finally, we consider the

application of the business judgment rule. The “heart of the business

judgment rule” is “judicial deference to business decisions by corporate

directors.” Matthew G. Doré, 6 Iowa Practice: Business Organizations

§ 28:6, at 94 (2011 ed.).        The business judgment rule applies “[w]hen

directors act in good faith in making a business decision, when the

decision is reasonably prudent, and when the directors believe it to be in

the corporate interest . . . .” Hanrahan v. Kruidenier, 473 N.W.2d 184,

186 (Iowa 1991).        The rule would not permit directors to violate an

unambiguous bylaw; rather, the rule (if applicable) would provide judicial

deference to board action authorized by the Association’s governing

documents.

      The district court declined the Association’s invitation to apply the

rule. We have not previously held whether the rule applies to the actions

of the board of a nonprofit condominium owners association.                          “The

business judgment rule, universally applied as a part of corporate law,

has long been codified in Iowa.” Hanrahan, 473 N.W.2d at 186 (citing

Iowa Code § 490.830 (1991)). Hanrahan applied the rule codified in the

Iowa Business Corporation Act, Iowa Code chapter 490. The Association

is a nonprofit corporation formed under chapter 504, the Revised Iowa

Nonprofit Corporation Act. Section 504.831 contains language identical

to section 490.830 codifying the business judgment rule. 4 Compare Iowa

      4Iowa   Code section 504.831 (2007) provides in pertinent part:
                                          20

Code § 490.830 (2007), with id. § 504.831.                   Accordingly, the legal

predicate exists for applying the business judgment rule to the nonprofit

Association board’s actions in this case.

      Other courts have applied the business judgment rule or its

equivalent to uphold the actions of condominium or homeowners

association boards. See, e.g., Lamden v. La Jolla Shores Clubdominium

_________________________
              1. Each member of the board of directors of a corporation, when
      discharging the duties of a director, shall act in conformity with all of the
      following:
             a. In good faith.
              b. In a manner the director reasonably believes to be in the best
      interests of the corporation.
              2. The members of the board of directors or a committee of the
      board, when becoming informed in connection with their decision-
      making functions or when devoting attention to their oversight functions,
      shall discharge their duties with the care that a person in a like position
      would reasonably believe appropriate under similar circumstances.
             3. In discharging board or committee duties, a director who does
      not have knowledge that makes reliance unwarranted is entitled to rely
      on the performance by any of the persons specified in subsection 5,
      paragraph “a”, to whom the board may have delegated, formally or
      informally by course of conduct, the authority or duty to perform one or
      more of the board’s functions that are delegable under applicable law.
             4. In discharging board or committee duties, a director who does
      not have knowledge that makes reliance unwarranted is entitled to rely
      on information, opinions, reports, or statements, including financial
      statements and other financial data, if prepared or presented by any of
      the persons specified in subsection 5.
              5. A director is entitled to rely, in accordance with subsection 3
      or 4, on any of the following:
              a. One or more officers or employees of the corporation whom the
      director reasonably believes to be reliable and competent in the functions
      performed or the information, opinions, reports, or statements provided
      by the officer or employee.
              b. Legal counsel, public accountants, or other persons as to
      matters involving skills or expertise the director reasonably believes are
      either of the following:
            (1) Matters within the particular person’s professional or expert
      competence.
             (2) Matters as to which the particular person merits confidence.
                                    21

Homeowners Ass’n, 980 P.2d 940, 950 (Cal. 1999) (holding “courts

should defer to the board’s authority and presumed expertise” when it

discharges its duty to repair a common area after a “reasonable

investigation, in good faith and with regard for the best interests of the

community association and its members”); Colorado Homes, Ltd. v.

Loerch–Wilson, 43 P.3d 718, 724 (Colo. App. 2001) (“We perceive no

reason why [the business judgment rule] should not apply in this case

insofar as the issue for resolution is whether the [homeowners

association] fulfilled its obligation to enforce the covenants.”); Weldy v.

Northbrook Condo. Ass’n, 904 A.2d 188, 192 (Conn. 2006) (noting the

court reviews “whether the [action] reflects reasoned or arbitrary and

capricious decision making”); Papalexiou v. Tower W. Condo., 401 A.2d
280, 286 (N.J. Super. Ct. 1979) (“If the [condominium] directors’ conduct

is authorized, a showing must be made of fraud, self-dealing or

unconscionable conduct to justify judicial review.”); Levandusky v. One

Fifth Ave. Apartment Corp., 553 N.E.2d 1317, 1322 (N.Y. 1990) (“So long

as the board acts for the purposes of the cooperative, within the scope of

its authority and in good faith, courts will not substitute their judgment

for the board’s.”); Agassiz W. Condo. Ass’n v. Solum, 527 N.W.2d 244,

248 (N.D. 1995) (“We hold the business-judgment rule applies to a

board’s   actions   regarding   repairs   to   the   common   areas   of   a

condominium.”);     Schwarzmann v. Ass’n of          Apartment Owners of

Bridgehaven, 655 P.2d 1177, 1181 (Wash. Ct. App. 1982) (“Absent a

showing of fraud, dishonesty, or incompetence, it is not the court’s job to

second-guess the actions of [condominium] directors.”).       We hold the

business judgment rule as codified in section 504.831 applies to the

actions of directors of nonprofit corporations organized under chapter

504.
                                    22

      The business judgment rule is usually applied as a defense to

claims a director is personally liable for corporate actions.          See

Hanrahan, 473 N.W.2d at 186. However, without invoking the business

judgment rule by name, we refused to enjoin efforts to amend the articles

of incorporation of an insurance company over the objection of some of

its members. Wolf v. Lutheran Mut. Life Ins. Co., 236 Iowa 334, 341–42,

18 N.W.2d 804, 809 (1945) (“[C]ourts [will not] interfere in the internal

management or policy of a corporation except in cases of fraud, bad

faith, breach of trust, gross mismanagement or ultra vires acts . . . .”).

Our court of appeals, citing Wolf, applied the rule by name to affirm an

order rejecting a challenge to bylaw amendments.        Cent. Iowa Power

Coop. v. Consumers Energy, No. 06–1060, 2007 WL 2710841, *3 (Iowa

Ct. App. Sept. 19, 2007) (“We believe the decision here to amend and

tighten the qualifications for membership to the board of directors fits

squarely within the protections afforded by the business judgment

rule.”). Similarly, we conclude the rule applies to the board’s exercise of

its interpretive authority over the bylaw in this case to proceed with the

garage repairs without a membership vote.

      We have noted “[t]he purpose of the [business judgment] rule is to

severely limit secondguessing of business decisions which have been

made by those whom the corporation has chosen to make them.”

Hanrahan, 473 N.W.2d at 186. We will not substitute our judgment for

the interpretation of the Association board if the factual predicates for

the rule are present.   In this case, there is no claim that any of the

Association board members were self-dealing or had a conflict of interest.

The rule applies when the directors act in good faith and in a manner

they reasonably believe to be in the best interest of the corporation. Iowa

Code section 504.831(1); see also Hanrahan, 473 N.W.2d at 186. The
                                    23

directors are entitled to rely on the advice of legal counsel on matters

within their professional competence. Iowa Code § 504.831(5)(b). They

did so here, relying on the legal opinion of Attorney Thomas G. Fisher,

Sr. that no membership vote was required for the garage repair and

assessment.

      The board thoroughly investigated the need for repairs to the

garage and the proposed special assessments, commissioning studies by

engineers and financial experts.     The board’s deliberations spanned

several years and numerous board meetings to which members were

invited.    The board secured multiple estimates and firm bids before

contracting for the repairs. Plaintiffs do not challenge the necessity for

the repairs or the reasonableness of the ultimate cost.     The challenge

concerns only the lack of a vote of preapproval by two-thirds of the

membership.     We conclude substantial evidence supports the factual

predicates for the business judgment rule reflected in the district court’s

findings:

            There is no doubt that the Board was open and honest
      with its members in addressing the necessity of repairs to
      the garage. There were several meetings where the repairs
      and the costs regarding same were discussed where
      members were allowed to voice their opinions. There was
      nothing clandestine in the way the Board handled bringing
      this matter to the membership.
             While the court agrees with the Association’s analysis
      of the record that shows the directors acted in good faith, the
      decision was reasonably prudent and that the Board believed
      the decision to be in the corporate interest . . . .

      The district court stopped short of applying the business judgment

rule because it concluded the rule does not permit the board to disregard

a bylaw the court found unambiguously required the membership vote.

As explained above, we believe the bylaw is ambiguous, and the board
                                      24

properly exercised its authority to interpret the bylaw.       We apply the

business judgment rule to defer the board’s interpretation. Accordingly,

we hold the board was entitled to proceed with the garage repairs and

special assessment without the preapproval of two-thirds of the

membership. We therefore do not need to reach the issue of laches.

        IV. Disposition.

        For these reasons, we reverse the ruling of the district court and

remand for entry of judgment in favor of the Association dismissing

plaintiffs’ declaratory judgment action and entering judgment against

plaintiffs on the counterclaim for their respective shares of the special

assessment including interest.      The district court shall determine the

reasonable attorneys fees incurred by the Association (including

appellate fees) in this litigation and enter judgment in its favor and

against plaintiffs, jointly and severally, for those fees and costs.

        REVERSED AND REMANDED.

        All justices concur except Wiggins and Mansfield, JJ., who take no

part.