Court Opinion

ID: 4212489
Source: CourtListenerOpinion
Date Created: 2017-10-18 15:02:57.512588+00
Date Added: 2024-06-11T14:40:41.905524
License: Public Domain

Cite as 2017 Ark. App. 539

                 ARKANSAS COURT OF APPEALS
                                       DIVISION II
                                     No.  CV-15-731

GENE GARNER AND LINDA      Opinion Delivered: October 18, 2017
NARUG
                APPELLANTS APPEAL FROM THE GARLAND
                           COUNTY CIRCUIT COURT
V.                         [NO. 26CV-14-746]

BOARD OF DIRECTORS, HOT       HONORABLE LYNN WILLIAMS,
SPRINGS VILLAGE PROPERTY      JUDGE
OWNERS ASSOCIATION, AND
HOT SPRINGS VILLAGE
PROPERTY OWNERS
ASSOCIATION
                    APPELLEES
                              AFFIRMED

                                MIKE MURPHY, Judge

       This is an appeal arising out of a declaratory-judgment action. Appellants Gene

Garner and Lynda Narug sued appellees Hot Springs Village Property Owners’ Association

(HSVPOA) and its board of directors regarding measures taken by those entities that affected

appellants as residents and members of the property owners’ association. Following a bench

trial, the circuit court dismissed appellants’ complaint with prejudice. Appellants raise four

arguments in support of reversal—namely, whether the circuit court erred in finding that

(1) the two-tier assessment system was reasonable, (2) the board had the authority to amend

the protective covenants and that the amendment allowing for the creation of overlay zones

was reasonable, (3) the board could vote its nonpaying inventory lots to establish a quorum,

and (4) moneys raised from the annual assessment could be used to fund the master plan and

other development. Finding no error, we affirm.
                               Cite as 2017 Ark. App. 539

                            I. Background and Issues on Appeal

      Hot Springs Village is a residential and commercial community located in Saline and

Garland Counties. It is the largest gated community in the United States. Appellants are

residents of Hot Springs Village and members in good standing of HSVPOA. HSVPOA

is a nonprofit corporation that serves as the administrator of Hot Springs Village. HSVPOA

owns the common property as well as many amenities and is governed by a board of

directors. HSVPOA and its board of directors were formed in 1970 in conjunction with

Cooper Communities, Inc., and are governed by a declaration, bylaws, and protective

covenants.

      There are 34,418 lots in Hot Springs Village. Of these lots, 8,476 are improved, and

25,083 are unimproved—lots are differentiated as improved and unimproved based on the

presence or absence of a water meter. There are an additional 2,354 inventory lots—these

lots are controlled by HSVPOA and are not subject to the payment of dues. Each member

of HSVPOA has voting rights and gets one vote per lot regardless of whether the lot is

improved. For many years, all lot owners paid assessments of $36.68 per lot.

      At the inception of Hot Springs Village in 1970, lot sales and profits were steady.

From 2003 to 2008, National Recreational Properties, Inc. (NRPI) accumulated many lots

and began to pay assessments on these lots and to resell them. After the recession, NRPI

stopped paying assessments on the lots it owned in 2008. NRPI abandoned its lots, and

other property owners abandoned and turned over their lots to HSVPOA as well. This

negatively affected the financial soundness of HSVPOA.

                                            2
                                 Cite as 2017 Ark. App. 539

      In 2013, HSVPOA experienced a $3.2 million budget shortfall, and the HSVPOA

board president appointed a group known as the Future Financial Task Force (FFTF) to

research potential revenue options to maintain HSVPOA’s financial viability.           From

October 2013 to July 2014, the FFTF evaluated new funding options and ultimately

recommended the adoption of a two-tier assessment. The two-tier assessment would

require owners of improved lots to pay $65 a month to HSVPOA while owners of

unimproved lots would continue to pay $36.68 a month.

      The board considered the FFTF’s recommendation and eventually decided to send

this initiative to a vote of the members of HSVPOA. The vote was to take place in

November 2014.

      Before the vote, appellants and Cathy Rudder 1 filed a lawsuit against appellees in the

Garland County Circuit Court seeking an injunction against the November 2014 election

and declaratory relief that the proposed two-tier assessment was unreasonable. Appellants

and Rudder also moved for a preliminary injunction.

      The November 2014 vote occurred, but a quorum was not established, and the vote

was of no effect. Thereafter, the board voted to resubmit the issue to HSVPOA members

for a vote in February 2015.

      Following the November 2014 vote, appellants amended their complaint multiple

times, including to drop Rudder as a plaintiff and to account for the November 2014 and

upcoming February 2015 votes. The circuit court also held a hearing on the motion for

      1
          Appellants’ complaint was later amended to remove Rudder as a plaintiff.
                                              3
                                Cite as 2017 Ark. App. 539

preliminary injunction in January 2015.       The circuit court denied the request for a

preliminary injunction, and appellants did not appeal from the denial.

       In the February 2015 election, a full quorum was achieved, and the voters approved

the two-tier assessment.

       Subsequently, appellants amended their complaint a fourth and final time. In their

fourth amended complaint, they sought a declaration that certain amendments to the

protective covenants were void. Specifically, they challenged the board’s authority to amend

protective covenants to create overlay zones. In May 2014, the board had amended the

protective covenants to create overlay zones—areas where the zoning restrictions could be

modified. The board took this action to attempt to create development in Hot Springs

Village.

       The circuit court held a bench trial on the matter in June 2015. The primary focus

of the litigation was whether the establishment of the two-tier assessment system in which

owners of improved lots paid higher assessments than those with unimproved lots was

reasonable. In July 2015, the circuit court entered a thorough judgment with extensive

findings of fact and conclusions of law dismissing appellants’ complaint with prejudice.

       Appellants timely appealed, raising four arguments in support of reversal. First, they

argue that the circuit court erred in ruling that the two-tier assessment system was

reasonable. Next, appellants challenge the circuit court’s finding that the board had the

authority to amend the protective covenants and that the amendment allowing for the

creation of overlay zones was reasonable. Appellants also challenge the circuit court’s

finding that the board could vote its nonpaying inventory lots to establish a quorum. Finally,

                                              4
                                 Cite as 2017 Ark. App. 539

appellants contend that the circuit court erred in finding that moneys raised from the annual

assessment could be used to fund the master plan and other development.

                                 II. The Two-Tier Assessment

       Appellants contend that the circuit court erred when it found that appellees’

establishment of a two-tier assessment system in which owners of improved lots paid higher

assessments than owners of unimproved lots was reasonable. This issue was the primary

focus of the litigation.

       Property owners may seek judicial intervention for recourse against any arbitrary and

capricious acts by a board of directors. Kell v. Bella Vista Prop. Owners’ Ass’n, 258 Ark. 757,

763, 528 S.W.2d 651, 655 (1975). In Hutchens v. Bella Vista Property Owners’ Association, this

court adopted a reasonableness test to determine whether an action by a property owners’

association that negatively affects some of its members is permissible. 82 Ark. App. 28, 37,

110 S.W.3d 325, 330 (2003). Under the reasonableness test, a rule that is unreasonable,

arbitrary, or capricious is invalid.   Id. at 36, 110 S.W.3d at 330.        “In applying the

reasonableness test, the reviewing court must determine:

       (1) whether the decision or rule is arbitrary,

       (2) whether the decision or rule is applied in an even-handed or
           discriminatory manner, and

       (3) whether the decision or rule was made in good faith for the common
           welfare of the owners and occupants of the condominium.

Id.   Courts will especially consider whether the majority’s action has an unfair or

disproportionate impact on only certain unit owners. Id.

                                              5
                                   Cite as 2017 Ark. App. 539

       In evaluating whether the circuit court erred in finding that the two-tier assessment

was reasonable, our review is limited to whether the decision was clearly erroneous. Poff v.

Peedin, 2010 Ark. 136, 366 S.W.3d 347. In its judgment, the circuit court went into

extensive detail to make clear the findings it made on the evidence before it. The circuit

court found that the two-tier assessment was “a principled distinction arrived at after a

rational, deliberative process.”

       First, we consider the evidence regarding whether the implementation of a two-tier

assessment was arbitrary. Hutchens, 82 Ark. App. at 36, 110 S.W.3d at 330. Appellants

admit that the two-tier assessment scheme was marketed to appear reasonable, but they

claim that the marketing was merely a pretext. Appellants argue that board members knew

that owners of unimproved lots would not vote to increase their own assessments and saw

the two-tier assessment scheme as the only way to increase HSVPOA funds. Appellants

maintain that owners of unimproved lots have no incentive to stop increasing the

assessments for owners of improved lots.

       In contrast, appellees accentuate facts in evidence that they contend support the

conclusion that the two-tier assessment was not arbitrary. Specifically, they highlight

evidence regarding the significant decline in assessment revenue and the negative impact it

had on Hot Springs Village. Appellees also emphasize the lengths to which the board went

to investigate options to address the decline in revenue. The board appointed the FFTF to

study the situation. The board then evaluated the FFTF’s proposal, voted, and took

feedback and public comment before submitting the proposal to the property owners.

Under these facts, the decision to implement the two-tier assessment was not arbitrary.

                                               6
                                 Cite as 2017 Ark. App. 539

       Next, we consider “whether the decision or rule is applied in an even-handed or

discriminatory manner.” Id. Appellants argue that the implementation of a two-tier

assessment created a situation in which the majority controlled and required the minority to

pay assessments that nearly doubled while the majority’s assessments remained unchanged.

They contend that the creation of two tiers offers no incentive for the majority owners to

increase their own assessments. Appellants also emphasize evidence that they believe shows

that the increase was proposed only to address the community’s budget shortfall. They

argue that this evidence demonstrates the inequitable nature of the two-tier assessment

because testimony from former board president Frank Leeming indicated that the budget

shortfall originated out of the failure of owners of unimproved lots to pay their assessments.

       Additionally, appellants discuss that many owners of unimproved lots—3,477—live

within 100 miles of Hot Springs Village and have quick access to Hot Springs Village and

its amenities. Appellants also mention the testimony of current board president Harvey

Shelton that it was the board’s desire that both tiers pay the same assessment by 2020. They

argue that Shelton’s statement is an admission of the inherent unfairness of the two-tier

assessment.

       Appellees acknowledge that the two-tier assessment creates a distinction between

owners of improved lots and owners of unimproved lots. However, they contend that this

distinction is not, by definition, discriminatory. To be discriminatory, the distinction must

be unprincipled and irrational, and they assert that in this case, the creation of the two tiers

was fair and rational because the two-tier assessment reflects the more significant usage of

amenities by owners of improved lots. Evidence was introduced to demonstrate that owners

                                               7
                                Cite as 2017 Ark. App. 539

of improved lots used property-owner-association facilities, such as services and

infrastructure, more often than owners of unimproved lots. Accordingly, we conclude that

the evidence supported the finding that the two-tier assessment was even-handed and not

discriminatory.

       Finally, we evaluate “whether the decision or rule was made in good faith for the

common welfare of the owners and occupants of the condominium.” Id. Here, the circuit

court made a finding that the board “acted in good faith and in what it considered the best

interests of the POA and Hot Springs Village.” Appellants again highlight evidence that

board members thought the only way to overcome HSVPOA’s budget issues was to increase

assessments on owners of improved lots.

       In response, appellees emphasize testimony that supports the circuit court’s finding.

Specifically, they discuss the testimony regarding the research and measures that occurred

before the owners voted on the two-tier assessment as well as the perceived need for the

assessment. In addition, they point to the testimony of Leeming who opposed the two-

tier assessment but testified that “the board majority truly felt that the two-tier assessment

would go a long way towards resolving the POA’s financial needs.” We see no error in the

circuit court’s finding that the decision was made in good faith.

       In evaluating the evidence that was before the circuit court, we hold that the circuit

court did not clearly err when it found that the two-tier assessment was reasonable. The

circuit court’s thorough order includes detailed findings on the reasonableness of the two-

tier assessment. Evidence demonstrates the need for additional funds. Additionally, there

is evidence that the decision to implement a two-tier assessment was arrived at after

                                              8
                                Cite as 2017 Ark. App. 539

extensive study and that the decision was rationally based on the fact that owners of

improved lots used association amenities more often than owners of unimproved lots.

       Appellants raise an additional challenge to the reasonableness of the two-tier

assessment. Appellants contend that the two-tier assessment was unreasonable because

HSVPOA’s governing documents did not allow such an assessment.

       In particular, appellants argue that article X, § 3 of the declaration prohibited an

unequal assessment. This section provides that the board, by a two-thirds majority vote,

can increase the annual assessment, but no greater than the Consumer Price Index.

However, article X, § 5 of the declaration provides that a majority of a quorum of HSVPOA

members in good standing can vote to increase the amount of the annual assessment with

no limit on the amount. A plain reading of the declaration shows that article X, § 3 only

governs the board’s authority to increase annual assessments—it does not affect HSVPOA

membership’s authority to fix annual assessments through a vote of the membership.

        III. The Modification of Protective Covenants and the Creation of Overlay Zones

       In appellants’ next point on appeal, they argue that the circuit court erred by finding

that the board had the authority to modify protective covenants and create overlay zones.

       Appellants first argue that appellees did not have the authority to modify the

protective covenants. We disagree. Since Hot Springs Village’s inception in 1970, Cooper

Communities and its successors and assigns had the authority to amend, rescind, and add to

protective covenants. Article XIV, § 4 of the declaration gave Cooper Communities the

authority to assign its rights, and it assigned its developer rights to HSVPOA in April 2011.

                                              9
                               Cite as 2017 Ark. App. 539

Accordingly, the April 2011 agreement gave appellees the authority to amend, rescind, and

add to the protective covenants.

       Appellants next argue that the governing documents prevented the manner in which

appellees amended the protective covenants. Appellants contend that because the protective

covenants are incorporated into the declaration, the protective covenants can be amended

only in the manner described in the declaration.

       Article XIV, § 1 of the declaration provides that the passage of any amendment

requires a two-thirds vote of the owners in good standing. Appellants accurately represent

the language of article XIV, § 1 of the declaration. However, they fail to take into

consideration the language of the protective covenants. Paragraph 3 of the protective

covenants contemplates that the protective covenants may be amended by the board.

       The declaration and the protective covenants are distinct documents that should be

interpreted as such. The declaration provides the overarching structure of HSVPOA, and

the protective covenants govern daily life in the community. Paragraph 3 of the protective

covenants allows the board to amend the protective covenants, and that provision is

meaningless and in contravention of Arkansas law if article XIV, § 1 of the declaration

controls.

       Assuming arguendo that the protective covenants and the declaration are a unified

document, the board still had the authority to amend the protective covenants. “Specific

provisions of a contract control the general provisions.” Taylor v. Hinkle, 360 Ark. 121,

133, 200 S.W.3d 387, 395 (2004). The protective covenants provide a specific procedure

for their amendment. This procedure controls over the general provision of article XIV, §

                                            10
                                 Cite as 2017 Ark. App. 539

1 that requires a two-thirds vote of the owners in good standing for the passage of an

amendment.

       Finally, appellants argue that the creation of overlay zones was unreasonable because

Arkansas Code Annotated section 18-12-103 requires a 100 percent vote of the owners for

passage. We do not reach the merits of this argument because the circuit court did not

consider it or rule on it. Our court has held that it will not review a matter on which the

circuit court has not ruled, and a ruling should not be presumed. Reed v. Guard, 374 Ark.
1, 5, 285 S.W.3d 662, 665 (2008).

                      IV. The Use of Inventory Lots to Obtain a Quorum

       The question presented in appellants’ third point on appeal is whether the declaration

and bylaws allowed inventory lots—lots owned by HSVPOA and not subject to the

payment of dues—to be used to increase the number of votes in an election for the purpose

of obtaining a quorum. The circuit court’s judgment includes the following finding: “The

Bylaws, Article IV, § 1, state that votes from lots owned by the POA will be cast in the

same proportion as votes cast by all members in good standing in all elections under the

Declaration.” Appellants contend that this finding amounted to reversible error.

       We summarily dispose of this issue for two reasons. First, the circuit court’s finding

was a verbatim recitation of a stipulation entered into by the parties. The parties agreed that

the bylaws allowed inventory lots to be used to increase the number of votes in an election

for the purpose of obtaining a quorum, and it is a basic rule of appellate procedure that a

party cannot change arguments on appeal. Taylor v. Producers Rice Mill, Inc., 89 Ark. App.
327, 202 S.W.3d 565 (2005). Furthermore, the parties stipulated that “POA-owned lots

                                              11
                                 Cite as 2017 Ark. App. 539

were not used” in the February 2015 vote. Because inventory lots were not used to obtain

a quorum in this instance, the issue is not proper for our consideration. As a general rule,

appellate courts will not review issues that are moot. Warren Wholesale Co., Inc. v. McLane

Co., Inc., 374 Ark. 171, 174, 286 S.W.3d 709, 711 (2008). A case becomes moot when any

judgment rendered would have no practical legal effect upon a then existing legal

controversy. Id. To do so would be to render advisory opinions, which this court will not

do. Id.

                             V. The Use of the Assessment Funds

       In their final point on appeal, appellants challenge the circuit court’s finding that the

annual assessment funds will be used for permissible purposes. The circuit court’s judgment

provides that “the increased assessment revenue will also replenish the POA’s cash reserves”

and finds that all proposed uses “directly or indirectly promote the health, safety, and welfare

of lot owners.”

       According to the declaration, a special assessment is an assessment that is limited in

time and imposed specifically for the purpose of defraying, in whole or in part, the cost of

construction or reconstruction, unexpected repair or replacement of sewer systems, water

systems, ways of access for vehicles and roads and streets. By contrast, the declaration

provides that annual assessments are to be levied for the purpose of “promoting the

recreation, health, safety and welfare of the owners, . . . in particular, the construction,

improvement, and maintenance of the properties, service and facilities devoted to this

purpose and related to the use and enjoyment of the . . . properties.”

                                              12
                                     Cite as 2017 Ark. App. 539

       The circuit court heard evidence that the revenue generated by the two-tier

assessment would be used for municipal services like paving roads, maintaining buildings,

keeping the water and sewer systems working, collecting trash, and mowing grass as well as

for subsidizing HSVPOA amenities. The increase was also intended to replenish HSVPOA’s

cash reserves. The evidence supports the circuit court’s finding that the assessment funds

would be used for maintenance and to promote the health, safety, and welfare of owners.

Accordingly, we hold that the circuit court did not err in determining that the proposed use

of the funds generated by the two-tier assessment fell within the definition of an annual

assessment.

                                           VI. Conclusion

       After considering each of appellants’ arguments on appeal, we affirm the decision of

the circuit court in all respects.

       Affirmed.

       VIRDEN and GLOVER, JJ., agree.

       Legacy Law Group, by: Bryan J. Reis and Philip B. Montgomery, for appellants.

       Quattlebaum, Grooms & Tull PLLC, by: E.B. Chiles IV and Justice J. Brooks I, for

appellees.

                                                13