McKnight v. Board of Directors

Moyer, C. J. The principal issue in •this case is whether the trial court erred in enjoining the board from entering into agreements pursuant to the authority of the Third Amendment. The first question presented by this case is whether the board of directors of Anchor Pointe, elected on March 8,1984, was legally constituted. This necessitates a determination of the status of First Federal. If, as appellants contend, First Federal was a good faith purchaser for value, then it was entitled to vote for all members of the condominium association’s board of directors in proportion to its unit ownership. However, if First Federal assumed the role of developer of Anchor Pointe, under R.C. 5311.01(T), the board was not legally constituted, as the developer was entitled to appoint only five of the members of the board pursuant to Section 4, Article VII of the Declaration of Condominium Ownership.1 [8] R.C. 5311.01(T) defines “developer” as follows: “* * * [A]ny person who, directly or indirectly, sells or offers for sale condominium ownership interests in a condominium development. ‘Developer’ includes the declarant of a condominium development and any successor to the declarant who stands in the same relation to the condominium development as the declarant.” R.C. 5311.01(N) provides: “ ‘Sale of a condominium ownership interest’ means the execution by both parties of an agreement for the conveyance or transfer for consideration of a condominium ownership interest, except ‘sale of a condominium ownership interest’ for purposes of this chapter shall not include a transfer of two or more units from the developer to another developer, a subsidiary of the developer, or a financial institution for the purpose of facilitating the sale of or the development of the remaining or unsold portion of the property. ” (Emphasis added.) Appellants maintain that the definition of “salé” provided in R.C. 5311.01(N) applies only when a determination must be made as to whether the consumer protection sections of the chapter contained in R.C. 5311.25 to 5311.27 apply. We disagree and reject the argument that we should employ the traditional notions of “sale” and “purchaser for value” and ignore the specific exception in R.C. 5311.01(N). Generally, a secured party who takes collateral and sells or retains it in order to satisfy debt for which the collateral is given is a purchaser for value. However, the General Assembly has carved out an exception to that rule as it applies to financial institutions involved in condominium developments. This is apparent from the lack of limiting language in R.C. 5311.01(N). Although the General Assembly could easily have limited the application of R.C. 5311.01(N) to the warranty provisions provided in the chapter, it did not.2 Appellants contend that a mortgagee acquiring title to property through [9] foreclosure or by accepting a deed in lieu of foreclosure does not necessarily assume the role of developer. As mortgagee holding the real estate as security for the loan, the bank has a right to foreclose and take title to the security upon the mortgagor’s default. The mortgagee then has the right to sell the property to satisfy the debt. We agree with First Federal’s contention that by acquiring title to property either through foreclosure or by accepting a deed in lieu of foreclosure, a mortgagee does not necessarily assume the role of the “developer” as defined by R.C. 5311.01(T). Generally, banks and other financial institutions that lend money to finance condominium developments are in the business of lending money and not building or developing condominiums. When such a lender is forced into its position as owner after a legitimate loan goes into default, the lender must be given the right to salvage its interest by selling the property. Such a situation, in and of itself, does not compel the lender to assume the obligations of a developer imposed by R.C. Chapter 5311 or the articles and bylaws of the condominium association. It follows that a mortgagee acquiring title to property or other collateral has the right to protect its interest by taking reasonable steps to maintain or preserve the property. However, when the mortgagee performs such acts as to become so intertwined with the promotion and development of the property that it, in essence, has engaged in the business of the developer, it cannot insulate itself from the duties, constraints and obligations of a developer pursuant to R.C. Chapter 5311. There is no “bright line” test which delineates with precision whether a mortgagee has taken such steps as to assume the role of developer. There are, however, certain factors that can be examined to determine if the lender has engaged in the business of developing or is acting solely to preserve its interest in the property. In Chotka v. Fidelco Growth Investors (Fla. 1980), 383 So. 2d 1169, a construction money lender acquired title from the original builder-developer through foreclosure proceedings following substantial completion of condominium development. The court found that Fidelco became more than just a lender when it took title to the condominium project, completed construction, and, holding itself out as developer and owner of the project, advertised and sold units to purchasers.3 The court in Chotka designated some of the factors a court may consider in order to determine the status of a lender acquiring title through foreclosure. For example, a court may consider whether the lender advertised the project or directly solicited potential purchasers, whether the lender participated in construction of units or common-area buildings, and whether the lender held itself out as the developer. Id. at 1170. Also relevant is whether the lender entered into contracts for services in which it shares a [10] profit or proprietary interest. Affirmative answers to these considerations should be balanced against the strong policy consideration of not imposing developer obligations upon banks and other lending institutions that are in the process of salvaging a security interest. A review of the record in the instant case supports the trial court’s determination that First Federal took steps to do much more than merely preserve its security interest in Anchor Pointe. Plaintiffs’ Exhibit 3 is an agreement between First Federal and Anchor Pointe Marina Corporation (“APMC”), an enterprise controlled by Virgil Gladieux. This agreement was signed on January 24, 1985, approximately one month before the vote on the Third Amendment. The agreement provides that First Federal will retain APMC as association manager of the marine complex for three years and pay fifty percent of the salary of a general manager chosen by APMC. (Item 3.) APMC is named the exclusive sales agent for all of First Federal’s property at the complex with the additional provision that First Federal, after paying a seven percent real estate commission and ordinary selling expenses, will receive one hundred percent of the net proceeds. (Item 4.) Thus, First Federal will receive a profit on any sales made by APMC. First Federal will receive a substantial profit if APMC exercises its option to buy the property remaining at the end of the three-year term. The purchase price agreed upon is four million dollars minus the full purchase price credit for any water slip sold and any profit received by First Federal from the operation of any of the leased businesses at the complex. (Item 14.) Profits earned from the leased businesses will be paid to First Federal and First Federal agrees to provide a reasonable amount for initial working capital, including a one million dollar line of credit for boat sales and service provided to APMC or an entity of APMC’s choice (Items 7 and 12). It is clear from a close reading of the agreement that First Federal did more than merely act to preserve its security interest. The record clearly supports the trial court’s finding that First Federal attempted to develop the Anchor Pointe complex and participate in and profit from the condominium business. The close supervisory relationship with Gladieux and APMC established by their agreement dictates a finding that First Federal was “* * * a financial institution [acting] for the purpose of facilitating the sale of or the development of the remaining or unsold portion of the property,” as contemplated by R.C. 5311.01(N). Furthermore, First Federal cannot insulate itself from the role of developer by entering into this type of agreement with a third party (Gladieux Enterprises) whose responsibility is to develop and promote the condominium complex. Although there are circumstances where a lender may legitimately hire a third party to preserve its interest, in the instant case, plaintiffs’ Exhibit 3 reveals an aim to jointly develop and profit from the operation of the condominium complex. Appellants argue in the alternative that the board was legally constituted when it was elected at the March 8, 1984 meeting pursuant to Section 4, Article VII of the Declaration of Condominium Ownership. Section 4 provides: “Within thirty days after the earlier of (A) five years from the date of the establishment of the Association, or (B) the sale and conveyance, to purchasers in good faith and for value, of Units to which 75% of the undivided interests in the Common Areas appertain, the Association shall meet and all Unit owners, including the Declarant, [11] shall elect nine Directors to replace all of those Directors earlier elected or designated by the Unit owners or Declarant, respectively, and elect new officers of the Association.* * *” We agree with the trial court’s finding that Section 4(A) of Article VII contravened the statutory requirements of R.C. 5311.08(C). R.C. 5311.08(C) provides, in relevant part: “Not later than the time that condominium ownership interests to which twenty-five per cent of the undivided interests in the common areas and facilities appertain have been sold and conveyed by the developer in a condominium development, the unit owners association shall meet and the unit owners, other than the developer, shall elect not less than twenty-five per cent of the members of the board of managers. Not later than the time that condominium ownership interests to which fifty per cent of the undivided interest appertain have been sold and conveyed, such unit owners shall elect not less than thirty-three and one-third per cent of the members of the board of managers. * * *” Section 4(A) of Article VII is patterned after R.C. 5311.08(D), which states: “Except as stated in division (C) of this section, the declaration of a condominium development may authorize the developer or persons designated by him to appoint and remove members of the board of managers and other officers of the unit owners association and to exercise the powers and responsibilities otherwise assigned by law or the declaration to the unit owners association, the board of managers, or other officers. Such an authorization may extend from the date of the establishment of the unit owners association until the earlier of: “(1) Five years, in the case of a condominium development the declaration of which includes expandable condominium property, or three years in the case of other condominium developments; “(2) Thirty days after the sale and conveyance of condominium ownership interests to which appertain seventy-five per cent of the undivided interests in the common areas and facilities to purchasers in good faith for value.” (Emphasis added.) R.C. 5311.08(D) specifically provides that its provisions apply if the conditions provided in R.C. 5311.08(C) are not met. Thus, once twenty-five percent of the units have been sold, R.C. 5311.08(D) cannot come into effect. To read subdivision (D) in any other way would be to allow the unit owners to assume at least partial control of the association and then to return that control to the developer at the end of five years. ' As the trial court pointed out, the obvious purpose of such requirements of R.C. 5311.08(C) is to ensure that unit owners gradually assume control of the association from the developer. Section 4(A), absent the limitation of R.C. 5311.08(C) as provided in R.C. 5311.08(D), would defeat this purpose if a majority of the units were still owned by the developer, as is the case herein. For these reasons, we adopt the reasoning and holding of the trial court with respect to Section 4(A), Article VII. Finally, appellants contend that the board of directors was legally constituted under Section 4(B), Article IV. This contention is based on the claim that the transfer of the unsold water slips to Port Lawrence Title and Trust Company as trustee for the benefit of First Federal was a good faith transfer for value. As previously discussed, the bulk transfer to First. Federal was not a sale as defined in R.C. 5311.01(N). Thus, the trial court did not err in finding that the Anchor Pointe board was illegally constituted when the [12] special meeting of February 27, 1985 was called. It necessarily follows that the Third Amendment adopted at that meeting was null and void. Appellants maintain that, regardless of the improperly constituted board of directors, First Federal, as a developer, could have appointed five of the nine directors. Since the amendment was unanimously presented to the association and could have still been presented by a majority, appellants contend that it makes no difference that the board was improperly constituted. This position ignores the fact that First Federal, with over sixty percent of the voting power, voted for all nine of the directors. Had the unit owners, other than First Federal, been permitted to vote for the four directors, as provided for in the declaration, this amendment may not have been unanimously presented to the association. Although only six First Federal employees were elected, First Federal cast its votes for all nine directors. Thus, even though three of the nine were individual unit owners, they were not elected by unit owners other than the developer, as required by both R.C. 5311.08(C) and the declaration. The casting of votes for all nine of the directors by First Federal tainted both the election and the board. The unanimous presentation of the amendment quite possibly affected the association’s vote. If a member of the board who had been elected only by the purchasers of the units had objected to the amendment, a different result may well have ensued. To assume that if only five members of the board, who could properly be appointed by First Federal, had presented the amendment it still would have received the same seventy-seven percent approval is speculative. Moreover, it ignores the fact that the individual unit owners were denied their absolute right to elect four of the directors. Additionally, we note that the Third Amendment which provided for the long-term leases with Gladieux, in effect, authorizes the developer to retain control of the common areas in violation of R.C. 5311.25(B). R.C. 5311.25(B) states that the condominium instruments must provide, with certain exceptions not applicable here, that a developer may not retain a property interest in any of the common areas and facilities except such interest it may have in an unsold unit. Appellants would have us subvert the clear purposes of the code in approving the board’s Third Amendment to the condominium declaration and its contracts with the Gladieux interests. The retention of property interests in the common areas is clearly prohibited by R.C. 5311.25(B) and (C) after control of the development is assumed by the unit owners association. The leases are part and parcel of the contract with Gladieux. Appellants would have us thwart the obvious intent of the statute by sanctioning the amendment and the contracts while practical control of the association remains in the hands of First Federal and its partners in what would amount to a joint venture. R.C. 5311.25(C) states that the condominium declaration must require that owners of condominium units sold by the developer assume control of the common areas and of the unit owners association as provided by R.C. 5311.08(C). In any case, the Gladieux contract is unenforceable since R.C. 5311.25(D) states that “[n]either the unit owners association nor the unit owners will be subject to any management contract or agreement executed prior to the assumption of control required by division (C) of this section for more than [13] one year subsequent to that assumption of control unless such a contract or agreement is renewed by a vote of unit owners pursuant to the bylaws required by section 5311.08 of the Revised Code.” Such a vote has never taken place nor does the contract provide for such action. This holding does not invalidate other actions of the board of directors taken during the period from March 8, 1984 through February 27, 1985 in the ordinary course of business. As stated by the court of appeals in State, ex rel. East Cleveland Democratic Club, Inc., v. Bibb (1984), 14 Ohio App. 3d 85, 14 OBR 99, 470 N.E. 2d 257, paragraph six of the syllabus: “When a corporate election is subsequently declared invalid, duly elected officers remain as holdover officers until the next valid election.” Thus, actions taken by the board of directors in the ordinary course of business will survive a challenge thereto. The judgment of the court of appeals is affirmed in part and reversed in part. Judgment affirmed in part and reversed in part. Cook, Shannon and Wright, JJ., concur. Sweeney and Douglas, JJ., dissent with opinion. H. Brown, J., dissents. Cook, J., of the Eleventh Appellate District, sitting for Locher, J. Shannon, J., of the First Appellate District, sitting for HOLMES, J. Footnotes [1] Section 4, Article VII provides: “Section A Board of Directors. The Board initially shall be those nine persons named as the initial Trustees pursuant to the provisions of the Articles, or such other person or persons as may from time to time be substituted by declarant. No later than the time that units to which 25% of the percentage interests in the Common Areas appertain have been sold and conveyed by the Declarant, the Unit owners shall meet, and at that meeting, the Unit owners other [8] than the Declarant shall elect four of the Directors and the Declarant shall designate the other five of the Directors, which nine Directors shall serve until the meeting described in the next paragraph. For purposes of computing the percentages of interests referred to in this paragraph, those percentages shall be computed by comparing the number of Units sold and conveyed to the original number of Units to be created (574). “Within thirty days after the earlier of (A) five years from the date of the establishment of the Association, or (B) the sale and conveyance, to purchasers in good faith and for value, of Units to which 75% of the undivided interests in the Common Areas appertain, the Association shall meet and all Unit owners, including the Declarant, shall elect nine Directors to replace all of those Directors earlier elected or designated by the Unit owners or Declarant, respectively, and elect new officers of the Association. The terms of the nine Directors shall be staggered so that the terms of one-third of the Directors will expire and successors be elected at each annual meeting of the Association. Thereafter, at such annual meetings, successors to the three Directors whose terms then expire shall be elected to serve three year terms.” [2] Furthermore, R.C. 5311.24 does provide for exceptions to the applicability of R.C. 5311.25 to 5311.27 and a transfer to “a financial institution for the purpose of facilitating the sale of or the development of the remaining or unsold portion of the property” is not one of those exceptions. It is noteworthy that this is in contrast to Section 4-101(4) of the Uniform Condominium Act which does specifically exempt any disposition by foreclosure or deed in lieu of foreclosure. [3] See, also, First Federal Savings & Loan v. Dept. of Business Regulation (Fla. App. 1985), 472 So. 2d 494, wherein the court held that a lender who had acquired deeds in lieu of foreclosure was not subject to civil penalties for failing to file certain documents required by Florida statutes to be filed by the condominium developer prior to sale of the units. The court held that the statutes did not apply to the lender where the lender did nothing to advertise or solicit buyers and the sales were not in the ordinary course of the lender’s business. The lender was merely conducting a salvage operation. The court rejected the department’s contention that the lender became a “second developer.”