Case Law Summaries

Mulligan v. Panther Valley Property Owners Association

• Opinion Date: February 16, 2001
• Real Property Law
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HOMEOWNERS ASSOCIATIONS—Amendment of a common interest owner’s association’s by-laws by its members is subject to a test of reasonableness.

A property owners association, through a vote of its membership, adopted six amendments to its Declaration of Covenants and Restrictions (Declarations) and its bylaws. A member of the association filed suit, challenging five of those amendments. The first amendment provided that the most serious level of sex offender under Megan’s Law could not reside within the community. The lower court upheld that amendment. The second amendment authorized the association to file a “Notice of Continuing Violation” with the county clerk if a member persisted in violating the association’s Declaration or its bylaws or rules. The lower court held this amendment to be invalid “because it did not require the Association to give notice to a member before filing such a Notice.” The third amendment provided that an owner could be liable for the association’s legal fees and costs if the association were required to file suit to enforce the Declaration, its bylaws or rules. The lower court struck down that amendment. The fourth amendment set forth a procedure governing a member’s inspection of the association’s books and records. That amendment was upheld as facially valid. The final amendment established minimum qualifications for election to the association’s board and the lower court concluded that this amendment also was facially valid.

The Appellate Division found that the member’s challenge to the amendments did not revolve around the procedure by which they were adopted but was directed to the substance of the amendments themselves. In essence, it was alleged that the amendments “should be measured under a test of reasonableness” and that each of the amendments failed that test. The member also maintained that each of the amendments represented a diminution of a member’s ownership rights and consequently should be declared invalid. The association, on the other hand, believed that the amendments should have been analyzed “under what is termed the business judgment rule to determine if they are authorized by statute and the applicable documents governing the parties’ relationship and to see if they violate any constitutional or statutory provision or conflict with public policy.” The association also asserted that the amendments were entitled to a presumption of validity. The Court found no reported case in New Jersey clearly setting the standard a reviewing court should employ where a membership votes to amend an association’s declaration and bylaws. The reported cases considered the affected amendments following action by a board of trustees, but not by members. In those cases, the court applied the “business judgment” rule, merely requiring that board members act reasonably and in good faith in carrying out their duties. The Court also noted that the association in question was not a condominium development, but more properly could be referred to as a “common interest development.” Not finding any case law in New Jersey, the Court looked to that of other states. In its research, it concluded that the “majority of jurisdictions appear to employ the reasonableness standard.” Therefore, it held that “the appropriate test to measure the validity of these amendments is that of reasonableness. We reached that conclusion for several reasons. First, we recognize that we are dealing with amendments to the documents governing life at [the community], as opposed to original provisions.” The Court did not consider such amendments to be entitled to the “very strong presumption of validity that some courts have attached to restrictions imposed by a common interest community from the outset of its development. Further, the Court was disturbed that the Declarations could be amended any time by a simple majority of the association’s members. It recognized that many associations require a supermajority to afford greater protection to the affected parties. It also looked to the Uniform Common Interest Ownership Act, a statute not yet passed in New Jersey, wherein a supermajority is required for amendment of association documents. Given that the amendments all reflected changes adopted substantially after the plaintiff took up residence within the community, and because the governing documents required no more than a simple majority vote, the Court was “unwilling to afford them the presumption of validity for which the [association] contend[s].” With respect to the sex offender’s provision, it rejected the contention that such a provision infringed the complaining member’s right to alienate her property and that it compelled her to violate the law by obligating her to seek out and identify sex offenders. If her arguments were confined to those two, the Court would have rejected her position out of hand, but the Court was troubled because the record did not show whether a provision such as this would make a large segment of the housing market unavailable to one category of individuals and “indeed perhaps to approach the ‘ogre of vigilantism and harassment,’ the potential dangers of which the Supreme Court recognized even while upholding the constitutionality of Megan’s Law.” Also, the Court was also not clear as to whether the association performed quasi-municipal duties. For those reasons, the Court reversed the lower court’s judgment upholding the validity of this amendment. It did not remand the matter because the record was too slim to be reviewed by the lower court and a party is not ordinarily entitled to a remand to cure such deficiency.

As to the member’s challenge to the amendment affecting a member’s right to inspect the association’s books and records, the Court held for the association. In its view, the Nonprofit Corporation Act only requires that a corporation’s books and records be available “upon at least 5 days’ written demand.” Because the language referred to “at least,” and not “no more than,” the association had a right to impose a ten day requirement. Further, the Court believed that trial courts could deal with these issues on a case-by-case basis and that the rules for a member’s inspection of the association’s books were reasonable. Of particular note, the Appellate Division refused to allow the association to employ a “private enforcement technique” of filing a “Notice of Violation” on the public records. It felt that such a provision violated a member’s due process rights if it could be submitted for recording without the member receiving specific notice.

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