Meritage Homeowners' Association v. Watt et al

Filing 58

AMENDED ORDER AND OPINION: The Watts' motion for summary judgment 35 is GRANTED with respect to their first counterclaim, regarding violation of the automatic stay. The motion is also GRANTED with respect to their third counterclaim, regarding breach of the settlement agreements. Finally, the motion is DENIED with respect to Meritage's claims. Signed on 11/20/2017 by Judge Ann L. Aiken. (ck)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
PORTLAND DIVISION

MERITAGE HOMEOWNERS'
ASSOCIATION,

Case No. 3:17-cv-00267-AA
AMENDED OPINION AND ORDER

Plaintiff,

v.
NICHOLAS LEE WATT and PATRICIA
MOUDY WATT,
Defendants.

AIKEN, Judge:
Plaintiff Meritage Homeowners' Association ("Meritage") filed this action against
defendants Nicholas Lee Watt and Patricia Moudy Watt ("the Watts"), asserting that the Watts
owe Meritage dues, assessments, interest, and related to a vacation property on the Oregon coast.
The Watts now move for summary judgment. For the reasons set forth below, the motion is
granted in part and denied in pmi. This opinion was initially filed August 13, 2017, but was
amended after the Watts filed a motion for reconsideration.

Page 1 - AMENDED OPINION AND ORDER

BACKGROUND 1

In 2006, the Watts took out a loan to purchase a second residence in Newport, Oregon
("the property"). The property, one of eighteen townhouse units within a planned community
known as Meritage at Little Creek, is subject to a series of covenants and restrictions ("CCRs")
enforced by Meritage. Pursuant to the CCRs, unit owners are responsible for maintenance and
repair of windows. Comp!. if 14.
In 2008 and 2009, Meritage and other interested paiiies filed a construction defect action
in state court, alleging defective installation of windows in all Meritage at Little Creek units
("the window litigation"). The defective windows caused substantial water damage to individual
units as well as to common areas of Meritage at Little Creek. In 2011, the Watts and ten other
Meritage at Little Creek owners sued Meritage in state court ("the HOA litigation").

The

plaintiffs in the HOA litigation then intervened in the window litigation. Also in 2011, Meritage
sued the Watts and other unit owners in state court for failure to pay assessments and charges
and for violating the CCRs ("the collection litigation"). Id.

if 20.

In 2012, the HOA litigation and the window litigation settled. After the settlement in the
HOA litigation, Meritage's insurance company refused to pay a claim for a portion ofMeritage's
attorney's fees. Meritage levied a special assessment to recoup those umeimbursed fees ("first
special assessment"). In accordance with the terms of the HOA litigation settlement agreement,
Meritage levied the first special assessment only against the plaintiffs in the HOA litigation

1

Unless otherwise noted, the facts are drawn from this Court's decision in 1'.'1eritage
Homeowners' Association v. Watt, 2017 WL 1364209 (D. Or. Apr. 11, 2017).
Page 2 - AMENDED OPINION AND ORDER

rather than against all unit owners. 2 Also in 2012, the Watts defaulted on their loan payments.
Lender Bank New York Mellon ("BNYM") instituted foreclosure proceedings.
In September 2013, Meritage approved a resolution imposing a fine of $500 per day, up
to $5,000 per month, against any unit owner that failed to repair the defective windows or
deposit the money necessary to begin the window replacement process. Id.

~

19.

In February 2014, Meritage obtained a stipulated judgment of $175,504 against the Watts
in the collection litigation. One month later, the \Vatts filed a petition for relief under Chapter 13
of the Bankruptcy Code. In June 2014, the Watts proposed a second amended Chapter 13 plan. 3
The second amended plan included the stipulated judgment from the collection litigation in its
list of debts. It also included a nonstandard provision purporting to vest the property in BNYM
upon confirmation. BNYM objected to the second amended plan because it did not want to take
title to the property. BNYM found taking title objectionable, in part, because it would make
BNYM responsible for ongoing obligations associated with the property-including dues and
assessments. Those obligations were substantial. Dues for the property exceed $15,000 per year
and, as noted, assessments for failure to replace the windows ran as high as $5,000 per month.
In September 2014, the Lincoln County Circuit Court ruled in a companion action to the
collection litigation that the first special assessment violated Oregon law because it had been
assessed against only a subset of unit owners without a determination that those unit owners
were at fault.

In response to that decision, Meritage rescinded the first special assessment.

2

The summary judgment record contains a complaint in yet another state-court action in
which some Meritage at Little Creek unit owners argue that Meritage lacked legal authority to
levy the first special assessment. See Wmrnn Deel. Ex. 6 June 20, 2017. Because the Watts
have not asserted any such challenge here, I assume, but do not decide, that the first special
assessment complied with the terms of the settlement agreement.
3

Meritage objected to the Watts' first two proposed plans.

Page 3 - AMENDED OPINION AND ORDER

Meritage applied a credit in the amount of the first special assessment to the Watts' $175,504
stipulated-judgment debt, which was by then a part of the Watts' bankruptcy proceeding.
During the fourth quarter of 2014, Meritage found that the Watts (and others) were at
fault with respect to the unreimbursed attorney's fees in the HOA litigation. It then levied a new
special assessment ("second special assessment") against the Watts in the amount of $26,316.25.
On October 15, 2014, the bankruptcy court confirmed the plan over BNYM's objection,
and the property was transfetred to BNYM.

BNYM appealed. On April 22, 2015, this Court

vacated and remanded, holding that the bankruptcy comt lacked statutory authority to force an
objecting creditor to assume a debtor's interest in and ongoing liabilities associated with a piece
of propeity. Bank ofN. Y. J\Iellon v. Watt, 2015 WL 1879680, *7 (D. Or. Apr. 22, 2015). 4
On August 27, 2015, the propeity was reconveyed to BNYM through a sale under 11
U.S.C. § 363. The practical effect of this complex procedural history is that, after they filed for
bankruptcy, the Watts were the owners of the prope1ty for roughly eleven months. 5
Meritage ceased attempts to collect the stipulated judgment from the Watts after they
filed for bankruptcy. However, throughout the bankruptcy process, Meritage has continued to
engage in collection activities against the Watts. Through those efforts, including in this action,
Meritage seeks to collect three debts it asserts are post-petition obligations incmTed during the
eleven months the Watts owned the prope1ty after filing for bankruptcy: unpaid post-petition
homeowners' association dues ("HOA dues"), unpaid post-petition assessments for failure to
replace the windows ("window fines"), and the second special assessment. Meritage sent the
4

The Watts' appeal of that decision is pending before the Ninth Circuit. See Bank ofN. Y.
iV!ellon v. Watt, 9th Cir. Case No. 15-35484.
5

The Watts owned the property for one seven-month stretch (the period between the date
they filed for bankruptcy and the date the bankruptcy comt confitmed the plan) and one fourmonth stretch (the period between the remand order and the§ 363 sale).
Page 4 - AMENDED OPINION AND ORDER

Watts collection statements regarding those debts in August 2014, 6 November 2014, January
2016, and May 2016. Nicholas Watt Deel.~ 12.
In June 2016, Meritage initiated this action as an adversary proceeding in bankruptcy
comt. Meritage seeks a declaratory judgment endorsing its collection effmis as "legitimate
effo1is to enforce the Watts' obligations under the CCRs" and "an appropriate exercise of
Meritage's fiduciary obligation to assure unit owners comply with the CCRs." Comp!.

~

45.

Meritage also seeks money damages, including attorney's fees, which it calculated to total
$124,969.03 as of the date the complaint was filed.

Id.~~

49-50.

Pursuant to 28 U.S.C. § 157(d) and Local Rule 2100-4, Judge Dunn sua sponte issued a
report and recommendation asking this Court to withdraw the reference with respect to the
adversary proceeding. Judge Dunn's recommendation rested on his determination that state law
issues predominate over bankruptcy issues in this case and on the relationship between
Meritage's claims in this action and its claims against BNYM in another case already pending in
this Comt. Judge Dunn also questioned whether the bankruptcy comi had authority to adjudicate
Meritage's claims under recent Supreme Court precedent. The case was assigned to Judge
Hernandez, who adopted Judge Dunn's repo1i and recommendation and withdrew the reference.
The case was then reassigned to me based on its close factual connection to }vferitage

Homeml'ners 'Association v. The Bank ofNew York !Ylellon, Case No. 6: 16-cv-00300.
Meritage had filed a motion for partial summary judgment in bankruptcy court. That
motion, which was fully briefed when Judge Hernandez withdrew the reference, sought summary
judgment with respect to the Watts' obligation to pay the second special assessment and unpaid

6

The August 2014 statement did not include the second special assessment, which was
not levied until later that year.
Page 5 - AMENDED OPINION AND ORDER

dues. Meritage did not seek summary judgment with respect to the window assessments or
attomey' s fees.
On April 11, 2017, I denied Meritage's motion. I concluded that Meritage was not
entitled to summary judgment with respect to the second special assessment because that
assessment
is simply the first special assessment in a new fotm. Because the Watts'
obligation to pay both the first and second special assessments arose from the
same pre-petition conduct, and because the Vlatts played no affirmative role in the
post-petition events that required the first special assessment to be rescinded, the
second special assessment is part of a debt "provided for by the plan" and subject
to discharge under [11 U.S.C.] § 1328(a).
1\1eritage Homeowners' Ass 'n, 2017 WL 1364209 at *5. I also concluded that the Watts were

liable for $7,422.96 in unpaid dues and associated interest. Id. at *6. However, I could not grant
summary judgment with respect to the unpaid dues because the Watts had made a partial
settlement payment of$14,969.79. Id.
The Watts now move for summary judgment on all Meritage's claims. They also seek
summary judgment on their first and third counterclaims, which allege violation of the
Bankruptcy Code's automatic stay and breach of the settlement agreements in the HOA litigation
and window litigation.
STANDARD OF REVIEW

Summary judgment is appropriate if "there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving
party has the burden of establishing the absence of a genuine issue of material fact. Id; Celotex
Co1p. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine

issue of material fact, the nonmoving party must go beyond the pleadings and identify facts
which show a genuine issue for trial. Id at 324. "Summary judgment is inappropriate if
Page 6 - AMENDED OPINION AND ORDER

reasonable jurors, drawing all inferences in favor of the nonmoving party, could return a verdict
in the nonmoving paiiy's favor." Diaz v. Eagle Produce Ltd. Partnership, 521 F.3d 1201, 1207
(9th Cir. 2008).
DISCUSSION

I.

1'.1eritage 's Claims
The Watts first seek summary judgment with respect to Meritage' s claims. In essence,

they contend that their maximum liability in this case could not possibly exceed the $14,969.79
payment they already made. To evaluate that argument, I must carefully examine Meritage's
allegations and revisit what was and was not decided in the prior summary judgment order.
Meritage sought $124,969.03 in damages as of the date the complaint was filed in June
2016. 7 That number corresponds exactly to the amount Meritage stated was due in an April 2016
statement to the Watts. The statement breaks down the amount due as follows:
Unpaid Dues

Principal
Interest

$7,100.80
$1,099.55

Window Fines

Principal
Interest

$25,000.00
$12,994.72

Special Assessment

Principal
Interest

$26,316.25
$6,177.47

Attorney's Fees (est.)

$60,000.00

Other Fees

$1,250.00

Offset for Partial Payment

($14,969.76)
TOTAL:

$124,969.03

Nicholas Watt Deel. Ex. 4 May 8, 2017.

7

Meritage alleges the amount of damages at issue in the case continues to grow because
of interest.
Page 7 - AMENDED OPINION AND ORDER

The prior summary judgment order decided two issues. First, it held that there is no
question of material fact that the Watts are liable to Meritage for $7,100.80 in unpaid dues and at
least $322.16 in interest on those dues. 8 }vferitage Homeowners' Ass 'n, 2017 WL 1364209 at *6.
Second, it held, as a matter oflaw, that Meritage cannot collect the second special assessment (or
any interest or fees attributable solely to that assessment) in this action. Id. at *5. Importantly,
the order did not decide any issues related to the window fines or attorney's fees. 9
The Watts begin by arguing that the window fines, like the second special assessment, are
pre-petition debts subject to discharge. They contend that because the resolution authorizing the
window fines was adopted before they filed for bankruptcy, any fines assessed pursuant to that
resolution are pre-petition debts subject to discharge. I disagree, and hold that the post-petition
window fines are not dischargeable in the Watts' bankruptcy proceeding.

8

There remain questions of material fact as to whether the Watts owe additional interest
or fees on the unpaid dues.
9

The attorney's fees question remains open notwithstanding footnote four of the prior
opinion, which stated that "[i]t is possible that Meritage would be entitled to attorney's fees and
costs to the extent they ( 1) are attributable to effotis to collect the unpaid dues only and not the
second special assessment and (2) took place before the date of the settlement payment.
However, any such entitlement would be offset by the amount of the settlement payment that
exceeded the Watts' dues, interest, and fees obligation." ivferitage Homeowners' Ass 'n, 2017
WL 1364209 at *6 n.4. The footnote was intended only to provide fmiher explanation for why
Meritage was not entitled to summary judgment with respect to unpaid dues. It did not resolve
any substantive issues related to Meritage's right to attorney's fees.
The footnote contains a clear error which I exercise my discretion to correct. Meritage
cannot collect any attorney's fees and costs attributable only to effotis to collect the second
special assessment. However, it remains possible that Meritage is entitled to attorney's fees for
collection activity aimed at both the second special assessment and some other debt (for
example, unpaid dues) that Meritage had a legal right to pursue. To the extent the prior summary
judgment opinion said otherwise, it is no longer law of the case. See United States v. Alexander,
106 F.3d 874, 876 (9th Cir. 1997) (enumerating exceptions to the law of the case doctrine).
Page 8 - AMENDED OPINION AND ORDER

The seminal case on the treatment of HOA dues in bankruptcy is In re Rosenfeld, 23 F.3d
833 (4th Cir. 1994). In that case, the Fourth Circuit faced a split of authority. Id at 836. One
line of cases held that any obligation to pay post-petition HOA dues is a pre-petition debt subject
to discharge because such obligations arise from a pre-petition contract. Id. at 836-37. Another
line of cases held that post-petition HOA dues are not dischargeable where, under state law, the
obligation to pay such dues is "a function of owning the land with which the covenant runs." Id.
at 837. The Fourth Circuit adopted the reasoning of the second line of cases. That holding has
been adopted by both the Ninth Circuit Bankruptcy Appellate Panel, Foster, 435 B.R. at 658-59,
and this Court, Bank ofN. Y Mellon, 2015 WL 1879680 at *3.
Here, there is no basis for treating the window fines differently from the HOA dues.
Meritage's authority to levy special assessments, like its authority to assess dues, arises from the
CCRs. Freitag Deel. Ex. 5 §§ 10.4 & 10.5 Feb. 8, 2017. Under Oregon law, both dues and other
types of assessments are ongoing obligations that run with the land.

See Or. Rev. Stat. §

94.712(1) (drawing no distinction between dues and other assessments). And just as owners at
Meritage at Little Creek must pay dues for each month they own the property, they must pay
window fines for each day they fail to repair the windows, up to a monthly ceiling. Thus, any
HOA dues or window fines attributable to days before the date the Watts filed their bankruptcy
petition are pre-petition debts subject to discharge.

But any HOA dues or window fines

attributable to days after that filing date are post-petition debts and not part of the bankruptcy
proceeding.
Treating the window fines like the HOA dues is fully consistent with my prior holding
that the second special assessment is a pre-petition debt subject to discharge. Unlike the window
fines and HOA dues Meritage seeks to collect from the Watts, the charges included in the second

Page 9 - AMENDED OPINION AND ORDER

special assessment arose exclusively from pre-petition events: the HOA litigation and settlement
and the insurance company's denial ofMeritage's claim for attorney's fees.
Substantial questions of fact remain regarding the Watts' liability for window fines,
attorney's fees, interest, and other fees. Accordingly, I deny the Watts' motion for summary
judgment on Meritage's claims.
II.

The Watts' Counterclaims

The Watts also move for summary judgment on two of their counterclaims. They argue
that there is no question of material fact that Meritage's collection activities violated the
automatic stay and breached both the HOA litigation settlement agreement and the windows
litigation settlement agreement.
A.

Violation of the Automatic Stay

The Watts contend that when Meritage sent them collection statements and filed this
action after they filed for Chapter 13 bankruptcy, it violated the Bankruptcy Code's automatic
stay provision. When a debtor files for bankruptcy, the stay "suspends all activity relating to
collection of pre-filing debts, with a number of exceptions." In re Partida, 862 F.3d 909, 911
(9th Cir. 2017). The stay's purpose is "to give the debtor a breathing spell from his creditors by
stopping all collection efforts, all harassment, and all foreclosure actions." Id. (quotation marks
omitted) (alterations normalized).

This allows the debtor "time to attempt a repayment or

reorganization plan, or simply to be relieved of the financial pressures that drove him into
bankruptcy." Id. (quotation marks omitted).
As relevant here, the automatic stay halts
(1) the commencement or continuation, including the issuance or employment of
process, of a judicial, administrative, or other action or proceeding against the
debtor that was or could have been commenced before the commencement of the

Page 10 - AMENDED OPINION AND ORDER

case under this title, or to recover a claim against the debtor that arose before the
commencement of the case under this title; [and]
(6) any act to collect, assess, or recover a claim against the debtor that arose
before the commencement of the case under this title[.]
11 U.S.C. §§ 362(a)(l) & (6). The statute further provides than "an individual injured by any
willful violation of a stay provided by this section shall recover actual damages, including costs
and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." Id. §
362(k)(I).
Meritage correctly observes that the prior summary judgment order did not explicitly
resolve whether the second special assessment was a "claim against the debtor that arose before
the commencement of the case" within the meaning of§ 362(a)(6). But here, whether the second
special assessment is subject to discharge under § 1328(a) (the question decided in the prior
summary judgment order) and whether the second special assessment arose before the
commencement of the Watts' bankruptcy proceeding (the question at issue in the present
summary judgment motion) are indistinguishable inquiries. Io

Because the first and second

special assessments are effectively the same debt, I hold that the second special assessment arose
before the commencement of the bankruptcy case. Meritage's attempts to collect the second
special assessment after the Watts filed for bankruptcy therefore violated the automatic stay.
The only remaining question is whether that violation was willful.
The Ninth Circuit has long adhered to the same definition of willfulness in this context:

IO In support of its argument that the second special assessment arose after the Watts filed
their bankruptcy petition, Meritage reasserts the same arguments it made in its partial summary
judgment motion. Meritage's reliance on the same authority in both briefs suggests that it agrees
that the analyses of whether a debt is subject to discharge under§ 1328(a) and whether a debt is
a "claim" that "arose before the commencement of the case" are, for present purposes,
indistinguishable. I carefully considered and rejected Meritage's arguments in the prior
summary judgment order, and see nothing in the text of§ 362(a)(6) that alters the analysis.

Page 11 - AMENDED OPINION AND ORDER

A "willful violation" does not require a specific intent to violate the automatic
stay. Rather, the statute provides for damages upon a finding that the defendant
knew of the automatic stay and that the defendant's actions which violated the
stay were intentional. Whether the party believes in good faith that it had a right
to the property is not relevant to whether the act was "willful" or whether
compensation must be awarded.
In re Pinkstaff, 974 F.2d 113, 115 (9th Cir. 1992) (citing In re Bloom, 875 F.2d 224, 227 (9th
Cir. 1989)).

This definition of "willful"-requiring only knowledge of the stay and an

intentional, as distinct from accidental, attempt to collect a debt-admittedly imposes a stringent
standard on creditors. As the Ninth Circuit Bankruptcy Appellate Panel explained,
[o]nee a creditor knows that the automatic stay exists, the creditor bears the risk
of all intentional acts that violate the automatic stay regardless of whether the
creditor means to violate the automatic stay. . . . The only solace for the creditor
who winds up willfully violating the automatic stay without meaning to do so is
that a good heart may figure in the assessment of ... damages. Sympathetic facts
may be used to ave11 punitive damages and, in view of the trial judge's discretion
over calculation of actual damage awards, may also figure into the calculus of
actual damages.
In re Campion, 294 B.R. 313, 318 (9th Cir. B.A.P. 2003).
Meritage's post-petition conduct activities were "willful" within the meanmg of §
362(k)(l). It is undisputed that Meritage knew about the \Vatts' bankruptcy filing and the
automatic stay. Notwithstanding that knowledge, it chose to pursue its claim for the second
special assessment after the Watts filed their Chapter 13 petition. Whether that claim was a prepetition debt subject to discharge or a recoverable post-petition debt was an open question under
the law of this circuit. In choosing to attempt to collect the second special assessment postpetition, Meritage bore the risk of violating the automatic stay by attempting to collect a prepetition debt.
I therefore grant the Watts' motion for summary judgment on their first counterclaim.

Page 12-AMENDED OPINION AND ORDER

B.

Breach of the Settlement Agreements

Next, the Watts argue that Meritage's collection activities violate the terms of the
settlement agreements reached in the HOA litigation and the window litigation. Breach of a
settlement agreement is a contract law claim governed by state law. See United Commercial Ins.
Serv., Inc. v. Paymaster Corp., 962 F.2d 853, 856 (9th Cir. 1992) ("The construction and

enforcement of settlement agreements are governed by principles of local law which apply to
interpretation of contracts generally.") (citation and quotation marks omitted); cf lolfatter of
Sparkman, 703 F.2d 1097, 1099 (9th Cir. 1983) ("When a bankruptcy comt adjudicates a

contract claim in connection with a petition in bankruptcy, the comt applies state law to the
contract dispute unless the bankruptcy code provides otherwise.") (citation omitted). Oregon
generally permits the contracting patties to choose which state's substantive law controls their
dispute. Or. Rev. Stat. § 15.350(1). Both agreements at issue here provide that they are to be
interpreted in accordance with Oregon law.
In interpreting a contract, Oregon conrts "seek to implement the intent of the parties to
the contract" by "consider[ing] the text of the contractual provision at issue in the context of the
contract as a whole." Jwnes v. Clackamas Cty., 299 P.3d 526, 532 (Or. 2003). If the meaning of
the text is clear, the analysis ends. Id. If the provision at issue is ambiguous, courts consider
extrinsic evidence of the contracting patties' intent. Yogman v. Parrott, 937 P.2d 1019, 1022
(Or. 1997). Finally, if evidence of the patties' intent does not resolve the ambiguity, courts rely
on "appropriate maxims of construction" to reach a decision. Id.
1.

HOA Litigation Settlement Agreement

The \Vatts contend that Meritage's attempts to collect the second special assessment
breached the tem1s of the HOA litigation settlement agreement. In that agreement, Meritage

Page 13-AMENDED OPINION AND ORDER

agreed to "forever release Plaintiffs" from "any and all past, present, and future claims arising
from ... the allegations in the HOA litigation, including, but not limited to, claims for expenses,
costs, attorney's fees, and damages of any kind, nature, or basis whether the claims are known or
unknown, anticipated or unanticipated, presently existing or hereafter arising." Freitag Deel. Ex.
2 ~ 3 Feb. 8, 2017. The agreement also contained the following provision:
Each Party acknowledges that the facts from which this Agreement arise are
unce1tain, and each Party assumes the risk that the damage alleged by Plaintiffs at
The Meritage Planned Community may worsen in the future, that new or
unforeseen damage may occur, new acts or decisions may be discovered or that
construction defects and damage may not be as severe as alleged in the HOA
Litigation. The agreements and amounts set foith in this Agreement and its
exhibits shall not be subject to future modification or reallocation based on any
subsequent information, discovery, award, verdict, or judgment in any proceeding
or otherwise.
Id.

~

17. The Watts argue that when Meritage levied the second special assessment, it modified

the agreement based on a subsequent judgment in another case, thereby breaching the settlement
agreement. 11
The meaning of "future modification or reallocation" here is ambiguous.

I cannot

determine from the text of the agreement alone whether the parties intended to prevent Meritage
from rescinding an assessment contemplated by the agreement to address a technical problem
and then issuing a new assessment to recoup the same amount of money. That ambiguity is fatal
to the Watts' motion for summmy judgment, because they do not make any arguments about

11

The Watts do not appear to argue that Meritage's attempts to collect unpaid dues,
window fines, or associated attorney's fees violate the terms of the agreement. That makes
sense, as the release section of the agreement specifically provides that Meritage "does not
release any claim against any patty for any unpaid dues, fines, interest, assessments, or any other
obligation to the HOA." Freitag Deel. Ex. 2 ~ 3 Feb. 8, 2017. It fuither excludes from the
release "any claims against Plaintiffs for any property damage" which arose or may arise "as a
result of ... Plaintiffs' ... failure to maintain and/or replace windows in their units in Meritage."
Id.
Page 14 - AMENDED OPINION AND ORDER

extrinsic evidence: they assert that the settlement agreement documents "speak for
themselves[.]" Defs.' Reply Supp. Mot. Summ. J. 6. They have, accordingly, failed to carry
their initial burden to show the absence of a genuine issue of material fact. 12 Summary judgment
must be denied.
2.

Window Litigation Settlement Agreement

The Watts also aver that Meritage breached the te1ms of the settlement agreement
reached in the windows litigation through its attempts to collect the window fines. Unlike the
HOA litigation settlement agreement, the windows litigation settlement agreement is
confidential. The parties submitted a copy of the agreement for my in camera review. I discuss
the terms of the agreement only to the extent necessary to resolve the Watts' summary judgment
motion.
The Watts received a cash settlement in the windows litigation. Under the terms of the
windows litigation settlement agreement, all intervening unit owners promised that the
settlement proceeds would be paid to Dallas Glass, to be applied "exclusively to the cost of
repairs" of their units at Meritage at Little Creek. The agreement fmther directs that the funds
paid to Dallas Glass "shall be used as a deposit on the contract and to purchase materials for use
in the repair of the Owners Units." The

~'atts

stipulated to entry of judgment against them for

all outstanding dues, assessments, fines, penalties, and interest. Meritage, in turn, agreed to take
no action to collect on the portions of that judgment attributable to window fines and "to impose
no further fines or interest related to repair and replacement of the windows so long as the funds
deposited with Dallas Glass on behalf of Watt remain on deposit with Dallas Glass

12

In addition, I note that the Watts appear to be attempting to have it both ways; having
benefited in the bankruptcy context from the treatment of the special assessments as the same
debt, they now seek to distinguish the two assessments for the pmposes of their contract claim.
Page 15-AMENDED OPINION AND ORDER

unchallenged." The agreement also states that "[i]n the event any effort is made to recover the
funds from Dallas Glass or the funds are removed from Dallas Glass for any reason on any basis
other than HOA collection actions, the fines suspended under this agreement shall be
immediately imposed at $500.00 per day[.]"
When the Watts filed their Chapter 13 petition, the stipulated judgment in the collection
litigation became part of the bankruptcy proceeding. Unable to collect on the judgment outside
the bankruptcy proceeding, Meritage garnished the funds on deposit with Dallas Glass to pay
pmi of the stipulated judgment. In response, the Watts filed amended schedules and a Chapter
13 plan, allowing them an option to seek a preferential transfer upon the Chapter 13 trustee's
assignment of rights to the Watts. Meritage then resumed assessing window fines.
Having reviewed the settlement agreement, the summary judgment record, and the
pmiies' arguments, I conclude that no questions of material fact remain and that Meritage
breached the windows litigation settlement agreement when it garnished the funds on hold with
Dallas Glass.

I also conclude that no questions of material fact remain as to Meritage's

imposition of new window fines. Meritage breached the agreement when it began assessing new
window fines.
Meritage's decision to garnish the funds on hold with Dallas Glass plainly violates the
provisions of the agreement stating that those funds would be used exclusively to repair the
defective windows. Meritage argues that garnishment of the Dallas Glass funds to satisfy the
collection judgment was "contemplated" and "authorized" by the agreement. Pl.'s Resp. Defs.'
Mot. Summ. J. 19. There are two references to "HOA collection actions" in the contract. Those
provisions provide that if there is any attempt to "recover" or "remove" the funds from Dallas
Glass other than HOA collection action, Meritage may begin assessing new window fines and

Page 16 - AMENDED OPINION AND ORDER

may execute the judgment against the owner attempting to access the Dallas Glass funds.
Contrary to Meritage's representation, neither provision voids the agreement or authorizes it to
garnish the funds paid to Dallas Glass. It is plain from Meritage's briefing that it believes it was
unfairly denied the benefit of its bargain when the Watts filed for bankruptcy. But that belief
boils down to a policy disagreement with the Chapter 13 bankruptcy system or perhaps a moral
objection to the Watts' actions. Neither can justify Meritage's breach of the plain text of the
settlement agreement.
Similarly, Meritage's assessment of new window fines also violates the agreement.
Meritage may begin assessing new window fines only if the Watts attempt to "recover" or
"remove" the funds from Dallas Glass. Meritage argues that the Watts' filing of amended
schedules constitutes pursuit of a preferential transfer. Meritage argues that such pursuit of a
preferential transfer is the Watts' attempt to "recover" the funds from Dallas Glass, which
justifies its imposition of the window fines. The Watts were required by law to inform the
Chapter 13 trustee about the garnishment by amending their asset schedules. While the amended
schedules gave the Watts an option to seek a preferential transfer, no evidence supports that the
Watts indeed sought a preferential transfer. Thus, no questions of material fact remain regarding
whether Meritage breached the terms of the agreement when it assessed new window fines.
Reasonable factfinders could not find the Watts' filing of amended schedules was pursuit of a
preferential transfer in the bankruptcy proceeding or an eff01t to recover the funds from Dallas
Glass. The Watts are therefore entitled to summary judgment on their third counterclaim.
CONCLUSION

The Watts' motion for summary judgment (doc. 35) is GRANTED with respect to their
first counterclaim, regarding violation of the automatic stay. The motion is also GRANTED

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with respect to their third counterclaim, regarding breach of the settlement agreements. Finally,
the motion is DENIED with respect to Meritage's claims.

IT IS SO ORDERED.
Dated

this~~ ofNovember 2017.

Ann Aiken
United States District Judge

Page 18 - AMENDED OPINION AND ORDER