Meritage Homeowners' Association v. The Bank of New York Mellon, etc.
OPINION AND ORDER: Meritage and Freitag's motion for summary judgment 46 is GRANTED IN PART and DENIED IN PART as follows: the motion is granted with respect to the portions of the third-party claim against Freitag related to failure to maintain an adequate reserve balance, failure to provide required financial disclosures, and the placement of fitted and unfitted plywood boards over windows, and is denied in all other respects. Meritage's motion for partial summary judgment 50 is DENIED. BNYM's motion for partial summary judgment 84 is GRANTED. Meritage's motion for a preliminary injunction 114 is DENIED. Signed on 4/13/2018 by Judge Ann L. Aiken. (ck)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
BANK OF NEW YORK MELLON,
BANK OF NEW YORK MELLON,
Page I - OPINION AND ORDER
Case No. 6:16-cv-00300-AA
OPINION AND ORDER
In this diversity action, plaintiff Meritage Homeowners' Association ("Meritage") alleges
that defendant Bank of New York Mellon ("BNYM") owes more than one million dollars in
dues, assessments, fees, and interest associated with a property located in a planned community
on the Oregon Coast, Meritage at Little Creek. BNYM initially had a secured interest in the
property; its purported liability to Meritage stems from the fact that it briefly took title to the
property in connection with the former owners' Chapter 13 bankruptcy proceeding and later
purchased the property in a § 363 sale under the Bankruptcy Code. BNYM asserts that it is
current on all liabilities to Meritage and counterclaims for nuisance and failure to maintain
common property, alleging that such failure has caused substantial damage to the property.
BNYM also contends that third-party defendant Kurt Freitag ("Freitag"), the developer of
Meritage at Little Creek who is in administrative control of Meritage, breached his fiduciary duty
to members of Meritage.
All parties now move for pattial summary judgment. Meritage also seeks a preliminary
injunction restraining BNYM from filing an action in state court to appoint a receiver to take
over control of Meritage. The Court heard oral argument on the motions on April 4, 2018.
For the reasons set forth below, (1) Meritage and Freitag are entitled to summary
judgment with respect to the portions of the third-party claim against Freitag related to failure to
maintain an adequate reserve balance, failure to provide required financial disclosures, and the
placement of fitted and unfitted plywood boards over windows; and (2) BNYM is entitled to
summary judgment on the issue of Freitag's authority to act on behalf of Meritage. The parties'
motions are otherwise denied.
Page 2 - OPINION AND ORDER
Meritage at Little Creek is a planned community of townhouses on the Oregon coast
developed by Freitag in his capacity as managing partner of Big Fish Partners I ("Big Fish"). In
2003, Freitag made a Declaration of Covenants, Conditions, and Restrictions ("the Declaration")
in connection with their development of Meritage at Little Creek. The Declaration established a
set of rules for the planned community: it defined Meritage's membership, allocated
maintenance responsibilities, and set procedures for passing bylaws and levying dues and
assessments. It also provided that Freitag, as Declarant, would retain administrative control over
Meritage until a certain portion of the units were sold and conveyed to new owners. 1 Freitag
retained administrative control of Meritage at all times pertinent to this lawsuit.
Meritage at Little Creek was developed in phases, with construction on the first six units
commencing in late December 2003. By October 2006, the community had grown to eighteen
units, which sold for between $300,000 and $400,000. In 2006, Patricia and Nicholas Watt ("the
Watts") took out a loan to purchase one of those units.2 That loan was secured by a deed of trust
and promissory note.
2008 kicked off a long, tangled series of lawsuits in state and federal court related to
Meritage at Little Creek. First, Meritage and Big Fish filed a construction defect action in state
court, alleging defective installation of windows in all eighteen Meritage at Little Creek units
("the window litigation"). Meritage alleged that defective windows had caused substantial water
The Declaration initially identified both Freitag and a second Big Fish paitner, Rita
Schaefer, as Declarants. Schaefer's status as Declarant is not relevant to the issues in this
The sequence of events in this case is quite complex. In this opinion, the unit the Watts
purchased is variously referred to as "the property," "the Watts' unit," or "BNYM's unit,"
depending on who owned the unit at the time being discussed.
Page 3 - OPINION AND ORDER
damage to individual units as well as to common areas of Meritage at Little Creek. In 2011, the
Watts and other Meritage at Little Creek owners sued Freitag, Big Fish, and Meritage in state
court ("the HOA litigation"). The plaintiffs in the HOA litigation alleged claims for breach of
fiduciary duty and negligence against Freitag and attempted to force Freitag to turn over control
of Meritage to the unit owners. The plaintiffs in the HOA litigation also intervened in the
window litigation. Later in 2011, Meritage sued the Watts and other unit owners in individual
collection actions in state court ("the collection litigation") for failure to pay assessments, dues,
and other fees.
While those state court actions were pending, Freitag infonned the unit owners by email
that a window had blown out of one of the units and crashed to the ground. Freitag stated that,
because other windows were at risk of falling in similar fashion, owners would be required to
cover the windows until they were repaired or replaced. The owners objected, disputing whether
the windows in fact needed to be covered. They threatened to seek a temporary restraining order
to stop Meritage from covering the windows.
In the midst of that dispute, a coastal storm blew out two more windows, including a
window in the Watts' unit. At that point (February 2012), fitted plywood boards were placed
over the windows in the Watts' unit and other units. Those boards were removed in October
2012 after the Watts signed an agreement indemnifying Meritage from liability if another
window fell. 3
In 2012, the Watts defaulted on their mortgage payments. BNYM had by then acquired
the beneficial interest in the Watts' loan and was the holder of the promissory note and deed of
The window manufacturer made repairs to the windows and the fitted plywood boards
were removed. Meritage refused to remove the boards without an indemnification agreement,
taking the position that the repairs (re-glazing windows with failed seals) had not addressed the
conditions that led to the windows blowing out.
Page 4 - OPINION AND ORDER
trust on the property. Also in 2012, the HOA litigation settled. Through a written agreement,
the Watts agreed to release any claims against Meritage and Freitag arising from the same events
underlying the HOA litigation.
In September 2013, Freitag, in his capacity as Declarant, 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
windows or deposit money to begin the window replacement process.
In 2013, the window litigation settled. The contractor who installed the windows in the
Watts' unit and other units in that same phase of Meritage at Little Creek offered a financial
settlement to unit owners in exchange for a promise to either replace their windows right away or
re-cover the windows with plywood. The Watts agreed and a second set of plywood coverings
were placed over the windows. However, for reasons unclear from the record, the windows were
not re-covered until February 2014. The Watts promised to use window litigation settlement
proceeds to replace the windows and released any future claims against Meritage or Freitag
related to the events underlying the window litigation.
The Watts also stipulated that the
windows were defective and caused water damage to the property.
In February 2014, Meritage obtained a stipulated judgment of $175,504 against the Watts
in the collection litigation. That amount reflected unpaid dues as well as special assessments
levied against the Watts due to their failure to replace the windows. One month later, and
without having made any window repairs, the Watts filed a petition for relief under Chapter 13
of the Bankruptcy Code. In June 2014, after Meritage objected to the Watts' first two plans, the
Watts proposed a second amended Chapter 13 plan. That plan included a nonstandard provision
vesting the Watts' unit in BNYM upon confirmation, in satisfaction of the Watts' secured debt to
BNYM. BNYM objected to that forced vesting provision because, among other reasons, owning
Page 5 - OPINION AND ORDER
the property would make BNYM responsible for the ongoing obligations associated with the
property-including dues and assessments. Those obligations were and are substantial. Dues
for the property now exceed $25,000 per year and, as noted, assessments for failure to replace
the windows ran as high as $60,000 per year.
On October 15, 2014, the bankruptcy court confirmed the plan over BNYM's objection,
and BNYM took title to the property. BNYM appealed. On April 22, 2015, this Court vacated
and remanded, holding that the bankruptcy court lacked statutory authority to force an objecting
creditor to assume a debtor's interest in and ongoing liabilities associated with a piece of
property. Bank ofNY Mellon v. Watt, 2015 WL 1879680, *7 (D. Or. Apr. 22, 2015). 4 Title to
the property transferred back to the Watts, who began work on a new Chapter 13 plan. On
August 12, 2015, BNYM purchased the property through a sale under 11 U.S.C. § 363.
Consistent with that statute, BNYM acquired the property "free and clear" of "any interest" in
the property. Storti Deel. Ex. M, Oct. 20, 2017. The§ 363 sale order made clear, however, that
BNYM would be required to comply with the Declaration going forward-an obligation that
included paying quarterly dues and any assessments levied by Meritage under the authority of
In late 2015, Freitag convened Meritage's annual meeting. Freitag and Meritage's lawyer
were the only people present at the meeting. Freitag determined, in his capacity as head of
Meritage, that any fines or assessments related to the replacement of windows were "essentially
self-renewing upon any event that would otherwise abrogate them" -for example, "in the event
of a bankruptcy filing, ... whereas the prior fines and assessments might be discharged, a new
assessment and continuing fines would effectively apply beginning immediately after the filing."
The Watts appealed that decision, but the Ninth Circuit dismissed the appeal for lack of
jurisdiction. Bank ofNY Mellon v. Watt, 867 F.3d 1155, 1158 (9th Cir. 2017).
Page 6 - OPINION AND ORDER
Freitag Deel. Ex. 11 at 4-5, July 17, 2017. Freitag further concluded that "even if a sale free and
clear did affect [a] prior assessment, a new assessment would attach immediately after the sale."
Id. at 5.
In January 2016, Freitag sent BNYM invoices stating that it was required to pay
approximately $300,000 in assessments, fines, dues, and fees arising from pre- and post-§ 363
sale events. Jonas Deel. Ex. I. The invoice listed a payment due date of February 15, 2016.
When BNYM did not pay by that date, Meritage filed this lawsuit, seeking to recover the money
it alleges BNYM owes. In its Answer, Meritage asserted counterclaims against Meritage for
failure to maintain common property, unlawfully placing boards over the windows of BNYM' s
unit, and nuisance.
Meritage also asserted a thirty-party claim against Freitag for bad faith
breach of fiduciary duty.
On March 14, 2016, BNYM paid Meritage $6,685.70, the amount necessary to cover
dues for the first quarter of 2016, interest on those dues (because the payment was late), and a
late fee. Jonas Deel. Ex. 4 at 2. BNYM disputed that it owed any additional money at that point.
Because BNYM did not pay the full amount demanded in the January invoices, Freitag applied
the payment to reduce the overall amount due, declared BNYM in default, and accelerated the
remaining dues payments for 2016.
That pattern has repeated with each quarterly invoice:
Freitag bills BNYM for dues, assessments, fines and fees; BNYM pays its quarterly dues
amount; and Freitag applies that payment against the total owed rather than specifically against
BNYM's dues obligation.
BNYM has not replaced the windows at the property and they remain covered with
plywood. BNYM had an architect examine the property during discovery; it now contends,
citing that architect's expert opinion, that the windows at Meritage at Little Creek were not
Page 7 - OPINION AND ORDER
defective when installed. Rather, BNYM contends that it was Meritage's failure to maintain
common property such as the exterior and chimney of the units that caused water intrusion and
created the risk that windows would blow out. That theory echoes claims the Watts and other
unit owners made in the HOA litigation.
The windows have now been replaced in seventeen of the eighteen units at Meritage at
Little Creek, with BNYM as the only holdout. In many of the seventeen other units, the new
window system was installed only after Meritage obtained money and/or title to the unit through
litigation with the unit owners. Pursuant to his unilateral authority as administrative head of
Meritage, Freitag required uniform replacement that amounts to a substantial upgrade; the new
window system increases the glass area of the units' ocean-facing fac;:ades from sixty percent to
ninety-five percent. The upgrade costs approximately $175,000, or roughly half what the typical
units in Meritage at Little Creek sold for in 2006. Meritage and Freitag contend that Meritage
has the authority under the Declaration to require BNYM to install a conforming window system
for aesthetic reasons, regardless of whether the windows are in fact defective.
The most recent invoice in the summary judgment record is dated October 2017. That
invoice demanded that BNYM pay Meritage more than one million dollars. The total billed
includes, among other items, more than $60,000 in dues and associated fees and interest; the
$175,000 special assessment for failure to replace the windows; more than $80,000 in window
fines and interest; a $25,000 "lost discount" assessment (levied because BNYM could have
installed the new window system at a reduced rate had it acted sooner); a $206,250 "economic
loss assessment" related to an appraisal Meritage obtained regarding how the plywood over
Page 8 - OPINION AND ORDER
windows at the property has devalued the neighboring units; and more than $300,000 in
attorney's fees. 5 Jonas Deel. Ex. 4 at 29.
The parties' versions of the facts in this case could hardly be more different. Meritage
and Freitag contend that Freitag did what was necessary in his capacity as head of the HOA to
ensure that a dangerous condition was eliminated, unit owners' investments were protected, and
Meritage remained solvent. They argue that BNYM is, without legal or factual justification,
simply refusing to bear its fair share of costs. BNYM, by contrast, argues that Freitag illegally
maintained control over the HOA long after the time when control should have passed to the unit
owners under the Declaration and Oregon law. It avers that Freitag both failed to live up to his
obligations to maintain common property in a way that caused the damage he now attributes to
defective windows and used aggressive, manipulative tactics to bully unit owners until they
acquiesced to his demands, resulting in extravagant upgrades that have dramatically enhanced
the value of his own investment. Unsurprisingly, and as set out in more detail below, such a
dramatic dispute about the facts means that most of the parties' claims cannot be resolved at the
summary judgment stage.
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
Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine
The attorney's fees amounts are not visible on the exhibit, apparently because those line
items were printed in yellow ink, a color that does not show up on the black-and-white copy
included in the summary judgment record. Compare Jonas Deel. Ex. 4 at 26 (color copy of the
July 2017 invoice) with Jonas Deel. Ex. 4 at 29 (black and white copy of the October 2017
invoice). However, the attorney's fee total can be discerned by and subtracting all other line
items from the final "pay this amount" line.
Page 9 - OPINION AND ORDER
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
reasonable jurors, drawing all inferences in favor of the nonmoving party, could return a verdict
in the nonmoving party's favor." Diaz v. Eagle Produce Ltd. P'ship, 521 F.3d 1201, 1207 (9th
There are four motions before me.
First, Meritage and Freitag move for summary
judgment on all BNYM's counterclaims and third-party claims. Second, Meritage and Freitag
move for summary judgment on a portion ofMeritage's first claim for relief, related to BNYM's
liability for dues, assessments, and related fees and interest. Third, BNYM moves for summary
judgment on the issue of Freitag's authority to carry out the actions giving rise to Meritage's
Finally, Meritage seeks a preliminary injunction to prevent BNYM from filing a
receivership action in state court during the pendency of this case. Below, I address each motion
BNYM's Counterclaims Against Meritage and Third-Party Claims Against Freitag
Meritage and Freitag contend that they are entitled to summary judgment on all of
BNYM's counterclaims and third-party claims for five reasons. First, they argue that BNYM is
bound by the Watts' release of claims through the settlement agreements in the HOA litigation
and the window litigation. Second, they aver that BNYM is bound by a separate covenant,
recorded in Lincoln County, in which the Watts agreed not to sue over facts and circumstances
alleged in the window litigation. Third, they assert that BNYM is judicially estopped from
taking any factual position inconsistent with the facts to which the Watts stipulated in the
settlement agreements and the covenant, including that the windows at the property are defective
Page 10 - OPINION AND ORDER
and cause water intrusion. Fourth, they argue that BNYM's claims against Freitag are derivative
actions, and thus must fail due to pleading deficiencies and because Oregon law does not
authorize derivative actions against homeowners' associations. Finally, Meritage and Freitag
assert that BNYM has produced insufficient evidence in support of its claims.
Releases in Settlement Agreements
First, Meritage and Freitag argue that BNYM's counterclaims and third-party claims are
barred by tbe Watts' promise to release claims in two contracts between the Watts and Meritage:
the settlement agreement from the window litigation and the settlement agreement from the
HOA litigation. Both agreements, in broad terms, released present and future claims arising out
of the facts underlying lawsuits. Both agreements also purported to bind the "successors" and
"assigns" of the contracting parties. See Bundy Deel. Ex. 4 at I & Ex. 8 at 4, Aug. 1, 2017.
BNYM appears to be both the Watts' successor and assignee with respect to the property. See
Assignee, Black's Law Dictionary (10th ed. 2014) (defining "assignee" as "someone to whom
property rights or powers are transferred by another"); Successor, Black's Law Dictionary (I 0th
ed. 2014) (defining "successor" as "someone who succeeds to the office, rights, responsibilities,
or place of another; one who replaces or follows a predecessor").
As an initial matter, BNYM cites Erection Co., Inc. v. W & W Steel, LLC, 2011 WL
5008325, *9-*10 (D. Or. Oct. 20, 2011) for the proposition that the settlement agreements are
unenforceable because not all parties to the litigation signed the agreements. In Erection Co.,
two businesses sent various drafts of an agreement back and forth. They finally reached an
agreement on terms, but the deal fell apart before both parties signed a final version of the
contract. A letter of intent signed by both parties before the negotiations began provided that the
contract "shall be effective only . .. when signed by all parties." Id. at *2 (emphasis in original).
Page 11 - OPINION AND ORDER
This Court held that the agreement was not enforceable. Ultimately, Erection Co. is not on
point. Here, although some patties to the litigation did not sign the final agreements, both the
Watts and Meritage did sign them. The Watts were therefore bound by their promise to abide by
the terms of the agreements.
The question, then, is whether the Watts' promises bind BNYM. "The interpretation of a
settlement agreement is governed by principles of state contract law." Botefi1r v. City of Eagle
Point, Or., 7 F .3d 152, 156 (9th Cir. 1993). It is plain from the language of the agreements that
the Watts intended to release the claims of their successors and assignees. But, as a general rule,
parties to a contract have no power to bind third parties without their consent. Cf Drury v.
Assisted Living Concepts, Inc., 262 P.3d 1162, 1165-66 (Or. Ct. App. 2011) (holding that
requiring a third-party beneficiary to arbitrate a contractual claim without first determining
whether that beneficiary assented to the agreement would "allow contracting parties to alter the
rights of a third party, based on whatever consideration the contracting parties intend to provide
to the third party, and without regard for whether the third party deems that consideration to be
an adequate exchange for the contractual obligations").
BNYM cites several cases from other jurisdictions holding that when a corporation's
assets are sold in an arms-length transaction, the purchasing entity is not liable for the
corporation's debts or obligations as a successor or assignee. See, e.g., Cargo Partners v.
Albatrans, Inc., 352 F.3d 41, 44-45 (2d Cir. 2003). Meritage and Freitag correctly point out that
those cases are about the de facto merger doctrine, which is specific to corporate law.
Neve1theless, I find the reasoning of those cases useful in adjudicating the question presented
here. The de facto merger doctrine provides that, "when one corporation purchases all of the
assets of another corporation, the purchasing corporation does not become liable for the debts
Page 12 - OPINION AND ORDER
and liabilities of the selling corporation." Tyree Oil, Inc. v. Bureau of Labor & Indus., 7 P.3d
571, 573 (Or. Ct. App. 2000). There are four exceptions to that rule:
(1) Where the purchaser expressly or impliedly agrees to assume such debts; (2)
where the transaction amounts to a consolidation or merger of the corporations;
(3) where the purchasing corporation is merely a continuation of the selling
corporation; and (4) where the transaction is entered into fraudulently in order to
escape liability for such debts.
Id. at 573-74. In other words, the de facto merger doctrine asks whether there is some special
reason to depart from the general rule and hold a successor corporation liable for the debts of its
Analogous reasoning can be applied here. There is no special reason in this case to
depart from the baseline rule that contracting parties generally cannot bind absent third parties
and hold BNYM to the promises the Watts made. Meritage and Freitag have failed to carry their
burden to convince me that BNYM should be so bound. Their argument rests entirely on their
assertion that the contract language plainly covers successors and assigns, and BNYM is both a
successor and an assign. I agree on both points, but that argument simply misses the mark;
BNYM was not a party to the agreements, and nothing in the summary judgment record suggests
that I should depart from the usual rule and require BNYM to abide by promises it did not make.
Thus, the releases of claims in the agreements do not bind BNYM. 6
Covenant Not to Sue
Meritage and Freitag next argue that BNYM' s counterclaims and third-party claims are
barred by a release contained in a restrictive covenant signed by the Watts and recorded in
Lincoln County on February 24, 2014. In Oregon, "[c]ovenants running with the land are
Because BNYM is not bound by the agreements, it is unnecessary for me to decide
whether either agreement contains an anticipatory release of claims that violates public policy.
See Bagley v. Mt. Bachelor, Inc., 340 P.3d 27, 36-37, (Or. 2014) (invalidating a contractual
anticipatory release on the ground of unconscionability).
Page 13 - OPINION AND ORDER
binding upon and enforceable against subsequent purchasers with notice." Texas Co. v. Butler,
256 P.2d 259, 263 (Or. 1953). For a covenant to run with the land,"(!) there must be privity of
the estate between the promisor and his successors; (2) the promisor and promisee must intend
that the covenant run; (3) the covenant must touch and concern the land of the promisor; and (4)
the promisee must benefit in the use of some land possessed by him as a result of the
performance of the promise." Nordbye v. BRCPIGM Ellington, 266 P.3d 92, 101 (Or. Ct. App.
2011) (quoting Johnson v. Highway Division, 556 P.2d 724 (Or. Ct. App. 1976)). Even if the
technical requirements for a restrictive covenant are not met, the release of claims in the
covenant may be enforceable as an equitable servitude. In Oregon, a "promise is binding as an
equitable servitude if (1) the parties intend the promise to be binding; (2) the promise concerns
the land or its use in a direct and not a collateral way; and (3) the subsequent grantee has notice
of the covenant." Ebbe v. Senior Estates Golf & Country Club, 657 P.2d 696, 700 (Or. Ct. App.
The Watts agreed that they, and their "successors and assigns[,] ... shall not bring any
future claims . . . arising out of, or related to, or in any way caused by the facts and
circumstances alleged in the Window Litigation or related lawsuits ... which could have been
alleged [in those lawsuits.]" Bundy Deel. Ex. 10 at 2-3, Aug. 1, 2017. It is undisputed that there
is privity of estate between the Watts and BNYM and that BNYM had constructive notice of the
covenant, which was recorded before the§ 363 sale. See Huffv. Duncan, 502 P.2d 584, 585 (Or.
1972). It is also clear from the use of the terms "successors and assigns" that the parties intended
the covenant to run with the land. See Butler Family Ltd. P 'ship v. Butler Brothers, LLC, 388
P.3d 1135, 1141 (Or. Ct. App. 2017). Thus, the parties' dispute over enforceability boils down
to whether the covenant touches and concerns the land (the third prong of the restrictive
Page 14- OPINION AND ORDER
covenant test) or concerns the land or its use in a direct way (the second prong of the equitable
At first glance, those two requirements appear somewhat different. However, the Oregon
Court of Appeals has stated that "an equivalent formulation of the 'touch and concern'
requirement is whether the promise is one respecting the use of the land of the promisor." Ebbe,
657 P.2d at 700 (quoting Huff, 502 P.2d at 584 n.2). Oregon courts eschew "applying the rule of
touching and concerning in an overtechnical manner," and ask whether non-lawyers "would
naturally regard the covenant as intimately bound up with the land, aiding the promisee as
landowner or hampering the promisor in similar capacity[.]" Abbott v. Bob's U-Drive, 352 P.2d
598, 604 (Or. 1960). In light of that case law, I see no principled distinction between the third
prong of the restrictive covenant test and the second prong of the equitable servitude test.
Whether the promise here touches and concerns the land presents a difficult and novel
question of state law. In Huff, the Oregon Supreme Coutt held that a restriction requiring land to
be used for residential pmposes touched and concerned the land. 502 P.2d at 585. In Abbott, the
comt held that, because a covenant to pay rent touches and concerns the land, a covenant to
arbitrate rent disputes also touched and concerned the land. 352 P.2d at 604. In Ebbe, the court
held a restrictive covenant related to fees for maintaining an adjacent golf course did not touch
and concern the land because subsequent purchasers had neither the right nor the obligation to
become members with rights to use the golf course. 657 P.2d at 702. Finally, in Summer Oaks
Limited Partnership v. McGinley, 55 P.3d 1100, ll05 (Or. Ct. App. 2002), the Oregon Court of
Appeals held that "system development charge" credits available from the city to offset the costs
of certain land improvements did not touch and concern the land because the credits were not
tied to any particular parcel of land.
Page 15 - OPINION AND ORDER
In Summer Oaks, the Oregon Court of Appeals began
by acknowledging that the resolution to that question, or more specifically how to
resolve it in the unique context of this dispute, is not obvious. That, largely, is
due to the fact that, legally, the thing underlying this dispute-SOC credits-are
'neither fish nor fowl;' they relate neither to the title of the land nor are they
neatly categorized as covenants or equitable servitudes that are more typically
susceptible to the 'run with the land' -type analysis.
Id. at 1104-05. This case presents a similar "neither fish nor fowl" conundrum. Id. at 1105.
The covenant in question is connected to the land because it relates to a promise not to sue over
issues that were or could have been litigated in a construction defect lawsuit related to the
property. But the connection to land is somewhat attenuated; the covenant does not directly
restrict what a subsequent purchaser can or cannot do with the property. In sum, the Oregon
cases on the scope of "touch and concern" do not resolve whether the covenant in this case
touches and concerns the land. Accordingly, I turn to other jurisdictions for guidance.
The Washington Supreme Court has held that a promise not to sue may be a covenant
that runs with the land. 1515-1519 Lakeview Blvd. Condominium Ass'n v. Apartment Sales
Corp., 43 P.3d 1233, 1239 (Wash. 2002). In that case, the covenant in question required owners
of a particular piece of property to warn prospective purchasers that the property was a potential
"slide area" and released any claims against the city relating to soil movement. Id. at 1235-36.
The court noted the dearth of on-point case law and concluded that it was "an open question
whether a covenant warning of risk and exculpating liability for that risk touches and concerns
the land." Id. at 1238. The court then concluded that the covenant satisfied Washington's touch
and concern doctrine because "the covenant [wa]s limited to the reasonable enjoyment of the
land and limits rights normally associated with ownership" and "few things touch and concern
land more than the soil itself." Id. at 1239.
Page 16 - OPINION AND ORDER
The Fifth Circuit Court of Appeals reached the opposite conclusion in In re El Paso
Refinery, LP, 302 F.3d 343 (5th Cir. 2002). That case concerned an oil refinery. The court had
to decide whether, under Texas law, a covenant not to "assert any claims for contribution and/or
indemnity ... for environmental liability" against the owner of the refinery's bankruptcy estate
was enforceable against a subsequent purchaser. Id. at 347. The court began by explaining that
a covenant may run with the land when it "affects the nature, quality or value of the thing
demised, independently of collateral circumstances, or if it affects the mode of enjoying it." Id.
at 356 (quoting Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 911(Tex.1982))
(internal quotation marks omitted and alterations normalized). It distinguished such covenants
from personal covenants, which "affect the grantor personally and [are] unrelated to the use of
the land." Id. Applying those tests, the Fifth Circuit held that the covenant in question did not
touch and concern the land.
Any burden or benefit credited by the [covenant] affects only [the debtor]
personally and has no direct impact upon the land itself. The Refinery's owner
may, in accordance with the [covenant]'s provisions, take remedial action or not
take remedial action, pollute or not pollute, as long as contribution is not sought
from [the debtor]. The covenant does not compel nor preclude the promisor or
any subsequent owner from doing anything on the land itself.
Id. at 356-57.
Finally, in Calabrese v. McHugh, 170 F. Supp. 2d 243, 254 (D. Conn. 2001), the United
States District Court for the District of Connecticut held that a promise not to sue did not touch
and concern the land. In that case, a former manufacturer of brass products sold off portions of a
thitty-acre landfill. Id. at 249. The recorded warranty deed in one of those sales purported to
release the manufacturer from all claims for loss or damage related to the landfill's prior use "as
a dump for fly-ash, cinders, and other refuse[.]" Id. Applying Connecticut law, the court held
that the release "confer[red] a personal benefit" on the manufacturer but neither "conferred a
Page 17 - OPINION AND ORDER
benefit on the remaining land" nor "impose[ d] any burden" on the parcel itself. Id. at 254. Even
though the text of the warranty deed made clear that the parties had intended the covenant to run
with the land, its connection to the land was too tenuous to make it enforceable against
subsequent purchasers. Id. at 255.
I find the reasoning of the Fifth Circuit and District of Connecticut persuasive and adopt
it here. The release of claims in the covenant the Watts signed does not directly concern the
windows at the property; rather, it purports to prevent subsequent owners from suing Meritage or
Freitag in particular disputes related to those windows. In other words, the covenant's primary
purpose is not to promote or prevent any particular use of the land, but to protect cettain entities
and individuals from liability. The release therefore is not enforceable as a restrictive covenant
because it does not touch and concern the land. Similarly, it is not enforceable as equitable
servitude because it does not concern the land or its use in a direct way. The covenant does not
bar BNYM's counter-claims or third-party claims. 7
Meritage and Freitag next contend that the settlement agreements and covenant contain
stipulated facts that bind BNYM in this litigation. As explained above, (1) BNYM was not a
party to the settlement agreements and there are no special circumstances that support requiring
BNYM to honor the terms of those agreements and (2) the covenant does not run with the land
and is not enforceable as an equitable servitude against BNYM. Nevertheless, Meritage and
Because BNYM is bound by neither the settlement agreements nor the covenant not to
sue, I need not decide whether obligations under those agreements were cut off by the § 363
sale-a novel and difficult question of statutory interpretation that turns on whether Meritage's
rights under the settlement agreements and the covenant constitute "claims" within the meaning
of the Bankruptcy Code. See In re Motors Liquidation Co., 829 F.3d 135, 155 (2d Cir. 2016)
(acknowledging the breadth of the phrase "free and clear of any interest" but holding that a
bankruptcy court's authority to cut off liabilities via a § 363 is no broader than its authority to
extinguish debts through the bankruptcy process generally).
Page 18 - OPINION AND ORDER
Freitag contend that BNYM is judicially estopped from taking factual positions contrary to the
stipulations in the settlement agreements and covenant. Specifically, Meritage and Freitag argue
that BNYM cannot take the position in this lawsuit that the windows were not defective and did
not cause water intrusion.
Judicial estoppel is an equitable doctrine that protects the integrity of the judicial process
by precluding a party from gaining an advantage by asserting one position, and then later seeking
an advantage by taking a clearly inconsistent position. Rissetto v. Plumbers & Steamfitters Local
343, 94 F.3d 597, 600-01 (9th Cir. 1996). It applies only in cases where a court "relied on, or
'accepted,' the party's previous inconsistent position." Hamilton v. State Farm Fire & Cos. Co.,
270 F.3d 778, 783 (9th Cir. 2001). Obtaining a "favorable settlement constitutes the success
required" for judicial estoppel to apply. Rissetto, 94 F.3d at 605. Even when the claim at issue
arises under state law, "federal law governs the application of judicial estoppel in federal court."
Id. at 603.
Judicial estoppel does not apply here. BNYM never agreed to the stipulated facts in the
settlement agreements or the covenant; it therefore cannot possibly take an inconsistent position
in this lawsuit. Meritage and Freitag insist that judicial estoppel nonetheless applies because the
Watts and BNYM were in privity with one another. But in the context of judicial estoppel,
privity means that "one of the parties to the earlier suit is so closely aligned with the non-party's
interests as to be its virtual representative." Milton H Greene Archives, Inc. v. Marilyn Monroe
LLC, 692 F.3d 983, 996 (9th Cir. 2012). That is plainly not the case here; the Watts and BNYM
have been at odds over many issues related to this dispute, including when the Watts defaulted
on their loan and when the Watts included a forced vesting provision in their bankruptcy plan.
Page 19 - OPINION AND ORDER
BNYM is not judicially estopped from arguing that the windows are functioning and that water
damage to the unit was caused by something else.
Meritage and Freitag also challenge BNYM's third-patty claims against Freitag on the
ground that BNYM cannot proceed with a derivative action in this case. A derivative action is a
suit brought by an individual shareholder to enforce "a right that the corporation . . . may
properly assert but has failed to enforce." Fed. R. Civ. P. 23.l(a). "Devised as a suit in equity,
the purpose of the derivative action is to place in the hands of the individual shareholder a means
to protect the interests of the corporation from the misfeasance and malfeasance of faithless
directors and managers." Rosenbloom v. Pyatt, 765 F.3d 1137, 1147--48 (9th Cir. 2014) (internal
quotation marks omitted). Ordinarily, a party seeking to bring a derivative action must go to the
corporation's board of directors to demand that it file a lawsuit or take other action to protect its
own interests. Sommers ex rel. FLIR Sys., Inc. v. Lewis, 641 F. Supp. 2d 1151, 1156 (D. Or.
2009). Alternatively, a derivative-action plaintiff may plead "demand futility," which requires
alleging that "the particularized factual allegations of the derivative ... complaint create a
reasonable doubt that the board of directors could have properly exercised its independent and
disinterested business judgment in responding to a demand." Id. (quoting Ra Ies v. Blasband, 634
A.2d 927, 934 (Del. 1993)) (alterations normalized). Federal courts look to the law of the state
in which the company was incorporated in order to determine whether a derivative action may
In re Silicon Graphics Inc. Sec. Litig., 183 F .3d 970, 989-990 (9th Cir. 1999),
abrogated on other grounds, S. Ferry L.P., No. 2 v. Killinger, 542 F .3d 776, 784 (9th Cir. 2008).
BNYM appears to have intended to plead its third-party claim against Freitag both as an
individual claim and as a derivative action. Compare Am. Answer
Page 20 - OPINION AND ORDER
70 ("As a consequence of
Mr. Freitag's breaches of fiduciary duties and bad faith, Meritage HOA has been and continues
to be damaged in an amount to be proven at trial[.]") with id.
ii 71 ("As a consequence of Mr.
Freitag' s breaches of fiduciary duty and bad faith, BNYM has been and continues to be directly
damaged in an amount to be proven at trial."). BNYM alleges both shared hatms (e.g., failure to
maintain common property) and individual harms (e.g., receipt of inferior maintenance because
it is involved in litigation with Meritage).
Because BNYM alleges it has been harmed
individually by Freitag's actions, it has individual standing to asse1t its third-party claim against
Freitag. See Noakes v. Schoenborn, 841P.2d682, 687 (holding that minority shareholders could
proceed with individual claims against majority shareholders because they had "allege[d] harm
to themselves distinct from the harm to the corporation"); cf Gubitosi v. Zegeye, 28 F. Supp. 2d
298, 306 (E.D. Pa. 1998) ("Where ... the alleged harm being sued upon was suffered directly by
the individual limited partners, it is not necessary that a derivative claim be asserted-the limited
partners have standing to sue on their own behalf for damages which they themselves
BNYM also may proceed with its claim as a derivative action. Meritage and Freitag
argue that Oregon law does not authorize derivative actions against homeowners' associations.
But homeowners' associations are nonprofit corporations. Or. Rev. Stat. § 94.625(1). Under
Oregon law, any member with more than two percent voting power and any director of the
nonprofit may bring a derivative action in the nonprofit's name. Id. § 65.174(1). The Oregon
Court of Appeals has held, in a different context, that when "nothing in [the Planned Community
Act] purport[s] to preclude or qualify the application" of Oregon's statute governing nonprofits
to homeowners' associations, the law applies to the homeowners' association as it would to any
other nonprofit. Goodsell v. Eagle-Air Estates Homeowners Ass'n, 278 P.3d 133, 137 (Or. Ct.
Page 21 - OPINION AND ORDER
App. 2012). The Planned Community Act is silent with respect to whether a derivative action
may be brought to enforce the rights of a homeowners' association. Accordingly, a derivative
action is available under the Oregon statutes governing nonprofit corporations.
The only remaining question is whether BNYM has adequately pleaded a derivative
action under Federal Rule of Civil Procedure 23.1. Because Freitag is the sole administrator of
Meritage and obviously would not agree to bring a claim against himself, BNYM has adequately
pleaded demand futility.
Meritage and Freitag nevertheless argue that two of Rule 23.l 's
requirements are not met. First, they argue that BNYM cannot satisfy the requirement of being a
shareholder at the time of the transactions alleged. Fed. R. Civ. P. 23.l(b). I am not persuaded.
Because BNYM alleges breach of fiduciary duty, its claim against Freitag-whether asserted
individually or derivatively-is limited to the period of time during which Freitag owed it such a
duty, i.e., the time when BNYM was a member of Meritage. That BNYM only become a
member of Meritage after the§ 363 sale is therefore not a reason to dismiss its derivative claim.
Meritage and Freitag also argue that BNYM is not a fair and adequate representative of
the other members of Meritage, in violation of Federal Rule of Civil Procedure 23.l(a). The
burden is on Meritage and Freitag to show that BNYM does not meet that requirement.
Guenther v. Pac. Telecom, Inc., 123 F.R.D. 341, 344 (D. Or. 1987). For the purposes of Rule
23.l(a), "[a]n adequate representative must have the capacity to vigorously and conscientiously
prosecute a derivative suit and be free from economic interests that are antagonistic to the
interests of the class."
Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990).
considering adequacy of representation under Rule 23 .I should consider:
(I) indications that the party advancing the derivative claims is not the true party
in interest, (2) the claimant's unfamiliarity with the litigation and unwillingness to
learn about the suit, (3) the degree of control exercised by the attorney over the
litigation, (4) the degree of support received by the claimant from the other
Page 22 - OPINION AND ORDER
shareholders, (5) the lack of any personal commitment to the action on the part of
the representative claimant, (6) the remedy sought by the claimant in the
derivative action, (7) the relative magnitude of the claimant's personal interests as
compared to the derivative action itself, and (8) the claimant's vindictiveness
toward the opposing party.
Field Turf Builders, LLC v. FieldTurf USA, Inc., 2010 WL 817628, *3 (D. Or. Mar. 4, 2010)
(citing Larson, 900 F.2d at 1367). "[T]he most important element to be considered is whether
[the purported representative's] interests are antagonistic to those plaintiff is seeking to
represent." Puri v. Khalsa, 674 F. App'x 679, 682 (9th Cir. 2017) (unpublished) (quoting 7C
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1833 (3d ed. 2016)).
There is no per se rule against maintaining simultaneous individual and derivative claims; rather,
courts must "look behind the surface duality of the two types of actions, and ... allow them to
proceed unless an actual conflict emerges." In re Tarcyznski, 2015 WL 728410, *6 (9th Cir.
B.A.P. Feb. 19, 2015).
Whether BNYM can fairly and adequately represent the interests of Meritage's other
owners is a close question. On the one hand, there is ample vindictiveness between BNYM and
Freitag. In addition, now that seventeen of the eighteen units in Meritage at Little Creek have
the new window system, it arguably disadvantages the other owners if BNYM prevails in its
argument that the windows do not need to be replaced. That is because a single unit that is
different aesthetically may reduce the other units' property value. On the other hand, BNYM is
the true paity in interest and it has deep familiarity with and personal commitment to this case.
Moreover, BNYM's interests are aligned with the other unit owners in other ways. BNYM
challenges Freitag' s authority on many of the some grounds raised by other unit owners in the
failed HOA litigation. Unit owners who were plaintiffs in that case presumably still want to see
control of Meritage taken away from Freitag. And if BNYM is correct that Freitag has shirked
Page 23 - OPINION AND ORDER
his responsibility to maintain common property, all unit owners would benefit from a judgment
in BNYM's favor.
In November 2015, Freitag emailed fourteen of Meritage's other members the following
message: "As we all know, the windows [in BNYM's unit] must be replaced. The real question
here is who will pay. [BNYM] argues, in effect, that it should not have to pay but rather it
should be the financial obligation of the homeowners' group as a whole." Bundy Deel. Ex. 28 at
3, Aug. I, 2017. The email went on to request other owners' feedback regarding whether
Meritage members should share the expense of replacing the windows in BNYM's unit or
BNYM should fund that replacement. Unsurprisingly, four people responded to say that they
believed BNYM should pay for the window replacement; nobody responded to say that Meritage
should foot the bill. Freitag and Meritage seem to think that this is powerful evidence that
BNYM and the other Meritage members have divergent interests, but I am not convinced. Of
course other unit owners do not want to be held financially responsible for replacing the
windows in a unit that is not their own. But that is not what would happen if BNYM were to
prevail on its claims in this lawsuit. The relevant evidence of suppmt (or opposition) of other
Meritage owners in this case relates to whether those owners suppmt removing Freitag from his
position of authority in the homeowners' association. The best evidence on that point is the 2011
HOA litigation, in which nearly all unit owners sought that same remedy-though due to the
passage oftime, the power of that evidence has weakened.
On balance, I conclude that Freitag and Meritage have failed to can-y their burden to
show that BNYM has a real conflict that will prevent it from vigorously and conscientiously
prosecuting its derivative claims. BNYM may proceed both individually and derivatively with
its claim against Freitag.
Page 24 - OPINION AND ORDER
Adequacy of Evidence
Finally, Meritage and Freitag contend that they are entitled to summary judgment
because there is insufficient evidence in the summary judgment record to support the conclusion
that they are liable on any ofBNYM's counterclaims or third-party claims.
Counterclaims Against Meritage
BNYM asse1ts three counterclaims against Meritage. First, BNYM seeks declaratory and
injunctive relief relating to Meritage's alleged failure to "uphold its maintenance obligations"
under the HOA's governing documents. Am. Answer
44. Specifically, BNYM asse1ts that
Meritage has "failed to maintain siding, trim, exterior chimney, and other elements" of common
property and that Meritage has "provided lower levels of maintenance to unit owners while those
unit owners were or are in active litigation with Meritage HOA." Id. Substantial questions of
material fact remain with respect to this counterclaim. BNYM submitted the declaration of
David York, an architect who has been licensed in Oregon for thirty-three years.
declaration, York states that it is his professional opinion that "lack of exterior maintenance" is
the source of water intrusion and damage to the property; that the windows were code-compliant
when installed and do not need to be replaced; and that the units that had newer window systems
"also had visibly better newer, fully maintained exteriors built of newer materials, while the unit
exteriors with older window systems - like BNYM's Unit - were visibly weathered, unkept and
in need of basic maintenance and material replacement." York Deel.
5-6, Oct. 20, 2017.
York's declaration provides support for concluding both that Meritage failed to maintain
common property in a way that caused the damage it now attributes to defective windows and
that Meritage has given preferential maintenance services to unit owners with whom it was not
engaged in litigation. Of course, the record also contains contrary evidence tending to show that
Page 25 - OPINION AND ORDER
defective windows caused the damage and explaining that upgrades to exterior elements of the
units are made only after the defective windows are replaced.
But that evidence merely
establishes disputed questions of material fact. Meritage's first counterclaim cannot be resolved
at the summary judgment stage.
Second, BNYM seeks declaratory and injunctive relief relating to Meritage's placement
of plywood boards over certain windows at the property. BNYM contends that the windows in
the unit "are performing" and that "there is no safety or other valid reason to require that
plywood remain over the windows." Am.
53. Moreover, BNYM alleges that Meritage
initially placed "relatively inconspicuous" fitted plywood boards over the windows, but later
replaced those fitted boards with "conspicuous and unattractive" unfitted plywood boards. Id.
Once again, substantial questions of material fact remain with respect to this
counterclaim. Meritage leans heavily on the fact that the Watts conceded to the placement of the
plywood boards over the windows through the settlement agreement in the window litigation. I
agree that the Watts' consent shields Meritage from liability on this claim during the Watts'
ownership of the property, and likely for a reasonable period of time thereafter. 8 However,
because BNYM never consented to having the plywood over the windows and has asked to have
it removed and because there is conflicting evidence in the summary judgment record regarding
whether the windows are defective or need to be replaced, there necessarily are disputed
questions of material fact regarding whether Meritage has continuing authority to require the
plywood boards to remain over the windows.
Meritage and Freitag argue that, ifBNYM is not the Watts' "successor and assign" such
that it is bound by the settlement agreements, it lacks standing to assert its counterclaims and
third-party claims with respect to the period of time when the Watts owned the prope1ty. But
BNYM has voluntarily limited its claims to events occurring during the period of time after the
§ 363 sale, with respect to which it clearly has standing.
Page 26 - OPINION AND ORDER
Third, BNYM asserts a claim for nuisance against Meritage. It contends that Meritage 's
alleged failure to maintain common property pursuant to its obligations under the HOA
governing documents "is causing moisture intrusion and other property damage to the exterior of
the building that has begun or will soon begin to migrate into the interior of the building." Am.
58. BNYM seeks damages to cover the cost of investigation, repair, and remediation
of the property. Reasonable jurors could rely on York's expert opinion to conclude that Meritage
is liable for damages on this third counterclaim. Meritage is therefore not entitled to summary
judgment on any of BNYM' s counterclaims.
Third-Party Claims Against Freitag
BNYM asserts a single third-party claim against Freitag, for bad faith breach of fiduciary
duty. BNYM alleges that Freitag owes a fiduciary duty to the Meritage HOA and to individual
Meritage homeowners, including to BNYM. BNYM further contends that Freitag has "grossly
negligently or recklessly" breached that duty by incurring significant expenses that are not in the
best interests of the Meritage HOA or its owners; failing to provide unit owners with the
disclosures required under Oregon law; failing to fully fund and maintain adequate reserve
account balances; wrongfully asserting fines and penalties for allegedly defective windows;
wrongfully asserting authority to require plywood boards to be placed over functioning windows,
wrongfully placing first fitted and then unfitted plywood boards over those windows; failing to
hire adequate management and maintenance staff; failing to maintain common prope1ty and
providing lower quality service to BNYM's unit; and retaliating against unit owners who engage
in litigation with the HOA. 9 Am. Answer~ 69.
The Amended Answer also alleges that Freitag wrongfully assessed owners for
expenses attributable to him personally and approved conflict-of-interest transactions. Am.
Answer~~ 69(i)-(ii). At its 30(b)(6) deposition, BNYM voluntarily withdrew those allegations.
Page 27 - OPINION AND ORDER
There is insufficient evidence in the summary judgment record to proceed on two of the
allegations outlined above: the allegation that Freitag failed to provide required disclosures
(subsection iv of Paragraph 69 of the Amended Answer) and the allegation that Freitag failed to
maintain adequate reserve funds (subsection v). In response to Meritage and Freitag's motion
for summary judgment, BNYM cites (1) Freitag's deposition testimony that, in March 2015, the
HOA's reserve account was about half the size it previously had been; (2) Freitag's admission
that he has not made it a practice to distribute the mandatory reserve study reports to all owners;
and (3) BNYM's attestation that it never has received an updated reserve study or budget since it
took title to the property. That evidence is insufficient. First, that a reserve account is fifty
percent of what it once was is not useful information in a vacuum; BNYM has not explained
what an adequate reserve balance would be for the HOA or cited any evidence comparing
reserve balances to that standard. Second, the status of the HOA's reserve account in March
2015 does not provide sufficient information to support a claim that the account was
inadequately funded five months later, when BNYM acquired the property. With respect to the
disclosures, BNYM filed its initial Answer in this lawsuit in April 2016, about nine months after
it acquired the property in the § 363 sale. It has not cited specifically which budgets or reserve
studies it should have received but did not receive, and Freitag's testimony that it was not his
regular practice to distribute those documents to all owners is insufficient to create a question of
material fact on this issue. Moreover, a stipulation of facts filed October 19, 2017, establishes
that BNYM had in fact received budget documents related to the years 2013, 2014, 2015, and
2016, through discovery prior to the May 2017 filing of its Amended Answer. Accordingly,
Freitag is entitled to summary judgment on the theories outlined in subsections iv and v of
Meritage Homeowners' Ass'n & Third-Patty Def. Kmt Freitag's Reply Supp. Mot. Summ. J. Ex.
30 at 6-7 (doc. 88-2).
Page 28 - OPINION AND ORDER
Paragraph 69 of the Amended Answer.
Freitag is also entitled to summary judgment on
subsections ix and x of that paragraph, which relate to the placement of the fitted and unfitted
plywood boards over the windows, as those boards were placed during the Watts' ownership of
There is, however, sufficient evidence to support the conclusion that Freitag took (or
failed to take) the remaining actions listed above.
The evidence supporting the allegations
regarding failure to maintain common property (subsection xii), failure to hire adequate
management and maintenance staff (subsection xi), providing lower quality maintenance service
to certain unit owners (subsection xiii), requiring plywood boards to remain over the windows
(viii), and retaliating against certain unit owners (subsection xiv) is sufficient for the reasons set
forth in Section l.E.l, supra. With respect to the alleged incursion of expenses not in the interest
of the HOA (subsection iii) and wrongful assertion of fines and penalties for allegedly defective
windows (subsections vi and vii), the summary judgment record establishes that Meritage and
Freitag have required unit owners not only to replace but to substantially upgrade the windows in
their units. Freitag has also presided over the decision to levy assessments of thousands of
dollars per month against unit owners who did not replace the windows. In addition, Freitag was
in charge of the decision to incur hundreds of thousands of dollars in legal fees-in this lawsuit
and in other lawsuits. Those facts are sufficient evidence to permit the allegations contained in
subsections iii, vi, and vii to stand.
There is also a genuine dispute of material fact as to whether Freitag acted in bad faith or
in a grossly negligent or reckless manner. Whether Freitag's actions rose to the level of gross
negligence or recklessness is a question of fact. Oregon Auto. Ins. Co. v. Fitzwater, 531 P .2d
894, 898 (Or. 1975). As explained in Section III, infra, Freitag lacked legal authority to retain
Page 29- OPINION AND ORDER
administrative control of Meritage beyond June 5, 2004; that conclusion, while not dispositive to
BNYM's third-party claim, is relevant to the determination of whether Freitag acted recklessly or
The evidence here is capable of supporting dramatically different conclusions regarding
whether Freitag breached his fiduciary duty and whether any such breach was in bad faith. One
possible reading of the record is that Freitag, faced with a dangerous construction defect and a
subgroup of owners who refused to step up to their obligations to address a pressing safety issue,
zealously used the authority of the HOA in an attempt to responsibly and promptly resolve the
problem, thereby protecting the owners who wanted to do the right thing and equitably
distributing costs across all members of the HOA. But another plausible inference from the
summary judgment evidence is that Freitag used a construction defect lawsuit and his powers
under the HOA's governing documents to consolidate his own power and increase the value of
his own investments by forcing owners to pay for upgrades that were unnecessary and incredibly
costly when compared to the value of the underlying units.
In sum, Freitag is entitled to summary judgment on the portion of BNYM's third-party
claim that relates to his alleged failure to maintain adequate reserve funds, provide required
financial disclosures, and place fitted and unfitted plywood boards over the prope1ty's windows.
Otherwise, Freitag's motion for summary judgment on the third-party claim is denied.
Meritage 's Claim for Damages and Injunctive Relief under the Planned Community Act
Meritage and Freitag next move for summary judgment with respect to money damages
from (I) dues that accrued while BNYM had title to the property pursuant to the Bankruptcy
Comt's confirmed plan, from October 17, 2014 through April 22, 2015 ("Vacated Plan Period");
(2) dues that accrued after BNYM took title in the 3 63 sale, from August 12, 2015 to the present
Page 30 - OPINION AND ORDER
("Post-§ 363 Sale Period"); (3) an assessment for failure to replace the windows in BNYM's unit
after BNYM took title in the§ 363 sale; and (4) fines and interest associated with each.
Dues During Vacated Plan Period
Plaintiffs first seek summary judgment on the question of BNYM's liability for dues,
interest, and collection/late fees assessed during the Vacated Plan Period. BNYM responds that
because the plan was vacated, it has no ownership liabilities that predate the § 363 sale.
I agree with BNYM.
The term "vacate" means "to nullify or cancel; make void;
invalidate[.]" Black's Law Dictionary (10th ed. 2014). In a host of legal contexts, the Ninth
Circuit has held that vacatur retroactively invalidates the prior decision. See, e.g., Massachi v.
Astrue, 486 F.3d 1149, 1154 (9th Cir. 2007) (holding that when the Appeals Council vacates an
ALJ's original decision, "the ALJ's original finding no longer exist[s]."); United States v.
Crowell, 374 F.3d 790, 792 (9th Cir. 2004) (distinguishing expungement from vacatur, and
noting that, "[w]hen a court vacates a conviction, it sets aside or nullifies the conviction and its
attendant legal disabilities[.]"); Wiedersperg v. lN.S., 896 F.2d 1179, 1182 (9th Cir. 1990)
(holding that a state court order vacating a criminal conviction that had triggered depotiation
retroactively rendered that deportation unlawful).
When I vacated the order confirming the
bankruptcy plan, the legal effect as to the forced vesting provision was that it never existed.
BNYM's failure to seek a stay under Federal Rule of Bankruptcy Procedure 8007 was a
gamble-had it lost on appeal, it would have been liable not only for dues but for interest and
fees associated with those dues. But it was a gamble that paid off. Cf In re Brown, 563 B.R.
451, 454 (D. Mass. 2017) (stating that a creditor who decided to go ahead with a foreclosure sale
without seeking a stay ran "the risk that this comi would uphold the forced vesting provision").
Page 31 - OPINION AND ORDER
Plaintiffs insist that this result is unfair because it effectively bars them from recovering
dues for the vacated plan period from anyone. They cite my statement in Watt, 2017 WL
1364209 at *1, that "[t]he practical effect of th[e] complex procedural history" in that case was
that, "after they filed for bankruptcy, the Watts were the owners of the property for two periods
of time:" from "the date of the Chapter 13 filing" to "the date of plan confirmation, when BNYM
took title," and from "the date of this Court's order vacating the order confirming plan" to the
"date of the§ 363 sale to BNYM[.]" Plaintiffs argue that this statement necessarily implies that
the Watts had no ownership responsibilities during the Vacated Plan Period.
I am not persuaded. First and most impottantly, in Watt, I never decided who owned the
property during the Vacated Plan Period. That is because Meritage never raised the issue.
Meritage did not seek dues or assessments from the Watts for that period of time; both
Meritage's adversarial complaint, filed initially in bankruptcy court, and its summary judgment
briefs expressly addressed only the pre-confirmation and vacatur-to-§ 363 sale periods of time.
See Complaint, Meritage Homeowners' Ass'n v. Watt, Case No. 3:17-cv-00267-AA (doc. 1-1);
Mem. Supp. Pis.' Am. Mot. Part. Summ. J. 3 & 5, Meritage Homeowners' Ass'n v. Watt, Case
No. 3:17-cv-00267-AA (doc. 19).
Any limits on Meritage's ability to recover dues and
assessments from the Watts for the Vacated Plan Period, therefore, flow from its own prior
Second, the statement that the Watts owned the property for the pre-confirmation and
vacatur-to-§ 363 sale periods does not necessarily lead to the conclusion that they were not liable
for dues during the vacated plan period. The prior opinion states that BNYM was "in title" but
never concludes that it was the owner of the property or that it owed dues. Third, even if the
prior opinion could fairly be interpreted as stating that BNYM was liable for dues in the vacated
Page 32 - OPINION AND ORDER
plan period, it would have no preclusive effect in this case because the issue was not actually
litigated in the prior action. See State ex rel. English v. Multnomah Cty., 238 P.3d 980, 988 (Or.
2010). Relatedly, the prior decision would not bind the court here because principles of stare
decisis do not apply to decisions of district courts. See Camreta v. Greene, 563 U.S. 692, 709
n.7 (2011) ("A decision of a federal district court judge is not binding precedent in either a
different judicial district, the same judicial district, or even upon the same judge in a different
case.") (internal quotation marks omitted).
BNYM is not liable for any dues, interest, or fees from the Vacated Plan Period.
Dues Post-§ 363 Sale
Plaintiffs next seek summary judgment on the question of BNYM's liability for dues,
interest, and late fees from after the § 363 sale. BNYM agrees that it owes dues for this period of
time, but insists that it has paid those dues, as well as applicable late fees and interest, in full. It
contends that Meritage has unlawfully applied those dues payments to liabilities it does not
actually owe, and that any deficiency arises from Meritage's refusal to apply the payments
Meritage's calculation of what BNYM owes rests in part on its application of
Meritage' s payments to fees associated with dues assessed for the Vacated Plan Period. BNYM
is not liable for those dues, as explained in Section II.A, supra. Meritage's calculation of what
BNYM owes also rests in pait on its application ofMeritage's payments to fees associated with
the $175,000 window assessment. As explained in Sections II.C and Ill, infra, plaintiffs are not
entitled to summary judgment with respect to BNYM's obligation to pay that assessment
because Freitag lacked legal authority to act on behalf of Meritage when he levied the
assessment. Accordingly, it cannot be detennined at this stage whether BNYM has paid its post§ 363 sale dues in full or whether it still owes dues and related fees.
Page 33 - OPINION AND ORDER
Plaintiffs also seek summary judgment on the question of BNYM's liability for the
$175,000 assessment (plus associated fines and interest) Meritage levied against BNYM for
refusing to replace the windows. Plaintiffs are not entitled to summary judgment with respect to
liability for this assessment because, as explained in Section III, infra, Freitag lacked legal
authority to act on behalf of Meritage both in 2013, when the resolution permitting the monthly
assessments for failure to replace the windows was passed, and in 2016, when Meritage first
began its attempts to collect the windows assessment from BNYM.
Because Meritage is not entitled to summary judgment with respect to BNYM's
obligation to pay dues during the Vacated Plan Period, dues during the Post-§ 363 Sale period, or
the windows assessment, it cannot be determined at this stage whether BNYM is liable to pay
any ofMeritage's attorney's fees. Meritage's motion for partial summary judgment is denied.
Freitag's Authority to Act on Behalf ofHOA
Finally, BNYM moves for partial summary judgment regarding whether Freitag had the
legal authority to levy assessments (and related interest, fines, and fees) related to the windows at
the property, take other action related to the windows and window replacements, and choose to
apply BNYM's quarterly dues payments to the total (disputed) balance owed ratherthan solely to
dues. 10 BNYM's argument rests on its contention that Freitag failed to turn over administrative
control of Meritage to the unit owners at the time mandated by the Declaration and Oregon law.
Jn their response brief, Meritage and Freitag take issue with BNYM's motion; they
assert that "it is unclear exactly which sections of BNYM's counter-claims and Third-Party
Complaint th[e] motion references" and suggest that BNYM's argument is "better couched as a
'motion for declaratory dete1mination' of sorts." Meritage Homeowners' Ass'n and Third-Party
Def. Kurt Freitag's Resp. BNYM's Mot. Part. Summ. J. 2 (doc. 92). I do not find BNYM's
Page 34 - OPINION AND ORDER
As a threshold matter, Meritage and Freitag contend that BNYM cannot proceed on the
theory that Freitag violated the Declaration by retaining administrative control of Meritage for
two reasons. First, they contend that BNYM's 30(b)(6) witness expressly disclaimed reliance on
any such theory. Having reviewed the excerpts of deposition testimony provided by the parties, I
Witnesses answer only the questions they are asked; nowhere does the
30(b)(6) witness disclaim reliance on a lack-of-authority theory.
Second, Meritage and Freitag argue that it is inherently contradictory to pursue claims for
breach of fiduciary duty while simultaneously contending that Freitag lacked legal authority to
take action on Meritage's behalf. According to that theory, if Freitag violated the Declaration by
failing to turn over control of Meritage, he owed Meritage's members no fiduciary duty during
any time period after turnover was required. Once again, I am not persuaded. First, it is wellestablished that parties may proceed to trial on alternative theories of liability even if they
ultimately cannot prevail simultaneously on both theories.
Cf, e.g., Hamlin v. Wilderville
Cemetery Ass'n, 313 P.3d 360, 367 n.3 (Or. Ct. App. 2013) (allowing claims for negligence and
intentional infliction of emotional distress based on the same conduct to proceed to trial).
Second, when Oregon courts assess whether a relationship triggers a heightened duty of care
(such as fiduciary duty), the question is whether "the party who is owed the duty effectively has
authorized the party who owes the duty to exercise independent judgment in the former party's
behalf and in the former party's interests." Shin v. Sunriver Preparatory Sch., Inc., 111 P.3d
762, 771 (Or. Ct. App. 2005) (internal quotation marks omitted). Whether or not Freitag's
motion confusing. Whether the assessments and fees were levied with or without lawful
authority is at the heart of the parties' dispute; it bears particular relevance to BNYM's thirdparty claim against Freitag and to whether Meritage has a right to recover most of the money it
assetts BNYM owes. Accordingly, plaintiffs motion is an appropriate request for summary
judgment on a pait of a claim or defense, as expressly authorized by Federal Rule of Civil
Page 35 - OPINION AND ORDER
control of the Meritage was authorized under the Declaration, he in fact retained control of
Meritage throughout the events giving rise to this litigation; during that time, he was legally
bound to act in the interest of Meritage and its members. Whether Freitag acted without legal
authority does not affect whether he owed Meritage's members a fiduciary duty; instead, it goes
to whether he breached that duty recklessly or with gross negligence, as required for BNYM to
hold him personally liable under Oregon law.
Effect of Or. Rev. Stat. § 65. 084
In a statement of supplemental authorities, Meritage cites Or. Rev. Stat. § 65.084. That
statute, titled "Challenge of Corporate Authority," provides:
(1) Except as provided in subsection (2) of this section, the validity of corporate
action may not be challenged on the ground that the c01poration lacks or lacked
power to act.
(2) A corporation's power to act may be challenged:
(a) In a proceeding by a member or members, a director or the Attorney
General against the corporation to enjoin the act;
(b) In a proceeding by the corporation, directly, derivatively or through a
receiver, a trustee or other legal representative, including the Attorney
General in the case of a public benefit corporation, against an incumbent
or fonner director, officer, employee or agent of the corporation ...
(3) In a proceeding under subsection (2)(a) of this section to enjoin an
unauthorized corporate act, the court may enjoin or set aside the act, if equitable
and if all affected persons are parties to the proceeding, and may award damages
for loss other than anticipated profits suffered by the corporation or another party
because of enjoining the unauthorized act.
Or. Rev. Stat. § 65.084. Meritage argues that BNYM's challenge to Freitag's authority to act
does not fall within subsection (2)(a) or (2)(b), and thus any ofBNYM's claims or defenses that
rest on Freitag' s purported lack of authority must fail.
Page 36 - OPINION AND ORDER
BNYM responds that its wrongful assessment argument does not constitute a challenge to
the corporation's power to act.
BNYM concedes that it is "assuredly within the scope of
[Meritage's] power to levy assessments consistent with the Declaration and Bylaws[.]" Reply
Supp. BNYM's Mot. Part. Summ. J. 26-27 (doc. 108). BNYM contends that it is challenging
not Meritage's authority to levy assessments, but the legality of the particular assessments levied
by Freitag in this case; if those assessments were not levied "according to specific procedures set
forth in [Meritage's] governing documents," BNYM argues, they are "a legal nullity." Id. 26-
Meritage's argument is foreclosed by Dischinger Orthodontics, PC v. Regence Bluecross
Blueshield of Oregon, 405 P.3d 164 (Or. Ct. App. 2017), the only Oregon case to address the
meaning of§ 65.084. In Dischinger, policyholders brought a putative class action against the
defendant insurance company, claiming that the defendant "breached insurance contracts with its
policyholders by retaining excessive earnings and distributing them as compensation to
executives, in violation of defendant's contracts, articles of incorporation, and state law." 405
P.3d at 165. The plaintiffs sought a declaration that the defendant had violated its articles of
incorporation. Id. The trial court held that the plaintiffs lacked standing to assert their claims.
On appeal, the plaintiffs argued that "their claims [we ]re not made on the ground that [the]
defendant lacked the power to act, but rather that, in so acting--contrary to its status as a
nonprofit public benefit corporation through its retention and distribution of profits---
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?