IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 84,171
D. CLARENCE UNRAU, LOUISE LANGENWALTER,
MARY THIESSEN, F.C. LOGANBILL, and ESTHER STUCKEY,
Plaintiffs/Appellants/Cross-appellees,
v.
KIDRON BETHEL RETIREMENT SERVICES, INC.,
and
KIDRON BETHEL CONDOMINIUMS, INC.,
Defendants/Appellees/Cross-appellants.
SYLLABUS BY THE COURT
1. Interpretation of a statute is a question of law, and the Supreme Court's review is unlimited.
2. In construing statutes and determining legislative intent, several provisions of an act, in pari materia, must be construed together with a view of reconciling and bringing them into workable harmony, if possible.
3. Where the trial court has made findings of fact and conclusions of law, the function of an appellate court is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law. Substantial evidence is evidence which possesses both relevance and substance and which furnishes a substantial basis of fact from which the issues can reasonably be resolved.
4. The marketing phase of a condominium project is a reasonable period of time in which the developer may maintain control of the unit owners' association. The marketing phase of the condominium is that time during which the developer actively engages in selling the condominium units. Allowing developer control during the marketing phase protects the developer's risk.
5. An agreement designed to protect the developer's interests during the development and marketing phase of a condominium implicitly contains limitations of time on such protection. This is consistent with the basic concept of a condominium, i.e., that unit owners will be afforded a proportionate voice in the management of the common areas and facilities.
6. Bylaws and declarations may be designed to protect the developers' interests during the development and marketing phase of a condominium and implicitly contain limitations of time on such a phase. Ownership does not justify developer control for an indefinite time.
7. There are situations in which class voting by a developer serves a legitimate purpose, and the Uniform Condominium Act permits such voting as provided in the declaration. However, units may not constitute a class simply because they are owned by the declarant. Permissible unit distinctions must pertain to the characteristics of the unit rather than characteristics of the owner.
8. In the absence of a statute, courts may place limitations on the control a subdivision developer may exercise over a property owners' association.
9. A judicial decision may be applied prospectively only if: (1) the decision establishes a new rule of law; (2) retroactive application would not further the principle on which the decision is based; and (3) retroactive application would cause substantial hardship or injustice.
10. Under the Kansas Apartment Ownership Act, bylaws may provide for the election from among the apartment owners of a board of directors, the number of persons constituting the board, and that the terms of at least one-third of the directors shall expire annually; the powers and duties of the board; the compensation, if any, of the directors; the method of removal from office of directors; and whether the board may engage the services of a manager or managing agent. K.S.A. 58-3119.
11. The Kansas Apartment Ownership Act does not restrict board membership to condominium residents. In fact, K.S.A. 58-3119 sets out a discretionary list of bylaw provisions that may govern the organizational structure of a condominium owners' association. The legislature's use of the language "may provide" in K.S.A. 58-3119(a) makes the provisions regarding the contents of the bylaws permissive and discretionary.
12. It is a general rule of law applicable to all contracts, including deeds, that prior stipulations and agreements are merged in the final and formal contract or deed executed by the parties. When a deed is delivered and accepted as performance of a contract to convey, the contract is presumed to be merged in the deed. An agreement for the conveyance of land is in its nature executory, and the acceptance of a deed in pursuance thereof is to be deemed prima facie an execution of the contract and the agreement thereby becomes void and of no further effect.
13. The interpretation and legal effect of written instruments are matters of law, and an appellate court exercises unlimited review. Regardless of the construction given a written contract by the trial court, an appellate court may construe a written contract and determine its legal effect.
14. Condominium common areas, facilities, limited common areas, and common expenses are defined by K.S.A. 58-3102.
15. Any unfair transaction undertaken by one in a fiduciary relationship may result in liability for unjust enrichment of the fiduciary. Where the fairness of a fiduciary transaction is challenged, the burden of proof is upon the fiduciary to prove by clear and satisfactory evidence that such transaction was fair and done in good faith.
Appeal from Harvey district court; CARL B. ANDERSON, JR., judge. Opinion filed July 13, 2001. Affirmed in part, reversed in part, and remanded with directions.
Randall E. Fisher, of Law Offices of Randall E. Fisher, of Newton, argued the cause and was on the briefs for appellants and cross-appellees.
Susan R. Schrag, of Morris, Laing, Evans, Brock & Kennedy, Chtd., of Wichita, argued the cause, and Dennis M. Feeney, of the same firm, and David C. Burns, of Sizemore, Burns & Gilmore, P.A., of Newton, were with her on the briefs for appellees and cross-appellants.
The opinion of the court was delivered by
LOCKETT, J.: Five condominium owners (Owners) brought an action against a condominium developer corporation and operator corporation seeking revision of condominium declarations, bylaws, and related documents. On appeal, Owners argue (1) that past acts of the illegally constituted board of directors of Kidron Bethel Condominium, Inc. (Association) were unlawful and invalid; (2) that persons who are not condominium owners cannot act as members of the board of directors; and (3) various other complaints decided by the district court which are discussed.
Developer corporation cross-appeals, claiming (1) the trial court erred in ordering a method of allocating votes different from the Association's bylaws and (2) funding the project justifies a continuing exercise of developer control over the Association.
The entities involved are:
Village: Kidron Bethel Village, includes residential facilities (nursing home, HUD apartments, and condominium units owned by residents), nonresidential facilities, including health fitness center, kitchen, and dining rooms, arts/crafts facility, and chapel, and services, including access to nursing care at a discounted rate and transportation.
KBRS: Kidron Bethel Retirement Services, Inc., developer and manager, a non-profit corporation. KBRS planned and constructed the independent living housing and nursing home facility at the Village. KBRS owns and provides the noncondominium facilities and services of the Village.
Association: The Association, Kidron Bethel Condominiums, Inc., was incorporated on November 22, 1989. The Association is a nonprofit incorporated homeowners' association for the condominium development. Plaintiffs are members of the homeowners' association. Members of the association's board of directors are referred to in this opinion as the "Board."
Kidron, Inc.: Corporation formed in 1979 to develop and provide Housing and Urban Development (HUD) financed independent living units in the Village. Kidron, Inc., is not a defendant in this action.
Owners' petition alleged that KBRS and the elected Board were guilty of various breaches of fiduciary duties, including mishandling membership money, conversion, and other similar acts. Owners requested that the district court dissolve the Board, remove all control of the Association from KBRS, and reincorporate the Association in compliance with K.S.A. 58-3101 et seq. Owners further requested that KBRS be permanently enjoined from being involved with the Association and its operations and activities; to conduct an accounting to determine the actual losses sustained by the Association by reason of the breach of fiduciary duties of KBRS and the Board; to conduct an accounting to determine the actual amount of unjust enrichment received by the defendants as a result of the breach of fiduciary duties; impose a constructive trust on the defendants until the Association can elect and install a new board of directors; order the defendants to convey possession and title of all the Association's assets to the newly elected board; order all assets of the Association to be held in constructive trust for the sole benefit of the Association; and order the defendants to pay the Association actual damages, attorney fees, and costs.
Many issues presented in this appeal require interpretation of the Kansas Apartment Ownership Act (Act), K.S.A. 58-3101 et seq. Other issues involve a review of the trial court's findings.
Throughout this opinion, the term "apartment owner" refers to the person or persons owning an apartment or condominium unit in fee simple absolute and an undivided interest in the fee simple estate of the common areas and facilities as specified and established in the declaration. K.S.A. 58-3102(b). Under the Act, each apartment owner is entitled to the exclusive ownership and possession of his or her apartment. K.S.A. 58-3105.
Standards of Review
Interpretation of a statute is a question of law, and the Supreme Court's review is unlimited. Hamilton v. State Farm Fire & Cas. Co., 263 Kan. 875, 879, 953 P.2d 1027 (1998). In construing statutes and determining legislative intent, several provisions of an act, in pari materia, must be construed together with a view of reconciling and bringing them into workable harmony, if possible. State v. Bolin, 266 Kan. 18, 24, 968 P.2d 1104 (1998) (citing State v. Vega-Fuentes, 264 Kan. 10, 14, 955 P.2d 1235 [1998]).
Where the trial court has made findings of fact and conclusions of law, the function of an appellate court is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law. Substantial evidence is evidence which possesses both relevance and substance and which furnishes a substantial basis of fact from which the issues can reasonably be resolved. Sampson v. Sampson, 267 Kan. 175, 181, 975 P.2d 1211 (1999).
Acts of an Illegally Constituted Board of Directors
When developing the Village in the late 1980's, KBRS formed the condominium and housing project, drew up bylaws pursuant to K.S.A. 58-3118, created and recorded the Declaration of Kidron Bethel Condominium, a Condominium Development of Kidron Bethel Retirement Services, Inc. (declaration) pursuant to K.S.A. 58-3111 and K.S.A. 58-3115, and incorporated the Association to operate the condominium project. The declaration provided that each condominium owner was a Class A voting member of the association. Each Class A member had one vote. In the event of multiple ownership interests in a condominium unit, each fractional owner had a fractional vote corresponding to his or her ownership interest. KBRS was a Class B member. As a Class B member, under the declaration, KBRS was entitled to one vote for each condominium unit it owned and an additional three votes for each Class A vote.
The original Bylaws of Kidron Bethel Condominiums, Inc. (bylaws) provided that the Board should consist of nine directors. The condominium resident owners, as Class A members, elected two directors. KBRS, the Class B member, elected seven directors. Directors did not need to be resident owners but had to reside in Kansas. Subsequent revisions to the bylaws were made as the Village expanded. The number of directors increased. However, KBRS consistently exercised control over the Board by its weighted Class B voting power.
The district court initially ruled that the election scheme set out in the declaration and the bylaws for electing the Association's directors was legal under Kansas law. In its final order the trial judge reversed that decision, concluding:
"I don't know that I can point to any particular part of the Act, or a particular case that has caused me to change my mind. However, in reading the Act in its entirety and the legislative history behind it, I have come to the conclusion that the provisions of the Act can only be construed to be in harmony with each other and provide equitable management of a condominium association if it embraces the concept of election of the Board of Directors of the association by the condominium owners exclusively. I recognize that defendants have cited to the court numerous jurisdictions that have allowed developers to control condominium associations. However, none of those cases have allowed the developer to control the association indefinitely, and most of those jurisdictions have specific language in their condominium law that provides for developer control and the length of time it may be maintained. In my own research I have found no cases, and defendants have cited me to none, that have allowed developers to maintain control of an association in perpetuity. On the contrary, all of the cases I have studied require at one point or another for the developer to turn over control to the condominium owners.
"The Kansas Act provides no authority for control of the association by the developer. In fact, it appears that under K.S.A. 58-3119 that the Act contemplates that the Board of Directors of the association would come from the condominium owners themselves. I agree with the defendants that this section is permissive in nature and does not resolve the issue. However, I think the section gives us a strong indication that the Act contemplates that the affairs of the association will be controlled by the condominium owners themselves. In addition, K.S.A. 38-3102 defines "apartment owner" as follows:
"(b) 'apartment owner' means the person or persons owning an apartment or condominium unit in fee simple absolute and an undivided interest in the fee simple estate of the common areas and facilities as specified and established in the Declarations.
"And defines 'association of apartment owners' as follows:
"(d) 'association of apartment owners' means all of the apartment or condominium unit owners acting as a group in accordance with the bylaws and Declarations (emphasis added).
"The definition cited above, especially the definition of 'association of apartment owners' leads me to believe that in order for all of the owners to act 'as a group' the condominium owners must be in a position to exclusively elect their Board of Directors. Otherwise this language is meaningless.
"Even if the Kansas act could be construed as allowing KBRS to control the association for a reasonable period of time during initial development and marketing (as determined by the Massachusetts Court in Barcley v. DeVeaue, 329 N.E. 2d 323), that period has come and gone. Ten years [have] elapsed since the condominium program has begun in this case and the vast majority of the condominiums have been built and sold. I recognize that KBRS still owns many of the condominiums that they have repurchased. However, such ownership does not justify developer control for an indefinite time. Furthermore, KBRS is protected because it will have the same right to vote its ownership interest in the election of the Board, the same as the other condominium owners. Ultimately, KBRS will control the association because at some time in the future it will own a majority of the condominium units by way of its buy-back agreement it has with the present condominium owners through their residency agreements.
"I also note that throughout this litigation the defendants have argued strenuously to the court that the vast majority of the condominium owners support the past actions of the Board of [the Association]. Assuming that to be the case, I am confident that the interest of KBRS will be protected by a new Board selected exclusively by those same condominium owners.
"The bottom line is I am changing my ruling and I am now finding the Kansas Apartment Ownership Act requires that the Board of Directors of [the Association] must be elected by the condominium owners exclusively. Anything in the Declarations or bylaws of [the Association] contrary to this ruling are declared null and void as of the date of this decision. All other terms of the Declarations and bylaws shall remain in full force and effect. To carry out this ruling I make the following orders:
"1. Each condominium unit will be entitled to one vote for each Board position in the election of a new Board of Directors for the association. In the case of a jointly owned unit, each owner shall be entitled to one-half vote on each Board position.
"2. KBRS shall have one vote for every condominium unit owned by it.
"3. I stand by my earlier ruling that a Board member does not necessarily have to be a condominium owner, provided all Board members are elected by the condominium owners exclusively.
"4. This ruling is prospective only, and not retroactive. Nothing contained in this ruling shall be construed as in any way invalidating any of the past acts of the present Board of Directors."
The order then instituted a procedure for electing and replacing the sitting board with a board elected only by the condominium owners. The court's order to reconstitute the Board was stayed pending appellate review.
The Owners agree that the trial court's ruling that the Association's Board of Directors was illegally elected in violation of the Act is correct; the Owners disagree with the court's decision not to invalidate the past acts of the Board. In the cross-appeal, KBRS and the Board argue that the judge erroneously ruled that the election of the Board by anyone other than the condominium owners violates the Act.
The statutory provisions for the composition and election of the board of directors of a condominium or association are K.S.A. 38-3102(b) and (d), which are quoted by the trial judge in his order. K.S.A. 58-3102(p) defines "person" as "individual, corporation, partnership, association, trustee or other legal entity."
The administration of every condominium property is governed by its bylaws. K.S.A. 58-3119 states, in part:
"The bylaws may provide for the following:
"(a) The election from among the apartment owners of a board of directors, the number of persons constituting the same, and that the terms of at least one-third (1/3) of the directors shall expire annually; the powers and duties of the board; the compensation, if any, of the directors; the method of removal from office of directors; and whether or not the board may engage the services of a manager or managing agent."
The apartment owners in this case are the individual condominium owners and KBRS, which has held fee simple title to various units from the project's inception. Although KBRS initially sold fee simple interests in the condominium units, it discontinued that practice and now sells life estates. Because KBRS no longer sells fee simple interests in the condominium units it has held or acquires by repurchasing units, it will ultimately become the owner of all condominium units in the Village.
The Boards of Directors of the three corporations that comprise the Village (KBRS, the Association, and Kidron, Inc.) are identical. Under the election scheme outlined in the declaration, the bylaws, and subsequent amendments to those documents, three directors are elected by the condominium owner/residents; four are appointed by four local Mennonite church congregations; three are elected by the financial contributors to KBRS; and three (known as community directors) are selected by the above 10 directors; the president of KBRS also serves in an ex-officio capacity. Although decisions regarding the operation and management of the Village are made by the Boards, the directors are not compensated for their services.
KBRS and the Board argue that because the Act does not prohibit developer control over a condominium project or require that only condominium residents elect a board of directors, the parties may contract as to the method of board election. They assert that because the parties contracted for the method of election in the Declaration and the bylaws, the courts cannot interfere with their agreement.
We note that in the absence of a specific statute, courts have placed numerous limitations on the control a subdivision developer may exercise over a property owners' association. For example, in Barclay v. DeVeau, 384 Mass. 676, 429 N.E.2d 323 (1981), unit owners argued that a provision in the declaration of a condominium trust giving the developer three votes for each unit owned offended the Massachusetts condominium act. The applicable statute provided that "[e]ach unit owner shall have the same percentage interest in the corporation, trust or unincorporated association provided for in the master deed for the management and regulation of the condominium as his proportionate interest in the common areas and facilities." Mass. Gen. L. ch. 183A, § 10(a) (1980). In conflict with the statute, the condominium trust provided for developer control until the developer owned less than 12 units.
The Barclay court recognized that the developer and its mortgagee risk a great deal in undertaking a condominium project and, to protect their large investment, may need to maintain control of the project for a specific period of time. 384 Mass. at 683. However, the court recognized that an agreement designed to protect the developer's interests during the development and marketing phase of a condominium implicitly contains limitations of time on such protection. This view was consistent with the basic concept of a condominium, i.e., that unit owners will be afforded a proportionate voice in the management of the common areas and facilities. 384 Mass. at 684.
The Barclay court held that the "marketing phase" of a condominium project was a reasonable period of time in which the developer may maintain control of the unit owners' association. It found that the marketing phase of the condominium is that time during which the developer actively engages in selling the condominium units. Allowing developer control during that period protects the developer's risk. 384 Mass. at 684-85.
In a footnote, the Barclay court noted that although the Massachusetts legislature had not adopted the portions of the Uniform Condominium Act dealing with developer control of a condominium association, the Act did present useful guidelines in determining the reasonableness of developer control in terms of time, percentage of interest owned, and marketing efforts. Specifically, the Uniform Act provides that regardless of the period provided in the declaration, a period of declarant control terminates no later than the earlier of 60 days after conveyance of 75 percent of the units which may be created, 2 years after all declarants have ceased to offer units for sale, or 2 years after any development right to add new units was last exercised. 384 Mass. at 685, n.17 (citing Uniform Condominium Act, § 3-103[d]-[e], 7 U.L.A. 291 [1980]).
Because the Barclay case record did not clearly indicate what criteria the trial judge considered in determining that the condominium project was still in the marketing phase, nor did the record indicate whether the judge considered the question of reasonable time apart from marketing efforts, the appellate court remanded the case for a determination of whether the developer was actively engaged in a bona fide effort to sell units and if the circumstances required that control must pass to the unit owners.
In Investors Ltd. v. Sun Mountain Condominiums, 106 Idaho 855, 683 P.2d 891 (Ct. App. 1984), the developer filed a condominium declaration that contemplated the construction of three buildings, each containing four condominium units. After constructing one building, the developer sold out to Investors Limited. Investors Limited proposed that the declaration be amended to permit construction of a fourth building on the property.
All the units in the existing structures had been sold. A majority of the owners of existing units opposed the proposed amendment. Investors Limited argued that it owned eight authorized, although unconstructed units, and it was entitled to vote for each unit.
The Investors Limited court disagreed. The court pointed out that the declaration, although not entirely clear, seemed to define "owner" with reference to physically existing units. Pertinent to this case, the court noted that "[t]he declarant could easily have made clear specific provisions in the declaration for retaining some control in the Association until all or part of the units were completed and sold, if this was the intent." 106 Idaho at 857.
Here, developer control is maintained through class voting and each class of members votes as a separate unit. The Official Comment to the Uniform Condominium Act (UCA) recognizes that there are situations in which class voting serves a legitimate purpose, and the UCA permits such voting as provided in the declaration. U.C.A. § 2-107, Comment 9, 7 U.L.A. 252 (1997). However, units may not constitute a class simply because they are owned by the declarant. U.C.A. § 2-107(c), 7 U.L.A. 250. Permissible unit distinctions must pertain to the characteristics of the unit rather than characteristics of the owner.
The Federal Housing Administration's proposed form, Declaration of Covenants, Conditions, and Restrictions, contemplates class voting as a device to enable the developer to control the project during its sales campaign. FHA Form 1401 (VA Form 26-8201) Art. III § 2. Developers following the prescriptions of this form divide unit owners into those comprising Class A membership (consisting of all unit owners except the developer) and those comprising Class B membership (the developer). Each Class A member has one vote per lot. The Class B member enjoys three votes per lot. To ensure that developer control is not perpetual, the developer automatically becomes a Class A member upon the earlier of (1) "when the total votes outstanding in the Class A membership equal the total votes outstanding in the Class B membership" or (2) a specified deadline date. Thus, the developer will remain in control of the subdivision until 75 percent of the lots are sold or until a deadline date. The contested voting scheme in Barclay was, as is in this case, similar to the class scheme provision in the FHA form.
The trial court's determinations that a reasonable period of marketing time had lapsed and that KBRS must relinquish its control of the Board are consistent with the concept of control proportionate to ownership interest. Here, as in Barclay, the bylaws and declarations are designed to protect the developers' interests during the development and marketing phase of a condominium and implicitly contain limitations of time on such a phase. In a well-reasoned opinion the trial judge concluded that, "ownership does not justify developer control for an indefinite time." The trial court determined correctly that the market phase had passed and ordered that the Board be reconstituted by election by the condominium owners in accordance with their ownership interest.
Prospective Ruling
The Owners contend that the trial court's conclusion that the past acts of the Board were lawful and valid is inconsistent with its determination that the Board was illegally elected. The ruling is not inconsistent. As noted previously, developer control over a board is not unlawful during the marketing phase of a condominium development.
The Board argues that the trial judge's ruling as to developer control of the Board should be prospective regardless of when the marketing/development phase of the project ended. The Board argues that this issue is subject to the analysis adopted in In re Estate of McDowell, 245 Kan. 278, 777 P.2d 826 (1989). There, the McDowell court held: "A judicial decision may be applied prospectively only if: (1) the decision establishes a new rule of law; (2) retroactive application would not further the principle on which the decision is based; and (3) retroactive application would cause substantial hardship or injustice." 245 Kan. 278, Syl. ¶ 2.
The Board also asserts that retroactive application of the ruling would not further the principle of owner control and would cause substantial hardship to other individual condominium owners. The Board points to the fact that many owners bought into the project and invested money with the expectation that special services and facilities, such as the Wellness Center, access to health services, and programs with Bethel College, would be available in the future. The Board argues that invalidating the past acts of the Board would reshape the community and frustrate the legitimate expectations of condominium owners. The Board also asserts that money the Owners paid cannot be traced because that money has long been combined with fees and reimbursements for health services, meals, and charitable contributions, and has not enriched any person. It also claims that invalidation of the prior Board decisions, which includes adoption of the bylaws, could expose individual members of the association to personal liability for the debts and liabilities of the association.
The Board argues that under basic corporate principles, the trial court's ruling that the sitting Board was illegally elected must be applied prospectively. The Board cites the de facto corporation doctrine for support. It argues that the Association's directors and officers are de facto directors and officers under Kansas law because they "assumed their duties as such under color of authority, performed those duties, and were recognized and accepted as . . . officers [or directors] by all who dealt with them." See Olathe Hospital Foundation