Steele v. Diamond Farm Homes Corp.

Hotten, J. Petitioner, Diane Steele ("Steele"), owned a home in the Diamond Farm development of Montgomery County, which was managed by a homeowner's association ("Association"). In accordance with the Association's Declaration of Covenants, Conditions and Restrictions ("Declaration"), the Association must obtain at least two-thirds of the total votes of all classes of members voting in person or by proxy to increase annual assessments. Through a letter dated September 19, 2016, Steele discovered that assessment increases in 2007, 2011, and 2014 did not receive the requisite two-thirds vote for approval. As a result, Steele calculated her overpayment in assessment dues, determined that she was entitled to an offset, and ceased making payments.

The Association noted Steele's payment delinquency in October 2016 and brought suit against her in the District Court located in Montgomery County regarding the unpaid assessments and attorney's fees. Thereafter, the District Court entered judgment in Steele's favor because the Association had failed to establish the amount of dues owed. The Association subsequently noted a de novo appeal to the Circuit Court for Montgomery County, which ruled in favor of the Association. Steele appealed and this Court granted certiorari .

The following questions are presented for review: 1. Was [Steele's] defense to a suit for [Association] dues, that she did not owe dues for the amounts of increases imposed without the supermajority required under the Declaration of Covenants, invalid due to [a statute restricting the use of the] ultra vires [defense,] or laches? 2. Did the [circuit] court err and abuse its discretion with an award of attorney['s] fees against [Steele], since [the Association] submitted no affidavit, lost in [D]istrict [C]ourt, and the principal recovered was less than one third of the awarded attorney['s] fees? For reasons discussed infra , we affirm the circuit court's judgment of $1,257.60 in assessment fees, plus $4,200 in attorney's fees.

BACKGROUND 1. Factual Background In 1969, the Association recorded its Declaration, establishing a homeowner's association for a number of single-family homes in Gaithersburg, Maryland. The Declaration reflects an annual assessment maximum of $150 per year, which can be increased with the assent of two-thirds of the homeowners. The relevant provision of the Declaration, Article V, § 5, states as follows: The basis and maximum of the annual assessments provided for in Section 3 above may be changed by the assent of two-thirds (2/3) of the total votes of all classes of Members voting in person or by proxy at a meeting duly called for that purpose and written notice of such meeting shall be sent to all Members at least thirty (30) days in advance and shall set forth the purpose of the meeting.

In 2003, 2007, 2011, and 2014, the Association increased the assessment. In 2003, the assessment increased to $720 per year, or $180 per quarter. 1 Ninety-four homeowners voted in favor of the increase and thirty-eight homeowners voted against it, representing the requisite two-thirds required for an increase. The Association disclosed the results of that vote in a newsletter sent to homeowners. The letter specified that "[o]f the 132 total votes, 94 homeowners voted "Yes" and 38 voted "No." A minimum of 81 votes were needed for the election to be binding, and two-thirds of the total must be "Yes" votes for the increase to be approved ." (emphasis added).

Subsequent letters that notified homeowners of increases did not specify that a two-thirds majority had been achieved. In February 2007, at a special meeting of the homeowners, the assessment was increased to $800 per year, or $200 per quarter. The Association disclosed the increase in a letter to homeowners, dated February 27, 2007, which specified that "[o]f the 90 proxies received[,] 57 voted for the increase and 33 against." The 2011 increase raised the assessment to $880 per year, or $220 per quarter, and the increase was again disclosed in a letter to homeowners. Nothing in the letter specified the vote count either for or against the increase.

The most recent increase in 2014, which occurred by vote at a January 22 board meeting, raised the assessment to its current level of $960 per year, or $240 per quarter. The Association notified homeowners by letter without reference to the vote count. In 2015 or 2016, the Board President asked Larry Lucas ("Lucas"), an Association homeowner who had previously been involved with the Association's Board, "to help clean up some of the records[.]" During his inspection of past records, Lucas noted that the results for elections to raise the annual assessment in 2007, 2011, and 2014 did not receive the two-thirds majority required by the Declaration. Lucas wrote a letter explaining these details, gave it to the Board members in September 2016, and later mailed the letter to every member of the Association and every homeowner. 2 Lucas's letter revealed that the last proper dues increase was in 2003.

Steele purchased a house in the Diamond Farm development in 1994. She became aware of the irregularity in past dues increases when she received Lucas's letter and calculated her overpayment in dues. Based on her overpayment figure of $1,400, Steele stopped making quarterly assessment payments in late 2016 to "set off" her overpayment. 3 Other relevant facts will be provided in the procedural background. 2. Procedural Background Proceeding in the District Court for Montgomery County In 2017, the Association brought suit in the District Court against Steele, seeking $1,257.60 in assessments and interest 4 as well as an award of attorney's fees in the amount of $850. 5 Steele contended that she was entitled to an offset because she had overpaid through illegitimate dues increases in 2007, 2011 and 2014.

Steele's motion for judgment, based on failure to prove the amount of dues owed, was granted at the close of the Association's case. The Association noted a de novo appeal to circuit court, and a trial was scheduled on July 12, 2018. Proceeding in the Circuit Court for Montgomery County On appeal, the Association maintained its assessment value of $1,257.60 against Steele, but sought attorney's fees in the amount of $26,589.13. The Association called Joselyn Wells ("Wells"), manager of the Association, as its first witness.

Wells testified regarding assessments and Steele's Statement of Delinquency Assessments ("Statement"), which was admitted into evidence over Steele's objection (objecting to the Statement on the grounds that the interest calculation was incorrect). Wells also testified regarding the additional attorney's fees requested by the Association, stating that the invoices for attorney's fees were "in line" with fees she had previously seen. Wells further indicated that she learned of Steele's objection to the calculation of assessments once she turned Steele's account over for collection. Laura Tierney ("Tierney"), a current Board member, also testified on behalf of the Association.

Tierney testified that even with dues at their present rate of $240 per quarter, or $960 per year, the Association was showing a net loss and was underfunding its reserve fund for capital expenses. When asked why the Association was spending far more on attorney's fees than its receipt of fees owed by Steele, Tierney stated that enabling the District Court decision to stand "would result in the financial ruin of the community," should the decision apply to all the Association homeowners. At the conclusion of the Association's case, Steele moved for judgment based on failure to prove the amount of dues owed, which was denied. Lucas testified on behalf of Steele, explaining his discovery that increases in the assessments from 2007, 2011, and 2014 did not receive the requisite two-thirds vote as required by the Declaration.

He further testified about his September 2016 letter, which he first provided to the Board and later mailed to homeowners. During Steele's testimony, she admitted that: (i) she likely received the Association newsletters informing her of fee increases in 2003, 2007, 2011, and 2014; (ii) she was capable of attending open Board meetings; (iii) she could have requested Association records at any time; and (iv) she was on record notice of the Declaration and its provisions. However, Steele indicated that she did not act until receiving Lucas's September 2016 letter. Circuit Court Ruling On August 7, 2018, the circuit court awarded judgment in the full amount of $1,257.60 plus $4,200 in attorney fees in the Association's favor.

(a) Rationale for Awarding Assessment Fees In its oral ruling, the circuit court elaborated on three alternative grounds for awarding the Association assessment fees, which are outlined below. As to the first ground, the circuit court stated: The first issue that the Court has to address is whether or not [ ] Steele's position in this case amounts to a defense of ultra vires and that the action by [the Association] in raising the dues would be an ultra vires act. The Association says that it is. [ ] Steele says it is not, and it was really just a [b]reach of the contractual agreements between the parties. Transcript of Proceedings, Diamond Farms Homes Corp. v. Steele , Circuit Court for Montgomery County, Case No. 9777-D. The Court analyzed the Declaration and held that "it's not a simple mere contract but is an organizational document." The circuit court further found that Steele's claims were "really a defense of capacity or power of the corporation[.]" Based on these assertions, the Court applied Md. Code, Corporations and Associations ("Corps. & Ass'ns") § 1-403 to the case.

The statute states, in pertinent part: *** (a) Unless a lack of power or capacity is asserted in a proceeding described in this section , an act of a corporation or a transfer of real or personal property by or to the corporation is not invalid or unenforceable solely because the corporation lacked the power or capacity to take the action. *** (b)(1) Lack of corporate power or capacity may be asserted by a stockholder in a proceeding to enjoin the corporation from doing an act or from transferring or acquiring real or personal property. *** (emphasis added). According to the circuit court, if Steele sought to attack the authority of the Association to collect assessments, she had to pursue the procedures outlined in Corps. & Ass'ns § 1-403 ("ultra vires statute"). Because she failed to follow these procedures, the circuit court concluded that she was precluded from asserting a defense against the Association. Regarding the second ground, the circuit court found that the homeowners' action, including Steele's action, of continuing to pay the increased assessments since their passage, constituted acquiescence or ratification of the increases (citing Poole v. Miller , 211 Md. 448 , 128 A.2d 607 (1957) ).

As to the final ground for its holding, which addressed the Association's defense of laches, the court held: I'm not sure if it's really laches that the argument is or more of an equitable estoppel or an estoppel argument in that a nine-year delay [since the 2007 increase] in asserting [Steele's] rights would be unreasonable and during that time, [the Association] was prejudiced because a more timely request for strict enforcements of the two-thirds [b]y-law would have allowed the [Association] to potentially remedy the defect in a more timely manner, or if it could not be remedied ... the [Association] would have then had an ability to properly budget for the decreased amount of revenue. Transcript of Proceedings, Diamond Farm Homes Corp. v. Diane Steele , supra. The circuit court concluded that, under a theory of laches or equitable estoppel, Steele's delayed claim prejudiced the Association and was therefore precluded. According to the circuit court, these three grounds justified awarding assessment fees in the Association's favor.

(b) Rationale for Awarding Attorney's Fees Diamond Farms sought attorney's fees in the amount of $26,589.13. The circuit court held that Wells's testimony was sufficient for establishing attorney's fees in the small claims case at issue, where the formal rules of evidence do not apply. See Md. Rule 7-112(d)(2). 6 After considering a number of factors, the court concluded that the uppermost range of permissible fees would be three times the amount in controversy. The court awarded $4,200 in attorney's fees.

Steele filed a Motion to Alter or Amend the Judgment, which was denied. Thereafter, Steele filed a petition for certiorari to this Court, which we granted. Steele v. Diamond Farm Homes Corp. , 462 Md. 84 , 198 A.3d 219 (2018). STANDARD OF REVIEW Neither Steele nor the Association challenged the circuit court's factual findings regarding the first issue.

As such, only the court's legal findings are in dispute. Errors of law and purely legal questions are reviewed de novo and this Court affords no deference to the decision of the court below. Schisler v. State , 394 Md. 519 , 535, 907 A.2d 175 , 184 (2006). The standard of review related to issue two, the circuit court's award of attorney's fees, is abuse of discretion.

Monmouth Meadows Homeowner's Ass'n v. Hamilton , 416 Md. 325 , 332, 7 A.3d 1 , 5 (2010). DISCUSSION A. The ultra vires statute and the doctrine of equitable estoppel preclude Steele's defense. 1. The ultra vires statute operates as a bar to Steele's defense. The Association contends that Steele's defense-that the Association's fee increases were invalid-is a defense rooted in the premise that the Association lacked the power or capacity to take such action.

The Association claims that the assertion that it lacked power or capacity is embedded in the ultra vires statute. Because the statute has specific criteria for bringing ultra vires claims, the Association asserts that Steele's defense is precluded on procedural grounds. We agree. The ultra vires statute, Corps. & Ass'ns. § 1-403, specifies that: *** (a) Unless a lack of power or capacity is asserted in a proceeding described in this section , an act of a corporation or a transfer of real or personal property by or to the corporation is not invalid or unenforceable solely because the corporation lacked the power or capacity to take the action. *** (b)(1) Lack of corporate power or capacity may be asserted by a stockholder in a proceeding to enjoin the corporation from doing an act or from transferring or acquiring real or personal property. *** (emphasis added).

The plain language of the statute required Steele to raise an argument regarding lack of power or capacity "in a proceeding to enjoin the corporation." Steele failed to do so. We explain more fully below. Ultra vires acts are those that exceed the express or implied powers of a corporation. See Greenbelt Homes, Inc. v. Nyman Realty, Inc. , 48 Md. App. 42 , 57, 426 A.2d 394 , 403 n.4 (1981) (internal citation omitted); see also City of Frederick v. Pickett , 392 Md. 411 , 419, 897 A.2d 228 , 233, n. 4 (2006) (internal citation omitted).

In an effort to restrain corporations' unchecked powers, shareholders (or the attorney general, see Corps. & Ass'ns. § 1-403(d) ) may challenge ultra vires acts. The instant matter considers the Association's lack of power or capacity to improperly increase dues pursuant to an express provision in its Declaration. We first observe that the Association is a corporation. The record reflects that the State Department of Assessments and Taxation of Maryland approved and received the Association's Articles of Incorporation on April 21, 1969.

We next analyze the situations in which a corporation's actions are considered ultra vires. The issue we seek to resolve is whether an Association's declaration operates as a document establishing a corporation's power and capacity, such that exceeding the scope of a declaration constitutes ultra vires action. In Greenbelt , supra, the Court of Special Appeals explained that: "An ultra vires act 'is one not within the express or implied powers of the corporation as fixed by its charter, the statutes, or the common law .' " 48 Md. App. at 57 , 426 A.2d at 403 n.4 (emphasis added) (quoting W. Fletcher, Cyclopedia of the Law of Private Corporations § 3399 (rev. perm. ed. 1978) ). Later, in Pickett , supra , we considered ultra vires acts to be those that are "beyond the legitimate powers of the corporation as they are defined by the statutes under which it is formed or which is applicable to it, by its charter or incorporation paper.

" 392 Md. at 419 , 897 A.2d at 233 n. 4 (internal citation omitted) (emphasis added). 7 "When properly used, the words 'ultra vires,' as applied to the act of a corporation, mean simply an act that is beyond the powers conferred upon the corporation by its charter, [statutes, or common law]." Fletcher, supra at § 3400. 8 We recognize that this jurisdiction's case law has not considered whether a declaration can operate as one of the documents under which a corporation can exceed its powers. See River Walk Apartments, LLC v. Twigg , 396 Md. 527 , 914 A.2d 770 (2007) (holding that the city of Frederick's actions were ultra vires when it exceeded the scope of its powers, as delegated in the city's Charter ); see also Inlet Associates v. Assateague House Condominium Ass'n, 313 Md. 413 , 545 A.2d 1296 (1988) (holding that Ocean City's Charter mandated an ordinance as opposed to a simple resolution for the matter at issue, and therefore, the City's actions were ultra vires). 9 Given that Maryland case law does not provide a relevant answer to our query, we consider the functionality of an Association's declaration. The Real Property Article of the Maryland Code ("Real Prop.") defines a declaration as: [A]n instrument, however denominated, recorded among the land records of the county in which the property of the declarant is located, that creates the authority for a homeowners association to impose on lots, or on the owners or occupants of lots, or on another homeowners association, condominium, or cooperative housing corporation any mandatory fee in connection with the provision of services or otherwise for the benefit of some or all of the lots, the owners or occupants of lots, or the common areas. *** See Real Prop. § 11B-101(d)(1) (emphasis added). The definition of a declaration provides that it operates to establish the capacity of an Association with respect to fees, which is at issue in the instant matter.

This supports the position that an Association's declaration prescribes its capacity and certain powers-the central concern regarding whether to apply the ultra vires statute. In the instant matter, we look to the Association's Articles of Incorporation, which is synonymous with a Charter, see n. 7, and is subject to the ultra vires statute. The Association's Articles of Incorporation specify that: "The purpose[ ] for which the corporation is formed [is] ... [t]o enforce any and all covenants, restrictions and agreements[.]" Those covenants, restrictions and agreements are explicitly outlined in the Association's Declaration, such that the Declaration operates as a key governing document outlining the Association's powers and capacity. See Real Prop. § 11B-116(a)(2)(i) (stating that: " 'Governing document' includes [a] declaration").

Because the Association's Articles of Incorporation expressly refers to the Declaration as a source of its power and capacity, we determine that the Declaration in the instant matter serves as a document subject to the ultra vires statute. Our review of the Declaration of the Association and its interaction with the Association's Articles of Incorporation persuades us that both documents dictate the parameters of the Association's authority and power. Therefore, Steele's argument had to follow the procedural guidelines specified in the ultra vires statute. In the instant matter, the ultra vires statute does not provide Steele a defense under the circumstances because she did not pursue, first, a derivative action, and she may not defend on the basis of the statute in this proceeding.

In other words, the ultra vires statute required that Steele pursue a derivative action, as a condition precedent, to enjoin the Association from improperly raising assessments. Steele did not bring a derivative action. Therefore, she cannot use the ultra vires statute as a defense. 2. Steele's defense is also precluded based on the doctrine of equitable estoppel.

The Statute of Limitations and Laches In her brief, Steele contended that, because she did not assert an initial claim or cause of action against the Association, neither the statute of limitations nor laches could apply to her argument because both doctrines operate as affirmative defenses. See Md. Rule 2-323(g)(10) & (15). Steele further contended that, assuming arguendo , that either doctrine applied, she would be subject to an analysis under the statute of limitations because her argument was grounded in a contract dispute-an issue of law, as opposed to an issue of equity. The Association did not address the statute of limitations in its brief, but rather, asserted that laches, "or more precisely," equitable estoppel, barred Steele's argument.

We concluded that Steele's contention-that the statute of limitations and laches operate as affirmative defenses inapplicable to her offset argument-was