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Garner v. Board of Directors

Court of Appeals of Arkansas, Division II

October 18, 2017

GENE GARNER AND LINDA NARUG APPELLANTS
v.
BOARD OF DIRECTORS, HOT SPRINGS VILLAGE PROPERTY OWNERS ASSOCIATION, AND HOT SPRINGS VILLAGE PROPERTY OWNERS ASSOCIATION APPELLEES

         APPEAL FROM THE GARLAND COUNTY CIRCUIT COURT [NO. 26CV-14-746] HONORABLE LYNN WILLIAMS, JUDGE

          Legacy Law Group, by: Bryan J. Reis and Philip B. Montgomery, for appellants.

          Quattlebaum, Grooms & Tull PLLC, by: E.B. Chiles IV and Justice J. Brooks I, for appellees.

          MIKE MURPHY, JUDGE.

         This is an appeal arising out of a declaratory-judgment action. Appellants Gene Garner and Lynda Narug sued appellees Hot Springs Village Property Owners' Association (HSVPOA) and its board of directors regarding measures taken by those entities that affected appellants as residents and members of the property owners' association. Following a bench trial, the circuit court dismissed appellants' complaint with prejudice. Appellants raise four arguments in support of reversal-namely, whether the circuit court erred in finding that (1) the two-tier assessment system was reasonable, (2) the board had the authority to amend the protective covenants and that the amendment allowing for the creation of overlay zones was reasonable, (3) the board could vote its nonpaying inventory lots to establish a quorum, and (4) moneys raised from the annual assessment could be used to fund the master plan and other development. Finding no error, we affirm.

         I. Background and Issues on Appeal

         Hot Springs Village is a residential and commercial community located in Saline and Garland Counties. It is the largest gated community in the United States. Appellants are residents of Hot Springs Village and members in good standing of HSVPOA. HSVPOA is a nonprofit corporation that serves as the administrator of Hot Springs Village. HSVPOA owns the common property as well as many amenities and is governed by a board of directors. HSVPOA and its board of directors were formed in 1970 in conjunction with Cooper Communities, Inc., and are governed by a declaration, bylaws, and protective covenants.

         There are 34, 418 lots in Hot Springs Village. Of these lots, 8, 476 are improved, and 25, 083 are unimproved-lots are differentiated as improved and unimproved based on the presence or absence of a water meter. There are an additional 2, 354 inventory lots-these lots are controlled by HSVPOA and are not subject to the payment of dues. Each member of HSVPOA has voting rights and gets one vote per lot regardless of whether the lot is improved. For many years, all lot owners paid assessments of $36.68 per lot.

         At the inception of Hot Springs Village in 1970, lot sales and profits were steady. From 2003 to 2008, National Recreational Properties, Inc. (NRPI) accumulated many lots and began to pay assessments on these lots and to resell them. After the recession, NRPI stopped paying assessments on the lots it owned in 2008. NRPI abandoned its lots, and other property owners abandoned and turned over their lots to HSVPOA as well. This negatively affected the financial soundness of HSVPOA.

         In 2013, HSVPOA experienced a $3.2 million budget shortfall, and the HSVPOA board president appointed a group known as the Future Financial Task Force (FFTF) to research potential revenue options to maintain HSVPOA's financial viability. From October 2013 to July 2014, the FFTF evaluated new funding options and ultimately recommended the adoption of a two-tier assessment. The two-tier assessment would require owners of improved lots to pay $65 a month to HSVPOA while owners of unimproved lots would continue to pay $36.68 a month.

         The board considered the FFTF's recommendation and eventually decided to send this initiative to a vote of the members of HSVPOA. The vote was to take place in November 2014.

         Before the vote, appellants and Cathy Rudder[1] filed a lawsuit against appellees in the Garland County Circuit Court seeking an injunction against the November 2014 election and declaratory relief that the proposed two-tier assessment was unreasonable. Appellants and Rudder also moved for a preliminary injunction.

         The November 2014 vote occurred, but a quorum was not established, and the vote was of no effect. Thereafter, the board voted to resubmit the issue to HSVPOA members for a vote in February 2015.

         Following the November 2014 vote, appellants amended their complaint multiple times, including to drop Rudder as a plaintiff and to account for the November 2014 and upcoming February 2015 votes. The circuit court also held a hearing on the motion for preliminary injunction in January 2015. The circuit court denied the request for a preliminary injunction, and appellants did not appeal from the denial.

         In the February 2015 election, a full quorum was achieved, and the voters approved the two-tier assessment.

         Subsequently, appellants amended their complaint a fourth and final time. In their fourth amended complaint, they sought a declaration that certain amendments to the protective covenants were void. Specifically, they challenged the board's authority to amend protective covenants to create overlay zones. In May 2014, the board had amended the protective covenants to create overlay zones-areas where the zoning restrictions could be modified. The board took this action to attempt to create development in Hot Springs Village.

         The circuit court held a bench trial on the matter in June 2015. The primary focus of the litigation was whether the establishment of the two-tier assessment system in which owners of improved lots paid higher assessments than those with unimproved lots was reasonable. In July 2015, the circuit court entered a thorough judgment with ...


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