Harlan v. Frawley Ranches Pud Homeowners Ass'n

#28027-aff in pt & rev in pt-GAS
2017 S.D. 54

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****

ROBERT HARLAN &
GENEIEVE HARLAN, Plaintiffs and Appellants,

v.

FRAWLEY RANCHES PUD
HOMEOWNERS ASSOCIATION, INC., Defendant and Appellee.

****

APPEAL FROM THE CIRCUIT COURT OF
THE FOURTH JUDICIAL CIRCUIT
LAWRENCE COUNTY, SOUTH DAKOTA

****

THE HONORABLE MICHELLE K. PERCY
Judge

****

DYLAN A. WILDE of
Wilde & Hunt, Prof. LLC
Spearfish, South Dakota Attorneys for appellants.

ROGER A. TELLINGHUISEN
MICHAEL V. WHEELER of
DeMersseman, Jensen
Tellinghuisen & Huffman, LLP
Rapid City, South Dakota Attorneys for defendant and
appellee.

****

CONSIDERED ON BRIEFS
MAY 30, 2017
OPINION FILED 09/13/17
#28027

SEVERSON, Justice

[¶1.] Robert and Geneieve Harlan are landowners whose land is subject to a

“declaration of covenants, conditions, restrictions, and reservations for land[.]” On

September 20, 2013, the Frawley Ranches Planned Unit Development Homeowners

Association, Inc. (HOA) filed a certificate of renewal and amendment to the

covenant with the Lawrence County Register of Deeds. The Harlans brought this

action seeking declaratory judgment declaring the certificate invalid because it was

alleged to have been filed in violation of the requirements established by the

covenant. They also brought a claim to quiet title to their property. After a trial to

the court, the circuit court denied the Harlans’ claims. The Harlans appeal. We

affirm in part and reverse in part.

Background

[¶2.] The Harlans are joint tenants of real property located in a planned

unit development and conveyed to them by Frawley Ranch, Inc. Their deed is

subject to “The Declaration of Covenants, Conditions, Restrictions and Reservations

for Land Owned or Possessed or Held by Frawley Ranch, Inc.” The Declaration of

Covenants was recorded on September 29, 1993. The Declaration of Covenants

provided that all record owners, excluding lessees and security interest holders, of

the lots or parcels described within the document are members of the HOA. Among

other powers, the HOA is granted the “power to administer and enforce all

provisions” of the Declaration of Covenants. According to its terms, the Declaration

of Covenants is initially in “full force and effect for a term of twenty (20) years” and

it is:

-1-
#28027

automatically extended for successive periods of twenty (20)
years, unless there is an affirmative vote to terminate th[e]
Declaration by the then members of the Association casting 90%
of the total votes cast at an election held for such purpose within
six (6) months prior to the expiration of the initial period hereof
or any extension.

[¶3.] Each member of the HOA is entitled to one vote for each lot in which

they hold the interest required for membership. In the case of joint ownership of a

parcel, such as the Harlans’, only one vote per individual lot or parcel is allowed. At

the time relevant to this case, there were 35 voting interests within the

development; five of those interests belonged to Frawley Ranch, Inc.

[¶4.] At an annual HOA meeting on June 5, 2013, the HOA discussed

amending the Declaration of Covenants so that it would automatically extend for

successive periods of five years rather than successive periods of twenty years. It

was agreed at the HOA meeting that the vote to amend would be conducted by

email. On August 29, 2013, the HOA’s secretary and board member, Todd Knutson,

emailed the members with a proposed covenant attached. It instructed the

members that “everyone must vote to either approve or reject” the new covenant

and that they must reply to the email with their vote. It explained that failure to

reply to the email would be considered a “NO vote.” After obtaining votes by the

members, the HOA board of directors determined that 90% of the members voted in

favor of the amendment. On September 20, 2013, it recorded an amendment

extending the Declaration of Covenants for five years. In response, the Harlans

commenced this action. They alleged that the election to amend the Declaration of

Covenants is required to occur at either the annual meeting of the members or a

-2-
#28027

special meeting of the members and that there was not the requisite 90% of

interests voting in favor of the amendment.

[¶5.] After a court trial on August 22–23, 2016, the circuit court denied the

Harlans’ claims for declaratory judgment and quiet title. It issued findings of fact

and conclusions of law. It determined that the Declaration of Covenants did not

require that an election for amending the Declaration of Covenants be held at a

meeting of the members or in person and therefore an email vote was proper. In its

findings of fact 24 and 25, the court found:

24. There were a total of 35 votes.
25. There were 32 ‘yes’ votes and three ‘no’ votes. The
affirmative vote percentage in favor of the amendment was
91.43%.

Lastly, it determined that Frawley Ranches had proven the affirmative defenses of

waiver, laches, and estoppel. The Harlans appeal to this Court raising three issues.

They contend the circuit court erred by determining: (1) that the email vote was a

valid and binding vote; (2) that the affirmative defenses of waiver, laches, and

estoppel applied; and (3) that the requisite 90% vote was obtained.

Standard of Review

[¶6.] “The interpretation of a covenant is a legal question which we review

de novo.” Halls v. White, 2006 S.D. 47, ¶ 4, 715 N.W.2d 577, 579. We review the

circuit court’s findings of fact for clear error. Id.

Analysis

1. Whether the Declaration of Covenants permits an election to
amend to be conducted by email.

-3-
#28027

[¶7.] The Harlans contend Article III of the Declaration of Covenants, in

conjunction with the bylaws of the HOA, require voting on amendment of the

Declaration of Covenants be held at a meeting of the members. “When interpreting

the terms of a restrictive covenant, we use the same rules of construction applicable

to contract interpretation.” Id. ¶ 7, 715 N.W.2d at 580. Article III provides:

Section 1. Term; Method of Termination and Amendments.
This Declaration shall be in full force and effect for a term of
twenty (20) years from the date this Declaration is recorded in
the Lawrence County Register of Deed’s Office. After twenty
(20) years, this Declaration, as amended, shall be automatically
extended for successive periods of twenty (20) years, unless there
is an affirmative vote to terminate this Declaration by the then
members of the Association casting 90% of the total votes cast at
an election held for such purpose within six (6) months prior to
expiration of the initial period hereof or any extension. This
declaration shall not be subject to termination or amendment
sooner than upon the expiration of twenty (20) years from and
after the initial recording hereof, except by Declarant before the
conveyance of any Lot or Parcel or upon the express written
agreement of all members of the Association and Declarant.[∗]
If the necessary votes and consents are obtained, the Board shall
cause to be recorded with the Register of Deeds of Lawrence
County, South Dakota, a certificate of termination, or a
certificate of amendment, as the case may be, duly signed by the
President or Vice-President and attested by the Secretary or

∗ The Harlans contend in footnote 1 of their initial brief that “The certificate of
Renewal and Amendment goes beyond merely changing ‘the words twenty
(20) to five (5)’ as stated in Knutson’s August 29, 2013 email as it eliminates
the ability to terminate or amend the Declaration upon the express written
agreement of all members of the Association and Declarant.” Contrary to
their assertion, there is still an ability to terminate the covenants with a 90%
vote. The certificate of renewal states that the covenants shall be for a term
of five years and then renew for additional periods of five years “unless there
is an affirmative vote to terminate the Covenants by the then members . . .
casting 90% of the total votes . . . .” The last sentence of the first paragraph
is eliminated; however, the last sentence only imposed additional
requirements for termination or amendment sooner than the initial 20 years.
Therefore, it would not apply to the renewal, and it makes sense that the
renewal would exclude such language.

-4-
#28027

Assistant Secretary of the Association with their signatures
acknowledged. There upon, in the case of termination, these
Covenants shall have no further force and effect. In the case of
amendment, the Covenants shall continue in full force and affect
for the remainder of the term subject to said amendment.

(Emphasis added.) The Declaration of Covenants is silent regarding any

requirements of the election to be held under Article II. However, “[i]n addition to

the right to adopt rules and regulations on the matters expressly mentioned” within

the Declaration, the HOA has the right “to adopt rules and regulations with respect

to all other aspects of the Association’s right, activities, and duties, provided said

rules and regulations are not inconsistent with the provisions of th[e] Declaration.”

Accordingly, the Harlans refer this Court to various provisions of the bylaws that

they believe require an election to occur at either an annual meeting of the

members or at a special meeting of the members.

[¶8.] The bylaws set forth that there be an annual meeting of the members

and allow the board of directors to call a special meeting for any purpose. But the

bylaws do not require voting to be held at a meeting of the members. The Harlans

believe the bylaws make it clear that any vote of the members is intended to occur

at a meeting of the members because throughout the bylaws there are repeated

references to voting at meetings of the members. For example, Article X of the

bylaws provides in part that the bylaws may be amended by the board of directors

“or by a two-thirds majority of the members at any regular or special meeting of the

membership.” The method of voting at a meeting of members is also set forth.

Article II, section 8 states that “[a]t all meetings of members, a member may vote in

person or by proxy executed in writing by the member or by the duly authorized

-5-
#28027

attorney-in-fact. Such proxy shall be filed with the secretary of the Corporation

before or at the time of the meeting.” Nevertheless, neither the Declaration of

Covenants nor the bylaws require that an election to amend the Declaration of

Covenants be held at a meeting of the members; they are silent on the requirements

of the election.

[¶9.] There is also no requirement that the election be in person or through

proxy. The section in the bylaws setting forth how a member may vote only applies

to meetings of members, not to amendment of the Declaration of Covenants.

Accordingly, the circuit court was correct to conclude that an electronic vote such as

one through email was properly established by the HOA.

2. Whether the court erred in determining that the affirmative
defenses of waiver, laches and estoppel applied.

[¶10.] The circuit court determined that waiver, laches, and estoppel applied

against the Harlans, and it denied their claims based on those affirmative defenses.

The Harlans assert that the circuit court erred by determining those defenses

applied because they did not have full knowledge of material facts. They assert

they did not know the Board would be monitoring votes as they came in or that

Knutson would contact members who voted “no” and follow-up with certain

members (but not all members) to ensure there was no confusion on the

amendment. It is unclear how these facts are material to the issue of whether the

Declaration of Covenants allowed an election through email. The circuit court

based its decision on its finding that the Harlans participated in the email vote.

The court determined that such conduct constituted “‘a clear, unequivocal and

decisive act’ showing an intention to relinquish any alleged right to compel votes to

-6-
#28027

occur at an annual or special meeting.” Nevertheless, we need not address the

court’s decision regarding the affirmative defenses. Having determined that the

Declaration of Covenants allowed an election through email, it is unnecessary to

address whether the court erred in its additional holding that waiver, laches, and

estoppel applied.

3. Whether the court erred by determining that the requisite
90% of votes cast were in favor of the amendment.

[¶11.] First, the Harlans challenge the vote of Daryll Propp, President of

Frawley Ranch, Inc., and President of the HOA. They assert Propp needed a proxy

or corporate resolution to vote on behalf of Frawley Ranch, Inc. Since Propp had no

such proxy, the Harlans claim Propp’s votes on behalf of Frawley Ranch, Inc., were

invalid.

[¶12.] The Harlans also contend the vote to amend failed because not all of

the votes were cast by email as established by the HOA and as directed by Knutson.

One HOA member, Jim Roth, directed his daughter to email his vote from her email

account rather than emailing through his own account. According to the Harlans,

this was improper because no proxy was presented as required by the bylaws in

section 8. The circuit court found “there is no dispute that Jim Roth favored the

proposed amendment and intended to vote ‘yes.’”

[¶13.] Another member, the Billings family, was in Alaska and voted by text

message because they did not have a phone capable of receiving and sending emails.

The Harlans claim such a vote is improper because it did not comply with the email

instructions sent by Knutson. The circuit court found that “there is no dispute that

-7-
#28027

the Billings intended to vote in favor of the proposed amendment, and that they did

so in a timely manner.”

[¶14.] The Harlans also challenge Knutson’s vote. There was no evidence

that Knutson, who was in charge of collecting and tallying the votes, responded to

himself in an email with his vote. Thus, the Harlans allege that he never voted.

Once again, the circuit court explicitly found that Knutson was in favor of the

amendment and recorded his vote on the spreadsheet where he recorded all of the

votes.

[¶15.] The HOA’s decision to hold an election by email to amend the

covenants did not violate the Declarations of Covenants or bylaws. Neither the

bylaws nor the Declaration requires that a vote to amend or terminate covenants

occur at an in-person meeting. Instead, the Declaration provides that a vote to

amend must occur “at an election.” The Declaration also provides that the HOA

may “adopt rules and regulations with respect to all other aspects of the

Association’s right, activities, and duties, provided said rules and regulations are

not inconsistent with the provisions of th[e] Declaration.” Here, the HOA decided to

hold the election to amend by email and adopted rules with respect to that election.

The HOA adopted specific rules governing the election to amend and did not follow

those rules.

[¶16.] After deciding to hold the election to amend by email, the HOA, via

Secretary Todd Knutson, informed the members the manner in which the election to

amend would be held. The email to the members provided:

Attached is a copy of the proposed new covenants and everyone
must vote to either approve or reject.

-8-
#28027

This will be a vote using email so you MUST reply to this email
with your vote. If you do not reply to this email with your vote,
it will be considered a NO vote.
....
So to recap, a YES vote will change the length of time the
covenants are enforce [sic], a NO vote will leave them
unchanged and they cannot be changed until the year 2033.
Thank you and remember to vote with your reply email.

[¶17.] Knutson kept track of the members’ votes on a spreadsheet. According

to the spreadsheet, the election passed with an affirmative vote by 90% of the total

votes. However, the Harlans claim Propp was required to obtain proxies for his five

votes for Frawley Ranch, Inc. And it is undisputed that not all the affirmative votes

were made by the members’ email as requested. Roth did not vote via his own

email, the Billings family voted by text message, and Knutson sent no email vote

(he mentally voted “YES” and tallied that vote).

[¶18.] This election is governed by the rules adopted by the HOA, not what

the Declaration of Covenants permitted. Thus, we must decide the legal question

whether Propp’s votes on behalf of Frawley Ranch, Inc., Roth’s vote via his

daughter’s email, the Billings family’s text message, and Knutson’s mental vote

complied with the rules and procedures adopted by the HOA governing amendment

of the Declaration of Covenants.

[¶19.] Regarding Propp’s vote on behalf of Frawley Ranch, Inc., no proxy is

required. Section 8 of the bylaws is applicable to meetings of members, which, as

discussed, did not occur here. Section 8 states “[a]t all meetings of members, a member

may vote in person or by proxy . . . .” Thus, the circuit court did not clearly err when it

found that “Propp is the President of Frawley Ranch . . . [and] was entitled to exercise

-9-
#28027

five votes on behalf of Frawley Ranch, Inc. for the five lots which Frawley Ranch, Inc.

owned at the time of the vote.”

[¶20.] However, the votes not cast by reply email require further analysis. In

Countryside South Homeowner’s Association v. Nedved, we recognized that “[a]

covenant is a contract between the governing authority and individual lot owners.”

2007 S.D. 70, ¶ 11, 737 N.W.2d 280, 283. Under the contract here, the HOA

adopted rules governing the election to amend. The adopted rule permitted voting

only by email, and it mandated that email votes had to be made by a reply to the

Secretary’s email. The rule was very clear: “This will be a vote using email so you

MUST reply to this email with your vote. If you do not reply to this email with your

vote, it will be considered a NO vote.” (Emphasis added.) After recapping this

procedure, Knutson then reminded the members “to vote with your reply email.”

(Emphasis added.) These rules bound both the members and the HOA. See

Nedved, 2007 S.D. 70, ¶ 11, 737 N.W.2d at 283; St. John’s Hosp. Med. Staff v. St.

John Reg. Med. Ctr., Inc., 90 S.D. 674, 245 N.W.2d 472 (1976) (both the association

and members are bound by the bylaws).

[¶21.] Under the adopted rule, the Secretary (Knutson) could not record

“YES” votes unless the vote was made by a reply email. The “reply email rule” was

clear and unambiguous, and it did not permit alternative methods of voting. Thus,

it is immaterial that Roth, the Billings family, and Knutson were in favor of the

amendment. Roth did not reply via his own email, and neither the Billings nor

Knutson voted in the manner required under the rules adopted with respect to this

election. Therefore, the HOA was required to consider their votes as “NO” votes,

the circuit court erred as a matter of law in counting votes cast by methods not
-10-
#28027

agreed to by the members, and in determining that 90% of the members voted to

amend the term of the covenant. We reverse as to this issue.

Conclusion

[¶22.] Nothing within the Declaration of Covenants of the HOA or within its

bylaws requires that an election to amend the Declaration of Covenants’ term be

conducted at an annual or special meeting of the members. However, the court did

err when it determined that 90% of the members of the HOA voted to amend the

term of the covenant. We affirm as to Issues 1 and 2, and reverse as to Issue 3, and

remand to the circuit court to address the amendment filed with the Lawrence

County Register of Deeds.

[¶23.] GILBERTSON, Chief Justice, and ZINTER and KERN, Justices, and

WILBUR, Retired Justice, concur.

-11-