Tuesday, April 12, 2011

Debaliviere Place Ass’n v. Veal[1]

Opinion handed down April 12, 2011
Link to Mo. Sup. Ct. Opinion

The Supreme Court of Missouri held that a dissolved neighborhood association could transfer its rights to collect assessments from property owners to a new neighborhood association with the same name because the transfer was an appropriate part of the winding up process of the dissolved association.

I. Facts and Holding

In 1992, the Missouri Secretary of State dissolved the Debaliviere Place Association (“the former association”), a nonprofit corporation with the right to collect assessments on property within the Debaliviere neighborhood in St. Louis.[2] In 2003, a new Debaliviere Place Association (“the new association”) was incorporated.[3]

In 1997, defendant Steven Veal acquired several apartment buildings in the Debaliviere neighborhood.[4] The deeds of these properties contained provisions making the properties subject to the former association’s declaration, which required property owners in the Debaliviere neighborhood to pay yearly assessments.[5] Veal had never paid these assessments.[6] After the new association was formed, it billed Veal for the annual assessments since 1998 for all his properties, alleging it had the authority to do so under the former association’s declaration.[7] Veal refused to pay the assessments, so the new association filed liens against his properties and filed in the circuit court in February 2006 to foreclose on the liens.[8]

Then, in June 2006, the former association assigned all its rights under the declaration to the new association.[9] In 2007, the new association, now as assignee of the former association, recorded two new liens against Veal’s properties to recover the unpaid assessments from 1998 forward.[10] It subsequently filed an action to foreclose on those liens.[11]

The circuit court consolidated the 2006 and 2007 lawsuits, and the new association moved for summary judgment.[12] The circuit court, granting summary judgment for the new association, held that there was a valid assignment of rights from the former association to the new association and that the new association had the right to enforce the declaration.[13] The court of appeals reversed and the case was subsequently transferred to the Supreme Court of Missouri.[14]

The new association argued that it had the authority to enforce the assessment because the former association validly transferred all its rights under the declaration to the new association.[15] The new association argued that this assignment was valid because the assignment of rights is a permissible winding up activity.[16]

Veal argued that the former association did not have the authority to assign its rights.[17] First, because the assessments were to be used to purchase additional property for development, Veal argued that the enforcement of the assessments was not a valid winding up activity.[18] Veal also argued that the assignment was invalid because the ten-year limitation on rescission applied to the winding up process.[19] Lastly, Veal argued that the foreclosure of the 2007 liens, which occurred after the June 2006 assignment, was invalid because the new association did not follow procedures for foreclosure outlined in the declaration.[20]

The Supreme Court of Missouri held that there was a valid assignment by the dissolved former association because the assignment of rights under a contract is a permissible winding up activity.[21] However, the new association could not enforce the assessments before the 2006 assignment because the declaration stated that only the former association and “its successors and assigns” could enforce the covenants.[22] Before 2006, the new association was neither the former association’s successor nor assignee.[23] Therefore the new association was not authorized to file the 2005 lien against the property or to foreclose on the lien in the 2006 lawsuit.[24] Lastly, although the declaration required the former association to wait ninety days after filing a lien before it could foreclose, this requirement was automatically waived by Veal when the ninety- day period expired.[25]

II. Legal Background

Veal’s property deed contained restrictions making his use of the property subject to the former association’s declaration, which mandated the payment of assessments.[26] To determine whether the new association had authority to enforce the declaration, the court had to decide whether the former association had the authority to assign its rights under the declaration.[27] When the former association assigned its rights in 2006, it was no longer incorporated and was in the winding up process.[28] Section 355.691 of the Revised Statutes of Missouri outlines the permissible activities of a dissolved corporation during its winding up process.[29] Specifically, the statute states that the dissolved corporation may only carry on activities that are appropriate to wind up and liquidate its affairs.[30] The court also referenced Smith v. Taylor-Morley, Inc., which held that the assignment of rights under a contract is part of the winding up process and is thus a permissible activity.[31]

In the instant case, the Supreme Court of Missouri clarified that it was irrelevant that the assessments were to be used for an activity that was not considered part of the winding up process.[32] The court stated that the former association could assign a right to the new association without exercising that right.[33]

Additionally, the former time limitations for rescission of forfeiture statute[34] did not apply in this situation.[35] The statute, which would have applied to the former association’s dissolution in 1992, provided that the secretary of state could not rescind the forfeiture after ten years.[36] The secretary of state did not rescind the former association’s forfeiture of incorporation, but rather a new association with the same name was formed.[37] Nor does the ten-year limitation on rescission apply to the winding up process.[38] There is no time limitation for winding up the affairs of a corporation.[39]

III. Comment

The law laid out by the Supreme Court of Missouri is clear, even though the court applied it to a confusing factual situation. This situation represents a trap for the unwary purchaser of real estate. Although the deeds to Veal’s property contained provisions making the properties subject to the declaration of the former association, it appears that no one was enforcing the payment of the annual assessments before the formation of the new association. It is not clear from the case when the former association stopped collecting the assessments. Because the Missouri Secretary of State dissolved the former association in 1992, it is likely that no one attempted to collect any assessments from 1992 forward. After 1992, a purchaser of property in the Debaliviere neighborhood might have assumed that he would not be billed for an annual assessment, even though the deed to his property contained a provision making his property subject to such an assessment. Additionally, as the years go by and the owner is not billed for the annual assessment, he might come to think that no assessment is owed for those past years.

It makes sense that there is no time limitation for the winding up of a dissolved corporation, because there are situations like the one in this case, where the new association needed the right of the former association to collect assessments in order to be financially solvent. However, one might argue in this situation that there should be equitable limitations to billing property owners for past assessments. Perhaps the new association should only be able to enforce its new right in the future and not the past. On the other hand, the property owner did have actual notice that his property was subject to a yearly assessment. This case serves as a warning to future real estate purchasers to carefully read their deeds to see if they will be subject to any provisions and covenants in another document.

-Lauren K. Shores, CPA

[1] No. SC91138 (Mo. April 12, 2011) (en banc), available at http://www.courts.mo.gov/file.jsp?id=45964. The West reporter citation is Debaliviere Place Ass'n v. Veal, 337 S.W.3d 670 (Mo. 2011) (en banc).[2] Id. at 672.
[3] Id.
[4] Id. at 673.
[5] Id. This declaration was a covenant that ran with the land for fifty years and was renewed automatically. Id.
[6] Id. Though not specifically stated in the opinion, it appears that Veal was not billed for any assessment from the time he purchased the properties in 1997 until the formation of the new association in 2003. Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id. at 673-74.
[14] Debaliviere Place Ass’n v. Veal, No. ED 93306, 2010 WL 2510390 (Mo. App. E.D. June 22, 2010).
[15] 337 S.W.3d at 674-75.
[16] Id. at 675-76.
[17] Id. at 675.
[18] Id.
[19] Id. at 675-76
[20] Id. at 678.
[21] Id. 677-78.
[22] Id. at 677.
[23] Id.
[24] Id.
[25] Id. at 678.
[26] Id. at 673-74.
[27] Id. at 674-75.
[28] Id. at 674.
[29] Mo. Rev. Stat. § 355.691 (2000).
[30] Id.
[31] 337 S.W.3d at 675(citing Smith v. Taylor-Morley, Inc., 929 S.W.2d 918, 923 (Mo. App. E.D. 1996)).
[32] 337 S.W.3d at 675. Veal argued that because the assessments were to be used for purchasing additional property and that purchasing additional property was not an allowable activity by a dissolved corporation, the former association could not validly assign this right. Id.
[33] Id.
[34] Mo. Rev. Stat. § 335.507.5 was repealed in 1995. Id. at 676, n. 6.
[35] Id. at 676.
[36] Id.; Mo. Rev. Stat. § 355.507.4 (1986).
[37] Id. at 676.
[38] Id.
[39] Id. (citing Prange v. Prange, 755 S.W.2d 581, 589 (Mo.App. E.D.1987); State Auto. and Cas. Underwriters v. Johnson, 766 S.W.2d 113, 123 (Mo.App. S.D.1989); Centerre Bank of Kansas City, Nat. Ass'n. v. Angle, 976 S.W.2d 608, 618 (Mo.App. W.D.1998)).