Missouri appeals court reverses trial court, slaps down bank that manipulated HOA

The Missouri Supreme Court, on June 30, 2015, reversed much of this Court of Appeals decision discussed in this post, reinstating the judgment of the trial court, after determining that Jefferson Bank’s amendment of the covenants was proper. The amendment removed the requirement that the HOA’s board members be residents; the Supreme Court reasoned that unanimous consent of the lot owners was not required since the nature of the amendment was to remove rather than add a restriction.

After the real estate bubble burst, many Missouri banks ended up owning a majority of lots in subdivisions, standing in the shoes of the developers–the banks’ previous customers. Banks face many challenges in their effort to sell the lots that they had to take through foreclosure; not the least is high-end architectural standards imposed by the original developer that seem unworkable in this more austere era.

Jefferson Bank & Trust found itself in this fix after it became the owner of 13 of the 18 lots in the Arbors at Sugar Creek subdivision. In 2005, the developer had recorded covenants that gave the board of the homeowners’ association (HOA) approval rights over any new construction. The owners of the five existing homes  protested when the bank and its new partner proposed to build what the homeowners characterized as “tract houses.”

Because the original HOA had been dissolved by the Missouri Secretary of State for failing to file annual reports, the bank formed a new HOA and recorded a new declaration of covenants, since it had more than 67% of the voting power, as required by the old declaration for amendment. The new declaration eliminated the old declaration’s requirement that HOA board members be residents, and the bank appointed its executives to be the new board.

After a bunch of wrangling in court, the trial court ruled that the new HOA was legitimate, that the new board acted reasonably in approving the new building plans, asking that the HOA reimburse the bank for subdivision maintenance costs paid by the bank, and awarding other damages against the lot owners.

The appeals court in this October 28, 2014 decision, agreed that the new HOA was the successor to the old HOA, but threw out the rest of the trial court’s judgment, to find that the bank acted in bad faith, having

• relied on its acquisition of majority voting power to unilaterally deny homeowners the benefit of self-governance that they received under the original declaration
• used its command of the subdivision’s affairs to advance in own financial interest in redeveloping the subdivision in a manner contrary to the wishes of the newly disenfranchised residents
• violated the implied covenant of good faith and fair dealing by amending the declaration and removing the residency requirement for board members so it could appoint its own executives to the board.

Having stacked the board of the new HOA, the appeals court ruled “all the board’s subsequent actions are null and void,” including the approval of development plans submitted by the bank’s partner.

The critical factor here is the requirement of the original declaration that the HOA board members be residents. The overreaching on this issue tainted everything else that the bank did.

It’s unusual to see a court roll over a bank in favor of homeowners. My guess is that the Missouri Supreme Court will be asked to review this decision.