97-654




                                                                        No. 97-654

                                     IN THE SUPREME COURT OF THE STATE OF MONTANA


                                                                        1998 MT 98



                                             STAGELINE ESTATES HOMEOWNERS'
                                      ASSOCIATION, INC., a nonprofit corporation,

                                                         Plaintiff and Respondent,

                                                                                 v.

                                               RICHARD JACKSON and PAULA JACKSON,

                                                        Defendants and Appellants.




                APPEAL FROM:                   District Court of the Eleventh Judicial District,
                                                       In and for the County of Flathead,
                                                 The Honorable Ted O. Lympus, Judge presiding.


                                                                COUNSEL OF RECORD:

                                                                   For Appellants:

                                Richard Jackson; Richard Jackson and Associates,
                                               Whitefish, Montana

                                                                   For Respondent:

                          Stephen C. Berg; Warden, Christiansen, Johnson & Berg,
                                            Kalispell, Montana




                                           Submitted on Briefs: February 26, 1998
                                                  Decided:   April 30, 1998
                                                           Filed:




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                                        __________________________________________
                                                          Clerk

Justice W. William Leaphart delivered the Opinion of the Court.


¶1   Richard L. Jackson and Paula Jackson (Jacksons) appeal from the
decision of the Eleventh Judicial District Court, Flathead County, determining
that Stageline Estates Homeowners' Association, Inc.'s (Association's)
assessments against the Jacksons was in accordance with the Association's
Bylaws, Articles of Incorporation, and not beyond the scope of the Declaration
of Covenants. The District Court entered judgment in favor of the Association
in the amount of $3,286 representing delinquent assessments plus interest and
attorney fees and costs. We affirm in part and remand for further
consideration.
           Factual and Procedural Background

¶2   Restrictive covenants concerning Stageline Estates subdivision in
Flathead County were filed on April 21, 1988 by way of a document entitled
"Declaration of Covenants, Conditions and Restrictions" (Declaration). The
Declaration established a Property Owners' Association (POA). Pursuant to
the Declaration, each owner of a lot subject to the covenants automatically
became a member of the POA. The Declaration states that the purpose of the
POA "shall be to maintain and provide for snow removal on the private road
and any other private road utilized by the members to their lots, and to provide
the architectural control for the subdivision." In addition, the Declaration
provided a means for the POA to annually assess the members for the
maintenance of the roads, including snow removal. Finally, the Declaration
provided that its provisions could be amended by an affirmative vote of 75%
of its members.

¶3   On April 29, 1991, the Association filed Articles of Incorporation with
the Secretary of State as a nonprofit corporation. This document allegedly
incorporated the original POA created by the Declaration. In addition, the
Association enacted Bylaws on November 15, 1991. According to the Articles
of Incorporation, the Association's purpose is "[t]o promote the health, safety
and welfare of the residents . . . and to provide for the maintenance,
preservation and architectural control of the residence lots and common areas
. . . ." In addition, the Bylaws provide the Association with authority to assess
the members for "the purpose of promoting the recreation, health, safety and
welfare of the residents of the Properties, and in particular for the
improvement or maintenance of the Properties, and for the facilities devoted
to the use and enjoyment of the Common Area." These assessments may be
imposed annually or pursuant to a "special assessment."

¶4   The Jacksons purchased their property within the subdivision on
November 25, 1991. The Jacksons acknowledge that they purchased their
property subject to covenants contained in the Declaration, but allege that the
Articles of Incorporation and Bylaws were not recorded at the time they
purchased their property and thus the terms of those documents are not binding

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on them.

¶5   The Jacksons paid annual assessments for the years 1992-94. The
Jacksons stopped paying the assessments in 1995 and have not paid since. As
a result, the Association filed a complaint in Justice Court on August 9, 1996
seeking to recover the unpaid assessments plus interest, attorney fees and
costs. The Justice Court entered judgment in favor of the Association in the
amount of $1,634. The Jacksons appealed to the District Court. The
Association filed a second complaint in District Court. The Jacksons filed an
answer and counterclaim asserting that they did not purchase their property
subject to the Articles of Incorporation and Bylaws of the Association. The
parties agreed to consolidate the Jacksons' appeal from Justice Court with the
new complaint instituted by the Association. The District Court entered
judgment in favor of the Association in the amount of $3,286 concluding that
the Association's imposition of assessments was in accordance with its Articles
of Incorporation and Bylaws, and not beyond the scope of the Declaration.
The Jacksons appeal to this Court seeking a reversal of the District Court
judgment and a declaration that they are not bound by the terms of the Articles
of Incorporation and Bylaws. We affirm in part and remand for further
consideration.
                       Discussion

¶6       The standard of review of a district court's finding of fact is whether
the court's findings of fact are clearly erroneous. Daines v. Knight (1995), 269
Mont. 320, 324, 888 P.2d 904, 906. The standard of review of a district
court's conclusions of law is whether the court's interpretation of the law is
correct. Carbon County v. Union Reserve Coal Co., Inc. (1995), 271 Mont.
459, 469, 898 P.2d 680, 686. We limit the scope of this opinion to the issue
of whether the Jacksons are responsible for past-due assessments for the years
1995-97. The Jacksons assert that they are not paying assessments because
their property is subject only to the assessments authorized in the Declaration.
The Declaration limits assessments to those collected for road maintenance
and snow removal. The District Court found that the assessments collected by
the Association for the years in question "seem to be used exclusively for
road-related purposes" and are in concert with the overall intent of the
Declaration. The court, therefore, concluded that the Association's imposition
of the assessments against the Jacksons was in accordance with its Articles of
Incorporation and Bylaws and not beyond the scope of the Declaration and
held that the Jacksons are liable for the unpaid fees.

¶7   The Jacksons do not seek to avoid their obligation to pay the costs of
road maintenance and snow removal. However, the Jacksons contend that the
authority given the Association in the Articles of Incorporation and Bylaws
exceeds that contemplated by the Declaration and, thus, the Jacksons seek to
preserve their right to object to the terms of the Articles of Incorporation and
Bylaws in the event the Association seeks to enforce assessments other than
those related to road maintenance. The District Court's finding that the
assessments collected to date by the Association were for the sole purpose of
maintaining the road is not clearly erroneous. Additionally, the District
Court's conclusion that the assessments for road maintenance do not exceed

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the scope of the Declaration is correct. Therefore, since the road maintenance
assessments are consistent with Article IV, sec. 5 of the Declaration, we hold
that the Jacksons are responsible for the past-due assessments plus interest.

¶8   The Jacksons seek a declaration that their property is not bound by the
terms of the Articles of Incorporation and Bylaws. The District Court did not
rule on the merits of the Jacksons' assertion that the Association has exceeded
its authority in expanding the terms of the Declaration via the Articles of
Incorporation and Bylaws. We remand to the District Court the issue of
whether the Articles of Incorporation and Bylaws are binding on the Jacksons.
Affirmed in part and remanded.

                                                                       /S/        W. WILLIAM LEAPHART

We concur:

/S/       J. A. TURNAGE
/S/       JAMES C. NELSON
/S/       JIM REGNIER
/S/       KARLA M. GRAY

Justice Terry N. Trieweiler dissenting.

¶9   I dissent from the majority opinion. Although Richard and Paula
Jackson were bound by the Declaration of Covenants which applied to their
subdivision, those covenants provided for assessments by the "property owners
association" which assessments could be made for only limited purposes.
Substitution of another entity for the property owners association, and
assessment for purposes other than those mentioned in the original Declaration
of Covenants, required amendment of the covenants by 75 percent of the
property owners in the Jacksons' subdivision. While the Articles of
Incorporation and Bylaws, pursuant to which the plaintiff assessed the
Jacksons, constituted actual amendments to the Declaration of Covenants,
there was no evidence of 75 percent approval for those amendments and,
therefore, no authority to assess pursuant to those Articles or Bylaws. When
Jacksons sought clarification and assurance that their assessments would be
used for the limited purposes provided for in the original covenants, that type
of assurance was denied and the corporation's attorney responded that the
assessments would be used for all those purposes provided for in the
Covenants, Articles, and Bylaws. Therefore, I conclude that Jacksons were
justified when they withheld payment of assessments made by a corporation
unauthorized to make those assessments and for purposes beyond those
provided for in the original Declaration of Covenants. My reasons are more
fully set forth as follows:

¶10 Jacksons purchased their property in a subdivision known as Stageline
Estates in Flathead County on November 25, 1991. At that time, there were
on file with the Clerk and Recorder in Flathead County the documents referred
to in the majority opinion as the Declaration of Covenants, Conditions and
Restrictions. Apparently, there were no Articles of Incorporation or Bylaws

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on file at the Clerk and Recorder's office which pertained to this real estate.

¶11 The Declaration of Covenants provided for a property owners
association which included every property owner in the subdivision. The
purpose of the property owners association was to maintain the private road
through the subdivision and provide for snow removal on the road, as well as
to provide for architectural control for the subdivision. Toward that end, the
association was given the authority to make assessments against each lot "for
the purpose of maintaining the road(s) and for providing snow removal." No
group of people other than the association was authorized by the original
covenants to make assessments, and no reason for assessments was authorized,
other than road maintenance and snow removal. The covenants otherwise
primarily provided for architectural control. However, the covenants also
provided as follows:
              ARTICLE VIII--AMENDMENT

               1.   This Declaration may be amended by an instrument
          signed by Members representing 75% of the total maximum number of
          authorized votes, agreeing to such amendment. Said instrument must
          be recorded with the County Clerk and Recorder.


¶12 There is no evidence that the Articles of Incorporation and Bylaws
pursuant to which the plaintiff corporation assessed the Jacksons in 1995,
1996, or 1997 was signed by 75 percent of the subdivision's property owners,
or that it was ever filed with the County Clerk and Recorder. Yet,
unbeknownst to Jacksons, those corporate documents substantially amended
the Declaration of Covenants by shifting authority to make assessments from
the property owners association to a small group of directors, by substantially
expanding the purposes for which assessments could be made, by providing
exemptions from assessments to certain property owners, and in other
important respects.

¶13 For example, pursuant to Article III of the Articles of Incorporation, the
new entity, now known as Stageline Estates Homeowners Association, Inc.,
exists for the additional purposes of acquiring water rights, real and personal
property, easements, and the installation and maintenance of wells, reservoirs,
and water mains. The new corporation was given the authority to exercise all
the powers and privileges previously exercised by the property owners
association, including making assessments against property in the subdivision,
but also to borrow money and pledge commonly owned property as security
for its loans.

¶14 Pursuant to Article V of the Articles of Incorporation, the business and
affairs of the corporation was now delegated to a board of three directors
which included the original two developers, plus their attorney, as opposed to
the previous property owners association.

¶15 The Bylaws reinforced the new corporation's authority to annex
additional residential properties and common areas, gave the directors the

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authority to employ a manager or independent contractor to handle the affairs
of the corporation, gave the three directors authority to fix the amount of the
annual assessment, provided for purchase of liability and hazard insurance by
the board of directors, and expanded the purpose of assessments to include the
following:
           Article XIII, Section 2. Purpose of Assessments: The
     assessments levied by the Association shall be used exclusively for the
     purpose of promoting the recreation, health, safety and welfare of the
     residents of the Properties, and in particular for the improvement or
     maintenance of the Properties, and for the facilities devoted to the use
     and enjoyment of the Common Area.


¶16 In addition to the expanded purpose for the annual assessment, the
Bylaws provided for special assessments for capital improvements which had
not been provided for in the original Covenants, and exempted certain property
owners from having to pay any assessments. Neither were those exemptions
provided for in the original Covenants.

¶17 Jacksons have always been willing to honor their obligation for road
maintenance and snow removal pursuant to the original Declaration of
Covenants; however, they sought some sort of accounting before making that
payment to assure that their contributions were being spent for an authorized
purpose instead of the expanded and unauthorized purposes included in the
Articles of Incorporation and Bylaws. For example, when Jacksons were
notified of the board of directors meeting, the assessment made at that
meeting, and the Bylaws pursuant to which the assessment was made by letter
dated February 6, 1995, and signed by the three directors, Richard Jackson
responded by letter dated February 20, 1995, that
     the Declaration of Covenants, Conditions and Restrictions which do
     govern the property do not provide for the establishment of any such
     organization. The only language in the Declaration of Covenants,
     Conditions and Restrictions which deal with a property owner's
     association provide that by being owners of property in this
     subdivision, the owners automatically become members of such an
     association for the specific purposes as set out in that document. . . .
     Further, in the Declaration of Covenants under which we are all bound,
     the purpose of the property owners association is limited solely to
     (a) maintaining and providing for snow removal on the private road and
     any other road utilized by members to their lots and (b) to provide
     architectural control of the subdivision. . . .

               In regard to the "assessments," the Declaration provides for
          annual assessments "for the purpose of maintaining the roads and for
          providing snow removal." This is the only use authorized for any such
          assessments, and I, along with all the other property owners, am bound
          by it. However, there is no provision for any additional use of those
          assessments, and again no provision for any new organization to be
          formed which would bind the property owners in any way outside the
          simple and very specific requirements of the Declaration of Covenants

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          itself.

                   . . . .

               . . . Further, the latest letter from the property owners
          association that I received, dated August 19, 1994, reflects that there is
          a total of $3,758.32 in that fund, which it seems to me at the current
          cost of road maintenance and snow removal would be adequate to
          cover those costs for a considerable period of time without any further
          assessments against the property owners. However, if you think that
          this is not going to be sufficient money, and you have some reasons
          why you think an additional assessment against the property owners for
          road maintenance and snow removal would be necessary, I would
          appreciate it if you could spell out those reasons for me in a letter so
          that I can understand what has been planned.


¶18 No response to Richard Jackson's legitimate inquiry is evident from the
record before us. Instead, it merely appears that he was threatened with suit
for past due assessments. In response to that threat, he made the following
statements to the plaintiff's attorney by letter dated July 12, 1996:
          If my involvement is limited to my status as a member of the
     "Property Owners Association" established by the Declaration of
     Covenants, Conditions and Restrictions filed in the Deed Records as I
     believe it is, then I am ready, and have been ready at all times, to do the
     same as all other property owners are bound to do, that is, pay my pro
     rata share of the "costs of maintaining the roads and for providing snow
     removal in the neighborhood."

               On the other hand, if you somehow feel that I am bound by the
          rules and requirements or your new non-profit corporation, its By-laws,
          procedures, assessments for recreation, health, safety and welfare,
          exemptions from assessments, committees, etc. please tell me how that
          could have happened, because I have never agreed to anything more
          than is contained in the Declaration of Covenants, Conditions and
          Restrictions filed in the Deed Records, which run with the land.


¶19 After he was sued in Justice Court and judgment was entered in favor
of the corporation, Richard Jackson indicated his intention to appeal that
judgment so that his obligations could be clarified by the District Court.
However, pending that appeal he offered to pay immediately any sums which
the corporation could assure him would be used only for the costs of
maintaining the roads and providing snow removal in the neighborhood. In
response, the attorney for the defendant corporation stated:
     You and the board have a fundamental difference of opinion as to the
     authority of the Association. This difference prevents settlement on the
     terms you propose. The board cannot, within its authority, create two
     classes of homeowners/members: one that pays its dues and
     assessments in accordance with the covenants, articles and bylaws, and

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          another that is willing to pay its dues and assessments in accordance
          with its more restrictive interpretation of the same documents in
          consideration for which the board would waive enforcement of the
          documents as to nonroad maintenance/snow removal matters.

          (Emphasis added.)

¶20 In other words, contrary to the inference in the majority opinion, at no
time has the corporation been willing to limit its expenditure of the
assessments made by its board of directors to those purposes specifically
provided for in the Declaration of Covenants. Furthermore, during the trial of
this matter, Martin White, who is vice president of the corporation, testified
that only 70 to 80 percent of the proceeds from the corporation's assessments
is spent on snow removal and road maintenance. That means that 20 to
30 percent of the current corporation's assessments is being spent for purposes
not provided for in the original Declaration of Covenants. Therefore, I
conclude that when the District Court found that the assessments for the years
in question were used for a purpose consistent with the original declaration,
that finding was clearly erroneous. Part of the fund's use was consistent with
the limitation provided for in the original declaration; however, part was not
consistent. Furthermore, no one from the new corporation was ever willing to
clarify until the time of trial what part of the assessments were being used for
the original and only legally authorized purpose, and what part was going to
be used for some new, expanded, and unauthorized purpose. Finally, I
conclude that the board of directors of the new corporation had no authority
to make any assessments in the first place. The only group with authority to
make the assessments, absent an amendment to the original declaration, was
the property owners association, which included each lot owner in the
subdivision. To transfer the assessing authority to a small group of three
people required an amendment to the Declaration of Covenants by 75 percent
of the homeowners, and that was not done.

¶21 For these reasons, I dissent from the majority opinion. I would reverse
the judgment of the District Court and remand this case to the District Court
for entry of judgment in favor of the defendants, Richard and Paula Jackson.

                                                             /S/       TERRY N. TRIEWEILER


Justice William E. Hunt, Sr., joins in the foregoing dissenting opinion.


                                                             /S/       WILLIAM E. HUNT, SR.




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