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Nebraska Supreme Court Holds a Unit Owner Could Bring a Derivative Action on Behalf of His Condominium Association

on Friday, 4 September 2015 in Dirt Alert: David C. Levy, Editor

McGill v. Lion Place Condo. Ass’n, 291 Neb. 70 (2015).

Paul McGill and Michael Henery developed the Lion Place Condominium (“Lion Place”) in Omaha, Nebraska. They recorded a Declaration of Condominium Property Regime (the “Declaration”) for Lion Place that established twelve residential units, four commercial units, common elements, and limited common elements. The Declaration also established an unincorporated association consisting of all unit owners and assigned one vote to each owner for each unit he owned. The Declaration allocated use of the limited common elements exclusively to the commercial units, although all the unit owners shared an undivided ownership interest in the limited common elements. McGill purchased four of the residential units, and Henery purchased all of the commercial units.

During discussions related to improvements to Lion Place, Henery offered to purchase the limited common elements. The association withheld approval of Henery’s offer and agreed to sell the limited common elements to the highest bidder. McGill then made an offer greater than Henery’s. In response, Henery made a higher offer, and the association voted to approve Henery’s second offer. Henery and the president of the association signed a purchase agreement, and the president signed an amendment to the Declaration to modify the boundaries of Henery’s units to include the limited common elements. McGill demanded the association initiate proceedings to invalidate the sale, and the association’s board refused. McGill, in his individual capacity, then filed an action in the district court for Douglas County to invalidate the sale.

The district court dismissed McGill’s suit for lack of standing. McGill then filed a second action in the district court on his own behalf as well as on behalf of all other members of the association similarly situated, derivatively, in the right of and for the benefit of the association. McGill claimed the vote of the association authorizing the sale was insufficient because only 77.7 percent of the authorized owners approved the transaction. Nebraska Revised Statute section 76-870(a) requires approval of 80 percent of the total authorized votes of the association. McGill also claimed that the unit owners with an interest in the limited common elements, being all of the unit owners in this case, did not unanimously execute a written agreement authorizing the sale, which Nebraska Revised Statute section 76-870(b) requires.

The district court upheld McGill’s derivative action. The district court explained that, while derivative actions are typically associated with corporations, nothing prevents an unincorporated association from bringing a derivative action. The district court also held that the vote of the association failed to comply with the 80 percent vote requirement of section 76-870(a) and the requirement of a unanimous written agreement per section 76-870(b). The district court awarded McGill attorney fees and expenses, plus costs. The association appealed.

The Nebraska Supreme Court affirmed in part and vacated in part. The Supreme Court affirmed the district court’s order voiding the association’s sale and conveyance of the limited common elements to Henery. The Supreme Court explained that the Nebraska Business Corporation Act does not apply because the association was unincorporated, but the Nebraska Condominium Act does apply, though it is silent as to derivative actions by unit owners. Citing to the equitable origins of derivative actions, the Supreme Court reasoned that, if Nebraska law did not allow derivative proceedings, a harm or injury to the condominium might go unaddressed through managerial abuse of power. The Supreme Court therefore held that, provided the unit owner first makes a demand on the association or otherwise provides evidence that such a demand would be futile, the unit owner may pursue a derivative action on behalf of an unincorporated owners’ association. Because McGill first made a demand on the association, the Supreme Court affirmed McGill’s derivative action as appropriate.

The Supreme Court also held that section 76 870(a) required approval of 80 percent of the total votes of the association and 100 percent of the unit owners with right to use the limited common elements. The 77.7 percent vote of all of the unit owners fell short of the 80 percent requirement. Further, neither the purchase agreement, the amendment to the declaration, nor the warranty deed satisfied the unanimous written agreement requirement in section 76 870(b) because only the association’s president signed on behalf of the association. The Supreme Court held that the unit owners retained their undivided ownership interest because the association’s sale and the conveyance of the limited common elements to Henery failed to comply with the requirements of sections 76 870(a) and (b). The Supreme Court vacated the award of costs and expenses and remanded the case for determination of the taxable costs.

The Supreme Court’s holding clarifies that owners in unincorporated condominium associations may initiate actions on behalf of their association. The decision, however, makes clear that owners must first make a demand on the association to take action before they file a derivative action or provide evidence that such a demand would be futile.

A full copy of the opinion is available here.

Amy L. Lawrenson

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